Texas Supreme Court Rules On Meaning Of “Like Kind And Quality” And On The Application Of The Statutory Penalty Provided By The Texas Insurance Code, Article 21.55
In Republic Underwriters Ins. Co. v. Mex-Tex, Inc., the Supreme Court of Texas considered “whether the commercial property insurer … breached its policy obligation to replace a damaged roof with one of ‘like kind and quality’, and if so, whether the insurer’s tender of partial payment of the claim avoided, on that amount, the 18% per annum delay penalty imposed by Article 21.55 of the Texas Insurance Code.” 2004 WL 2625017, 48 Tex.Sup.Ct.J. 134 (Tex. Nov. 19, 2004). In a split decision, the majority held that the trial court was justified in finding that Republic breached the policy, but that the penalty prescribed by Article 21.55 was not properly assessed.
The insured (“Mex-Tex”) notified Republic of damage to property it owned in Amarillo, Texas, after a hail storm. Mex-Tex claimed that its roof had been destroyed and needed to be replaced. After its investigation, Republic “disputed the amount of damage attributable to hail. The roof had leaked for a long time, and months before the storm Mex-Tex had obtained estimates to replace it.” Without Republic’s coverage position or approval, Mex-Tex retained a contractor to replace the damaged roof at a cost of $179,000 with one of the same kind, “but which would be fixed to the building mechanically rather than by ballast (that is, rocks) as the old roof had been.”
Republic’s first offer was for $22,000: the cost it believed was necessary to repair the “minimal hail damage.” Mex-Tex rejected that offer. Republic then submitted a check in the amount of $145,460, “an amount representing what Republic’s engineer had determined was the cost of replacing the … roof with an identical one, attached by ballast.” “Mex-Tex returned the check. Republic re-sent it. Mex-Tex re-returned it. Republic then replied that it would hold the money until Mex-Tex accepted it, which Mex-Tex did … as partial payment of its claim.” During this time, Mex-Tex initiated suit against Republic “for breach of the policy and delay penalties under Article 21.55.”
After a bench trial, the court found Republic breached its duty under the policy to replace the roof with “like kind and quality”, and that Republic was liable for 18% interest under Article 21.55 on the amount of $179,000, the entire claim presented by Mex-Tex. The court of appeals affirmed.
On appeal to the Texas Supreme Court, Republic argued that “it could not have breached the policy by offering to replace Mex-Tex’s roof with an identical one and refusing to pay for a more expensive one.” Republic further argued that the delay penalty imposed by Article 21.55 “should have been calculated only on the $33,540 difference between the payment it tendered Mex-Tex and the full amount Mex-Tex claimed …”
The Supreme Court majority held that the policy phrase “like kind and quality”:
neither restricted nor required Republic to pay for the cost to replace the roof with an identical one. The policy clearly allows more leeway than that. There was evidence to support the court’s finding that Mex-Tex’s new roof was within that leeway. Mex-Tex’s roofing contractor and its expert … both testified that the … roofs were comparable. The only evidence to the contrary was the difference in cost. … [T]he trial court could find that Republic breached the policy by refusing to pay the cost of the new roof.
The majority agreed with Republic, however, that it was only liable for the 18% interest penalty on the difference between Mex-Tex’s claim and Republic’s payment in the amount of $145,460. As defined in Article 21.55, a “claim” “means a first party claim made by an insured or a policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract that must be paid by the insurer directly to the insured or beneficiary.” The Mex-Tex majority interpreted “that must be paid” as “the amount ultimately determined to be owed, which of course would be net of any partial payments made prior to that determination.”
In this case, Mex-Tex received only partial payment; Republic failed to provide payment for the amount of the claim “that must [have been] paid.” Article 21.55, § 1(3). However, the majority held that 18% interest on the full amount of Mex-Tex’s claim was not appropriate because Mex-Tex failed to establish that Republic’s payment was conditioned on a full release and settlement. Although the penalty provided by Article 21.55 should be assessed on the full amount determined to be owed when partial payment is made conditionally, the Mex-Tex court determined that the evidence presented to the trial court established that Republic’s partial payment was just that: partial. It was on this final point that the dissent opined, stating that there was evidence in the record sufficient to create a triable issue of fact regarding whether Republic’s payment was indeed unconditional.
Mex-Tex illustrates two things. First, Texas courts appear to broadly interpret “like kind and quality.” Second, if an insurer issues payment only subject to a full release and settlement, but a court later determines its payment fell short of the amount that “must be paid,” a Texas court, under Article 21.55, may apply the 18% interest penalty to the entire amount owed to the insured, despite payment already made.