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By Steven J. Badger
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Virtually all property insurance policies include an appraisal provision to resolve disputes over the “amount of loss” for a covered claim. Historically, the phrase “amount of loss” was interpreted to limit appraisal to those situations where the sole dispute was the cost to repair the agreed scope of covered damage. For nearly a century, this limitation on the use of appraisal was clear pursuant to Texas case law and New York statutory law.

That is no longer the case in Texas and is now about to change in New York as well.

New York’s Legislative Shift

Under New York Insurance Law Section 3408(c), appraisals under property insurance policies were previously limited to:

[D]etermination of actual cash value and/or replacement cost, or the amount of loss which shall be determined as specified in the policy and shall proceed pursuant to the terms of the applicable appraisal clause of the insurance policy.[1]

Judicial decisions applying New York law conformed to this statutory language. Courts held that appraisal was a tool for resolving valuation disputes, not disagreements over the scope of a covered loss.[2] As stated in Kawa v. Nationwide Mutual Fire Insurance Company, appraisal under New York law extended “merely to the specific issues of cash value and the amount of loss, leaving all other issues for determination in a plenary action.”[3]

The New York legislature has now decided otherwise. On June 17, 2014, the Legislature passed an amendment to Section 3408(c) that appears to vastly expand the scope of appraisal.[4] The bill states that “an appraisal shall not determine whether the policy actually provides coverage for any portion of the claimed loss or damage.”[5] However, the legislature declared that appraisals:

Shall determine the actual cash value, the replacement cost, the extent of the loss or damage and the amount of the loss or damage which shall be determined as specified in the policy and shall proceed pursuant to the terms of the applicable appraisal clause of the insurance policy.[6]

This bill brings an important change to New York appraisals. Determining the “extent of loss or damage” is now appropriate in appraisals under Section 3408(c). In order to ascertain the “extent of loss or damage” appraisers will naturally consider causation issues. Under New York law, such an analysis appears to now be required. This is a profound shift from New York’s previously restricted scope of appraisal.

The Legislature promulgated the bill to address how “the courts have taken a limited view as to what issues are subject to appraisal.”[7] In other words, the Legislature circumvented New York case law that conformed to the previous language of Section 3408(c). As justification for this action, sponsors of the legislation argued that a broadened appraisal process would reduce claims ending up in litigation, stating: “This change will result in substantial savings in litigation costs to both sides of a dispute.”[8]

To those familiar with the appraisal process in Texas, New York’s shift is a very familiar one.

The Johnson Decision in Texas

Texas appraisal law seemed relatively clear before 2009. Property insurance appraisals assessed “amount of loss” only, including repair and replacement costs. Appraisers lacked authority “to determine questions of causation, coverage or liability.”[9] Only disputes as to the cost to repair an agreed amount of damage were subject to appraisal.

In 2009, however, the Texas Supreme Court provided a new interpretation to the words “amount of loss” in State Farm Lloyds v. Johnson.[10] There the insured filed a claim for roof damage following a hailstorm. The parties did not agree on estimated repair costs. Additionally, the insurer argued that some damage was not caused by hail, creating an issue of causation, which would have traditionally precluded the claim from appraisal.

The Johnson court restated the principle that appraisal was only appropriate for “amount of loss,” not liability. However, the court then proceeded to blur the line between damages and liability. The court’s broad and loosely worded decision tied causation to “both liability and damages because it is in the connection between them.”[11] The court stated that when causation disputes involve separating covered losses from pre-existing conditions, appraisal is no longer avoidable merely because the causation question exists. The court reasoned that if “appraisers can never allocate damages between covered and excluded perils … appraisals can never assess hail damage unless a roof is brand new.” As a result, Texas courts interpreting Johnson currently permit appraisers to address causation issues.[12]

Comparison and Ramifications

The New York Legislature’s clearly stated intent in expanding the scope of appraisal is to limit the number of litigated insurance disputes. Interestingly, the Texas court in Johnson also expressed such an intent, noting the few times it had addressed appraisal issues over the past century and its assumption, therefore, that appraisal provides an effective means of resolving disputed first-property insurance claims.

Oh how wrong they were.

For anyone involved in Texas first-party property insurance claims, the actual experience since Johnson has been just the opposite. Not only has the number of appraisals skyrocketed, the number of disputes arising from the appraisal process has soared as well. Prior to 2010, there were only a handful of reported Texas decisions involving appraisal. Since 2010, there have been dozens. Certainly, the broadened scope of appraisal subsequent to Johnson has contributed to this increase, along with other contributing causes.[13]

There is no reason to expect New York’s experience will be any different. New York’s amended statute states that an appraisal may not address whether a policy covers any portion of claimed loss or damage.[14] However, by adding “extent of loss” to the scope of appraisal in New York, like is now the case in Texas, appraisers will determine causation out of necessity.

