INSURANCE APPRAISAL A SEMI-LEGAL PROCEEDING:

POLICYHOLDER RECOVERY OF ATTORNEY FEES CONTROLLED BY STATUTE

Rodriguez [HO] v. Safeco Insurance of Indiana [ “Ir”] (Tex. 2024)

For quite a long time, as long as 150 years, or so, in America, there have been clauses in property insurance policies permitting insurers to demand an appraisal process, as opposed to a lawsuit process, at least to determine the monetary value of the insured’s losses. Along the way, these clauses made the demand for appraisal a right of the insured and the insurer. Either contracting party For many, many years, the presence of symmetrical appraisal-demand clauses in the contracts of insurance has been standard practice in property insurance policies, especially as to the property (“first-party” homeowner’s (HO) policies) has been standard practice. 

Coverage appraisal processes varied in accordance with the terms of the applicable insurance policy, but one arrangement was to use selected experts to determine the monetary value of physical objects, and their work was strictly restricted to that. The appraisers were not authorized to determine coverage or legal questions. Over many years, this restriction began to relax for a simple practical reason, namely, to be able to use the appraisal process to completely determine the controversy. Other restrictions also weakened, so that most such insurance loss appraisals were self-sufficient for resolving selected insurance claims controversies, if demanded.

Over many years, this process became embodied in statutes. In Texas, the most relevant statute is Insurance Code section 542 of the Insurance Code . The case under discussion here is about one often important component of one such demanded insurance appraisal, namely, whether and when attorneys representing the insurance are entitled to attorney fees from Ir.

In this case (hereinafter, Rodriguez (HO), abbreviating Home Owner), the Texas Supreme Court was responding to a question regarding Texas insurance law put to it by the Fifth Circuit Court of Appeals, the federal appellate court with jurisdiction over the federal district court where the question was first considered. See 74 F.5th 352 (October 3, 2022).

The case first arose when Rodriguez’s insured dwelling sustained damages resulting from a tornado on May 25, 2019. He filed a claim with his property insurance carrier, and it was processed. A satisfactory result was not obtained. HO filed a lawsuit. There was a court-ordered mediation. No settlement was reached.

Ir, Safeco, demanded an appraisal based on section 542 of the  Texas Insurance Code  and the language of the insurance policy. Once this was done, the controversy over HO’s compensable losses-and-damages was “moved” by law from the court to the statutorily structured appraisal process.

The appraisal proceeded and nearly concluded. The amount of the claim was determined and paid. Usually, that is the end of an appraisal process, unless one of the parties wants and seeks a court-entered order. This is often done. It is usually not an adversarial proceeding. There can be “leftovers,” however, not considered in the appraisal process, and that may involve litigation. Sometimes, allegations of insurer bad faith can be a “left-over,” and in this case the leftover issue was whether the insurer might be required to pay HO’s attorney fees.

Roughly speaking, in breach of contract case, controlled by Texas law, the breaching party may be liable for all or part of the legal fees charged to the contracting party, if the breach is material and causative of injury to the other contracting party. Of course, this rule applies to some insurance contracts, e.g., relevant parts of HO policies. (My abstract illustrative example is just that and no more.)

In this case, there was such a remaining issue, and it concerned Rodriguez’s right to have his attorney fees paid by Safeco. The federal district court had decided on that issue, so there was an appeal to the federal court of appeals. The district court and the appellate court noticed that there were several reported cases on this topic that were in conflict. Some said “Yes, attorney fees can be charged in this kind of case, but other courts took the opposite point of view. The appellate panel, therefore, referred a question to the Texas Supreme Court, its answer to which would provide an authoritative and precedential answer as to relevant Texas law.

The Texas Supreme Court has discretionary jurisdiction under Texas law to answer properly certified questions from the Fifth Circuit Court of Appeals, and other similar courts if it wishes to do so, though it has no duty to answer any certified question submitted to it.  (Many states have laws of appellate procedure at least Texas Insurance Code.

In the “underlying” case that led up to this decision,  an insured HO sustained a compensable loss when a tornado damaged his dwelling. HO filed a claim. The insurer, Safeco Insurance of Indiana (“Safeco” or “Ir”) paid $27,449.88, a relatively small sum, given the damages; HO accepted the payment as part of the sum which he alleged he had demanded. His attorney sought an additional $29,500.00, which sum included attorney fees. Ir refused to pay further, so HO sued Ir on June 18, 2020, in Texas state court on several theories, including breach of contract, i.e., of the insurance policy and statutory bad faith. His causes of action included attorney fees.

