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Chapter 542 of the Texas Insurance Code, also known as the Texas Prompt Payment of Claims Act (“TPPCA”), generally allows an insured to recover interest and attorneys’ fees, in addition to the amount of the insurance claim, when an insurer delays payment of a claim longer than the statute’s imposed deadlines. Following the Texas Supreme Court’s opinion in Barbara Technologies Corporation v. State Farm Lloyds, state and federal courts applying Texas law have grappled with issues concerning the interplay between the TPPCA and the contractual loss appraisal process – including the insured’s ability to recover statutory attorneys’ fees following the insurer’s payment of an appraisal award and all TPPCA interest potentially owed on the claim.
A more recent statutory enactment, Chapter 542A , also known as the “Hail Bill,” brings an additional layer of analysis to the issue for weather-related claims.
Early opinions in weather-related matters governed by both Chapters 542 and 542A signaled a split of authority on this issue. However, more recent decisions – including the Eastern District’s opinion in Morakabian v. Allstate Vehicle and Property Insurance Company and the Dallas Court of Appeals’ opinion in Rosales v. Allstate Vehicle and Property Insurance Company – reflect a clear and ever-growing consensus that in weather-related claims governed by Chapter 542A, an insurer’s payment of an appraisal award and all statutory interest, defeats any remaining claim for attorneys’ fees as a matter of law.
Setting the Stage – Ortiz and Barbara Technologies
In 2019 the Texas Supreme Court issued a pair of opinions intended to clarify rights of insureds and insurers post-appraisal. More specifically, in Ortiz v. State Farm Lloydsandthe aforementioned Barbara Technologies case, the Texas Supreme Court considered the effect of an insurer’s payment of an appraisal award on an insured’s claims for breach of contract, bad faith, and violations of the TPPCA. In Ortiz, the Texas Supreme Court held that an insured’s breach of contract claim is barred by an insurer’s payment of the appraisal award. It also held that the payment of an appraisal award bars statutory and common law bad faith claims. In Barbara Technologies, the Texas Supreme Court concluded that an insured’s claim for alleged violation(s) of the TPPCA (under certain circumstances) may survive an insurer’s payment of an appraisal award.
Taken together, Ortiz and Barbara Technologies stand for the general proposition that only an insured’s claims under the TPPCA remain viable after the payment of an appraisal award. However, given the age of the claims at issue in those two cases,neither Ortiz nor Barbara Technologies addressed how the 2017 enactment of Chapter 542A of the Texas Insurance Code might apply to an insured’s TPPCA claims in the post-appraisal context.
Chapter 542A’s Formula for Calculating Attorneys’ Fees
In 2017, the Texas Legislature passed H.B. 1774. The bill created Chapter 542A of the Texas Insurance Code, which applies to actions arising out of weather-related property insurance claims filed on or after September 1, 2017. Among other changes, the legislature added Section 542A.007 to the Insurance Code, which limits the amount of attorneys’ fees a plaintiff may recover in a weather-related property insurance action to the lesser of:
(1) the amount of reasonable and necessary attorney’s fees supported at trial by sufficient evidence and determined by the trier of fact to have been incurred by the claimant in bringing the action;
(2) the amount of attorney’s fees that may be awarded to the claimant under other appliable law; or
(3) the amount calculated by:
(A) dividing the amount to be awarded in the judgment to the claimant for the claimant’s claim under the insurance policy for damage to or loss of covered property by the amount alleged to be owed on the claim for that damage or loss in a notice given under this chapter; and
(B) multiplying the amount calculated under Paragraph (a) by the total amount of reasonable and necessary attorney’s fees supported at trial by sufficient evidence and determined by the trier of fact to have been incurred by the claimant in bringing the action.
Early decisions from the federal courts in Texas reflected conflicting opinions on the application of Chapter 542A.007’s fees-calculation formula in the post-appraisal context. A few courts held the payment of an appraisal award has no impact on an insured’s right to recover attorneys’ fees under Section 542A.007, whereas the majority of federal courts to address the issue held that such a payment, coupled with a preemptive payment of all TPPCA statutory interest potentially owed in connection with an appraisal award, precludes the award of attorneys’ fees under the calculation detailed in Section 542A.007.
In matters of first impression for both courts, the United States District Court for the Eastern District of Texas (Sherman Division) and the Dallas Court of Appeals recently joined the fray – with both courts endorsing and adopting the majority view that for matters governed by Chapter 542A, there is no obligation for payment of attorneys’ fees.
Morakabian v. Allstate
In Morakabian,the United States District Court for the Eastern District of Texas (Sherman Division) joined the long list of federal courts to hold that an insurer’s payment of an appraisal award in a weather-related claim, plus all related interest that may be owed under the TPCCA, defeats any remaining claim for attorneys’ fees.
Morakabian arose out of a disputed claim for storm-caused damage. When Morakabian’s homeowner’s insurer declined to pay his claim, Morakabian filed suit and demanded appraisal. Upon completion of the appraisal process, the insurer paid the resulting award and an additional $4,699, which represented the insurer’s calculation of the maximum amount of TPPCA interest potentially owed on the claim. The payment included no attorneys’ fees.
