Supreme Court Raises the Bar for Insureds who Oppose Appraisals

Litigation / Arbitration E-Alert

Supreme Court Raises the Bar for Insureds who Oppose Appraisals

Today, the Texas Supreme Court significantly bolstered the ability of insurers to compel appraisal under an insurance policy, even after the insured has filed suit. Frequently in the course of a claim dispute, the insurer will make one or more payments on a claim but ultimately not pay to the insured’s satisfaction. If the insured files suit, sometimes months or years later, it is often to the surprise of the insurer, who was unaware there was still a dispute. At this point, the insurer may invoke the appraisal provision of the policy in its answer or in a motion to compel appraisal. Since months or years have elapsed since the parties stopped communicating, however, the insured often responds by claiming the insurer waived its right to appraisal.

In In re Universal Underwriters of Texas Ins. Co., No. 10-0238 (Tex. May 6, 2011), the Supreme Court of Texas addressed such a situation. The Court rejected the insured’s waiver defense and ordered the trial court to grant the insurer’s motion to compel appraisal. In doing so, the Court raised the bar insureds must meet to establish waiver.

First, the Court clarified how to determine whether an insurer has unreasonably delayed in invoking appraisal. The Court held that any delay is judged only after the parties have reached an impasse. The Court defined impasse as "a mutual understanding that neither [party] will negotiate further." This is a high bar for insureds because they must show more than mere disagreement, but that both parties were aware that further negotiations would be futile. If one party believes negotiations are still ongoing, or is unaware of a disagreement on the claim, there can be no impasse. If impasse had never been reached before the lawsuit was filed, an insurer could not have delayed in invoking appraisal before litigation.

Second, the Court required that to establish waiver, the insured must show the insurer’s delay in invoking appraisal prejudiced him. Showing prejudice is a new requirement for insureds, but is consistent with similar requirements in other contexts, including when a plaintiff argues waiver of an arbitration clause or when an insurer attempts to deny coverage for lack of notice.

Third, the Court appears to have undercut the ability of insureds to establish any prejudice at all. In dicta, the Court notes "it is difficult to see how prejudice could ever be shown when the policy, like the one here, gives both sides the same opportunity to demand appraisal. If a party senses that impasse has been reached, it can avoid prejudice by demanding an appraisal itself. This could short-circuit potential litigation and should be pursued before resorting to the courts." If the insured must show prejudice to establish waiver, but can avoid prejudice by invoking appraisal himself, he must now either invoke appraisal or lose his waiver defense when the insurer invokes appraisal. Either way, the insurer gets appraisal.

Taken together, the Court’s new requirements for showing waiver in the appraisal context – there must have been an impasse and the insured must have been prejudiced from a delay in invoking appraisal after the impasse – makes it much more likely an insurer will be able to successfully invoke its appraisal clause after it has been sued. That, in turn, raises the possibility the insurer can limit or eliminate its contractual exposure early in the case, and potentially its bad faith exposure, as well.