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The U.S. Court of Appeals for the Fifth Circuit, affirming a decision by the U.S. District Court for the Northern District of Texas, has ruled that a payment made by an insurer to comply with an appraisal award after the 60-day period provided in the state’s Prompt Payment of Claims Act was not a late payment subject to the penalty provided in that law.

The Case

Mainali Corporation owned a gas station and convenience store (the “Property”) in Decatur, Texas, that was damaged by fire.

The next day, Mainali notified its insurer, Covington Specialty Insurance Company.

Three days after the fire, Covington sent an independent adjuster to investigate Mainali’s claim. Over the course of several payments, Covington paid Mainali $389,255.59 using an actual cash value basis.

Mainali disputed the calculation.

About two months after Covington’s last payment, Mainali sued Covington.

Covington exercised its right of appraisal under the policy. As a result, Covington and Mainali each designated an appraiser, and the two appraisers agreed on an umpire.

The appraisal panel issued an appraisal award of $387,925.49 as actual cash value and a replacement cost value of $449,349.61. Mainali did not repair or replace the Property.

The appraisal award provided that it was “inclusive of all FIRE damages sustained to the insured property” and was the sum of three types of losses: building, contents, and business interruption.

Although Covington already had paid more than the total amount the appraisal panel said it owed, it paid an additional $15,175.82 for the building allocation after the panel announced its award.

Covington subsequently moved for summary judgment on Mainali’s claims. It argued that, under Texas law, its timely payment of the appraisal award precluded liability on Mainali’s breach of contract and extracontractual claims.

Mainali pressed its claim under the Prompt Payment of Claims Act in Chapter 542 of the Texas Insurance Code. It argued that the post-appraisal payment was subject to that act’s interest penalties for payments made more than 60 days after the insurer received necessary documentation from the insured.

The U.S. District Court for the Northern District of Texas granted Covington’s motion, and Mainali appealed to the Fifth Circuit.

The Fifth Circuit’s Decision

The circuit court affirmed.

In its decision, the circuit court explained that Section 542.058 of the Texas Insurance Code requires that an insurer pay a policyholder’s claim within 60 days of receiving all documentation needed to resolve the claim. An insurer that does not do so is liable for an 18 percent penalty on the amount that was not timely paid, plus attorneys’ fees.

The circuit court then ruled that a payment made to comply with an appraisal award after the 60-day window was not subject to this penalty.

Covington, the circuit court reasoned, had not been trying to avoid payment of the claim but, instead, had invoked a contractually agreed to mechanism for assessing the amount it owed.

The Fifth Circuit observed that Covington had made a preappraisal award that was “undeniably reasonable” and that only because of an allocation issue relating to the building award did Covington, “out of an abundance of caution,” issue an additional $15,175.82 to Mainali after the appraisal. It concluded that Covington had not violated the Prompt Payment of Claims Act.

The case is Mainali Corp. v. Covington Specialty Ins. Co., No. 17-10350 (5th Cir. Sep. 21, 2017). Attorneys involved include: For MAINALI CORPORATION, Plaintiff – Appellant: Khagendra Gharti Chhetry, Esq., Counsel, Chhetry & Associates, P.C., New York, NY. For COVINGTON SPECIALTY INSURANCE COMPANY, ENGLE MARTIN & ASSOCIATES, INCORPORATED, LYNN SUMMERS, Defendant – Appellees: Wade Crosnoe, Thompson, Coe, Cousins & Irons, L.L.P., Austin, TX; Harrison Henry Yoss, Thompson, Coe, Cousins & Irons, L.L.P., Dallas, TX.