A Primer On Appraisal in Texas
A PRIMER ON APPRAISAL IN TEXAS
OR ONE OF THE MOST FREQUENTLY ABUSED AND MISUED PROVISIONS IN AN INSUREANCE POLICY
By: Mark A. Ticer
Appraisal is an option/process frequently found in many insurance policies but most commonly used in the property damage context. The language of most polices states that appraisal is mandatory when properly demanded by the insurer or insured. Appraisal when properly employed is binding on the parties as to the amount of loss only. All too frequently though appraisal is improperly invoked, employed, and carried out almost exclusively by insurers and appraisers to the detriment of the insured. Appraisals are frequently carried out without attorneys, usually just between the insurer and the insured.
Appraisal is not arbitration. In arbitration, all contested issues are submitted to an arbitrator(s) for resolution while in appraisal only the amount of loss is decided by two (2) appraisers and an umpire, if necessary. Arbitration and appraisal are alike in that arbitrators, appraisers, and umpires are to be impartial, independent, and free from bias. Arbitration is formal in nature functioning somewhat like a court while appraisal is an informal process conducted by two (2) appraisers who determine solely the amount of loss. If the two (2) appraisers disagree, then an umpire is chosen by the parties to resolve differences; if the appraisers cannot agree on an umpire then frequently a court is petitioned to appoint one.
The appraisal language in a policy typically reads as follows:
Appraisal. If you and we fail to agree on the actual cash value, amount of loss, or cost of repair or replacement, either can make a written demand for appraisal. Each will then select a competent, independent, appraiser and notify the other of the appraiser’s identity within 20 days of receipt of the written demand. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a district court of a judicial district where the loss occurred. The two appraisers will then set the amount of loss, stating separately the actual cash value and loss to each item.
If the appraisers fail to agree, they will submit their differences to the umpire. An itemized decision agreed to by any two of these three and filed with us will set the amount of loss. Such award shall be binding on you and us.
Each party will pay its own appraiser and bear the other expenses of the appraisal and umpire equally.
Appraisal is employed to determine the amount of loss, nothing more. Ideally, this clause can be invoked by either party when a determination on the amount of loss is all that is at issue. For example, you inherited your grandmother’s fine silver including utensils and plates. These items are stolen from your home. You claim the items taken are worth over $10,000. The insurer asserts the value is $1,000. Your homeowners’ insurer acknowledges coverage. The use of appraisal in this instance would be appropriate.
Appraisal does not apply in the third party liability context. In other words, a third party making a claim against an insured is not required to engage in the appraisal process with the third party’s insurer.
The Law Regarding Appraisal in Texas
A. The Basics
Appraisal is not arbitration. In Re Allstate Ins. Co., 85 S.W.3d 193, 195 (Tex. 2002); Scottish Union National Ins. Co. vs. Clancy, 71 Tex. 5, 8 S.W.3d 630, 631 (1988). In theory, appraisal is to be used to provide a simple, speedy, inexpensive, and fair method of determining the amount of loss only. Fire Ass’n vs. Ballard, 112 S.W.2d 532, 534 (Tex. Civ. App. – Waco 1938, no writ). If a lawsuit is filed and one party demands appraisal, abatement is not required. In Re Allstate Ins. Co. at 85 S.W.3d 193, 195 (Tex. 2002). If appraisal is properly invoked, carried out, and awarded, the amount of loss is binding on the insurer and the insured. Clancy, 8 S.W. at 631; Standard Fire Ins. Co. vs. Fraiman, 514 S.W.2d 343, 344-345 (Tex. Civ. App. – Houston [14th Dist.] 1974, no writ).
Appraisal clauses are inserted for the insurer’s benefit and may be waived. Ins. Service Co. vs. Brodie, 337 S.W.2d 414, 415 (Tex. Civ. App. – Fort Worth 1960, writ ref’d n.r.e.). The insurer “will not be permitted to use this clause oppressively, or in bad faith.” Id. at 417.
