After Hurricane Ike some Texas courts decided that if a claim went to appraisal and the carrier paid the award, then no matter how nasty the carrier had been in handling the claim up to the time of appraisal, the policyholder lost the right to pursue a cause of action for breach of contract (and attorney fees).1
The reasoning was that the policyholder cannot use the difference between what was paid before appraisal and what was awarded in the appraisal as evidence of breach of contract. Therefore, breach of contract was automatically out. The courts further held that because the policyholder had to prove an independent injury (breach of contract) as a pre-requisite to recovering on extra-contractual claims,2 once the carrier paid the appraisal award and breach of contract was out then all extra-contractual claims were out. Thus, the lawsuit was over.
This reasoning never made sense to me. I handled many Ike cases where the carrier had been completely recalcitrant for a year or two before I was hired to file suit. Then the carrier would invoke appraisal, pay the award, and the case was over. There was nothing my clients could do. It reminded me of a popular song during my high school days by Nona Hendryx called Transformation. My favorite line in the song is, “You live a life of sin, then you’re born again.” The carriers could invoke appraisal and wash away all their sins.
In June 2015, Judge Boyle of the United State District Court for the Northern District of Texas decided Graber v. State Farm Lloyds.3 The facts in Graber are the typical fact pattern in first-party claims. The policyholder filed a claim and State Farm low-balled the policyholder, who had to hire a lawyer and file suit. After suit was filed the policyholder demanded appraisal. The appraisal award came back at about three times what State Farm paid. State Farm paid the award and moved for summary judgment to get the entire case dismissed. Judge Boyle granted the judgment on breach of contract, common law bad faith, and some claims under statutory bad faith and DTPA. The court found a fact issue on causes of action based upon the Texas Prompt Payment Act.4 More importantly, the court held that paying an appraisal award is no defense for the insurance company on Texas Prompt Payment Act damages. In doing so the court clarified the true holdings in Breshears and Higginbotham,5 and didn’t dismiss all extra-contractual causes of action simply because breach of contract was dismissed.
The Graber decision sent a bit of a ripple through the property insurance world. Some of my friends at an insurance defense firm recently wrote an article asserting that Graber was an “outlier” case and nothing more than an anomalous bump in the road. Well, the road is getting bumpier.
On December 4, 2015 the Southern District of Texas decided Cavazos v. State Farm Lloyds.6 Not only did Cavazos involve the same insurance company as Graber, but near identical facts. After paying the appraisal award State Farm moved for summary judgment arguing that payment of the award eliminated all causes of action for Cavazos. The court disagreed. Interestingly, the court did not automatically dismiss the breach of contract cause of action. The court, and the policyholder, agreed that the policyholder could not use the difference between what State Farm originally paid and what was paid in the award to show breach of contract. However, citing Graber, the court found that the policyholder was not barred from litigating his breach of contract claim using other evidence. The policyholder pointed out that damage in the award was greater than damages initially offered by State Farm. Setting aside the difference in what was paid, the policyholder argued that State Farm minimized the scope at the beginning of the claim constituted separate evidence of breach of contract and had nothing to do with the difference between what was paid and what was awarded. The court agreed and denied State Farm’s motion for summary judgment. Having denied the summary judgment on breach of contract, the court also denied summary judgment as to all of the policyholder’s bad faith extra-contractual claims. The court also pointed out that the Fifth Circuit recently certified to the Texas Supreme Court the question whether an injury is required to pursue bad faith.7
Given Graber, Cavazos, and the Fifth Circuit’s certified question to the Texas Supreme Court, it seems like the courts are looking at these post-appraisal cases more deliberately and with a more reasoned approach. Maybe my friends are correct. Maybe these cases are outliers and anomalies. However, I like to think they are harbingers of a trend toward reasoned opinions, which take into account the real world truths of how some carriers unfortunately handle many claims. In the end, each post-appraisal summary judgment should be decided on its own facts. If the carrier followed the rules before and after appraisal then there is a basis for dismissing the policyholder’s suit. However, it is not fair to dismiss every case out of hand simply because, after years of poor claims handling by the carrier, one of the parties invokes appraisal.
1 Breshears v. State Farm Lloyds, 155 S.W.3d 340 (Tex. App. – – Corpus Christi 2004, pet. denied).
2 When I say “extra-contractual claims” I mean common law bad faith, statutory bad faith, DTPA claims, and Texas Prompt Payment Act claims.
3 Graber v. State Farm Lloyds, No. 3:13-CV-2671-B, 2015 WL 3755030 (N.D. Tex. June 15, 2015).
4 Texas Insurance Code Section 541.061.
5 Higginbotham v. State Farm Mut. Auto. Ins. Co., 103 F3d. 456 (5th Cir. 1997).
6 Cavazos v. State Farm Lloyds, No. 7:14-CV-395, 2015 WL 8074063 (S.D. Tex. Dec. 4, 2015).
7 In Re Deepwater Horizon, No. 14-31321. 2015 WL 7421978, at *7 (5th Cir. Nov. 19, 2015) (“Whether, to maintain a cause of action under Chapter 541 of the Texas Insurance Code against an insurer that wrongfully withheld policy benefits, an insured must allege and prove an injury independent from the denied policy benefits?”).