INTRODUCTION: Appraisal provisions have been a feature of insurance policies in Texas for well over a century.1 Indeed, in the Texas Supreme Court’s 2009 opinion of State Farm Lloyds v. Johnson, the court noted that it has only addressed insurance appraisal provisions a total of five times between 1888 and 2002.2 Since Johnson, insurance appraisal law has grown substantially and now has claimed a front-row seat in Texas property insurance coverage litigation. The Randel case, discussed below, is the most recent appraisal opinion.
DEFINITION OF APPRAISAL: It is an “extra-judicial” contractually agreed process that is binding on the parties for resolving a disagreement between the insurance carrier and the policyholder about the amount of a covered loss under an insurance policy.3 Appraisal cannot be used to decide liability for the loss or the interpretation of policy language. Appraisal only determines the single issue of the amount of loss for the claim at issue.
TYPICAL APPRAISAL CLAUSE:
If you [the policyholder] and we [insurer] fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. Each shall notify the other of the appraiser’s identity within 20 days of receipt of the written demand. The two appraisers shall then select a competent, impartial umpire. The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall be the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreements signed by any two of these three shall set the amount of the loss.4
Randel v. Travelers Lloyds of Texas Insurance Company,5 issued on August 12, 2021, is the most recent appraisal case, and it comes out of the Fifth Circuit. Two issues are presented: (1) does the payment of the appraisal award prevent a plaintiff from continuing to pursue a breach of contract claim, and (2) can an insurer be liable under the Texas Prompt Payment of Claims Act (“TPPCA”).
Plaintiffs’ home burned down on the Fourth of July, and plaintiffs filed a claim with their insurer, Travelers. That same day, Travelers provided a $10,000 advance check for personal property loss. The main dwelling was then inspected by Travelers, along with the plaintiffs and the plaintiffs’ contractors. Plaintiffs fired their contractors shortly after that over a disagreement about the repairs to be made. Travelers provided its dwelling estimate of damages as $179,232.16. After deducting depreciation and the policy deductible, they issued a check for $126,720.80.6 Travelers’ estimate for personal property was $53,270.49, and it made this payment as well as one for $24,446.33 for loss-of-use. Upon a reinspection of the property by Travelers, it declined further coverage of the property charging plaintiffs with a failure to mitigate damages because additional damages had accrued after plaintiffs had fired their contractors and all repair work had ceased.
At this point, plaintiffs decided to invoke the policy’s appraisal provision, but Travelers argued that appraisal was not appropriate because the dispute was about coverage rather than the amount of damages. Appraisal was granted. The loss of use claim was excluded from the appraisal, but the appraisal award for the dwelling was $317,030.75 for actual cost value (“ACV”), and for personal property, the estimate was $100,331.02.7 Travelers timely paid the award in 5 days with a total payout, after all deductions, for $164,435.23 for dwelling and $21,098.22 for personal property. With a subsequent fourth payment for loss of use, the total loss of use claim from Travelers was $46,657.22, and the total payment from Travelers was $533,529.88.
The full payment of the appraisal award, however, did not end the parties’ dispute. Plaintiffs filed suit in state court several weeks before the payment of the appraisal award alleging breach of contract, insurance code violations, including violations under Chapter 542 of the Texas Insurance Code, entitled the Texas Prompt Payment Claims Act (“TPPCA’), and bad faith. Travelers removed the suit to federal court and moved for summary judgment on all of plaintiffs’ claims due to the payment of the appraisal award.
On plaintiffs’ breach of contract claim, the district court concluded that plaintiffs’ acceptance of the appraisal award precluded their breach of contract claim for dwelling damages. The court also noted that plaintiffs were not entitled to any more loss of use damages. Without a breach of contract claim, plaintiffs were not entitled to pursue a bad faith claim. For TPPCA violations, the court found that Travelers had complied with deadlines on loss of use payments, and its pre-appraisal payments, although untimely, were found “reasonable.” Hence, Travelers escaped liability under TPCCA.8
The Fifth Circuit’s holdings:
BREACH OF CONTRACT: In reviewing the district court’s decision on the breach of contract claim and affirming the district court’s dismissal, the Fifth Circuit announced:
- That the mere issuance of the appraisal award does not bar a breach of contract claim, but rather, because appraisals only set the amount of damages, an insurer can still defend on coverage question liability.
- The appraisal only becomes binding if the court ultimately determines coverage.
- The Court clarified that the issuance of an appraisal award in and of itself does not bar a breach of contract claim but rather, payment and acceptance of the award does bar a breach of contract claim.9
- “This rule above applies even when the appraisal award values the covered loss in an amount greater than the insurer had initially asserted and even when the insurer initially denies the insured’s claim.”10
TPPCA: The district court dismissed the TPPCA claim relating to dwelling and personal property coverage because although “Travelers’ early payments were less than the amount it ultimately owed, the early payments were in an amount it [the court] deemed reasonable.”11 The Fifth Circuit noted that the district court’s ruling was understandable at the time it was given. In 2017, the Fifth Circuit made an Erie guess with the Mainali Corporation v. Covington Specialty Insurance Company opinion that prompt payment liability would not be imposed so long as the pre-appraisal payment was timely and was “reasonable.”12 Thereafter, a problem emerged with different Texas courts finding what constituted “reasonable” differently. The Texas Supreme Court in Hinojos v. State Farm Lloyds solved that problem by setting a new test for “reasonableness” and ruling that “a reasonable payment should roughly correspond to the amount owed on the claim.”13 Although the result in Mainali still stands given that it involved an overpayment, the reasonableness standard that it applied turned out to be too broad.14 The rule today is the rule from Hinojos –“to avoid prompt payment liability, a pre-appraisal payment must ‘roughly correspond’ to the amount ultimately owed.”15
In Randal, because there was such a large gap ($185,000) between the pre-appraisal payment and the appraisal award, Travelers conceded that the pre-appraisal payment was not reasonable given the recent guidance from Hinojos; therefore, the pre-appraisal was not a defense to TPPCA liability for Travelers.16 The Fifth Circuit remanded the case for the trial court to determine interest for the late payment under the TPPCA.
LOSS OF USE BENEFITS UNDER TPPCA: The Fifth Circuit affirmed the district court finding that Travelers made timely payments of the full amount for the loss of use benefits.
Randal is the most recent appraisal opinion for Texas policyholders, but it surely won’t be the last as the use of appraisal clauses continues to grow, and appraisal law becomes more refined and clarified.
1 See Scottish Union & Nat’l Ins. Co. v. Clancy, 8 S.W. 630, 631 (Tex. [Comm’n Op.] 1888).
2 State Farm Lloyds v. Johnson, 290 S.W.3d 886, 889 (Tex. 2009).
3 Id. at 887-88.
5 Randel v. Travelers Lloyds of Texas Ins. Co., 2021 WL 3560910 (5th Cir. Aug. 12, 2021).
6 Id. at *1.
7 Id. at *2.
9 Id. at *3.
12 Id.; see Mainali Corp. v. Covington Specialty, Ins. Co., 872 F.3d 255, 259 (5th Cir. 2017).
13 See Hinojos v. State Farm Lloyds, 619 S.W.3d 651, 658 (Tex. 2021).
15 Hinojos, 619 S.W.3d at 658.
16 Randal, 2021 WL 3560910 at *4.