Prior to the 2009 Texas Supreme Court decision in State Farm Lloyds v. Johnson,1 Texas courts were split regarding the line between damage and liability, and when an appraiser could decide causation as part of the damage determination. For the most part, that issue has been resolved.
In Johnson, the Texas Supreme Court resolved the split by defining the scope of appraisals and the meaning of “amount of loss.” The court determined that an appraiser could determine the amount of loss, even though the appraiser may need to decide causation. Since that ruling courts have allowed appraisers to evaluate whether damage was caused by a covered event or was the result of a non-covered cause of loss, pre-existing wear and tear.
In Salas Realty, LLC, et al. v. Transportation Insurance Company,2 a recent case in the Northern District of Texas, the court revisited Johnson and Texas law as it has developed in order to determine whether the causation exclusion in Transportation Insurance Company’s (“Transportation”) appraisal provision rendered the clause inoperative. Salas Realty (“Salas”) submitted a claim to its insurer for hail damage to its roof and demanded appraisal. Transportation refused to go to appraisal as it denied coverage upon its adjuster’s determination that the damage was due to wear and tear, an exclusion under the policy. Salas argued the dispute was over the amount of loss resulting from the hail storm. Transportation argued the dispute was over cause of the damage. The appraisal provision in the policy stated:
If the Named Insured and the Insurer fail to agree on the amount of loss for physical damage or business income or extra expense, either may make a written demand for appraisal in which case within 20 days of that written demand each shall select an appraiser and shall notify the other of its chosen appraiser. This APPRAISAL Condition is not available to the Named Insured or the Insurer if there is a dispute as to whether the loss or damage was caused in whole or in part by the covered peril. This APPRAISAL Condition is not available if there is a dispute as to whether or not the loss is covered in whole or in part under this coverage part.
The Salas court found that the Texas Supreme Court in Johnson held:
Specifically, an appraiser can determine whether the damage is due to wear and tear or a covered damage, which means an appraiser may decide causation when deciding the amount of loss. Otherwise, appraisal clauses would be largely inoperative because ‘appraisals [could] never assess… damage unless a roof [was] brand new.’3
The Salas court found “A limitation in an insurance contract is against public policy and void as a matter of law when the provision is illegal or inconsistent with public policy.”4 The court further found that “[i]t is long-standing rule that the Court must read an insurance policy to avoid rendering any portion inoperative.”5 Further the court found that “[t]he Texas Supreme Court encourages enforcing appraisal clauses, rather than enforcing interpretations that leave the clauses inoperative.”6
Interestingly, we are seeing similar attempts by insurers to include language in appraisal provisions reserving only “their right” to avoid the outcome of the appraisal award, which is a binding alternative dispute resolution provided in the contract of insurance. The court in Salas wisely discerned the desire of Transportation to have it both ways and refused to let them have their cake and eat it, too.
1 State Farm Lloyds v. Johnson, 290 S.W.3d 886, 889 (Tex. 2009).
2 Salas Realty, LLC, et al. v. Transportation Ins. Co., No. 3:19-cv-1572-N (N.D. Tex. Dec. 2, 2019).
3 Id. citing State Farm Lloyds v. Johnson, at 892-93.
4 Salas Realty; see also Westchester Fire Ins. Co. v. Admiral Ins. Co., 152 S.W.3d 172, 182 (Tex. App. – Fort Worth, no writ.).
5 Id. citing Fiess v. State Farm Lloyds, 202 S.W.3d 744, 748 (Tex. 2006) (“[I}t has again long been the rule that we must read all parts of a policy together, giving meaning to every sentence, clause, and word to avoid rendering any portion inoperative.”)
6 Id. See State Farm Lloyds v. Johnson, 290 S.W.3d 886, 893 (Tex. 2009); see also SPJST Lodge #514 & Am. Sokol Org. v. Century Sur. Co., 2015 WL 12699508, at *2 (N.D. Tex. Nov. 23, 2015)(O’Conner, J.); Essex Ins. Co. v. Levy Props., Inc., 2013 WL 12122119, at *5 (N.D. Tex. May 7, 2013)(Cummings, J.).