Insurance Law360
September 30, 2020
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On Oct. 6, the U.S. Court of Appeals for the Fifth Circuit is set to hear oral arguments in Pearson v. Allstate Fire and Casualty Insurance Company. The case centers on statutory construction of Chapters 542 and 542A of the Texas Insurance Code, and the Texas Supreme Court's recent holdings in Barbara Technologies Corp. v. State Farm Lloyds[1] and Ortiz v. State Farm Lloyds.[2]
The specific issue to be addressed on appeal is whether amounts previously paid by an insurance carrier pursuant to an appraisal award can be considered actual damages for the purpose of calculating attorney fees. The Fifth Circuit's determination is sure to have a profound effect on post-appraisal litigation in Texas.
Setting the Stage
The Texas Supreme Court threw the Texas property insurance industry into a frenzy in the summer of 2019 when it held in Barbara Technologies that an insurer's prompt payment of an appraisal award did not foreclose or establish liability under Chapter 542 of the Texas Insurance Code, otherwise known as the Texas Prompt Payment of Claims Act, or TPPCA.
Ortiz, which was decided on the same day as Barbara Technologies, was less controversial in that it generally kept with Texas precedent that a policyholder's breach of contract and, accordingly, statutory and common law bad faith claims, were precluded following the timely payment of an appraisal award.
But Barbara Technologies opened a previously closed door for policyholders to attempt recovery of statutory interest and attorney fees through the TPPCA, or at least extract higher settlements with the threat that interest and attorney fees were not precluded, "if an insurer later accepts a claim after initially rejecting it, or if an insurer is adjudicated liable for a claim it rejected."[3]
Two major issues emanated from the confusion resulting from the Barbara Technologies holding. The first is identifying the circumstances that trigger liability under the TPPCA in the first instance. That is: Is an insurer's timeliness in investigating and paying a claim and the difference between the amount paid by the insurer and a later appraisal award dispositive?
Courts construing Texas law before and after Barbara Technologies have held that if an insurance carrier complied with the timing requirements of the TPPCA and made a reasonable claim determination, even if that determination was lower than a subsequent appraisal award, then the insurer complied with the TPPCA.[4] This issue is currently before the Texas Supreme Court in Hinojos v. State Farm Lloyds.[5]
The second involves the effect of an insurer promptly paying an appraisal award and applicable statutory interest on the award. Interest and attorney fees are the only damages recoverable under the TPPCA, and only if an insurer accepts liability or is adjudicated liable.
In this situation, the question is whether the courts will allow a policyholder to incur attorney fees in determining liability for the sole purpose of recovering such attorney fees. That is the issue before the Fifth Circuit in Pearson.
Pearson v. Allstate Fire and Casualty Insurance Company
The facts in Pearson are fairly straightforward. Corrine Pearson's residence was damaged by a storm event. Pearson's homeowner's carrier, Allstate, allegedly underpaid the claim. Pearson filed a lawsuit in state court in Texas.
Allstate subsequently removed the case to the U.S. District Court for the Northern District of Texas, Dallas Division, and demanded appraisal pursuant to the insurance policy. The case was then abated until the appraisal process was completed. Allstate then timely paid the appraisal award plus interest.
Relying on Texas Insurance Code Sections 542.060(c) and 542A.007, Allstate argued that there was nothing left to litigate — the insured's breach of contract and bad faith claims were precluded pursuant to Ortiz, any statutory interest potentially recoverable under the TPPCA had been paid and, accordingly, the calculation of attorney fees under Section 542.007A must equal $0.
Here's where things get interesting.
H.B. 1774 was enacted on Sept. 1, 2017, to address abuses in lawsuits arising from wind and hail claims. Chapter 542A was born. In addition to implementing presuit notice requirements and providing insurers with the ability to elect to accept whatever...
