Ten months ago, the Supreme Court of Texas issued an opinion which was predicted by some to change the course of Texas precedent regarding extracontractual liability after timely payment of an appraisal award. Eight months ago, we published an article, “Why Menchaca Changes Nothing for Appraisal Law” which predicted that the USAA Texas Lloyds Co. v. Menchaca[1] decision would not disturb the finality of an appraisal award because timely payment categorically precludes breach of contract claims, and by extension, common law and statutory bad faith claims. Since that article, numerous courts have spoken. We got it right — so far. 

Under well-established, and well-reasoned, Texas appraisal law precedent, “if the appraisal award has been reached in accordance with the terms of the insurance policy and the insurer has timely tendered the full amount awarded by the appraisers, that conduct is legally sufficient to entitle the insurer to summary judgment on the breach-of-contract claim against it.”[2] Since timely and full payment of an appraisal award precludes a breach of contract claim, extracontractual claims for fraud, bad faith and violations of the Deceptive Trade Practices Act and the Texas Insurance Code usually also fail.[3] The court in Garcia v. Lloyds addressed the effect of the insurer's payment of an appraisal award on an insured's extracontractual claims and explained in order to defeat a summary judgment on a common law bad faith claim, the insured has the burden to raise a genuine issue of material fact that the insurer failed to timely investigate the claim or the insurer committed some act, so extreme, that it would cause injury independent of the policy claim.[4] The appellate court held that when an insured fails to present evidence on a breach of common law bad faith claim or of an independent injury, and the carrier timely pays all covered damages determined by the appraisal award, the insured's statutory bad faith claims are likewise foreclosed.[5] (see “Fixing Problems In The Texas Insurance Appraisal Process” for a more thorough discussion). Bottom line, appraisal law is crystal clear on this issue.

Although Menchaca is not a case involving payment of an appraisal award, the Texas Supreme Court used it to provide clarity regarding the relationship between claims for an insurance policy breach and Insurance Code violations and applied five rules governing how claims under the policy and claims under the statute relate.[6] The court further explained the independent injury rule; specifically, that statutory violation does not permit the insured to recover any damages beyond policy benefits unless the violation causes an injury that is independent from the loss of the benefits.[7] But in the appraisal context, timely tendered payment of an appraisal award precludes all claims.

And therein lies the post-Menchaca confusion. Policyholder advocates had theorized, and attempted to argue, that Menchaca would muddy the waters of appraisal law because the jury in Menchaca found that even though the insurer complied with the insurance policy, that finding did not preclude an extracontractual claim under the Texas Insurance Code. Applying this to appraisals, policyholder advocates argued that an insured may pursue post-appraisal statutory claims even if a breach of contract claim is precluded.[8] While the Menchaca opinion was less than precise(?), it cannot be read to change the land of appraisal law. Payment of appraisal award precludes any assertion that there is injury independent from the loss of the benefits because appraisal (and its associated costs) are directly linked to a right to policy benefits. To date, post-Menchaca precedent in the appraisal context confirms our original prediction — Menchaca changes nothing. Numerous courts, both state and federal cases alike, have issued opinions concerning the application of Menchaca to appraisals, and these opinions have resolved any impending confusion — at least for now.[9]

In Carroll v. State Farm Lloyds, one of the first federal district court cases applying Menchaca, State Farm sought summary judgment based on its full and timely payment of the appraisal award.[10] The court explained that none of Menchaca’s “five rules” supported claims against the insurer: payment of the appraisal award satisfied the insured’s right to receive benefits under the policy, precluding any “loss of benefits” and thus no independent loss flowed from the original denial of policy benefits.[11] The court affirmed that Menchaca does not alter the long-standing case law regarding the effect of full and timely payment of an appraisal award.[12] State Farm was entitled to judgment as a matter of law on both breach of contract and extracontractual claims.[13]

