Plaut Spouts: Reflections of an Old Guy with a Corner Office
On February 20, 2019, the Texas Supreme Court heard argument in Barbara Technologies Corp. v. State Farm Lloyds and Oscar Ortiz v. State Farm Lloyds. These cases raised questions about whether insurers have potential Insurance Code and common law “bad faith” liability following invocation of the appraisal process and payment of an appraisal award. In both cases, appraisal panels awarded significantly more for repair costs than the insurers had initially estimated, making them attractive vehicles for policyholder arguments that carriers should be penalized for their initial underpayments. Eight justices heard argument as Justice Phil Johnson has retired from the Court and Justice Brett Busby was appointed to the Court the day after argument. Our very own old guy David Plaut was there and watched live. Links to both arguments can be found here.
Argument at the Supreme Court in both cases was spirited and wide-ranging. Justices Boyd, Guzman, Lehrmann, Blacklock, and Green were the most active in their questioning. Although it is difficult to forecast any particular result in these cases, it is clear that a number of the Justices are reviewing the case based on Menchaca and the finding there that the question in insurance cases in not whether the insurer “breached” the policy, but whether the policyholder “was entitled to policy benefits.” This Menchaca mode of analysis is clearly helpful to the policyholders’ position as it potentially calls into question the Breshears rule that there can be no “bad faith” – common law or statutory – when the insurer promptly pays an appraisal award.
Justice Boyd – who authored the plurality opinion in Menchaca – is clearly concerned (as are Justices Guzman, Green, and Blacklock) with any rule that forecloses all policyholder relief under the Insurance Code and common law. Justice Boyd observed that for most insureds, “appraisal is a completely hollow remedy” as the insured is going to spend more to go through the appraisal process then a claim is worth.
Boyd emphasized that if there is no coverage, then there can be no Insurance Code claim under Menchaca. Arguably, the reverse is also true. If there is coverage – entitlement to benefits under Menchaca – then a failure to pay could potentially allow for recovery of Insurance Code and late payment penalties. Justice Guzman asked if payment of the appraisal award isn’t some evidence of coverage, some evidence that benefits were owed. That line of thinking is further indicative of the Court’s view of this issue through a Menchaca prism. Justice Boyd broached this question stating decisively that Menchaca “did away with breach of contract analysis.” In other words, the question is now solely a question of whether benefits that were owed were withheld.
In almost the same breath, however, Justices Boyd and Guzman queried what “independent injury” there was in these cases. Justice Guzman emphasized that State Farm had the contractual right to invoke appraisal, and that under Menchaca there is still an “independent injury” requirement. She asked what “independent injury” the Ortizes could demonstrate in their case in light of the fact that the costs of appraisal and attorneys’ fees are not recoverable. Justice Guzman noted that the benefit of the bargain damages in the appraisal context do not include the policyholders’ “out of pocket” expenses for appraisal fees and costs. State Farm’s counsel agreed, arguing those fees and costs are similar to the policy’s deductible and are not recoverable. Justice Lehrmann likewise asked how there could be any independent damages under Menchaca since State Farm paid the claim within 60 days of the appraisal award. She does not see how there can be anything “due and owing” after the insurer pays the appraisal award, nor does she how there can be “independent injury” under the Insurance Code if payment is made promptly after an appraisal award.
Justice Boyd also expressed concern that the Prompt Payment statute has not caught up with the appraisal law/public policy concerns of the Court’s appraisal cases in Johnson and Universal Underwriters. He emphasized that the Prompt Payment statute is not a fault-based system, and that if a claim is covered and the insurer misses the applicable deadlines, it must pay the late-payment penalty.
In addressing the question of whether the Prompt Payment statute applies in the appraisal process, Justice Boyd focused on section 542.058(a) of the Insurance Code, noting that under that section the insurer has right to “all items, statements, and forms reasonably requested under Section 542.055” and can delay payment until receiving all necessary items. The question is whether that “additional information” safe harbor includes the appraisal process. Under Section 542.055(a)(3), the insurer may request these items from the claimant. Under Section 542.055(b) “[a]n insurer may make additional requests for information if during the investigation of the claim, the additional requests are necessary.” Justice Boyd notes a disconnect between the insurance policy and the Prompt Payment Statute on this issue, emphasizing that it appears the statutory framework “has not kept up” with the Court’s appraisal precedent. Justice Boyd asked counsel if under 542.055(b), the need for additional information from third parties would toll Prompt Payment penalties. Justice Blacklock asked a similar question.Whether invocation of the appraisal process is a “request for information” under Section 542.055(b) that tolls Prompt Payment penalties is a question of first impression that could go either way. We’ll certainly be watching.