Federal Court Ruling Vacates Hail Claim Appraisal Award, Highlights Appraiser Abuses

Denise Johnson | Claims Journal | July 26, 2018

A recent decision by a Colorado federal appeals court could have significant impact on hail claims and appraisals across the country.

Copper Oaks Master Home Owners Association v. American Family Mutual Insurance Co. involves a claim of hail damage that led to a dispute regarding damages.

According to the facts outlined within the opinion, Copper Oaks managed several residential buildings in Lakewood, Colo., at the time of the loss. On September 9, 2013, a hail storm allegedly caused property damage to the Copper Oaks complex. Due to debris scattered about the premises, the property manager, Mark Richardson, contacted Derek O’ Driscoll of Impact Claim Services, LLC, and requested he conduct a free inspection of the building roofs. At a November 2013 board meeting, O’Driscoll discussed his roofing evaluation and offered to represent Copper Oaks as public adjuster on its anticipated claim to American Family.

A month later, a separate report commissioned by Richardson found that Copper Oaks was “severely undercapitalized given the size, age and condition of the complex.” The report found that the HOA was severely underreserved – it had $70,112 in reserves, just 11 percent of the recommended amount of $625,597 to carry out extensive repairs needed. A special assessment of $1500 per unit was recommended but there was no evidence that was conveyed to the unit owners.

Copper Oaks hired Impact Claims in March 2014 as its public adjuster and agreed to pay a contingent fee of 15 percent of any insurance award.

American Family was first notified of the loss in April 2014. The insurer inspected the property damage and provided an estimate of $620,979 as the replacement cost value (RCV). The insurer issued payment of $497,765.43, the actual cash value of the loss, in July 2014.

Impact Claims determined Copper Oak’s loss to be much higher than the amount paid by American Family. Later in 2014, O’Driscoll estimated the total damage due to the hail storm at nearly $3.6 million. Upon learning of the increased damage estimate, American Family hired Madsen, Kneppers & Associates to appraise the loss. After an inspection, the firm issued a report estimating the total RCV loss at $608,398.49.

Disappointed with the amount American Family initially paid on the claim, Copper Oaks filed suit in state court. American Family had the case removed to federal court. The Amended Complaint stated four claims: 1) a request for declaratory judgment as to the appraisal process and award; 2) a request to compel an appraisal award in accordance with process specified in the Policy; 3) breach of contract in failing to pay the amounts owed under the Policy; and 4) unreasonable delay in payment in violation of C.R.S. 10-3-1115 and 1116.

Besides the dispute on damages, the parties disagreed as to whether the complex was actually damaged by hail during the storm. The court noted there wasn’t any contemporaneous evidence that hail had impacted any part of the property – “no statements of occupants, photos or the like.”

A requirement when the value of a claim is disputed is that the parties to the policy must engage in an appraisal process to determine the value of the loss.

The parties were ordered to participate in the appraisal process. The policy requires each party to appoint a “competent and impartial” appraiser. The two appraisers then jointly select a neutral umpire. Each appraiser submits an opinion as to the amount of the loss to the umpire. Upon the agreement of the umpire and at least one of the appraisers, the amount of the loss is conclusively determined.

The appraisal process, according to Steven Badger, a Dallas attorney with Zelle LLP, “was intended to be an amicable and expeditious approach to resolving disputed insurance claims. Appraisal clauses have been found in insurance policies for over 100 years, with the process serving as a valuable way to bring disputed claims to closure without the need for lawyers or lawsuits.”

Copper Oaks selected George Keys of Keys Claims Consultants, Inc. to act as its appraiser. American Family selected James Whipple. Keys and Whipple selected Robert Norton as the umpire.

Keys’ appraisal, submitted on February 29, 2016, found that “every roof, every elevation, every chimney, and virtually all of the siding on every building at the Copper Oaks’ property had either been damaged by hail or, if undamaged, would nevertheless have to be replaced in order to fully repair the hail damage.”

His initial loss estimate was $4,968,115.62 and was later revised to $5,066,238.99.

Whipple’s damage appraisal came in at $406,234.29.

Norton, as the umpire, concluded that there was some hail damage, but not nearly as much as Keys claimed. In July 2016, Norton proposed an appraisal award of $3,061,201.44. Neither appraiser agreed with the umpire’s proposed amount leading to Norton’s advisement that if they couldn’t agree, he would circulate a proposed final award of $2,943,919.72.

