• Atlanta
• Boston
• Dallas
• Ft. Lauderdale
• London
• Minneapolis
• New York
• Oakland
• Philadelphia
• Washington, DC

By Brad E. Brewer and James W. Holbrook
To read this article in PDF format, please click here.

For more than a decade, courts applying Texas law — including the Fifth Circuit,[1] two federal district courts[2] and several Texas courts of appeal[3] — have uniformly held that an insurer’s full and timely payment of an appraisal award insulates the insurer from statutory penalties under Texas’ Prompt Payment of Claims Act (TPPCA). However, in an unprecedented ruling, Judge Jane Boyle of the United States District Court for the Northern District of Texas recently broke ranks with these courts. In Graber v. State Farm Lloyds, Judge Boyle held that an insurer’s “full and timely payment of [an] appraisal award d[id] not preclude [the insured’s] claim for statutory interest under the TPPCA.”[4]

This development raises a critical question: Does Graber pave a new road to recovery for insureds? These authors suggest it does not. A close examination of Graber’s underpinnings and a comprehensive review of other cases addressing TPPCA liability in the post-appraisal context reveal that Graber is best viewed as an outlier. Indeed, opinions issued by two Texas courts in the days immediately following Graber — one by the United States District Court for the Southern District of Texas and another by the Fifth Court of Appeals — suggest Graber represents an anomalous bump in the road for a single insurer defendant, not an alteration of the well-established law regarding TPPCA claims.[5]

Graber v. State Farm Lloyds

Graber arose from an all-too-common scenario — a disputed insurance claim, the amount of which had been determined by appraisal. Like so many cases before it, the insured submitted a claim and the insurer timely paid its measure of the claimed loss.[6] Appraisal ensued and the appraisal panel issued an award that exceeded State Farm’s original payment.[7] State Farm timely paid the award, but the insured nevertheless proceeded with suit, asserting claims for breach of contract, breach of the common law duty of good faith and fair dealing and various violations of the Texas Insurance Code.[8] State Farm responded with a motion for summary judgment, seeking the dismissal of all claims on the basis that it timely paid the appraisal award.[9]

Following the road paved by other Texas courts, the Graber court made quick work of the insured’s breach of contract claim. Citing Breshears v. State Farm Lloyds,[10] the court held that the insured’s breach of contract claim could not be supported by the fact that the appraisal award was higher than the amount originally paid by State Farm.[11] This was especially true considering that “the contract [the insured] claim[ed] [was] breached provide[d] for resolution of disputes through appraisal.”[12] The court thus dismissed the insured’s breach of contract claim, noting that “an insurer does not breach the insurance contract where, as here, it pays all damages determined by the appraisal.”[13]

The Graber court continued down the path of earlier Texas courts in dismissing the insured’s claims for breach of the common law duty of good faith and fair dealing. In doing so, the Graber court held that, because State Farm had not breached the relevant insurance policy, the insured could not maintain common-law bad faith claims unless State Farm (1) failed to timely investigate the insured’s claim or (2) committed some act so extreme that it would cause injury independent of the policy claim.[14] Because the insured failed to establish either of these circumstances, the insured’s claims for common-law bad faith failed.[15]

Seemingly on cruise control, the Graber court next dismissed the insured’s claims for statutory bad faith. It did so on the well-settled basis that those claims “require[d] the same predicate recovery as [the insured’s common-law] bad faith claims and therefore are reviewed under the same standard.”[16] Because the insured’s statutory bad faith claims were based on the same theory of liability as its failed common-law bad faith claims, those claims likewise failed.[17]

Turning its attention to the insured’s claim for statutory penalties under the TPPCA, the Graber court veered sharply off the well-traveled path of Texas law. Despite acknowledging the long line of cases holding that an insurer’s timely payment of an appraisal award bars an insured from recovering under the TPPCA, the court boldly stated that such authority “[was] without basis in the text of the TPPCA or the Texas Supreme Court and Fifth Circuit decisions construing the act.”[18] And, on that premise, the Graber court reached the unprecedented conclusion that State Farm was not entitled to summary judgment on the insured’s TPPCA claim, despite its full and timely payment of the appraisal award issued under the policy’s appraisal provision.[19]

Flaws in the Graber Holding

The Graber Court Failed to Distinguish (or Limit) the Scope of the Breshears Holding.

