The Texas Supreme Court recently upheld an appeals court ruling that favors the insured in a dispute over the scope of an appraisal clause in a homeowners insurance policy.
Delivering the written opinion of the Court in State Farm Lloyds V. Becky Ann Johnson (NO. 06-1071), Justice Scott Brister noted that while most property insurance policies in Texas have appraisal clauses, rarely have they been the subject of litigation.
As to the case under review, which was argued before the Court on Jan. 15, 2008, Justice Brister explained that while the parties agreed “that the scope of appraisal includes damage questions and excludes liability questions … they disagree which is involved in this dispute about hail damage to a homeowner’s roof. Because an appraisal has yet to take place, we agree with the insured that the record does not establish that it will exceed the permissible scope of appraisal. Accordingly, we affirm the court of appeals’ judgment in favor of the insured.”
An April 2003 hailstorm in Plano, Texas, damaged the roof of Becky Ann Johnson’s home, and she filed a claim under her homeowners insurance policy with State Farm Lloyds, according to the Court document.
An inspector hired by State Farm concluded that only the ridgeline of Johnson’s roof was damaged and estimated repair costs at $499.50. The policy had a $1,477 deductible. Johnson’s roofing contractor, however, said the entire roof needed to be replaced at a cost of more than $13,000.
“To settle this difference,” Justice Brister wrote, “Johnson demanded appraisal of the ‘amount of loss’ under the following provision in her standard-form policy:
“‘Appraisal. If 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. 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 agreement signed by any two of these three shall set the amount of the loss.'”
Refusing to participate in the appraisal, State Farm asserted that the dispute over the claim “concerned causation and not ‘amount of loss.’ Johnson filed suit seeking only a declaratory judgment compelling appraisal.”
The trial court agreed with State Farm that no appraisal was warranted, but an appeals court reversed that decision.
“While trial courts have some discretion as to the timing of an appraisal, they have no discretion to ignore a valid appraisal clause entirely,” Justice Brister wrote in explaining why the state Supreme Court agreed to review the case.
“Insurance appraisal clauses have been around for a long time,” Brister wrote. “In 1888 in Scottish Union & National Insurance Co. v. Clancy, this Court enforced an appraisal clause much like the one used here. It would be going too far to say the Court approved of such clauses, but we unequivocally found them enforceable.”
Brister explained that once parties have bound themselves to such an agreement in a policy they are not at liberty to disregard it. Thus, Brister wrote, “[i]n the absence of fraud, accident, or mistake, the parties having agreed that the amount of loss shall be determined in a particular way, we are constrained to hold that such stipulation is valid.”
State Farm had argued that no appraisal was needed “because appraisers cannot decide causation issues,” Brister said, but he noted that the record in this case “does not establish as a matter of law either that this dispute is about causation or that it is beyond the scope of appraisal.”
In its motion for summary judgment, State Farm asserted that “the only shingles on Johnson’s roof that were actually damaged by hail were the shingles on the ridge of her roof.” Brister pointed out, however, that a “dispute about how many shingles were damaged and needed replacing is surely a question for the appraisers.”
On appeal, State Farm said that in addition to disputing which shingles were damaged, it was disputing “which were damaged by hail. But nothing in the summary judgment record establishes Johnson’s roof was damaged by anything else,” Brister wrote. He also said the record did not conclusively show that “the parties’ dispute is solely about how much of the roof was damaged rather than how much needs to be replaced.”
He added that “[even] if the parties’ dispute involves causation, that does not prove whether it is a question of liability or damages.” Causation, at least as an initial matter, should always be considered by appraisers, Brister wrote.
“This of course does not mean appraisers can rewrite the policy,” Brister pointed out. “No matter what the appraisers say, State Farm does not have to pay for repairs due to wear and tear or any other excluded peril because those perils are excluded. But whether the appraisers have gone beyond the damage questions entrusted to them will depend on the nature of the damage, the possible causes, the parties’ dispute, and the structure of the appraisal award. … State Farm cannot avoid appraisal at this point merely because there might be a causation question that exceeds the scope of appraisal.”
An Unusual Case
Brister said the case before the Court was unusual for several reasons:
“First, appraisal is intended to take place before suit is filed; this Court and others have held it is a condition precedent to suit. …
“Second, in most cases appraisal can be structured in a way that decides the amount of loss without deciding any liability questions. …
“Third, the scant precedent involving disputes about the scope of appraisal suggests that appraisals generally resolve such disputes. The final appraisal award here may substantiate State Farm’s claim that only the ridgeline suffered hail damage, or reach some in-between figure that proves acceptable to all concerned. Litigating the scope of appraisal is wasteful and unnecessary if the appraisal itself can settle this controversy. …
“Finally, even if an appraisal award is flawed, that can be easily remedied by disregarding it later.”
In ruling in favor of the insured in this case, Brister explained that the Court did not decide “whether the appraisal conducted on remand will necessarily be binding. The summary judgment record does not, and probably cannot, answer that question until after the appraisal has taken place. But for the reasons stated above, we affirm the court of appeals’ order granting Johnson’s motion for summary judgment to compel State Farm to participate in the appraisal process, and remanding the issue of her attorney’s fees to the trial court for consideration.”
Source: Texas Supreme Court, www.supreme.courts.state.tx.us/
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