Similarly, in Cano v. State Farm Lloyds, State Farm moved for summary judgment, arguing that as a matter of law, a timely payment of the appraisal award estops plaintiff from bringing other extracontractual claims.[14] The court explained that an insured had a right to receive benefits under the insurance policy, and the carrier had acceded to this by paying the appraisal award. Recovery of extracontractual damages that exceed policy benefits requires that the statutory violation or bad faith cause an injury that is independent from the loss of benefits.[15] The Cano court found that no independent damages existed, and the only “extreme act” was that “Defendants’ conduct during the investigation of the loss was extremely unreasonable and egregious.”[16] The court held this alleged “independent injury” was insufficient to support the insured’s claim of bad faith, and State Farm was thus entitled to judgment as a matter of law on the extracontractual tort claims.[17]

As the court in Krahmer v. State Farm Lloyds opined: “Texas law dictates that the insured is estopped from maintaining a breach of contract claim when the insurer makes a proper payment pursuant to the appraisal clause” and Menchaca “does not purport to alter the long-standing case law regarding the effect of full and timely payment of an appraisal award.”[18]

Texas state courts understand the implications of Menchaca no differently from the federal courts. The court in Ortiz v. State Farm Lloyds[19] reiterated that under Garcia, an insurer’s payment of an appraisal award entitles the insurer to summary judgment on an insured’s contractual and extracontractual claims.[20] The insured in Ortiz asserted the court must reconsider Garcia in light of the recent Supreme Court decision in Menchaca, but the court held that Menchaca: (1) did not involve the payment of an appraisal award, and (2) nothing in the “five distinct but interrelated rules that govern the relationship between contractual and extracontractual claims in the insurance context” required a revisit of Garcia.[21]

In Lazos v. State Farm Lloyds, State Farm had investigated the claim submitted by the policyholder and denied any payment.[22] The insured filed suit, then State Farm invoked the policy’s appraisal provision and paid an award.[23] Because State Farm paid the appraisal award in this case, and Lazos has failed to assert any ground for setting aside the appraisal award or present evidence of an act so extreme that it caused him injury independent of his claim under the policy, the court held summary judgment was properly granted on the insured’s contractual and extracontractual claims.[24]

In Alvarez v. State Farm Lloyds, the Fourth Court of Appeals again analyzed Menchaca as it applies in the appraisal context.[25] The court reiterated the Ortiz court’s position regarding Garcia.[26] Because State Farm paid the appraisal award, and the insured failed to assert any ground for setting aside the appraisal award or present evidence of an act so extreme that it caused him injury independent of his claim under the policy, summary judgment was properly granted in favor of State Farm.[27]

Appealing denial of summary judgment, in Wellington Insurance Co. v. Banuelos,[28] appellants Wellington and Barkkume presented the issue of whether the insured's breach of contract and extracontractual claims can survive a timely paid appraisal award.[29] The Fourth Court of Appeals again explained that Menchaca does not require revisiting Garcia. Because the carrier timely paid the appraisal award, and the insured failed to assert any ground for setting aside the appraisal award or present evidence of an act so extreme that it caused him injury independent of his claim under the policy, the court reversed the trial court’s ruling and held that summary judgment should have been granted.[30]

Most recently, in an unpublished opinion filed on Feb. 13, 2018, the Fourteenth Court of Appeals affirmed the trial court’s grant of summary judgment dismissing the insured’s breach of contract and extracontractual claims against his insurer after the insurer timely paid the appraisal award.[31] In Haiquan Zhu v. First Community Insurance Co., the court reiterated the fact that appraisal clauses estop a party from contesting the issue of damages in a lawsuit based on an insurance contract.[32] Applying Menchaca, the court explained the insured had a right to receive benefits under the insurance policy, and he received those benefits in the form of First Community's initial payment and the subsequent tender of payment based on the appraisal award.[33] The court reinforced the application of the independent injury rule, holding that in order to recover any damages beyond policy benefits, the insured must establish that the statutory violation caused an injury that is independent from the loss of benefits.[34] The insured received the benefits and did not allege any act so extreme as to cause independent injury, and accordingly, the appellate court concluded that the trial court did not err in granting summary judgment on the insured’s claims.[35]

