COMPLEX APPRAISAL SOLUTIONS

Most property insurance policies include appraisal provisions. If there is a dispute about the value of an item covered, the appraisal clause allows a disinterested and competent appraiser to determine the amount of loss. If the appraisers disagree, policies provide for the appointment of an impartial umpire to either agree with one party or obtain a compromise. The choice to pursue appraisal over other forms of dispute resolution can be a complicated decision that carries legal consequences.

Because appraisals are typically binding with a few exceptions, it is difficult to undo an appraisal with which the policyholder disagrees. Our appraisal lawyers have been helping clients with property insurance claims involving appraisals for many years. Our experience includes matters related to insurance appraisers and the litigation needed to dispute or enforce an appraisal award.  In fact, our firm has actually created Texas case law favorable to commercial policyholders in the appraisal context.

Experienced and Knowledgeable Appraisal Attorneys

Our appraisal attorneys have written and lectured extensively about the use of appraisal and the challenges of undoing or enforcing an appraisal. Clients can be assured that when an appraisal is used to resolve questions about the value of a covered item, they will be receiving highly knowledgeable and experienced counsel that advocates for maximum payment, while preserving all their rights under Texas law. Often appraisal takes place after litigation has been filed against the insurance carriers. That said, all too frequently appraisal is improperly or untimely invoked, employed, and carried out almost exclusively by insurers to the detriment of the insured.

Appraisal is not arbitration. In arbitration, all contested issues are submitted to an arbitrator(s) for resolution, while in appraisal only the amount of loss is decided by two (2) appraisers and an umpire, if necessary. However, recent Texas law holds that the appraisal panel can decide far more than the “scope of loss” as noted in the underlying policy—they can also decide causation in many circumstances.  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 (2) appraisers. If the two (2) appraisers disagree, then an umpire is chosen by the parties to resolve differences; if the appraisers cannot agree on an umpire, frequently a court is petitioned by counsel 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.

Insureds Now Have The Ability to Recover Penalties, Attorneys’ Fees and Interest After an Appraisal Award Under Texas Law

On June 28, 2019, a divided Supreme Court of Texas in Barbara Technologies issued a significant decision addressing how an insurer’s timely payment of an appraisal award impacts the viability of a policyholder’s contractual and extra-contractual claims post-appraisal. Barbara Technologies Corp. v. State Farm Lloyds, No. 17-0640, 2019 WL 2666484, at *1 (Tex. June 28, 2019).  The Barbara Technologies court held that the timely payment of an appraisal award neither proves nor disproves liability under the Texas Prompt Payment of Claims Act (“TPPCA”). The opinion is significant because, as the dissenting opinion notes, it upends years of decisions from Texas intermediate appellate courts, U.S. District Courts, and the Fifth Circuit — which generally held that the timely payment of an appraisal award barred all claims, including TPPCA claims. The decision is also noteworthy because TPPCA claims allow a policyholder to recover penalty interest and attorneys’ fees, in addition to the actual claim amount.

Texas policyholders scored another significant victory in March 2021 at the Texas Supreme Court in Hinojos v. State Farm. The Court reversed and remanded the court of appeals’ grant of summary judgment in favor of an insurer, based on a partial payment the insurer had made before a later, much higher payment resulting from an appraisal award. The ruling provides further clarification on the effect of the appraisal process under the Texas Prompt Payment of Claims Act. Tex. Ins. Code. Ch. 542 (the “TPPCA”). The Court expanded on its June 2019 decision in Barbara Technologies, confirming that insurers are still liable under the TPPCA when there is an appraisal award regardless of whether there was a prior partial payment.

The TPPCA, Section 542 of the Insurance Code, requires insurance companies to pay interest, in addition to the amount of the insurance claim, when the insurance company delays payment of the claim longer than the statute’s deadlines for making a decision on the claim. That deadline can be as short as 75 days after you notify the insurer of the claim. Appraisal does NOT extend these deadlines:

1. 15 days after receiving your claim - Acknowledging your claim, beginning its investigation of the claim, and requesting relevant information from you.

2. 15 business days after receiving all relevant information - Insurer must make a decision to accept or reject your claim.

3. Within 5 business days - The insurer decides to accept your claim, it must pay the portion it accepted.

4. Insurer must make a decision within 45 days of notifying you that it needs more time - If the insurer needs more time to make a decision, it must tell you, and explain why it needs more time.

5. 60 days after receiving all information necessary to decide your claim - If the insurer delays payment, the insurer “shall pay” interest and attorney’s fees, in addition to the amount of the claim.

