The Appraisal Clause: In Texas, A Bad Faith Killer?

In re Universal Underwriters of Texas Insurance Company,

345 S.W.3d 404 (Tex. 2011).

— \”It is difficult to see how prejudice could ever be shown when the policy, like the one here, gives both sides the same opportunity to demand appraisal.\” —

Unless subsequent opinions erode the quoted language above, the Supreme Court of Texas may have forever altered the damage model for bad faith insurance litigation. The Court\’s opinion gave teeth, if not fangs, to the appraisal clause – – a contractual provision that had long been present in most insurance policies, but which had not been used by insurers on a routine or regular basis. With some variations, the appraisal clause reads as follows:

If you or we fail to agree on the amount of the loss, either party may made a written demand for an appraisal. Upon such demand, each party must select a competent and impartial appraiser and notify the other of the appraiser\’s identity within 20 days after the demand is received. The appraisers will select a competent and impartial umpire. If the appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the residence premises is located to select an umpire.

The appraiser shall then determine the amount of loss, stating separately the actual cash value and the amount of loss to each item. If the appraisers submit a written report of an agreement to you and to us the amount agreed upon shall be the amount of the loss. If they cannot agree, they will submit their differences to the umpire. A written award agreed upon by any two will determine the amount of the loss.

In the past, in what I will refer to as the old model, policyholders could sue first and develop a damage model later. It was not uncommon for an initial demand letter sent simultaneous with the petition to demand payment of the limits remaining on the policy, in addition to penalties, interest, and attorney=s fees. Sometimes, the initial demand included a demand for mental anguish damages, along with a trebling of actual damages. Under the old model, at the time mediation occurred, counsel for the policyholder had likely incurred no more than a filing fee, a mediation fee, and the cost for an estimator to prepare a bells and whistles estimate.

An examination of the old model using actual numbers will put the risk/reward in perspective. In a hypothetical residential property loss, assume that the insurer, within a couple of months after the loss, paid the insured $50,000 for covered property damage to a home that was insured for $150,000. The policyholder, dissatisfied with the payment, retained counsel, who immediately filed suit and sent a demand letter asking for the $100,000 remaining on the dwelling portion of policy, along with penalties, interest, and attorney\’s fees. If it took a year for the case to make its way to mediation, the attorney would likely have obtained a repair estimate exceeding the dwelling limits for the home. The $100,000 contract demand, after adding penalties, interest, and attorney\’s fees, would easily increase to $172,500, a demand that would certainly be on the low end because it does not include separate demands for contents and ALE. If counsel then asked for the trebling of actual damages under the DTPA, even without accounting for mental anguish, that $100,000 contract demand would expand to a minimum of $450,000.

Under this old model, the financial risk for the policyholder and her attorney was low while the financial risk to the insurer was high. Faced with the potential of having to pay a judgment well in excess of policy limits, insurers were faced with the decision to pay a premium early only slightly in excess of policy limits or risk a significantly higher payment following a trial on the merits. If prior verdicts in Hurricane Rita and Hurricane Ike cases are any indication of the risk, the risk of a verdict 5 to 7 times in excess of contract damages was a realistic possibility.

In re Underwriters may have ended the days where the old damage model was commonplace. At a minimum, from the insurance company\’s perspective, the Supreme Court has leveled the litigation playing field. Before In re Underwriters, insurers had attempted to invoke the appraisal clause after suit had been filed, but in response, policyholders argued, often successfully, that because suit had already been filed, the right to an appraisal had been waived. Alternatively, policyholder would argue that waiver was an issue to be addressed in written discovery, discovery that often became onerous and expensive. The understood goal was to avoid appraisal at all costs because of its preclusive effect to any future bad faith claims.

After In re Underwriters, not only does a policyholder arguing that the insurance carrier waived the right to invoke the appraisal clause have to show that the carrier failed to request an appraisal within a reasonable time after an impasse, the policyholder must also show that she was prejudiced by that failure. It is not enough for a policyholder to simply argue that the insurer waited too long after suit was filed or a demand for payment was made to invoke the appraisal clause. The policyholder must show that the insurer waited too long after it [the insurer] expressed its unwillingness to negotiate further to invoke the appraisal clause. Moreover, before the delay clock begins to start, both parties must be aware that further negotiations would be futile.

Even if the insurer waited long after an impasse to demand an appraisal, in order to avoid the demand, the policyholder must also show that she has been prejudiced by the unreasonable delay. Delay, standing alone, is not enough. A number of reasoned arguments can be presented in support of prejudice, but the Supreme Court of Texas, before being presented with these arguments, seems to have already preordained the result by holding that \”[i]t is difficult to see how prejudice could ever be shown when the policy, like the one here, gives both sides the same opportunity to demand appraisal.\”

From a practical standpoint, this opinion arguably allows the parties in litigation to proceed to and through mediation to see if the matter can be resolved. If mediation is unsuccessful, and in lights of the Court\’s opinion that prejudice is unlikely to ever be demonstrated, there is apparently no impediment to the insurer then demanding an appraisal of the loss. As long as the appraisal award is paid in a timely fashion, the old damage model that totaled as much as $450,000 on a $100,000 contract demand is effectively capped at $100,000. As such, at the onset of litigation, the insurer knows, with relative certainty, the most that it will have to pay, as long as it invokes the appraisal clause and timely pays the umpire award. Consequently, the insurer\’s incentive to pay a premium settlement in excess of policy limits early in the litigation, without the policyholder=s attorney having to incur significant time and expense developing the case is removed, and consequently, so too is an attorney=s eagerness to sign up a policyholder\’s case with the potential for a high return on investment.

http://www.jonathanallenlaw.com I represent small businesses operating in North Texas in insurance coverage matters, commercial claims, construction defect disputes, and general liability suits brought by contractors and employees. My blogs can be found at http://www.jonathanallenlaw.com.

http://www.jonathanallenlaw.com I represent small businesses operating in North Texas in insurance coverage matters, commercial claims, construction defect disputes, and general liability suits brought by contractors and employees. My blogs can be found at http://www.jonathanallenlaw.com.

Author Bio: http://www.jonathanallenlaw.com I represent small businesses operating in North Texas in insurance coverage matters, commercial claims, construction defect disputes, and general liability suits brought by contractors and employees. My blogs can be found at http://www.jonathanallenlaw.com.

Category: Legal
Keywords: Insurance Coverage, Appraisal, Bad Faith Litigation