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Jun 13, 2014 | Elliott Cooper/Micah Dortch

The Appraisal Process: Now We Understand

By: Elliott Cooper and Micah Dortch

     Appraisal is a process frequently found in many insurance policies but is most commonly used in property damage situations. The language will usually state that appraisal is mandatory when properly demanded by the insurer or insured. When properly executed, appraisal is binding on the parties as to the amount of loss only. However, many times appraisal is improperly invoked, employed, and/or carried out. 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.  Traditionally, appraisal is employed to determine the amount of loss and nothing more. The appraisal clause can be invoked by either party when a determination on the amount of loss is all that is at issue.  However, recent decisions have altered the scope of appraisal in certain circumstances.

     On July 3, 2009, the Supreme Court of Texas altered the law regarding the proper scope of an appraisal when it issued its opinion in State Farm Lloyds v. Johnson, 290 S.W.3d 886 (Tex. 2009).  In the Johnson case, an April, 2003 hailstorm in Plano, Texas damaged the roof of Becky Ann Johnson's home, and she filed a claim under her homeowner’s insurance policy with State Farm Lloyds.  An inspector hired by State Farm concluded that only the ridgeline of Johnson's roof was damaged and estimated repair costs at $499.50. The policy had a $1,477 deductible. Johnson's roofing contractor, however, said the entire roof needed to be replaced at a cost of more than $13,000.  Thus, a dispute arose over the extent of damages which were covered by the policy and those which were excluded from coverage.  Thereafter, Johnson demanded appraisal of the damage to the roof in accordance with the terms of her policy.  Refusing to participate in the appraisal, State Farm asserted that the dispute over the claim concerned causation and not the amount of loss.  Johnson filed suit seeking only a declaratory judgment compelling appraisal.  The trial court agreed with State Farm that no appraisal was warranted, but an appeals court reversed that decision.  The case was appealed to the Supreme Court of Texas, which affirmed the decision of the court of appeals holding that appraisal was proper under the circumstances presented.

     In arguing against appraisal, State Farm relied upon the long held principle that causation is not a proper issue for an appraisal.  Surprisingly, the Court rejected this argument, holding that when different types of damage occur to different items of property, and appraisers may have to decide the damage caused by each before the courts can decide liability.  The Court noted that appraisers consider causation in every case, at least as an initial matter. An appraisal is for damages caused by a specific occurrence, not every repair a home might need. 

     In support of its reasoning, the Court cited Lundstrom v. United Servs. Auto. Ass'n-CIC, 192 S.W.3d 78, 89 (Tex. App.--Houston [14th Dist.] 2006, pet. denied).  In Lundstrom, appraisers assessed $ 4,226.19 for damages due to water (a covered peril) but made no finding for damages due to mold (coverage was disputed). The Texas Court of Appeals rejected the argument that appraisal is barred whenever causation factors into the award. The court affirmed the water damage award and rendered mold damage moot by finding no coverage. In this context, if courts could decide the amount of damage caused by each peril, there would be no damage questions left for the appraisers. The same would be true in Johnson’s case, where the causation question involved separating loss due to a covered event from a property's pre-existing condition.

     Thus, in certain situations, the Supreme Court of Texas appears to carve out an exception to the general rule that an appraisal should not involve decisions regarding causation or coverage.  Even when certain elements of causation are at issue, the Johnson court holds that appraisal should still take place, and the results will be sorted out later in the courts.  Considering the long held precedent of limiting appraisal to the amount of loss, the Court’s opinion in Johnson clouded the waters of appraisal law in Texas.

     Recently, the Fifth Circuit issued an opinion in TMM Investments, Ltd. v. Ohio Casualty Insurance Company, wherein it held:

At the very least, Johnson arguably establishes that appraisal panels are within their rights when they consider whether damage was caused by a particular event or was instead the result of non-covered pre-existing perils like wear and tear. Indeed, this is the way many subsequent cases have interpreted Johnson’s guidance. See, e.g., MLCSV10, 866 F. Supp. 2d at 705 (“Lochridge’s causation evaluation involved no more than ‘separating loss due to a covered event from a property’s pre-existing condition.’” (quoting Johnson, 290 S.W.3d at 892)); Essex Ins. Co. v. Helton, 4:10-cv-2229, at *2 (S.D. Tex. Jan. 24, 2012) (slip op.) (“However, where there are different types of damage to different items of property, or where the property is not new and has suffered wear and tear, appraisers may have to decide causation in order to decide damages.”). To the extent the appraisers merely distinguished damage caused by pre-existing conditions from damage caused by the storm, they were acting within their authority.

     The court went on to note:

Second, it appears the district court misapplied the law even if its statements about the reasons for Butler’s and Boyd’s exclusions are accurate. Johnson stated, “[W]hen different causes are alleged for a single injury to property, causation is a liability question for the courts. . . . By contrast, when different types of damage occur to different items of property, appraisers may have to decide the damage caused by each before the courts can decide liability.” Johnson, 290 S.W.3d at 892. Putting aside the question of why this distinction should matter, even according to the facts as the district court found them, this is a case of the second variety because damage is alleged to have occurred to the roof membrane and the skylights. Additionally, the closeness of the facts in Johnson to those at bar—both involved roofs damaged in part by hailstorms—militates in favor of arriving at a holding similar to the one arrived at by the Johnson court. Coupled with the requirement that we indulge “every reasonable presumption to sustain an appraisal award,” Johnson appears to compel reversal of the district court’s order setting aside the award in this case.

     All in all, the TMM decision settles the question of whether an appraiser can make determinations of causation.  In fact, the TMM decision makes it clear that an appraiser is expected to and tasked with such a duty.