January 24, 2018
In Scottish Union & National Insurance vs. Clancy, the Supreme Court of Texas held that compliance with an appraisal provision in an insurance policy was a condition precedent to suit and had not been waived by the insurance company. In American Fire Insurance Company vs. Stuart, the Court of Civil Appeals of Texas held that appraisal was not proper when there had not yet been an attempt at settlement of the claim by both parties. In Royal Insurance Company vs. Parlin & Orendorff Company, the Court of Civil Appeals of Texas held that a jury properly set aside an appraisal award where an appraiser was “neither impartial nor disinterested.”
These three cases addressed issues commonly disputed in Texas appraisals. All three of these cases were decided in the late 1800s.
And here we are 120 years later still arguing about the same issues.
Interestingly, during the 1900s, there was very little litigation concerning the appraisal process. The Supreme Court of Texas issued only a handful of decisions concerning appraisal. For a century, Texas law was fairly well-settled that appraisal only addressed disputes as to the cost to repair an agreed amount of damage. Disputes as to the existence or extent of damage were outside the scope of the appraisal process.
That all changed in 2009, for two reasons.
First, Hurricane Ike had just struck the Texas coast. Damage was catastrophic. Underemployed Houston and San Antonio personal injury attorneys became “policyholder attorneys.” The number of licensed public insurance adjusters in Texas more than doubled.
And so-called “insurance restoration contractors” from across the country descended on Houston. With a large portion of the estimated $30 billion in Ike damage being paid for by the insurance industry, there was big money to be made hanging around insurance claims. The first-party insurance claims process became an entrepreneurial business model.
And then July 3, 2009, arrived — a day that would forever change the Texas appraisal process. On that date the Supreme Court of Texas issued its decision in State Farm vs. Johnson, a decision that changed over a century of precedent governing the scope of the Texas appraisal process.
Insurance practitioners still argue over what the case actually holds in its lengthy discussion of divisible versus indivisible injuries, and the differences between causation and liability. Let’s be honest. No one really knows exactly what the court actually held. But what is clear now is that as a result of Johnson, arguably all types of disputes are now going to appraisal — including disputes as to the existence and scope of hail (and other types of) damage.
With the convergence of these two events, use of the appraisal process in Texas has grown exponentially. Gone are the days where three reputable and smart insurance professionals (two appraisers and an umpire they both respected and agreed upon) would get in a room and work cooperatively to fairly resolve a disputed claim.
Instead, appraisal has become a tactical game, with many of the involved parties working to achieve their desired outcomes and, in many cases, advance their personal interests. There now even exists a cottage industry of professional appraisers, who advertise their success rates and employ strategies to maximize success in the process — a process that was intended to be quasi-judicial, independent and amicable in nature.
Abuses of the process are widespread. And, yes, these abuses come from all involved parties. Some policyholder attorneys sign up clients and dump them right into appraisal, knowing that they won’t have to litigate and can still take a 45 percent contingency fee out of the award. Some professional appraisers employ the law of large numbers, dramatically increasing the policyholder’s claimed damage allegations in appraisal hoping that the umpire will then believe that the policyholder’s original claimed damage figure was reasonable or, better yet, just “split the baby.”
Some insurance restoration contractors are demanding appraisal on behalf of property owners, appointing other friendly contractors as appraisers in a quid pro quo type of arrangement. Some insurance industry attorneys demand appraisal after years of litigation and on the eve of trial, hoping to avoid bad facts and extracontractual damages. And everyone does whatever they can do to get their desired umpire — because everyone knows that the outcome of appraisal is all about the umpire.
And unfortunately, it’s likely to get worse before it gets better. In Florida, one insurance company has taken the word “impartial” out of its appraisal provision. The rationale was that if public adjusters with a contingency fee interest in the outcome of the appraisal are allowed to be appraisers (as they are in Florida, but, thank goodness, not in Texas) then why shouldn’t the insurance company just use one of its own employees as its appraiser?
Appraisal has become a non-judicial dispute resolution process entirely devoid of ethical guidelines and procedural requirements. It should therefore come as no surprise that one insurance company just rewrote its appraisal provision — turning what used to be one simple paragraph into three full pages.
