TEXAS PROMPT PAYMENT OF CLAIMS ACT & POLICY APPRAISAL CLAUSES
BARBARA TECHNOLOGIES [BT] CORPORATION, PETITIONER
v.
STATE FARM LLOYDS [SFL], RESPONDENT
17-0640
JUNE 28, 2019
589 S.W.3d 806 (Tex. 2019)
MAJORITY OPINION aka COURT'S OPINION
PRELIMINARY OBSERVATIONS [MSQ COMMENT]
In reading, reviewing, studying, and thinking about this case, it is important to keep four things in mind:
First, the case is technically about how the appraisal process fits in with the law regarding timetables for assessing damages against first-party property insurers that are liable to pay claims made by insureds under their contracts of insurance. It is not, however, restricted to that relatively rare topic. It is also a discussion regarding relevant or related provisions of the Texas Prompt Payment of Claims Act. What the Court, as a whole--all justices together--has set out to do, whether consciously or unconsciously, is to create a new logical and rhetorical structure of legal practice–whether advising, pleading, discovery, trial, or appellate–when it comes to statutory insurance bad faith in the claims process.
Second, one should keep in mind that there are other ways to think about, pursue, punish, compensate, and prevent statutory bad faith cases. This case is not about insurer bad faith when it comes to wrongful denial of a claim, performing poor or no investigations and related topics. It is about the timetables facing the insured that are actually and already known to be liable for paying the insured's claim. The Opinion of the Court makes this point explicitly by referring to Subchapter 541 which is entitled UNFAIR METHODS OF COMPETITION AND UNFAIR OR DECEPTIVE ACT OR PRACTICES DEFINED. One has the impression that the Court is specifically referring to section 541.151 & .152. But all that is another matter for a different case.
Third, it is important to keep in mind a procedural matter. This is a case that arose out of a judgment rendered on a situation in which there were cross-motions for summary judgment. One needs to keep in mind which party has what burden of proof in the particular kind of context facing the Court, as opposed to another, e.g., where there was a trial on the merits.
Fourth, this case involves a rather complicated set of opinions. This may come as a surprise to at least some readers since the operative statute at issue is not (or appear not to be) complex. Readers of this blog and the three opinions which come from the court who are not already familiar with the Court's statutory bad faith jurisprudence may need to read slowly, several times, and be ready to consult cited cases. (The relevant and reliable treatise literature is non-existent, but some CLE papers may be helpful.)
Normally "Quinn Comment" sections are in smaller type. Not this one, however.
OPINION OF THE COURT
This case concerns when the crucial timetable found in Section 542 of the Texas Insurance Code begins to run where there is an appraisal clause in the insurance policy, the insurer invokes it, the appraisal finding that overrules the insurer's valuation of the case by many times 100%, and the insurer pays the appraisal value promptly upon its having been "rendered." The insurer had not actually "denied coverage," although it had originally calculated it to fall completely within the deductible clause.
Although none of the three opinions speculate as to the thoughts of the policyholder's lawyers, it is easy to imagine what they must have been.
Here is part of the opening paragraph of the Opinion of the court. Justice Green delivered it, and he was joined by four other Justices:
Thumb Nail Introduction
There were cross-motions (competing motions) for summary judgment. The issue was "whether an insured party can prevail on its claim for damages for delayed payment pursuant to the Texas Prompt Payment of Claims Act (TPPCA), see Tex. Ins. Code [TIC] 542, when it is undisputed that the insurer investigated the claim, rejected it, invoked the policy's provision for an appraisal process, and ultimately paid the insured in full in accordance with the appraisal." As the Court observes, this case is not about the provisions to be found in other places such as TIC section 541.
The majority held No: "[T]he insurer's payment based on the appraisal was neither an acknowledgment of liability under the policy nor an award of actual damages." The insured did not establish that it was entitled to TPPCA prompt payment damages, as a matter of law. The insurer likewise did not establish that it can owe no TPPCA damages, as a matter of law. As a result, the Supreme Court reversed the court of appeals judgment and remanded the case to the trial court for further proceedings.
