Most property insurance policies include an appraisal provision that may be invoked by either the insurer or the insured to determine the value of a loss. Courts generally agree that “valuation” is the task of an appraisal panel, and “coverage determinations” are the province of courts. However, courts are inconsistent as to whether the scope of damage falls under “valuation” (which may be decided by appraisal) or falls under “coverage determination” (which must be decided by a court).
Generally speaking, the purpose of an appraisal provision is to avoid litigation where the insurer admits coverage and the dispute concerns only the amount or value of the loss. Insurers sometimes argue appraisal is a condition which must be satisfied by the policyholder before any suit may be filed against the insurer. See Texas Supreme Court Now Requires Showing of Prejudice for Waiver of Appraisal Provisions by Sergio Leal. Insurers also attempt to deny policyholders’ use of the appraisal provision by denying appraisal of the scope of damage or scope of repair.
Policyholders who believe their claims have been undervalued or underpaid often invoke the appraisal provision, hoping to avoid the time and expense of litigation. Unfortunately, insureds often receive one of the following responses from the insurer:
- “The scope of covered damage is not subject to appraisal.”
- “Method of repair is not subject to appraisal.”
- “The cause of damage is not subject to appraisal.”
The above responses are an exercise in semantics. They not only prevent the policyholder from using a policy provision that was bargained for and paid for by the policyholder, it also forces the policyholder to spend the time and money required for litigation, defeating the purpose of the appraisal provision.
Fortunately for policyholders, a trend may indicate that scope of damage/scope of repair actually is subject to appraisal. The following list is not exhaustive, but provides numerous recent cases finding scope is subject to appraisal.
In Carbonneau v. Am. Family Mut. Ins. Co., No. 06-1853-PHX-DGC, 2006 WL 3257724, *1 (D. Ariz. Nov. 9, 2006), the insureds’ home was damaged by a wind and hail storm. The insurer’s adjuster determined that the home had sustained wind or water damage to the roof, chimney and interior drywall in the amount of $8,110.70. Believing that the insurer handled their claim unreasonably, the homeowners hired a public adjuster who estimated repairs totaling $25,429.13. The policyholders then demanded appraisal pursuant to the appraisal clause of their policy. The insurer refused, arguing that the insured sought coverage for damages not covered under the policy and the issue of coverage of certain damage was outside the scope of the appraisal clause. The court noted that appraisal was similar to arbitration and that “any doubts concerning the scope of arbitrable issues are to be resolved in favor of arbitration.” The court concluded the insured could compel arbitration stating:
Both parties agree that Defendant must repair storm damage. The dispute is over what repairs are necessary to repair such damage. Plaintiffs claim the dispute concerns the amount of damages while Defendant argues the dispute is about coverage . . . Resolving doubt in favor of appraisal, however, the Court will grant Plaintiffs' motion. Were such doubts not resolved in favor of appraisal, insurance companies could avoid appraisal obligations merely by claiming that the dispute concerned coverage. The appraisal system, with one appraiser appointed by each side and an umpire to resolve differences, will determine the amount necessary to repair covered damages. (Emphasis added).
In Johnson v. State Farm Lloyds, 204 S.W.3d 897, 903 (Tex. App. 2006) aff'd, 290 S.W.3d 886 (Tex. 2009), the parties disputed the extent of hail damage to the insured's roof, specifically whether only the ridgeline was damaged or the entire roof needed to be replaced. The court determined the insured could demand appraisal on this issue, even if the appraisers' inquiry would include some causation element. The court noted,
If the parties had to first agree on which specific shingles were damaged and approach every disagreement on extent of damage as a causation, coverage or liability issue, either party could defeat the other party's request for an appraisal by labeling a disagreement as a coverage dispute. Instead, as the process is designed, once it is determined that there is a covered loss and a dispute about the amount of that loss, the appraisal process determines the amount that should be paid because of loss from a covered peril.
In QBE Ins. Corp. v. Twin Homes of French Ridge Homeowners Ass'n, 778 N.W.2d 393, 395 (Minn. Ct. App. 2010), hail damaged townhome roofs on 16 of the insured’s buildings. The parties could not agree on the amount of loss and the insured townhome association demanded appraisal. The two appraisers could not agree and an umpire was selected. The panel issued an appraisal award that provided for total roof replacement. The insurer disagreed with the appraisal award and initiated a declaratory judgment action against its insured, claiming that “the appraisal panel exceeded its authority by awarding total roof replacement based on wear and tear and the unavailability of the roofing shingles that were used on the original roof.” The court disagreed with the insurer because, like arbitration, overturning the decision of the appraisal panel requires a clear showing that the panel exceeded its authority. Moreover, any inconsistencies in the coverage and valuation provisions would be interpreted against the insurer and in favor of policyholders.
In St. Charles Parish Hosp. Serv. Dist. No. 1 v. United Fire & Cas. Co., 681 F. Supp. 2d 748, 757 (E.D. La. 2010), Hurricane Katrina damaged the insured hospital. The insured’s appraiser estimated the loss at approximately $3.4 million, of which $1.8 million was for loss of business income. The insurer’s appraiser estimated repairs could be made for approximately $250,000. The court agreed scope was subject to appraisal stating,
[A]n appraiser's job is not to determine policy coverage or liability, but [ ] causation must be considered in order to determine the scope of the loss that must be measured . . . the extent to which [appraiser] considered causation in his appraisal does not by itself warrant vacating the award. (Emphasis added).
The court in Triple S Properties Inc. v. St. Paul Surplus Lines Ins. Co., No. 3:08-CV-796-O, 2010 WL 3911422 (N.D. Tex. Oct. 5, 2010), came to the same conclusion. Hopefully these cases indicate a trend is emerging, favoring appraisal of scope of damage/scope of repair, and possibly decreasing litigation. Unfortunately, insurers determined to force policyholders to litigate before covered benefits are paid may still allege appraiser bias. For more on that issue, see Sergio Leal’s, Texas Insurance Law: When an Appraiser is Deemed Biased.