Disputes arising in the context of property insurance appraisals continue to be litigated across the country. Nowhere is that more true than in Texas and Florida, where state and federal courts continue to wrestle with the proper scope of appraisal and, more narrowly, the impact timely compliance with the appraisal process has on an insured’s ability to assert extra-contractual claims. However, two recent court opinions in those states highlight their differing approaches in this context.
In Trafalgar v. Zurich Insurance Company, C.A. No. 4D11-1376; 2012 WL 3822215 (Fla. App. 4 Dist. Sept. 5, 2012), a Florida District Court of Appeal recently held that an appraisal award entered in favor of the insured can constitute a “favorable resolution” of an underlying breach of contract dispute, a prerequisite for permitting a separate bad faith cause of action to proceed. In that case, the insured property owner, Trafalgar, submitted a claim to its property insurer, Zurich, after sustaining damage to a shopping center as a result of Hurricane Wilma. After completing its initial investigation, Zurich issued two payments totaling almost $581,000. Trafalgar subsequently submitted a proof of loss in excess of $1.8 million. Zurich responded to the proof of loss and advised that it was continuing to investigate the claim. Zurich ultimately tendered an additional payment, bringing its total payments to just over $641,000, but not before Trafalgar filed suit alleging breach of contract for failure to pay all policy proceeds due. Zurich promptly invoked the policy’s appraisal provision, which resulted in an appraisal award more than two times the amount of Zurich’s previous payments. Zurich timely tendered payment for the balance of the appraisal award.
Based on its timely payment of the appraisal award, Zurich moved for and was granted summary judgment on Trafalgar’s breach of contract claim. However, the trial court allowed Trafalgar to amend its complaint to assert a bad faith cause of action based on Zurich’s alleged improper denial of benefits and pattern of delay both before and after suit was filed. Zurich argued the bad faith cause of action was also barred because Trafalgar’s breach of contract claim had been dismissed and, as a result, there had been no “favorable resolution” of that claim, a prerequisite to permitting bad faith causes of action to proceed under Florida law. The trial court again agreed with Zurich and granted summary judgment dismissing Trafalgar’s bad faith cause of action. Trafalgar appealed.
Florida’s Fourth District Court of Appeal ultimately held that the appraisal award itself constituted a “favorable resolution” of the breach of contract claim, stating specifically that “[a] judgment on a breach of contract action is not the only way of obtaining a favorable resolution.” As a result, despite Zurich’s timely payment of the appraisal award and the trial court’s summary dismissal of Trafalgar’s breach of contract claim, the court allowed the bad faith claim to proceed.
Based on the Trafalgar holding, Florida has seemingly opened an express lane to the assertion of post-appraisal bad faith claims against insurers in that state. Even in the absence of a breach of contract, Florida insurers could still face bad faith claims as a result. Texas courts, on the other hand, continue to view timely payment of a valid appraisal award as a roadblock to an insured’s assertion of extra-contractual claims. This trend recently continued with a decision by U.S. District Judge Melinda Harmon of the United States District Court for the Southern District of Texas. In Mag-Dolphus, Inc. v. Ohio Casualty Insurance Company, C.A. No. 4:11-CV-1525; 2012 WL 4018001 (S.D. Tex. Sept. 12, 2012), Judge Harmon granted Ohio Casualty’s motion for summary judgment based on the insured’s invocation and the insurer’s timely compliance with the insurance policy’s appraisal provision, holding that the bad faith claims were precluded as a matter of law.
The facts of the Mag-Dolphus case are typical. The insured, Mag-Dolphus, Inc., sustained property damage as a result of Hurricane Ike and reported a claim to its insurer, Ohio Casualty. Ohio Casualty inspected the damage and estimated the total claim value at just over $40,000. After the parties failed to agree on the amount of loss, Mag-Dolphus invoked the policy’s appraisal provision. Each party selected independent appraisers, and the appraisers subsequently selected an umpire. The umpire awarded almost $192,000 in replacement costs, less depreciation, deductibles and previous payments. Ohio Casualty promptly issued payment to Mag-Dolphus consistent with the award, and later issued a second check for the recoverable depreciation. Several months later, Mag-Dolphus sued Ohio Casualty asserting causes of action for breach of contract, common law and statutory bad faith, fraud and violations of the Texas Insurance Code.
The U.S. District Court ultimately granted summary judgment in favor of Ohio Casualty on all of Mag-Dolphus’ claims. The court ruled that Mag-Dolphus’ acceptance of timely payment of the binding and enforceable appraisal award estopped any assertion of its breach of contract claim. Because the breach of contract claim failed as a matter of law, the court also ruled that Mag-Dolphus’ claims for bad faith must also fail in the absence of a showing that Ohio Casualty failed to timely investigate the claim or committed some act so extreme as to cause independent injury apart from the claim under the policy. The court also ruled that Mag-Dolphus did not meet its burden of proof on the fraud and Insurance Code allegations.
The Mag-Dolphus ruling continues a line of Texas state and federal court cases supporting the proposition that an appraisal award is intended to resolve the amount of loss due under an insurance contract, not to serve as a basis for extra-contractual liability if the award happens to be larger than the insurer’s initial loss measurement. This line of cases may not require the summary dismissal of extra-contractual claims where the evidence supports an insurer’s complete failure to timely investigate a claim or some extreme act by an insurer that causes independent injury. However, these circumstances are the exception rather than the rule. As a result, while it may not be the case in Florida, Texas property insurers still enjoy protection against extra-contractual liability when valid and enforceable appraisal awards are timely paid and accepted.
G. Brian Odom is a partner in Zelle Hofmann Voelbel & Mason LLP’s Dallas office.