Daily Development for Monday, March 1, 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

INSURANCE; PROPERTY INSURANCE;  APPRAISAL CLAUSE: When appraisal clauses in property insurance policies provide for a right of the insured to demand an appraisal of the "amount of loss," Texas courts will generally enforce such provisions by requiring insurance companies to participate in the appraisal process, even if the appraiser must make some causation determination.

State Farm Lloyds v. Johnson, 290 S.W.3d 886 (Tex. 2009).

Johnson's roof was damaged by a hailstorm, prompting Johnson to file a claim under her homeowners' insurance policy with State Farm Lloyds ("State Farm"). Johnson's contractor concluded that the entire roof needed to be repaired, at a cost of $13,000. State Farm's inspector concluded that hail had damaged only the ridgeline of her roof, and estimated repair costs at an amount less than Johnson's $1,477 deductible.

To settle the difference, Johnson demanded an appraisal of the "amount of loss" under her policy's provision that either party "can demand that the amount of loss be set by appraisal" upon written demand. State Farm refused to participate in the appraisal, asserting that the dispute concerned causation rather than the "amount of loss," and appraisers cannot decide causation issues. Johnson filed suit seeking a declaratory judgment compelling an appraisal.

The trial court held in favor of State Farm, and the court of appeals reversed. The Texas Supreme Court took the case to address, as a matter of first impression, the scope of such appraisal clauses and the meaning of "amount of loss."

The court began by referring to its prior cases in which appraisal clauses have been discussed in some form (typically in the context of waiver or enforceability of the appraisal clause, rather than the scope of appraisal), concluding that while "[m]ost appraisal clauses do not define the scope of appraisal in detail" and "the line between liability and damage questions may not always be clear," the scope of appraisal is generally to determine damages owed under the policy rather than liability of the insurance company. With respect to whether an appraisal can establish causation, the court addressed several issues: (1) whether the subject dispute was about causation, (2) whether causation disputes are questions of liability or damages, and (3) when appraisals should be reviewed.

Despite State Farm's contention that the only shingles damaged on Johnson's roof were those on the ridge of her roof, and that such shingles were the only shingles damaged by hail (i.e., the causation of any damage covered by the policy), the court held that it could not determine that the parties' dispute was about causation. The record lacked evidence that the roof was damaged by anything else, and nothing established that the parties' dispute was solely about how much of the roof was damaged rather than how much needed replacement.

Nevertheless, even if the dispute involved causation, this fact would not prove whether the case was a question of liability (not subject to appraisal) or damages (subject to appraisal). The court noted that while causation relates to both liability and damages because it is the connection between them, "in actual cases, causation usually falls into one category or the other." When different causes are alleged for a single injury to property, causation is a liability question for the courts. However, when different types of damage occur to different items of property, appraisers may have to decide the damage caused by each before courts can decide liability, or when the causation question involved separating loss due to a covered event from a pre-existing condition of the property. In those cases, appraisers must always consider causation as part of their assessment, particularly because "setting the 'amount of loss' requires appraisers to decide between damages for which coverag
e is claimed from damages caused by everything else." In concluding that State Farm could not avoid participating in the appraisal process because there might be a causation question exceeding the scope of the appraisal, the court noted that its holding does not mean appraisers can rewrite policies: "whether appraisers have gone beyond the damage questions entrusted to them will depend on the nature of the damage, the possible causes, the parties' dispute, and the structure of the appraisal award."

As further support for its holding that the appraisal in question should not initially be prohibited, the court highlighted the unusual nature of the case (in that typical appraisal cases involve challenges to appraisals after they have taken place), noting that this fact "makes a big difference" for several reasons: (1) allowing litigation about the scope of appraisal before the same takes place would encourage more litigation; (2) most appraisals can be structured in a way that decides amount of loss without determining liability; and (3) the scarcity of court cases involving the scope of appraisals suggests that appraisals resolve disputes, and therefore the subject dispute may be similarly resolved. Finally, noting that the appraisal could always be disregarded later, the court concluded that "unless the 'amount of loss' will never be needed . . ., appraisals should generally go forward without preemptive intervention by the courts."

Comment: Although this case came out for the insured, the rule set forth certainly is a double edged sword, and might give the insurer to duck into appraisal and avoid more expensive and less predicable litigation in tough cases. 

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