According to the opinion, Keys submitted his bill to Copper Oaks a week after the appraisal award of $2,873,085.35 was announced. The bill reflected 666.40 hours of work, all charged at a rate of $350 per hour, totaling $233,240. Of importance was that there wasn’t any differentiation in hourly rates based on the tasks performed or by the person performing the tasks.

In January 2017, the parties announced a dispute over the validity of the appraisal award. Copper Oaks sought to enforce the appraisal award, while American Family filed a motion to vacate the appraisal award.

During a hearing, the court bifurcated the allegations within the complaint into claims that concerned the appraisal process (Claims 1 and 2) and claims that concerned breach of contract and statutory bad faith breach of contract (Claims 3 and 4).

American Family contended that the appraisal award should be invalidated because the appraiser selected by Copper Oaks and the umpire were not impartial. Copper Oaks responded that American Family i) waived any objection to Keys and Norton, ii) was estopped from challenging them, and iii) its request is barred by the doctrine of laches.

Prior to and during this case, there were several judicial opinions in unrelated cases involving Keys that disqualified him as an appraiser and vacated associated appraisal awards.

Analysis of records and testimony by the appraisers led the court to determine that It was essential that the appraisal award be high enough to allow Copper Oaks to pay the bills of Keys, O’Driscoll, and related vendors as well as sufficient enough to allow Copper Oaks to make the repairs. The court noted that “Copper Oaks was required to obtain an appraisal award of nearly 128 percent of actual repair costs, simply to break even.”

After a bench trial to determine the sufficiency of the appraisal award, the court stated it intended to grant American Family’s motion to vacate the appraisal award. The Court reasoned that Keys was not “fair and competent”, because he had a “direct material interest in the amounts determined by the appraisal process” and because he did not disclose “facts that a reasonable person would consider likely to affect the appraisers interest in the amounts determined by the appraisal process.”

The court’s decision disqualified Keys and invalidated the appraisal award. The court stated, “Mr. Keys’ appraisal was so bereft of methodology and supporting evidence as to be completely implausible.”

The court deemed Norton as also not, “fair, competent and impartial.” This, too, invalidated the appraisal award.

According to the federal court, judgment was entered in favor of American Family on the first and second claims in Copper Oaks’ Amended Complaint. As a result, the court stated, “Because the vacatur of the appraisal award nullifies any determination as to amount that existed at the time of filing this action, Copper Oaks had no standing to bring its third claim, sounding in breach of contract for failure to pay.”

Thus, Copper Oaks third claim was dismissed.

Copper Oaks’ fourth claim for relief, based on the allegation of an unreasonable delay, was scheduled for determination by trial.

The decision highlights changes in the appraisal process over the past decade, said Badger.

“A cottage industry has emerged comprised of individuals who inject themselves into the appraisal process for their own financial gain. Since the appraisal process is not governed by any formal procedural rules or ethical guidelines, the process is now ripe for abuse, manipulation and outright fraud,” said Badger. “With this cottage industry, no longer is the objective to achieve a prompt and fair resolution of the claims, but to extort the highest possible payment from the insurance company to maximize profits to the contractors, public adjusters, appraisers and lawyers who are all part of these schemes.”

Badger is the author of several articles on fraud abuse in hail claims published by Claims Journal, including The Emerging Hail Risk: What the Hail Is Going On?

“The Copper Oaks matter is a prime example of the abuses that have sadly become commonplace in the insurance claim appraisal process, particularly in Texas and Colorado,” said Badger. “Sadly, it took federal court litigation to remedy the clear abuses that took place during this appraisal process. ”

Badger described the common abuses seen in the appraisal process.

“These abuses include significant and unsubstantiated increases in the alleged damages once the matter is in appraisal, appraisers motivated to jack-up claim values based on having a financial interest in the outcome, undisclosed friendly relationships between appraisers and umpires, and literal extortion by umpires when the insurance company appraiser refuses to sign their excessive proposed awards,” he said. “All of these schemes were present in the Copper Oaks matter.”

New schemes pop up every frequently, he added, describing a recent one where a policyholder appraiser charged $2,500 per hour, up to 20 percent of the appraisal award.

“It’s outrageous,” Badger said. “The clear intent with that fee is for the appraiser to receive a 20 percent contingency fee on the appraisal award, which is absolutely forbidden in both Texas and Colorado.”

Though the federal court decision in this case should aid in bringing awareness to the issue, Badger said fighting the schemes is an ongoing battle.

