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by Shannon O'Malley

Since the 2009 decision in State Farm Lloyds v. Johnson, the Texas Supreme Court has repeatedly found property insurance/appraisal-related cases on its docket. Now, seventeen years later, the Court found itself again looking at the scope of appraisal and when and whether parties waive that contractual right.

Background

In In re ACE American Insurance Company, --- S.W.3d ----, 2026 WL 1261448 (Tex. 2026), the Court addressed whether a trial court abused its discretion in denying an insurer’s motion to compel appraisal. The Texas Supreme Court granted writ and directed the parties to appraisal.

The dispute arose out of a June 12, 2022, water line break in the fire suppression system, which caused considerable water damage to the insured’s warehouse concrete slab. The property was insured by a market of carriers who retained an independent adjuster to investigate and adjust the damage. The insured pleaded that the adjuster was minimally involved and “made a conscious choice to sit on the sidelines.” The insured repaired the property and submitted its claim to the carriers.

On January 30, 2023, the carriers made an appraisal demand because, despite some payments issued by the carriers, the parties were allegedly at an impasse with respect to the remaining scope of damage and costs related to the claim. The insured rejected appraisal as premature and unwarranted. Based on that, the parties attempted to continue to negotiate the extent of covered damage.

By June 2024, the carriers re-asserted their demand for appraisal. At that time, the carriers had paid approximately $1.2 million for the damage while the insured sought $10 million under the policies’ mold sublimit. Other disputes concerned using time and material pricing vs. fixed-pricing, coverage for increased building-code costs, and inflated pricing.

Upon the insured’s rejection of the June 2024 appraisal demand, the carriers initiated suit to compel appraisal. The insured counter-sued for breach of contract. The trial and appellate courts declined to compel appraisal, prompting the carriers’ writ of mandamus to the Texas Supreme Court.

Analysis

The Court revisited its prior assessment of appraisal, noting its purpose is to “resolve dispute about ‘the amount of loss’ for a covered claim.” The insured argued appraisal was inappropriate for three reasons:

1. The parties’ disagreement centered on threshold issue of coverage, causation, and “the very existence of damage” rather than the “amount of loss.”
2. There is no genuine disagreement about the amount of loss because the carriers had not clearly stated their position on the issue.
3. The carriers engaged in a pattern of bad faith, “coverage-avoiding” conduct during the adjustment process, which excused the insured from its obligation to comply with the appraisal provision.

The Court addressed each of these arguments.

First, the Court addressed the “scope of appraisal: coverage vs. amount of loss.” The Court revisited its discussion in Johnson, noting that the issue there addressed “how many shingles were damaged and needed replacing, which was a question for the appraisers because it necessarily affected the replacement cost and, in turn, the amount of loss.” The Court reiterated its holding in Johnson and noted that case “demonstrates that a party who seeks to avoid appraisal in the first instance on the ground that the dispute falls outside the scope of the appraisal provision…must clear a significant hurdle.”

In this case, the Court found the parties’ dispute was at least in part about the amount of loss and noted potential coverage disputes do not defeat a contractual right to appraisal. The carriers maintained that the insured spent more than necessary to return the property to its pre-loss state. The Court found that fell clearly within a policy’s appraisal scope.

This includes the parties’ dispute over mold coverage, which the Court found did not render the amount of loss issue moot. Nor did the question of the proper measure of loss – be it on a time and material or fixed price contract: the reasonable measure of damage is an appraisable issue. Similarly, the scope of necessary repairs governed whether claimed code upgrades were necessary. “Again, the scope of the needed repairs—which would include the costs traceable to compliance with building codes—is an issue for the appraisers.”

In reaching its decision to compel appraisal, the Court noted, that it “hold[s] only that any such coverage disputes do not render an appraisal improper in the first instance.”

Next, the Court addressed whether there was a genuine disagreement on the amount of loss. The carriers maintained that “they paid all that is owed” under the claim. The Court recognized that the carriers’ measure is the “amount of loss” the carriers maintained is due. The fact that the insured maintained a higher amount was due was sufficient to show that there was a dispute as to the amount of loss. The Court noted that even if the carriers’ position on what was owed under the policy shifted over time, “it is nevertheless abundantly clear that [the carriers] have consistently viewed the amount of loss as significantly less than the Insured does. The appraisal provision requires nothing more.”

Finally, the insured argued that the carriers’ material breach of the policy precluded the insured’s responsibility to comply with the policy’s appraisal provision—i.e. that when one party breaches a contract, the other party is excused from performance. The Court noted that “[c]ourts have uniformly rejected similar arguments, and for good reason.” This is because (1) the only exception to the appraisal procedure is illegality and waiver – neither of which applied here; and (2) since appraisal should take place before litigation, there is no finding of breach of contract yet, excusing an insured from complying with the policy terms. Essentially, the second argument “puts the cart before the horse” because there has been no finding of breach yet. Therefore, the Court determined “an insurer’s alleged bad faith in handling a claim does not constitute an exception to the general enforceability of an appraisal clause.”

The Lowdown: In Texas, appraisal is always appropriate to determine the amount and scope of damage. Even if there are coverage issues, bad faith allegations, and other equitable claims – a court will enforce an insurance policy’s appraisal provision to resolve disputes concerning the amount and scope of damage. 

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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.