In a decision that further defines the power of an appraiser, a Texas federal court analyzed the enforceability of an appraisal award where appraisers specifically determined that damage was caused by wind and hail in Encalade v. State Farm Lloyds, No. CV H-24-4310, 2025 WL 3755128 (S.D. Tex. Dec. 29, 2025). While noting that appraisers can overstep their authority by making certain causation determinations, the Court enforced the appraisal award on the basis that the appraisers separated a loss due to a covered event from a pre-existing condition at the property. Importantly, however, the Court also ruled that State Farm’s failure to initially pay the appraisal award did not entitle the insureds to summary judgment with respect to their claims for breach of contract, violations of the Texas Prompt Payment of Claims Act (“TPPCA”), and bad faith.
Background
Following a wind and hailstorm, the insureds submitted a claim to State Farm for damage their home allegedly sustained. State Farm subsequently inspected the home and determined that the claimed damage was not covered under the insureds’ policy. As disagreements with the insureds continued, State Farm later sent an engineer to inspect the home, who also concluded that the damage was not covered.
A year after receiving State Farm’s letter denying coverage, the insureds invoked their policy’s appraisal clause. The appraisers failed to agree on the insureds’ loss, and an umpire was retained to resolve the dispute. Both appraisers ultimately signed an award finding that the property had suffered approximately $50,000 in storm-caused damage. State Farm, however, declined to pay this award on the basis that its investigation did not uncover damage due to wind or hail. Instead, it asserted the alleged damage was caused by wear and tear—a cause explicitly excluded under the policy.
After State Farm again denied the claim following the insureds’ submission of a post-appraisal notice for settlement, the insureds filed suit against State Farm for breach of contract, violations of the TPPCA, and bad faith. The insureds additionally moved for a declaratory judgment to enforce the appraisal award.
The Court’s Enforcement of the Award
The primary issue before the Court was whether the appraisal award could be enforced, given the appraisers’ conclusion that damages were due to the alleged hailstorm and not wear and tear. Although State Farm did not dispute that appraisal awards are binding, it did dispute whether an appraiser’s causation assessment is binding when an insurer disagrees with the assessment. For guidance, the Court looked to the Texas Supreme Court’s reasoning in State Farm Lloyds v. Johnson, 290 S.W.3d 886 (Tex. 2009) on this matter.
In reaching its decision, the Court emphasized that appraisers cannot allocate loss for a single injury between different causes—i.e., when different causes are alleged for a single injury to insured property, such as plumbing leaks and settling. However, the Court further reasoned that the job of an appraiser forces them to allocate damages by separating loss due to a covered cause from a pre-existing condition. Therefore, appraisers may distinguish a loss due to a covered event with pre-existing damage, such as wear and tear.
Here, although State Farm argued that other potential causes for the insureds’ damage included “excluded damages” like wear and tear, as well as “post-wind hail damage,” the Court stressed that State Farm failed to provide any facts to support these causes. Thus, because the record did not establish that the insureds’ home was damaged by anything other than wind or hail, the Court concluded that the appraiser’s causation determination was within their authority. Accordingly, the Court granted the insureds’ motion for declaratory judgment and chose to enforce the award.
The Insureds’ Breach of Contract and Extracontractual Claims
The Court arrived at a different conclusion regarding the insureds’ breach of contract claim. Rather than assert the individual elements of a breach of contract claim, the insureds simply argued that because the appraisal award was binding, State Farm was liable because it did not initially pay the award.
In denying the insureds’ motion for summary judgment on this claim, the Court noted the insureds failed to demonstrate that State Farm breached the terms of the insurance agreement by withholding payment until the Court resolved the causation assessment at issue. For example, the policy did not require that payment be made by a certain date that had since passed, and the insureds did not argue that State Farm breached the policy by delaying payment for an unreasonable period. Thus, this delay in payment alone did not establish a breach of the insurance agreement.
Similarly, because the insureds did not demonstrate that State Farm was liable for breach of contract, a necessary element for their Insurance Code claim was not satisfied. The insureds additionally failed to establish that they sustained injuries independent from a denial of policy benefits, thereby making their bad faith claim insufficient. Accordingly, the Court also denied the insureds’ motions for summary judgment on their Insurance Code and bad faith claims.
The Lowdown
Insurers should be cognizant of their reasons for contesting an appraisal award’s causation determination. If specific evidence cannot be offered to a potential Texas court as to why the award’s causation determination is improper or why it wrongfully allocates loss for a single injury between different causes, it should be prepared to pay the award absent another reason to contest its validity. Notably, while this case does not directly address the enforceability of an appraisal award when a date of loss is in dispute, arguments could be made here that timing determinations should not be part of the appraisal process so long as an insurer has evidence that damage occurred on a different date than claimed.