In an attempt to justify its dramatic departure from well-established Texas case law, the Graber court strained to limit the reach of Breshears — the case on which it relied to dismiss the insured’s breach of contract claim. In doing so, the court stated:

[T]he Breshears court did not hold that the insurer's full and timely payment of the appraisal award precluded the insured's claim for statutory interest under the TPPCA. Rather, the court merely observed that “[t]he fact that the appraisal process was later invoked [did] not alter the fact that [the insurer] complied with the insurance code and provided a reasonable payment within a reasonable time.”[20]

The substantive impact (if any) of this purported distinction on the court’s analysis is murky at best. This lack of clarity is only compounded by the court’s candid acknowledgement that the facts in Breshears were starkly similar to those presented in Graber.[21]

The Cases on Which the Graber Court relied — Higginbotham and Mex-Tex — Are Inapposite.

Higginbotham v. State Farm Mutual Automobile Insurance Co.

Apparently recognizing the difficulty inherent in its efforts to limit the reach of Breshears, the Graber court next attempted to discount Breshears in its entirety, asserting that its holding “run[s] afoul of the Fifth Circuit's opinion in Higginbotham v. State Farm Mutual Automobile Insurance Co.,[22] which rejected a good-faith defense to TPPCA liability.[23] This assertion, however, also missed the mark.

1. Payment of an appraisal award is not a “defense” to TPPCA liability.

The long-standing rule first articulated in Breshears (and reiterated in a litany of later cases) is not a "defense" to prompt-payment liability. It is recognition of the fact that an insurer’s timely payment of an appraisal award poses an insurmountable obstacle to the insured’s establishment of a prima facie TPPCA claim. The Texas court of appeals’ opinion in Amine v. Liberty Lloyds of Texas Insurance Co.[24] aptly demonstrates this point.

In reaching the unremarkable conclusion that an insurer’s “full and timely payment of an appraisal award ... preclude[d] an award of [TPPCA] penalties as a matter of law,”[25] the Amine court explained that a successful TPPCA claimant must establish: (1) a claim under an insurance policy; (2) that the insurer is liable for the claim; and (3) the insurer failed to follow one or more sections of the TPPCA with respect to the claim.[26] The insured in Amine could not meet this burden, because there was no evidence of liability on the part of the insurer.[27] The policy at issue provided a contractual mechanism for resolving any controversy regarding the amount of the insured’s claimed loss — namely, appraisal. The insurer participated in the appraisal process (as required by the policy) and timely paid the appraisal award (as required by the policy), which — as the Amine court held — did not constitute a finding of liability under the TPPCA.[28] In short, the insurer fully complied with the requirements of the policy,[29] precluding not only a breach of contract claim, but also the corresponding finding of liability necessary to support a TPPCA claim. The same was true in Graber.

2. The insurer in Higginbotham — which was not an appraisal case — was found liable for breach of the policy.

Higginbotham, which served as the linchpin of the Graber court’s unprecedented ruling, is readily distinguishable for at least two additional reasons. Higginbotham — unlike Graber, Breshears, Amine and similar cases — was not an appraisal case.[30] And the insurer in Higginbotham — unlike the insurers in Graber, Breshears, Amine and similar cases — was found liable for breach of contract.[31] These distinctions are crucial. In fact, the Fifth Circuit recently confirmed that Higginbotham is inapplicable where — as in Graber, Breshears, Amine and similar cases — there is no finding of liability for breach of contract.[32]

Because the Graber court correctly held that State Farm’s submission to the appraisal process and timely payment of the ensuing appraisal award precluded the insured’s claim for breach of contract, the insured’s TPPCA claim should have met a similar fate. Indeed, as relevant authority makes clear, the court’s dismissal of the insured’s breach of contract claim rendered the insured incapable of establishing the contractual liability required to recover under the TPPCA.

Republic Underwriters Insurance Co. v. Mex-Tex Inc.

