David C. Godbey, United States District Judge.
This Order addresses Plaintiffs Salas Realty, LLC and Salas Plumbing, Inc.'s (collectively "Salas") Application for Appointment of Umpire [1]. For the following reasons, the Court directs the parties each to appoint an appraiser and instructs the two appraisers to select an umpire.
Salas insured its property with Defendant Transportation Insurance Company ("Transportation"). Notice of Removal, Ex. C, Salas Realty, LLC / Salas Plumbing, Inc.'s Appl. Appointment Umpire ("Salas's Appl.") 2 [1]. Salas submitted a claim with Transportation because Salas alleged its property suffered damage after a hail
The insurance contract includes an appraisal clause that states in relevant part:
Id. at 3; see also Def.'s Opp'n 3. Salas argues that it is entitled to an appraiser because the disagreement concerns the amount of loss resulting from the hail storm. Salas's Appl. 2. But Transportation contends that the adjuster determined the loss resulted directly from wear and tear, so the dispute concerns the cause of the damage, not the amount of loss. Transportation Insurance Company's App. Opp'n Pl.'s Appl. Appointment Umpire ("Def.'s App."), Ex. A-1 2 [10]; Def.'s Opp'n 3-5.
Appraisals are a "means of resolving disputes about the `amount of loss' for a covered claim." State Farm Lloyds v. Johnson, 290 S.W.3d 886, 889 (Tex. 2009) (internal quotations and citations omitted). Texas law generally holds appraisal clauses are enforceable, but appraisal-clause litigation is sparse. See id. at 888-89. Yet, in 2009, the Texas Supreme Court in State Farm Lloyds v. Johnson clarified the appropriate scope of appraisals. See id. at 887.
Prior to 2009, the Texas Supreme Court addressed this topic only five times, and each concerned either waiver or enforceability. Id. at 889. Historically, insurance companies have used these clauses in property insurance contracts, and Texas law generally has encouraged courts to enforce these clauses. Id. at 888, 894. In fact, Texas law has pushed parties to conduct an appraisal prior to filing suit because an appraisal does not require court intervention and is usually faster and less expensive than litigation. Id. at 894-95, 894 n.42 (noting that Texas law considers appraisals a condition precedent to litigation).
Long-standing Texas law limits appraisals to determining damage, not liability, because the question of liability is left for the courts. Id. at 889-90. However, the line between the damage and liability question is not always clear. Id. at 890. Prior to 2009, Texas courts split on when an appraiser could decide causation as a part of his damage determination. Id. (collecting cases).
In 2009, the Texas Supreme Court defined the scope of appraisals and the meaning of "amount of loss." Id. at 887, 895. In Johnson, the insurance company and the insured disputed whether an appraisal was appropriate under the contract's appraisal clause. Id. at 887-88. The contract included the following provision:
Id. (emphasis in original).
The insured's property suffered hail damage after a storm. Id. at 887. The insurance company concluded that the storm damaged only the ridgeline of the roof, while the insured's contractor estimated that the whole roof needed repair. Id. The insured requested an appraisal under the insurance contract. Id. The insurance company refused to comply because it claimed that the parties disagreed as to the cause of the damage, which exceeded the scope of an appraisal. Id. at 888. Ultimately, the dispute concerned two intertwined issues: First, was the insurance company and the insured's dispute about causation or amount of loss? See id. at 888, 891. Second, if the dispute concerned causation, was an appraisal appropriate? See id.
The Texas Supreme Court held that determining the extent of hail damage necessarily required the appraiser to decide causation, but an appraisal was still appropriate. Id. at 887, 895. First, the Court determined that, as a matter of law, it was unclear whether the parties disagreed about causation or amount of loss. Id. at 891. Regardless, the Court found that even if the parties did disagree about causation, a causation dispute did not bar an appraisal. Id.
Next, the Court defined the scope of an appraisal by outlining two categories —when an appraiser cannot decide causation and when an appraisal may. Id. at 892. First, appraisers cannot decide causation when the injury is indivisible. Id. at 892, 894. The Texas Supreme Court detailed that "when different causes are alleged for a single injury to property, causation is a liability question for the courts." Id. at 892. For example, in assessing damages to the foundation of a structure, an appraiser assessed damages due to plumbing leaks (a covered cause) as $0 but damages due to settling (an excluded cause) as more than $0. Id. (citing Wells v. Am. States Preferred Ins. Co., 919 S.W.2d 679, 685-86 (Tex. App.-Dallas 1996, writ denied)). In this type of scenario, the appraiser assessed a single injury, so assessing the causation of the injury overstepped his authority. Id. The appraiser can decide the amount of loss, but the appraiser cannot decide what caused it because that is a question of liability, which is reserved for the courts. Id.
Alternatively, an appraiser can decide causation when the injury is divisible. Id. at 892, 894. "[W]hen different types of damage occur to different items of
Furthermore, when covered damages and pre-existing wear and tear occur, this dispute falls into the second category. Id. at 892. The Court explained that "[t]he same is true when the causation question involves separating loss due to a covered event from a property's pre-existing condition." Id. Specifically, an appraiser can determine whether the damage is due to wear and tear or a covered damage, which means an appraiser may decide causation when deciding the amount of loss. Id. Otherwise, appraisal clauses would be largely inoperative because "appraisals [could] never assess ... damage unless a roof [was] brand new." Id. at 892-93.
