On July 12 the U.S. Court of Appeals for the Fifth Circuit requested the Texas Supreme Court to weigh in on the effect of the Texas Legislature’s 2017 amendments to the Texas Prompt Payment of Claims Act, Chapter 542A, Insurance Code (HB 1774). As you recall, the amendments responded to the spiraling costs of settling claims resulting from severe weather events, primarily wind and hailstorms. Among other things, the Legislature limited attorney’s fees to the difference between the amount claimed by plaintiff under the policy and the judgment ultimately rendered, multiplied by the amount of reasonable and necessary attorney’s fees determined by the trier of fact. The question posed by the Fifth Circuit was whether this limitation precluded an award of attorney’s fees when the insurer that invoked the appraisal process under the policy fully paid the appraisal award plus interest. On Friday, SCOTX replied that it did.

The case, Mario Rodriguez v. Safeco Insurance Company of Indiana (No. 22-1070), arose from damage to Rodriguez’s home from a 2019 tornado. The Safeco adjuster determined that covered damage to the home came to nearly $1,300 and tendered payment. Rodriguez objected, claiming an additional $29,500. When Safeco did not respond within 60 days, Rodriguez filed suit, alleging violations of Chapter 541 (unfair claim settlement practices) and 542 (delayed payment of a claim), Insurance Code. Safeco subsequently invoked the appraisal provision of the policy. An appraisal panel determined that the replacement cost of the damage to the home came to more than $36,500. Safeco paid $32,447.43, which represented the cash value of the award less Rodriguez’s deductible, applicable policy limits, and the prior payment. The company further paid another $9,458.40 for “any conceivable interest Plaintiff could allege to be owed under [Chapter 542]” on the payment of the award. Safeco then filed a motion for summary judgment, asserting that the 2017 amendments, Chapter 542A, foreclosed Rodriguez’s claim for attorney’s fees under Chapter 542, as well as any other claims. The district court agreed and granted the motion. Rodriguez appealed to the Fifth Circuit.

Noting that the Texas Supreme Court has not yet ruled on the attorney’s fee issue presented by Chapter 542A, and that the federal district courts have split pretty much down the middle, the Fifth Circuit demurred from offering its own interpretation of the 2017 amendments and certified the following question to SCOTX: In an action under Chapter 542A of the Texas Prompt Payment of Claims Act, does an insurer’s payment of the full appraisal award plus any possible statutory interest preclude recover of attorney’s fees?

Chapter 542A, among other reforms, limited statutory interest in a Chapter 542 claim to 5% (as opposed to 18%) and tied the amount of an award of attorney’s fees to the amount awarded in the judgment. Under the statutory formula, the amount of reasonable and necessary attorney’s fees is reduced if the amount to be awarded in the judgment for the claim under the insurance policy is less than the amount alleged to be owed. Safeco argued that since it paid the appraisal award and an amount sufficient to cover statutory interest, there was no “amount to be awarded in the judgment” and, consequently, no liability for attorney’s fees. Plaintiff, on the other hand, contended that preemptively paying statutory damages to avoid attorney’s fees violates SCOTX’s ruling in Barbara Technologies Corp. v. State Farm Lloyds, 589 S.W.3d 806 (Tex. 2019). In that case SCOTX held that the insurer’s full payment of the loss established by the appraisal process did not “excuse an insurer liable under the policy from having to pay [Chapter 542] damages merely because it tendered payment based on an appraisal award, or to foreclose any further proceedings to determine the insurer’s liability under the policy.” 589 S.W.3d, at 819.

There have been two Texas intermediate appellate decision on the question:  Louis Rosales, Sr. v. Allstate Vehicle and Property Insurance Company (No. 05-22-00676; delivered May 16, 2023) and Kester v. State Farm Lloyds (No. 02-22-00267-CV; delivered July 6, 2023) In both cases, just as Safeco did, the insurer paid the appraisal award and an amount sufficient to cover the 5% statutory interest. Since the appraisal award, as Justice Miskel wrote in the Rosales opinion, is “binding as to the maximum amount of damages to or loss of [plaintiff’s] property . . . there remains no ‘amount to be awarded in the judgment’ for [plaintiff’s] ‘claim under the insurance policy for damage or loss to the covered property.’” Consequently, “Chapter 542A’s formula must result in an award of zero attorney’s fees.” Moreover, the existence of interest “described as statutory damages” is beside the point because the determination of attorney’s fees under § 542A.007(a)(3)(A) depends on damages awarded for a claim under the policy, not awarded by the statute.

In an opinion by Justice Blacklock, SCOTX agreed. As we urged in our amicus brief in this case, the Court viewed the case as purely one of statutory construction and had no difficulty concluding that the plain language of § 542A.007(a)(3)(a) precluded the plaintiff from recovering fees when payment of the appraisal award plus interest satisfied the insurer’s obligation under the policy. In other words, without a judgment, there can be no attorney’s fees. In response to plaintiff’s argument that Barbara Technologies left the door open to attorney’s fees under Chapter 542A, the Court pointed to its decision in Ortiz v. State Farm Lloyds, 589 S.W.3d 127 (Tex. 2019), handed down the same day as Barbara Technologies, in which the Court held that an insurer’s payment of the appraisal award discharged its obligations under the policy. Barbara Technologies, on the other hand, “is primarily concerned with how and when the insurer’s liability is established,” not “whether there is ’an amount to be awarded in the judgment’ against the insurer for a claim under the insurance policy.”

We would also like to point a very interesting comment Justice Blacklock made at the end of the opinion. Responding to plaintiffs’ amici and courts that argue that the Legislature could not have intended to eliminate attorney’s fees altogether in Chapter 542A, Justice Blacklock opined:

The unavailability of attorney’s fees in cases like this one—or in any case—comes nowhere close to an unthinkable or unfathomable result. The default rule is the American rule, in which parties pay their own attorney’s fees. (citation omitted) To the extent attorney’s fees are available at all in cases like this one, they are only available because the Legislature has created an exception to the American Rule. The Legislature’s later decision to restrict—or to eliminate entirely—an exception of its own creation and thereby move back toward the default American Rule raises no absurdity concerns.

Given the proliferation over the past few sessions of legislative proposals authorizing attorney’s fee awards in this or that case, we welcome Justice Blacklock’s reminder that every exception erodes the American Rule and should only be adopted if absolutely necessary. Indeed, perhaps it is time to review exceptions already on the books to determine whether eliminating them better serves the interests of justice. After all, the American Rule is based on the premise that requiring parties to pay their own fees assures that litigation is a last resort and that neither side has a financial incentive to stir up unnecessary litigation. Every time we make an exception, we introduce into the system an incentive to sue. If we are going to do that, we ought to have a very good reason.

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