In a further effort to justify its holding, the Graber court asserted that Breshears and its progeny conflict with the Texas Supreme Court’s holding in Republic Underwriters Insurance Co. v. Mex-Tex Inc.,[33] which held (in very general terms) that an insurer must pay interest on the unpaid amount of a claim. Several courts have concluded, however, that Mex-Tex has no application in the appraisal context. As one federal district court recently explained:

... Mex–Tex was not an appraisal case, and more relevant authority directs that an insurer commits no prompt payment violation when it submits to the delay inherent in the contractual appraisal process (in this case, invoked by the insured) before paying all covered damages determined by that process. Moreover, even assuming that appraisal awards must be paid within the time periods prescribed by [the TPPCA], [the insurer] complied with [the statute’s provisions ... by paying the award within 60 days of the umpire's decision.[34]

Accordingly, Mex-Tex — like Higginbotham — provides no support for the Graber court’s unprecedented conclusion that an insured’s TPPCA claims survive the insurer’s full and timely payment of an appraisal award.

The Graber Court Did not Reference, Let Alone Distinguish, the Fifth Circuit’s ‘highly persuasive’ holding in Blum’s Furniture.

Perhaps Graber’s most glaring flaw lies not in its unpersuasive attempt to distinguish Breshears, nor in its reliance on factually distinguishable case law, but in the “highly persuasive authority”[35] it ignores — specifically, the Fifth Circuit’s holding in Blum’s Furniture Co. v. Certain Underwriters at Lloyds London.[36]

In Blum’s Furniture, the insured submitted a claim to its insurer (Lloyds) for property damage caused by Hurricane Ike.[37] Lloyds promptly paid the insured $50,000 and, upon receiving a revised damage estimate from the insured approximately one year later, paid the insured an additional $300,000.[38] After accepting these payments, the insured demanded appraisal.[39] The appraisal — which lasted more than a year — resulted in an award exceeding $1 million.[40]

Lloyds promptly paid the appraisal award, less amounts already paid and other deductions provided for by the policy,[41] but the insured nevertheless proceeded with suit against Lloyds, asserting breach of contract and extracontractual claims, including a claim for alleged violation of the TPPCA.[42] Following the close of discovery, Lloyds moved for summary judgment, arguing that its timely payment of the appraisal award precluded all claims asserted by the insured.[43] The district court agreed and dismissed the insured’s suit in its entirety.[44]

In disposing of the insured’s TPPCA claim, the district court noted that, “[u]nder Texas law, ‘full and timely payment of an appraisal award under the policy precludes an award of penalties under the Insurance Code's prompt payment provisions as a matter of law.’[45] Because Lloyds made full and timely payment of the appraisal award ... , [the insured’s] prompt payment claim fail[ed] as a matter of law.”[46]

The insured appealed to the Fifth Circuit, arguing (in part) that the district court improperly dismissed the insured’s TPPCA claim.[47] Four nonparty trade groups weighed in on the issue as well, claiming (as amici curiae) that the Supreme Court of Texas would not bar an action under the TPPCA when an insurer timely pays an adverse appraisal award.[48] The Fifth Circuit rejected these arguments, holding that the insured failed to establish a genuine issue of material fact regarding its extracontractual claims.[49] And, in so holding, the Fifth Circuit affirmed the district court’s summary judgment in its entirety, including the dismissal of the insured’s claim for alleged violations of the TPPCA.[50]

Although the Fifth Circuit’s opinion in Blum’s Furniture was not published, it remains “highly persuasive authority,” and courts “ha[ve] repeatedly relied on the reasoning of Blum's Furniture in analyzing noncontractual claims in [the post-appraisal] context.”[51] But, in Graber, the court ignored the instructive guidance provided by the Fifth Circuit.[52] This fact alone casts considerable doubt on the merit and weight of Graber’s holding.

Conclusion

Graber is plainly at odds with the litany of Texas cases holding that an insurer’s full and timely payment of an appraisal award precludes the insured from recovering statutory penalties under the TPPCA. But what is the likely impact and reach of the opinion? Has Graber paved a new road to recovery for insureds? Or is it an anomalous bump in the road that should be regarded by only those practitioners litigating insurance disputes in Judge Boyle’s court? Until the Texas Supreme Court addresses the issue, or other Texas courts adopt Graber’s recently-staked position on post-appraisal TPPCA liability, Graber is best viewed as an outlier, a position in conflict with well-settled Texas law. Indeed, in the short time since the Graber ruling was issued, two separate courts — a federal district court and a state appellate court — have issued rulings in line with Breshears (and contrary to Graber).[53] These cases provide a clear indication that — despite the holding in Graber — an insurer’s full and timely payment of an appraisal award will continue to bar an insured’s TPPCA claim.

