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The Supreme Court of Texas ruled an insurer's payment of an appraisal award barred an insured's breach of contract claim premised on failure to pay the amount of the covered loss and barred the insured's common law and statutory bad faith claims to the extent the only actual damages sought were lost policy benefits. But the court did not bar the insured's claim under the Texas Prompt Payment Act.

The Case

Oscar Ortiz had a homeowners' insurance policy with State Farm Lloyds and submitted a claim to State Farm for wind and hail damage. State Farm sent an adjuster to inspect the property, and the adjuster estimated damage caused by wind or hail to be $733, which was below the policy's $1,000 deductible. The adjuster observed additional damage that he concluded was not caused by hail and, therefore, was not covered by the policy.

In response to State Farm's request that Ortiz forward any estimates “related to this loss that exceed your deductible,” Ortiz sent State Farm an estimate he received from a public adjuster valuing the loss at $23,526. State Farm conducted a second inspection with the public adjuster present and revised the damage estimate to $974, again concluding the damage amount did not exceed the deductible.

About six weeks after being notified of the results of the second inspection, Ortiz sued State Farm for breach of contract, violations of the Prompt Payment Act, and statutory and common law bad faith insurance practices.

State Farm answered, and the trial court granted its motion to compel appraisal. The appraisal award set the replacement cost at $9,448 and the actual cash value at $5,244. State Farm paid the award minus the deductible about seven business days after receiving it.

State Farm then moved for summary judgment, arguing its payment of the appraisal award resolved and disposed of all claims in the Ortiz lawsuit.

The trial court rendered final judgment in State Farm's favor on all claims, and the court of appeals affirmed. The dispute reached the Supreme Court of Texas.

The State Farm Policy

The State Farm policy provided: “If you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. … The two appraisers shall then select a competent, impartial umpire. … The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to [State Farm], the amount agreed upon shall be the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any two of these three shall set the amount of the loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire shall be paid equally by [Ortiz] and [State Farm].

The Decision

The Supreme Court affirmed the court of appeals' decision in part and reversed in part.

The court held that State Farm's payment of the arbitration award barred Ortiz's breach of contract claim premised on failure to pay the amount of the covered loss, the payment barred Ortiz's common law and statutory bad faith claims to the extent the only actual damages sought were lost policy benefits, and Ortiz could proceed on his claim under the Prompt Payment Act.

In its decision, the court first ruled that an insurer's payment of an appraisal award in the face of allegations of pre-appraisal underpayment foreclosed liability on a breach of contract claim. According to the court, an appraisal award did not demonstrate that an insurer breached the policy by failing to pay the covered loss. If it did, the court reasoned, insureds would be incentivized to sue for breach every time an appraisal yielded a higher amount than the insurer's estimate (regardless of whether the insurer paid the award), thereby encouraging litigation rather than “short-circuit[ing]” it.

The court decided that, having invoked the agreed procedure for determining the amount of loss, and having paid that binding amount, State Farm had complied with its obligations under the policy.

Next, the court considered the bad faith claims against State Farm. It noted Ortiz sought no actual damages -– for example, he did not claim the delay in payment resulting from State Farm's allegedly unreasonable investigation had caused additional property damage to his home and he did not seek either appraisal costs or sums related to pre-appraisal damage assessments -– other than the policy benefits paid in accordance with the policy's appraisal provision. Given that, the court said he could not maintain a common law or statutory bad faith claim against State Farm.

The court also found Ortiz was not entitled to recover his attorney fees and costs incurred in his action against State Farm. It reasoned that the only “actual damages” Ortiz sought were the policy benefits wrongfully withheld, which State Farm paid. Moreover, the court ruled the attorney fees and costs Ortiz incurred in prosecuting his lawsuit were not part of the “actual damages” he was entitled to recover because Texas law was clear that attorney fees and costs incurred in the prosecution or defense of a claim were “not damages” and were not recoverable under the American Rule in the absence of legislation to that effect.

Finally, the court ruled, as it decided in Barbara Technologies v. State Farm Lloyds, No. 17-0640 (Tex. June 28), that an insurer's payment of an appraisal award did not as a matter of law bar the insured's claims under the Prompt Payment Act, which imposes procedural requirements and deadlines on insurance companies to promote the prompt payment of insurance claims.

The case is Ortiz v. State Farm Lloyds, No. 17-1048 (Tex. June 28). Attorneys involved include: For Oscar Ortiz, petitioner: Joshua P. Davis and Katherine James, Davis Law Group, Houston; For State Farm Lloyds, Respondent: Melissa A. Lorber and Craig T. Enoch, Enoch Kever, Austin; Amanda Hazleton and Jennifer Durbin, Allen, Stein & Durbin, San Antonio.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Meyerowitz is the Director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. Contact him at smeyerowitz@meyerowitzcommunications.com.