B. When Is Appraisal Appropriate?
Absent agreement between the parties, appraisal is only to be used to determine the amount of loss. Wells vs. American States Preferred Ins. Co., 919 S.W.2d 679, 684 (Tex. App. – Dallas 1996, writ denied). Appraisers and umpires have no authority or power in an appraisal to determine “questions of causation, coverage, or liability…” Id. If there is only one case and one issue that you take away from this article, it should be the Wells case and the fact that appraisal cannot be used to determine causation, coverage, or liability.
Appraisal is not appropriate where an insurer claims only partial damage while the insured claims total damage. Glen Fall Ins. Co. vs. Peters, 386 S.W.2d 529, 532 (Tex. 1965). ” Whether a building is an actual total loss…depends upon whether a reasonably prudent owner, uninsured, desiring to rebuild, would have used the remnant for restoring the building.” Id. at 531. This is more than a question of the amount of loss. Once the issue of total loss is decided, appraisal is proper. Id. at 532.
It is this writer’s experience that appraisers and insurers frequently misuse appraisal to determine causation and coverage. For example, appraisal is frequently invoked by insurers in roof damage claims. A dispute will arise over whether the roof was damaged by hail (a covered peril) or ordinary wear and tear (not covered). The appraisers and umpires will get on a roof in an appraisal and one appraiser may decide that hail caused the damage resulting in a total loss while the other appraiser will make a finding of no hail damage. The umpire will make his decision with one side or the other. In these circumstances, appraisal is clearly inappropriate because the appraisers and umpire are making a determination concerning causation and ultimately coverage. These determinations have no place in an appraisal.
Insurers wanting a quick resolution on a claim are sometimes guilty of using appraisal to determine causation and coverage. It is not uncommon for an adjuster to make a written demand for appraisal and state that the appraisers and umpire will decide the amount of hail damage and when the loss occurred. These statements invalidate the appraisal process. The appraisers and umpire all too often accommodate this sort of demand. The participants compliance with these terms in the appraisal does not validate the appraisal award or waive the insured’s subsequent objection. Wells, 919 S.W.2d at 685.
Some appraisers and/or umpires simply could care less what their duties are; they will make their findings as they see fit. It is this writer’s experience that the frequently used appraisers hired by an insurer who are professionals will make all sorts of findings which are contrary to the appraisal process. In one case, an appraiser who had signed an oath as an appraiser to only determine the amount of loss testified that appraisers have to decide what is hail and what is not hail and that if the memorandum of appraisal had the wrong date of loss, the appraiser should change same.
The dangers of appraisal are apparent.
C. The Demand For Appraisal and Memorandums of Appraisal
The appraisal language requires that a demand for appraisal must be in writing. The language also addresses certain time limits for naming appraisers and umpires, how that it is to be accomplished, who pays, and appointment of an umpire. In addition, insurers sometimes use a memorandum of appraisal for the appraisers and/or umpire to sign. The memorandum often includes the property damaged, the date of loss, the cause of the loss, and sometimes an oath for an appraiser to sign. The policy language though does not mandate any memorandum of appraisal.
While a memorandum of appraisal is not required, its use cannot be underestimated. A proper memorandum specifies the parameters of an appraisal including the appraiser’s duty of only affixing the amount of loss. The memorandum avoids waiver issues such as arguments that the parties agreed to allow the appraisers to determine causation, coverage, and/or liability. A memorandum would also include an oath for appraisers and umpires to be disinterested, impartial, and competent. In sum, a properly drafted memorandum eliminates wiggle room & subsequent misunderstandings. It also helps to avoid fraud and misrepresentation.
One would think an insurer would want these protections to eliminate uncertainty. Yet, one insurance defense lawyer has said form memorandums of appraisal may cause undue problems: “As a result, the adjuster is given this sound legal advice concerning such form: ‘Throw every one of them in the trash.'” Bowman, R., “An Overview of the Appraisal Clause in Texas” (October 21, 1996), p. 8. Perhaps the defense lawyer was concerned that the memorandum of appraisal form is often misused. Regardless, a properly drafted memorandum of appraisal protects on all parties.
