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5th Circ. Insurance Case May Encourage Post-Appraisal Suits

Insurance Law360
September 30, 2020

By Michael C. Upshaw
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On Oct. 6, the U.S. Court of Appeals for the Fifth Circuit is set to hear oral arguments in Pearson v. Allstate Fire and Casualty Insurance Company. The case centers on statutory construction of Chapters 542 and 542A of the Texas Insurance Code, and the Texas Supreme Court's recent holdings in Barbara Technologies Corp. v. State Farm Lloyds[1] and Ortiz v. State Farm Lloyds.[2]

The specific issue to be addressed on appeal is whether amounts previously paid by an insurance carrier pursuant to an appraisal award can be considered actual damages for the purpose of calculating attorney fees. The Fifth Circuit's determination is sure to have a profound effect on post-appraisal litigation in Texas.

Setting the Stage

The Texas Supreme Court threw the Texas property insurance industry into a frenzy in the summer of 2019 when it held in Barbara Technologies that an insurer's prompt payment of an appraisal award did not foreclose or establish liability under Chapter 542 of the Texas Insurance Code, otherwise known as the Texas Prompt Payment of Claims Act, or TPPCA.

Ortiz, which was decided on the same day as Barbara Technologies, was less controversial in that it generally kept with Texas precedent that a policyholder's breach of contract and, accordingly, statutory and common law bad faith claims, were precluded following the timely payment of an appraisal award.

But Barbara Technologies opened a previously closed door for policyholders to attempt recovery of statutory interest and attorney fees through the TPPCA, or at least extract higher settlements with the threat that interest and attorney fees were not precluded, "if an insurer later accepts a claim after initially rejecting it, or if an insurer is adjudicated liable for a claim it rejected."[3]

Two major issues emanated from the confusion resulting from the Barbara Technologies holding. The first is identifying the circumstances that trigger liability under the TPPCA in the first instance. That is: Is an insurer's timeliness in investigating and paying a claim and the difference between the amount paid by the insurer and a later appraisal award dispositive?

Courts construing Texas law before and after Barbara Technologies have held that if an insurance carrier complied with the timing requirements of the TPPCA and made a reasonable claim determination, even if that determination was lower than a subsequent appraisal award, then the insurer complied with the TPPCA.[4] This issue is currently before the Texas Supreme Court in Hinojos v. State Farm Lloyds.[5]

The second involves the effect of an insurer promptly paying an appraisal award and applicable statutory interest on the award. Interest and attorney fees are the only damages recoverable under the TPPCA, and only if an insurer accepts liability or is adjudicated liable.

In this situation, the question is whether the courts will allow a policyholder to incur attorney fees in determining liability for the sole purpose of recovering such attorney fees. That is the issue before the Fifth Circuit in Pearson.

Pearson v. Allstate Fire and Casualty Insurance Company

The facts in Pearson are fairly straightforward. Corrine Pearson's residence was damaged by a storm event. Pearson's homeowner's carrier, Allstate, allegedly underpaid the claim. Pearson filed a lawsuit in state court in Texas.

Allstate subsequently removed the case to the U.S. District Court for the Northern District of Texas, Dallas Division, and demanded appraisal pursuant to the insurance policy. The case was then abated until the appraisal process was completed. Allstate then timely paid the appraisal award plus interest.

Relying on Texas Insurance Code Sections 542.060(c) and 542A.007, Allstate argued that there was nothing left to litigate — the insured's breach of contract and bad faith claims were precluded pursuant to Ortiz, any statutory interest potentially recoverable under the TPPCA had been paid and, accordingly, the calculation of attorney fees under Section 542.007A must equal $0.

Here's where things get interesting.

H.B. 1774 was enacted on Sept. 1, 2017, to address abuses in lawsuits arising from wind and hail claims. Chapter 542A was born. In addition to implementing presuit notice requirements and providing insurers with the ability to elect to accept whatever liability an agent might have to the policyholder, Chapter 542A provides a method for calculating attorney fees:

(a)  Except as otherwise provided by this section, the amount of attorney's fees that may be awarded to a claimant in an action to which this chapter applies is the lesser of:

* * *

(3) the amount calculated by:

(A) dividing the amount to be awarded in the judgment to the claimant for the claimant's claim under the insurance policy for damage to or loss of covered property by the amount alleged to be owed on the claim for that damage or loss in a notice given under this chapter; and

Allstate argued, and the trial court agreed, that because the appraisal award set the value of the claim under the insurance policy, and that amount had been paid, there is no "amount to be awarded in the judgment to the claimant for the claimant's claim under the insurance policy."

Because the numerator in the equation is $0, and Section 542A.007 requires the lesser amount of three options, attorney fees are always $0 where Chapter 542A applies and an appraisal award has been paid.

Following a grant of summary judgment in Allstate's favor in the trial court, Pearson appealed to the Fifth Circuit with two main arguments: (1) interpreting the statute as Allstate proposes eviscerates the holding in Barbara Technologies that payment of an appraisal award does not preclude liability under the TPPCA, and (2) insurance companies will be incentivized to wrongfully deny claims, wait to be sued, invoke appraisal, pay the award and then pay statutory interest on the eve of trial to preclude the only damages left to be recovered under the TPPCA.

In response, Allstate argued that it promptly demanded appraisal after suit was filed and the case was removed to the federal court. The litigation was abated during the appraisal process and not lifted until after Allstate had paid the award. Interest was paid roughly two months later.

