TEXAS LAW INTRODUCTION
In most circumstances, an insured may not prevail on a bad faith claim without first showing that the insurer breached the contract. See Liberty National Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996). However, the U.S. Court for the Southern District of Texas ruled that an insured can pursue its bad faith claim even after the court dismissed the breach of contract claim. Intermodal Equip. Logistics, LLC and Sea Train Logistics, LLC v. Hartford Accident & Indem. Co., No. 3:10-cv-00458 (S.D. Tex. Galveston Div. May, 24, 2012). A recent federal opinion from Judge Sam Lindsay of the Northern District of Texas, Dallas Division, found that an insurer’s payment of an appraisal award was insufficient to defeat the insured’s breach of contract claim, and that the insured’s statutory and common-law bad faith claims remained viable as well. See Church On The Rock North d/b/a North Church v. Church Mutual Ins. Co., No. 3:10-CV-0975-L (N.D. Tex. Feb. 11, 2013) The Intermodal Court concluded that Texas law recognizes three exceptions to the general rule.
BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING EXCEPTION
The Texas Supreme Court recognized a claim for the breach of an insurer’s duty of good faith and fair dealing in Arnold v. National County Mutual Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987). The insurer breaches its duty of good faith and fair dealing if an insured can prove that a carrier denied or delayed the payment of the insured’s claim when it knew or should have known that it was reasonably clear that the claim was covered. Universe Life Ins. Co. v. Giles, 650 S.W.2d 48, 49 (Tex. 1987). The tort was adopted to provide tort damages against an insurer’s wrongful denial or wrongful attempts to coerce unfair settlements through unreasonable delay in payment. The Texas Supreme Court expressly stated that “the duty of an insurer to timely investigate its insured’s claims” was an independent tort which could be pursued in the absence of a showing that the insurer breached the insurance contract. Republic Insurance Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995).
However, a plaintiff’s extra-contractual claims fail if the insurer’s denial of the claim is appropriate. Tivoli Corp. v. Jewelers Mut. Ins. Co., 932 S.W.2d 704, 712 (Tex. App.—San Antonio 1996, writ denied). The general rule is that there can be no claim for bad faith independent of the policy action when an insurer has promptly denied a claim that is in fact not covered. See id. Only when the insurer, in denying the claim, commits acts so extreme that an injury occurs to the insured which is clearly independent of the policy claim, is there an exception to the general rule. Id.
TEXAS INSURANCE CODE AND DTPA EXCEPTION
The same rationale supports an insured’s statutory claims under the Texas Insurance Code and the Deceptive Trade Practices Act (DTPA). The provisions of these statutes are in addition to any other remedies permitted by law. Higginbotham v. State Farm Mutual Auto Ins. Co., 103 F.3d 456, 460 (5th Cir. 1997). “Texas courts have clearly ruled that these extra-contractual tort claims require the same predicate for recovery as bad faith causes of action in Texas.” Id. (citing Emmeret v. Progressive County Mutual Ins. Co., 882 S.W.2d 32, 36 (Tex. App.—Tyler 1994, writ denied). If an insured can prove that an insurer may have unduly delayed payment of his claim after the insurer’s liability became reasonably clear, it will establish a case under these statutes for the jury to decide. See Giles, 950 S.W.2d at 56.
INDEPENDENT ACT EXCEPTION
Texas Courts have also recognized that in the absence of proof of a breach of contract, an insured may recover tort damages if it is shown that an insurer committed some extreme acts that caused injury independent of the policy claim. Stoker, 903 S.W.2d at 341 (citing Aranda v. Insurance Company of North America, 748 S.W.2d 210, 214 (Tex. 1988). For example, if an insurer’s intentional or unreasonably delay in the payment of a valid claim, forces an insured to sell real property, exhaust savings, incur substantial tax penalties due to late payment, and borrow substantial amounts of money just to keep from “going bankrupt,” then this damage evidence could support a claim that the insurer’s acts were sufficiently extreme to establish an actionable bad faith tort. See Intermodal Equip. Logistics, LLC and Sea Train Logistics, LLC v. Hartford Accident & Indem. Co., No. 3:10-cv-00458 (S.D. Tex. Galveston Div. May, 24, 2012).
