The Use of Appraisers in First-Party Property Insurance Litigation:
A Resounding Endorsement by Texas Appellate Courts
Property insurance policies routinely include an appraisal clause that sets forth a non-judicial procedure for resolving disputes about the “amount of loss,” i.e., the value of damaged property or the cost of repairs. When properly invoked, the policy provides a procedure pursuant to which each party appoints a qualified appraiser to conduct initial negotiations and attempt to reach an agreement. Any disputes are then submitted to an impartial “umpire” who is responsible for issuing a decision binding on both parties. While somewhat similar to arbitration, the appraisal process is not “a quasi-judicial proceeding, complete with formal hearings, notice to parties, and testimony of witnesses.”1 Instead, appraisal is much more informal and, until recently, limited in scope.
Invoking appraisal avoids or preempts litigation because the umpire’s final decision, setting the “amount of loss,” usually moots the most valuable and important cause of action asserted by policyholders in first-party litigation, i.e., breach of contract for failure to pay the full amount owed.2 Without a breach of contract claim, the insured’s extra-contractual causes of action – bad faith, late payment, deceptive trade practices, etc. – are normally dismissed or settled, in part because these claim are both less valuable and more difficult to prove. Therefore, insurers view appraisal as an effective method for preventing policyholders from utilizing jury bias against insurers, which exists even in the most defense-friendly jurisdictions.
The Scope of Appraisal Expands
At least traditionally, the appraisal process was not meant to resolve coverage disputes, such as questions about what caused the loss.3 However, in State Farm Lloyds v. Johnson, the Texas Supreme Court held that compelling litigants to engage in the appraisal process is appropriate, even if appraisal “turns out to involve not just damage but liability questions.”4 The Court reasoned that appraisal necessarily encompasses a threshold determination about what caused the loss, so unless coverage is the only dispute, appraisal should be compulsory.5 Furthermore, even though appraisal is subject to collateral attack and might not “necessarily be binding,” it cannot “be prohibited as an initial matter” because, “[l]ike any other contractual provision, appraisal clauses should be enforced.”6
Alleging Waiver to Avoid Appraisal
After State Farm Lloyds v. Johnson, post-lawsuit demands for appraisal by insurers became more common, along with motions to compel. Many plaintiffs responded by asserting the affirmative defense of waiver based on the insurer’s delay in invoking the appraisal clause. For example, in Southland Lloyds Ins. Co. v. Cantu, plaintiff established waiver by arguing that the insurer failed to respond to the insured’s pre-suit demand for appraisal and waited sixteen months after suit filed before filing a motion to compel. 7 The insurer in Cantu did not seek immediate mandamus relief regarding its appraisal demand, presumably because the trial in that case occurred before the decision in Johnson.8 However, after Johnson, seeking mandamus relief became the favored strategy for insurers.9
Setting a New Standard for Waiver
When presented with an insurer’s petition for writ of mandamus, the Texas Supreme Court declared a new standard for litigants seeking to avoid appraisal based on the opposing party’s delay. In the case of In re Universal Underwriters of Texas Ins. Co., the Texas Supreme Court held that waiver can only occur when the party opposing appraisal suffers prejudice – i.e., “harm to…legal rights or financial position” – and the party invoking appraisal fails to do so within a reasonable time after “the point of impasse.”10 The Court defined impasse as the point at which the parties are “aware that further negotiations would be futile” and reach “a mutual understanding that neither will negotiate further.”11 Applying this new standard to the facts, the Court held that impasse occurred when the insured filed suit.12 Therefore, the insurer demanding appraisal only one month later did not constitute waiver.13
In Universal Underwriters the insured did not attempt to establish prejudice, so the Court addressed the issue in general terms, stating “it is difficult to see how prejudice could ever be shown when the policy, like the one here, gives both sides the same opportunity to demand appraisal.”14 The Court went on to say that a party alleging waiver can “avoid prejudice by demanding an appraisal itself” and “should [do so] before resorting to the courts.”15 Following the decision in Universal Underwriters, several courts applied the new standard for waiver, and it now appears that appraisal is effectively unavoidable.16 The most recent case addressing this issue, In re Texas Windstorm, is telling in this regard. In that case, the insured’s counsel defeated a motion to compel appraisal in district court but didn’t even bother to respond to the insurer’s petition for writ of mandamus.17
Proving Prejudice is Possible but Highly Unlikely
In the case of In re Cypress Texas Lloyds, the Beaumont Court of Appeals considered an argument that the insurer’s conduct financially prejudiced plaintiffs. The insurer in Cypress Texas Lloyds apparently employed a deliberate strategy to delay compelling appraisal, and plaintiff incurred expenses during the delay.18 However, the court held there was no prejudice because plaintiffs “could have avoided the costs by requesting the appraisal themselves.”19 In Dike v. Valley Forge Ins. Co., U.S. District Judge Lee Rosenthal addressed the issue of proving prejudice based on alleged harm to a “legal right.”20 In Dike, plaintiff argued that the insurer’s delay created prejudice because plaintiff’s deadline had passed for changing his election of remedy from an actual-cash-value basis to a replacement-cost basis.21 Judge Rosenthal rejected this argument, stating that plaintiff provided no evidence that appraisal prevents him from asserting this legal right to the umpire.22 This decision seems to assume that appraisal allows the parties to assert any and all legal rights, which might be correct because the appraisal process is almost completely devoid of procedures or rules. Therefore, establishing prejudice by prospectively proving harm to a legal right might be impossible, i.e., until the appraisal process is complete, there is no way of knowing whether a particular legal right will be harmed by the umpire’s decision. Given the Texas Supreme Court’s statement that establishing prejudice is extremely unlikely, the decisions in Cypress Texas Lloyds and Dike are not surprising.
