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Courts and Coverage

Appraisal under the Homeowners Policy

Brent Cooper | October 1, 2010

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Justice scale, gavel, and books

Appraisal is a process frequently found in many insurance policies but is most commonly used in property damage situations. The language will usually state that appraisal is mandatory when properly demanded by the insurer or insured.

When properly executed, appraisal is binding on the parties as to the amount of loss only. However, many times appraisal is improperly invoked, employed, and/or carried out. Appraisals are frequently carried out without attorneys, usually just between the insurer and the insured.

Appraisal is not arbitration. In arbitration, all contested issues are submitted to an arbitrator(s) for resolution, whereas in appraisal, only the amount of loss is decided by two appraisers and an umpire, if necessary. Arbitration and appraisal are alike in that arbitrators, appraisers, and umpires are to be impartial, independent, and free from bias. Arbitration is formal in nature functioning somewhat like a court while appraisal is an informal process conducted by two appraisers who determine solely the amount of loss. If the two appraisers disagree, then an umpire is chosen by the parties to resolve differences; if the appraisers cannot agree on an umpire, then frequently a court is petitioned to appoint one.

The appraisal language in a policy typically reads as follows.

Appraisal. If you and we fail to agree on the actual cash value, amount of loss, or cost of repair or replacement, either can make a written demand for appraisal. Each will then select a competent, independent, appraiser and notify the other of the appraiser's identity within 20 days of receipt of the written demand. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a district court of a judicial district where the loss occurred. The two appraisers will then set the amount of loss, stating separately the actual cash value and loss to each item.

If the appraisers fail to agree, they will submit their differences to the umpire. An itemized decision agreed to by any two of these three and filed with us will set the amount of loss. Such award shall be binding on you and us.

Each party will pay its own appraiser and bear the other expenses of the appraisal and umpire equally.

Traditionally, appraisal is employed to determine the amount of loss and nothing more. The appraisal clause can be invoked by either party when a determination on the amount of loss is all that is at issue. However, a recent Texas Supreme Court decision has altered the scope of appraisal in certain circumstances, an issue which this paper will address below.

The Law Regarding Appraisal

Again, appraisal is not arbitration. 1 In theory, appraisal is to be used to provide a simple, speedy, inexpensive, and fair method of determining the amount of loss only. 2 If a lawsuit is filed, and one party properly demands appraisal, abatement is not required. 3 If appraisal is properly invoked, carried out, and awarded, the amount of loss is binding on the insurer and the insured. 4

Appraisal clauses were traditionally inserted for the insurer's benefit and may be waived. However, either the insurer and/or the insured may invoke appraisal. The insurer "will not be permitted to use this clause oppressively, or in bad faith." Insurance Serv. Co. v. Brodie, 337 S.W.2d 414–417 (Tex. Civ. App.—Fort Worth 1960, writ ref'd n.r.e.).

Absent agreement between the parties, appraisal has customarily been used to determine the amount of loss only. 5 Until recently, appraisers and umpires have had no authority or power in an appraisal to determine "questions of causation, coverage, or liability ..." However, the Supreme Court's 2009 opinion in State Farm Lloyd's v. Johnson, 290 S.W.3d 886 (Tex. 2009), has slightly altered this approach, and this paper will analyze those issues below.

The appraisal language requires that a demand for appraisal must be in writing. Usually, the language also addresses certain time limits for naming appraisers and umpires, how appraisal is to be accomplished, who pays the costs of appraisal, and the appointment of an umpire. Additionally, insurers sometimes use a written memorandum of appraisal for the appraisers and/or umpire to sign. The memorandum often includes the property damaged, the date of loss, the cause of the loss, and sometimes an oath for an appraiser to sign. The typical policy language does not mandate any memorandum of appraisal.

Timeliness and Waiver in Demanding Appraisal

While policy language does not usually address the timing of appraisal, Texas courts have held that demand for appraisal must be made within a reasonable time. 6 An insurer must move promptly to determine the amount of loss. Thus, these cases demonstrate that once an insurer or insured recognizes that a dispute over the amount of loss exists and is not capable of resolution, the proponent of appraisal should promptly demand appraisal in writing. Otherwise, appraisal can be waived.

