Does A Bad Faith Cause Of Action Survive An Appraisal Award? The Answer May Be, 'It Depends'

Intermodal Equipment Logistics, U.S. District Court for the Southern District of Texas

Earlier this year, the U.S. District Court for the Southern District of Texas ruled an insured can pursue its bad faith claim even where the insurer made timely payment of the appraisal award and the court dismissed the breach of contract claim on summary judgment. Intermodal Equip. Logistics, LLC and Sea Train Logistics, LLC v. Hartford Accident & Indem. Co., No. 3:10-cv-00458 (S.D. Tex. Galveston Div. May, 24, 2012). Intermodal Equipment Logistics (Intermodal) made claims to Hartford Accident and Indemnity Company (Hartford) for its business income loss caused by Hurricane Ike, which hit the Texas shores in 2008. Hartford valued and paid $208,000 for the loss. Intermodal filed suit against Hartford in September 2010, alleging Hartford grossly, and in bad faith, undervalued Intermodal's losses and breached the insurance contract. The parties agreed to mediate, but when this failed in May 2011, Hartford successfully compelled appraisal in accordance with the standard appraisal provision in its policy. The appraisal finished in January 2012 and awarded Intermodal $705,539, which Hartford timely paid.

The court held that timely payment of the appraisal award negated the breach of contract claim as a matter of law. Id. (citing Franco v. Slavonich Mutual Fire Insurance Ass'n, 154 S.W.3d 777, 787 (Tex. App. -- Houston, [14th Dist] 2004, no pet.) (payment and acceptance of a binding appraisal award estops further prosecution of a breach of contract claim); Blum's Furniture Co., Inc. v. Certain Underwriters at Lloyds London, 2012 WL 181413 (5th Cir. Jan. 24, 2012) (unpublished), and Breshears v. State Farm Lloyds, 155 S.W.3d 340 (Tex. App. -- Corpus Christi, 2004, no pet.)). In dismissing Intermodal's breach of contract claim, the court confirmed that an insured may not use the difference between the amount originally paid by the insurer and the appraisal award as evidence of breach of contract.

The general rule provides that an insurance bad faith claim first requires an underlying breach of the insurance contract. However, the court here ruled the bad faith claim survived, citing the following three exceptions to the general rule:

An insured proves that a carrier "denied or delayed the payment of the insured's claim when it knew or should have know[n] that it was reasonably clear that the claim was covered." An insured sues under the Texas Insurance Code as...