5th Circuit Asks Texas Supreme Ct. if Attorney Fees Owed After Insurer Pays Appraisal Award

A federal appellate court, grappling with conflicting decisions from federal courts, is asking the Texas Supreme Court to decide whether attorney fees can be awarded to claimants when insurers pay appraisal awards plus interest owed because of the late payment.

A panel of the 5th Circuit Court of Appeal decided Wednesday to send this certified question to resolve a lawsuit filed by homeowner Mario Rodriguez against Safeco Insurance Co. of Indiana:

“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 recovery of attorney’s fees?”

Rodriguez sued Safeco after the carrier paid only $1,295.55 for damage caused by a tornado that struck his home in Plainview in May 2019. He demanded an additional $29,500, but Safeco did not respond.

Safeco invoked the policy’s appraisal provision after Rodriguez sued. In April 2022, the appraisal panel determined the replacement cost value of the damage was $36,514.52. Safeco paid $32,447.43, which was the amount of the award after taking into account the policy limits and subtracting the deductible and the prior payment. Safeco also paid an additional $9,458.40, claiming that amount would cover “any conceivable interest owed” under the TPPCA.

Safeco filed a motion for summary judgment with the US District Court in Dallas. The carrier argued that under the TPPCA, as amended by the state legislature in 2017, it had paid all that is owed for Rodriguez’s claim. The District Court granted the motion, stating in its order that the legislature clearly intended to limit attorney fees when insurers pay appraisal awards.

Rodriguez appealed.

The 5th Circuit panel noted in its opinion that federal courts have ruled differently on the question of whether attorney fees are owed if a carrier pays an appraisal award plus any interest required by the TPPCA.

A judge with the Eastern District of Texas ruled in March that payment of an appraisal award “extinguishes a plaintiff’s right to attorney fees under the TPPCA.”

But on a December 2019 decision, a judge with the Western District of Texas ruled that if insurers are allowed to avoid attorney fees after delaying payment for legitimate claims, they “could systematically avoid liability for TPPCA attorney’s fees by … paying only a small fraction of the alleged claim amount to a claimant” and then invoking appraisal if the claimant disputed the lowball offer.

The appellate panel said the Texas Supreme Court, which has the final say over the meaning of state law, is best suited to resolve the split of opinions on the question.

Insurance defense attorney Steve Badger, a partner with the Zelle law firm in Dallas, said he’s happy to see that the Texas Supreme Court has been given a chance to provide “final clarity” on the issue.

“There is no reason to expect that the Texas Supreme Court will disagree with the careful analysis of Dallas Court of Appeals, Fort Worth Court of Appeals, and numerous federal district courts which all found that based on the plain statutory language in Chapter 542A, the only possible answer is that attorneys fees are not recoverable,” Badger saidin an email.

“What is unfortunate is the reality that this issue is being driven by policyholder attorneys who want a way to recover attorneys’ fees without having to do much work. They know that they can sign up clients on a full contingency fee, dump their matters in appraisal, sit around for a few months, and then wait for the award to come in. They can then collect their contingency fee without having to do any work. The more important question that should be considered is whether an attorney charging a Texas building owner a full contingency fee on a matter dumped into appraisal violates Texas ethical Rule 1.04 prohibiting attorneys from charging an unconscionable fee.”

Rodriguez’s attorney on appeal, Daly & Black shareholder Melissa Wray in Houston, said her client’s case was in litigation for more than a year before Safeco invoked appraisal. She said Rodriguez had to pay for expert witnesses to make his case.

Wray said most homeowners are not aware that their insurance policy has a provision that allows them to demand an appraisal. Instead, they turn to attorneys to help them obtain a fair settlement.

In a joint statement with co-counsel James Willis, Day & Black said its attorneys are glad to see that the issue is not as clear cut as insurers make it out to be.

“For decades, the Texas Prompt Payment of Claims Act has subjected insurers who do not pay claims in a timely manner to strict liability for penalty interest and the insured’s reasonable and necessary attorneys’ fees,” they said in an email. “Some courts have construed recent amendments to the Texas Insurance Code in a manner that allows insurers to completely escape liability under the Act despite its clear mandate, while others have declined to adopt such a strained reading of the Code.

“If these courts’ rulings are allowed to stand, the effect on Texas residential and commercial policyholders will be devastating. Allow insurance companies to systematically avoid paying attorneys’ fees when they wrongfully deny and underpay policyholder claims will force Texas insureds to pay their lawyers out of claim proceeds that should be going to rebuilding efforts.”