The Texas Insurance Code was amended in 2017 to add Section 542A to address insurance claims arising “from damage to or loss of covered property caused, wholly or partly, by forces of nature, including an earthquake or earth tremor, a wildfire, a flood, a tornado, lightening, a hurricane, hail, wind, a snowstorm, or a rainstorm.” Section 542A made a number of important changes to the Insurance Code impacting an insured’s recovery for claims arising from weather related losses.
The appraisal process is an old one, having been part of property insurance policies since the late 1800s. The process was intended to be lawyer-free, a way to resolve claim payment disputes efficiently and quickly without the need for litigation. The court’s only involvement was to select an independent umpire if the insured and the insurer could not agree on the value of the loss.[1]
The Texas Supreme Court, in Rodriguez v. Safeco, No. 23-0534, 2024 WL 388142 (Tex. Feb. 2, 2024), was presented this issue from the Fifth Circuit Court of Appeals, based on a split in the Texas Courts of Appeal concerning the recovery of attorney’s fees under 542A:
“In an action under Chapter 542A of the Texas Prompt Payment of Claims Act, does an insurer’s payment of the full appraisal award plus any possible statutory interest preclude recovery of attorney’s fees?”
Absent Chapter 542A, the Insurance Code does provide for the award of attorney’s fees “if an insurer that is liable for a claim under an insurance policy is not in compliance with this subchapter, the insurer is liable to pay … in addition to the amount of the claim, interest on the amount of the claim at the rate of 18 percent a year as damages, together with reasonable and necessary attorney’s fees.”[2]
At issue was this provision of §542A.007:
(a) Except as otherwise provided by this section, the amount of attorney’s fees that may be awarded to a claimant in an action to which this chapter applies is the lesser of:
(1) the amount of reasonable and necessary attorney’s fees supported at trial by sufficient evidence and determined by the trier of fact to have been incurred by the claimant in bringing the action;
(2) the amount of attorney’s fees that may be awarded to the claimant under other applicable law; or
(3) the amount calculated by:
(A) dividing the amount to be awarded in the judgment to the claimant for the claimant’s claim under the insurance policy for damage to or loss of covered property by the amount alleged to be owed on the claim for that damage or loss in a notice given under this chapter; and
*2 (B) multiplying the amount calculated under Paragraph (A) by the total amount of reasonable and necessary attorney’s fees supported at trial by sufficient evidence and determined by the trier of fact to have been incurred by the claimant in bringing the action. (emphasis added)
Section 542A.007(a)(3) is read in conjunction with § 542A.007(c):
The court may not award attorney’s fees to the claimant if the amount calculated under Subsection (a)(3)(A) is less than 0.2.
So, even if under § 542A.007 the amount owed for attorney’s fees is zero because once the insurance company discharges its obligations after appraisal and, therefore, there will never be a judgment to the claimant,[3] there is no opportunity to find another avenue of recovery because of § 542A.007(c): zero is less than .2.[4]
Unfortunately for the homeowner, Safeco did not invoke the appraisal provision of the policy until two years into the lawsuit filed by the insured to challenge the amount paid to him. There was considerable discussion in the briefing and at oral argument that the insureds in invoking appraisal were responsible for the appraisal costs they incurred and had no avenue to recovery those costs, that disallowing the recovery of attorney’s fees encouraged insurance companies to cause the insured considerably in attorney’s fees and expert costs with no recourse, and that preventing recovery of fees left insureds vulnerable to sophisticated insurance companies and their appraisers.
In the end, the Court did was it is mandated to do and applied the statute as written, rendering what do about the consequences for the State Legislature to resolve.
It is notable that the insured did not invoke the appraisal process before suing and that the attorneys fighting for a different interpretation filed suit without invoking appraisal on behalf of their client. If there is a dispute only to the amount of the loss, appraisal should be invoked by the insured before there is any thought of retaining counsel. As argued in the many amicus briefs, this leaves homeowners in a vulnerable position.
This opinion has no impact on appraisal awards rejected by the insurance company that then forces the insured into litigation. In that case, the insurance company is open to liability for attorney’s fees, penalty interest, and bad faith/treble damage awards if is found to have wrongfully withheld payment for covered losses.
[1] Appraisal without lawyers only works when there are no coverage disputes. This discussion does not include those claims where there is a legitimate issue over the existence or extent of coverage for a loss. Appraisal can set the damages, but cannot resolve policy coverage issues.
[2] Tex. Ins. Code §542.060
[3] The Texas Supreme Court has previously held that payment of an appraisal award extinguishes liability on a breach of contract claim and satisfies the insurer’s obligations under the policy.
[4] I will leave for another day the Court’s discussion of “non-zero” and number theory.
