Insurance policies that provide coverage for loss of property, both personal and commercial, typically contain an appraisal provision. Appraisal, when the circumstances are appropriate, is an efficient method to determine the amount of loss under most property policies. However, an appraisal to determine the amount of the loss should not be invoked when causation, coverage, or liability under the policy are still in dispute.
For many years, Texas courts had been consistent in their interpretation of appraisal clauses in insurance policies. Appraisal was to be used to provide a simple, speedy, inexpensive, and fair method of determining the amount of loss. If the appraisal clause is properly invoked, carried out, and awarded, the determination of the amount of loss is binding on the insurer and insured. Because of the binding nature of appraisal, an appraisal award can only be set aside in three circumstances: (1) when the award was made without authority; (2) when the award was the result of fraud, accident or mistake; and (3) when the award was not made in substantial compliance with the terms of the insurance policy. An award is made without authority when the appraiser attempts to determine questions of causation, coverage, or liability.
The status of appraisal law appeared predictable and settled until the Texas Supreme Court’s decision in State Farm Lloyds v. Johnson, 290 S.W.3d. 886 (Tex. 2009). The Johnson case involved the determination of whether the meaning of the term “amount of loss” in an appraisal clause of a homeowner’s insurance policy includes the extent of loss and whether the insured can compel the insurer to appraisal when there is a dispute about the extent of loss. Johnson argued that the amount of loss includes a dispute over the extent of the damage. Whereas, State Farm argued that no appraisal can be compelled unless the parties agree on causation, coverage, and liability. Specifically, State Farm took the position that because it had only acknowledged coverage for hail damage to the ridgeline of the Johnson’s roof and the remainder of the roof was damaged due to wear and tear, which is excluded under the policy, the issue was in dispute was coverage and not the amount of loss. State Farm further argued that the amount of loss does not include the extent of loss, because determining the extent of loss, would necessarily include a determination of coverage, causation, and/or liability.