NORTH CHURCH V. CHURCH MUTUAL
A recent federal opinion from Judge Sam Lindsay of the Northern District of Texas, Dallas Division, found that an insurer’s payment of an appraisal award was insufficient to defeat the insured’s breach of contract claim, and that the insured’s statutory and common-law bad faith claims remained viable as well. See Church On The Rock North d/b/a North Church v. Church Mutual Ins. Co., No. 3:10-CV-0975-L, 2013 U.S. Dist. LEXIS 17849 (N.D. Tex. Feb. 11, 2013). North Church sued Church Mutual over its handling of a claim for damages arising out of an April 2010 thunderstorm. The parties agreed on the cost of a number of repairs, but differed on others, including the amount to be paid for replacement of North Church’s roof. Church Mutual invoked the appraisal process, and while appraisal was ongoing, North Church sued. Church Mutual removed the lawsuit to federal court, and the case was administratively closed (subject to a potential future motion to re-open) so that appraisal could be completed. Upon receipt of the appraisal award, Church Mutual issued two checks, one for the remaining unpaid balance of the loss owed, and a second for the withheld depreciation. Church Mutual later moved to re-open the lawsuit and for summary judgment on North Church’s claims for breach of contract, common law bad faith, and violations of the Texas Insurance Code and the Deceptive Trade Practices Act. According to Judge Lindsay’s order, “[b]oiled down to its essence, [Church Mutual’s] contention is that without a viable contract claim, North Church’s other claims necessarily fail, and North Church cannot succeed on its contract claim because it is estopped by the alleged binding appraisal award and [Church Mutual’s] timely payment of that award from pursuing a contract claim[.]” See North Church, No. 3:10-CV-0975-L, 2013 U.S. Dist. LEXIS 17849 *15. Judge Lindsay rejected Church Mutual’s position in all respects. Specifically, he concluded that Church Mutual had failed to establish as a matter of law that the appraisal award was binding and enforceable, but only assumed that it was true. Moreover, Church Mutual did not present sufficient evidence to prove that North Church intended to be bound by the award, failed to prove that its payments were timely, and did not establish as a matter of law that its calculations of deductible, depreciation, and prior payments were correct. Thus, Church Mutual’s motion for summary judgment on the contract claims was denied. Judge Lindsay likewise denied Church Mutual’s summary judgment in relation to the insured’s extra-contractual claims. He did so not only because their contract claims remained viable and because mere payment of an appraisal award, without more, did not preclude an award for pre-appraisal violations of the Insurance Code. He also noted that North Church’s statutory claims were based on timing of payment and purported misrepresentations, not allegedly wrongful underpayment or denial of policy benefits, so the statutory claims would not stand or fall with the common-law bad faith claim. In closing, Judge Lindsay expressly stated that he was not commenting on the strength or weakness of North Church’s case, but only that Church Mutual had not met its summary judgment burden. See North Church, No. 3:10-CV-0975-L, 2013 U.S. Dist. LEXIS 17849 *42.
Like the Texas Intermodal Court, the 10th Circuit held a bad faith cause of action involving pre- and post-appraisal conduct presents a factual issue that is “generally inappropriate for decision as a matter of law.” Blakely v. USAA Cas. Ins. Co., 2012 U.S. App. LEXIS 21694 (10th Cir. Utah, Oct. 22, 2012).
In Blakely, the Blakelys sought coverage under their homeowners’ policy issued by USAA, after sealant applied by a flooring contractor caught fire in their basement. The fire damaged floor joists and subflooring exposed in the basement and caused smoke and soot damage throughout the house and to personal property.