Yes, often lost in all of this is the policyholder who just wants a quick and fair assessment of their damages. That is what appraisal was intended to be. As the Supreme Court of Texas recognized in State Farm vs. Johnson, appraisal was “intended to take place before suit is filed” and “requires no attorneys, no lawsuits, no pleadings, no subpoenas, and no hearings.”
So how do we get appraisal back to what it used to be/what it was intended to be? I wish I had an easy answer.
Appraisal is a creature of contract. It exists only because it is set forth in the insurance policy contract between the insurance company and its insured. There is no doubt that additional changes to the standard appraisal language are coming to address some of the common problems and abuses.
Some believe that legislative intervention is needed. They argue for the creation of a “statutory appraisal process” similar to what the Texas legislature created in 2011 for the Texas Windstorm Insurance Association. Others despise the TWIA process as they find it unfair to insureds. At the request of the Office of Public Insurance Counsel, Texas House of Representatives Speaker Joe Strauss has included “use of appraisal processes under property insurance policies” in his Interim Committee Charges as an issue for the House Committee on Insurance to consider prior to the 2019 legislative session.
Other than creating a statutory appraisal process, it is unclear what else the Committee on Insurance would or even could consider. Again, appraisal is a contractually agreed process. Perhaps the legislature would mandate the terms to be included in Texas appraisal provisions. That appears unlikely.
Or perhaps the legislature will explore whether there are other ways to address some of the current hot topics, common issues and abuses in the appraisal process. If that is the desire, here are a few.
Finality of Appraisal Awards
Texas law has become very clear, with almost every Texas appellate and federal court weighing in on the issue, that the timely payment of an appraisal award bars all extracontractual remedies. Given that appraisal is a contractually agreed part of the adjustment process, this result makes sense. It is also consistent with the language in Johnson that appraisals do not require litigation or attorneys.
If a dispute arises during a claim process, appraisal is timely demanded, and the appraisal award is timely paid, the process worked as intended and there is no reason for litigation. There was a dispute, and it was timely resolved during the claim process. If the objective of the appraisal process is to avoid litigation by getting disputed claims quickly resolved, the case law on the finality of appraisal awards should not be disturbed.
Use It or Lose It
Appraisal should not be used as a litigation tactic. It should not be demanded by an insured years after the lawsuit was filed to avoid a trial when the facts did not come together as hoped. Likewise, it should not be demanded by an insurance company on the eve of trial to avoid bad facts and extracontractual exposure.
Unfortunately, this abuse is taking place — on both sides. It is wrong. Appraisal should not be demanded on the eve of trial, nor should it be used for purposes of litigation-related gamesmanship. Perhaps a “use it or lose it” requirement is needed. The insured loses the right to demand appraisal when it files a lawsuit. The insurance company loses the right to demand appraisal a short time after suit is filed once it becomes apparent that further claim settlement discussions would be futile and the matter cannot be resolved by agreement of the parties. This is fair to both sides.
Lawyers Signing Up Clients and Dumping Them into Appraisal
Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct plainly states that a lawyer may not collect an unconscionable fee. Under this rule, the first factor to be considered in evaluating the reasonableness of a fee is the “time and labor required.”
Some attorneys are signing up Hurricane Harvey clients on a 45 percent contingency fee and immediately dumping their cases into appraisal. These attorneys are well aware that appraisal will bring finality to the dispute and there will be no resulting litigation.
Essentially, the lawyer pockets almost half the appraisal award for doing virtually nothing — other than sending an appraisal demand and advancing the costs of the appraiser and umpire. One would think that the same outcome could be achieved by retaining a licensed public adjuster who, for a 10 percent fee, would first try to resolve the claim and, if such efforts were unsuccessful, would then invoke the appraisal process.
Contractors Acting as Wanna-Be Lawyers Demanding Appraisal for Homeowners
Prior to enactment of the Texas public insurance adjuster licensing statute in 2003, cases held that it was considered the unauthorized practice of law to advise building owners on their insurance claims. These cases held:
Contracting with persons to represent them with regard to their personal causes of action for property damages and/or personal injury constitutes the practice of law. Advising persons as to their rights and the advisability of making claims for personal injuries and/or property damages constitutes the practice of law. Advising persons as to whether to accept an offered sum of money in settlement of claims for personal injuries and/or property damages entails the practice of law. Entering into contracts with persons to represent them in their personal injury and/or property damage matters on a contingent fee together with an attempted assignment of a portion of the person's cause of action involves the practice of law. Entering into contracts with third persons which purport to grant the exclusive right to select and retain legal counsel to represent the individual in any legal proceeding constitutes the practice of law. Advising "clients" of their rights, duties, and privileges under the laws entails the practice of law.
