Texas Supreme Court Rejects Efforts to Avoid Appraisal Through Coverage and Bad-Faith Allegations, Reinforcing Insurers’ Rights in Complex Property Claims

By Ramy P. Elmasri

In a significant victory for property insurers, the Texas Supreme Court issued a sweeping opinion reinforcing the enforceability of appraisal provisions in complex first-party property disputes, rejecting policyholder attempts to avoid appraisal by recasting valuation disputes as coverage, causation, engineering, or bad-faith issues.

In In re ACE American Insurance Company, the Court conditionally granted mandamus relief and ordered the trial court to compel appraisal in a high-dollar commercial property loss involving extensive water damage, mold remediation disputes, code-compliance issues, and competing engineering and construction methodologies. The ruling tracks and reinforces the framework established in State Farm Lloyds v. Johnson, making clear that Texas’s strong policy favoring appraisal is now settled doctrine—not a case-by-case balancing act.

The opinion sends a clear message: appraisal remains a powerful and enforceable mechanism for resolving disputes concerning the amount of loss, even where insureds attempt to inject broader allegations regarding causation, coverage, claim handling, or technical construction disputes.

The Court Rejects “Coverage Dispute” Attempts to Avoid Appraisal

The insured argued that appraisal was improper because the dispute allegedly involved:

• coverage questions;
• causation disputes;
• engineering methodology;
• building code compliance; and
• whether certain repairs were necessary at all.

The Court rejected each of those arguments, reaffirming that appraisal necessarily includes some level of causation analysis because determining the amount of loss inherently requires distinguishing covered damage from everything else.

The Court’s mold-sublimit example illustrates the point vividly. Insurers had paid the insured approximately $1.2 million for mold remediation—which they contended was the full value of the mold claim—while the insured demanded the policy’s full mold sublimit of $10 million. The Court held that dispute was squarely about the amount of loss, not a coverage question, regardless of whether other insurers might also contribute to mold-related costs. Similarly, disputes over whether mold remediation should have been priced on a time-and-materials basis versus a fixed-price contract, and whether code-upgrade costs were triggered by overly extensive repairs, were all deemed amount-of-loss issues for the appraisers—not courts.

Importantly, the Court emphasized that even highly technical disputes involving engineering decisions, remediation protocols, or construction methodologies do not remove a dispute from the scope of appraisal. The appraisal provision contains no exception for complex technical issues, and the Court declined to write one in.

The Court further reinforced that appraisals should generally proceed first, with any remaining legal coverage questions to be resolved later by the courts if necessary. A party cannot avoid appraisal merely because there might be a causation or coverage question that could exceed the scope of appraisal.

The Court Rejects the “Bad Faith Excuses Appraisal” Theory—And the “Prior Material Breach” Variant

The insured pressed two related but distinct arguments in an effort to sidestep appraisal. First, it alleged that the insurers’ bad-faith conduct in adjusting the claim excused compliance with the appraisal provision. Second, it argued that the insurers’ alleged failures constituted a prior material breach of the policy that discharged the insured from its contractual obligations, including the obligation to participate in appraisal. The Court rejected both theories.

On bad faith, the insured pointed to:

• delayed adjustment;
• inadequate investigation;
• minimal site involvement by the claim manager; and
• alleged “coverage-avoiding conduct” throughout the adjustment process.

The Court held unequivocally that an insurer’s alleged bad faith in handling a claim does not constitute an exception to the general enforceability of an appraisal clause. Texas courts have recognized only two limited exceptions to appraisal enforceability—illegality and waiver—and bad faith is not among them.

On prior material breach, the Court was equally direct. Accepting that argument would require a court to first determine whether the insurer actually breached the policy—putting the cart before the horse and effectively converting every coverage dispute into a mechanism for bypassing appraisal altogether. As the Court noted, if insureds could avoid appraisal merely by alleging a dispute over coverage or claims handling, appraisal clauses would be rendered virtually meaningless.

That holding is particularly significant given the increasing trend of policyholders attempting to defeat or delay appraisal through extra-contractual allegations and aggressive claims-handling attacks.

What This Means for Property Insurers:

The decision provides substantial support for insurers confronting any of the following in Texas property claims:

• Inflated repair demands or remediation costs that exceed what was reasonably necessary to return property to pre-loss condition;
• Large-scale remediation disputes where the insured selected its own contractor and methodology without prior insurer approval;
• Code-upgrade disagreements where insured-directed over-scope allegedly triggered additional compliance obligations;
• Competing contractor or engineering estimates on scope and methodology; and
• Attempts to transform valuation disputes into full-blown coverage litigation through strategic pleading.

In practical terms, insurers should consider invoking appraisal early and on the record when a genuine disagreement on amount of loss exists—without waiting for the insured to reframe the dispute as a coverage or bad-faith matter. The ruling confirms that an insured’s allegations of bad faith or prior breach do not constitute proof of either, and courts may not allow those allegations to derail the contractual appraisal process before liability is actually tried or decided.

The practical impact of the ruling extends beyond any single claim. Had the Court accepted the insured’s position, virtually every major commercial property dispute could have bypassed appraisal through artful pleading, dramatically increasing litigation costs, delaying claim resolution, and driving increased exposure and premium pressure throughout the Texas property market. Instead, the Court reaffirmed appraisal’s role as an efficient mechanism for narrowing disputes before litigation escalates.

Key Takeaway

The Texas Supreme Court has made clear that insureds cannot avoid appraisal simply by labeling amount-of-loss disputes as coverage, causation, engineering, or bad-faith matters. For property insurers confronting increasingly technical and high-exposure claims, the decision represents a major reaffirmation of the strength and utility of appraisal under Texas law—and because it builds directly on the Johnson framework, carriers can treat this holding as settled, durable doctrine rather than a one-off result.

About the Author

Ramy Elmasri is a Shareholder and Managing Partner—Texas at Clausen Miller P.C. He focuses his practice on complex insurance coverage, first-party property, construction, and commercial litigation, regularly representing insurers in high-exposure matters involving property losses, coverage disputes, bad-faith allegations, and risk-transfer issues throughout Texas state and federal courts. He also provides strategic counseling and thought leadership on emerging developments affecting the insurance industry.

[email protected]  |  346.229.4612

The full opinion is available through the Texas Supreme Court’s website. The case is In re ACE American Insurance Company et al., No. 25-0461 (Tex. May 8, 2026).