Texas Supreme Court Explains Scope of Appraisal As Matter Of First Impression
November, 2009
In State Farm Lloyds v. Johnson, 2009 Tex. LEXIS 470 (Tex. 2009), the Texas Supreme Court affirmed an appellate court order compelling the insurer to participate in the appraisal process.
Facts
A hailstorm damaged the insured's roof. The insurer determined that the hail damaged only the shingles on the roof's ridgeline and estimated repair costs at less than the deductible. The insured contended that the entire roof needed to be replaced at a significantly greater expense. The insured demanded appraisal under the policy's appraisal provision, which stated that "[i]f you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal." The insurer refused to participate, contending that the parties' dispute concerned causation, an issue that it claimed appraisers cannot decide, and not "the amount of the loss." The insured filed suit, seeking only to compel appraisal. The trial court granted the insurer's motion for summary judgment, agreeing that appraisal was not warranted, but the appellate court reversed, requiring appraisal.
Analysis
The Texas Supreme Court held that the insurer could not avoid appraisal merely because a causation question might exceed the scope of appraisal. The court's holding was based in significant part on what it characterized as the "unusual posture" of the case. The court noted that in contrast to the case before it, where appraisal had not yet taken place, several Texas cases had addressed the appraisal of hail damage and every challenge occurred after the appraisal.
To reach its holding, the court also addressed the permissible scope of appraisal as it relates to issues of causation. The parties agreed that the scope of appraisal included damage questions and excluded liability questions but disagreed over whether appraisers could decide causation questions. The court could not directly answer that question because the summary judgment record before it did not include sufficient facts to determine in the abstract whether there was a causation dispute.
Nonetheless, the court provided insight into the permissible scope of appraisal in Texas which depends on the nature of the damage, the possible causes, the parties' dispute, and the structure of the appraisal award. After noting that the few courts to have addressed the causation issue were split, the court stated that "when different causes are alleged for a single injury to property, causation is a liability question for the courts," and appraisers can assess the amount of damage. By way of example, the court cited a case where the appraisers improperly decided causation by assessing foundation damage due to plumbing leaks (a covered peril) as $0 and damage due to settling (an excluded peril) as $22,875.94, leaving no question of liability for the court. In contrast, the court stated that "when different types of damage occur to different items of property, appraisers may have to decide damage caused by each [without deciding who must pay for it] before the court can decide liability." By way of another example, the court cited a different case where the appraisers properly assessed $4,226.19 for water damage (a covered peril) but made no finding for mold damage (for which coverage was disputed) because the court was able to determine whether the mold damage was covered (it was not). The court further stated that the same was true "when the causation question involves separating loss due to a covered event from a property's pre-existing condition", such as wear and tear which is typically excluded. In the end, however, no matter what the appraisers decide, the court affirmed that the insurer does not have to pay for repairs due to excluded perils.
Learning Point: Insurers in Texas must comply with an appraisal provision in a policy even if an impermissible question of causation may arise. Instead of avoiding the appraisal, insurers can challenge whether the appraisers improperly determined liability questions after the appraisal, and regardless of the award, insurers do not have to pay to repair or replace a loss caused by an excluded peril.
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