The Blakelys alleged that USAA refused to replace more than a couple of the charred floor joists or parts of the damaged subflooring. The Blakelys also alleged the adjuster failed to respond to their complaints, inaccurately claimed that the house did not smell like smoke, and delegated part of the work to a non-adjuster. USAA paid approximately $93,000.00 to the Insureds.
Two years after the fire, the Blakelys invoked their contractual right to appraisal, which determined the true value of the amount of loss was just over $291,000, that the house smelled like smoke, and that additional joists required repairs. The Blakleys filed suit against USAA, asserting claims for emotional distress, breach of statutory duties, breach of contract, and breach of the implied covenant of good faith and fair dealing. The district court granted USAA’s summary judgment on all claims except for the breach of the duty of good faith and fair dealing.
Like the Intermodal Court, the 10th Circuit held that whether the insurer breached its duty of good faith and fair dealing was a factual issue. The Court reasoned that reasonable minds could differ as to whether USAA’s conduct measures up to the standard required for insurance claim investigations. The Court determined that there were issues of facts as to whether USAA acted reasonably by its refusal to replace more of the joists and subfloor, the adjuster’s refusal to communicate with the insured, the adjuster’s claims that the house did not smell like smoke, and the adjuster’s delegation of duties to a non-adjuster. Alternatively, the Court determined that a jury could find the insurer breached its duties of good faith and fair dealing by undervaluing the insured’s loss by the amount that it did.
In Florida, courts have held that an appraisal award was enough to permit a bad faith claim to go forward. In Tropical Paradise Resorts, LLC v. Clarendon America Ins. Co., the insured filed an amended complaint for breach of the insurance contract, statutory bad faith, breach of the implied covenant of good faith and fair dealing. No. 08-60254, 2008 WL 3889577 (S.D. Fla. Aug., 20, 2008). The insurer moved to dismiss the bad faith claim on the grounds that it was not ripe for determination, i.e., no determination of liability or extent of damage. Prior to the lawsuit, the parties participated in appraisal and an award was issued. The Court found that since the insurer had no dispute to coverage as a whole and did not dispute the actual loss determined by the umpire, then the appraisal award was sufficient to determine the insurer’s extent of liability and damage. Id. at *3.
Also, in State Farm Florida Insurance Co. v. Seville Place Condominium Association, Florida’s Third District Court of Appeal found that a confirmed appraisal award was sufficient to move forward with a bad faith action. State Farm Florida Ins. Co. v. Seville Place Condominium Ass’n Inc., 74 So. 3d 105 (Fla. DCA 2011).
In 316, Inc. v. Maryland Casualty Co., the insured filed a bad faith action without filing an action for breach of contract. 625 F. Supp. 2d 1187 (N.D. Fla. 2008). The insured, 316, suffered property damage as a result of Hurricane Ivan. It reported the loss to the insurer, Maryland Casualty, began to adjust and pay on the loss. After approximately seven months of adjustment, Maryland Casualty had paid the insured approximately $3.8 million. The insured believed it was owed additional amounts and Maryland Casualty invoked appraisal. Ultimately, the appraisal panel issued an award that required Maryland Casualty to pay the insured an additional $2.7 million. Maryland Casualty paid the appraisal award within the time allotted by the policy, and the insured filed a bad faith lawsuit.
In analyzing the bad faith claim, the Court reasoned whether the insurer delayed in paying the claim when it knew it owed money. The Court stated: “as the amount by which an anticipated claim exceeds policy limits increases, the amount of time before a prudent insurer would be expected to tender policy limits decreases.” Id. at 1192 (citing Snowden v. Lumbermens Mut. Cas. Co., 358 F. Supp. 2d 1125, 1129 (N.D. Fla. 2003)). The Court found that Maryland Casualty’s payments showed that “it was intent on upholding its side of the insurance contract.” “The fact that the appraisers found that Maryland owed more money to the insured does not, in and of itself, indicate bad faith on the part of Maryland.” Id. at 1193. It was reasonable for Maryland Casualty to demand appraisal when its assessment of damages was below policy limits.