—By Brad E. Brewer and James W. Holbrook, III, Zelle Hofmann Voelbel & Mason LLP

Brad Brewer and James Holbrook are partners in Zelle Hofmann's Dallas office.

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] Blum’s Furniture Co. v. Certain Underwriters at Lloyds London, 459 F. App’x 366, (5th Cir. 2012) (affirming summary judgment for insurer on TPPCA claims).

[2] See, e.g., Burks v. Metro. Lloyds Insurance Co. of Texas, No. H-14-591, (S.D. Tex. July 8, 2015) (holding that “Plaintiff’s claim for noncompliance with [TPPCA’s] ‘prompt payment of claims’ requirement . . . [was] barred by Defendant's payment of the appraisal award”); Barry v. Allstate Tex. Lloyds, No. 4:14-CV-870, (S.D. Tex. March 31, 2015) (“Since [insurance carrier] made the full and timely payment of the appraisal award minus any applicable offsets to the plaintiff upon the award's issuance, the defendants [we]re entitled to judgment as a matter of law on the plaintiff's claim for violation of the prompt payment provisions of the Texas Insurance Code.”); United Neurology, P.A. v. Hartford Lloyds Ins. Co., No. H-10-4248, (S.D. Tex. March 31, 2015) (“Under Texas law, timely payment of an appraisal award under the policy precludes an award of statutory penalties under the [TPPCA] as a matter of law.”); Quibodeaux v. Nautilus Ins. Co., No. 1:10-CV-739, (E.D. Tex. March 10, 2015) (holding that “no genuine issue of material fact exist[ed] on plaintiffs' ‘prompt payment act’ claims under [TPPCA] because the undisputed record evidence show[ed] that [insurance carrier] invoked the appraisal provision of the insurance policy and timely paid the appraisal award”); Caso v. Allstate Tex. Lloyds, No. 7:12-CV-478, (S.D. Tex. Feb. 7, 2014) (holding that insured’s statutory bad faith and TPPCA claims were derivatively precluded by timely payment of appraisal award and resultant estoppel on insured’s breach of contract claim); Gabriel v. Allstate Texas Lloyds, No. 7:13-CV-181, (S.D. Tex. Nov. 1, 2013) (rejecting insured’s claim that insurance carrier violated TPPCA “by failing to pay the appraisal-determined amount of loss during the initial adjustment of the claim,” stating that insured’s argument “misinterpret[ed] the relevant authorities and [we]re vitiated by the policy, statute, and record”); Scalise v. Allstate Tex. Lloyds, No. 7:13–CV–178, 2013 (S.D. Tex. Dec. 20, 2013) (holding that “an insurer commits no prompt payment violation when it submits to the delay inherent in the contractual appraisal process . . . before paying all covered damages determined by that process”); Mag-Dolphus, Inc. v. Ohio Cas. Ins. Co., 906 F. Supp. 2d 642, 652 (S.D. Tex. 2012) (holding that “‘full and timely payment of an appraisal award under the policy precludes an award of penalties under the Insurance Code's prompt payment provisions as a matter of law’”) (quoting In re Slavonic Mut. Fire Ins. Ass’n, 308 S.W.3d 556, 563 (Tex. App. – Houston [14th Dist.] 2010, no pet.)); Waterhill Cos. v. Great Am. Assur. Co., No. 7:13–CV–178, (S.D. Tex. March 16, 2006) (holding that “[a] delay in payment pursuant to the appraisal process does not constitute [a TPPCA] violation”).

[3] See, e.g., Bernstien v. Safeco Ins. Co. of Illinois, No. 05-13-01533-CV, (Tex. App. – Dallas, June 30, 2015, no pet. hist.) (holding that insurer’s “timely payment of an appraisal award under the policy precludes an award of statutory penalties under the [TPPCA]”); In re Slavonic, 308 S.W.3d at 563 (“Texas courts considering the issue have concluded that full and timely payment of an appraisal award under the policy precludes an award of penalties under the Insurance Code's prompt payment provisions as a matter of law.”); Amine v. Liberty Lloyds of Tex. Ins., No. 01-06-00396-CV, (Tex. App. – Houston 1st Dist.] 2007, no pet.) (“where insurer makes timely payment pursuant to an appraisal award, there is no violation of the code's prompt payment deadlines”); Breshears v. State Farm Lloyds, 155 S.W.3d 340, 344 (Tex. App. – Corpus Christi 2004, pet. denied) (holding that insurer did not breach contract and insureds were not entitled to payment of penalty fees, “even though final payment was delayed until completion of appraisal process”).