Furthermore, the demand for appraisal must be invoked properly. The demand must not only be timely but in substantial compliance with the terms of the policy. In Insurance Serv. Co. v. Brodie, 337 S.W.2d 414, 415 (Tex. Civ. App.—Fort Worth 1960, writ ref'd n.r.e.), the insurer improperly appointed one individual and two companies as appraisers. The court found that this appointment did not comply with the policy's provisions. Brodie filed suit some 42 days after the insurer demanded appraisal. The demand for appraisal took place 72 days after the adjuster had viewed and examined the loss. The Brodie court agreed the demand for appraisal was untimely, waived, and not in compliance with the policy.

Waiver of the appraisal clause can occur in other ways. An acceptance of a proof of loss waives appraisal. 7 Likewise, retention of a proof of loss for unreasonable time without demanding appraisal waives this condition. 8 An insurer who demands appraisal and fails to participate any further has waived the condition. 9 Where an invalid appraisal has occurred, no further appraisal is required. 10 And, of course, where the insurer flatly denies the claim, the appraisal clause is waived.

The Requirement of Competent and Disinterested Appraisers

Texas law requires appraisers to be competent and disinterested. The appraiser is not obligated to either party to the appraisal, not required to represent either party's views or position, and not to be biased. Pennsylvania Fire Ins. Co. v. W.T. Waggoner Estate, 39 S.W.2d 593, 594–595 (Tex. Comm'n App. 1931, no writ). An appraiser is not the selecting party's expert or independent contractor.

The purpose of the clause is to secure a fair and impartial tribunal to settle the differences submitted to them. In their selection, it is not contemplated that they shall represent either party to the controversy or be a partisan in the cause, nor is an appraiser expected to sustain the views or to further the interest of the party who may have named him. And this is true not only with respect to estimating the amount of loss but also with reference to the selection of an umpire. They are to act in a quasi-judicial capacity and as a court selected by the parties free from all partiality and bias in favor of either party, so as to do equal justice between them. The tribunal, having been selected to act instead of the court and in the place of the court, must, like a court, be impartial and nonpartisan:

The term "disinterested" does not mean simply lack of pecuniary interest, but requires the appraiser to be not biased or prejudiced. And, if this provision of the policy was not carried out in this spirit and for this purpose, neither party is precluded from going to the courts, notwithstanding the agreement to submit their differences to the board of appraisers.

Delaware Underwriters v. Brock, 211 S.W. 779, 780–81 (1919).

Disinterested means without bias and prejudice as well as without pecuniary interest. As a result, those who repeatedly perform appraisals on behalf of the same party certainly call into question issues of bias and prejudice. In Holt v. State Farm Lloyd's, 1999 WL 261923 (N.D. Tex. 1999), the insurer sought to enforce an appraisal award as an affirmative defense to plaintiff's breach of contract and extra-contractual claims. At issue was whether Tim Marshall of Haag Engineering, who received approximately one quarter of his income from State Farm appraisal work, was biased and/or prejudiced. The District Court declined to grant State Farm's summary judgment given the plaintiff's evidence, finding a fact issue for the jury existed. Holt is one of the only cases that specifically addresses the issue, although the W.T. Waggoner Estate case includes a finding of a biased appraiser and umpire which invalidated an appraisal. 11

W.T. Waggoner Estate does hold that the inadequacy of an award may be considered as a factor in evaluating bias and prejudice of an appraiser or umpire. This factor alone is insufficient to establish bias and prejudice, and subsequent cases have not embraced W.T. Waggoner Estate. 12 However, in May v. Foremost Ins. Co., 627 S.W.2d 230, 233–234 (Tex. App.—San Antonio 1981, no writ), an appellate court denied enforcement of an appraisal award based on the insurer's summary judgment motion because of a continuing business relationship between the insurer and appraiser. The insurer was accused of acting in concert with the appraiser in order to object to an umpire previously agreed upon.

Other states address this issue differently. 13 In Michigan, an appraiser who has been asked to participate as an appraiser by the same plaintiff on an ongoing basis is not evidence of bias. In contrast, in Pennsylvania, prior relationships may be considered. In California, an insurer must disclose any current dealings with an appraiser. Thus, the more appraisals and the more longstanding the relationship between an appraiser and the selecting party, the more likely a finding of bias and prejudice will be found, or at least create a fact issue to prevent enforcement of an appraisal award.