The case is principally about how appraisals fit into the insurance claims process and the law of statutory insurance bad faith. However, it is also about how to apply Menchaca when an appraisal is used. Moreover, it is about how to interpret TPPCA, a matter of more general interest. If one is pro-policyholder-IBF, the result in this case is disappointing; if you are pro-insurer-IBF you are likely to like it at least a little, while wishing for more.
For the viewer only interested in a thumbnail introduction, stop reading. If one is seeking a more detailed summary and discussion, keep reading.
An Extraneous Quinn Comment
Barbara Technologies [BT] Corporation states publically on the internet that it does business as Americas Computer Company and that it has been in business in San Antonio since 1984. Its company slogan is "We sell the best and fix the rest." It has huge catalogs and sells 140,000 different electronic items. Apparently "electronic" means something like cyber-digital equipment, computer-related stuff, and things like security cameras. It states that it sells to and repairs for governments and educational institutions.
I. Background*
*The titles of sections and subsections here and below are those of the Court.
The policy covered commercial property of Barbara Tech in San Antonio. On March 31, 2013, it sustained wind and hail damage. On November 4, 2013, SFL calculated and communicated to BT $3,153.57 in loss and indicated that this sum was lower than the $5K deductible. On March 14, 2014, SFL provided a second inspection and found no difference. BT filed suit on July 14, 2014. On January 9, 2015, SFL invoked the appraisal clause found in the policy. On August 18, 2015, the appraisal reported the loss value at $195.345.63, which SFL paid, minus the deductible and depreciation paid the next day--that amount being approximately $178,085.25. SFL's payment occurred four business days after the appraisal amount was rendered. BT accepted the sum and amended its suit so as to be about TPPCA timetable violations.
Quinn Comment. Why did it take SFL so long to invoke the appraisal clause? And something else: it is shocking and suspicious that someone--presumable SFL--was this far "off" in its inspections and estimates of loss. Yet none of the Justices makes any reference to this astounding fact. Granted, technicaly speaking, it has notiing to do with the issues in the case. However, something went terribly wrong in this adjustment process, or in the appraisal phase of it.
There were cross-motions for summary judgment. BT wanted to measure the statute's 60-day deadline on payment by the insurer from a date much closer to its filing date of the claim. SF wanted to measure it from the rendition of the appraisal and the deadline never to apply since it claimed it was not liable in any case.
The trial court denied BT's motion and granted that of SFL, and the court of appeals affirmed in 2017. BT v. SFL, 566 S.W.3d 294 (Tex. App.–San Antonio 2017, pet. granted)(mem. op.). No doubt the opinion was short as it was because the court of appeals was relying on its own recent precedent from Garcia v. SFL, 514 S.W.3d 257 (Tex. App.–San Antonio 2016, pet. denied).
II. Appraisal and the TPPCA
Justice Green's majority Opinion of the Court describes the legal issue before it as "whether an insured's claim for prompt payment of damages under the TPPCA survives the insurer's payment in full after the amount of loss was determined through an appraisal process provided for in the parties' insurance policy."
A. Standard of Proof
When there are cross-motions for summary judgment, as here, the court grants the judgment the trial court should have granted.
B. State Farm's Motion for Summary Judgment
SFL filed a "traditional" MSJ on two grounds. First, it claimed not to be subject to TPPCA because it had paid the loss well before the TPPCA deadline if calculated starting with the issuance of the appraisal award, since it paid the appraised amount almost immediately upon the appraisal award being rendered. Second, it claimed that it was not liable for the loss and had not accepted the proposition that it was liable. The San Antonio Court of Appeals reviewed SFL's first argument. The Opinion of the Supreme Court reviewed them both. Justice Green begins outlining and discussing SFL's arguments on p. 5 of its 37-page opinion and doesn't turn to BT's MSJ until p. 32.
