Is Breach of Contract Required for Bad Faith?

Payment of Appraisal Award Fulfills Policy Promises

An insurance company and its insured disagreed on the scope of damage due to hail. Eventually appraisal was demanded and an award was rendered and paid, including interest. Regardless, the insureds, unhappy, sued the insurer. In Burks v. Metropolitan Lloyds Ins. Co. of Texas, Slip Copy, 2015 WL 4126654 (S.D.Tex., 7/8/2015) the U.S. District Court for the Southern District of Texas, resolved the dispute and tendered an opinion regarding the ability to sue for bad faith even when the insurer fulfills its obligations under the policy of insurance.


This suit arises from a dispute between Plaintiffs Michael Burks and Cynthia Burks (“Plaintiffs”) and their homeowners insurance provider, Defendant Metropolitan Lloyds Insurance Company of Texas (“Defendant”), which at all relevant times insured Plaintiffs’ home in Magnolia, Texas (the “Property”).  Approximately three months after an April 27, 2013 hailstorm caused damage to the Property, Plaintiffs filed a claim with Defendant on their Homeowners Insurance Policy (the “Policy”).  Defendant engaged Tailored Adjustment Services (“Tailored”) to perform an inspection of the Property, and Michael Eason (“Eason”), a licensed adjuster with Tailored, promptly inspected the Property within two weeks of when Metropolitan received Plaintiffs’ claim.

Excerpts of Eason’s appraisal in the summary judgment record indicate that he made detailed inspections of the Property, and included detailed measurements of the surface areas of the roof, their total perimeter lengths, the numbers of squares, and the total ridge lengths. Eason noted in his report that the Property’s main roof and garage roof had been replaced due to storm damage in 2009, and did not find any storm-related damage to the shingles of the main roof or garage roof. Eason did note hail damage to three HVAC caps and a window bead, and recommended full replacement of a metal roof and a fiberglass roof on lean tos attached to the garage, four metal panels on a separate carport, and a metal gazebo roof. Eason estimated a total replacement cost of $5,080.68.

Plaintiffs state that during his inspection, “Eason informed [a local roofing contractor present at the Property] and Mr. Burks that he was instructed by Metropolitan not to pay for the roof because Metropolitan paid to replace the roof in 2009 and was not going to pay for it again.”

Three days after Eason’s inspection, Defendant notified Plaintiffs of the estimate and, after applying their $3,900 deductible, issued payment of $1,180.68. Plaintiff Michael Burks called Defendant to complain that the amount was “totally insufficient,” that “we would be probably taking other action,” and asked what he should do with the check. He was told just to void it and Metropolitan would cancel it. Defendant, apparently misinterpreting Plaintiffs’ intent, sent to Plaintiffs a letter stating in relevant part: “This letter will confirm our conversation of 8/12/13, in which you stated you were no longer interested in pursuing this claim. Since you are voluntarily withdrawing your claim for 4/27/13, we will not be investigating this loss any further. Our file will be considered closed.”

Six months after the foregoing exchange, Plaintiffs filed this suit alleging breach of contract, fraud, breach of the covenant of good faith and fair dealing, and violations of Sections 541 and 542 of the Texas Insurance Code. Defendant removed the case to the federal District Court and shortly thereafter Defendant’s counsel wrote to Plaintiffs’ counsel that Defendant “would like to reissue the check for $1,180.68,” which was not accepted.

Thereafter an appraisal was conducted and the two party-appointed appraisers and their chosen umpire made an appraisal award finding that the replacement cost value was $28,912.02, and the actual cash value was $23,648.07.  Defendant then paid to Plaintiffs $20,088.93, representing the actual cash value of the appraised loss less the $3,900 deductible, plus $340.86 in penalty interest. Plaintiffs accepted the payment from Defendants, but argue the appraisal award is inadequate “because Metropolitan’s proposed settlement did not include for elements of damages such as attorneys’ fees and statutory penalties.”


Plaintiffs allege that Defendant’s “failure and/or refusal … to pay adequate compensation,” constitutes a breach of Defendant’s insurance contract with Plaintiffs. Defendant argues that Defendant’s prompt payment of the appraisal award to Plaintiffs fulfills Defendant’s contractual obligations under the Policy and precludes Plaintiffs’ claim for breach of contract. “Under Texas law, when an insurer makes timely payment of a binding and enforceable appraisal award, and the insured accepts the payment, the insured is ‘estopped by the appraisal award from maintaining a breach of contract claim against [the insurer].’” Blum’s Furniture Co. v. Certain Underwriters at Lloyds London, 459 F. App’x 366, 368 (5th Cir.2012)

Plaintiffs do not dispute that the parties engaged in the binding appraisal process established by the Policy, but argue that their dispute with Defendant is “not about the valuation of damage to the roof,” but rather “whether the roof damage would be covered at all,” such that the appraisal process did not fully resolve their dispute. Plaintiffs’ theory seems to be that if the insured claims storm damages to a half dozen structures on the insured property, but the insurer finds storm damages to only four of the structures, that the insurer has breached the contract if the appraisal process results in a finding of damage to either or both of the other two structures, even though the insured accepts the insurer’s payment of the full appraisal award.

Defendant argues that Plaintiffs’ remaining claims must be dismissed because there was no breach of the insurance contract and bad faith claims require such a breach. Under Texas law, “in most circumstances, an insured may not prevail on a bad faith claim without first showing that the insurer breached the contract.” Liberty Nat. Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex.1996).

Plaintiffs argue that the Akin rule generally prohibiting bad faith claims without a breach of contract should be limited to cases where in fact there is no insurance coverage. Such a distinction has not been found in the Texas cases and appears entirely unwarranted.
Defendant Metropolitan Lloyds Insurance Company of Texas’ Motion for Summary Judgment is granted and Plaintiffs Michael Burks and Cynthia Burks’ claims are dismissed with prejudice.


The tort of bad faith is an anomaly allowing tort damages for breach of the terms of a contract of insurance. Because of the availability of punitive and other tort damages plaintiffs and their lawyers attempt to stretch the tort to cases, even where the insurer, fulfills the terms and conditions of the policy. In this case the insurer fulfilled the terms of the contract and paid everything it owed. There should never be a right to a tort of bad faith if the insurer fulfills the terms of the contract and there is no evidence of breach.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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3 Responses to Is Breach of Contract Required for Bad Faith?

  1. I’ve never known much about bad faith claims, and it is really nice to read such a detailed article about them. I have been been wondering if you had any more information on the process of making a bad faith claim? Thank you for an informative article and for your applicable story about this particular area of law.

    • Barry Zalma says:

      Just do a search in the blog and you will find more. You could also consider buying my book “Insurance Claims: A Comprehensive Guide” from the National Underwriter Company.

    • Barry Zalma says:

      Most states require a breach of contract before you can make prove a claim of bad faith since if they don’t owe the claim they didn’t act in bad faith.

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