Competency should also not be overlooked. An engineer is likely not competent as an appraiser for a silverware set, and a plumber probably will not suffice as an expert on roofing. Carefully examine every appraiser's competency or expertise in his/her appointment and subsequent award. If an appraiser is believed to be incompetent, a challenge to the award should be available to the party objecting to competency. 14 In a summary judgment proceeding to enforce an appraisal decision, the appraiser's competency must be established as competency is mandated by the policy.

Impact on Extra-Contractual Damages

The appraisal process can be beneficial both to the insured and the insurer who are attempting to obtain expedited resolution of matters involving the valuation of a claim under a homeowners policy. However, the impact may extend beyond the terms of the contract. If the insured is looking to attempt to collect extra-contractual damages or other statutory penalties, the appraisal process, or lack thereof, may impose an impediment to their recovery. In Amine v Liberty Lloyd's, 2007 Tex. App. LEXIS 6280 (Tex. App.—Houston [1st Dist.] 2007), the court of appeals held that the liability of the insurer was not reasonably clear for the purposes of bad faith prior to the time that appraisal had taken place. That court held that a payment of the appraisal award by the insurer prevented the accrual of any statutory penalties for late payment because the obligation to pay did not accrue before the conclusion of the appraisal process.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.


1 In Re Allstate Ins. Co., 85 S.W.3d 193, 195 (Tex. 2002); Scottish Union Nat'l Ins. Co. v. Clancy, 71 Tex. 5, 8 S.W.3d 630, 631 (1988).
2 Fire Ass'n v. Ballard, 112 S.W.2d 532, 534 (Tex. Civ. App.—Waco 1938, no writ).
3 In re Allstate Ins. Co. at 85 S.W.3d 193, 195 (Tex. 2002).
4 Standard Fire Ins. Co. v. Fraiman, 514 S.W.2d 343, 344–345 (Tex. Civ. App.—Houston [14th Dist.] 1974, no writ).
5 Wells v. American States Preferred Ins. Co., 919 S.W.2d 679, 684 (Tex. App.—Dallas 1996, writ denied).
6 American Fire Ins. Co. v. Stuart, 38 S.W. 395 (Tex. Civ. App.—1996, no writ) (58-day delay); Boston Ins. Co. v. Kurley, 281 S.W. 275 (Tex. Civ. App.—Eastland 1926, no writ) (59-day delay).
7 Springfield Fire & Marine Ins. Co. v. Cannon, 46 S.W. 375 (Tex. Civ. App. 1898, no writ); Stuart, 38 S.W. at 395.
8 Gulf Ins. Co. v. Carroll, 330 S.W.2d 227, 231 (Tex. Civ. App.—Waco 1959, no writ); Kurley, supra; and American Central Ins. Co. v. Heath, 29 Tex. 445, 69 S.W. 235 (Tex. Civ. App.—1902, no writ).
9 Northern Assur. Co. v. Samuels, 33 S.W. 239 (Tex. Civ. App.—1895, no writ).
10 Security Ins. Co. v. Kelley, 196 S.W.2d 874, 878 (Tex. Civ. App.—Amarillo 1917, writ ref'd); Wells, 919 S.W.2d at 686–687.
11 But see, Gardner v. State Farm Lloyd's, 76 S.W.3d 140 (Tex. App.—Houston [1st Dist.] 2002, no petition) (no fact issue on summary judgment regarding independence of appraiser), and Bunting v. State Farms Lloyd's, 2000 WL 191672 (N.D. Tex. 2000) (insufficient evidence to raise a fact issue regarding appraiser's independence).
12 See, e.g., Hennessey v. Vanguard Ins. Co., 895 S.W.2d 794, 798–799 (Tex. App.—Amarillo 1995, writ denied).
13 See Northern Assur. Co. v. Melinsky, 213 N.W. 70, 71 (Mich. 1927); Pennsylvania Land v. State Farm Mut. Ins. Co., 600 A.2d 605, 607 (Pa. Super 1991); Gibers v. State Farm Gen. Ins. Co., 45 Cal. Rptr. 2d 725, 728 (Ct. App. 1995).
14 See E.I. Dupont de Nemours & Co., Inc. v. Robinson, 923 S.W.2d 549 (Tex. 1995).