The Role of Causation Analysis in the Insurance Appraisal Process

At its most basic level, the insurance agreement providing a right to appraisal is a contract between two parties. While the interpretation of a contract is a matter for the courts, all parties concerned (including policyholders and insurers) have an interest in preserving the appraisal process and recognizing that allowing an appraiser to consider causation where an insurer has not disputed coverage is not a threat to a court's power to determine coverage issues. Courts broadly recognize the public policy importance in encouraging efficient, out-of-court resolutions to disputes between policyholders and insurers. Mitchell v. Aetna Cas. & Surety Co., 579 F.2d 342, 350 (5th Cir. 1978); CIGNA Ins. Co. supra at 269; and In re Slavonic Mutual Fire Ins. Ass'n, No. 14-09-01057-CV, 2010 WL 123633, at * 1-2 (Tex. App. Apr. 1, 2010). Allowing an appraiser to consider causation issues such as whether damage to a roof resulted from a hail storm or was pre-existing damage does not prevent an insurer from reserving its right to contest coverage at a later time and does not divest a court of its power to determine ultimate coverage issues. Rather, the allowance ensures that practical considerations are included within a valuable, alternative dispute resolution processes. And, with the volume of property damage claims at present and yet to come, the continued inclusion of this allowance may be one of the most important actions that can be taken to preserve this method of resolution.

Rebecca Goforth Bush is Special Counsel with Lugenbuhl, Wheaton, Peck, Rankin and Hubbard and practices in the firm's New Orleans office. The views presented in this article are not necessarily the views of the firm or its clients.

With the recent onslaught of hurricane claims in the aftermath of Hurricane Katrina and the growing number of hurricane claims related to the 2008 phenomena that was Hurricane Ike, the importance of efficient, economical, and accurate resolution of property claims following natural disasters has become increasingly evident to courts, insurers, and policyholders alike. Enter the concept of appraisal and a long-established insurance clause routinely enforced by the tribunals. While insurance appraisal clauses are standard in many homeowners' policies, the manner in which they are utilized by insurers and policyholders ' and the way in which they are interpreted by the courts ' differs based upon the role an appraiser plays in interpreting causation.

Several courts recognize that an appraiser will properly take into account certain causation elements in assessing the loss amount. These courts insist that causation is a matter best left solely to the courts only when an insurer denies coverage. On the other side, several courts have also determined that causation questions never belong in an appraiser's loss determination, whether or not an insurer is denying coverage. Regardless of the outcome of this debate, the appraisal process will continue to be a critical tool in effectively resolving claims of the magnitude that these devastating events precipitate. The question for the courts (and key players such as insurers and policyholders) is the extent to which this tool should be used and the extent to which it will be allowed to cross into the jurisprudential boundaries of the court system.

Insurance Appraisals: The Process

An insurance appraisal refers to a process by which the amount of loss relating to a claim is determined by a neutral party. Insurance appraisal clauses are regularly included in property insurance policies. State Farm Lloyds v. Johnson , 290 S.W.3d 886, 888 (Tex. 2009). See also Scottish Union & Nat'l Ins. Co. v. Clancy , 8 S.W. 630, 631 (Tex. 1888). Enforced by courts dating back to well before the 20th century, they are widely regarded as valuable tools for resolving disputes about the “amount of loss” for a “covered claim.” Id. A typical appraisal clause found in a homeowner's, automobile liability or property policy is as follows:

Appraisal. If you and we fail to agree on the amount of loss, either one can demand that the amount of loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. Each shall notify the other of the appraiser's identity within 20 days after receipt of the written demand. The two appraisers shall then select a competent, impartial umpire. ' The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall be the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any two of these three shall set the amount of the loss.

State Farm Lloyds, 290 S.W.3d at 887-88.

Appraisals are intended to take place before lawsuits. Id. at 894. See also In re Liberty Mutual Fire Ins. Co., No. 14-09-00876-CV, 2010 WL 1655492, at *2 (Tex. App. Apr. 27, 2010). They are informal and do not require the involvement of lawyers, pleadings, motions, hearings, or subpoenas. State Farm Lloyds supra, at 894. The goal of an appraisal is to resolve a disagreement about the amount of damages between an insurance company and policyholder. Each side (insurer and insured) will typically select a competent and neutral appraiser. Id. at 888-890. Together, the appraisers select an umpire. Id. Appraisers are not allowed to make legal determinations. Couch on Insurance ' 213.44 (3rd ed. 1999). They do not address questions relating to policy defenses or coverages. Couch on Insurance supra, at ' 212.13. They are not required to be judges, attorneys, or insurance experts and are not licensed by any particular board. Couch on Insurance supra, at ' 213.44. See also State Farm supra at 891. Appraisers are not required to physically inspect a property subject to dispute or to read the policy at issue. Couch on Insurance supra, at ' 212.13. Rather, an appraiser's primary role is to determine the amount of the loss as opposed to the cause of the loss. Id. at ' 212.13. See also Wells v. American States Preferred Ins. Co., 919 S.W.3d 679 (Tex. App. 1996), writ denied, (Aug. 16, 1996), reh'g of writ of error overruled (Oct. 18. 1996). Contractors often serve as appraisers given their familiarity with construction costs. Couch on Insurance supra, at ' 212.13. See also State Farm Lloyds supra, at 890.