D. Timeliness and Wavier In Demanding Appraisal
While the policy language dealing with appraisal does not address the timing of same, the Texas courts have addressed this issue. The demand for appraisal must be made within a reasonable time. American Fire Ins. Co. vs. Stuart, 38 S.W. 395 (Tex. Civ. App. – 1996, no writ) (58 day delay); Boston Ins. Co. vs. Kurley, 281 S.W. 275 (Tex. Civ. App. – Eastland 1926, no writ) (59 day delay). An insurer must move promptly to determine the amount of loss. Brodie, 337 S.W.2d at 417. The reasoning to take from these cases is that once an insurer or insured recognizes that a dispute over the amount of loss exists and is not capable of resolution, the proponent of appraisal should promptly demand appraisal and do so in writing.
Furthermore, the demand for appraisal must be invoked properly; that is, the demand must not only be timely but in substantial compliance with the terms of the policy. In Brodie, the insurer improperly appointed one individual and two companies as appraisers. Id. The Court found this appointment not in compliance. Id. Brodie filed suit some forty-two (42) days after the insurer demanded appraisal. Id. The demand for appraisal took place seventy-two (72) days after the adjuster had viewed and examined the loss. Id. at 416. The Brodie court agreed the demand for appraisal was untimely, waived, and not in compliance with the policy.
Again, it is this writer’s experience that insurers with repeated frequency do not seek appraisal in a timely manner. Appraisal is demanded often months after it is readily apparent that there is a disagreement on the amount of loss between the insurer and the insured. In other cases, the insurer demands appraisal after suit is filed. Texas authorities clearly support the argument in these circumstances that any right to appraisal has been waived for a lack of timeliness.
Waiver of the appraisal clause can occur in other ways. An acceptance of a proof of loss waives appraisal. Springfield Fire & Marine Ins. Co. vs. Cannon, 46 S.W. 375 (Tex. Civ. App. 1898, no writ); Stuart, 38 S.W. at 395. Likewise, retention of a proof of loss for unreasonable time without demanding appraisal waives this condition. Gulf Ins. Co. vs. Carroll, 330 S.W.2d 227, 231 (Tex. Civ. App. – Waco 1959, no writ); Kurley, supra; and American Central Ins. Co. vs. Heath, 29 Tex. 445, 69 S.W. 235 (Tex. Civ. App. – 1902, no writ). An insurer who demands appraisal and fails to participate any further has waived the condition. Northern Assurance Co. vs. Samuels, 33 S.W. 239 (Tex. Civ. App. – 1895, no writ). Where an invalid appraisal has occurred, no further appraisal is required. Security Ins. Co. vs. Kelley, 196 S.W.2d 874, 878 (Tex. Civ. App. – Amarillo 1917, writ ref’d); Wells, 919 S.W.2d at 686-687. And obviously, where the insurer flat out denies the claim, the appraisal clause is waived.
The prudent practitioner should evaluate all demands for appraisal on the basis on timeliness and waiver.
E. The Requirement of Competent and Disinterested Appraisers
If ever there is a more misused area of appraisal it is that of the requirement of a competent and disinterested appraiser. Insurers hire their pet appraisers over and over and see no problem with this practice. Insureds who are unrepresented and unfamiliar with the appraisal process are convinced by their roofers to hire them (that is those that will do the roofing work) to act as the insured’s appraiser. One side acts out of ignorance while the other acts out of manipulation. The result is usually disagreement with an umpire’s participation required.
The appraiser is not beholden to either party to the appraisal, not required to represent either party’s views or position, and not to be biased. Pennsylvania Fire Ins. Co. vs. W.T. Waggoner Estate, 39 S.W.2d 593, 594-595 (Tex. Comm’n App. 1931, no writ). An appraiser is not the selecting party’s expert or independent contractor.
