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By Kristin Suga Heres
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While appraisal is a method of dispute resolution commonly provided for in insurance contracts, many jurisdictions lack a well-developed body of case law addressing questions relating to the scope of appraisal, the role of party appraisers and umpires and other important issues. This is not the case, however, in Texas, where, in recent years, courts have generated a flood of appraisal-related decisions that cover a broad range of topics.

In its recent opinion in TMM Investments Ltd. v. Ohio Casualty Insurance Co.,[1] the Fifth Circuit Court of Appeals continued this trend, reaffirming Texas’ role as a leading source of modern appraisal jurisprudence. The TMM Investments decision, which is decidedly pro-appraisal, is significant in that it demonstrates that courts in the Lone Star State will go to great lengths to preserve appraisal awards and that the scope of appraisal — at least in Texas — reaches well beyond quantum issues.

In TMM Investments, an insured shopping center owner claimed that it sustained severe roof damage during a hailstorm and subsequently (almost two years later) put its property insurance carrier on notice of the loss. The parties’ respective assessments of the damage were vastly different.

The insurer offered to pay the insured an amount based on the insurer’s estimate. The insured refused the offer and, invoking the “Appraisal Property Loss Conditions” section of the subject policy, demanded appraisal.

Pursuant to the terms of the policy, the parties each selected party appraisers, and the appraisers selected an umpire. During the appraisal process, the insurer’s party appraiser expressed concerns that while some of the claimed damage was caused by the hail storm, interior damage caused by water infiltration was not attributable to the storm.[2]

Both party appraisers issued their own, divergent appraisal reports opining as to the amount of the loss. However, the party appraisers agreed in their respective reports that the shopping center’s heating, ventilation and air conditioning system sustained $2,794 in damage.[3]

Several months later, the umpire issued an appraisal award, signed by the umpire and the insurer’s party appraiser.[4] Notably, the umpire chose to exclude from his award the damage to the HVAC system because he did not believe the damage affected the system’s operation.

The insurer ultimately tendered payment for the actual cash value (ACV) amount listed in the umpire’s award, less the policy deductible. After being notified by the insured that the umpire’s award did not include the HVAC damage, the insurer sent a check to the insured equal to the ACV amount stated in the award plus the agreed amount ($2,794) of the HVAC damage. The insured declined to accept the insurer’s check and sued its insurer, claiming that the appraisal process was flawed and that the award should be set aside.

On its cross-motion for summary judgment, the insured argued, inter alia, that the umpire had exceeded his authority by excluding from his award the damage to the HVAC system (which both party appraisers had agreed to), and the party appraisers exceeded their authority by improperly considering causation and coverage issues.

The U.S. District Court for the Eastern District of Texas accepted these arguments and concluded that the appraisal award was invalid and should be set aside in its entirety.

Don’t Throw Out the Appraisal Award with the Bathwater

On appeal, the Fifth Circuit agreed with the district court’s conclusion that the umpire had exceeded his authority in omitting the HVAC damages from the appraisal award. Citing several Texas appraisal cases, the court observed that “unless there is a discrepancy between the findings of the two appraisers appointed by the parties, there is no duty for the umpire to perform.”[5]

In the case at bar, there was no dispute between the party appraisers with respect to the amount of damage the HVAC system had sustained. However, while the Fifth Circuit recognized that the umpire had overstepped the bounds of his authority, the court determined that this error did not justify “throwing out” the entire appraisal award.[6]

The court reasoned that this “minor mistake[]” did not “taint the entire award” and should not “frustrate the parties’ intent to be bound by the appraisal provision of their contract.” The court therefore preserved the remainder of the appraisal award.

The decision in TMM Investments demonstrates that there is at least some willingness on the part of courts to overlook minor irregularities in appraisal awards — particularly when the problematic aspect of the award can be readily separated from the rest of the
award — for the sake of preserving awards and the intent of the parties.

Not Just a Numbers Game

In TMM Investments, the Fifth Circuit was also faced with the age-old question of whether appraisal panels may consider more than just quantum issues. While the district court below concluded that the appraisal panel had acted outside the scope of its contractually granted authority in considering issues relating to loss causation, the Fifth Circuit disagreed on this point and declined to set aside the appraisal award on this basis.

In setting aside the appraisal award, the court below found that the panel improperly “attribut[ed] the roof membrane damage to improper installation and the skylight damage to rocks thrown from below.”[7] However, the Fifth Circuit, relying on the Texas Supreme Court’s oft-cited decision in State Farm Lloyds v. Johnson,[8] concluded that an appraisal panel’s authority includes the consideration of issues beyond the amount of the loss, specifically, causation issues.

Citing Johnson, the Fifth Circuit noted, “Any appraisal necessarily includes some causation element because settling the ‘amount of loss’ requires appraisers to decide between damages for which coverage is claimed from damages caused by everything else.”[9] The court thus concluded that the appraisers acted within the scope of their authority in distinguishing damage “caused by pre-existing conditions from damage caused by the storm.”[10]

In upholding the appraisal award in TMM Investments, the Fifth Circuit confirmed that Johnson and its progeny are still alive and well and that the scope of appraisal remains broad in Texas.

While the TMM Investments decision is certainly pro-appraisal, the development of a significant body of appraisal case law in Texas may also be viewed as a positive development for appraisal more generally. As the amount of guiding precedent increases, so does the “certainty” attendant in the process.

For instance, knowing how courts have addressed issues relating to the scope of appraisal and the validity of awards may serve to guide parties’ conduct and allow them to be better able to decide whether appraisal is appropriate for their particular circumstances.

--By Kristin Suga Heres, Zelle Hofmann Voelbel & Mason LLP

Kristin Suga Heres is a senior associate in the Boston office of Zelle Hofmann. Her practice focuses on the resolution of insurance and reinsurance coverage disputes.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] No. 12-40635, 2013 WL 5222625, -- F.3d -- (5th Cir. Sept. 17, 2013).

[2] The insurer’s appraiser testified under oath that he believed that some of the claimed interior damage (damage to skylights) was the result of projectiles from inside the building (e.g., bullets, rocks) and not hail. Id. at *2.

[3] After issuing his report but before the umpire’s appraisal award was issued, the insured’s party appraiser resigned citing concerns with respect to the way the appraisal was being conducted. Id.

[4] The policy at issue contained a standard appraisal clause providing that a “decision agreed to by any two will be binding as to the amount of loss.” Id. at *1.

[5] Id.

[6] Id. at *5.

[7] Id. at *6.

[8] 290 S.W.3d 886 (Tex. 2009).

[9] TMM Investments, 2013 WL 5222625 at *7 (citing Johnson, 290 S.W.3d at 893).

[10] Id.