In most jurisdictions, underlying coverage issues must be resolved prior to invoking appraisal in a first-party property claim. The question of what constitutes a coverage issue (typically reserved for a court’s judicial determination) and what constitutes a damage issue (appropriate for an appraisal panel’s consideration), however, is not always readily apparent. A routine subject of this particular appraisal debate is whether causation is a coverage or a damages inquiry, and recent decisions under Florida, Georgia and Texas law are evident of two things: (1) the determination of the issue is, in large part, factually dependent; but (2) the debate is far from over.
In a recent appellate decision, Citizens Prop. Ins. Corp. v. Denetrescu, 2014 WL 1225124, — So.3d — (Fla. 4th DCA, March 26, 2014), Florida’s Fourth District Court of Appeal found that causation is a coverage question and only for the court’s consideration when the underlying facts include a complete coverage denial by the insurer. There, the insurer issued such a denial for wind and rain damage to a roof and the resulting contents damage based on policy exclusions for wear and tear, neglect, and pre-existing damage, as well as on the policyholder’s non-compliance with post-loss duties under the contract of insurance. The policyholder filed a lawsuit challenging the insurer’s denial and filed a motion to compel appraisal during the course of discovery. In the lower court’s order granting the policyholder’s motion, the court included the its coverage determination – namely that “water leaks are covered under the policy” and that the insurer’s “affirmative defenses dealing with specific exclusions under the policy are appropriate for appraisal as the defenses deal with the causation of the damages.”
On appeal, the District Court of Appeal completely rejected the lower court’s use of an order compelling an appraisal as a vehicle to make coverage determinations, finding that it was procedurally improper and violated due process. The court was clear that, under Florida law, such coverage determinations are only appropriate when based on competent evidence reviewed through either summary adjudication or at trial. Additionally, and in light of the insurer’s complete denial of the damage at issue, the District Court of Appeal held that a judicial determination on all coverage issues, including causation, must first be made by the court. In reaching its ruling, the court cited a Florida Supreme Court decision, Johnson v. National Mut. Ins. Co., 828 So.2d 1021, 1022 (Fla. 2002), which held that “causation is a coverage question for the court when an insurer wholly denies that there is a covered loss and an amount-of-loss question for the appraisal panel when an insurer admits that there is covered loss, the amount of which is disputed.”
In Texas, the United States District Court for the Southern District also addressed whether causation could fall within the permissible scope of appraisal under in its January 30, 2014 decision in United Neurology, P.A. v. Hartford Lloyd’s Ins. Co., 2014 WL 345666, — F. Supp.2d — (S.D. Tex. January 30, 2014) concluding that causation was within the appraisal panel’s authority where a partial denial of coverage was at issue. The United Neurology case arose from a policyholder’s claim for a complete roofing system replacement and payment for interior damage and loss of income associated with two rental properties following Hurricane Ike. Due to the insurer’s finding that a substantial portion of the damage was not caused by the hurricane – but rather from expressly excluded causes of loss, including pre-existing wear and tear and post-loss neglect – the insurer issued a partial denial and invoked the appraisal clause.
During the appraisal, the umpire indicated that the extent of damages due to the hurricane versus those due to lack of mitigation would be considered and the policyholder’s designated appraiser objected. The policyholder’s appraiser further requested that the umpire at least distinguish the amount of damages attributable to mitigation so that the award could still be upheld even if the court later determined that failure to mitigate was a liability issue and therefore outside of panel’s authority. The appraisal award that was issued did not identify the amount of reduction for the policyholder’s failure to mitigate, and the policyholder moved to set aside the award on the grounds that the umpire and the insurer’s appraiser had exceeded their authority in considering mitigation under Texas law and in violation of the insurance policy’s appraisal provision.
