Texas Court Holds Property Owner Can Pursue Extra-Contractual Claims, Even if Insured’s Breach of Contract Claim is Time-Barred Under Policy

We previously wrote advising policyholders about several recent reported decisions in Texas, which held that an insured’s breach of contract claim was BARRED if the lawsuit was not filed within 2 years and 1 day of the carrier’s initial decision on the claim, even during the pendency of an appraisal. Don’t Allow the Appraisal Process To Drag Out  In essence, Texas courts have rejected the notion that either party’s invocation of the appraisal process tolls or restarts the limitations period. Abedinia v. Lighthouse Property Ins. Co., No. 12-2000183-CV, 2021 WL 4898456 (Tex. App.—Tyler Oct. 20, 2021) (“Texas state and federal courts have held in similar cases-when a claim for a single event that caused damage is denied, partially paid, or closed, but later reinvestigated by the insurance carrier, yet ultimately denied-that no tolling or resetting of the statute of limitations occurs.”).

But just last month, in a significant well-reasoned ruling for insureds, the Southern District of Texas held that even though the insured’s cause of action for breach of contract was untimely and time-barred, the court denied the carrier’s summary judgment on the insured’s remaining extra-contractual statutory claims under Chapters 541 and 542 of the Texas Insurance Code (which included violations of the Prompt Payment of Claims Act and unfair insurance practices). In Johnston v. Palomar Specialty Ins. Co., Cause No. 4:23-CV-02306 (S.D. Tex. Dec. 14, 2023), Johnston’s home was damaged by wind and hail in January 2020, but Palomar did not send Johnston a decision letter accepting liability for part of the claim until November 4, 2021. For unknown reason, Johnston waited until January 28, 2023 to invoke the policy’s appraisal provision. Although Palomar initially agreed to the appraisal, the carrier withdrew from the appraisal process a month later. Johnston then filed suit on May 11, 2023, alleging breach of contract and other extra-contractual claims.

The parties’ insurance contract included the following limitations provision (a similar provision is now included in most Texas policies), which set a deadline for any suit under the contract to be filed:

“a) No suit or action can be brought unless the policy provisions have been complied with. A suit brought against us must be filed by the earliest of the following dates: 1) two years from the date we accept or reject the claim; or 2) three years from the date of loss that is the subject of the claim.”

Judge Ellison correctly observed that the Texas Insurance Code provides “[n]otwithstanding Section 16.070, Civil Practice and Remedies Code,” an insurer “may provide for a contractual limitations period,” which “may not end before the earlier of: (1) two years from the date the insurer accepts or rejects the claim; or (2) three years from the date of the loss that is the subject of the claim.” TEX. INS. CODE § 2301.010(b). Limitations provisions that would usually be unenforceable under § 16.070 become enforceable if they meet the criteria in § 2301.010(b). Because the policy’s limitation provision above was valid under § 2301.010(b), the court appropriately granted summary judgment on the insured’s beach of contract claim since the lawsuit was filed outside the 3-year limitation period in the policy.

But that wasn’t the end of the story. Palomar argued that under the Texas Supreme Court’s holding in USAA v. Menchaca, Johnston’s extra-contractual claims automatically rise or fall with his contract claim. In Menchaca, the court clarified that, as a general rule, “an insured cannot recover policy benefits as damages for an insurer's statutory violation if the policy does not provide the insured a right to receive those benefits.” The court rejected this logic, noting:

“Unlike in Menchaca, here there has been no adjudication determining whether Johnston is entitled to policy benefits. To be sure, Johnston is barred from litigating his breach of contract claim due to the limitations provision. However, this conclusion is not the same as finding that Johnston’s policy does not cover his loss. That is, the Court’s findings go towards whether Johnston’s contract claim is procedurally proper and do not bear on substantive issues such as whether Johnston is owed any benefits under the policy. . . Palomar points to no authority finding that a procedural issue with a contract claim automatically precludes extra-contractual actions. On the contrary, other cases applying the rule referenced in Menchaca did so only after the court or an arbitrator made a substantive finding that the insured was not entitled to benefits under the policy.”

As a separate basis for its holding, the court cited other Texas decisions which make clear that an “insured need not even bring a breach of contract claim, much less succeed on it, in order to recover policy benefits under an extra-contractual claim.” The court further pointed out that Menchaca actually explicitly noted that proving a policy covers an insured’s injury is not the same as succeeding on a breach of contract claim (“While an insured cannot recover policy benefits for a statutory violation unless the jury finds that the insured had a right to the benefits under the policy, the insured does not also have to prevail on a separate breach-of-contract claim based on the insurer's failure to pay those benefits.”).

The decision whether to seek a resolution through the appraisal process can be difficult. The timing of its invocation in Johnston was certainly questionable. It is best to consider all of your dispute resolution options in order to make a fully informed decision on whether to utilize appraisal or to file a lawsuit. Remember, the insurance company has highly experienced attorneys working for it, often in the background even after the appraisal process has been invoked.  While the insured in Johnston lived to fight another day in disputing his carrier’s initial decision, the moral of this story for insureds, roofers or public adjusters is to always consider seeking the advice of counsel to determine the earliest possible running of a state’s statute of limitations and the interplay with the specific policy language in issue. Statutes of limitation can be complex and lead to disastrous results for an insured, if the issue is not carefully analyzed by a knowledgeable Texas policyholder lawyer.