A recent Law.com story by Adolfo Pesquera, “Attorney Fees Included? Doubts Swirl Over Fees for Insurance Claims”, reports that a certified question on an insurance law amendment—and the peril it portends for attorney fees—has been sent to the Texas Supreme Court from the U.S. Court of Appeals for the Fifth Circuit. The Fifth Circuit informed the supreme court that a 2017 Texas Legislature amendment to the insurance code that addresses unfair or deceptive acts or practices raises “an important issue … as to which there is no controlling Texas Supreme Court authority, and the authority from the intermediate state appellate courts provides insufficient guidance.”
The central issue is how, if at all, the amendments change a policyholder’s ability to collect Texas Prompt Payment of Claims Act damages, such as attorney fees, when the insurer pays an appraisal award and estimated interest, the Fifth Circuit said.
No Fees?
In the underlying case, Mario Rodriguez v. Safeco Insurance Co. of Indiana, the policyholder filed a claim for tornado damage to his home. Disagreements between the homeowner and insurer resulted in a lawsuit. Safeco invoked the policy’s appraisal provision, and paid $32,447 of the estimated $36,514 replacement cost value to Rodriguez’s home. Safeco also paid $9,458, claiming the amount represented “any conceivable interest plaintiff could allege to be owed under the [TPPCA] on the above-referenced appraisal award payment,” the Fifth Circuit noted.
Safeco filed a motion for summary judgment, arguing that, in light of the 2017 amendments to § 542 of the Texas Insurance Code, § 542A, its payment of the appraisal award plus interest foreclosed Rodriguez’s claim for attorney’s fees under the TPPCA and eliminated all remaining claims. Rodriguez argued that the legislature did not intend the amendments to read attorney’s fees out of the TPPCA in the appraisal context.
The federal district court in the Northern District of Texas granted Safeco’s motion and dismissed all claims, holding that, “although the issue presents policy factors that weigh in favor of each possible outcome, the court finds that the legislature’s intent appears clear when enacting Chapter 542A of the Texas Insurance Code to limit attorney’s fees.”
Courts Divided
The Fifth Circuit said the federal courts are split on this issue. In Morakabian v. Allstate Vehicle & Prop., the Eastern District held on March 30, 2023 that the plain language of the section makes clear that payment of the appraisal award extinguishes a plaintiff’s right to attorney fees. However, Gonzalez v. Allstate Fire & Cas. Ins. Co., a Dec. 2, 2019 case in the Western District, held that while it is true the legislature intended to place a limit on attorney fees, there is no indication the legislature intended to read attorney fees out of statute for all practical purposes.
The Fifth Circuit noted that the court in Gonzalez found that the alternative interpretation would mean “insurers could systematically avoid liability for TPPCA attorney’s fees by, first, paying only a small fraction of the alleged claim amount; second, invoking appraisal; and third, only following appraisal, paying the difference and any interest owed to the claimant.”
The question presented to the state supreme court states: “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 is represented by James Winston Willis and Melissa Wray of the Daley & Black firm on Houston. In a joint statement, Willis and Wray said that for decades the Prompt Payment of Claims Act subjected insurers who don’t pay claims in a timely way to strict liability for penalty interest and the insured’s reasonable attorney fees.
“Some courts have construed recent amendments to the Texas Insurance Code in a manner that allows insurers to completely escape liability under the Act,” Willis and Wray said. “If these courts’ rulings are allowed to stand, the effect on Texas residential and commercial policyholders will be devastating.” Allowing insurers to systematically avoid paying attorney fees when they wrongfully deny and underpay claims will force Texas insureds to pay their lawyers out of claim proceeds that should be going to rebuilding, the plaintiff attorneys said.
“Mr. Rodriquez is experiencing this very hardship right now because the district court denied his claim for attorneys’ fees after Safeco not only vastly underpaid his claim when it adjusted it but also vigorously litigated the case for more than a year before the amount of loss was ultimately set at more than 28 times what Safeco’s adjuster found,” Willis and Wray said.