The Supreme Court of Texas seemingly supports the interpretation and application of Menchaca in the appraisal context, as can be inferred by its decision to deny a petition for review in two appraisal cases. In Richardson East Baptist Church v. Philadelphia Indemnity Insurance Co.,[36] the insured appealed the trial court’s judgment that it take nothing on its claims against the insurer. On appeal, the insured argued its extracontractual claims under chapters 541 and 542 of the Texas Insurance Code and the claim for breach of the duty of good faith and fair dealing were not barred by acceptance of the appraisal award.[37] Ultimately, the Fifth Court of Appeals affirmed the trial court’s ruling. On Sept. 22, 2017, the Texas Supreme Court denied the insured’s petition for review.

Additionally, in Floyd Circle Partners LLC v. Republic Lloyds,[38] the insured presented two issues for review — first, the insured contended the trial court erred in granting summary and second, the trial court abused its discretion denying a continuance. The Fifth Court of Appeals had this to say about Menchaca’s application in the appraisal context:

“Where a plaintiff’s claim for breach of an insurance contract fails, to prevail on an action for violations of chapter 541 of the insurance code, the plaintiff must show either that the insured failed to timely investigate the claim or that the insurer committed an extreme act that caused an injury independent of the policy claim. Bernstein v. Safeco Ins. Co. of Ill., No. 05-13-01533-cv, 2015 WL 3958232, at *2 (Tex. App.—Dallas, June 30, 2015); see USAA Tex. Lloyds Co. v. Menchaca, No. 14-0721, 2017 WL 1311752, at *11-12 (Tex. Apr. 7, 2017).”

The Court of Appeals affirmed the trial court’s ruling. Thereafter, the insured filed a petition for review with the Texas Supreme Court. The insured argued in its appeal that the court was presented with a “much-needed opportunity for this Court to address, explain, elaborate, clarify and provide guidance to the public as well as the Bench and Bar when litigating and addressing the question of validity and challenges to insurance appraisal awards.”[39] On Jan. 5, 2018, the Supreme Court of Texas denied review.

Unless the Texas Supreme Court chooses to overtly change the currently understood implications of Menchaca, for now, we can say we told you so.[40]

Victoria L. Vish is an associate with Zelle LLP in Dallas.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] USAA Texas Lloyds Co. v. Menchaca, No. 14-0721, ––– S.W.3d at ––––, 2017 WL 1311752, 60 Tex. Sup. Ct. J. 672 (Tex. Apr. 7, 2017, reh’g granted Dec. 15, 2017).

[2] See United Neurology, P.A. v. Hartford Lloyd's Insurance Co., 101 F. Supp. 3d 584, 619 (S.D. Tex. 2015), aff'd, 624 Fed.Appx. 225 (5th Cir. 2015) (and cases cited therein).

[3] See id. at 620; McEntyre v. State Farm Lloyds Inc., 2016 WL 6071598, *6 (E.D. Tex. Oct. 17, 2016).

[4] Garcia v. Lloyds, 514 S.W.3d 257, 276-79 (Tex. App.—San Antonio 2016, pet. denied).

[5] Id. at 279.

[6] Menchaca, ––– S.W.3d at ––––, 2017 WL 1311752, at *3.

[7] Id. at *1.

[8] See Tyler McGuire and Lindsey Bruning, “Why Menchaca Changes Nothing for Appraisal Law,” Law360 (available at http://www.zelle.com/news-publications-532.html).

[9] On Dec. 15, 2017, the Supreme Court of Texas granted rehearing on USAA Texas Lloyds Co. v. Menchaca.

[10] Carroll v. State Farm Lloyds, No. CV H-16-1626, 2017 WL 2999681, at *2 (S.D. Tex. June 28, 2017).

[11] Id. at *3.

[12] Id.

[13] Id.

