Texas policyholders scored another significant victory at the Texas Supreme Court in Hinojos v. State Farm Lloyds, No. 19-0280. The Court reversed and remanded the court of appeals’ grant of summary judgment in favor of an insurer, based on a partial payment the insurer had made before a later, much higher payment resulting from an appraisal award. The ruling provides further clarification on the effect of the appraisal process under the Texas Prompt Payment of Claims Act. Tex. Ins. Code. Ch. 542 (the “TPPCA”). Raizner Slania filed an amicus curiae brief on behalf of United Policyholders in support of Mr. Hinojos.
The Court expanded on its June 2019 decision in Raizner Slania’s client’s case, Barbara Technologies Corporation v. State Farm Lloyd’s (“Barbara Tech”), confirming that insurers are still liable under the TPPCA when there is an appraisal award regardless of whether there was a prior partial payment. A brief review of Barbara Tech is helpful to understanding the successful outcome for policyholders in Hinojos.
A Review of Barbara Tech and its Progeny
The TPPCA imposes liability on insurers who fail to pay valid claims by statutorily imposed deadlines, requiring payment of statutory interest plus reasonable and necessary attorney’s fees in addition to the amount of the claim. The purpose of these penalties is to deter insurance companies from delaying payment to policyholders with valid claims. In Barbara Tech, Raizner Slania argued – and the Court agreed – that the payment of an appraisal award does not, as a matter of law, absolve an insurer of liability under the TPPCA. In other words, an appraisal payment does not excuse an insurer from having to pay interest on the amount of the claim not paid by the statutory deadline plus attorney’s fees.
The Reasonableness Exception
One unintended consequence of Barbara Tech is the application of a “reasonableness” exception to the TPPCA. After Barbara Tech, several courts— both state and federal—have applied this exception to liability under the TPPCA if the insurer made a “reasonable” payment before a claim was taken through the appraisal process and the appraisal award ultimately paid. In our amicus brief, we urged the Court to strike down the “reasonableness” exception, as lower courts relied on misinterpreted language in Mainali Corp. v. Covington Specialty Insurance Co., 872 F.3d 255 (5th Cir. 2017). We posed the following question, to highlight the nonsensical nature of the exception, which also bears no statutory support:
If, per Barbara Technologies, an insurer cannot be excused from TPPCA liability based on the full payment of an appraisal award, then how can it be excused from liability based on a smaller, partial payment it made before it later paid the appraisal award?
The Court in Hinojos recognized the absurdity and held:
Nothing in Chapter 542 discharges prompt payment liability based on the partial payment of the amount that “must be paid” under the policy. Otherwise, an insurer could pay a nominal amount toward a valid claim to avoid the prompt payment deadline that the Legislature has imposed.
The outcome of this case in conjunction with Barbara Tech enforces the TPPCA’s intended purpose and policies of insurance by encouraging insurers to pay the amounts owed on a claim promptly. The ruling on these issues in Hinojos is of consequence to many cases, including Shin v. Allstate Texas Lloyds pending in the Fifth Circuit Court of Appeals. No. 4:18-CV-01784, 2019 U.S. Dist. LEXIS 149330 (S.D. Tex. Sept. 3, 2019) (Ellison, J.), appeal stayed in abeyance, No. 19-20698 (5th Cir. Oct. 4, 2019). Because the TPPCA is a Texas law and because the Fifth Circuit must follow the lead of the Texas Supreme Court in all matters of Texas substantive law, all insurance companies operating in Texas cannot escape TPPCA liability for claim payments not made within the statutorily required period because prior partial payments were made before the appraisal process.
The trial court will still have to determine the amount for which the insurer is contractually liable under the policy, whether the insurer complied with statutory deadlines, and the amount of statutory damages owed.
We want to congratulate Andrew Bender of The Bender Law Firm PLLC and Sharon McCally of McCally Law PC who advocated successfully on behalf of Mr. Hinojos on appeal.