A recent Texas state appellate court decision confirms the importance of clarity in the appraisal process as to the issues being considered by an appraisal panel. In Texas Windstorm Insurance Association v. Dickinson Independent School District,[1] the 14th Court of Appeals in Houston reversed and remanded a post-appraisal award summary judgment ruling in favor of TWIA policyholder, Dickinson ISD, holding: “Standing alone, the Appraisal Award simply does not provide sufficient evidence from which a court may determine as a matter of law which Appraisal Award damages, if any, were caused by a covered peril.”[2]
Background
The Dickinson ISD case stemmed from alleged windstorm damage sustained during Hurricane Ike in September 2008. The Texas Windstorm Insurance Association made multiple payments under its policy for damage to Dickinson ISD buildings during the following three years. After Dickinson ISD demanded recovery for overhead and profit, statutory interest, and attorney and expert fees, TWIA invoked the appraisal provision of the policy. By the time the appraisal panel inspected the buildings, five years had passed since the date of the storm. TWIA contended that there was no indication of wind damage to support Dickinson ISD’s claim, and no wind-created openings that caused interior damage to the buildings. TWIA also asserted that the policyholder had already recovered for certain damages, which were covered under manufacturer warranties.
An appraisal award was eventually executed awarding Dickinson ISD nearly $11 million. The award listed a date of loss consistent with the date of Hurricane Ike and described the type of loss/claim as “Appraisal for Hurricane wind damage.” The award also stated that the appraisers, “carefully examined the damages pursuant to the loss described herein above ...” While the award was accompanied by 25 pages listing the replacement cost value, depreciation and actual cash value of 134 buildings and other items, it did not indicate that the damages listed were caused solely by wind or other covered perils during Hurricane Ike. The court was then asked whether the award alone was sufficient to establish conclusively that Dickinson ISD suffered covered losses in the amount awarded.
Reliance on State Farm Lloyds v. Johnson
The Dickinson ISD case provided the appellate court with an opportunity to analyze the Texas Supreme Court’s oft-cited decision in State Farm Lloyds v. Johnson.[3] The most thorough analysis of the appraisal process by the highest court in Texas, Johnson makes clear that although the “line between liability and damage questions may not always be clear, ... the scope of appraisal is damages, not liability.”[4] But the Johnson court also recognized “when different types of damage occur to different items of property, appraisers may have to decide the damage caused by each before the courts can decide liability.”[5] It is this distinction between causation as a liability issue and causation as a damages issue that the court was tasked with addressing in TWIA v. Dickinson ISD.
It is important to note that Dickinson ISD only submitted four pieces of summary judgment evidence to the trial court: (a) a copy of the TWIA policy, (b) the Appraisal Award, (c) TWIA’s answer, and (d) TWIA’s letter invoking the appraisal process. Forty other exhibits, including deposition excerpts from the court-appointed umpire, were filed late and not considered. Hence, on the issues of causation and damages, for which Dickinson ISD sought summary judgment, the only evidence before the court from the actual appraisal process was the appraisal award itself.
The appellate court reversed summary judgment in favor of Dickinson ISD and held that the appraisal award alone was insufficient for Dickinson ISD to carry its burden of proving causation and damages as a matter of law. In a footnote addressing a portion of the appraisal award, the court explained that numerous interior rooms were listed as having sustained damage. However, the court observed that there was nothing in the appraisal award to indicate what type of damage each line item represented. “For example, nothing indicate[d] whether the dollar amounts reflect[ed] damage from wind as opposed to flood, rain, or mold, all of which [were] excluded under the policy.”[6]
The court also stated that a factfinder could reasonably infer that some of the damages were caused in the five years after Hurricane Ike, based on the evidence submitted by TWIA.
Holding
The court made clear, quoting Johnson, that the analysis of an appraisal award will be made on a case-by-case basis: “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.”[7]
The lessons of TWIA v. Dickinson ISD are simple and clear. Both insurers and insureds must ensure that their designated appraisers obtain clarity going into the appraisal process as to the scope of the issues being considered. The court’s ruling indicates that boilerplate awards are insufficient under Texas law to prove whether damages were caused by a covered peril. This is true even where the award lists a specific date of loss and a specific type of loss, such as “Hurricane wind damage.”
The lessons of TWIA v. Dickinson ISD are also easily addressed. Both parties to the appraisal process can provide their appraisers with the specific questions or issues to be addressed by the panel consistent with the policy and applicable Texas law. For example, when there are questions as to date of loss and covered versus excluded damage, the appraisal panel could be asked:
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Was there a [hail] event on the reported date of loss?
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Did the [hail] event cause physical loss or damage covered by the policy?
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State the replacement cost and actual cash value of the physical loss or damage caused solely by the [hail] event on the reported date of loss?
The parties could agree to use an agreed appraisal protocol that provides the appraisal panel with guidance as to the issues to be addressed, along with any other terms that could prove useful in ensuring that the panel issues a clear award that brings the dispute to conclusion. That objective serves the interests of all involved parties.
Absent such clarity, TWIA v. Dickinson ISD provides a basis to question awards that are not clear as to the issues addressed by the appraisal panel. However, the opinion does not give insurers a free pass to ignore an appraisal award anytime there is evidence of noncovered damages. Had Dickinson ISD timely submitted additional summary judgment evidence showing that the damages listed in the award were only for covered damages, the result may have been different. And nothing in the court’s decision precludes an insured from submitting such evidence at trial.
Insurers and insureds have remedies at their disposal to seek clarification of an appraisal award. Where the facts underlying an appraisal indicate that noncovered damages are included in an appraisal award, an insurer could first exercise its right to seek prelitigation depositions. Texas Rule of Civil Procedure 202 allows for depositions to investigate a claim or suit. The purpose of such a deposition in this situation would be to determine whether to file a lawsuit seeking to set aside an appraisal award.
But this approach is not without risk. It is currently well established under Texas law that full and timely payment of an appraisal award precludes recovery of penalties and interest under the prompt payment provisions of the Texas Insurance Code.[8] Whether seeking clarification prior to paying an award would expose a carrier to extracontractual damages appears to be an unresolved issue under Texas law. However, the reasoning set forth in TWIA v. Dickinson ISD, provides at least some support for the argument that seeking clarification prior to tendering payment of an appraisal award should not expose carriers to liability for extracontractual damages.
But the way to avoid all of these issues is very simple. The parties to the appraisal process should cooperate in educating the appraisal panel as to the issues they are being asked to address and the importance of issuing a detailed appraisal award identifying the cause of loss for each damage item, perhaps with the use of an appraisal protocol. As illustrated by TWIA v. Dickinson ISD, boilerplate awards can frustrate the very purpose of appraisal, which is to provide the parties with an efficient and effective means of resolving a dispute over the amount of a covered loss.
[1] Texas Windstorm Ins. Ass'n v. Dickinson Indep. Sch. Dist., 14-16-00474-CV, 2018 WL 2436924, at *1 (Tex. App.—Houston [14th Dist.] May 31, 2018, no pet. h.).[3] 290 S.W.3d 886 (Tex. 2009).
[2] Id. at *11.
[3] 290 S.W.3d 886 (Tex. 2009).
[4] Johnson, 290 S.W.3d at 890.
[5] Id. at 886.
[6] Dickinson Indep. Sch. Dist., 2018 WL 2436924, at n.13.
[7] Id. at *10.
[8] Nat'l Sec. Fire & Cas. Co. v. Hurst, 523 S.W.3d 840, 847 (Tex. App.—Houston [14th Dist.] 2017, pet. filed), reh'g denied (July 25, 2017).