Ir removed the case to the federal district court, based on diversity of citizenship. The dispute could not be resolved by mediation, so Safeco demanded resolution by an “insurance appraisal.” As already indicated, Texas law contains such a quasi-mandatory procedure, as do many other states.

In the end, there was no disagreement as to coverage limits and as to whether Id. had paid policy limits. It had. Indeed, the parties agreed that Ir’s had paid an additional $9,458.40 to cover additional possible interest.  So, the only issue left was HO’s right to have Ir pay his lawyer’s entitlement to attorney fees, and if so, how much. Or, to put the matter slightly differently, did Ir have a duty to pay HO’s legal fees?

Underlying all this is whether the insurer’s paying all of the amount determined by the appraisers ends the matter or whether there is still HO’s entitlement to attorney’s fees. Sometimes, issues regarding the insured’s legal fees arise after the appraisal process is concluded. Those cases are not the same as this one.

This matter – the award of attorney fees and the permitted amount is controlled by the language of the Texas Insurance Code, 542A.007. It is not as simple as reading a “Jack and Jill” children’s book, but it is genuinely difficult only for those who did not complete 4th-grade arithmetic class or who have never realized that a problem in arithmetic may involve two or more steps – such as the one here one being division and the other involving multiplication.  

As applied here, and in most other cases, the relevant section of the statute specifies that the amount of attorneys that may be awarded to a claimant in a case governed by that statute – shall be the lesser of three choices as found in 542A(a)(1), (2) and (3), and now we come to the only complicated part. The amount that may be awarded is determined by 542A.007(a)(1), the usual way awarding amounts of attorney fees in litigation, where they can be awarded are determined in trials.

The proper amount 542.007 is determined by two arithmetical challenges, if they constitute the lesser amount the number found in the judgment after the work done, then decided by the finder of fact but divided by one number, 542.007(a)(3)(A), resulting from a division and then that number is multiplied by another. 542.007(a)(3)(B).

         The parties disputed the calculation. Ir argued that having paid the appraised amount in formal appraisal and an additional sum to cover interest, discharged it from having to pay attorney’s fees. HO argued the contrary. He argued that an amount owed by an insurer is not limited by its payment of policy limits and an additional payment. Such a payment may not refute an insured’s right to attorney fees, since that amount is determined by an insured’s breach of contract, so payment of policy limits under the contract of insurance does not defeat an obligation of payment to an insured for the insurer’s breach of contract. HO’s position, in effect, was that Ir had breached the contract by failing to pay at least twice before it finally did pay.

Thus, the insured argued that there must be an amount of attorney fees to which the insured might be entitled for such a breach. That is often the case, both in ordinary breach-of-contract cases and in breach-of-insurance contract cases. However, if the amount or the possible award of attorney fees is controlled by a statute and if the statute is such that the amount of attorney fees that can be awarded is zero, then there is nothing to argue about. And that is what happened in this. The important thing to remember is that awards of attorney the insurer may be obligated to pay are limited by the statute.

Now, let’s look at the “fraction” that is prescribed/required by sub-subsection (3) of the statute’s subsection. It limits awards of attorney fees awardable as the result of a calculation. That computation must begin with answering a question that is not mathematical, namely, whether and/or to what extent the insured sustained losses or sustained damages (losses) covered property.

That answer to that question is usually answered in insurance appraisals by the decisions of the “appraisal panel” –  two appraisers (two out of two) usually, and sometimes including the umpire (two out of three).

Quite often, this answer will bring the matter to a close. Once the appraisers have concluded their work, unless there is property damaged by the event bringing about the claim, once the appraisers have concluded results as to all covered damaged or lost damaged property, the appraisal is over, as is the case, except for obtaining a judgment from a court, if the appraisal process requires that.

Now, suppose the insured has paid the entire amount in controversy, that is, all the lost or damaged property at issue, and so no property value has been erroneously excluded from consideration or, at least, that has been left out of the prescribed calculation. (Of course, errors in computing the worth of the property in controversy are to be ignored, though corruption is not.*)  In this case, HO is not arguing that there were errors in the appraisal process. (I will return to this point presently.)

