Court allows bad faith claims to proceed despite payment of appraisal award

Court allows bad faith claims to proceed despite payment of appraisal award; denies insurer's motion for summary judgment.

Insurance companies frequently argue that when the insurer invokes appraisal and pays the award, the policyholder cannot prevail on a breach of contract claim which, in turn, precludes him from prevailing on a bad faith claim under the Insurance Code and DTPA. They argue that a breach of contract is a prerequisite to a bad faith claim. Despite well-reasoned arguments from policyholders, this tactic has sometimes been successful, resulting in abatement of bad faith claims during the appraisal process and, upon payment of the appraisal award, summary judgment in the insurance company's favor.

But some recent intermediate appellate court rulings in such cases have favored policyholders, recognizing that breach of contract and bad faith claims are independent of one another and holding that an insurance company may be liable for bad faith even though it did not breach the insurance contract. The Corpus Christi Court of Appeals recently upheld a bad faith award even though the jury found that the carrier did not breach the contract. The Insurance Code, the court said, creates a statutory duty -- separate and apart from the insurer's duty under the policy -- to conduct a reasonable investigation and cover all damages that would have been discovered in a reasonable investigation.

Last Friday, relying on these recent cases and others, Daly & Black, P.C., successfully defeated a motion for summary judgment on our client's bad faith claims filed by AAA.

Our client's roof was damaged in a storm. AAA initially denied his claim and later, after our client asked for reinspection, found what it called "minimal damage" totaling $3300. When our client continued to challenge AAA's handling of his claim, AAA invoked appraisal pursuant to the insurance policy. AAA's chosen appraiser and our client's appraiser agreed that the damage was not "minimal," but in fact totaled almost $18,000. AAA timely paid the award. In its motion for summary judgment, AAA argued that its payment of the appraisal award negated our client's breach of contract claim and therefore precluded a bad faith claim. The court squarely rejected this argument, agreeing with our lawyers that even if AAA did not breach the insurance contract, it may have nonetheless committed bad faith by failing -- prior to invoking appraisal -- to uphold its statutory duty to conduct a reasonable investigation and cover all damages that would have been discovered in such an investigation. A copy of the court's order can be found here.

This is a significant victory. The ruling in this case, and the rulings in the cases mentioned above, indicate that courts are not willing to absolve insurance companies of tort liability based on payment of an appraisal award. When insurance companies recognize that they cannot use the appraisal process to insulate themselves from bad faith liability, and that they will be held accountable for violations of their statutory duty to their insureds, they may be more likely to act reasonably in the first instance rather than wrongfully denying, delaying, and underpaying claims. These pro-policyholder are also important because they compromise the leverage gained by the insurance company when it invokes appraisal. If a bad faith claim can survive payment of an appraisal award, there is no reason to abate the claim until after appraisal is complete.

We look forward to achieving similar results in other cases and resolving our clients' claims as efficiently, as expeditiously, and as favorably as possible. Contact us for more information.

Categories: Insurance Claims