[14] Cano v. State Farm Lloyds, No. 3:14–CV–2720–L, 2017 WL 3279139 (N.D. Tex. Aug. 2, 2017).

[15] Id. at *6 (citing Hurst, 523 S.W.3d at 848; Menchaca, 2017 WL 1311752, at *11–12).

[16] Cano, 2017 WL 3279139 at *5.

[17] Id.

[18] Krahmer v. State Farm Lloyds, No. 7:17-CV-15, 2017 WL 5075666, at *3 (S.D. Tex. Sept. 14, 2017).

[19] Ortiz v. State Farm Lloyds, 04-17-00252-CV, 2017 WL 5162315 (Tex. App.—San Antonio Nov. 8, 2017, pet. filed)(citing Garcia v. State Farm Lloyds, 514 S.W.3d 257, 264-65 (Tex. App.–San Antonio 2016, pet. denied)).

[20] Ortiz, 2017 WL 5162315, at *2–3.

[21] Id. (quoting Menchaca, 2017 WL 1311752, at *4).

[22] Lazos v. State Farm Lloyds, No. 04-17-00286-CV, 2018 WL 521585, at *1 (Tex. App.—San Antonio Jan. 24, 2018, no pet. h.).

[23] Id.

[24] Id.

[25] Alvarez v. State Farm Lloyds, No. 04-17-00251-CV, 2018 WL 340135, at *1 (Tex. App.—San Antonio Jan. 10, 2018, no pet. h.).

[26] Id. at *2–*3 (quoting Menchaca, 2017 WL 1311752, at *4).

[27] Id. (citing Garcia, 514 S.W.3d at 265, 278–79).

[28] Wellington Insurance Co. v. Banuelos, No. 04-17-00365-CV, 2018 WL 626534 (Tex. App.—San Antonio Jan. 31, 2018, no pet. h.).

[29] Wellington Insurance Co. v. Banuelos, 04-17-00365-CV, 2018 WL 626534, at *1 (Tex. App.—San Antonio Jan. 31, 2018, no pet. h.) (citing Garcia, 514 S.W.3d at 265, 278–79).

[30] Id. at *2.

[31] Haiquan Zhu, v. First Community Insurance Co., No. 14-16-00226-CV, 2018 WL 842350 (Tex. App.—Houston [14th Dist.] Feb. 13, 2018, no pet. h.).

[32] Id. (citing Hurst, 523 S.W.3d at 844).

[33] Id. (citing Hurst, 523 S.W.3d at 845–47; Franco, 154 S.W.3d at 785–87).

[34] Id. (citing USAA Tex. Lloyds Co. v. Menchaca, No. 14-0721, 2017 WL 1311752, at *11–12 (Tex. Apr. 7, 2017); Hurst, 523 S.W.3d at 848).

[35] Id.

[36] Richardson E. Baptist Church v. Philadelphia Indem. Insurance Co., 05-14-01491-CV, 2016 WL 1242480 (Tex. App.—Dallas Mar. 30, 2016, pet. denied).

[37] Id. at *6.

[38] Floyd Circle Partners LLC v. Republic Lloyds, No. 05-16-00224-cv, 2017 WL 3124469 (Tex. App.—Dallas July 24, 2017).

[39] Brief for Petitioner at 14, Floyd Circle Partners LLC v. Republic Lloyds (No. 17-0734).

[40] Since Menchaca, only one reported decision has denied an insurance company’s post-appraisal motion for summary judgment. This case, however, was clearly factually distinguishable from other post-Menchaca decisions because the insurance company failed to timely pay the appraisal award and stated conditions on its payment. Given those facts, the court held that the insurer did not prove its entitlement to summary judgment on the defense of estoppel (and therefore the breach of contract claims), and thus, there was no foundation for the argument that the insured was estopped from pursuing extracontractual claims. See Christopher Hall v. Germania Farm Mutual, No. 07-16-00304-cv, 2017 WL 4630028 (Tex. App.—Amarillo, Oct. 13, 2017).