So now we turn to arithmetic. It is to use visual fractions. Step #1 is to divide the amount to be awarded in the judgment for the claimant’s claim under the policy by the amount alleged to be owed on the claim.  

Remember: HO did not contest the proposition that the appraisal process had entirely treated his claim and that the insurer had paid that amount, at least. In my opinion, there was nothing left to “argue about.” (There might have been if HO alleged an error in the appraisal process.

 But let’s use the court’s methodology. It said divide the amount to be awarded by the court in its judgment by the amount alleged by HO to be unpaid in the appraisal – in other words, the amount the insurer still owes HO at the end of the appraisal process. Of course, this is a model for guidance only, but it’s good enough.

Of course, this number resulting from the division will be zero ($0), and for discussion here, forget about the $-sign. The insurer so far will owe nothing, so the insured will not be entitled to any recovery. The situation is very much like the situation in which the final judgment of a court says, “The plaintiff takes nothing.” Consequently, there can be no award of attorney fees.

At this point, there is a bit of wit built into the problem. The numerator in the visual fraction is to be multiplied by the amount HO is said to be unpaid in the appraisal. Of course, that number is zero ) ($0), as well. So what we have is zero being divided by zero (0/0). It is not hard to guess what the result is going to be.

At this point, there is a bit of wit built into the problem. The result in the visual fraction is to be multiplied by the amount HO is said to be unpaid in the appraisal. That number is zero ($0), as well. So what we have is zero being divided by zero (0/0). It is not hard to guess what the result is going to be.

The court seems to have taken the idea that “Plaintiff takes nothing”  too seriously because the remainder of the court’s solution to its arithmetic problem is as if the statutorily prescribed division and multiplication simply uses the idea of  “nothingness.” From the point of view of mathematics, this idea is nonsense, quite literally.  (Of course, when we talk about a plaintiff taking nothing, we don’t usually say, “The plaintiff takes $0.” But that is exactly what is happening.

What the court seems to have forgotten is that arithmetic works by means of (or “in”) numbers. The same is true for most parts of mathematics, though not all. The controlling statute is arithmetic in nature; this means that it is, by its very essence, numeral in nature and, therefore, to be understood and applied by using numbers, and not utilizing ordinary judicial (or legalistic)  English language usage. It must be done “by the numbers” in at least two senses.

(At one point it is describing step one, the division step, the court uses fractional language and simply says there is no numerator. That’s nonsense, of course.
Footnote 5 in the court’s opinion illustrates the court’s unnecessary – impossible – mathematical nervousness.)

So here’s how the actual process works. The visual fraction for Step One consists of a numerator and a denominator. The numerator is zero; the denominator is zero, so the arithmetic result is zero. Now, let’s go on to the multiplication. It’s zero times zero, and that, of course, is zero. (The court does say quite this.

But, “QUED,” as the saying goes.

It seems to me that the court’s exposition of this case is mostly well done. It seems concerned some lawyers might try and wiggle out of precedential importance by bringing up a different kind of appraisal case where the process, including the arithmetic, might be quite different. Consider one in which there is a continuing controversy as to what is or may be included in the appraisal process. Or consider one in which there are two different insurance policies involved in the claim but, say, inadvertently not included in the appraisal process.

In conclusion, it is worth recognizing that this case arises out of a situation in which there are several cases that have said one thing and a smaller number of cases that have said the opposite. There is a much simpler way to deal with this matter than was deployed here. There is Texas precedent governing this case and any that fit into its pattern, that is Ortiz v State Farm Lloyds, 589 SW3d 127 (Tex. 2019) “holding that an insurer’s payment of the appraisal award discharges its obligations under the policy.” There was no breach of contract in that case, nor was there one in this case, given the way the statute is formulated. If there were a case other than Ortiz like this case, there would have to be a different pattern of facts, or it would be controlled by something other than section 542A of the Texas Insurance Code.

Such a different statute is quite possible. Suppose HO’s right to attorney fees to pay his lawyer if the lawyer has had to put in a lot of work on behalf of his client, e.g. because the insurer was obstructionist or not so bright and through a lot of work the lawyer persuaded the insurer to pay a larger sum than it originally offered.

This last observation is purely imaginative though sensible.  The controlling Texas statute looks nothing like this imagined one, however, and statutes are interpreted as written, so the saying goes.