Virtually all property insurance policies contain an appraisal clause, which outlines the appraisal procedure in broad terms. Those broad terms sometimes do not provide much guidance about the process, or about the effect which an appraisal award may have. A case in point is Graber v. State Farm Lloyds, 2015 WL 11120532 (N.D. Tex. 8/6/15).
In Graber, plaintiff purchased a homeowner’s policy from State Farm Lloyds. Plaintiff claimed that the home suffered covered damage as a result of a hailstorm. State Farm Lloyds inspected the home and concluded covered hail damage was present in certain areas of the home. On this basis, State Farm Lloyds issued a payment to plaintiff for damage to those itemized areas. Plaintiff was unsatisfied with the payment and requested a reinspection. State Farm Lloyds appointed a new inspector, reinspected the property and issued a supplemental payment on the claim. Plaintiff remained unsatisfied and sent a notice letter under the Texas Deceptive Trade Practices Act. State Farm Lloyds conducted a third inspection, but found no additional covered damage. Plaintiff then filed suit, claiming that State Farm Lloyds breached the terms of the insurance policy by failing to make full payment on the hail claim. Plaintiff also alleged, among other things, that State Farm Lloyds was liable for statutory penalties for not paying the claims in a timely manner under Texas Insurance Code section 542, commonly known as the Texas Prompt Payment of Claims Act. After litigating for approximately nine months, Plaintiff invoked appraisal under the terms of the insurance policy.
The appraisal award came back substantially higher than the amounts paid by State Farm Lloyds. State Farm Lloyds timely tendered the appraisal award, less deductible and prior payments, and then moved for summary judgment. State Farm Lloyds argued that its timely payment of the appraisal award eliminated Graber’s claims that it had breached the insurance contract or failed to pay plaintiff’s claims in a timely manner. The district court dismissed plaintiff’s claims for breach of contract and statutory bad faith, but held that timely payment of an appraisal award did not equate to timely payment of the insurance claim itself under section 542. Thus, because State Farm Lloyds paid the appraisal award after the statutory deadlines ran, State Farm Lloyds could be held liable for statutory penalties and interest. In making this ruling, the Court acknowledged several prior opinions which reached a contrary conclusion. State Farm Lloyds asked the Court to reconsider this ruling, arguing that it could not be held liable for breach of contract due to the payment of the appraisal award. The Court rejected this, and similar, arguments. Essentially, the Court held that State Farm Lloyds admitted liability when it admitted to covered damages in its letter accompanying the initial payment. To the extent that the appraisal covered additional damage items which were not part of the original estimate, there would not be section 542 liability for those payments, as State Farm Lloyds had not admitted to such coverage. Although State Farm Lloyds disputed any liability beyond its agreed payment, the mere acceptance of responsibility meant that State Farm Lloyds could be responsible under the Texas Insurance Code for statutory penalties arising from the underpayment of the agreed damage in the loss.
As acknowledged by the Court in its initial order, the Graber ruling runs contrary to other Texas case law regarding the effect of timely appraisal award payments: In re Slavonic Mut. Fire Ins. Ass’n, 308 S.W.3d 556 (Tex. App. Houston 2010); Amine v. Liberty Lloyds of Tex. Ins. Co., 2007 WL 2264477 (Tex. App. Houston 2007, no pet.); Waterhill Cos. Ltd. v. Great Amer. Assur. Co., 2006 WL 696577 (S.D. Tex. 2006); Breshears v. State Farm Lloyds, 155 S.W.3d 340, 343 (Tex. App. Corpus Christi 2004, pet. denied). In Breshears, for example, the insurer’s “reasonable” – though insufficient – payment of a claim was enough to satisfy the prompt payment requirement under section 542. Without so stating in its opinion, Graber appears to center around the discrepancy between State Farm Lloyds’ initial payment and the appraisal. The ruling also threatens to undermine the goal of prompt claim payment. Under Graber, a carrier which makes a partial payment will have admitted to liability, for at least part of a claim. Thus, Graber might incentivize a carrier to dispute all of a claim and call for appraisal in order to avoid any statutory liability, rather than promptly pay a portion of the claim and appraise the remainder. Notably, State Farm Lloyds made the initial undisputed payment under a complete reservation of rights. However, the Court did not find that payment in this manner would make any difference when assessing statutory liability.
The Fifth Circuit will not have a chance at appellate review, because the case has since been resolved by other means. Essentially, the Graber ruling raises questions about the effect of an appraisal award and complicates an adjustment where some aspects of a claim can be paid as undisputed.