1. Payment of Appraisal Award
The Court begins by analyzing the plain provisions of the TPPCA and providing an explication of relevant parts of chapter 542 of TIC. Significantly, it emphasizes that it contains a number of provisions alongside a timetable for the payment of losses. It does not attempt to integrate the Five Rules set forth in Menchaca into its discussion.
a. The TPPCA
Moreover, although the third word in the name of the statute is "payment," the statute contains a number of other provisions. The other specific "requirements and deadlines for responding to, investigating and evaluating insurance claims." All of these are enforceable under TPPCA aka section 542 of TIC. The reader should keep in mind that 542 and 541 are quite different in many ways, some of which are central to the adjustment process.
The Court's descriptions of the key requirements imposed by the statute are worth being fully quoted.
"(1) the insurer must acknowledge receipt of the claim, commence any investigation of the claim, and request any items, statements or forms required from the claimant within fifteen days of its receipt of notice of the claim;
(2) the insurer must notify the claimant of acceptance or rejection of the claim no later than fifteen business days after the insurer receives all items, statements, and forms to secure final proof of loss;
(3) if the insurer notifies the insured that it will pay all or part of the claim, it must pay by the fifth business day after the date of notice of acceptance of the claim;
(4) if the insurer delays payment of a claim for more than the applicable statutory period of sixty days, the insurer shall pay TPPCA damage; and
(5) an insurer that is liable for a claim under an insurance policy and violates a TPPCA provision is liable for TPPCA damages in the form of 18% interest on the amount of the claim per year, with attorney's fees."
The Opinion of the Court makes two additional points also worthy of being quoted:
[1] "[T]he TPPCA has three main components–non-payment requirements and deadlines, deadlines for paying claims, and enforcement."
[2] "Only the payment deadline and enforcement provisions are at issue here [i.e., in this case]."
And so the Court goes on and describes what it must determine: whether SFL's invocation of the policy's appraisal provision and subsequent payment leaves SFL exposed to liability for prompt payment damages under the TPPCA?
Quinn Comment. Is there a problem with (1)? What if an insurer "requests" or demands a "boatload" of items that it does not need and thereby either prolongs the adjustment process or makes it so it never has to accept or reject the insured's claim thereby avoiding TPPCA problems completely? Is a solution to that kind of tactic to be found in TPPCA? The answer might well be no, even though the statute at one point contains a requirement that requests or demands by an insurer be reasonable. What then to do? First, keep in mind 542.055(3); it contains the word "reasonable." Second, look elsewhere: (i) try 541.060, 541.151, 541.152, and related provisions, (ii) try common law bad faith,* and (iii) try breach of contract. Fortunately, the Court's Opinion considers this problem abstractly and issues an important "caution," as shall be seen presently. (Comon law bad faith, the origin of insurane bad faith litigtion is not fashionable these days and is perceived by many to be dead.)
In its section B.1.a, now being discussed, the Opinion of the Court opens its discussion of the relationship between appraisals and TPPCA. It notes that the legislature did not include any explicit reference to appraisal in the Act. However, since appraisal clauses in contracts of insurance and the practice of using appraisals in the adjustment process had been used for many, many years before the passage of TPPCA, it must be inferred that it was aware of the practice and that its use does not alter the requirements and deadlines of the Act. This, said the Court, is a fundamental principle of statutory interpretation; in addition, in a different context, the legislature had placed appraisal squarely in the context of insurance claims adjustment.
The Court also reminded the reader that one of its own decisions had recognized that the use of appraisals and had indicated that appraisal-related misconduct by an insurer might have the consequence that the insurer waived its right to appraisal if its misconduct prejudiced the insured. In re Universal Underwriters of Texas, 345 S.W.3d 404, 410 (Tex. 2011).
________
b. The Appraisal Process
Appraisal clauses are in most property insurance policies. This makes the claims handling process more efficient and less expensive. Appraisals are sometimes used to determine the value of a property, at other times it is used to try and value the loss itself, or to do both.