In fact, the scope of appraisal and resulting problems might be even greater in New York, as its new statutory language appears to support an appraisal process even broader than it is in Texas. The Johnson decision does not stand for the idea that appraisers can always tackle causation. In fact, the Johnson court stated that “when different causes are alleged for a single injury to property, causation is a liability question for the courts.”[15] Therefore, questions of causation are appropriate for appraisal only when causation disputes involve “separating loss due to a covered event from a property’s pre-existing condition.”[16] On the other hand, a close reading of the New York bill indicates that extent of loss must be addressed during appraisals.

Notably, New York’s statutory change will impact appraisals throughout the country. Many insurance companies utilize New York choice of law provisions for policies issued across the country, taking advantage of New York’s clearly narrow scope of appraisal. Those companies that opt for New York law will no longer be afforded the narrow construction of the appraisal procedure. It is likely that insurers utilizing New York law will see an increased number of claims headed to appraisal.

So what’s the end result? In Texas, the Johnson decision dramatically changed the appraisal process in the state by bringing causation into the appraisal process. This has resulted in a dramatic increase in the number of claims submitted to appraisal, confusion in the appraisal process and litigated disputes. Similarly, the impact of New York’s recent legislation will be substantial. Unfortunately, if the New York experience ends up being similar to Texas', the appraisal process will result in an increase rather than a reduction in litigated claims.

To avoid these predictable disputes, parties should consider drafting appraisal protocols to help govern the procedures to be followed and the scope of the appraisal process. In light of the Johnson decision, Texas insureds and insurers alike have found appraisal protocols to be useful tools in clarifying an appraisal panel’s authority on issues such as causation. Protocols can also better establish the procedures to be followed by the appraisal panel, thereby ensuring fairness in the process for all involved parties. However, because the new appraisal requirement in New York is statutory (rather than purely contractual), it is unclear whether parties could draft a protocol that limits an appraisal panel’s authority on the “extent of loss” issue. At a minimum, however, the protocols could be used to set forth the parties’ understanding of the statute, issues to be addressed and agreed procedure to be followed. If the goal of the appraisal process is to produce a fair award and bring insurance disputes to closure without litigation, there is no argument against the use of an appraisal protocol.

Even with different nuances and uncertainties from recent changes, the current status of both Texas and New York appraisal law is certainly one of expansive change. And, as the history of first-party property insurance law informs us, where goes Texas and New York so goes the country.

—By Steven J. Badger, Zelle Hofmann Voelbel & Mason LLP

Steven Badger is a partner in Zelle Hofmann Voelbel & Mason's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] N.Y. Insurance Law § 3408 (McKinney, 2014)

[2] See Amerex Grp. Inc. v. Lexington Ins. Co., 678 F.3d 193, 204 (2d Cir. 2012); Kawa v. Nationwide Mut. Fire Ins. Co., 174 Misc 2d 407, 409 [Sup Ct 1997].

[3] Kawa, 174 Misc 2d at 411.

[4] The legislation will be effective immediately upon signature into law by New York Gov. Andrew Cuomo.

[5] 2013 N.Y. Senate Bill No. 4756.

[6] Id.

[7] Id.

[8] Id. (see legislative notes section entitled “Justification”).

[9] Wells v. Am. States Preferred Ins. Co., 919 S.W.2d 679, 684 (Tex. App—Dallas 1996, writ denied).

[10] State Farm Lloyds v. Johnson, 290 S.W.3d 886, 890-893 (Tex. 2009).

[11] Id. at 892.

[12] See MLCSV10 v. Stateside Enterprises Inc., No. H-10-4186 (S.D. Tex. Mar. 30, 2012).

[13] See “What The Hail™ Is Going On In Texas?” Law360, Dec. 19, 2013, http://www.law360.com/articles/497082/what-the-hail-is-going-on-in-texas and;
“The Emerging Hail Risk: What The Hail™ Is Going On?” Claims Journal, May 2, 2014, http://www.claimsjournal.com/news/national/2014/05/02/248354.htm

[14] 2013 N.Y. Senate Bill No. 4756.

[15] Johnson, 290 S.W.3d at 892.

[16] Id.