Ever since the Texas Supreme Court drastically broadened the scope of appraisal in State Farm Lloyds v. Johnson, insurance companies providing coverage in Texas have likely wondered if continuing to include an appraisal provision in their policy is good practice. Frankly, most in the insurance industry are starting to question whether appraisal is a valuable tool or a process run amok. Recently, however, a Texas federal court reminded us why it remains important to make this form of alternative dispute resolution available in property policies.
In Scalise v. Allstate Texas Lloyds, the insured owned a home in McAllen, Texas. Allstate provided coverage under a homeowners’ policy. After the insured made a claim for the March 29, 2012, storm event, an Allstate adjuster timely inspected the property and determined the covered damage totaled $551.79. After subtracting the applicable $500 deductible, Allstate tendered a check in the amount of $51.79 no later than April 18, 2012. The insured did not agree with Allstate’s amount of loss assessment and on July 20, 2012, the insured requested appraisal under the policy through counsel.
The policy contained the following appraisal provision:
Appraisal. If you and we fail to agree on the actual 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 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 you or we request that they do so, the appraisers will also set:
a. the full replacement cost of the dwelling;
b. the full replacement cost of any other building upon which loss is claimed; and
c. the full cost of repair or replacement of loss to such building, without deduction for depreciation.
If the appraisers failed 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 the loss. Such award will be binding on you and us.
Each party will pay its own appraiser and bear the other expenses of the appraisal and umpire equally.
Pursuant to these policy terms, each party selected an appraiser and the two appraisers were able to agree on an umpire with court involvement. After inspecting the property, the insured’s appraiser provided a damage estimate totaling $56,881.88 and the carrier’s appraiser calculated the damage at $437.76, an amount the insured noted was close to Allstate’s original estimate.
On March 11, 2013, the insured attempted to withdraw from the appraisal on the basis that Allstate failed to select a “competent and independent” appraiser, in that the appraiser for the carrier “completely failed to include costs for repair or replacement of obvious covered damage” in his estimate. The insured subsequently filed suit on March 19, 2013, for breach of contract, violations of the Texas Insurance Code and bad faith. Obviously the insured believed the appraisal was not going his way and for good reason. On April 10, 2013, the carrier’s appraiser and the umpire rendered an appraisal award totaling $9,795.30. Thereafter, Allstate subtracted its prior payment and the applicable deductible from the award and forwarded the balance to the insured’s counsel on April 30, 2013.
The insured continued to challenge the appraisal process and the award, thus the lawsuit also continued. However, Allstate filed for summary judgment asking the federal court to dismiss all claims, including claims for breach of contract claim, violations of the Texas prompt payment statute, common law bad faith and statutory bad faith. The summary judgment motion was based entirely on the timely payment of the appraisal award.
The first issue for the federal court was whether a party can withdraw from the appraisal process before an appraisal award is issued. The insured argued that the carrier’s appraiser was neither “competent” nor “independent” in large part because of his “low-ball” estimate, which provided a valid reason for the insured to both withdraw from the appraisal and invalidate the appraisal award.
The federal court did not agree. The federal court first noted that the purpose of an appraisal is to determine the “amount of loss” or the damages. In this case, the insured provided no authority suggesting a party can opt out of appraisal simply because it does not agree with the other appraiser’s estimate:
If a plaintiff were allowed to invoke appraisal, await the estimates, and then determine whether to risk an unfavorable award or commence litigation, the entire purpose of an appraisal — to resolve the parties’ dispute over the amount of loss for a covered claim without incurring the time and expense of litigation — would be vitiated.
Finding the award valid, and that a party is unable to withdraw from appraisal at the eleventh hour, the federal court turned to the insured’s causes of action.
The federal court determined that the timely payment of an appraisal award negates a breach of contract claim as a matter of law. Specifically, the federal court found that the appraisal process provides an alternative means for determining whether damages have been undervalued. Thus, an insurance carrier does not breach the insurance contract if it pays all damages determined by the appraisal, as was done in this case. This is true even if the final appraisal award is much higher than the carrier’s initial payment. The federal court also ruled that all extracontractual claims were precluded. The insured claimed that prompt payment penalties under chapter 542, including attorneys’ fees, were due because the appraisal award was higher than Allstate’s initial payment. The federal court found that “an insurer commits no prompt payment violation when it submits to the delay inherent in the contractual appraisal process ... before paying all covered damages determined by that process” and makes payment of the award within sixty days of the umpire’s decision. Again, this is regardless of whether the final appraisal award is higher than the carrier’s initial payment.
The insured’s bad faith claims, both statutory and common law, were also dismissed by the federal court. In most circumstances, an insured may not prevail on a bad faith claim without first showing that the carrier breached the contract. Because the parties submitted the dispute for resolution through appraisal, Allstate’s payment of all covered damages found in the award ended the potential breach of contract dispute and any bad faith claim arising from it. The federal court did note that there are two exceptions to this rule:
1. Where an insurance carrier commits an “extreme act” that would cause injury independent of the policy claim; or
2. Where an insurance carrier fails to timely investigate a claim.
However, the federal court determined that Allstate’s alleged conduct did not fall into either exception, and specifically found that Allstate’s investigation and adjustment very timely. The federal court also noted that no Texas court has ever found a recovery available for an insurer’s “extreme act” under this exception. And with that, not one of the insured’s causes of action survived summary judgment. The causes of action did not survive because the carrier made prompt payment of the final appraisal award, an award that was almost 20 times the carrier’s initial adjustment.
Finally, it should be noted that the federal court’s initial statement in the Scalise opinion was that this case is one of many insurance claim disputes arising from a hail storm that hit Hildago County, Texas, and surrounding areas on March 29, 2012. It is a fact that there has been a dramatic increase in appraisals and litigation arising from Texas hail storms. Insurance carriers should expect that trend to continue.
The real question is whether insurance carriers participating in the Texas market still believe appraisal is a valuable tool or a process run amok. Protection from claims for breach of contract, prompt payment statute violations and bad faith certainly suggests appraisal still may be a valuable tool.
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.
 290 S.W.3d 886 (Tex. 2009).
 Civil Action No. 7:13-CV-178, 2013 WL 6835248 (S.D. Tex. Dec. 20, 2013).
 Id. at *2.
 Id. at *3.
 Id. at *4. See also Breshears v. State Farm Lloyds, 155 S.W.3d 340, 344 (Tex. App.—Corpus Christi 2004, pet. denied); Blum’s Furniture Co., Inc. v. Certain Underwriters at Lloyd’s London, 459 Fed. Appx. 366, 368 (5th Cir. 2012).
 Id. at *6. See also Tex. Ins. Code § 542.058.
 Id. at *7.
 Id. (citing Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995).
 Id. at *1. Over the last couple years, the number of hail damage lawsuits that are filed across Texas has been staggering. This is especially true for recent storms that occurred in McAllen, Amarillo and Dallas. Very telling is the fact that a large number of the lawsuits in those areas are filed by attorneys from Houston and San Antonio, attorneys that previously worked on Hurricane Ike litigation. Our firm suspects that most of the cases are going to the out-of-town attorneys as referrals from roofing contractors and public adjusters that chase storms. See Steven J. Badger, "What The Hail Is Going On In Texas?," Law360, December 19, 2013.