Considering two principal questions in an insurance dispute between Texas homeowners and their insurance carrier, the U.S. Court of Appeals for the Fifth Circuit handed each party a win and a loss.
The dispute in Randel v. Travelers Lloyds of Texas concerns the insurer’s handling of a claim filed by Randy and Debra Randel following a Fourth of July fire that started in their garage and damaged their home.
According to the Fifth Circuit panel, the two questions it needed to consider in the case are:
- “Does the payment of the appraisal award prevent a plaintiff from continuing to pursue a breach of contract claim against an insurer?”
- “Can an insurer be liable under the Texas Prompt Payment of Claims Act for failing to timely pay the full damages it owed even though it timely made sizeable payments in response to the claim?”
The answer to both questions, the Court determined, is “yes.”
The Randels notified the insurer the day after the fire and Travelers made an early payment on the claim. The Randels felt the amount was insufficient.
Acknowledging the claim upon receipt, Travelers issued a $10,000 advance check to the Randels and inspected the property with the Randels and their contractor.
The Randels authorized their contractors to repair the property but later told them to stop after they disagreed about certain repairs.
Travelers in August estimated the damage to the Randels’ property at $179,232.16 and paid the Randels $126,720.86 after the deductible and depreciation costs. In October, the insurer estimated the couple’s personal property loss to be $53,270.49. Travelers also paid out $24,446.33 in three loss of use payments over several months, the court explained.
The Randels felt Travelers’ estimate of the damage was insufficient. A public adjuster hired by the couple estimated damage to their house at $499,448.69, an amount that was much higher than Travelers’ estimate.
In Travelers’ view, “after the Randels fired the contractors, repairs ceased, and thus any additional damage resulted from the Randels’ failure to mitigate. Travelers thus declined coverage for additional damage to the property,” the opinion states.
Randels invoked the policy’s appraisal provision, which Travelers initially balked at but to which it eventually agreed.
“The parties submitted for appraisal the dwelling and personal property claims but excluded the loss-of-use claim. An appraisal award granted $317,030.70 actual cash value in dwelling damages and $100,331.02 actual cash value in personal property damage,” the opinion states.
Travelers paid the award — minus the prior payments and the policy deductible — within five business days. Ultimately, the insurer paid $533,529.88 on the claim, an amount that included payments for personal property and loss of use, as well as for damage to the dwelling.
The Randels sued in state court, however, alleging “that Travelers underpaid their claims in violation of the insurance policy, acted in bad faith, and violated the Texas Prompt Payment of Claims Act (the Act). The Randels continued to press these claims after Travelers paid the appraisal amount,” the opinion states.
The case was moved to federal court where Travelers obtained a summary judgment on the claims against it. The district “court concluded that the Randels’ acceptance of the appraisal payment ended their breach of contract claim for damages to the dwelling and determined that the Randels were not entitled to additional benefits for loss of use,” the Fifth Circuit’s opinion states. Therefore, the district court decided, the Randels could not maintain their bad faith claim without a breach of contract claim.
The 5th Circuit Court agreed the Randels’ breach of contract claim was appropriately denied by the lower court.
“Although the issuance of an appraisal award does not bar a breach of contract claim, payment and acceptance of the award does,” the 5th Circuit’s opinion states, citing a ruling from the Texas Supreme Court’s decision in Ortiz v. State Farm Lloyds. “[T]he insurer’s payment of the award bars the insured’s breach of contract claim premised on a failure to pay the amount of the covered loss.”
The Court found no evidence that Travelers failed to pay the amounts it owed but the Randel’s claim regarding prompt payment was another matter.
Citing the Texas Supreme Court’s ruling in Barbara Techs. Corp. v. State Farm Lloyds, the Fifth Circuit noted that paying the full amount of an appraisal award does not necessarily erase a prompt payment claim. “That is because an insurer may be liable under the Texas Prompt Payment of Claims Act even when it pays in full if that payment was not timely,” the opinion states.
“The district court dismissed the prompt payment claim relating to dwelling and personal property coverage because although Travelers’ early payments were less than the amount it ultimately owed, the early payments were in an amount it deemed reasonable,” the Fifth Circuit’s opinion states.
However, while the Randels’ case was on appeal, “the Supreme Court of Texas provided the answer we could only guess at four years ago,” the opinion states. “It held that that ‘a reasonable payment should roughly correspond to the amount owed on the claim.'”
The Court noted that in the current case it did not need to determine how close to the final amount owed the payment made before the appraisal needed to be because the numbers were so far off. “There is a substantial gap of roughly $185,000 between the preappraisal dwelling and personal property payments and the appraisal award,” the opinion states.
“Travelers now concedes that its preappraisal payment was not reasonable given the recent guidance from the state high court. Travelers’ preappraisal payment thus is not a defense to liability under the Texas Prompt Payment of Claims Act. As a result of this recent clarification of Texas law, the claim seeking interest for late payment of dwelling coverage must be remanded,” the Court concluded.
Topics Liability
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