By Jessica C. Engler & Michael deBarros[1]

Policyholders are often disappointed in the amount of time their insurers take to investigate and pay claims.  In 2003, the Texas Legislature enacted the Texas Prompt Payment of Claims Act (“TPPCA”) to facilitate the prompt investigation and payment of Texas insurance claims.[2] Codified at Section 542 of the Texas Insurance Code, the TPPCA imposes an affirmative duty on insurers to promptly pay claims as soon as it becomes “reasonably clear” that they are obligated to do so under the policy.

The TPPCA outlines requirements and deadlines that insurance carriers must meet to avoid paying penalties to an insured.[3] In short, the TPPCA generally requires insurers to accept or reject claims within 15 business days of receiving of the insured’s written notice of claim, or within 30 days for surplus line insurers. If the insurer rejects the claim, it must state its reasons for rejection. If an insurer accepts a claim, it must pay the claim within 5 business days. If the insurer fails to pay the claim within 60 days, the insured is entitled to payment of the claim, statutory damages of 18 percent interest per year, and attorney’s fees.

Texas courts have continuously held that to prevail under a claim for TPPCA damages under section 542.060, the insured must establish: (1) the insurer’s liability under the insurance policy, and (2) that the insurer failed to comply with one or more sections of the TPPCA in processing or paying the claim.[4] Although this test is easily applied to insureds who do not receive acceptance or rejection of their claim within the 15 day time period, or payment within 5 business days after acceptance of their claim, the procedure is less clear when the insured submits to the appraisal process after the insurer has rejected the claim.

Many property insurance policies have appraisal clauses. A typical appraisal clause provides that if the insured or the insurer disagrees on the valuation of property or the amount of loss, either party may make a written demand for appraisal of the loss. After the demand is made, the insured and insurer each select an appraiser and the two appraisers value the property and set the amount of the loss as to each item. If the appraisers fail to agree on a valuation or the amount of loss, the dispute is submitted to an “umpire” who determines a valuation and amount of loss that is binding on the parties.

In Barbara Technologies v. State Farm Lloyds[5]  and Ortiz v. State Farm Lloyds,[6] the Texas Supreme Court recently decided whether an insurer may be liable for damages and fees under the TPPCA after it pays an insured, in full, within five business days of an appraisal award. The cases are factually similar. In both cases, the insureds filed claims for wind and hail damage and State Farm denied the claims, alleging that the damages sustained were less than the policy deductibles. The insureds filed suit to recover damages for the underpayment, and State Farm invoked the appraisal clauses. The appraisers found State Farm had undervalued the loss, and State Farm issued payments to the policyholders within the five business days of the appraisal award. The trial court in both cases concluded that State Farm’s prompt payment of the appraised amount at the conclusion of the appraisals foreclosed all TPPCA claims against the insurers.

On appeal, the Texas Supreme Court held that the TPPCA’s requirements and deadlines—including the 60 day payment deadline—continue to apply, even during appraisal. Consequently, an insurer’s payment of an appraisal award within five business days of the award does not immunize it from TPPCA claims. The Court did note, however, that an appraisal award does not establish liability under an insurance policy as a matter of law.  Therefore, an insured must still prove that the loss is covered under the policy to succeed in its TPPCA claim.

These cases are important because insurers can no longer avoid TPPCA liability by rejecting a claim, invoking appraisal, and delaying payment until the appraisal concludes. In his dissent, Justice Nathan Hecht cautioned that the holding could have a chilling effect on the appraisal process:

The result of today’s decision is this: If an appraisal is requested, either by the insurer or the insured, after a claim has been rejected in whole or in part, and the insurer immediately pays the award, it is nevertheless liable for 18 percent interest and attorney fees if the claim is later adjudicated to be covered by the policy. Unless the insured gives up, litigation is unavoidable, either over the rejection or over the penalty. If that does not make appraisal requests unlikely, it certainly makes them less likely. The Court renders the appraisal process it praises of little use.

Time will tell whether these opinions materially affect the way insurers handle claims in Texas.  For now, insurers are on notice that the appraisal process will not, by itself, suspend or eliminate TPPCA delay damages.

*********************************************************

[1] Special thanks to Gabriella Leonovicz, Tulane University Law School Class of 2021, for her assistance with this article.

[2] See Mike Geeslin, Texas Dep’t of Insurance, Technical Advisory Committee on Claims Processing Report on Activities, Sept. 2010, at 2-4 (2010).

[3] See Tex. Ins. Code §§ 542.055(a)(1)-(3), .056(a), .057(a) .058(a), .060.

[4] Barbara Technologies Corp. v. State Farm Lloyds, No. 17-0640, p. 10, June 28, 2019 (https://www.txcourts.gov/media/1444300/170640.pdf)

[5] Id.

[6] Ortiz v. State Farm Lloyds, No. 17-1048, June 28, 2019 (https://www.txcourts.gov/media/1444305/171048.pdf)