[4] Graber v. State Farm Lloyds, No. 3:13–CV–2671, (N.D. Tex. June 15, 2015).

[5] See Burks; Bernstien.

[6] See Graber.

[7] See id.

[8] See id.

[9] See id.

[10] 155 S.W.3d 340 (Tex. App.—Corpus Christi 2004, pet. denied).

[11] Graber, (citing Breshears, 155 S.W.3d at 343).

[12] Id. (quoting Breshears, 155 S.W.3d at 343).

[13] Id. (quoting Scalise v. Allstate Lloyds, No. 4:13-CV-178, (S.D. Tex. Dec. 20, 2013)).

[14] See id. (citing Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995)).

[15] See id.

[16] Graber.

[17] See id.

[18] Id.

[19] See id.

[20] Id. Despite its attempt to limit the holding of Breshears, the Graber court ultimately described Breshears as “[t]he first case to recognize a defense to TPPCA liability for the full and timely payment of an appraisal award.” Id.

[21] See Graber. Notably, the Graber court made no meaningful effort to limit or distinguish the many other cases in which courts applying Texas law — including the Fifth Circuit — independently concluded that an insurer’s full and timely payment of an appraisal award barred the insured’s TPPCA claims. It focused its efforts solely on limiting the reach of Breshears.

[22] 103 F.3d 456, 461 (5th Cir. 1997).

[23] Graber.

[24] No. 01-06-00396-CV, (Tex. App. – Houston 1st Dist.] 2007, no pet.).

[25] Amine, (emphasis in original).

[26] See id. (citing Allstate Inc. Co. v. Bonner, 51 S.W.3d 289, 291 (Tex. 2001)).

[27] See id.

[28] See id.

[29] See id.; see also Breshears, 155 S.W.3d at 344 (holding that insurer “complied with every requirement of the contract” where it participated in the appraisal process and paid the appraisal amount set by the appraisers and umpire); United Neurology, P.A. v. Hartford Lloyds Ins. Co., No. H-10-4248, (S.D. Tex. March 31, 2015) (noting that insurer’s payment obligation, “including the timeliness of that payment is governed by the agreement of the parties as manifested in the [insurance] policy”).

[30] See Amine, (distinguishing Higginbotham).

[31] See id. (distinguishing Higginbotham).

[32] See Tremago LP v. Euler-Hermes Am. Credit Indemnity Co., 602 F. App'x 981, 984 (5th Cir.Feb. 25, 2015 (holding that Higginbotham is inapposite where an insurer “has never been found liable for breach of contract” and “will [not] ever face such a liability determination.”)

[33] 150 S.W.3d 423,427-28.

[34] Scalise, (internal citations omitted).

[35] Burks v. Metro. Lloyds Ins. Co. of Texas, No. H-14-591, (S.D. Tex. July 8, 2015).

[36] 459 F. App’x 366 (5th Cir. 2012).

[37] See Blum’s Furniture, 459 F. App’x at 367.

[38] See id.

[39] See id.

[40] See id.

[41] See id.

[42] See Blum’s Furniture, 459 F. App’x at 367.

[43] See id. at 367-68.

[44] See id.

[45] Blum’s Furniture Co. v. Certain Underwriters at Lloyds London, No. H–09–3479, (S.D. Tex. Mar 2, 2011) (quoting In re Slavonic, 308 S.W.3d at 563-64).

[46] Id.

[47] See Appellant’s Brief, (July 20, 2011).

[48] See Brief of Amicicuriae, Texas Apartment Association, Inc., Texas Automobile Dealers Association, Texas Organization of Rural & Community Hospitals, and Texas Building Owners and Managers Association, Inc. in Support of Reversal, (July 27, 2011).

[49] See Blum’s Furniture, 459 F. App’x at 369.

[50] See id.

[51] Burks, (citing cases).

[52] Interestingly, the Graber court cited the district court’s summary judgment ruling in Blum’s Furniture and noted (in its citation) that the district court’s ruling was affirmed on appeal by the Fifth Circuit, but it made no reference to the substance, scope, or impact of the Fifth Circuit’s opinion. See Graber.

[53] See Burks; Bernstien.