Ortiz v. State Farm Lloyds [SFL], 589 S.W.3d 127 (Tex. 2019)

Opinion of the Court

This case is closely similar and therefore related to an insurance case decided the same day, namely Barbara Technologies Corporation [BT] v. State Farm Lloyds [SFL], 589 S.W.3d 127 (Tex. 2019). [The abbreviations are mine, not the Court’s.] Both cases concern the relationship between the use of appraisals in the adjustment process involving first-party insurance claims and the TPPCA. As with Barbara Tech v. SFL, this case involved three separate opinions. The section titles and identifications (Roman numerals and capital letters) are those of the Court. 

The task before the Court was to determine the effect of an insurer’s payment of an appraisal award on an insured’s claims for breach of contract, bad faith insurance practices, and violations of the Texas Prompt Payment of Claims Act (TPPA), the last of which is also often called a type of bad faith.  The Court held that the insurer’s payment of the claim bars the insured’s breach of contract claim if it is based upon the insurer’s failure to pay the amount of the covered loss. The Court also held that the insurer’s payment of the award bars the insured’s common law and statutory bad faith causes of action to the extent that the only actual damages sought are lost policy benefits. Finally, the Court held that the insured could proceed with its TPPCA action, just as it had held in Barbara Tech.

I. Background  

Ortiz’s house sustained wind and hail damage, so he filed a claim with his homeowner’s insurer, SFL. Upon inspection, the SFL adjuster estimated the loss as within the policy’s $1000.00 deductible. The adjuster observed further damage but thought it was not covered. Ortiz sends SFL an estimate he had received from a public adjuster for over $23,525.99. SFL conducted a second inspection and increased its estimate to $973.94 indicating that it was still within the deductible. 

Thereafter, Ortiz sued for breach of contract, violation of TPPCA, and both statutory and common law bad faith, plus several other causes of action which were not part of the appeal. SFL answered and shortly thereafter demanded appraisal, pursuant to the insurance contract. Ortiz resisted arguing that SFL has waived its right to appraisal under the contract since it had waited so long to demand it. SFL filed a motion to compel which the judge granted. The appraisal award set the replacement cost of the loss at $9,447.52, and the actual cash value at $5,243.93. SFL paid the award minus the deductible, within several business days approximately seven business days of its receiving notice of the award. 

Quinn’s CommentIt looks to me that the how-many-days number is not quite right. SFL received notice of the award on December 17, 2015, and paid it on December 30, 2015. The damage was sustained on November 22, 2014, and paid at the end of the next year. This is approximately 13 months later. The award was approximately 10 times the size of SFL’s second inspection estimate, assuming that replacement cost was the operative number SFL used to determine its payment. The opinions, in this case, make no reference to the expenses Ortiz incurred in pursuing his case. Of course, many (especially lawyers and adjusters) know that the wheel of justice turns slowly. It is worth remembering that this decision was not made until June 28, 2019.

II. Standard of Review

As is usual, the Court gave a short statement regarding the standard of review. In this case, it was for a judgment based upon a traditional summary judgment motion.

III. Analysis 

A. Analysis  

Appraisals are efficient and less costly than litigation to adjust claims. Their use has been highly lauded by many courts over the years. A party’s right to its use the device can be waived, but waiting until after suit is filed is not one of them. “Rather, waiver in this context occurs when the party seeking appraisal fails to demand it within a reasonable time after the parties reach an impasse on the amount of the loss, if [and only if? msq] the failure prejudices the opposing party. We have recognized the inherent difficulty of demonstrating prejudice when a policy allows both parties the opportunity to demand appraisal, opining that appraisal “could short-circuit potential litigation and should be pursued before resorting to the courts.”  Granted, the court might have said, this particular appraisal was not sought until after suit had begun. But although Ortiz raised that matter before the trial court; he did not include it in the appeal or seek to set aside the award. In addition, he did not dispute SFL’s full payment. The Court went on to say that it has noted the validity of appraisal provisions “absent fraud, accident, or mistake[.]”

B. Breach of Contract  

The Court makes short shrift of the breach of contract claim. Its main arguments are that the insurance policy involved here is a contract, and it includes an appraisal clause. In addition, if an insurer’s first estimate after correction by an appraisal award were a breach of contract, “insureds would be incentivized to sue for breach every time an appraisal yields a higher amount than the insurer’s estimate (regardless of whether the insurer pays the award), thereby encouraging litigation rather than “‘short-circuit[ing]’ it as intended.”  

Quinn’s Comment. As much as one might wish to make sure that individual-person policyholders are protected, it is difficult to see why a policyholder lawyer would pursue this case, except to try and prove that demands to have appraisals after litigation has begun have been waived. Once that argument has failed, everything else should be abandoned (except for the fact that there is an astoundingly anomalous error  SFL made in estimating the loss in the Barbara Tech case). It is worth noting, perhaps, that SFL is often the insurer party–usually the defendant party–in the raft of appraisal versus TPPCA cases that have arisen in the last few years. 

C. Bad Faith Claims 

While it is true, said the Court, that an insured’s pursuit of common law and/or statutory bad faith claim exists, such an action cannot be used merely to recover benefits under the contract. In this case, the only damages Otiz sought were his expenses in pursuing his claim, and, in this case, that sum was attorney fees that are not recoverable except as a “plus” founded upon actual damages.

Quinn Comments. (1) The Court imagines a situation in which Ortiz might have pursued attorney fees. He might have alleged that SFL’s defective investigation caused the adjustment process to slow down enough that the house was further damaged and so there were additional “actual damages” onto which attorney fees could be added.  (2) As well established as the “American Rule” regarding attorney fees is, someone might wonder if the fact that contracts of insurance create “special relationships” between insurers and insureds might support the idea that there should be an exception to the American Rule for individuals who are insured.  Maybe too dangerous an idea to support? Too much possible collateral damage.

The Court states that insureds like Ortiz may, under Barbara Tech, have an opportunity to sue for TPPCA violations. It holds that “an insurer’s payment of an appraisal award does not, as a matter of law, bar an insured’s claims under the TPPCA.”

For this reason and this reason only, the Court reversed and remanded part of the court of appeals judgment.