The United States District Court for the Western District of Texas in Austin recently held that an insurer's timely payment of an appraisal award bars the insured's extra-contractual tort claims. Michels v. Safeco Ins. Co. of Indiana, No. 1:12-cv-00511-SS (W.D. Tex. March 13, 2013).
In Michels v. Safeco Ins. Co. of Indiana, the insured claimed smoke damage to his property as a result of wildfires and the parties disagreed as to the extent of the damage to the home. The insured initially invoked appraisal, and after the parties designated their appraisers, rescinded his appraisal demand. Thereafter, the insurer made its own demand for appraisal and obtained a court order compelling appraisal. After the appraisal award was entered, the insurer paid the amount awarded and moved for summary judgment on all of the insured's claims.
The district court held that, as a matter of law, compliance with the appraisal provision by payment of the appraisal award negates any claim for breach of contract and a claim under the prompt payment of claims act. The court also found that an insured's "bad faith" claims under Chapter 541 of the Texas Insurance Code and the Texas Deceptive Trade Practices Act ("DTPA") fail in the absence of a breach of the contract by the insurer when these claims are based on a wrongful denial of policy benefits. The court further dismissed the insured's claims of misrepresentation finding that these claims were merely a restatement of the insured's claim for breach of contract and that post-loss misrepresentations do not give rise to liability.
Last year, the United States District Court for the Southern District of Texas in Galveston also recognized that the insurer's timely payment of an appraisal award negates the insured's claim for breach of the contract and violation of the prompt payment of claims act but held that an insured may still pursue a claim for bad faith under certain circumstances. Intermodal Equipment Logistics, LLC and Sea Train Logistics, LLC v. Hartford Accident & Indemnity Company, No. 3:10-cv-00458 (S.D. Tex. May 24, 2012).
The district court in Galveston first affirmed the general rule that an insured may not prevail on a claim for bad faith without first showing the insurer breached the contract. The court then found three exceptions to the general rule when an insured proves that the insurer: (1) breached its duty to "timely investigate its insured's claims;" (2) breached Texas Insurance Code or the Texas Deceptive Trade Practices Act by "unduly delay[ing] payment of its claim after its liability became reasonably clear;" or (3) "committed some extreme acts that caused injury independent of the policy claim."
In that case, the insured contended that it was required to sell family property, exhaust personal savings, incur property tax penalties, and borrow money to keep the business from going bankrupt as a result of the insurer's failure to pay the amount owed. The insured also claimed that it suffered irreparable damage to the business reputation as a result of its failure to pay timely. The court found that these damages, to the extent the insured could show were caused by the insurer's purposeful withholding of a valid claim, would be sufficiently extreme to establish a bad faith cause of action. Recognizing that the insured may ultimately fail in proving its bad faith case, the court found that there was a genuine issue of material fact to prevent summary judgment.
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