The insurer later moved for summary judgment on the insured’s case in its entirety, and Morakabian responded by nonsuiting all but his claims for interest and attorneys’ fees under the TPPCA. Relying on section 542A.007 of the Texas Insurance Code, which includes a statutorily-prescribed formula for calculating the maximum amount of attorneys’ fees potentially recoverable by an insured in a weather-related action, the insurer argued that its payment of the appraisal award and all TPPCA interest potentially owed on the claim rendered the amount recoverable by Morakabian at trial $0, which, in turn, yielded a calculated fee award of $0.
In response to the insurer’s motion, Morakabian did not contend that the insurer failed to pay the full amount of the appraisal award, nor did it argue that the insurer’s additional payment of $4,699 was insufficient to cover all TPPCA interest potentially owed on the claim. Instead, Morakabian argued more generally that the insurer could not preclude the insured from litigating its TPPCA claim through trial (and recovering attorney fees) by preemptively paying all interest potentially due under the TPCCA.
After analyzing the plain language of section 542A.007 and examining several recent opinions addressing the post-appraisal recovery of attorneys’ fees, the court rejected Morakabian’s argument and granted summary judgment for the insurer. The court reasoned that, given the insurer’s payment of the appraisal award and all interest potentially recoverable under the TPPCA, Morakabian’s potential recovery on the claim at trial was $0, which—under the plain language of the fees-calculation formula set forth in section 542A.007—could not support an award of attorneys’ fees. And, in so doing, the Morakabian court expressly noted that it was “unpersuaded by [the] analysis” of the only two cited holdings to the contrary.
Rosales v. Allstate
The Dallas Court of Appeals reached the same conclusion in Rosales, becoming the first Texas appellate court to address the impact of section 542A.007’s fees-calculation formula on an insured’s claim for attorneys’ fees in the post-appraisal context.
Rosales – like Morakabian –arose out of a disputed claim for storm-caused damage. When Louis Rosales’ homeowner’s insurer refused to pay for a full roof replacement, citing an absence of covered damage, Rosales filed suit and demanded appraisal. Upon completion of the appraisal process, the insurer paid the resulting award and an additional $1,408, which represented the insurer’s calculation of the maximum amount of TPPCA interest potentially owed on the claim. The payment included no attorneys’ fees. The insurer then sought (and obtained) summary judgment on all contractual and extra-contractual claims asserted by Rosales, including Rosales’ cause of action for alleged violation(s) of the TPPCA. And, because the trial court’s summary disposition of Rosales’ contractual and extracontractual claims reduced Rosales’ potential recovery on those causes of action to $0, the trial court further held that application of section 542A.007’s formula for calculating attorneys’ fees precluded Rosales from recovering attorneys’ fees as a matter of law.
Rosales appealed and, in a matter of first impression for a Texas state appellate court, the Dallas Court of Appeals affirmed the trial court’s judgment disposing of Rosales’ statutory claim for attorneys’ fees. In so holding, the Dallas Court of Appeals adopted the reasoning of Morakabian and the many other federal courts in Texas that have concluded “the formula prescribed by section 542A.007 precludes any award of attorney’s fees—and an insurer is entitled to summary judgment on a TPPCA claim—when it preemptively pays both the appraisal award and any possible interest.”
The court also addressed (and noted its disagreement with) the dwindling minority of contrary opinions in Texas, noting that such holdings:
generally revolved around (1) the view that prepaying damages in this fashion is impermissible attempt to unilaterally settle the case . . . and (2) the perceived unfairness of allowing a party to zero out one variable of the damage equation by eliminating, through a strategic concession another variable on which it depends and, in so doing preventing the party pursuing attorney’s fees from being made whole.
In rejecting the first of these two rationales, the Dallas Court of Appeals held that an insurer’s payment of TPPCA interest prior to trial does not constitute an involuntary, unilateral settlement, but rather a permitted (and desired) effort by the insurer to extinguish the eventual judgment obligation. And, in rejecting the second rationale, the court held that Texas law not only allows, but encourages, the prepayment of damages to reduce or offset a statute’s formula-based calculation of penalties.
With the issuance of the Eastern District’s opinion in Morakabian, judges in all four federal district courts in Texas have now held that an insurer’s payment of an appraisal award in a weather-related claim, plus all related interest that may be owed under the TPCCA, precludes an insured from recovering attorneys’ fees under section 542A.007. And, in reaching the same conclusion, the Rosales court became the first Texas state appellate court to weigh in on the issue. These well-reasoned opinions not only signal a clear consensus regarding Chapter 542A.007’s preclusive effect on the recovery of attorneys’ fees in the post-appraisal context, but also confirm that the few early federal court holdings to the contrary have been relegated to outlier status and stripped of any purported precedential value.
This leaves one to ponder the ethical issues raised by certain policyholder attorneys who sign up insureds on a full contingency-fee basis knowing that: (1) they intend to invoke the appraisal process, (2) they will have little work to do on the file once put into appraisal,and, based on these recent authorities, (3) there exists no viable legal avenue for their clients to recoup their attorneys’ fees. Is charging a full contingency fee on a matter put into appraisal an “unconscionable fee” under Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct? That’s a subject for another article. For now, it has become clear in Texas that attorneys’ fees are not recoverable in a weather-related matter after the insurer pays the appraisal award and all statutory interest potentially owed on the claim.