The purpose of the clause is to secure a fair and impartial tribunal to settle the differences submitted to hem. In their selection it is not contemplated that they shall represent either party to the controversy or be a partisan in the cause or either, nor is an appraiser expected to sustain the views or to be further the interest of the party who may have named him. And this is true, not only with respect to estimating the amount of loss but also with reference to the selection of an umpire. The are to act in a quasi-judicial capacity and as a court selected by the parties free from all partiality and bias in favor of either party, so as to do equal justice between them. The tribunal, having been selected to act instead of the court and in the place of the court, must, like a court, be impartial and nonpartisan. For the term “dispecuniary interest, but requires the appraiser to be not biased or prejudiced.” And, if this provision of the policy was not carried out in this spirit and for this purpose, neither party is precluded from going to the courts, notwithstanding the agreement to submit their differences to the board of appraisers.
Id. quoting Delaware Underwriters vs. Brock, 109 Tex. 925, 211 S.W.2d 779, 780 (1919).
Disinterested means without bias and prejudice as well as without pecuniary interest. W.T. Waggoner Estate, 39 S.W.2d at 595. Consequently, those who repeatedly perform appraisals on behalf of same party certainly call into question issues of bias and prejudice. Thus far only one Texas case has directly addressed the bias and prejudice argument. In Holt vs. State Farm Lloyds, the insurer sought to enforce an appraisal award as an affirmative defense to Plaintiff’s breach of contract and extra-contractual claims. 1999 WL 261923 (N.D. Tex. 1999) at p. 1. At issue was whether Tim Marshall of Haag Engineering who received approximately one quarter of his income from State Farm appraisal work was biased and/or prejudiced. Id. at p. 4. The District Court declined to grant State Farm’s summary judgment given Plaintiff’s evidence, finding a fact issue for the jury existed. Id. Holt is the only Texas case specifically addressing this issue although the W.T. Waggoner Estate case includes a finding of a biased appraiser and umpire which invalidated an appraisal. W.T. Waggoner Estate, 39 S.W.2d 594.
The W.T. Waggoner Estate does hold that the inadequacy of an award may be considered as a factor in evaluating bias and prejudice of an appraiser or umpire. Id. at 595. This factor alone though is insufficient to establish bias and prejudice. Hennessey vs. Vanguard Ins. Co., 895 S.W.2d 794, 798-799 (Tex. App. – Amarillo 1995, writ denied). In May vs. Foremost Ins. Co., 627 S.W. 2d 230, 233-234 (Tex. App. – San Antonio 1981, no writ), the Court denied enforcement of an appraisal award based on the insurer’s summary judgment motion because of a continuing business relationship between the insurer and appraiser. The insurer was accused of acting in a concert with the appraiser in order to object to an umpire previously agreed upon. Id.
Other jurisdictions have different rules. In Michigan, an appraiser who has been asked to participate as an appraiser by the same Plaintiff on an ongoing basis is not evidence of bias. Northern Assurance Co. vs. Melinsky, 213 N.W. 70, 71 (Mich. 1927). In contrast, prior relationships may be considered in Pennsylvania. Land vs. State Farm Mut. Ins. Co., 600 A.2d 605, 607 (Pa. Super Ct. 1991). In California, an insurer must disclose any current dealings with an appraiser. Gibers vs. State Farm General Ins. Co., 45 Cal. Rptr. 2d 725, 728 (Ct. App. 1995).
The lesson regarding bias and prejudice seems obvious. The more appraisals and the more longstanding relationship between an appraiser and the selecting party, the more likely a finding of bias and prejudice will be found or at least create a fact issue to prevent enforcement of an appraisal award. This is fertile ground to challenge an appraisal determination.
Competency should not be overlooked. An engineer is likely not competent as an appraiser for a jewelry case and a roofer probably will not suffice as an expert on foundations. These choices seem obvious. Yet, do not assume every roofer or engineer is competent to evaluate replacement for a roof damaged by hail. A public adjuster by virtue of his profession is not competent to address all areas of home damage merely because he must now hold a license. The moral to this story is: carefully examine every appraiser’s competency (expertise) in his/her appointment and subsequent award. A Robinson type challenge should be available to the party objecting to competency. In a summary judgment proceeding to enforce an appraisal decision, the appraiser’s competency must be established. Competency is mandated by the policy.