In conclusion, the Texas Supreme Court determined that an appraiser could determine the amount of loss, even though the appraiser may need to decide an inherent causation question. See id. at 893, 895. The Court specified that State Farm could not avoid appraisal "merely because there might be a causation question that exceeds the scope of appraisal." Id. at 893. But the Court reiterated that this ruling does not mean that the appraiser can rewrite the policy or overstep a court's role. Id.
Additionally, part of the Court's reasoning rested on the posture of this case. Id. The appraisal had not yet occurred. Id. at 893-94. The Court explained that "appraisals should generally go forward without preemptive intervention by the courts" because a court can always review an appraisal and determine whether the appraiser overstepped his authority. Id. at 895. The Court encouraged parties to conduct appraisals before litigation ensues because someone must determine the amount of loss, and appraisals generally aid in avoiding litigation. Id. at 894-95.
Since Johnson, courts continue to allow appraisers to evaluate whether damage was caused by a particular event or was the result of noncovered pre-existing perils like wear and tear. TMM Investments, Ltd. v. Ohio Cas. Ins. Co., 730 F.3d 466, 474 (5th Cir. 2013) (collecting cases).
The Court finds Transportation's causation exclusion void as against public policy, and the Court directs the parties to appoint appraisers who can then appoint an umpire as under the policy.
Parties are free to contract, but parties cannot agree to terms that are against public policy. Phila. Indem. Ins. Co. v. White, 490 S.W.3d 468, 475 (Tex. 2016). In Texas, insurance policies are controlled by Texas contract law. Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987). A court should first determine the contractual rights of the parties under the insurance policy before rendering the contract provision void. Tex. Farmers Ins.
It is a long-standing rule that the Court must read an insurance policy to avoid rendering any portion inoperative. Fiess v. State Farm Lloyds, 202 S.W.3d 744, 748 (Tex. 2006) ("[I]t has again long been the rule that we must read all parts of a policy together, giving meaning to every sentence, clause, and word to avoid rendering any portion inoperative."). The Texas Supreme Court encourages enforcing appraisal clauses, rather than enforcing interpretations that leave the clauses inoperative. See State Farm Lloyds v. Johnson, 290 S.W.3d 886, 893 (Tex. 2009); see also SPJST Lodge #514 & Am. Sokol Org. v. Century Sur. Co., 2015 WL 12699508, at *2 (N.D. Tex. Nov. 23, 2015) (O'Connor, J.); Essex Ins. Co. v. Levy Props., Inc., 2013 WL 12122119, at *5 (N.D. Tex. May 7, 2013) (Cummings, J.).
Here, the Court finds that Transportation's causation exclusion is void, and the Court directs the parties to appoint appraisers. Like in Johnson, before an appraisal has taken place, the parties dispute the same two-part issue—whether the issue is one of causation or amount of loss, and, consequently, whether Salas can elect for an appraisal. See Johnson, 290 S.W.3d at 887-88, 891, 894. Transportation contends that Salas is excluded from an appraisal because Transportation's adjuster determined the loss resulted from wear and tear, making this a causation dispute. Def.'s Opp'n 3-5. Transportation argues that under the contract's appraisal clause, Salas cannot elect for an appraisal when the parties dispute causation. Id.
However, the Court holds that Transportation's causation exclusion violates public policy. See Johnson, 290 S.W.3d at 892-93. The appraisal clause allows Salas to elect for an appraisal when the parties disagree about the amount of loss. Salas's Appl. 3; Def.'s Opp'n 3. As Transportation argues, the clause also includes a causation exclusion preventing the parties from electing for an appraisal when the parties disagree over whether the loss was caused by covered peril, meaning Salas cannot elect for an appraisal when the dispute concerns separating covered loss from wear and tear. See Def.'s Opp'n 3.
This issue mirrors the scenario described in Johnson. See Johnson, 290 S.W.3d at 892-93. Based on Johnson, the Court finds an appraisal is appropriate when separating loss from a covered event from wear and tear, even though the appraiser may have to make a causation determination. See id. But Transportation's causation exclusion prohibits Salas from appointing appraisers in this scenario, unless the property is brand new. As predicted in Johnson, Transportation's causation exclusion renders the appraisal clause "largely inoperative" because if "appraisers can never allocate damages between covered and excluded perils, then appraisals can never assess [storm] damage unless [the property] is brand new." Id.
Accordingly, the Court finds that the parties should appoint appraisers. See id. at 892-93. The appraisers can make a causation determination in order to separate the damages resulting from the storm from the damages resulting from wear and tear. Id.
The Court directs Salas and Transportation each to designate an appraiser within fourteen (14) days of the date of this Order. The two appraisers will select an umpire as provided in the policy. If the two appraisers are unable to agree on an umpire within twenty-eight (28) days after the date of this Order, the parties must advise the Court, which will select an umpire.