Reaching the Point of “Impasse”
Two recent cases signal that proving an impasse occurred is possibly more difficult than establishing prejudice. In the case of In re GuideOne Mutual Ins. Co., the Beaumont Court of Appeals distinguished Universal Underwriters, which held that an impasse existed on the date plaintiff filed suit.23 GuideOne Mutual found that an impasse did not occur because the parties had recently engaged in mediation, “which indicated that they were still negotiating years after the suit commenced.24” In the case of In re Public Service Mutual Ins. Co., the Austin Court of Appeals went a step further and held that an impasse did not exist because counsel engaged in discussions about the possibility of attending mediation.25 Because court-ordered mediations are so common and because litigants routinely engage in informal settlement negotiations – or discussions about the prospect of settlement negotiations – it appears that, as a practical matter, proving an impasse exists is nearly impossible.
Appraisal Process Unavoidable but Beware of Collateral Attacks
The plaintiffs in both GuideOne Mutual and Public Service Mutual challenged the Court of Appeals’ interpretation of impasse and sought mandamus relief from the Texas Supreme Court. However, the Court denied both petitions, perhaps indicating that waiver as an affirmative defense to enforcement of standard appraisal clauses is a dead letter. It is still possible to avoid enforcement of an appraisal clause by proving fraud, mistake, illegality, or unconscionability, but these affirmative defenses have little practical impact in the context of standardized contracts.26 Thus, it seems that appraisal is effectively unavoidable in the vast majority of cases.
This could result in an increasing number of attacks on appraisals by alleging the award was made without authority or failed to substantially comply with the terms of the insurance contract.27 For example, the 5th Circuit recently held that an umpire exceeded his authority by disregarding certain repairs that both parties’ appraisers agreed were necessary.28 Even though the Court upheld the remainder of the umpire’s award, this case serves as a good reminder that, although unavoidable, the appraisal process must still proceed in compliance with all contractual terms, which may differ substantially from policy to policy.
1Hartford Lloyd’s Insurance Co. v. Teachworth, 898 F.2d 1058, 1062 (5th Cir.1990).
2Breshears v. State Farm Lloyds, 155 S.W.3d 340, 344 (Tex.App.—Corpus Christi 2004, pet denied).
4290 S.W.3d 886, 893 (Tex.2009).
5Id. at 893-95
7399 S.W.3d 558, 578 (Tex.App.—San Antonio 2011, pet. denied).
9In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404, 406 (Tex.2011) (orig. proceeding) (citing In re Allstate Cnty. Mut. Ins. Co., 85 S.W.3d 193, 196 (Tex.2002)).
10Id. at 409-10.
11Id. at 410
14Id. at 412.
15Id. at 410.
16Dike v. Valley Forge Ins. Co., 797 F.Supp.2d 777 (S.D.Tex. 2011); In re Cypress Texas Lloyds, No. 09–12–00077–CV, 2012 WL 1435739 (Tex.App.—Beaumont, Apr. 26, 2012, orig. proceeding [mand. denied]); In re GuideOne Mut. Ins. Co., Not Reported in S.W.3d, 2013 WL 257371 (Tex.App.—Beaumont, Jan. 24, 2013, orig. proceeding [mand. denied]) (mem. op.); In re Public Service Mut. Ins. Co., Not Reported in S.W.3d, 2013 WL 692441 at *2 (Tex.App.—Austin, Feb. 21, 2013, orig. proceeding [mand. denied]) (mem. op.); In re Texas Windstorm Ins. Ass’n, Not Reported in S.W.3d, 2013 WL 4806996 (Tex.App.—Houston [14 Dist.], Sept. 10, 2013, orig. proceeding) (mem. op) (per curiam).
172013 WL 4806996 at *1.
182012 WL 1435739.
19Id. at *2.
20797 F.Supp.2d 777.
21Id. at 785 n.3.
23213 WL 257371.
24Id. at *1.
252013 WL 692441 at *2.
26Universal Underwriters, 345 S.W.3d at 407.
27Hennessey v. Vanguard ins. Co., 895 S.W.2d 794, 798 (Tex.App.—Amarillo 1995, writ denied).
28TMM Investments, Ltd. v. Ohio Casualty Insurance Co., No. 12-40635, 2013 WL 5222625 (5th Cir. Sept. 17, 2013) (apply Texas law).
This Litigation Alert is a summary of recent developments in the law and is provided for informational purposes only. It is not intended to constitute legal advice or to create an attorney-client relationship. Readers should obtain legal advice specific to their situation in connection with topics discussed.
Copyright © 2013 Kane Russell Coleman & Logan PC. All rights reserved. Unless otherwise indicated, the authors are not certified by the Texas Board of Legal Specialization.