TEXAS PROMPT PAYMENT OF CLAIMS ACT [TPPCA]
INSURANCE BAD FAITH
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.
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.
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.
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.”
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.
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.