Last week, I wrote about whether evidence related to an appraisal award could be used as evidence in a breach of contract lawsuit. After that post, I received a few questions regarding how an appraisal may affect any extra-contractual/bad faith claims. Fortunately, another astute observer sent me an interesting (although unpublished) opinion that sheds some light on where we stand today.
In what can be construed as a first for Texas law, in April 2012, a federal District Court judge in the Southern District of Texas ruled that timely payment of an appraisal award by an insurer did not prevent the insured pursuing its claims for bad faith in Intermodal Equipment Logistics, LLC and Sea Train Logistics, LLC v. Hartford Accident and Indemnity Company, No. G-10-458 (S.D. Tex.—Galveston Div., May 24, 2012).
In Intermodal, the insurer, Hartford, moved for summary judgment on all claims brought by the insured after Hartford timely paid the appraisal award. The district judge referred Hartford’s motion to Magistrate Judge John Froeschner of Galveston for a report and recommendation, which is not an uncommon practice.
In this case, Intermodal Equipment Logistics, LLC claimed that Hartford grossly – and in bad faith – undervalued its business income loss allegedly resulting from Hurricane Ike by only paying approximately $208,000.00 in 2009. After three years of negotiating the claim and filing suit, Hartford filed a motion to compel appraisal, which the federal court granted. In 2012, three (3) years after Hartford’s initial payment, the parties participated in the appraisal process, which resulted in a determination that Intermodal sustained business interruption losses in the amount of $705,539.00, or a difference of $497,539 from what Hartford paid in 2009. In an attempt to avoid any further liability, Hartford promptly paid the appraisal awarded, including any applicable deductibles and prior payments, and quickly moved for summary judgment, arguing payment of the award constituted compliance with the policy and precluded the Plaintiff’s extra-contractual claims.
The federal magistrate court agreed with Hartford that Intermodal’s claims for breach of contract, prompt payment of claims act, and common law fraud should be dismissed. However, the Court denied Hartford’s motion for summary judgment as to Intermodal’s bad faith claims. The federal magistrate judge noted that “in most circumstances, an insured may not prevail on a bad faith claim without first showing that the insurer breached the contract,” but concluded that Texas law recognizes three exceptions to this general rule.
First, a claim for breach of an insurer’s duty of good faith and fair dealing may be established if an insured can prove that a carrier denied or delayed the payment of the insured’s claim when it knew or should have known that it was reasonably clear that the claim was covered.1 According to Republic Insurance Co. v. Stoker,2 “the duty of an insurer to timely investigate its insured’s claims is an independent tort which could be pursued in the absence of a showing that the insurer breached the insurance contract.” Intermodal argued that Hartford should be found liable under the cause of action because the evidence it provided during the appraisal process was the same evidence it provided to Hartford in 2009.
Second, the federal magistrate found that statutory claims under the Texas Insurance Code and the Deceptive Trade Practices Act require the same predicate for recovery as bad faith causes of action in Texas and are in addition to any other remedies permitted by law.3
Finally, absent proof of a breach of contract, the magistrate court found that an insured may recover tort damages if it is shown that an insurer committed some extreme acts that caused injury independent of the policy claim.4
Based on these findings, the magistrate court recommended that the federal district court deny Hartford’s motion for summary judgment on the common law and statutory bad faith claims.
Hartford quickly objected to the federal magistrate court’s recommendations, arguing the only time bad faith can survive in Texas after a timely payment of an appraisal award was in the “extreme acts/independent injury” scenario described in the federal magistrate’s third exception. Hartford argued that because there was no evidence it had committed an extreme act that caused an independent injury, Intermodal’s bad faith claims should be dismissed.
The federal court, reviewed the parties’ arguments de novo—as if the federal judge were considering the question for the first time, allowing him to substitute his own judgment about whether the magistrate court correctly applied the law. Upon review, the federal district judge concluded that “Judge Froschner’s (the magistrate judge) findings and conclusions are well-grounded in law and in fact,” and adopted the magistrate’s recommendations, granting Hartford’s motion for summary judgment on plaintiff’s breach of contract, prompt payment, and fraud claims and denying summary judgment on plaintiff’s bad faith claims.
This is a victory for Texas policyholders. In Intermodal, both the federal magistrate and federal district judges agreed that timely payment of an appraisal award alone is not sufficient to immunize an insurer from bad faith liability. These judges correctly recognized that an insurer cannot delay a claim when its liability is reasonably clear. In my experience, insurers like to argue they did not know they had to pay for covered damages until after the appraisal award was rendered, and therefore they did not commit bad faith. This “blind indifference” is the result of insurers ignoring evidence provided by their insureds and instead relying solely on their own experts. In this case, Intermodal argues this led to a 3 year delay which caused further damage. If the facts play out this way, Hartford should be found liable for bad faith.
1 Arnold v. National County Mutual Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987); Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 49 (Tex. 1987).
2 903 S.W.2d 338, 341 (Tex. 1995).
3 Higginbotham v. State Farm Mutual Auto Ins. Co., 103 F.3d 456, 460 (5th Cir. 1997) (citing Emmeret v. Progressive County Mutual Ins. Co., 882 S.W.2d 32, 36 (Tex. App.—Tyler, 1994, writ denied).
4 Stoker, 903 S.W.2d at 341 (citing Aranda v. Insurance Company of North America, 748 S.W.2d 210, 214 (Tex. 1988)).
