Insurance Dispute Appraisal Mandatory
Appraisal is Mandatory in an Insurance Dispute
October 19, 2011
Since the first standard fire insurance policy was mandated in New York in the 19th Century insurers and insureds who disputed the amount of loss had available the appraisal process where a panel of three appraisers (limited arbitrators) to establish the amount of loss. Today appraisal clauses are uniformly included in most forms of property insurance policies. Virtually every property insurance policy for both homeowners and corporations contains a provision specifying “appraisal” as a means of resolving disputes about the “amount of loss” for a covered claim. The appraisers make no decisions with regard to coverage but only to the quantum of the loss.
A Standard Fire Insurance Policy provides:
In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon such umpire, then, on request of the insured or this company, such umpire shall be selected by a judge of a court of record in the state in which the property covered is located. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him and the expenses of and umpire shall be paid by the parties equally.
Lawyers don’t like appraisals because they can limit the amount of loss and are usually decided by a panel of appraisers who are not trained in the law. They will try to avoid appraisal by arguing waiver or some other action by the insurer. Texas insureds, like those in every state in the United States, acquire property insurance policies with an appraisal clause almost identical to the provision in the 19th Century New York Standard Fire Policy. The Texas Court of Appeal was called upon to resolve a dispute over the right to appraisal in a case called In Re Certain Underwriters At Lloyd’s, No. 10-11-00263-CV (Tex.App. Dist.10 10/12/2011) after a hurricane damaged plaintiffs’ property.
The case involves an insurance claim made by the Andersons with regard to their house located in New Waverly, Texas, which was damaged as a result of Hurricane Ike on September 13, 2008. The Andersons alleged that the roof of their house sustained extensive damage and that water damaged the ceilings, walls, insulation, and flooring of the house. The Andersons further alleged that, immediately after the storm, they filed a claim with Lloyd’s, their insurance company. Thereafter, Lloyd’s sent an adjustor to the Andersons’ home to inspect the damage. The Andersons note that the adjustor only spent ten to fifteen minutes at the house and did not get on the roof.
Upset by what they perceived as an inadequate inspection, the Andersons called Lloyd’s and requested that a different adjuster inspect the property. The Andersons’ property was re-inspected, and the second adjustor’s inspection resulted in the insurer’s conclusion that the extent of the damage to the property did not exceed the $750 deductible associated with the homeowner’s policy covering the house.
Lloyd’s denied the claim and in a letter dated December 5, 2008, Lloyd’s told the Andersons: “If you disagree with or have a question about the enclosed property damage estimate, please call Quality Claims Service. Should you have any questions concerning the above, or if you have any additional information that would help Certain Underwriters at Lloyd’s re-evaluate your claim, please do not hesitate to call.”
In response to Lloyd’s’s December 5, 2008 letter, the Andersons repeatedly called to complain about the adjuster’s poor investigation of their damages and their disagreement with Lloyd’s’ estimate of the claim and eventually filed suit.
In their lawsuit, which was filed on August 25, 2010, the Andersons asserted causes of action against Lloyd’s for: (1) violations of the insurance code, including unfair settlement practices and the failure to promptly pay claims; (2) fraud; (3) conspiracy to commit fraud; (4) breach of contract; and (5) breach of the duty of good faith and fair dealing. In their original answer and in a separate motion to compel, Lloyd’s requested that the proceedings be abated and that the matter be sent to appraisal, as allowed by the underlying homeowner’s insurance policy.
On November 8, 2010, the trial court denied Lloyd’s’s appraisal request.
The Request for a Writ of Mandate
Lloyd’s asked the Court of Appeal to issue a writ of mandate compelling that the appraisal go forward. Accompanying its mandamus petition was an emergency motion to stay the trial court proceedings. Upon receiving the filings, the Court of Appeal granted Lloyd’s’ emergency motion to stay the trial court proceedings and requested a response. The Andersons filed a response to Lloyd’s’ petition on September 2, 2011.
Today, mandamus review of significant rulings in exceptional cases may be essential to preserve important substantive and procedural rights from impairment or loss, allow the appellate courts to give needed and helpful direction to the law that would otherwise prove elusive in appeals from final judgments. Mandamus can spare private parties and the public the time and money utterly wasted in unnecessary litigation.
Appraisal clauses, commonly found in homeowners, automobile, and property policies, provide a means to resolve disputes about the amount of loss for a covered claim. These clauses are generally enforceable, absent illegality or waiver. Appraisals can provide a less expensive, more efficient alternative to litigation, and the courts of Texas recently held that they should generally go forward without preemptive intervention by the courts.
Though appraisals have proceeded for well over a century with little judicial involvement, in rare cases, a court may conclude that a party has waived its right to enforce the appraisal provision. In the absence of fraud, accident, or mistake, the parties having agreed that the amount of loss shall be determined in a particular way, the courts are constrained to hold that the appraisal provision is valid.
In deciding whether a demand for appraisal was made within a reasonable time, and consequently has not been waived even if suit was filed before the demand was made, courts have considered the timeliness of the demand in light of the circumstances as they existed at the time the demand was made. Pertinent circumstances include (1) the time between the breakdown of good faith negotiations concerning the amount of the loss suffered by the insured and the appraisal demand; and (2) whether there would be any prejudice to the other party resulting from the delay in demanding an appraisal.
Delay alone is not enough to prove waiver. To prove waiver a party must also demonstrate prejudice. The Court of Appeal found it difficult to see how prejudice could ever be shown when the policy, like the Lloyd’s policy, gives both sides the same opportunity to demand appraisal. If a party senses that impasse has been reached, it can avoid prejudice by demanding an appraisal itself. This could short-circuit potential litigation and should be pursued before resorting to the courts.
The Court of Appeal concluded that Lloyd’s has shown that the trial court clearly abused its discretion by:
- failing to enforce the appraisal clause of the underlying homeowner’s insurance policy; and
- concluding that Lloyd’s had waived this right.
Deciding that mandamus relief is appropriate to enforce an appraisal clause because denying the appraisal would “vitiate the insurer’s right to defend its breach of contract claim.” Because the Court of Appeal held that the appraisal provision was not waived by Lloyd’s it held that Lloyd’s was entitled to mandamus relief.
Accordingly, the Court of Appeal directed the trial court to grant Lloyd’s’ motion to compel appraisal.
Appraisal is an important tool to help both the insured and the insurer resolve disputes over the amount of loss. Once that issue is resolved more often than not the entire dispute is resolved and litigation between the parties can be avoided. Even if litigation is not avoided the proof required at trial will be limited and the parties and courts will save a great deal of time and money.
It is incumbent on every insurer and insured to elect the right to appraisal promptly or risk losing it altogether. It is usually best to tender the amount the insurer believes it owes and advise the insured that, if the insured disputes the decision of the insurer, the insured has the right to demand appraisal. It should advise the insured that if the award is more than that paid it will pay the difference promptly and if the award is less than that paid it expects to be reimbursed.