Courts on both sides of the appraiser/causation issue acknowledge that the purpose of an appraisal is to determine the “amount of loss” or “damage.” In re Security National Ins. Co., No. 14-10-00009-CV, 2010 WL 1609247, at *4 (Tex. App. Apr. 22, 2010). For example, both sides will agree that issues such as the cost of replacing roof shingles after a storm and how many roof shingles have been damaged are ones that properly fall within the purview of an appraisal panel regardless of how broadly or narrowly one interprets its right to address causation. The differences between the arguments for and against the inclusion of causation within the scope of an appraisal analysis arise when considering the cause of the damage. On one hand, an appraiser should be allowed to consider factors such as pre-existing damage, deterioration caused by neglect, and whether the damage was caused by excluded causes. Along these lines, because an insurer is not contesting coverage per se, there would be no apparent reason why an appraiser could not consider these factors to efficiently resolve the dispute. If the appraiser were not allowed to consider factors such as whether or not damage to a roof, for example, was caused by the failure to maintain that roof or by a violent thunderstorm, the appraiser's actions may be for naught. This is so because a court may later eviscerate the appraisal decision if the court determines that the damages were attributable to an issue such as the failure of an insured to repair or replace a 20-year roof that has been in place for a period of 40 years, exacerbating what would have been covered damage.

Under a pure interpretation of the role of an appraiser, courts have held that the sole responsibility of the appraiser is only to determine the dollar value of the loss and not whether or not the damage or loss is covered by the policy. Augenstein v. Insurance Co. of North Am., 360 N.E.2d 320, 323 (Mass. 1977). These courts opine that the role of the appraiser is to value property only and to refrain from making any determination as to whether or not the amounts arrived upon will be paid to the insured. Munn v. National Fire Ins. Co. of Hartford, 115 S.2d 54, 56 (Miss. 1959). Perhaps the most practical conclusion is to recognize that the interpretations are not mutually exclusive and may be appropriate depending upon whether or not an insurer is denying coverage of an alleged loss.

Appraisal: Arguments for a Limited Scope

Courts ruling in favor of a more limited scope of appraisals have uniformly held that appraisers exceed the authority granted to them when they issue determinations pertaining to any issue besides the actual cash value or “hard money” cost of the property at issue. Holt v. State Farm Lloyds, 1999 WL 261923, at *2 (N.D. Tex. Apr. 21, 1999). Consider these examples:

• Germania Farm Mutual Ins. Ass'n v. Williams, No. 11-11-000393-CV, 2002 WL 32341841, at *4 (Tex. App. May 23, 2002) ' The court held that appraisers who looked at the insured's roof damage improperly considered the cause of loss and limited their award to loss caused by hail or wind because the “appraisal clause only authorized the appraisal panel to determine the cash value, the amount of loss, or the cost of repair or replacement” and that nothing in the insurance policy “authorizes the appraisal panel to interpret provisions of the policy or to consider or resolve questions of causation, coverage or liability.”
• HHC Associates v. Assurance Co. of Am., 256 F. Supp. 2d 505, 511 (E.D.Va. 2003) ' The court found that whether coverage was properly denied is a legal issue reserved for the court alone. See also Zar Realty Mgmt. Corp. v. Allianz Ins. Co., 2003 WL 1744288, at *4 (S.D.N.Y. March 31, 2003).
• Holt v. State Farm Lloyds, No. CA 3:98-CV-1076-R, 1999 WL 261923, at *2 (N.D. Tex. Apr. 21, 1999) ' The court held that the appraiser exceeded his scope of authority in determining that a property sustained no hail damage to its roof and urged the well-established principle that “appraisers may only determine the amount of loss and may not assess causation, coverage, or liability for the damage.”
• Rogers v. State Farm Fire & Cas. Co., 984 So. 2d 382, 392 (Ala. 2007) ' The court held that determining what damaged the brick veneer or foundation of a structure is within the exclusive purview of the court and not the appraisers.
• Wells v. American States Preferred Ins. Co., 919 S.W.2d 679, 685 (Tex. App. 1996) ' The court concluded that the appraisal provision did not authorize the appraisers to determine whether a plumbing leak caused the foundation movement loss to the homeowner's policy. See also Salinas v. State Farm Lloyds, 2008 WL 552498 (5th Cir. 2008).