“All the insurance company wants is a level playing field – where both sides pick impartial appraisers and work fairly to achieve a prompt and fair resolution of the claim,” Badger explained. “Regardless of who prevails, if the process is fair then it achieves its intended purpose. But there was absolutely nothing fair about the process in the Copper Oaks case. And the federal judge exposed it. Hopefully this well-written decision will serve as a much-needed warning to the entire cottage industry engaged in these appraisal schemes.”

Connecticut Court Holds Unresolved Coverage Issues Makes Appraisal Premature

Michael S. Levine, Lorelie S. Masters & Geoffrey B. Fehling | Hunton Andrews Kurth | July 2, 2018

A Connecticut court recently denied a motion to compel appraisal of a claim for coverage of a commercial property damage claim, holding that, where the insurance policy at issue provides for appraisal of disputes related to the value or quantum or a loss suffered—not the rights and liabilities of the parties under the policy—appraisal is premature. The decision relied on law that equates insurance appraisal to arbitration and follows a number of decisions holding that parties cannot expand the scope of appraisal clauses to resolve questions of coverage or liability where, as in this case, those issues are not supported by the applicable policy language.


Ice Cube Building (ICB) owned commercial property in Groton, Connecticut, that was covered by a property insurance policy issued by Scottsdale. Following a winter storm, the weight of the accumulated snow and ice caused the roof to leak and water to enter the building. ICB provided notice of the claim to Scottsdale, which acknowledged partial coverage for the loss. Scottsdale paid the undisputed amount of the claim, but ICB asserted that it had incurred additional, unreimbursed loss in excess of $1 million that was covered by the policy.

When Scottsdale refused to pay, ICB sued in state court for breach of contract and a declaratory judgment that the policy covered all of its unreimbursed losses. After Scottsdale removed the case to federal court and filed an answer and counterclaim, ICB moved to compel arbitration under the policy’s appraisal provision and to stay the litigation.

June 18 Decision

The parties did not dispute that the policy required appraisal of certain disputes, including appraisal as to the amount of loss, arising from the policy. They disagreed, however, on whether the policy’s appraisal clause requires arbitration of a dispute over coverage of ICB’s claim and not simply the amount of damage ICB asserts remains unpaid.

In its motion, ICB pointed to the disagreement on the “amount of loss it suffered” and its written demand for appraisal, arguing that Connecticut’s arbitration statute and the terms of the policy require the court to appoint an appraiser to assess its unreimbursed losses. Scottsdale countered by arguing that “an appraisal is premature because there are outstanding coverage issues that the Court must address as a condition predicate to the appraisal process.” The Court agreed with Scottsdale and denied the motion.

In reaching its decision, the Court noted that “the Policy unambiguously provides for arbitration of disagreements relating to the ‘value of the property’ or the ‘amount of loss’ suffered by the policyholder.” However, “[b]ecause the Policy expressly provides for the arbitration of disputes related to the value or quantum of a loss suffered—not the rights and liabilities of the parties under the Policy—and the Court may only compel the parties to arbitrate matters which they have agreed to arbitrate under the provisions of the insurance policy, the Court cannot compel the parties to arbitrate the question of coverage . . . .” The Court agreed with Scottsdale’s position that, where coverage is in dispute, those unresolved coverage issues posed antecedent questions for the court and are not appropriate for appraisal. As a result, the court denied ICB’s motion to compel appraisal as premature.


As this decision makes clear, appraisal should not be used to determine coverage issues impacting the scope of an insurer’s liability for the claim. The court in Ice Cube Building specifically relied on the language of the appraisal provision, pointing out that appraisal, as a type of arbitration, is a creature of contract and its scope cannot exceed what the parties agreed to. This distinction is often made clear in the policy’s appraisal provision, which commonly limit appraisal to the “amount of loss.”

As was the case in Ice Cube Building, courts have followed such unambiguous restrictions on the scope of issues addressed in appraisals and have refused to compel appraisal where disputed issues include questions of coverage and liability. In many cases, insurers attempt to invoke appraisal clauses prematurely, seeking to resolve issues of both the extent of damage and coverage. Interestingly in Ice Cube Building the policyholder attempted to force appraisal, and the insurer correctly noted that, under the terms of the policy, unresolved coverage and liability issues posed antecedent questions for the court to decide that were inappropriate for appraisal. Policyholders should carefully review the proper scope of appraisal provisions in first-party property policies to determine the most efficient and effective way to resolve disputed claims and to ensure that coverage issues are resolved in the appropriate forum or process. The case is Ice Cube Building, LLC v. Scottsdale Insurance Co., No. 3:17-CV-00973 (VAB), 2018 WL 3025037 (D. Conn. June 18, 2018).