Quinn Comment. One might wonder if appraisals are always efficient and economical. Appraisal clauses in standard policies, e.g., homeowner policies, require the insured to pay part of the costs. Of course, if an insured cannot afford to pay that sum, then it cannot participate in an appraisal. Might this not give an insurer an advantage and do it in a way that would not appear to prejudice the insured?
It may be that an appraisal fits within an insurer's getting information it needs to actually adjust the claim to finality. The value of a property and the value of a loss are often matters of controversy. An appraisal can bring objectivity to the handling of a claim.
c. Availability of TPPCA Damages for Payment of Appraisal Award
Quinn Comment. In many discussions of TPPCA, and elsewhere, the word "damage" or "damages" is used in several senses. First, an insurer is said to be liable to the insured under the contract, if it owes money to the insured under the provision of the policy. These are sometimes called "contract damages" or "policy-based damages." Second, an insurer may be liable for "TPPCA damages," or other bad-faith damages. And it can be liable for both. Both of these types of damages presuppose that there be coverage under the policy that the insurer is legally obligated to pay. Third, property claims usually involve physical damages to tangible objects in which the policyholder has an insurable interest. (There are rare exceptions to the requirement that there be a physical injury. One of them is where the insured has lost the use of his property as the result of an order by a governmental entity. One sees such claims arising during the Spring of 2020.)
The Court begins this discussion by noting that "the insurance claim process is inherently adversarial. The adversarial process begins as soon as the claim is filed and ends only when the resolution of the claim is finally determined and accepted by the parties. The TPPCA governs the insurer's request for necessary information, investigation, and evaluation of the claim, which then allows the insurer to accept and pay, or reject the claim. The appraisal process, as an agreed-upon mechanism for dispute resolution provided by the parties' insurance policy, is also part of the adversarial process; however, it exists to allow the insurer and the insured to resolve a dispute as to the value of the property or amount of loss, without having to submit to the time and expense of litigation."
In this context, the Court observes a difference between [i] appraisals that occur during the process in which the insurer gathers information, investigates, and evaluating the claim and [ii] appraisals that are sought after the insurer has denied the claim and concluded that it is not liable under that policy, and has therefore received all requested information from the claimant, etc. The Opinion of the Court states that "[w]hen the appraisal process is initiated after the insurer has rejected a claim–that is, after the insurer has received all requested information from the claimant, conducted an investigation, evaluated the claim, and concluded it is not liable under the policy–the issue generally becomes a contractual dispute resolution, rather than a statutory matter of prompt payment of claims."
Quinn Comment. For me, anyway, this is a confusing passage. Justice Green makes it sound like insurers do not deny claims until they have all the information they need or to which they are entitled. This is not the case. Historically speaking, sometimes insurers deny claims because there has allegedly been a violation of a condition in the policy, e.g., lack of cooperation or lack of timely filing. Occasionally, some insurers deny claims because the adjustment process has stalled, and they want the matter 'off' their "books."* It's conceivable that some insurers now and then deny claims because they think they can get away with it or for some other entirely illegitimate reason, e.g., racial, gender, and/or age bias. (*It may be that the times are "ah-changin." It used to be that one never–or almost never–saw an unresolved claim lying around, as it were, "open." One can see that these days. For example, an insurer never expressly denies the claim, but issues a series of reservation of rights letters, the last one indicating somehow that it will do nothing more, unless the insured promptly does X, Y, & Z, and that the insurer will not be sending another reservation of rights letter.
The BT/SFL appraisal was of the second sort; BT has already filed suit responding to STL's denial of its claim when STL demanded appraisal. This brought the Court to an important question. SFL argued that its seeking an appraisal was a method for seeking new information and therefore "constituted an additional information request under section 542.055(b), extending the TPPCA's deadline to accept or reject the claim. If considered information necessary to evaluate the claim, SFL contends that the time period for accepting or rejecting the claim did not begin until its receipt of the appraisal award and that it therefore paid timely–within four business days after it received the information required to secure final proof of loss."