Appraisal: A Broader Scope to Include Causation Determinations

On the side of viewing causation as part of the proper role of an appraiser, several courts have relied upon the importance of certain causation questions in the process. Some examples include the following:

• CIGNA Ins. Co. v. Didimoi Property Holdings, 110 F. Supp.2d 259, 271 (D. Del. 2000) ' The court determined that an appraisal provision authorized appraisers to determine whether claimed damage was caused by fire and appraisers could consider amount of time needed for repairs in assessing lost-income claims.
• F.C.I. Realty Trust v. Aetna Cas. & Sur. Co., 906 F.Supp. 30 (D. Mass. 1995) ' The court held that appraisers may reach the issue of causation in order to make their required estimate of the amount of loss or damage under policy.
• St. Charles Parish Hosp. Serv. v. United Fire & Cas. Co., 681 F. Supp. 2d 748, 756-57 (E.D. La. 2010) ' The court held that an appraisal award under an insurance policy could not be nullified on the basis that the appraiser made a causation determination.
• Kendall Lakes Townhomes Developers, Inc. v. Agricultural Excess & Surplus Lines Ins. Co., 916 So. 2d 12, 16 (Fl. App. 3d 2005) ' The court held that causation was an amount-of-loss question for an appraisal panel and not a coverage question that could only be decided by a trial court where an insurance company had not wholly denied coverage.

The Scope of Appraisal in the Context of Increased Volume of Claims

While the courts have not uniformly addressed the issue of whether causation should be included within the scope of insurance appraisals, a recent Texas Supreme Court decision presents perhaps one of the most comprehensive views of the opposing arguments. In State Farm Lloyds v. Johnson, 290 S.W.3d 886, 887-88 (Tex. 2009), an insured brought an action against her homeowner's insurer requesting a declaratory judgment that the dispute over the extent of loss caused by hail was a dispute over the “amount of loss” and thus, was subject to appraisal. The court reviewed the history of appraisal clauses and noted their inclusion in almost every type of property insurance policy. Id. at 889. In making its determination, the court noted the scarcity of rulings on these clauses and the absence of a previous decision pertaining to a dispute about the scope of appraisal. Id. Candidly, the court further noted the apparent success in the appraisal process without the involvement of the judicial system. Id. Causation, in the court's opinion, “relates to both liability and damages because it is the connection between them.” Id. at 891-92. If an appraiser was never allowed to allocate damages between covered and non-covered perils, then appraisers would never be able to assess damage unless a home or component part of a home (such as a roof) was brand new because they would not be able to consider factors such as normal wear and tear, disrepair, or damage caused by another factor. Id. at 893. In essence, appraisal clauses would be rendered “inoperative” ' a construction the court apparently intended to avoid. Id. See also Johnson v. Nationwide Mutual Ins. Co., 828 So.2d 1021, 1022 (Fla. 2002) (the court held that causation is a coverage question for the court when an insurer wholly denies that there is a covered loss and an amount-of-loss question for the appraisal panel when an insurer admits that there is a covered loss, the amount of which is disputed) and Lasha v. Farmers Ins. Co. of Washington, No. 21641-1-III, 2004 WL 119880, at *3 (Wash. App. Jan. 27, 2004) (the court upheld a Florida Supreme Court ruling that “causation is a coverage question for the court when an insurer wholly denies that there is a covered loss and an amount-of-loss question for the appraisal panel when an insurer admits that there is a covered loss, the amount of which is disputed.” See also Auto-Owners Ins. Co. v. Kaiser, 476 N.W.2d 467, 469-70 (Mich. App. 1991).

At its most basic level, the insurance agreement providing a right to appraisal is a contract between two parties. While the interpretation of a contract is a matter for the courts, all parties concerned (including policyholders and insurers) have an interest in preserving the appraisal process and recognizing that allowing an appraiser to consider causation where an insurer has not disputed coverage is not a threat to a court's power to determine coverage issues. Courts broadly recognize the public policy importance in encouraging efficient, out-of-court resolutions to disputes between policyholders and insurers. Mitchell v. Aetna Cas. & Surety Co., 579 F.2d 342, 350 (5th Cir. 1978); CIGNA Ins. Co. supra at 269; and In re Slavonic Mutual Fire Ins. Ass'n, No. 14-09-01057-CV, 2010 WL 123633, at * 1-2 (Tex. App. Apr. 1, 2010). Allowing an appraiser to consider causation issues such as whether damage to a roof resulted from a hail storm or was pre-existing damage does not prevent an insurer from reserving its right to contest coverage at a later time and does not divest a court of its power to determine ultimate coverage issues. Rather, the allowance ensures that practical considerations are included within a valuable, alternative dispute resolution processes. And, with the volume of property damage claims at present and yet to come, the continued inclusion of this allowance may be one of the most important actions that can be taken to preserve this method of resolution.

Rebecca Goforth Bush is Special Counsel with Lugenbuhl, Wheaton, Peck, Rankin and Hubbard and practices in the firm's New Orleans office. The views presented in this article are not necessarily the views of the firm or its clients.