To Invoke or Not to Invoke: The Appraisal Process and What it Can and Cannot Do for You

Many property insurance policies, including the standard Texas homeowners policy, contain appraisal clauses that allow either the carrier or the policyholder to make a written demand for an appraisal if the parties fail to agree on the actual cash value, amount of loss or cost of repair. Insurers need to be cognizant of the situations in which appraisal may be invoked and the circumstances under which appraisal awards may be set aside.

The typical appraisal clause allows each party to select an appraiser. The two appraisers then determine the amount of the loss, and if they fail to agree, they submit their differences to an umpire whom they have chosen together. A decision agreed to by any two of the three sets the amount of the loss and is binding on the parties. Each party pays its own appraiser and splits the cost of the umpire.

If the amount of loss is all that is at issue, appraisal is appropriate. Wells v. American States Preferred Ins. Co., 919 S.W.2d 679, 684 (Tex.App.-Dallas 1996, writ denied). According to Wells, “appraisers have no power or authority to determine questions of causation, coverage or liability.” Id.

Frequently, there is a fine line between determining the amount of loss and venturing into the realm of coverage, causation or liability. For instance, appraisers working on a water damage claim made by a homeowner may disagree about the scope of repairs needed and submit appraisals that address different areas of a dwelling: one appraisal contemplates repairs throughout the home while the other appraisal covers just a few rooms. Under a strict reading of the appraisal clause, such determinations exceed the scope of the appraisal clause. Id. Where the nature of the damage is agreed upon by the carrier and the policyholder but the amount required to make the necessary repairs is disputed, the appraisal process is an appropriate remedy and a right either party may invoke. Id.

Appraisal awards made pursuant to the provisions of an insurance contract are binding and enforceable. Barnes v. Western Alliance Ins. Co., 844 S.W.2d 264, 267 (Tex. App. – Fort Worth 1992, writ dism’d by agr.). Moreover, every reasonable presumption will be indulged to sustain an appraisal award. Providence, 877 S.W.2d at 875. Continental Ins. Co. v. Everson, 93 S.W.2d 591, 594 (Tex. Civ. App. – San Antonio 1936, writ dism’d).

The Fort Worth Court of Appeals recently examined whether a carrier waives its right to demand an appraisal after payments have been tendered to the policyholder for part of the loss. In re Clarendon Ins. Co., 2004 WL 2984916 (Tex.App.-Fort Worth 2004) the court considered whether the trial court abused its discretion by striking the insurer’s demand for an appraisal of mold and water damage to the insured’s home.

The insurer, Clarendon, enlisted the help of a third party claims administrator to adjust the losses claimed by the insured, Goff. The administrator verbally agreed to allow Goff, a homebuilder by profession, to do his own repair work. Goff was instructed to submit invoices for the repair work he performed, which would be reimbursed by Clarendon monthly.

Over the first four months, Clarendon paid Goff $263,998.50 for repairs. After making these payments, Clarendon became concerned about the manner in which the third party claims administrator was handling Goff’s claim and hired a new administrator. Goff refused to allow anyone to enter his home to videotape or photograph the repairs, so Clarendon stopped making payments to Goff because it could not verify his invoices. Goff made a policy limits demand to Clarendon and filed suit shortly thereafter. Clarendon sent Goff a demand for appraisal based on the appraisal clause in the policy and sought abatement or dismissal of the lawsuit in light of Clarendon’s invocation of the appraisal provision. Goff filed a motion to strike the appraisal demand.

The trial court granted Goff’s motion to strike the appraisal demand and Clarendon filed a mandamus action, which resulted in the opinion issued by the Fort Worth Court of Appeals. On appeal, Goff argued that Clarendon waived its right to an appraisal by paying Goff’s invoices for four months The Fort Worth court disagreed and determined that Clarendon had not waived its right to an appraisal.

According to the court, where an insurance contract “mandates appraisal to resolve the parties’ dispute regarding the value of a loss and where the appraisal provision has not been waived, a trial court abuses its discretion and misapplies the law by refusing to enforce the appraisal provision.” The court looked at the 2002 Texas Supreme Court opinion In re Allstate County Mut. Ins. Co., 85 S.W.3d 193 (Tex. 2002)(orig. proceeding), which held that an insurer did not have an adequate remedy at law when the trial court abused its discretion by determining that the appraisal clause was unenforceable, because the parties contractually agreed to the appraisal clause as the method for determining the amount owed by the insurance company to avoid breach of the contract. The Supreme Court noted that an appraisal “goes to the heart of the insured’s breach of contract action” and held that denying the appraisal would prejudice the carrier’s ability to defend the breach of contract action.