Brown v. Unauthorized Practice of Law Committee, 742 S.W.2d 34 (Tex. App.—Dallas 1987, writ denied) (citations omitted). See also Greene vs. Unauthorized Practice of Law Committee, 883 S.W.2d 293 (Tex.App.—Dallas 1994, no writ).
There was no ambiguity in these decisions. You have to be an attorney — or, today, a licensed public adjuster — to advise people as to their rights in property insurance claims. If you are neither, you cannot provide such advice.
But it’s going on in countless Hurricane Harvey matters. Roofing contractors, insurance restoration contractors and “insurance claim professionals” are attempting to handle insurance claims for building owners. When a dispute arises, they are invoking appraisal “on behalf of” the building owner. They prepare the appraisal demand form, select the appraiser, ask the homeowner to “sign here” and then send in the appraisal demand. It is absolutely illegal. It needs to be stopped.
The Law of Large Numbers
Appraisals are intended to resolve a dispute as to the amount of loss. Take a typical hail damage dispute. The insured measures the roof replacement cost at $20,000. The insurance company measures the roof repair cost at $1,500. The appraisal panel will decide whether the right number is $20,000, $1,500 or perhaps something in between.
Some “professional appraisers” are using “the law of large numbers” to change this typical scenario. Instead of accepting their client’s previous damage estimate of $20,000, these professional appraisers come up with a new number multiples above the original estimate. They add windows, siding, brick, the trampoline, a bbq, interior damage and whatever else they can use to get the number as high as possible.
They are limited only by their imagination (and their conscience, one would hope). Obviously, when they submit their new $100,000 damage figure, it is with the hope that the umpire will consider the insured’s original $20,000 figure as a fair result — or just “split the baby.”
This is wrong. Section 35.02 of the Texas Penal Code defines insurance fraud as providing false or misleading material information in support of an insurance claim. Since appraisal is part of the insurance claim process, it is reasonable to conclude that an appraiser’s use of inflated baseless damage figures solely as a tactical move to drive up a potential appraisal award constitutes criminal insurance fraud.
Or, if this is how it’s going to be, perhaps the insurance companies should all change their measures and start every appraisal at $0. What’s that old saying about a goose and a gander?
Appraisal Without a Dispute
As the Court of Appeals of Texas held over a century ago in American First, you can’t have a dispute as to the amount of loss unless both sides have stated their positions and attempted to reach agreement on the claim measure. That’s a pretty simple concept.
Surprisingly — well, actually, not very surprisingly — some attorneys and public adjusters are attempting to drive matters into appraisal without ever advising the insurance company of their measure, or that there even exists a dispute as to the claim measure. They make no effort to resolve the claim, preferring to never state a reasonable damage estimate during the claims process and allowing “the law of large numbers” strategy to be employed by their “professional appraiser” in front of a hopefully friendly umpire.
A similar abuse by a few mass-marketing public adjusters was addressed in 2015 by the Texas legislature. These public adjusters were nothing more than referral sources for lawyers. In 2015 the Texas public adjuster licensing statute was amended to require public adjusters to actually perform the services typically provided by a public adjuster.
Obviously, this would include preparing an estimate and making at least some effort to work with the insurance company in negotiating a resolution of the claim before invoking appraisal. Fortunately, several Texas courts have recently seen right through this strategy and are requiring both sides to state their claim measures and attempt to resolve the disputed claim before allowing the appraisal process to go forward.
So that’s pretty much what's going on in the Texas appraisal process. Is it a perfect process? No. Is it a preferable process to litigation? Absolutely — so long as it is conducted on a level playing field by a competent and impartial appraisal panel that completes its work in substantial compliance with the policy and without fraud, accident or mistake.
When those simple — but sometimes elusive — parameters are met, the appraisal process is unquestionably the best way to resolve disputed insurance claims for the benefit of the property owner.