The district court disagreed with the policyholder, drawing a distinction between a policyholder’s “reasonable mitigation” under the doctrine of mitigation of damages (a liability/coverage issue) and the defense of “failure to mitigate” (as an express exclusion for “neglect” under the policy’s special property coverage form). Because the policy expressly excluded from coverage pre-existing wear and tear and post-loss neglect, the court found that the appraisal panel could consider causation of the damage in order to segregate uncovered damage (that due to pre-existing wear and tear or post-loss neglect) to determine the amount of covered loss (due to an actual covered loss event). See id. at * 9, citing TMM Investments, Ltd. v. Ohio Casualty Ins. Co., 730 F.3d 466 (5th Cir. 2013). The court expressly rejected the policyholder’s attempt to transmogrify the policy’s “neglect” exclusion into a liability argument under the doctrine of mitigation of damages.
Interestingly, the United Neurology analysis under Texas law and the Denetrescu analysis under Florida law both involve express policy exclusions for damage from wear and tear and neglect. Nevertheless, the United Neurology Texas-based analysis determined that the causation issues implicated from those exclusions were appropriate for appraisal, while the Denetrescu Florida-based analysis found the causation issues only appropriate for the court. Based on the Denetrescu court’s reliance on the Florida Supreme Court case, Johnson v. National Mut. Ins. Co., however, it is possible that Florida law could align with the Texas analysis in United Neurology if the underlying facts in the Florida case involved a partial denial rather than a complete denial of coverage. See, e.g., Johnson v. National Mut. Ins. Co., 828 So.2d at 1022 (holding that causation is a liability/court question when an insurer wholly denies coverage and an amount-of-loss/appraisal question when an insurer admits that there is covered loss, the amount of which is disputed.)
Finally, the Georgia Court of Appeals recently addressed the scope of appraisal under Georgia law in Lam v. Allstate Indemnity Co., 2014 WL 1228118, — S.E.2d — (Ga. App. March 26, 2014). There, the policyholder filed suit seeking to enforce the policy’s appraisal provision against the insurer where he sought a complete roof replacement and the insurer determined that the damage was only to four shingles with limited interior ceiling damage. Though the insurer did not deny coverage and admitted that the four damaged shingles and the damaged ceiling were all covered by the policy, the trial court dismissed the case for failure to state a claim. The Georgia Court of Appeals affirmed, finding that, although the insurer conceded there was covered wind damage and agreed to pay for it, the parties could not agree as to how much of the roof was damaged. Ultimately, therefore, the court concluded that the dispute was one of coverage and was not a proper basis for appraisal.
Unlike the United Neurology case, this Lam decision notes that the insurer did not deny coverage or provide additional any explanation of its position. Rather than denying coverage (partial or otherwise), the insurer only advised the policyholder that the appraisal provision was inapplicable due to the difference in estimates relating to coverage instead of pricing. In light of the United Neurology analysis, however, it remains questionable whether the application of Texas law would result in the same conclusion as that reached in Lam under Georgia law. Notably, one of the main Texas cases on which the United Neurology court ultimately permitted the appraisal panel to address causation issues there was State Farm Lloyds v. Johnson, 290 S.W.3d 886 (Tex. 2009), which coincidentally involved similar facts to those at issue in Lam – namely that the policyholder and the insurer disagreed as to the number of damaged shingles in need of replacement. Unlike the Lam decision, the Texas Supreme Court opined in State Farm Lloyd’s that the dispute about the number of damaged shingles fell within the scope of appraisal because the amount of loss depends on both the price and the number of shingles.
These recent decisions exemplify the varying and sometimes conflicting jurisdictional views with respect to appraisal. As a result, and prior to proceeding with appraisal, parties will benefit from: (1) confirming the applicable jurisdiction’s permissible scope of appraisal; (2) determining whether the insurer may potentially waive certain rights and defenses by submitting to appraisal, including, but not limited to, those rights and defenses related to its coverage analysis; and (3) pinning down whether policyholder claims, including ones for bad faith or extra-contractual damages, can survive the appraisal.