The effect of an appraisal award is to prevent one party from contesting the issue of damages in a suit on the insurance contract, leaving only the question of liability for the court. Scottish Union & Nat’l Ins. Co. v. Clancy, 71 Tex. 5, 8 S.W. 630, 631 (1888). In other words, the amount of damages determined through the appraisal process is set in stone and only causation, coverage or liability questions remain, unless the appraisal award is overturned. An appraisal award may be set aside only in three instances: when it was 1) made without authority; 2) the result of fraud, accident, or mistake; or 3) not made in substantial compliance with the terms of the contract. Providence Lloyds Ins. Co. v. Crystal City Indep. Sch. Dist., 877 S.W.2d 872, 875 (Tex.App.-San Antonio 1994, no writ).

Several cases demonstrate the deference courts pay to appraisal awards. In Hennessey v. Vanguard Ins. Co., 895 S.W.2d 794, 797-98 (Tex.App.–Amarillo 1995, writ denied), the Hennesseys’ homeowners insurer, Vanguard, invoked the appraisal clause regarding a roof damage claim. Vanguard’s appraiser determined that the roof could be repaired for $2,555, while the Hennesseys’ appraiser put the cost at $18,000. The umpire chosen by the two appraisers determined that the roof could be repaired for $800, much less than either appraisal. The homeowners contended that the great disparity between the umpire’s award and the appraisals established the impartiality of the appraisal. The court disagreed and determined that a finding of disparity, even gross disparity, between an umpire’s award and the cost of repair cannot support a finding of bias or partiality without additional evidence.

In Providence Lloyds Ins. Co. v. Crystal City I.S.D., 877 S.W.2d 872 (Tex.App.-San Antonio 1994, no writ), a school district recovered a judgment from its carrier following a jury trial regarding a fire loss claim in which the insurance appraisal process in Texas had been invoked. The trial court refused to enforce the appraisal award, and the evidence of the appraisal and the testimony of the umpire were excluded at trial. The jury returned a verdict in excess of the appraisal award and the court awarded the school district the difference between the $1,237,000 jury verdict and the $1,014,801 sum previously paid by the insurer immediately after the umpire issued its award in that amount. The insurer appealed the trial court’s judgment, contending that the court erred by not enforcing the appraisal award and permitting the breach of contract case to be tried. The school district contested the umpire’s award, contending that the umpire exercised independent judgment regarding five items, instead of agreeing with one appraiser or the other. As such, the school district argued, the appraisal was not made in substantial compliance with the appraisal provision in the policy and the trial court’s decision to overturn the award was proper. The court of appeals disagreed and held that the appraisal award precluded recovery on the breach of contract claim. The court stated that “it was the duty of the umpire under the terms of the contract of insurance to ascertain and determine, in the exercise of his own judgment and as a result of his own investigation, the cost values of the disputed items, independent of the findings of the appraisers, or either of them.”

In Gardner v. State Farm Lloyds, 76 S.W.3d 140 (Tex.App.-Houston [1st Dist.] 2002, no pet.), the San Antonio Court of Appeals considered whether the trial court properly granted the Gardners’ carrier’s summary judgment motion in a breach of contract and bad faith case regarding a hail damage claim in which an appraisal award was made. Since the Gardners were the nonmovant in the summary judgment proceeding, the court viewed the evidence in the light most favorable to the Gardners, as required under the relevant standard of review. The Gardners disputed that the appraiser selected by the insurer was “independent,” and contended that the appraisal award should be overturned. The appraiser’s employer had written a training program used by the insurer in adjusting hail damage claims and numerous publications about hailstorm evaluations, served as a consultant for the insurer and been paid by the insurer for assignments across the United States over seven years. Despite the allegedly cozy relationship between the appraiser’s company and the insurer, which the court deemed an “arm’s length business relationship,” the court determined that the appraiser was independent because the insurer did not direct the appraiser to reach any conclusions and the appraiser did not perform any act or conduct exhibiting partisan tendencies. A key element to the court’s conclusion was the fact that the policyholder’s complaint concerned a pre-existing relationship between the carrier and the appraiser’s employer, not the appraiser himself.

In light of the deference paid to appraisal awards by Texas courts, it is preferable to address problems directly during the appraisal process, when issues can be handled without the need for court intervention or without having to take action to set aside an award that has already been made. The appraisal process can be a simple, inexpensive and efficient method for determining the amount of loss, as long as it is invoked properly and the appraisers and umpire perform their duties in accordance with the terms of the policy. If the appraisal clause is not invoked properly, or the appraisers and umpires fail to live up to their duties, it can sometimes complicate matters and spur protracted litigation, although the goal of invoking appraisal was to avoid that very result.