Although not argued, as a practical matter, it makes little sense for an insurer to continue to incur litigation expenses for written discovery, depositions, experts, pretrial briefings and conferences solely for the purpose of avoiding paying interest on the typical residential claim appraisal award.

However, there will be some cases where the potential exposure for interest is high and raising a legitimate objection to an award is a viable option. Insurers will have to weigh the risk of being adjudicated liable for interest amounts the same way they do in any other litigated matter.  

The Fifth Circuit's decision in Pearson will come down to statutory interpretation. Barbara Technologies involved insurance claims from 2013 and 2014 — prior to the enactment of Chapter 542A. Hence, in Barbara Technologies the Texas Supreme Court did not address the TPPCA in relation to Chapter 542A.

The same is true of other cases considered by the Texas Supreme Court following Barbara Technologies. Here, the parties agree that Chapter 542A applies to the claim. Allstate argues that that the intent of "the amount to be awarded in the judgment" in Section 542A.007 is the "amount of policy benefits the insurer has not paid."[6]

Allstate points to "to be awarded" as forward-looking, which contemplates a "judgment not yet in existence," not some amount that an insurer could have been liable for in the past but is no longer liable because the appraisal award has been paid. On this issue Allstate argues:

Continuing this litigation simply so that Pearson can amass attorney fees trying to show Allstate was liable at some point in the past for amounts it already paid to her pursuant to the policy would simply constitute litigation for litigation's sake and undermine the fundamental purpose for which the Legislature enacted Chapter 542A.[7]

Pearson argues that dicta in Barbara Technologies confirms that if an insurer is adjudicated liable for the claim, "the amount of the appraisal award would represent actual damages under the TPPCA."

Additionally, Pearson argues that Allstate's interpretation would read attorney fees out of the TPPCA for all practical purposes in the context of post-appraisal TPPCA claims. Finally, Pearson contends that Allstate's argument regarding litigation for litigation's sake ignores the fees that Pearson incurred before Allstate paid the appraisal award. 

If lawyers were not involved in the claim prior to appraisal being invoked, these issues would be much easier to resolve. As stated by the Texas Supreme Court in State Farm v. Johnson, "Appraisals require no attorneys, no lawsuits, no pleadings, no subpoenas, and no hearings."[8] Unfortunately, that is not the reality of what is happening in the Texas claims process.

However, Barbara Technologies has resulted in the creation of a cottage industry of sorts for the plaintiffs bar. In the wake of Barbara Technologies, policyholder attorneys began to solicit clients who had their appraisal awards paid so that the attorneys could generate attorney fees that they could then collect. 

Also troubling is the conduct by attorneys soliciting contractors who have worked on properties where appraisal awards were paid. Contractors are strangers to the insurance policy and should not be invoking appraisal. But some contractors do. Since Barbara Technologies, contractor-driven appraisal demands have become commonplace. And it is often the case that, after an appraisal award is issued, a lawyer shows up for the first time, demanding interest and attorney fees.

Also concerning is the emerging practice of lawyers signing up clients on a full 40% or more contingency and then putting all of their matters into appraisal. Despite appraisal being a process that, at least according to the Texas Supreme Court, shouldn't even require attorneys, some attorneys have decided that appraisal is always preferable to litigation.

This is not surprising, given that the appointed appraiser does all the work and the attorney can still argue under Barbara Technologies for the recovery of attorney fees — for essentially doing nothing.

Chapter 542A was enacted to help reduce litigation in weather-related insurance claims. A ruling favorable to Pearson would have the opposite effect and actually encourage litigation. As Allstate warns, with such a holding, after every appraisal litigation will ensue for the sole purpose of generating recoverable attorney fees. That is not consistent with the statutory intent of H.B. 1774.

Michael C. Upshaw is an associate at Zelle LLP .

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Barbara Techs. Corp. v. State Farm Lloyds, 589 S.W.3d 806 (Tex. 2019), reh'g denied (Dec. 13, 2019).

[2] Ortiz v. State Farm Lloyds, 589 S.W.3d 127 (Tex. 2019), reh'g denied (Dec. 13, 2019).

[3] Barbara Techs., 589 S.W.3d at 822.

[4] See Breshears v. State Farm Lloyds, 155 S.W.3d 340, 345 (Tex. App.—Corpus Christi 2004, pet. denied) (pre-appraisal payment of roughly 80 percent of appraisal award was "undeniably" reasonable.); Hinojos v. State Farm Lloyds, 569 S.W.3d 304, 313 (Tex. App.—El Paso 2019, pet. granted) (pre-appraisal payment 6.8 times less than appraisal award was reasonable); Mainali Corp. v. Covington Specialty Ins. Co., 872 F.3d 255 (5th Cir. 2017), as revised (Sept. 27, 2017) (pre-appraisal payment exceeded amount owed pursuant to appraisal award and was therefore reasonable); Crenshaw v. State Farm Lloyds, 425 F. Supp. 3d 729, 740 (N.D. Tex. 2019) (pre-appraisal payment 3.64 times less than appraisal award was reasonable).

[5] Hinojos v. State Farm Lloyds, et al., Case No. 19-0280 (Tex. filed April 4, 2019).

[6] Appellee's Br. at p. 11., Pearson v. Allstate Fire and Cas. Ins. Co., Case No. 20-10199 (5th Cir. filed Feb. 21, 2020).

[7] Id. at p. 6.

[8] State Farm Lloyds v. Johnson, 290 S.W.3d 886, 894 (Tex. 2009).

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