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Why Menchaca Changes Nothing for Appraisal Law

Texas Law360
June 6, 2017

By Lindsey P. Bruning and Tyler J. McGuire
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On April 7, 2017, the Supreme Court of Texas issued an opinion that some argue changed the landscape of Texas law regarding extracontractual liability in first-party insurance cases. In USAA Texas Lloyds Co. v. Menchaca, the court sought to clarify precedent by “announcing five rules that address the relationship between contract claims under an insurance policy and tort claims under the Insurance Code.”[1]

In the wake of Menchaca, some policyholder attorneys immediately claimed that the decision negates the well-established rule regarding an insurer’s potential liability after the payment of an appraisal award. Courts across Texas have been nearly uniform in holding that the timely payment of an appraisal award categorically precludes breach of contract claims, and by extension common law and statutory bad faith claims.

Menchaca changes nothing with respect to this rule. Both a close reading of Menchaca and the first appraisal decision following Menchaca confirm that appraisal law remains unaffected.

Menchaca Does Not Disturb Finality of Appraisal

In Menchaca, the insured used Chapter 541 of the Texas Insurance Code as the vehicle to recover policy benefits that were still owed following a claim adjustment (“benefit of the bargain damages”). Arguably due to questionable jury instructions at the trial court level, the insured recovered policy proceeds under the Texas Insurance Code even though the jury did not find that USAA breached the policy.[2] Notably, the claim was not appraised.

No similar situation could arise in the context of appraisal. Appraisal is to occur before litigation and is a binding contractual remedy that ensures the full amount of loss is paid. There are no policy proceeds for an insured to recover after appraisal. Unlike the dispute in Menchaca, appraisal requires no lawsuit, trial or jury award. Policy benefits are paid as part of the underlying insurance claim process.

Policyholder attorneys are nonetheless attempting to link Menchaca to appraisal claims, arguing that an insured may pursue post-appraisal statutory claims even if a breach of contract claim is precluded by the timely payment of an appraisal award. But this argument wholly ignores the clear language of the fourth rule announced by the court — the “Independent Injury Rule.” The court plainly explained the Independent Injury Rule as follows:

[A]n insurer's statutory violation does not permit the insured to recover any damages beyond policy benefits unless the violation causes an injury that is independent from the loss of the benefits.[3]

Accordingly, an insurer’s statutory violation does not permit an insured to recover any damages beyond policy benefits unless the violation causes an injury that is independent from the loss of the benefits. Such damages do not exist post-appraisal. Post-appraisal claims under the Texas Insurance Code would only survive if an insured demonstrated a truly independent injury — a very rare occurrence.[4] An independent injury cannot “flow from” the right to receive policy benefits.

In short, Menchaca does not alter the existing law regarding the finality of appraisal. In fact, as discussed below, the first Texas court to analyze Menchaca with respect to post-appraisal claims confirmed that the law remains unchanged.

Post-Menchaca Case Law Confirms the Finality of Appraisal

In National Security Fire & Casualty Company v. Hurst, the Court of Appeals for the 14th District of Houston recently confirmed that nothing in Menchaca disturbs the finality of appraisal.[5]

Hurst involved contractual and extracontractual claims against National Security Fire & Casualty arising from wind damage to Hurst’s home as a result of Hurricane Ike. Hurst disagreed with National’s initial assessment of the loss and filed a lawsuit on Sept. 7, 2010. On Feb. 19, 2014, Hurst’s counsel invoked the policy’s appraisal clause. The appraisal award was issued on Sept. 25, 2014, and National immediately tendered payment of the award. Hurst did not move to set aside the award, never returned or cashed the check, and continued to pursue litigation. Ultimately, trial was held and the jury found in favor of Hurst, awarding contractual damages equal to the appraisal award. Additionally, the jury awarded nearly $100,000 in extracontractual damages for common law bad faith, unfair settlement practices in violation of Section 541.151 of the Insurance Code, and violations of the prompt payment provisions of Chapter 542 of the Texas Insurance Code.