F. Grounds for Avoiding An Appraisal Award
Prudent counsel should seek to prevent an improper claim from going to appraisal where issues of coverage, liability, and causation exist. This includes the use of injunctive relief. Undoing an appraisal is analogous to attempting to preserve privileged documents once they have already been produced. It is frequently an uphill battle with the obvious bias in preserving the appraisal award. Many trial courts view appraisal like mediated settlement agreements. With the necessary evidence, appraisal awards can be set aside.
Case law provides three (3) basis instances where an appraisal award may be disregarded: (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 contract. Providence Lloyds vs. Crystal City Indep. School Dist., 877 S.W. 872, 875 (Tex. App. – San Antonio 1994, no writ); Hennessey, 895 S.W.2d at 798. All of these exceptions overlap each other. Providence, 877 S.W.2d at 878. Significantly, every reasonable presumption will be indulged in favor of an appraisal award. Hennessey, 895 S.W.2d at 798. However, in a summary judgment proceeding this presumption will not override summary judgment principles: that is all reasonable inferences will be indulged in favor of the nonmovant and the evidence will be viewed in the light most favorable to the nonmovant. Mays, 627 S.W.2d at 233-234; Hennessey, 895 S.W.2d at 798.
Several cases in Texas have addressed an appraisal award made without authority. Unless the appraisers disagree about the amount of loss, an umpire has no authority to sign an appraisal award. Fisch vs. Transcontinental Ins. Co., 356 S.W.2d 186, 189-190 (Tex. Civ. App. – Houston 1962, writ ref’d n.r.e.) In Fisch, the record was silent as to whether there were any differences between the two (2) appraisers. Id. at 189. The Court of Appeals reversed a directed verdict in favor of the insurer because there was no evidence of any disagreement between the appraisers and therefore any award signed by the umpire was without authority. Id. at 189-190. ” An appraiser’s acts in excess of the authority conferred upon him by the appraisal agreement is not binding on the parties.” Id. at 190.
For those who frequently oppose appraisal, the Wells case provides an excellent example of appraisers/umpires acting outside their authority. The Wells made a claim for foundation damage with their insurer, American States. Wells, 919 S.W.2d at 681. Id. The insurer denied the claim, demanded appraisal, and then sued to enforce appraisal. Id. The Wells counterclaimed for breach of contract and other claims. Id. The trial court abated the counterclaims until appraisal was completed. Id. Two appraisers and an umpire determined the damage was $22,875.94 but one appraiser and an umpire determined the foundation damage was not caused by a plumbing leak. Id. The lack of a plumbing leak precluded coverage and the trial court entered summary judgment in favor of the insurer. Id. Before any lawsuit was filed, the parties disagreed on the cause of the foundation damage and consequently coverage. Id.
Setting aside the issues of waiver of appraisal by denying the claim and no evidence of any disagreement on amount by the appraisers, the Court of Appeals reversed summary judgment in favor of the insurer finding that the appraiser and umpire exceeded their authority in determining the amount of loss. “… we conclude further that the appraisal section of the policy, as a matter of law, did not authorize and empower the appraisal panel to determine that the plumbing leak did not cause the loss to the Wells’ property.” Id. at 685. “… we conclude that the one appraiser and the umpire exceeded their authority when they determined that the plumbing leak did not cause the Wells’ loss.” Id.
In Holt, the District Court declined to grant the insurer summary judgment on enforcement of an appraisal award. 1999 WL 261923 at p.3. There, one appraiser and an umpire entered in award for $565 for wind damage to Holt’s roof. Id. Yet, in the award was a statement: “No evidence of damaging hail in the form of splits of impacts that broke the wood shingles in the past nine (9) to twelve (12) months.” Id. This statement was “an expression of damage causation. It was made without authority because it was outside the scope of the appraisal process…” Id.
These two (2) cases illustrate an award made without authority. The appraisal award itself provided the necessary evidence to demonstrate lack of authority. However, there is no requirement that the evidence must come from the award itself though the mental processes of the appraisers and umpire are likely insufficient to establish this factor. Providence, 877 S.W.2d at 878-879.
