Almost every policy I read contains an appraisal clause in it. These clauses often allow one party to demand appraisal to set the amount of loss in an insurance claim. Simply put if the insured and insurer disagree on the dollar amount to fix covered damage the appraisal policy can be used to determine the dollar amount of the damage.
Recently the United States Court of Appeals for the 5th Circuit held that when an insurer pays the amount of an appraisal award, the Texas Prompt Payment of Claims Statute does not apply.1 Normally an insurer must issue payment to an insured within 60 days of receiving all documentation needed to resolve the claim.2 If the insurer does not do so, it is liable for an 10-18% penalty on the amount not timely paid, plus attorney’s fees.3 The court pointed out that most, if not all, payments made after appraisal are made much later than the 60 days that the law requires, but ultimately held that a payment made after the appraisal process does not violate the Texas Insurance Code.
Why does this matter to insureds?
The Prompt Payment Statute serves as a deterrent to insurance companies so they do not delay or improperly deny claims. Once this deterrent is taken away there is no consequence to denying every claim no matter how meritorious. If an insurance company’s only penalty in wrongfully delaying and denying a claim is simply to have to pay the amount that the policy requires, why pay any claim properly? As insurance companies evaluate risk, and the property damage from Hurricane Harvey is projected to be in the billions of dollars, they might determine the reward from delaying payment of claims and holding on to the money as long as possible may be a risk worth taking.
1 Mainali Corp. v. Covington Speciality Ins. Co., No. 17-10350 (5th Cir. Sept. 27, 2017).
2 Tex. Ins. Code § 542.058.
3 Tex. Ins. Code § 542.060.