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. The amendments responded to the spiraling costs of settling claims resulting from severe weather events, primarily wind and hailstorms. SCOTX accepted the question and scheduled oral argument on October 4.

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?

As you recall, 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 argues 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, contends 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.

Safeco’s brief on the merits cites a number of federal district court decisions concurring with its reading of Chapter 542A (which were likewise cited by the Fifth Circuit), as well as some going the other way. The only other Texas authority on the subject came from the Houston [14th] Court of Appeals, which “held that an insurer who paid the appraisal award and statutory interest was not entitled to summary judgment on a [Chapter 542] claim.” Like Barbara Technologies, however, that case was decided under Chapter 542, not the 2017 statute. The court rejected plaintiff’s contention that allowing prepayment of damages to zero out attorney’s fees “gutted” the statute, reasoning that, based on SCOTX’s decision in JCB, Inc. v. Horsburgh & Scott Co., 597 S.W.3d 881 (Tex. 2019), plaintiffs in contract actions have a duty to mitigate damages, just as defendants in Chapter 542 cases “are encouraged to pay what is owed before trial.” Indeed, the possible liability for attorney’s fees in such cases is part of the insurer’s incentive to pay disputed amounts before trial.

TCJL’s brief (which is brief) argues that this case involves a straight-up question of statutory construction and that the Dallas and Fort Worth Courts of Appeals got it right. We argue further that adopting Rodriguez’s position would effectively gut the statute and frustrate the Legislature’s policy objective in enacting H.B. 1774. We also point out that the statutory calculation of attorney’s fees, as it affects our members (the great majority of which are consumers of property and casualty insurance), cuts both ways, but that the greater good demanded that we support H.B. 1774 and urge the Court to uphold the plain language of the statute.

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