Quinn Comment. If readers of the Court's Opinion find the last seven words of the sentence just quoted confusing, they are not alone. By whom "required"? What might "secure" mean? What is a "final" proof of loss? Who determines that it is final? These are not iron-clad or fixed-terms in property adjustment. It is true that insurers are often entitled to take a claimant's "statement under oath," but it is not necessarily a "final proof of loss." Standard insurance policies do not generally use that phrase, nor does established law.
In any case, because of the necessary connection, the Court's Opinion posits between claim denial (including where the denial is based on the claim's being too small) and the insurer's having obtained sufficient information, it virtually holds that SFL's invocation of the appraisal clause was not part of the investigative process but strictly a contractual matter. The Court observes that if the appraisal process is being used for gathering information, the insurer alone would pay for the appraisal. [See Footnote 8].
Quinn's Comment. This assertion may strike some familiar with the history of the adjustment process and the various ways in which appraisal clauses have been formulated over the years, as less than certain.
The Court's next issue is "[SFL's] argument that full and timely payment in accordance with the appraisal forecloses any possibility of TPPCA damages. . . .[W]e must examine the TPPCA's deadline and enforcement provisions to determine how they apply in the context of contractual appraisals."
The Court makes two important points:
First, if an insurer invalidly denies a claim, this may very well trigger TPPCA damages if the adjustment process then goes on after the TPPCA deadline.
Second, the Court cautions that various opinions found in courts of appeal are disapproved to the extent that they can be read to "excuse an insurer liable under the policy from having to pay TPPCA damages merely because it tendered payment based on an appraisal award or to foreclose any further proceeding to determine the insurer's liability under the policy. . . . Nothing in the TPPCA would excuse an insurer from liability for TPPCA damages if it was liable under the terms of the policy but delayed payment beyond the appliable statutory deadline, regardless of the use of the appraisal process."
2. State Farm's Liability
STL had a second ground for seeking summary judgment: "it has not been shown to be, and cannot be shown to be, liable under the policy for Barbara Tech's claims." The Court's Opinion "construe[d] State Farm's argument to be that the liability element in section 542.060(a) is negated as a matter of law.
a. Section 542.060
Quinn's Opening Comment. The exact language of 542.060(a) is extremely important. It is important to notice that an insurer can be liable for two different kinds of damages, those that arise under the contract of insurance and for those that arise from TIC. It is also important to keep track of the fact that the term "liable" has at least two meanings in "legalese." (i) In one sense, someone is "liable" for failing to do x, if he was obligated to do x and didn't; (ii) in another sense, someone is liable for failing to do x, only if he has acknowledged (or admitted?) his liability or it has been officially established. This is a very important distinction. The Court pivots toward sense (ii) while the Boyd Opinion pivots toward sense (i)
The language that matters here is in 542.060(a): "If an insurer that is liable for a claim under an insurance policy is not in compliance with this subchapter [i.e., SUBCHAPTER A. UNFAIR CLAIM SETTLEMENT PRACTICES, the insurer is liable to pay the policyholder. . . [TPPCA damages]" (Emphasis added.)
Quinn's Next Comment. In spelling out the meaning of the language from 542.060(a), the Court uses the second sense of "liable." Thus, an insurer is not liable under a contract of insurance unless it has acknowledged that it is or there has been an official court or arbitration finding that it is liable. Only when an insurer's liability has been thusly established do the compliance requirements of subchapter B kick in. Obviously, the second meaning of liable--the one the court uses--is much narrower than the first sense. One could even call the first sense of "liable," "potentially liable," and call the second sense of "liable" "actually liable." If this language is used, 542.060 applies only to insurers who are actually liable under the contract of insurance. But see the Boyd Opinion.
