My business has a property-insurance claim, and we disagree with the insurer about what is owed. If we believe the insurer has handled the claim in bad faith, can we still be required to go through the policy’s appraisal process?
The Supreme Court of Texas addressed that question this
spring in In re ACE American Insurance Co., 734 S.W.3d 887 (Tex. 2026).
What appraisal is. Most property-insurance policies
contain an appraisal clause. If the insurer and the insured disagree on the
“amount of loss,” either side can demand appraisal. Each side picks an
appraiser, the two appraisers pick an umpire, and a decision agreed to by any
two of them is binding as to the amount of loss. Under longstanding Texas law,
appraisal decides only how much the loss is. Whether the insurer is
liable, and what the policy covers, remain questions for the courts. Id.
at 891 & n.3, 892 (citing State Farm Lloyds v. Johnson, 290 S.W.3d
886, 890 (Tex. 2009)). Appraisal clauses are “generally enforceable, absent
illegality or waiver.” Id. at 892.
What happened. In June 2022, a water line feeding
the fire-suppression system at a Dallas food-distribution warehouse ruptured
beneath the slab and caused extensive damage. The insurers paid part of the
claim, including about $1.2 million for mold remediation. The insured contended
it was owed more, including the full $10 million mold sublimit. The insurers
demanded appraisal. The insured refused, calling the demand “premature and
unwarranted.” After further negotiations failed, the insurers sued to compel
appraisal. The insured counterclaimed for breach of contract, Insurance Code
violations, and bad faith, alleging that the insurers had invoked appraisal to
“coerce” it into accepting a “lowball” offer. Id. at 890–91, 893.
The trial court denied the motion to compel appraisal, and
the Dallas Court of Appeals denied mandamus relief. The Supreme Court granted
it. Id. at 891, 896.
Coverage questions do not block appraisal. The
insured’s main argument was that the dispute was really about coverage,
causation, and whether damage existed at all — matters outside an appraiser’s
role. The Court disagreed. No one suggested the damage had been caused by
anything other than the burst water line, a covered peril. What the insurers
mainly contended was that the insured had spent more than necessary to restore
the warehouse. On the Court’s framing, that is a dispute over the amount of
loss. Id. at 893.
The Court applied that reasoning to each of the insured’s
examples:
•
Mold. The difference between $1.2 million
and $10 million was “over the amount of loss.” Any question about how mold
losses should be split with another insurer could be decided by a court after
the appraisers set the number. Whether remediation should have been billed on a
time-and-materials basis instead of a fixed price was also an appraisal
question. Id. at 893.
•
Building-code costs. The insurers did not
dispute coverage for the added cost of complying with building codes. They
argued only that the insured’s more extensive repairs triggered extra code
requirements. The scope of necessary repairs was for the appraisers. Any
narrower coverage question about a particular compliance cost could still go to
a court afterward. Id. at 893–94.
•
Replacement cost and technical complexity.
The insured argued that the dispute turned on “complex engineering and
construction methodologies” that appraisers were not equipped to handle. The
Court said that an appraiser deciding whether cheaper methods would have
sufficed was “well within the ‘amount of loss’ lane,” and that the policy
contained no exception for technically complex disputes. Id. at 894.
The Court was careful about what it was not deciding.
It did not hold that no coverage disputes remain. It held only that such
disputes “do not render an appraisal improper in the first instance.” Id.
at 894. Quoting its 2009 decision in Johnson, it repeated that “unless
the ‘amount of loss’ will never be needed,” appraisal should generally go
forward “without preemptive intervention by the courts.” Id. at 893–94.
A disagreement is enough. The insured also argued
that the insurers’ valuation had been “inconsistent and constantly shifting,”
so there was no genuine disagreement to trigger appraisal. The Court rejected
that. To “disagree,” it said, is simply “to fail to agree.” The insurers had
consistently valued the loss well below the insured’s figure, and “[t]he
appraisal provision requires nothing more.” Id. at 894–95.
Alleged bad faith is not an exception. Finally, the
insured argued that the insurers’ alleged failures — slow and bad-faith
adjustment, nonpayment, and unfounded coverage defenses — were prior material
breaches that excused it from appraisal. The Court rejected that argument as
well. Accepting it would require a court to decide whether the insurer breached
the policy before appraisal could occur, which “puts the cart before the
horse.” And if an insured could avoid appraisal by alleging a coverage or
claims-handling dispute, the Court said, “appraisal clauses would be virtually
a nullity.” Id. at 895–96. The Court held that “an insurer’s alleged bad
faith in handling a claim does not constitute an exception to the general
enforceability of an appraisal clause.” Id. at 896. It made no
difference that the insured said it had evidence, not just allegations, of bad
faith; at this stage, neither breach nor bad faith had been tried or decided. Id.
at 896 n.7.
What it appears to mean. For commercial
policyholders, the decision suggests that framing a disagreement as a coverage
or bad-faith dispute may not keep it out of appraisal. That appears especially
true where the real fight is over the cost or scope of repairs. Disputes about
which repair methods were necessary, or whether costs were inflated, seem to
fall squarely within appraisal, however technical they are.
The opinion also preserves several things. Coverage
questions, and the insured’s claims for breach of contract and bad faith,
remain for the courts. The policy itself reserved the insured’s right to sue
and the insurer’s right to deny the claim. And the Court noted that an
appraisal award can still be set aside afterward in limited circumstances, such
as fraud, accident, or mistake. Id. at 891 n.3, 895 n.6.
See also our post on quantum
meruit when a contract exists, another recent decision about holding
parties to the terms of their contract.
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