Buried in a standard homeowners insurance policy is a section that for the last hundred years was rarely used and even less frequently interpreted by Texas Courts. The section I am referring to is the “appraisal clause.”
What is the Appraisal Clause?
On its face, the appraisal clause is designed to provide the policyholder with a simple and relatively fast way to resolve a dispute with the insurance company. All too often, however, insurance companies use this section as a sword and a shield to avoid liability.
Texas Appraisal Clause
Let’s take a look at the standard appraisal clause in a Texas homeowners insurance policy. In this case, I used the language from the State Farm Lloyds policy that the Texas Supreme Court considered in Johnson v. State Farm Lloyds, 290 S.W.3d 886 (Tex. 2006):
Appraisal. If you and we fail to agree on the amount of loss, either one can demand that the amount of the 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 of receipt of the written demand. The two appraisers shall then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the residence premises is located to select an 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. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire shall be paid equally by you and us.
Let’s Break This Down
Here are the requirements of the appraisal clause:
- If there is a disagreement about the amount of the loss;
- Either party can demand appraisal;
- The appraiser must be “competent” and “disinterested”;
- Once appraisal is invoked, you have 20 days to identify your appraiser to the other side;
- The appraisers will select an impartial umpire;
- If the appraisers cannot agree on an umpire within 15 days, the court will pick one;
- The appraisers will set the value of the loss;
- If they can’t agree, then the umpire decides the amount of the loss; and
- Appraisers are paid by the party appointing them, the umpire’s cost is split equally.
The Reality of an Appraisal
On its face, appraisal appears complicated, but in reality simply submits the dispute to qualified, independent individuals who may have more expertise in construction than the average policyholder might. In essence, it is designed to determine the amount of the loss and that determination should be binding on the parties.
In reality, appraisal often plays out very differently. First, if you are not experienced in the world of insurance, you must understand that your insurance company hires appraisers to work for them day in and day out.
Even if an appraiser is competent and “disinterested” as the policy requires, you have to consider the fact that the appraiser has probably done a significant amount of work for the insurance company and may even rely on that company for a significant amount of his or her income.
Chances are, if you are an inexperienced policyholder, you should think twice before getting involved. Appraisal can be a difficult web of politics, relationships and complex coverage interpretations. If you have any doubts, don’t hesitate to contact us at (713) 781-8600.