The Court's reasoning then becomes manifest. Nothing about the fact that SFL utilized the appraisal clause establishes that it was not liable under the contract nor does its use make it legally impossible to proving its liability. "[I]n this case. . . State Farm's invocation of the contractual appraisal process did not supplant its earlier rejection of the claim in accordance with TPPCA." "State Farm's liability on the claim has not been established through the TPPCA process or as a result of the contractual appraisal process." "[U]nder the TPPCA, until an insurer is determined to owe the claimant benefits and thus is liable under the policy–either by accepting the claim and notifying the insured that it will pay, or through an adjudication of liability–the insurer is required to pay nothing, is subject to no payment deadline, and is not subject to TPPCA damages for delaying payment. This is not to say that a rejected claim can never trigger damages under the TPPCA; to the contrary, if an insurer later accepts a claim after initially rejecting it or if an insurer is adjudicated liable for a claim it rejected, TPPCA deadlines and prompt pay requirements will apply."
Given the nature of appraisals, however, paying a claim on the basis of an appraisal does nothing to establish an insurer's liability under its contract with the insured. Afterall, appraisals are not about liability; they are about valuation. The fact that an insurer pays a claim after an appraisal does not show liability; it is much more like a settlement than it is like an arbitration.
Matters would be quite otherwise, said Justice Green, if SFL had refused to pay the appraisal award then a judgment had been rendered against it that it was liable on the claim and thus had wrongfully withheld payment of the claim. The parties agreed that the judgment would subject TFL to TPPCA damages for delay in paying the claim.
Quinn's Comments. Two points: (1) Is the court using both senses of "liable"–one for contractual liability under the insurance policy and the other one for liability under TPPCA? (2) The Court's decision on this part of the case (i) involves discussions of much recent presidential history and (ii) is much more complicated-looking than my explication of it. On problems regarding the term "liable," see the Boyd Opinion
b. Section 542.058
The Court does not analyze this section of Subchapter 542 since it was not really an issue before the court. However, it reminds readers by discussing precedent briefly that in order to recover under 542.060 an insured must establish (1) a claim under the insurance policy, (2) the liability of the insurer for that claim, and (3) that the insurer has failed to comply with at least one of the TPPCA sections with respect to that claim.
c. Other Remedies
The Court's Opinion spends several pages regarding other remedies an insurer might have. It does not include common law bad faith, however. It makes at least one extremely important point, however, and that is this: an insured may have a breach of contract actions. "Thus, we caution that outright denials of insureds' claims without good faith investigation and evaluation are not an insurer's answer to TPPCA prompt pay damages."
B. Barbara Tech's Motion for Summary Judgment
The Court sees nothing new to discuss since the principles have all be dealt with in earlier parts of the Opinion.
D. Actual Damages
BT argued that it was entitled to recover the value appraisal award as "actual damages" under TPPCA. It was proceeding on the basis of one of the Five Rules laid out on Menchaca in accordance with which an insured might recover actual damages from an insurer if it caused the insured to lose its claim and the actual damages would be what insured would have received if the insurer had not torpedoed the insured's claim. BT then claims that the appraisal award is that sum, and so it should be counted as actual damages as part of the TPPCA.
The majority disagreed on very simple grounds. In order for an amount to be actual damages, there must be a logically antecedent finding or judgment as to liability. There is no such thing in an appraisal. Quite the opposite. It is not an adjudication and therefore should not be treated as such.
Quinn's Final Comment.
I have been asked in a deposition from time to time whether I was certain as to the truth of what I had said. My answer is a shortened version of this: "No I am not certain. I am describing an empirical matter and expressing conclusions about them. Empirical propositions are always contingent and often slightly wrong. Sometimes they are simply the function of the scientific mind is to be ready to recognize errs and ready to revise descriptions and hypotheses. I am usually right about what I assert since I built a little bit of vagueness in, or what I say is close enough to right that the error is of no consequence. Usually, in measuring small distances an error of 1/100 of an inch is an error, but almost completely negligible, except in unusual-to-rare, high precision situations. Still, the pervasiveness of negligible, indifferent errors is enough to justify the avoidance of certainty and dogmatism both in what is said and in what is thought. Those who do not recognize this principle are not just dogmatic but epistemologically arrogant, even prideful.
