Appraisal is Not Arbitration

In arbitration, all contested issues are submitted to an arbitrator(s) for resolution, whereas in appraisal, only the amount of loss is decided by two appraisers and an umpire, if necessary. 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 appraisers who determine solely the amount of loss. If the two appraisers disagree, then an umpire is chosen by the parties to resolve differences; if the appraisers cannot agree on an umpire, then frequently a court is petitioned to appoint one.

The Law Regarding Appraisal       

Again, appraisal is not arbitration. In theory, appraisal is to be used to provide a simple, speedy, inexpensive, and fair method of determining the amount of loss only. If an appraisal is properly invoked, carried out, and awarded, the amount of loss is binding on the insurer and the insured.

Appraisal clauses were traditionally inserted for the insurer’s benefit and may be waived. However, either the insurer and/or the insured may invoke appraisal. The insurer “will not be permitted to use this clause oppressively, or in bad faith.” Insurance Serv. Co. v. Brodie, 337 S.W.2d 414–417 (Tex. Civ. App.—Fort Worth 1960.).

Absent agreement between the parties, appraisal has customarily been used to determine the amount of loss only. Until recently, appraisers and umpires have had no authority or power in an appraisal to determine “questions of causation, coverage, or liability …” However, the Supreme Court’s 2009 opinion in State Farm Lloyd’s v. Johnson, 290 S.W.3d 886 (Tex. 2009), has slightly altered this approach.

The appraisal language requires that a demand for appraisal must be in writing. Usually, the language also addresses certain time limits for naming appraisers and umpires, how appraisal is to be accomplished, who pays the costs of appraisal, and the appointment of an umpire. Additionally, insurers sometimes use a written memorandum of appraisal for the appraisers and/or umpire to sign. The memorandum often includes the property damaged, the date of loss, the cause of the loss, and sometimes an oath for an appraiser to sign. The typical policy language does not mandate any memorandum of appraisal.

Timeliness and Waiver in Demanding Appraisal

While policy language does not typically address the timing of appraisal, Texas courts have held that a demand for appraisal must be made within a reasonable time. An insurer must move promptly to determine the amount of loss. Thus, these cases demonstrate that once an insurer or insured recognizes that a dispute over the amount of loss exists and is not capable of resolution, the proponent of appraisal should promptly demand appraisal in writing. Otherwise, appraisal can be waived.

Furthermore, the demand for appraisal must be invoked properly. The demand must not only be timely, but in substantial compliance with the terms of the policy. In Insurance Serv. Co. v. Brodie, 337 S.W.2d 414, 415 (Tex. Civ. App.—Fort Worth 1960, writ ref’d n.r.e.), the insurer improperly appointed one individual and two companies as appraisers. The court found that this appointment did not comply with the policy provisions.

Waiver of the appraisal clause can occur in other ways. An acceptance of a proof of loss waives appraisal. Likewise, retention of a proof of loss for unreasonable time without demanding appraisal waives this condition. An insurer who demands appraisal and fails to participate any further has waived the condition.  Where an invalid appraisal has occurred, no further appraisal is required.  And, of course, where the insurer flatly denies the claim, the appraisal clause is waived.

The Requirement of Competent and Disinterested Appraisers

Texas law requires appraisers to be competent and disinterested. The appraiser is not obligated to either party to the appraisal, not required to represent either party’s views or position, and not to be biased. Pennsylvania Fire Ins. Co. v. W.T. Waggoner Estate, 39 S.W.2d 593, 594–595 (Tex. Comm’n App. 1931, no writ). An appraiser is not the selecting party’s expert or independent contractor.

The purpose of the clause is to secure a fair and impartial tribunal to settle the differences submitted to them. In their selection, it is not contemplated that they shall represent either party to the controversy or be a partisan in the cause, nor is an appraiser expected to sustain the views or to further the interest of the party who may have named him. And this is true not only with respect to estimating the amount of loss, but also with reference to the selection of an umpire. They are to act in a quasi-judicial capacity and as a court selected by the parties free from all partiality and bias in favor of either party, to do equal justice between them. The tribunal, having been selected to act instead of the court and in the place of the court, must, like a court, be impartial and nonpartisan:

The term “disinterested” does not mean simply lack of pecuniary interest, but requires the appraiser to be not biased or prejudiced. And, if this provision of the policy was not carried out in this spirit and for this purpose, neither party is precluded from going to the courts, notwithstanding the agreement to submit their differences to the board of appraisers.

Disinterested Appraisers

Disinterested means without bias and prejudice, as well as without pecuniary interest. As a result, those who repeatedly perform appraisals on behalf of the same party certainly call into question issues of bias and prejudice. In Holt v. State Farm Lloyd’s, 1999 WL 261923 (N.D. Tex. 1999), the insurer sought to enforce an appraisal award as an affirmative defense to plaintiff’s breach of contract and extra-contractual claims. 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. The District Court declined to grant State Farm’s summary judgment given the plaintiff’s evidence, finding a fact issue for the jury existed. Holt is one of the only cases that specifically addresses the issue, although the W.T. Waggoner Estate case includes a finding of a biased appraiser and umpire which invalidated an appraisal.¹¹

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. This factor alone is insufficient to establish bias and prejudice, and subsequent cases have not embraced W.T. Waggoner Estate. However, in May v. Foremost Ins. Co., 627 S.W.2d 230, 233–234 (Tex. App.—San Antonio 1981, no writ), an appellate court denied enforcement of an appraisal award based on the insurer’s summary judgment motion because of a continuing business relationship between the insurer and appraiser. The insurer was accused of acting in concert with the appraiser in order to object to an umpire previously agreed upon.

Competency should also not be overlooked. An engineer is likely not competent as an appraiser for a silverware set, and a plumber probably will not suffice as an expert on roofing. Carefully examine every appraiser’s competency or expertise in his/her appointment and subsequent award. If an appraiser is believed to be incompetent, a challenge to the award should be available to the party objecting to competency. In a summary judgment proceeding to enforce an appraisal decision, the appraiser’s competency must be established as competency is mandated by the policy.