Appraisal Process Does Not Protect Insurers From Prompt Pay Claims
The Texas Prompt Payment of Claims Act is a Texas insurance law that imposes requirements and time deadlines on insurance companies regarding how and when they must respond to first party claims. Tex. Ins. Code §§ 542.051 et seq. An insurer may be held liable for statutory penalties and attorney’s fees if it fails to timely pay valid first party claims. Tex. Ins. Code §§ 542.060. Typcially, an insurer is required to pay a valid first party claim within 60 days after the insurer receives all of the requested items and statements relating to the claim, and if it fails, will be liable for the amount the insured is legally entitled to recover on the claim, plus a penalty of 18 percent per year on the unpaid amount of the claim, and attorney’s fees. Tex. Ins. Code § 542.058(a). Detailed information about the Texas Prompt Payment of Claims Act can be found in The Insurance Adjuster’s Essential Guide for Handling Texas Claims.
Over the last two years the Texas Supreme Court has decided three cases involving the interplay between the Prompt Payment of Claims Act and the appraisal process commonly found in most homeowner’s insurance policies. The main issue in these cases is whether an insurer can wait, without incurring prompt payment penalties, to pay part or all of the claim until the appraisal process determines the amount of the claim. The appraisal clause allows either the insurer or the insured to invoke the appriasal process when the amount of the loss is not agreed upon, and then the appriasers can determine the amount of the loss. Consistent with its prior decisions in this area, the Court determined that relaince on the appraisal process does not protect an insurer from the time deadlines and penalties of the Prompt Payment of Claims Act.
The most recent case is Hinojos v. state Farm Lloyds, No. 19-0280, 2021 WL 1080854 (Tex. March 19, 2021). In Hinojos, a hail and wind storm damage claim was submitted to State Farm Lloyds, and after two inspections State Farm paid Hinojos $1,995.11 representing State Farm’s assessment of the claim less the deductible and depreciation. Id. at *2. Fifteen months after Hinojos sued, State Farm invoked the appraisal process. The appraisers determined the amount of the loss to be $38,269.95 on a replacement cost basis and $26,259.86 on an actual cash basis. Id. at *3. Within a week of the appraiser’s determination, but two and half years after the claim was originally filed, State Farm tendered an additional $22,974.75 to Hinojos. Id. State Farm then sought and obtained summary judgment on Hinojos’ prompt pay claim arguing that it paid the amount of the claim promptly after it was determined in the appraisal process. Id. The Texas Supreme Court reversed and remanded the case for further proceedings.
Consistent with its prior decisions in this area, the Texas Supreme Court held that nothing in the Prompt Payment of Claims Act allows an insurer to escape penalties for paying only a partial amount of the claim within the time deadlines of the statute. Id. at *4. Additionally, nothing in the statute provides a defense for an insurer to make only a reasonable payment. Id. at *5. Rather, the Court relied on the definition of “claim” in the statute which includes the terms “that must be paid” as meaning that anything less than the full amount owed on a claim is subject to possible prompt pay penalties if not paid timely. Id. at *4. Otherwise, the Court observed, insurers could simply pay a nominal amount on a first party claim and await, without penalty, the ultimate determination of what is actually owed on a claim before having to pay fully. Id. The phrase, "that must be paid", limits "claim" to the amount ultimately determined to be owed, which would be net of any partial payments made by the Insurer prior to that determination. This encourages insurers to pay the undisputed portion of a claim early, consistent with the statute's purpose "to obtain prompt payment of claims made pursuant to policies of insurance." Republic Underwriters Ins. Co. v. Mex-Tex, Inc., 150 S.W.3d. 423, 425 (Tex. 2004). Finally, the Court acknowledged the important role that the appraisal process plays in resolving disputes, but it does not shield an insurer from prompt pay penalties; and it is the insurer’s responsibility to seek prompt resolution of a disputed claim through appraisal if it seeks to avoid statutory penalties on amounts that were not promptly paid. Id. at *6.