SUPREME COURT OF TEXAS HOLDS PROMPT PAYMENT OF APPRAISAL AWARD DOES NOT PRECLUDE PROMPT PAYMENT PENALTIES, BUT INSURED MUST STILL ESTABLISH CONTRACTUAL LIABILITY FOR DAMAGES

The Supreme Court of Texas recently considered whether an insurers prompt payment of the additional amount of loss determined through appraisal, after its initial timely payment based on its own damage estimate, precluded liability for statutory interest under Texas Prompt Payment of Claims Act on the additional amount, and determined that statutory interest may be recovered. But, despite the appraisal award, the insured must first establish: 1) the amount for which the insurer is contractually liable under the policy; 2) the insurer’s failure to comply with statutory deadlines; and 3) “statutory damages based on the amount contractually owed less the amounts paid within the statutory deadline.”  

In Hinojos v. State Farm Lloyds, 2021WL 1080854 (Tex. March 19, 2021), the insured presented a claim for wind and hail damage to the insured residence and after a series of reinspections, State Farm timely paid amounts owed after applying the deductible. Disputing the amount of damage, the insured filed suit and fifteen months later into the lawsuit, State Farm invoked appraisal. The appraisal process determined the amount of loss to be $22,974.75 more than what State Farm initially paid. “Within a week of the appraisers’ decision, and about two-and-a-half years after Hinojos submitted his claim, State Farm tendered” the additional amount and moved for summary judgment asserting that payment of the award precluded further liability. Prior to the Supreme Court’s Barbara Technologies Corp. v. State Farm Lloyds, 589 S.W.3d 127 (Tex. 2019), and Alvarez v. State Farm Lloyds, 601 S.W.3d 781 (Tex. 2020), decisions, the trial court granted State Farm’s motion and the court of appeals affirmed. The Supreme Court granted the homeowners petition for review.

Applying its holdings in Barbara Technologies Corp. v. State Farm Lloyds and Alvarez v. State Farm Lloyds, the Court rejected State Farm’s “reasonable payment” arguments based on dicta in those and related decisions and held that “an insurer’s acceptance and partial payment of the claim within the statutory deadline does not preclude liability for interest on amounts owed but unpaid when the statutory deadline expires.” And addressing the reasonableness argument further, the Court stated: “Although the statute says nothing about reasonableness, a reasonable payment should roughly correspond to the amount owed on the claim. When it does not, a partial payment mitigates the damage resulting from a chapter 542 violation. Interest accrues only on the unpaid portion of the claim.”

Lastly, the Court noted that the decision did not address the insured’s affirmative claim for Chapter 542 relief and that in order to prevail, the insured must first establish: 1) the amount for which the insurer is contractually liable under the policy; 2) the insurer’s failure to comply with statutory deadlines; and 3) “statutory damages based on the amount contractually owed less the amounts paid within the statutory deadline.” Accordingly, the summary judgment in State Farm’s favor was reversed, and the case was remanded to the trial court for further proceedings.

Editor’s Note: The Texas Supreme Court’s ruling is consistent with our expectations following Barbara Technologies Corp. v. State Farm Lloyds and Alvarez v. State Farm Lloyds. And the requirement that the insured establish contractual liability as a prerequisite to recovery under Chapter 542, recognizes that than an appraisal award, does not necessarily establish coverage or liability for the loss as suggested by Barbara Technologies Corp. v. State Farm Lloyds and Ortiz v. State Farm Lloyds, 589 S.W.3d 127 (Tex. 2019). So coverage issues and other policy defenses should be properly documented and preserved.