[authors: Steven J. Badger and Lindsey P. Bruning]
Local courts have recently seen a dramatic increase in the filing of hail damage actions. Many of these actions are not conventional lawsuits, but requests for the judicial appointment of an appraisal umpire. Considering that hail (and hail damage claims) is nothing new to North Texas, what has spawned the recent increase in these non-traditional filings?
To the insurance practitioner it is obvious—State Farm Lloyds v. Johnson 290 S.W.3d 886, 889-90 (Tex. 2009).
Prior to Johnson, appraisal was limited to a narrow range of disputes involving the “amount of loss.”Appraisal was not appropriate to determine questions of causation, coverage or liability. It was appropriate only when the carrier or policyholder agreed on the existence of covered damage, but disagreed on the cost to repair such damage.
Johnson changed everything. In Johnson, the Texas Supreme Court confirmed the historical view that appraisal was intended to address “damages” and not “liability,” but it muddied the water in distinguishing one from the other.
Typical disputes involve questions as to the existence of hail damage or the cause of such damage (either hail or pre-existing conditions). These questions historically fell outside the appraisal process and conventional litigation offered the parties’ only vehicle to resolve such issues.
The Johnson Court changed that, stating: if “appraisers can never allocate damages between covered and excluded perils . . . appraisals can never asses hail damage unless a roof is brand new . . . .” Johnson, 290 S.W.3d at 892-93. Seizing on this language, courts have generally interpreted Johnson as permitting appraisers to resolve questions of causation.
Virtually every disputed hail damage claim is now subject to appraisal. This has spawned a cottage industry in which public adjusters, contractors and “claim consultants” go door-to-door marketing their services to building owners in pursuit of hail damage claims. When the claim cannot be resolved through the claim adjustment process, it is put into appraisal.
A close examination of the recent rash of appraisal-related filings in local courts suggests many of the underlying hail claims are not being pursued by the policyholder, but by public adjusters, contractors and “claim consultants” acting on the policyholder’s behalf. A lawyer is hired to file the petition to appoint an umpire. But once the umpire is appointed, it is back to the non-judicial world of appraisal where no procedural rules or ethical codes of conduct exist, and only the terms of the insurance policy govern the proceeding.
This results in a process ripe for abuse. For example, if a contractor appoints his long-time friend as appraiser, all that is needed to ensure a favorable result is the appointment of a friendly umpire. Fortunately, insurance policies generally require that the appraisers and umpire be competent and disinterested, meaning they do not have any financial interest in the awards. This provides a remedy if an appraiser’s or umpire’s competency and/or partiality is subject to challenge.
However, once an appraisal award is issued, little can be done. Success in disputing an appraisal award is unlikely. Courts have repeatedly stated that “[e]very reasonable presumption will be indulged to sustain an appraisal award.”Appraisal awards may be challenged only where the award: (1) is made without authority; (2) results from fraud, accident, or mistake; or (3) was not made in substantial compliance with the policy.
So what does the future hold? Until the Texas Supreme Court recognizes the unintended consequences of Johnson and restricts appraisal to its traditional, pre-Johnson scope, it is likely the wave of appraisal-related filings will continue (not only in hail claims, but also hurricane/wind damage claims). Additionally, carriers should consider amending their policy language to clearly limit the appraisal process to the narrow situation in which the parties agree on the existence of covered damage, but disagree on the cost to repair such agreed damage.