TX Supreme Court: Insurers Can Compel Appraisal Even During Coverage Disputes
The Texas Supreme Court in In re ACE American Insurance Company reaffirmed that an insurer is entitled to compel appraisal, regardless of coverage disputes that may be outside the appraisal’s scope. The ruling reinforces a clear path for insurers to require appraisal when there is a disagreement over the amount of loss, even when the parties also dispute coverage.
In re ACE involved a claim for water damage resulting from a burst fire-suppression system at the insured’s food-distribution warehouse in Dallas, Texas. The insurers inspected the loss and issued undisputed payments, but the insured asserted more was owed under the policy.
The insurers invoked appraisal, asserting the parties had reached an impasse with respect to the scope of damage and costs, and the insured refused, contending appraisal was premature and unwarranted. After about eighteen months of unsuccessful negotiations, the insurers reiterated their appraisal demand. When the insured refused again, the insurers filed suit to compel the appraisal.
The trial court denied the insurers’ motion to compel appraisal, and the insurers sought relief from the Court of Appeals for the Fifth District of Texas at Dallas. The appellate court also refused to compel the appraisal without written opinion. The insurers then filed a petition for writ of mandamus with the Texas Supreme Court. The Court granted the petition, ordering the trial court to grant the insurers’ motion to compel appraisal.
Before the Texas Supreme Court, the insured presented three arguments why appraisal was inappropriate. The Court rejected each.
1. The insured argued the parties’ disagreement centered on threshold issues of coverage, causation, and the “existence” of damage, not the amount of loss.
The Court held that the parties’ dispute was “at least in part” about the amount of loss, and potential coverage disputes do not defeat a contractual right to appraisal. This is consistent with longstanding precedent that the appraisal would leave questions of coverage, causation, and the insurers’ liability under the policy unanswered. Those questions are for the court to decide.
The insurers paid approximately $1.2 million for mold damage and refused to pay more, contending that another, separate policy also provided coverage for mold. But the insured claimed an additional $10 million was owed for mold. Yet, the Court noted there was no dispute that the damage was caused by anything other than the pipe leak, a covered peril, and regardless of other insurance, the disagreement in value demonstrated an amount of loss dispute.
The Court held that the appraisers may set the amount of mold damage, and the trial court could then resolve any dispute over allocation of that amount. Similarly, the Court rejected that appraisal was inappropriate for a dispute regarding building code compliance, as appraisal would set the scope and costs of needed repairs, and a court would determine coverage.
2. The insured argued there was no genuine disagreement over the amount of loss because the insurers had not provided a definitive position on that issue.
The Court found that the insurers had been consistent in their contention that they had paid all they believed the insured was owed under the policy. The fact the insurers’ valuation of the claim had changed over time was inconsequential, because the insurers consistently viewed the amount of loss was less than the insured’s claim.
3. The insured argued that since the insurers’ “bad-faith, ‘coverage-avoiding conduct’” constituted a material breach of the policy, the insured was no longer required to agree to appraisal under the policy.
The Texas Supreme Court, however, had only identified two specific and limited exceptions to the enforcement of an appraisal provision, illegality and waiver. Neither was present here. Nor did the Court need to address any possible grounds for setting aside the award, as the appraisal had not yet occurred. The Court rejected the insured’s argument because it would defeat appraisal provisions in almost every instance by allowing an insured to avoid appraisal simply by alleging a dispute over coverage or claims handling.
In sum, to be entitled to an appraisal to determine the amount of loss, the policy’s appraisal clause required a disagreement over the amount of loss, and nothing more. Disputes over coverage, overlapping insurance policies, applicable sub-limits, entitlement to code compliance costs, and purported bad-faith claims handling, were all outside the scope of the appraisal. But that was inconsequential to the Court’s holding, because the policy only required an amount-of-loss dispute, and the trial court could resolve those issues.
What does this ruling mean for insurers and insureds in Texas?
In re ACE reaffirms longstanding Texas precedent enshrining the enforceability of appraisal provisions in insurance policies. The Texas Supreme Court again found that the appraisal clause should be enforced absent illegality and waiver, as appraisal generally provides a cost- and time-efficient means of alternative dispute resolution.
Although appraisal does not establish coverage or liability, either party may generally request an appraisal so long as there is some amount of loss dispute. While amount of loss may only be a tertiary issue to the overall dispute, unless the amount of loss would never be important to the case, the Texas Supreme Court commands appraisal to move forward.
Requiring appraisal provides the benefit of resolving at least some part of the dispute. Importantly, under current Texas law, when the insurer pays the full value of the appraisal award, it forecloses any breach of contract claim and, by extinguishing damages, likewise eliminates bad faith claims under the Texas Insurance Code.
However, where the dispute is largely over coverage, requiring an appraisal may not be the best option. If there is a dispositive coverage question, appraisal could be costly and inefficient. If the policy excludes water damage, appraising the amount of water damage would provide little to no benefit. Although disputes are rarely this straightforward, compelling appraisal in certain disputes where the amount of loss is not the primary issue may result in largely unnecessary costs with minimal benefit. Potential inefficiency, however, is not a basis to avoid a valid demand for appraisal. Under the Texas Supreme Court’s decision in In re ACE, a disagreement over the amount of loss is all that is required to compel appraisal.
Please contact Julien C. Petit, William R. de los Santos or any member of the Phelps insurance team if you have questions or need advice or guidance.
