Menchaca At Work: Houston Court Strengthens Appraisal Defenses, Requires Independent Injury for EC Claims

July 11th, 2017 By Eric S. Peabody

Even before the dust has settled on the Texas Supreme Court’s decision in USAA v. Menchaca, — S.W.3d —, 2017 WL 1311752 (Tex. Apr. 7, 2017, mot. reh’g filed), Texas intermediate appellate courts are busily construing its holdings. In National Security Fire & Casualty Co. v. Hurst, No. 14-15-00714-CV, 2017 WL 2258243 (Houston [14th Dist.] May 23, 2017, n.p.h.), the court used Menchaca to reverse a judgment in favor of the insured and render judgment for the carrier in a protracted Hurricane Ike claim.  In Hurst, the insured first made a claim almost two years after the storm. The carrier, National, had an independent adjuster inspect the claim and paid the adjuster’s estimate.  Although the insured cashed the check, he did not use the funds to repair his property and did not request a re-inspection. Instead, he filed suit on the eve of limitations, alleging the usual battery of contractual and extra-contractual claims against National and the independent adjusters.

Three-and-a-half years into the litigation, the insured invoked appraisal.  An award was issued, and National paid the difference between its original payment and the award 30 days later, but included a release of extra-contractual claims with the award payment. The insured did not return or cash the check or move to set aside the award, but continued with the litigation. Trial by jury resulted in damages against National for breach of contract, common-law bad faith, and various Insurance Code violations, including prompt-payment penalties. The jury also awarded damages against the independent adjusters for Insurance Code infractions.

On appeal, the court held that National’s tender of the full appraisal award “settle[d] the issue of damages” and estopped the insured from pursuing a breach of contract claim – regardless of whether the insured accepted the payment or cashed the check.  Id. at *3. With regard to the release, the court held that it did not constitute a breach of contract because it did not “render the tender less than the ‘set’ amount.”  Id. at *4. It also was not an extreme act causing independent injury that would entitle the insured to extra-contractual damages. Id. at *6.

On the issue of prompt payment penalties, the court reaffirmed its earlier decisions that “full and timely payment of an appraisal award” precludes an award of penalties and attorneys’ fees as a matter of law.  Id. at *5. Although the insured did not specifically contest the timeliness of the award, the court applied the 60-day deadline of section 542.058 to hold that payment 30 days after award issuance was “well within the timeliness requirements.” Id.

Because the appraisal award set the amount of policy benefits, which National paid, the court held that the insured could only recover under his extra-contractual causes of action by demonstrating “an injury that is independent from the loss of benefits.” Id. at *6 (citing Menchaca).  Noting that such an injury would be extremely rare, even if not theoretically impossible, the court emphasized that injuries that “stem” or “flow” from the denial of policy benefits are not independent of the “claim of underpayment.”  Id.  In conclusion, the court held that an insured cannot defeat an appraisal award by refusing payment or by “asserting extra-contractual claims that are derivative of the policy claim” – which would “obviate the very purpose of the binding appraisal process.”  Id. at *7.

Take-aways: Hurst is a great case for post-appraisal summary judgments, which synthesizes the developing appraisal case law and applies Menchaca in a manner consistent with that precedent.  But the court clearly struggled a bit with the insurer’s inclusion of a release with the appraisal payment and limited its holdings on that issue to the facts of the case – an implied note of caution to carriers.