Texas has perhaps the most substantive body of law on insurance appraisal. In recent years, Texas courts have issued a plethora of appraisal-related decisions covering a vast assortment of topics. Some provide clarity on the appraisal process while others muddy the waters further. One thing is clear across the board — Texas is pro-appraisal.
As a matter of public policy, Texas courts have long encouraged appraisal as an alternative to litigation. But, at what point does the benefit of avoiding litigation dissipate to the point that appraisal is no longer useful?
Waiver Of The Right To Appraisal
Under Texas law, “[o]nce the parties have reached an impasse — that is, a mutual understanding that neither will negotiate further — appraisal must be invoked within a reasonable time.” Typically, such an impasse is clear when a party receives notice of the other’s intention to sue, if not before.
Waiver of the right to appraisal requires intent — either an intentional relinquishment of the right to appraisal or intentional conduct inconsistent with claiming the right to appraisal — and a showing of prejudice. Although the failure to invoke appraisal within a reasonable time may be inconsistent with claiming the right to appraisal, it “is not enough to find waiver” without a showing that it prejudiced the other party. The question then becomes, what does it take to show prejudice?
In re Universal Underwriters of Texas Insurance Co.
In 2011, the Texas Supreme Court addressed waiver of the right to appraisal in In re Universal Underwriters of Texas Insurance Co. In that case, the court rejected the argument that Universal Underwriters waived its right to appraisal by not invoking until one month after suit was filed, finding that the appraisal demand was within a reasonable time after the parties reached an impasse. The court then rejected the insured’s argument that waiver of an appraisal clause did not require a showing of prejudice.
The court explained that there are different ways to demonstrate that a party’s legal rights or financial position have been negatively impacted. Prejudice may include inherent unfairness in terms of delay, expense, or damage to a party’s legal position, purposefully and unjustifiably manipulating the exercise of arbitral rights to gain an unfair advantage over the opposing party, or causing an opposing party to incur expenses as a result of dilatory behavior.
Despite recognizing potential ways in which a party could be prejudiced, the court then commented:
[I]t is difficult to see how prejudice could ever be shown when the policy, like the one here, gives both sides the same opportunity to demand appraisal. If a party senses that impasse has been reached, it can avoid prejudice by demanding an appraisal itself.
Several courts applying Texas law have latched onto the Texas Supreme Court’s statement.
Heller v. ACE European Group Ltd.
Most recently, the above language was embraced by a Southern District of Texas court in Heller v. ACE European Group Ltd. Heller owned three residential properties he claimed were damaged by a hailstorm. He filed claims for each of the properties and the insurer, ACE, was on site adjusting the properties within five days. Just over a month later, ACE issued payments on two of the properties and notified Heller that the claim on the third property had been accepted but fell below the deductible.
Five months after the payments were issued and seven months after the hailstorm, Heller filed suit in state court, which was then removed to federal court. For over a year, Heller was uncooperative as the parties attempted to engage in discovery.
Initially, he failed to respond to written discovery requests or provide court-ordered information. Heller was sanctioned by the court for these violations. Even after being sanctioned by the court, he failed to appear for his deposition, allow access to the property for inspection, or designate experts (even after the court granted a three-week extension).
Fourteen months after suit was filed, the court granted three motions for summary judgment filed by ACE on Heller’s misrepresentation, causation and prompt payment claims, sanctioned Heller for his discovery conduct, and denied Heller’s request for more time to designate experts. Finally, and perhaps most strikingly, the court then granted Heller’s motion to compel appraisal.
In response to Heller’s motion to compel appraisal, ACE argued that Heller had waived his right to appraisal. The court disagreed. In addition to finding that ACE had not established the first element of waiver — intent — the court provided the following comments on ACE’s claim that it had been prejudiced:
[ACE] also claims prejudice due to [Heller]’s dilatory enforcement of the appraisal clause. Texas courts have found waiver where a party sits on its rights for an unreasonable time and thereby causes prejudice to the other party. However, as Underwriters points out, defendant could have avoided any putative prejudice by demanding appraisal, but did not.
There was no more discussion of prejudice. The court acknowledged that resorting to appraisal after over a year of litigation openly disregarded Texas’ policy of encouraging appraisal as an alternative to litigation but nonetheless granted the motion to compel appraisal because appraisal could “still avoid some litigation in th[e] case.”
Jai Bhole Inc. v. Employers Fire Insurance Co.
Despite what appears to have been less egregious conduct than in Heller, a magistrate judge from the Southern District of Texas recently found that a two-year delay in seeking appraisal was indicative of the insurance carrier’s intent to waive its right to appraisal. Jai Bhole Inc.’s motel was damaged by Hurricane Ike on Sept. 13, 2008. Employers issued a $95,000 payment to Jai Bhole on Dec. 30, 2008. Ten months later, Jai Bhole filed suit seeking additional benefits under its policy.
In June 2011, the parties attempted to mediate the case, but mediation was futile due to Employers’ belief that its accord and satisfaction defense barred Jai Bhole’s claim. After Employers’ summary judgment motion on that defense was denied, the parties attempted to mediate a second time. After the parties were unable to reach a resolution, Employers demanded appraisal.
