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By Crystal Vogt and Bennett A. Moss
To read this article in PDF format, please click here.

In USAA Texas Lloyds Company v. Menchaca,[1] the Texas Supreme Court provided five distinct rules regarding the relationship between claims for an insurance policy breach and Texas Insurance Code violations. Shortly after the opinion was released, Zelle LLP published an article stating why the decision would change nothing with respect to appraisal law.[2] In short, the article concluded that Menchaca had no effect on the general rule that extracontractual claims do not survive the failure of a breach of contract claim unless the insured can prove an “independent injury” beyond the denial of policy benefits.[3]

Policyholder attorneys argued otherwise. Although Menchaca was not a case involving payment of an appraisal award, insureds immediately used its language to argue that extracontractual exposure survived the timely payment of an appraisal award.

That argument was short-lived. In Cano v. State Farm Lloyds, the United States District Court for the Northern District of Texas, Dallas Division, held that an insurer’s timely payment of an appraisal award protected it from any extracontractual liability, as Menchaca required that any extracontractual claim must not “flow or stem from denial of policy benefits” after an appraisal payment is accepted.[4] The Houston Court of Appeals came to the same conclusion in Zhu v. First Community Insurance Company, further echoing Menchaca’s recognition that “a successful independent-injury claim would be rare, and we in fact have yet to encounter one.”[5]

Just when it seemed that Texas courts were interpreting the Menchaca decision in a consistent fashion, the Texas Supreme Court granted rehearing on Dec. 15, 2017. Upon rehearing, the Menchaca court withdrew its April 2017 opinion and issued a new, superseding opinion on April 13, 2018 (Menchaca II).[6]

In Menchaca II, the court reversed certain aspects of its previous ruling based on issues pertaining to faulty jury instructions, but left largely intact the five rules governing how breach of contract claims under a policy and statutory extracontractual claims relate.[7] Regardless, the new decision seemingly provided another opportunity for courts to reinterpret how Menchaca might affect claims for extracontractual damages after the timely payment of an appraisal award.

However, even after the new Menchaca II opinion, Texas courts have continued to hold that timely payment of an appraisal award precludes insurer liability for extracontractual claims.

In three recent decisions interpreting Menchaca II, courts made clear that the prompt payment of an appraisal award precludes any extracontractual liability for insurers.

In Abdalla v. Farmers Insurance Exchange, an insured appealed a summary judgment ruling against it.[8] Abdalla sued Farmers alleging breach of contract and asserting various extracontractual claims relating to a water loss under a policy Farmers had issued to Abdalla. The amount of the loss had been submitted to appraisal in accordance with the policy’s terms. The appraisal umpire found that the appraisal of Farmers’ appraiser was “more sound and well supported,” and issued an appraisal award fully adopting Farmers’ appraisal.[9] Farmers then timely issued payment of the appraisal award to Abdalla. In its lawsuit, Abdalla moved for the court to vacate the appraisal award, asserting that the award was clearly a product of mistake. However, the trial court instead granted summary judgment in favor of Farmers, holding that, as a matter of law, Farmers’ timely payment of the appraisal award established that it had not breached the insurance policy. The court further held that because Abdalla’s breach of contract claim had been extinguished, Abdalla was precluded from recovering on all of his extracontractual claims.

On appeal, the Amarillo Court of Appeals made quick work of affirming the trial court’s ruling. First, the appellate court held that an umpire’s full adoption of one appraiser’s appraisal did not provide a basis for vacating the award due to mistake, and therefore held that summary judgment with respect to Abdalla’s breach of contract claim was properly granted. With the breach of contract claim dismissed, the court then turned to address whether any of Abdalla’s extracontractual claims could survive summary judgment. The court noted that Abdalla’s appellate brief did not cite any actual damage caused by Farmers’ conduct, nor did it cite to any evidence creating a material issue of fact on the subject. The court then pointed out that the Texas Supreme Court’s new Menchaca II opinion reaffirmed the requirement of an independent injury to support extracontractual causes of action:

After discussing its own precedent, the Supreme Court first reiterated that “an insured can recover actual damages caused by the insurer’s bad faith conduct if the damages ‘are separate from and … differ from benefits under the contract.’”[10] Then, it observed that damages were recoverable "only if [they] are truly independent of the insured’s right to receive policy benefits."[11]

The Abdalla court held that because Abdalla had cited no evidence that he had sustained independent damages, his extracontractual claims were precluded under Menchaca. The prompt payment of the appraisal award precluded Farmers’ liability.

Three days later, the United States District Court for the Western District of Texas delved more deeply into what may (or may not) constitute an injury independent of a policy claim. In Kezar v. State Farm Lloyds, State Farm moved the court to grant summary judgment against the Kezars.[12] The Kezars owned a home covered by a State Farm policy which suffered a fire loss. The Kezars alleged that State Farm had provided them with an inadequate initial claims estimate, failed to timely address damaged temporary roof coverings (causing more damage), and delayed in responding to settlement communications. State Farm invoked the policy’s appraisal provision and promptly issued a payment to the Kezars consistent with the appraisal award. After finding that State Farm had timely paid the appraisal award, the court granted summary judgment to State Farm with respect to the breach of contract claims.[13] The court then analyzed whether the Kezars’ extracontractual causes of action would withstand the court’s dismissal of the breach of contract claim.

