In USAA Texas Lloyds Company v. Menchaca,[1] the Texas Supreme Court provided five distinct rules regarding the relationship between claims for an insurance policy breach and Texas Insurance Code violations. Shortly after the opinion was released, Zelle LLP published an article stating why the decision would change nothing with respect to appraisal law.[2] In short, the article concluded that Menchaca had no effect on the general rule that extracontractual claims do not survive the failure of a breach of contract claim unless the insured can prove an “independent injury” beyond the denial of policy benefits.[3]
Policyholder attorneys argued otherwise. Although Menchaca was not a case involving payment of an appraisal award, insureds immediately used its language to argue that extracontractual exposure survived the timely payment of an appraisal award.
That argument was short-lived. In Cano v. State Farm Lloyds, the United States District Court for the Northern District of Texas, Dallas Division, held that an insurer’s timely payment of an appraisal award protected it from any extracontractual liability, as Menchaca required that any extracontractual claim must not “flow or stem from denial of policy benefits” after an appraisal payment is accepted.[4] The Houston Court of Appeals came to the same conclusion in Zhu v. First Community Insurance Company, further echoing Menchaca’s recognition that “a successful independent-injury claim would be rare, and we in fact have yet to encounter one.”[5]
Just when it seemed that Texas courts were interpreting the Menchaca decision in a consistent fashion, the Texas Supreme Court granted rehearing on Dec. 15, 2017. Upon rehearing, the Menchaca court withdrew its April 2017 opinion and issued a new, superseding opinion on April 13, 2018 (Menchaca II).[6]
In Menchaca II, the court reversed certain aspects of its previous ruling based on issues pertaining to faulty jury instructions, but left largely intact the five rules governing how breach of contract claims under a policy and statutory extracontractual claims relate.[7] Regardless, the new decision seemingly provided another opportunity for courts to reinterpret how Menchaca might affect claims for extracontractual damages after the timely payment of an appraisal award.
However, even after the new Menchaca II opinion, Texas courts have continued to hold that timely payment of an appraisal award precludes insurer liability for extracontractual claims.
In three recent decisions interpreting Menchaca II, courts made clear that the prompt payment of an appraisal award precludes any extracontractual liability for insurers.
In Abdalla v. Farmers Insurance Exchange, an insured appealed a summary judgment ruling against it.[8] Abdalla sued Farmers alleging breach of contract and asserting various extracontractual claims relating to a water loss under a policy Farmers had issued to Abdalla. The amount of the loss had been submitted to appraisal in accordance with the policy’s terms. The appraisal umpire found that the appraisal of Farmers’ appraiser was “more sound and well supported,” and issued an appraisal award fully adopting Farmers’ appraisal.[9] Farmers then timely issued payment of the appraisal award to Abdalla. In its lawsuit, Abdalla moved for the court to vacate the appraisal award, asserting that the award was clearly a product of mistake. However, the trial court instead granted summary judgment in favor of Farmers, holding that, as a matter of law, Farmers’ timely payment of the appraisal award established that it had not breached the insurance policy. The court further held that because Abdalla’s breach of contract claim had been extinguished, Abdalla was precluded from recovering on all of his extracontractual claims.
On appeal, the Amarillo Court of Appeals made quick work of affirming the trial court’s ruling. First, the appellate court held that an umpire’s full adoption of one appraiser’s appraisal did not provide a basis for vacating the award due to mistake, and therefore held that summary judgment with respect to Abdalla’s breach of contract claim was properly granted. With the breach of contract claim dismissed, the court then turned to address whether any of Abdalla’s extracontractual claims could survive summary judgment. The court noted that Abdalla’s appellate brief did not cite any actual damage caused by Farmers’ conduct, nor did it cite to any evidence creating a material issue of fact on the subject. The court then pointed out that the Texas Supreme Court’s new Menchaca II opinion reaffirmed the requirement of an independent injury to support extracontractual causes of action:
After discussing its own precedent, the Supreme Court first reiterated that “an insured can recover actual damages caused by the insurer’s bad faith conduct if the damages ‘are separate from and … differ from...