After finding that Employers’ delay reflected an intent to waive the right to appraisal, the court addressed the prejudice that would result if no waiver was found:
Employers argument the plaintiff will not suffer any prejudice also rings hollow. Plaintiff has allegedly already incurred costs and fees, including the costs of two mediations, of about $40,000 and estimates that its share of any appraisal, especially one not likely to succeed, would waste about $10,000 more. Employers assertion that plaintiff could have avoided these costs “merely by demanding appraisal, as it was entitled to do” under the policy, is disingenuous. Many of the expenses incurred by plaintiff were a direct result of Employers’ continued intransigence. After all, Employers continually refused to recognize plaintiff’s right to claim any additional benefits and seemed poised to continue to do so despite any appraisal award favorable to plaintiff. Furthermore, plaintiff, perhaps, did not want to appraise its loss, preferring, instead, to have a jury determine the amount of its contractual damages, if any. In addition, if an appraisal were to be overwhelming[ly] favorable to Employers after all this time, payment of a meager award could possibly preclude plaintiff from recovery of attorney’s fees for breach of contract and damages for any extra contractual claims. See Breshears v. State Farm Lloyds, 155 S.W.3d 340 (Tex.App. — Corpus Christi 2004, rev. denied) (Summary judgment dismissing insured’s contractual and extra-contractual claims proper where insurer paid appraisal award within  days). Discovery in this over–[three]–year–old case has closed and the case is currently set for docket call and trial assignment in March of this year. At this late date, a court–ordered appraisal could very well harm the plaintiff’s legal right to proceed to trial and, if successful, have a jury, not appraisers, determine all of its damages.
In the face of what would appear to be obvious prejudice to ACE, the Heller court summarily dismissed ACE’s prejudice claim because ACE could have compelled appraisal itself. No other case has relied on the statement in Underwriters to ignore such egregious facts.
Under Heller, it would appear to be virtually “impossible” to establish sufficient prejudice for a court to find waiver. Because most appraisal provisions can be invoked by either party, the holding in Heller completely eviscerates a party’s ability to show prejudice — and therefore waiver — in the vast majority of cases.
Although appraisal is a useful tool that often allows parties to resolve a claim without incurring the time and expense of suit, it now has the potential to be used to regain ground that a party previously lost in litigation. For example, Heller lost the ability to have an expert testify to the scope and cost of repairs, which would have been a necessity at trial, but regained that ability by invoking the appraisal provision.
An appraisal award would supply a binding decision regarding the scope and cost of repairs and negate the need for expert testimony on that issue at trial. Based on Underwriters and Heller, a party can now proceed through litigation — conducting discovery and even seeking settlement — and then, if the process does not go in its favor, it may be able to demand appraisal to obtain a second bite at the apple. However, as indicated by the ruling in Jai Bhole Inc., not every court will allow parties to engage in such gamesmanship.
 In re Universal Underwriters of Tex. Ins. Co., 345 S.W.3d 404, 410 (Tex. 2011).
 See In re Tex. Windstorms Ins. Ass’n, No. 14-13-00632-CV, 2013 WL 4806996, at *2 (Tex.App. — Houston [14th Dist.] Sept. 10, 2013).
 Universal, 345 S.W.3d at 407.
 Id. at 411.
 Id. at 410.
 Id. at 411-12.
 Id. at 411.
 Id. (citing to Perry Homes v. Cull, 258 S.W.3d 580, 597 (Tex. 2008); In re Tyco Int’l Ltd. Sec. Litig., 422 F.3d 41, 47 n.5 (1st Cir. 2005); and Menorah Ins. Co. Ltd. v. INX Reinsurance Corp., 72 F.3d 218, 222 (1st Cir. 1995)).
 Id. at 412.
 See In re Pub. Serv. Mut. Ins. Co., No. 03-13-00003-CV, 2013 WL 692441, at *5 (Tex.App. — Austin Feb. 21, 2013); EDM Office Servs. Inc. v. Hartford Lloyds Ins. Co., No. H-10-3754, 2011 WL 2619069, at *5 (S.D. Tex. July 1, 2011); Dike v. Valley Forge Ins. Co., 797 F.Supp.2d 777, 784 (S.D. Tex. June 23, 2011); In re Cypress Tex. Lloyds, No. 09-12-00077-CV, 2012 WL 1435739, at *1 (Tex.App. — Beaumont Apr. 26, 2012); James v. Prop. & Cas. Ins. Co. of Hartford, No. H-10-1998, 2011 WL 4067880, at *2 (S.D. Tex. Sep. 12, 2011); Butler v. Prop. & Cas. Ins. Co. of Hartford, No. H-10-3613, 2011 WL 2174965, at *1 n.3 (S.D. Tex. June 3, 2011).
 No. 7:12-CV-422, 2013 WL 6589253 (S.D. Tex. Dec. 16, 2013).
 Id. at *7.
 Id. at *8.
 No. G-10-522; 2014 WL 50165 (S.D. Tex. Jan. 7, 2014).
 Id. at *2.