The Kezar court reiterated the need for an independent injury to exist in order for the Kezars’ extracontractual claims to survive summary judgment.[14] However, unlike Abdalla, the Kezars argued that State Farm’s intentional delay in settling their claims caused them injury independent of the policy claim: 

Specifically, the Kezars identify three acts of allegedly intentional delay: (1) State Farm's agent initially estimated the loss at a value approximately $200,000 lower than the ultimate appraisal award; (2) State Farm appointed its appraiser 28 days late; and (3) State Farm's appraiser took seven months to submit his estimate. The Kezars state that these delays injured them by increasing their construction costs, diminishing their health and quality of life, requiring them to spend money to convert their office into a residential space, and delaying their claim to their appraisal award.[15] 

However, the court was unconvinced by the Kezars’ argument, holding that “none of these injuries are sufficiently independent, nor are any of these acts sufficiently extreme, to warrant application of the independent injury rule.”[16] The court held: 

According to the Kezars' own characterization of their injuries, each is caused by State Farm's allegedly bad-faith delays in fully resolving their claims. Because these injuries flow from the denial of the Kezars' claim, the independent injury rule does not apply. Accordingly, their recovery for this extracontractual cause of action is barred by their failure to establish a breach of contract.[17] 

The court granted summary judgment for State Farm, holding that the Kezars failed to establish any independent injury.[18] Again, the insurer’s prompt payment of the appraisal award precluded the insured’s liability.

Most recently, the Amarillo Court of Appeals had the opportunity to analyze an insurer’s liability after its timely payment of an appraisal award. In Turner v. Peerless Indemnity Insurance Co., appraisal was invoked by Peerless after a disagreement arose between Turner and Peerless concerning the amount of damage to covered property.[19] An appraisal award was issued, and Peerless promptly paid the award. However, Turner filed suit for breach of contract and extracontractual damages, contending that “lost benefits under the policy could serve as evidence of an independent injury” triggering liability.[20]

The Amarillo Court of Appeals disagreed with Turner. The court noted that “[t]he independent injury rule is alive and well, as reiterated by the Texas Supreme Court in its recent Menchaca opinion…”[21] Applying Menchaca II to the matter at hand, the Turner court held that because Peerless’ prompt payment of the appraisal award thwarted Turner’s breach of contract claim, there could be no extracontractual liability after the payment of the appraisal award.

So once again we state ... Menchaca changes nothing. In the wake of Menchaca II, no Texas court has reached a result contrary to the cases that have followed the two Menchaca decisions. Cases interpreting Menchaca II confirm that Menchaca II does not affect the general rule that the timely payment of an appraisal award precludes extracontractual exposure for carriers.

However, the final word on this hotly contested issue might still be forthcoming. There are currently six cases in front of the Supreme Court of Texas raising this very issue.[22] It remains to be seen whether the court accepts review of any of these cases. Until it does, Texas law remains very clear: Menchaca changes nothing — the timely payment of an appraisal award precludes extracontractual exposure.

Crytsal Vogt is a senior associate and Bennett Moss is an associate at Zelle LLP.

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] No. 14-0721, 2017 WL 1311752 (Tex. 2017).

[2] See Tyler McGuire and Lindsey Bruning, “Why Menchaca Changes Nothing for Appraisal Law,” Law360 (available at http://www.zellelaw.com/news-publications-532.html).

[3] Menchaca, 2017 WL 1311752.

[4] 276 F. Supp. 3d 620, 628 (N.D. Tex. 2017).

[5] 543 S.W.3d 428, 438 (Tex. App.—Houston [14th Dist.] 2018, pet. filed).

[6] USAA Texas Lloyds Company v. Menchaca, 545 S.W.3d 479 (Tex. 2018).

[7] See Id.

[8] No. 07-17-00020-CV, 2018 WL 2220269 (Tex. App.—Amarillo, May 14, 2018, no pet. h.). [9] Id. at *1.

[10] See USAA Tex. Lloyds Co. v. Menchaca, 2018 WL 1866041, No. 14-0721 (Tex. April 13, 2018).

[11] Id. at *3.

[12] 2018 WL 2271380, No. 1:17-CV-389-RP (W.D. Tex. May 17, 2018).

[13] Id. at *3.

[14] Id. at *4.

[15] Id.

[16] Id.

[17] Id. at *5.

[18] Id.

[19] No. 07-17-00279-CV, 2018 WL 2709489 (Tex. App.—Amarillo June 5, 2018, no pet. h.)

[20] Id. at *4.

[21] Id. (emphasis added).

[22] See Lazos v. State Farm Lloyds, No. 04-17-00286-CV, 2018 WL 521585 (Tex. App.—San Antonio Jan. 24, 2018, pet. filed); Alvarez v. State Farm Lloyds, No. 04-17-00251-CV, 2018 WL 340135 (Tex. App.—San Antonio Jan. 10, 2018, pet. filed); Ortiz v. State Farm Lloyds, No. 04-17-00252-CV, 2017 WL 5162315 (Tex. App.—San Antonio Nov. 8, 2017, pet. filed); Barbara Tech. Corp. v. State Farm Lloyds, No. 04-16-00420-CV, 2017 WL 1423714 (Tex. App.—San Antonio Apr. 19, 2017, pet. filed); Zhu v. First Community Ins. Co., 543 S.W.3d 428 (Tex. App.—Houston [14th Dist.] 2018, pet. filed); Nat’l Sec. Fire & Cas. Co. v. Hurst, 523 S.W.3d 840 (Tex. App.—Houston [14th Dist.] 2017, pet. filed).