Appraisals which are a result of fraud, accident, and mistake can also be set aside or be made unenforceable. The most frequently cited case for this category is Barnes vs. Western Alliance Ins. Co., 844 S.W.2d 264 (Tex. App. – Fort Worth 1992, writ dism’d by agr.) Barnes claimed roof hail damage to two (2) buildings he owned. Id. at 266. When Barnes and the insurer could not agree on the amount of loss, Barnes demanded appraisal. Id. at 267. An appraisal award signed by Barnes’ chosen appraiser and the umpire was entered for $402,798.00. Id. The insurer neither challenged the award nor paid it forcing Barnes to file suit to enforce the award. Id. Following a trial, the jury awarded $67,834.89 and found that the award should be set aside for fraud, accident, or mistake. Id.
In the words of the Court of Appeals, the record “reveals numerous instances in which Barnes admitted in open court that he had previously lied about the hail damage to the roof and about the repair costs.” Id. at 268-269. The evidence in addition to Barnes’ own testimony was overwhelming in substantiating fraud. Id. at 270.
While the insured was the culprit in Barnes, an insurer can be equally guilty of fraud, accident, and mistake which will invalidate an appraisal award. In Holt, the District Court raised issues concerning the use of an independent and unbiased appraiser where the appraiser performed a substantial number of appraisals in favor of the appointing insurer. Holt, 1999 WL 261923 at pp. 3-4. In May, the insurer and the appraiser colluded on the appointment of an umpire and the appointed umpire had a prior employment relationship with the insurer. May, 627 S.W.2d at 234. The Texas Supreme Court reversed summary judgment in favor of the insurer and found a fact issue existed to preclude enforcement of the appraisal award. Id.
As previously pointed out, a gross disparity in an award versus repair cost is not by itself a basis to invalidate an appraisal award. Hennessey, 895 S.W.2d at 798-799.
The last category given to set aside an appraisal award is for all practical purposes a combination of the first two and anything else not in compliance with the policy. Obviously, appraisers and umpires determining causation, liability, and coverage are not in compliance with the policy; the same is true for an award based on fraud, accident, or mistake. An example falling perhaps outside the first two (2) categories is an appraisal where a disagreement exists over a partial loss versus a total loss. See Peters, 386 S.W.2d at 532. In Hennessey, the Court of Appeals reversed a summary judgment in favor of an insurer based on an appraisal award where the memorandum of appraisal and policy language conflicted. 895 S.W.2d at 801. Other areas of noncompliance with the policy include no written demand for appraisal, delay in proceeding with appraisal, payment of appraisers and umpire, etc.
The avoidance of an appraisal award may be accomplished. In almost all of the cases cited, the avoidance took place at the Court of Appeals. Therefore, the better practice is to avoid problems and issues before the appraisal and prevent an improper appraisal from ever going forward.
F. Eight Simple Rules for Appraisal For The Insured
- Avoid appraisal if possible (some exceptions);
- Confirm the appraisal was not requested after a complete denial of the claim or long after a dispute was evident;
- Stop attempts for appraisal where issues of coverage, causation, and liability are evident;
- Obtain a written memorandum of appraisal setting out the basis for appraisal;
- Confirm the independence and competency of the appraisers and umpires;
- Have the appraisers and umpire sign an oath that they will carry out their duties fairly and impartially and in accordance with their duties (can make this part of the memorandum of appraisal);
- Make sure the record reflects any disagreement between the appraisers so the umpire’s involvement is warranted; and
- Look for statements on the appraisal award dealing with coverage, causation, and liability.
These rules should provide some guidance on the validity of an appraisal. Given the frequent misuse, misunderstanding, and misapplication of appraisal, it is this writer’s view that there are too many minefields to obtain a valid appraisal award. While setting aside the award may be desirable, it may be time consuming. The irony of course is that this provision is designed for a speedy and efficient resolution of a claim which theoretically both the insurer and insured seek. The result is often the opposite. Unfortunately, the appraisal clause is one of the most frequently abused and misused provisions in an insurance policy. Participants would do well to abide by appraisal rules and limitations in order to achieve a valid and enforceable appraisal.