A long time ago in a land far, far away, property insurers and their insureds recognized that not every insurance dispute necessitated the expense and headache of a full-blown lawsuit. The result of this recognition was the birth of a new creature, the appraisal provision. This new creature, inserted into property insurance policies, gave insurers and insureds an efficient and effective means of resolving a dispute over the amount of a covered loss when both parties agreed on all issues other than the cost to repair or replace the damaged property. Each side would appoint a knowledgeable person from the industry and the two of them would come up with an agreed cost. If they couldn’t agree, an umpire was brought in to resolve the issue. It was efficient and fair.

Although the appraisal provision can take many forms, a typical one provides:

If we and you disagree on the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser and notify the other of the appraiser selected within 20 days of such demand. The two appraisers will select an umpire. If they cannot agree within 15 days upon such umpire, either may request that selection be made by a judge of a court having jurisdiction. Each appraiser will state the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding as the amount of loss.

In the late 1800s, the appraisal provision made its way into Texas insurance policies. For well over a century, the appraisal provision performed as intended, and generally succeeded in keeping those disputes involving only the amount of a covered property loss off the dockets of Texas courts.

But in 2009, a decision from the Texas Supreme Court in State Farm Lloyds v. Johnson blurred the previous clear boundaries of the appraisal provision’s territory.[1] Confusion ensued. The dockets of Texas courts exploded with disputes as to the proper boundaries of the appraisal provision’s reach.

Compelled to follow Johnson’s unclear directives, other Texas courts continued to distort the boundaries of the appraisal provision. Eventually, it appeared that perhaps every conceivable dispute would be within the reach of the appraisal provision.

The facts the Texas Supreme Court examined in Johnson are unexceptional. After a hailstorm in her town, Becky Ann Johnson filed a claim under her homeowner’s insurance policy for damage to her roof. State Farm’s inspector concluded that the hail had only damaged the ridgeline of her roof and estimated repair costs at $499.50.

Johnson’s roofing contractor disagreed and concluded the entire roof required replacement at a cost of more than $13,000. As a result of the disagreement, Johnson demanded appraisal under a provision similar to the one quoted above.

State Farm refused to participate in the appraisal, asserting that the parties’ dispute involved the cause of the damage — hail or not hail, and not simply the “amount of loss” as stated in the appraisal provision. Johnson filed a declaratory judgment action asking the court to compel appraisal. The trial court agreed with State Farm that appraisal was not appropriate. The court of appeals reversed, holding that appraisal was required.

In affirming the court of appeals’ order compelling State Farm to participate in appraisal, the Texas Supreme Court held that in determining the “amount of loss,” appraisers can allocate damage between covered and excluded causes of loss.[2]

Other courts interpreting Texas law have since expanded Johnson to specifically hold that appraisers can resolve questions of causation.[3]

Accordingly, since Johnson, appraisals in Texas have not been limited to simply ascertaining the dollar amount of an agreed-upon covered claim. Instead, appraisals have involved determinations by the appraisers and umpire of whether damage was caused by a covered or a noncovered peril, as well as various other disputes traditionally considered to be coverage and causation questions outside the purview of the appraisal provision.

However, a recent decision by the Northern District of Texas has recognized that not all disputes are within the broad boundaries created by Johnson — a positive first step in returning the appraisal provision to its intended purpose. In December 2013, the Northern District of Texas issued an opinion in Devonshire Real Estate & Asset Management LP v. American Insurance Co.[4] Like Johnson and its progeny, the issue in Devonshire focused on the phrase “amount of loss” in a policy’s appraisal provision. And as in Johnson, Devonshire began with a hailstorm.

The insured and insurer in Devonshire disputed the amount the insurer owed for hail damage to the insured’s apartment complex. The insured sued and the insurer demanded appraisal. Appraisal progressed with each side selecting an appraiser. The two appraisers agreed to an appraisal award with specific lines for replacement cost value (RCV) and actual cash value (ACV).

The appraisal award also included an amount for tax, overhead and profit, but clarified that the award was “less prior payments.” Following the signing of the appraisal award, the insured’s appraiser submitted a letter to the court that was filed as a notice of appraisal, which calculated prior amounts paid for gutters and carports on a replacement cost value and an actual cash value basis.

The insurer’s appraiser submitted a subsequent letter, disputing the insured’s appraiser’s calculations, stating that the calculation did not deduct taxes, overhead and profit. Additional documents were filed by the appraisers to clarify their differences with regard to the ultimate amount the insurer owed.

The issue before the court was whether the appraisers, in submitting their multiple documents, had fulfilled their duties under the appraisal clause. The insurer argued that in order to state the “amount of loss” as required under the policy, the appraisers must calculate the appropriate amount of deductions to apply to the total loss award and provide the “amount of loss payable.”

If the appraisers cannot agree on the “amount of loss payable,” the dispute should be submitted to the umpire. The insured, on the other hand, argued that the appraisers fulfilled their duties when they calculated the total amount of loss (upon which they agreed) and that they were not required to determine the net loss or “amount of loss payable.” The insured further argued that because the appraisers fulfilled their duties, the appraisal award was complete and binding and should not be disturbed by the court.

In examining this issue, the court began as follows: “In order to determine the proper scope of the appraisers’ duties, the court looks to the language of the insurance contract.” (Johnson, on the other hand, began its discussion with “A Brief History of Appraisal Clauses,” beginning with a decision from 1888.)

The Devonshire court explained that the appraisal provision at issue stated that each appraiser would determine the “amount of loss,” not the “amount of net loss.” Based on the plain meaning of the language alone, the court held that the appraisers were required to ascertain the “total sum of financial detriment caused to the property and nothing more.” The policy did not provide them with the obligation or authority to determine the net loss owed by the insurer.

The court even specifically recognized that its ruling was likely not the most efficient, stating:

It would likely be more efficient for the appraisers here to agree to the amount of prior payments, given that the parties agree that certain prior payments should be deducted. ... yet the contract’s language only vests the appraisers with the responsibility of stating the “amount of loss,” and the appraisers accomplished this once they determined the total financial detriment that Devonshire suffered ...

Although Devonshire did not involve the question of whether causation could be decided by appraisal and the court never openly questioned the holding of Johnson in its opinion, the court’s focus on examining solely the rights bestowed to appraisers by the policy language, and the court’s statement that the job was complete when the appraisers “determined the total financial detriment” sound similar to the arguments that have been used against the expansion of the scope of appraisal.

Only time will tell whether the Devonshire opinion is an outlier in the tale of the Texas appraisal provision or whether it is the beginning of the end of the appraisal provision’s conquest beyond the scope provided to it by the policy language. Regardless, Devonshire suggests there may be a few more pages of the tale left to tell.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 290 S.W.3d 886, 889-90 (Tex. 2009).

[2] Id. at 893.

[3] TTM Investments, Ltd. v. Ohio Cas. Ins Co., 730 F.3d 466, 475 (5th Cir. 2013); MLCSV10 v. Stateside Enters., Inc., 866 F. Supp.2d 691 (S.D. Tex. 2012).

[4] CA No. 3:12-CV-2199, 2013 WL 6814731 (N.D. Tex. Dec. 26, 2013).