National appealed, arguing that “full and timely payment of the appraisal award precludes as a matter of law any award for breach of contract, penalty interest, or any statutory or common-law bad faith violations.” The court agreed with National, holding that because National tendered the full amount of the loss as determined by the appraisal process, Hurst was estopped from recovering for breach of contract and his extracontractual claims.

Specifically regarding the bad faith and unfair claims settlement practices claims, the court cited to Menchaca and stated as follows:

In order to recover any damages beyond policy benefits, the statutory violation or bad faith must cause an injury that is independent from the loss of benefits. USAA Tex. Lloyds Co. v. Menchaca, No. 14-0721, 2017 WL 1311752, at *11-12 (Tex. Apr. 7, 2017). The Menchaca court recognized that “a successful independent-injury claim would be rare, and we in fact have yet to encounter one.” Id. at *12 (citing Mid–Continent Cas. Co. v. Eland Energy, Inc., 709 F.3d 515, 521 (5th Cir. 2013)) (observing “[t]he Stoker language has frequently been discussed, but in seventeen years since the decision appeared, no Texas Court has yet held that recovery is available for an insurer's extreme act, causing injury independent of the policy claim.”) The Menchaca court explained that “[t]his is likely because the Insurance Code offers procedural protections against misconduct likely to lead to an improper denial of benefits and little else.” Id. The court acknowledged that it has further limited the natural range of injury by insisting that an “independent injury” may not “flow” or “stem” from denial of policy benefits.

                                                                    ***

Hurst has received the benefits to which he was entitled under the policy and has not alleged any act so extreme as to cause independent injury. See Menchaca, 2017 WL 1311752, at *11-12; see also Progressive Cty. Mut. Ins. v. Boyd, 177 S.W.3d 919, 922 (Tex. 2005) (holding any error in granting summary judgment on bad-faith claims harmless where insured made no allegations that he suffered any damages unrelated to or independent of the policy claim); see generally Cantu v. State Farm Lloyds, No. 7:14-CV-456, 2016 WL 5372542, at *8 (S.D. Tex. Sept. 26, 2016) (holding extra-contractual claims failed where insured did not allege an action constituting an independent injury); Alvarado v. State Farm Lloyds, No. 7:14-CV-166, 2016 WL 6905865, at *4-5 (S.D. Tex. June 15, 2016) (same)

                                                                    ***

The amount of damage to certain items, and which items were covered at all, speaks to the issue of damages and were therefore estopped by the appraisal award. See Montoya v. State Farm Lloyds, No. 7:14-CV-00182, 2016 WL 7734650, at *3-4 (S.D. Tex. Sept. 12, 2016). The claim of underpayment is not one that is independent of the issue of damages under the policy. Id. (holding insurers were entitled to summary judgment on extra-contractual claims where there was no evidence of an injury independent of underpayment or failure to timely investigate). Accordingly, the trial court erred in denying appellants' motion for directed verdict on Hurst's extra-contractual claims.[6]

The court in Hurst appropriately applied the Independent Injury Rule explained in Menchaca and confirmed that an insured’s extracontractual damages are precluded by the full and timely payment of an appraisal award. Appraisal (and its associated costs) are directly linked to a right to policy benefits. Such damages cannot constitute an independent injury. As a result, Menchaca changes nothing and the rule that timely payment of an appraisal award precludes extracontractual liability remains the law in Texas.

Lindsey P. Bruning is a senior associate and Tyler J. McGuire is an associate with Zelle LLP in Dallas.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 14-0721, 2017 WL 1311752 at *1 (Tex. Apr. 7, 2017).

[2] Menchaca, 2017 WL 1311752, at *2.

[3] Id. at *11 (original emphasis).

[4] Id. at *12.

[5] No. 14-15-00714-CV, 2017 WL 2258243 (Tex. App.—Houston [14th District] May 23, 2017).

[6] Id. at *6.

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