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.
The Texas Supreme Court accepted State Farm Lloyds’ petition for review to decide whether the dispute between Johnson and State Farm fell within the scope of the appraisal clause of the policy. The Court, in its opinion, traced the history of appraisal clauses under Texas law. The Court recognized that appraisal clauses are enforceable and were generally used to determine the amount of loss for a covered claim. But the Court pointed out it had not previously addressed the scope of appraisal clauses, more particularly the meaning of “amount of loss” as used in the policy. The Court acknowledged that most appraisal clauses instruct the appraisers to decide the “amount of loss,” and not to engage in policy construction or determining whether the claim should be paid. The Court decided that the facts in Johnson indicated that State Farm did not prove that the dispute was about causation. The Court reasoned that, because State Farm acknowledged some shingles were damaged by hail, a covered peril, the dispute concerned the number of shingles damaged stating that “A dispute about how many shingles were damaged and needed replacing is certainly a question for the appraisers.” To support this conclusion, the Court asserted that the cost of replacing shingles is a function of both price and number. To the extent the parties disagree which shingles need replacing, that dispute would fall within the scope of appraisal. The Court stated that to hold otherwise would mean that appraisers could never evaluate hail damage unless the roof was brand new, making an appraisal clause invalid or meaningless. The Court went even further and announced that even if appraisal does involve liability questions, it should not be prohibited initially and stated that appraisal should occur pre-litigation, without involvement of the legal process and without preemptive intervention by the Courts.
The Johnson case seems contrary to the Supreme Court’s willingness to uncomplicate trials and keep litigation costs down. The standard to overturn an appraisal award is hardly simple or easy to satisfy. The parties to appraisal will bear the costs of the appraisal for their own appraiser and typically one-half the cost of an umpire. The parties may then need to assume the additional burden and expense of litigating the competence and/or bias of an appraiser or umpire, that appraisers or the umpire exceeded their authority, or that causation, liability and/or coverage was improperly decided. The unsophisticated and unrepresented insured may not become aware of the binding results of an appraisal until its too late. Because appraisal is viewed as a presumptively legitimate process, courts often swayed to enforce the award no matter how the bad the result or how unjust the award may be.
Therefore the prudent practitioner should keep in mind that appraisal was not meant to be used in every case. It was designed to be employed in circumstances where there is no real controversy as to what extent the property is covered only a dispute as to its value. However, if appraisal is invoked and the appraiser attempts to determine questions of causation, coverage, or liability when evaluating the amount of loss the binding effect of the award may be subject to challenge.
DISCLAIMER Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. This firm does not represent any person unless and until it is retained and agrees to provide such representation in writing.