Not in Texas.
Insurance policies have an excruciating number of clauses that can alter an insured’s claim in ways you might not have thought possible. One of the most important clauses every insured, public adjuster, or appraiser must familiarize themselves with is the appraisal clause. This clause is used to settle the “amount of loss” in an insurance claim.
Most appraisal clauses will be similar to this:
If we and you disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each patty will:
- Pay its chosen appraiser; and
- Bear the other expenses of the appraisal and umpire
If there is an appraisal, we will still retain our right to deny the claim.
Once an insurance carrier agrees a covered loss has occurred, an appraisal clause can be key to ensuring the proper amount of loss for damages is calculated. However, once an appraisal award has been made it is very difficult to set aside. See State Farm Lloyds v. Johnson, 290 S.W.3d 886, 888 (Tex. 2009).
There are three recognized circumstances in which an appraisal award will be overturned. First, if the award is made without authority; second, if the award was made on the basis of a mistake, accident, or fraud; and finally, if not made in substantial compliance with the policy. See Gen. Star Indem. Co. v. Spring Creek Creek Vill. Apartments Phase V, Inc., 152 S.W.3d 733, 737 (Tex. App.—Houston [14th Dist.] 2004, no pet.); Barnes v. Western Alliance Ins. Co., 844 S.W.2d 264, 267 (1992).
In State Farm v. Johnson, the Texas Supreme Court did allude to the fact that an appraisal award could be set aside if the award is not “an honest assessment of necessary repairs.” Johnson, 290 S.W.3d, at 895. This comment by the TSC could open the door to future litigation, but as of today there are no case rulings regarding an “outrageous” award.
One way an appraisal award can be set aside is if an appraiser is biased. However, the party asserting bias bears a heavy burden to prove such bias exists. “For example, merely showing “a pre-existing relationship, without more, does not support a finding of bias.” Franco v. Slavonic Mui. Fire Ins. Ass’n, 154 S.W.3d 777,786 (Tex. App.—Houston [14th Dist.] 2004). Generally, to show bias, the party asserting the bias needs to show that an appraiser has a monetary interest in the case. For example, in General Star Indemnity Co. v. Spring Creek Village Apartments Phase Inc., 152 S.W.3d 733, 737 (Tex. App.—Houston [14th Dist.] 2004), the insured’s appraiser had an agreement where his percentage of compensation would go up if the cost of repair were over $2 million. The court found the appraiser therefore had a direct monetary interest in assuring the value of loss was high enough to trigger a bigger profit for his business.
Additionally, while there is no Texas case law or statutory law discussing what a party’s counsel and appraiser may discuss, it is generally understood that any effort to exercise control or influence over an appraiser is inappropriate and may be used as evidence of bias. This does not mean all communication is banned. But the communication must be factual in nature, should be information for the use of all of the appraisers and the umpire, and should not involve any mention of the weight an appraiser should attach to certain materials, or who an appraiser should retain as an additional expert. For instance, factual information such as photos, repair bills, or an adjuster or expert consultation report may be given by a party’s lawyer so long as there is no suggestion that certain documents are more credible than others. Similarly, contacting an appraiser for a status update on the appraisal process would not be seen as an exercise of control by a party’s attorney.
Another means to set aside an appraisal award is where it is made without authority. Here, the insurance policy controls and appraisers should be given a copy of at least the appraisal language in order to abide by the constraints set forth therein. For example, in the appraisal clause shown above, an umpire and an appraiser cannot make an award without the two appointed appraisers first disagreeing and submitting their differences to the umpire. If the umpire and appraiser attempt to agree on an amount before an initial disagreement, then the umpire and appraiser would not have authority under the Policy to make an award. Fisch v. Transcon. Ins. Co., 356 S.W.2d 186, 190 (Tex. Civ. App.—Houston 1962).
Appraisals that are the result of fraud, accident, or mistake may also be set aside. Fraud is found where a party simply lies about the basis on which an award is made. For instance, in Barnes vs. Western Alliance Insurance Co., 844 S.W.2d 264 (Tex. App.—Fort Worth 1992, writ dism’d by agr.) an insured homeowner made a hail claim on two buildings and invoked appraisal. An appraiser and the Umpire entered an award for $402,798, but the award was set aside at trial when the jury determined that based on the evidence and testimony the homeowner had lied about the hail damage and repair costs which the appraiser and umpire had relied on in determining the award.
An award may also be set aside by mistake. Mistake occurs when appraisers are “operating under a mistake of fact that result[s] in an unintended award.” Nemo Cay Resort Townhome Ass’n v. Rockhill Ins. Co., No. 2:19-CV-00386, 2021 U.S. Dist. LEXIS 59518, at *10 (S.D. Tex. 2021). For example, an appraisal panel intends to award the replacement cost value to return a damaged roofing system back to its pre-loss condition. If the panel then reviews an incomplete quote to repair the roof that does not include roof flashing, and based on this document, agrees to not include the cost to remove and replace flashing in its award, then the appraisal award would be based on a mistake. This award would not give effect to the panel’s true intention to award the actual cost to return the roof to its pre-loss condition. See id. at 9–12.
Failing to Follow the Insurance Policy
An appraisal award may also be overturned if an appraiser or the umpire do not comply with the Policy’s requirements. For instance, if the Policy requires the appraisers create an itemized estimate, or even for the appraisal award to be itemized, the appraisers and umpire must do so. See Richardson v. Allstate Tex. Lloyd’s, No. 05-06-00100-CV, 2007 Tex. App. LEXIS 5384, at *7–10 (Tex. App.—Dallas July 11, 2007) (setting aside appraisal award where appraisers did not make itemized estimates, appraisers did not submit only disagreed to items to the umpire, and the final award was not itemized, all of which was required under the Policy).
An appraisal award is very difficult to set aside. As a result, Insureds should be fully informed of their options before agreeing to participate in the appraisal process. Not all claims are good for appraisal. In that same regard, appraisers must read the Policy to ensure their actions do not lead to an award being set aside.
By Andrew Spadoni