The Requirement of Competent and Disinterested Appraisers

If ever there was a more misused area of appraisal, it is that of the requirement of a competent and disinterested appraiser. Insurers hire their pet appraisers over and over, and see no problem with this practice. Insureds who are unrepresented and unfamiliar with the appraisal process are usually unaware of these past relationships.

Disinterested means without bias and prejudice as well as without pecuniary interest. Consequently, those who repeatedly perform appraisals on behalf of same party certainly call into question issues of bias and prejudice. Thus far, only one Texas case has directly addressed the bias and prejudice argument. In Holt vs. State Farm Lloyds, the insurer sought to enforce an appraisal award as an affirmative defense to plaintiff’s breach of contract and extra-contractual claims. 1999 WL 261923 (N.D. Tex. 1999), p. 1. 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. Id. at p. 4. The District Court declined to grant State Farm’s summary judgment given plaintiff’s evidence, finding a fact issue for the jury existed. Id. Holt is the only Texas case specifically addressing this issue, although the W.T. Waggoner Estate decision includes a finding of a biased appraiser and umpire which invalidated an appraisal. W.T. Waggoner Estate, 39 S.W.2d at 594.

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. Id. at 595. This factor alone though is insufficient to establish bias and prejudice. Hennessey vs. Vanguard Ins. Co., 895 S.W.2d 794, 798-799 (Tex. App.—Amarillo 1995, writ denied).

Format for Appraisal Award

Insurers often demand that insurance appraisers use a particular format for a property damage appraisal. The insurers want a very detailed, itemized type of format to determine the award, where appraisers must “state the amount of loss separately for each portion of the property in dispute and for each major building component (for example, roofs, exterior walls and windows, interior water damage, etc.).” This is not motivated by a desire to keep excellent records – rather the more detail there is in the award, the easier it is for an insurer to pick it apart line-item entries and refuse to pay individual components. Unfortunately, the insurance company usually can still deny the claim if it does not like the amount awarded (although doing so may lead to an eventual finding of bad faith). Unfortunately, policyholders have no such advantage.

It is usually in the best interests of a policyholder to have a very simple appraisal award format where the appraisal panel awards lump sum numbers, outlining only broad categories such as building damage, personal property, and sometimes law and ordinance coverage.

In a December 2020 decision from a Texas federal court, the judge declined to require the use of an appraisal format that went beyond the format required by the insurance policy. In Mt. Hawley Insurance Company, et al v. Harrods Eastbelt, LTD, the insurer asked the court to require appraisers to present their findings with separate totals for each major portion of the property and each major building component. The court ruled that the request was outside the scope of the agreed upon policy terms, which only required that “appraisers state separately the value of the property and amount of loss.”

This was a significant victory for policyholders in their ability to avoid pretextual disputes from insurers during the appraisal process.

Is Labor Subject to Depreciation in an Award?

In Texas, a carrier likely cannot depreciate labor from the total Replacement Cost Value (RCV). Mitchell v. State Farm is a decision from the Fifth Circuit Court of Appeals holding that under Mississippi law, unless the policy specifically permits depreciating labor, labor cannot be depreciated. While the Court was applying Mississippi law, another federal court recently considered Mitchell in the context of Texas law. Sims v. Allstate found that the law in Texas was identical to the law in Mississippi on that issue, and therefore Mitchell would likely apply. While not binding authority, Mitchell and Sims strongly support that depreciating labor in Texas is improper.

Issues in Insurance Appraisals

Most appraisal problems arise from claims made under a property & casualty policy, including:

  • Disputes about the value of the property

  • Disputes over the format of the actual appraisal award

  • Disputes about causation, covered perils and normal wear and tear

  • Inappropriate use of appraisers by insurance companies for disputes other than those described in the appraisal language of the policy

  • Disputes over timing of an appraisal

  • Disputes about the competency or impartiality of an appraiser or umpire

  • Excessive application of depreciation by carrier or improperly applying depreciation to certain trades

  • Recovery of monies held back for depreciation after you complete repairs

  • The failure to pay amounts due for “code compliance”

While an accepted contractual dispute resolution process on paper, appraisal can quickly get out of hand when insurance companies don’t follow the rules. An insurer that is liable for the claim in Texas who violated the Prompt Payment of Claims Act must pay interest at a rate that ranges between 10% and 18%.

Even if you have already been through the appraisal process, if your insurer failed to pay the interest required by law or has declined to pay a substantial part of the appraisal award, we can help.

Contact us today or call us at (346) 704-5295 to discuss your property insurance claim free of charge. We have handled contested insurance appraisals throughout the US.