On May 16, the Court of Appeals for the Fifth District of Texas at Dallas resolved an ongoing question, holding that an insurer's tender of possible interest payments that could be due under the Prompt Payment of Claims Act would foreclose an insured's ability to obtain attorney's fees against the insurer in Texas Insurance Code 542A cases.
Chapter 542A applies to insurance claims that arise out of forces of nature (i.e., earthquakes, earth tremors, freezes, wildfires, floods, tornados, lightning, hurricanes, hail, wind, snowstorms, or rainstorms).
Previously, only federal courts had addressed this issue, with the majority of district courts noting that an insurer reducing the potential judgment on a matter to zero following payment of an appraisal award would result in no award of attorney's fees.
Some opinions more broadly held that an insured was precluded as a matter of law from recovering attorney's fees where there was also no entitlement to damages under the Texas Prompt Payment of Claims Act (TPPCA).
Other courts noted that Chapter 542A limits the recovery of attorney's fees where the amount awarded in the judgment is less than the amount demanded by an insured. If the possible judgment is zero, then the attorney's fees award can only be zero, therefore entitling the insurer to summary judgment on the insured's TPPCA claim.
A minority of district courts have held that an insurer's payment of the appraisal award and interest does not necessarily defeat a claim under the TPPCA. One court held that paying the interest in advance was akin to a failed attempt to unilaterally settle the claim; other courts denied summary judgment where an insurer did not prove how it calculated statutory interest or when the interest began to accrue. The minority opinions also relied on Hinojos v. State Farm Lloyds, in which the Court specifically held that the partial payment of a claim only mitigates the possible damage owed and does not relieve an insurer of all liability.
Prior to this recent decision on May 16, only one state court case had addressed whether the payment of statutory interest under the TPPCA would preclude recovery of attorney's fees. However, Chapter 542A did not apply to this case because it applied an earlier version of the statutory framework for calculating TPPCA interest and attorney's fees. In this case, the insurer argued that it was entitled to summary judgment as a matter of law because it:
- voluntarily paid the appraisal award; and
- voluntarily paid the statutory interest due on the late payment of the claim.
The Houston Court of Appeals held that under the TPPCA, if an insurer fails to transmit payment to an insured on a valid claim within the relevant statutory deadlines, an insurer is required to pay:
- the amount of the claim;
- interest on the amount of the claim at the rate of 18 percent a year as damages, together with reasonable and necessary attorney's fees.
Relying on precedent, the court rejected the insurer's argument and held that paying an appraisal award along with statutory interest calculated on the basis of the appraisal award would be "akin to forcing on the insured a settlement that the insured did not agree to."
While the Houston Court of Appeals reasoned that an advance payment of an appraisal award and statutory interest might entitle an insurer to an offset, it does not as a matter of law vitiate a TPPCA claim.
The New Texas Court of Appeals' Ruling: Rosales v. Allstate Vehicle and Property Insurance Company
This case involved a 2020 hailstorm, which was adjusted below the policy deductible. The insured filed a lawsuit against its insurer alleging breach of contract, bad faith, and TPPCA violations. Nearly five months after the lawsuit was filed, the Insured invoked the appraisal clause. Following the issuance of an appraisal award, the insurer paid the actual cash value of the award, less the policy deductible. The insurer also issued payment for any interest that could be alleged under the TPPCA.
The Dallas Court of Appeals noted that the findings in prior Texas Supreme Court decisions, specifically Barbara Technologies, were distinguishable given that Chapter 542A did not apply to those cases. Notably, the Court inferred that it would be an unreasonable stretch to apply the case to preclude the recovery of attorney's fees if both the appraisal award and interest were paid, noting that the case only held that the payment of the appraisal award alone would be insufficient to preclude claims for TPPCA interest and attorney's fees, but ultimately found the case distinguishable without ruling on the issue.
The Court outlined the exact recovery provided under Chapter 542A, including the contractual amount due under the claim (determined via appraisal), the interest due if untimely (pursuant to Section 542.060(c)), and attorney fees (pursuant to Section 542A.007). Notably, Chapter 542A can operate to limit the recovery of attorney's fees where an insured obtains a judgment that is less than the amount the insured demanded before filing suit.
Specifically, this statute can reduce attorney's fees by a percentage which is calculated by dividing the amount to be awarded in the judgment under the policy by the amount the insured alleges is owed in its pre-suit notice letter. In applying this statute to this case, the Court explained that once the appraisal award was paid, there remained no amount that could be awarded under the policy in a judgment, and as a result, the attorney fee recovery would be zero. The Court even went further to note that the existence of statutory damages for interest would not change the calculation of attorney's fees, as Chapter 542A's calculation for fees looks at the "amount to be awarded for a 'claim under the insurance policy for damage to or loss of covered property.'"
Because TPPCA interest is not an amount awarded under the policy, it is therefore not part of the code's formula for attorney's fees. Given that the insurer in the present matter paid "(1) the amount of the claim as determined by the binding appraisal, (2) the maximum amount of interest owed as statutory damages under 542.060(c), and (3) reasonable and necessary attorney's fees of zero as calculated by 542A's formula ... ," there was no additional recovery for the insured under the Texas Prompt Payment of Claims Act, and the insurer was entitled to summary judgment.
Unlike the court in Ahmed, this Court held that the insurer's "prepayment of all possible damages does not create an involuntary, unilateral settlement of claims, but rather it is an effort to extinguish the underlying obligation."
The Court specifically noted that the pre-payment of the interest was not an attempt to unilaterally settle a claim and that Texas law supported such a pre-payment as a way of reducing their liability and encouraging defendants to pay what is owed before trial. However, in making this distinction, the Court relied exclusively on the application of Chapter 542A.
Changes to Post-Appraisal
Prior to the Rosales decision, insurers frequently had to decide whether to pay interest on an appraisal award that could be calculated under Chapter 542 to mitigate damages going into potential litigation. A majority of federal courts had already agreed that an insured's claim for attorney's fees is precluded upon payment of an appraisal award and potential interest, entitling an insurer to summary judgment on a TPPCA claim in Chapter 542A cases. However, insurers that had to proceed in state court did not have a clear direction on whether such a pre-payment would be advantageous.
The Court's opinion provides guidance on this issue, making it easier for insurers sued in Texas state courts where Chapter 542A applies to mitigate potential damages against an insured post-appraisal. However, the advantage of this change would be very dependent on the type of claim, the amount of loss at stake, and the amount of time that has passed before appraisal has concluded, as these issues may affect the ultimate interest calculation.
Nevertheless, even if the insurer did not pay interest post-appraisal, this decision does suggest that if an insurer makes a full payment of an appraisal award in a case governed by Chapter 542A, and where there are no additional damages awarded under the policy following trial, this payment could preclude an insured from obtaining attorney's fees based upon the formula in Section 542A.007.
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