Texas Supreme Court Rules to Cut Out Attorney’s Fees in First-Party Appraisals

The Texas Supreme Court recently ruled that when an insurance company pays an appraisal award plus any statutory interest in a weather-related first-party property case, there is no liability for attorney’s fees.

The court responded to a certified question from the 5th Circuit Court of Appeals on whether an insurer who has fully discharged its obligations under the policy’s appraisal provision is precluded from paying attorney’s fees under the Texas insurance code.

The question presented to the court arose from a dispute between a homeowner, Mario Rodriguez, and his insurance company, Safeco Insurance Company of Indiana.

In May 2019, a tornado damaged Rodriguez’s home. Safeco issued a payment of $27,449, which Rodriguez accepted. Rodriguez’s counsel then told Safeco it owed an additional $29,500 and threatened to sue. Rodriguez sued in June 2020, alleging breach of contract and statutory claims under the insurance code.

After the two parties failed to mediate, Safeco invoked the insurance policy’s appraisal provision, and a panel valued the damage to Rodriguez’s home at $36,514. After subtracting prior payments and other amounts, Safeco issued a check for $32,447 covering the full appraisal, plus another $9,458 for any interest possibly owed on the appraised amount.

Safeco argued that its full payment of the appraisal plus interest should put an end to litigation, including any attempt by Rodriguez to recover attorney’s fees, to which a district court agreed. Rodriguez appealed to the 5th Circuit.

The 5th Circuit noted that courts are split on the issue of whether attorney’s fees are precluded when an insurer pays the appraised amount under the insurance policy, and certified the question to the Texas Supreme Court.

In its analysis, the court focused on Chapter 542A of the insurance code, which limits the recovery of attorney’s fees in storm-related first-party claims. The statute, amended in 2017, contains a formula for awarding attorney’s fees when there is an amount to be awarded in the judgment to the claimant for the claimant’s claim under the insurance policy. Because Safeco has already paid all amounts owed under the insurance policy plus any possible statutory interest, “there is not and never will be a money judgment on Rodriguez’s claim under his insurance policy, so attorney’s fees are unavailable,” the court’s opinion says.

Insurance defense attorneys hope the court’s ruling will put an end to a practice by some Texas policyholder attorneys of signing up clients on a full contingency fee and then putting the matters into appraisal. Attorneys fees and appraisal costs are subtracted from the award, leaving little money left for the insured to fix their damage, said Steven Badger, a partner with the Dallas office of Zelle LLP. Badger submitted an amicus letter in support of Safeco’s position.

“Appraisal was intended as a way to resolve disputes prior to and without the need for litigation,” Badger said. “We need to return to appraisal being used either pre-suit or immediately after a lawsuit is filed. Neither side should use appraisal as a litigation tactic.”

Badger said appraisal needs to return to being used either pre-suit or immediately after a lawsuit is filed.

Policyholders attorneys argue the state legislature could not have intended Safeco’s interpretation of Chapter 542A and fear the court’s ruling will lead to unfair practices by insurance companies.

“The Court zeroed in on a part of the 2017 amendments that may not align with the overall consumer protection goals of the Code but felt constrained to apply the precise terms of the statute and all but invited the legislature to assess whether the ‘practical consequences’ of the attorneys’ fee formula is what it really intended,” said Jeff Raizner, partner at Raizner Slania.

Raizner said he hopes the case can serve as a catalyst for responsible dialogue and legislative action to fix appraisal in Texas.