Texas Case Shows Clarity is Key in the Appraisal Process

Jennifer L. Gibbs and Michael C. Upshaw | Zelle | July 5, 2018

A recent Texas state appellate court decision confirms the importance of clarity in the appraisal process as to the issues being considered by an appraisal panel. In Texas Windstorm Insurance Association v. Dickinson Independent School District,[1] the 14th Court of Appeals in Houston reversed and remanded a post-appraisal award summary judgment ruling in favor of TWIA policyholder, Dickinson ISD, holding: “Standing alone, the Appraisal Award simply does not provide sufficient evidence from which a court may determine as a matter of law which Appraisal Award damages, if any, were caused by a covered peril.”[2]


The Dickinson ISD case stemmed from alleged windstorm damage sustained during Hurricane Ike in September 2008. The Texas Windstorm Insurance Association made multiple payments under its policy for damage to Dickinson ISD buildings during the following three years. After Dickinson ISD demanded recovery for overhead and profit, statutory interest, and attorney and expert fees, TWIA invoked the appraisal provision of the policy. By the time the appraisal panel inspected the buildings, five years had passed since the date of the storm. TWIA contended that there was no indication of wind damage to support Dickinson ISD’s claim, and no wind-created openings that caused interior damage to the buildings. TWIA also asserted that the policyholder had already recovered for certain damages, which were covered under manufacturer warranties.

An appraisal award was eventually executed awarding Dickinson ISD nearly $11 million. The award listed a date of loss consistent with the date of Hurricane Ike and described the type of loss/claim as “Appraisal for Hurricane wind damage.” The award also stated that the appraisers, “carefully examined the damages pursuant to the loss described herein above …” While the award was accompanied by 25 pages listing the replacement cost value, depreciation and actual cash value of 134 buildings and other items, it did not indicate that the damages listed were caused solely by wind or other covered perils during Hurricane Ike. The court was then asked whether the award alone was sufficient to establish conclusively that Dickinson ISD suffered covered losses in the amount awarded.

Reliance on State Farm Lloyds v. Johnson

The Dickinson ISD case provided the appellate court with an opportunity to analyze the Texas Supreme Court’s oft-cited decision in State Farm Lloyds v. Johnson.[3] The most thorough analysis of the appraisal process by the highest court in Texas, Johnson makes clear that although the “line between liability and damage questions may not always be clear, … the scope of appraisal is damages, not liability.”[4] But the Johnson court also recognized “when different types of damage occur to different items of property, appraisers may have to decide the damage caused by each before the courts can decide liability.”[5] It is this distinction between causation as a liability issue and causation as a damages issue that the court was tasked with addressing in TWIA v. Dickinson ISD.

It is important to note that Dickinson ISD only submitted four pieces of summary judgment evidence to the trial court: (a) a copy of the TWIA policy, (b) the Appraisal Award, (c) TWIA’s answer, and (d) TWIA’s letter invoking the appraisal process. Forty other exhibits, including deposition excerpts from the court-appointed umpire, were filed late and not considered. Hence, on the issues of causation and damages, for which Dickinson ISD sought summary judgment, the only evidence before the court from the actual appraisal process was the appraisal award itself.

The appellate court reversed summary judgment in favor of Dickinson ISD and held that the appraisal award alone was insufficient for Dickinson ISD to carry its burden of proving causation and damages as a matter of law. In a footnote addressing a portion of the appraisal award, the court explained that numerous interior rooms were listed as having sustained damage. However, the court observed that there was nothing in the appraisal award to indicate what type of damage each line item represented. “For example, nothing indicate[d] whether the dollar amounts reflect[ed] damage from wind as opposed to flood, rain, or mold, all of which [were] excluded under the policy.”[6]

The court also stated that a factfinder could reasonably infer that some of the damages were caused in the five years after Hurricane Ike, based on the evidence submitted by TWIA.


The court made clear, quoting Johnson, that the analysis of an appraisal award will be made on a case-by-case basis: “Whether the appraisers have gone beyond the damage questions entrusted to them will depend on the nature of the damage, the possible causes, the parties’ dispute, and the structure of the appraisal award.”[7]

The lessons of TWIA v. Dickinson ISD are simple and clear. Both insurers and insureds must ensure that their designated appraisers obtain clarity going into the appraisal process as to the scope of the issues being considered. The court’s ruling indicates that boilerplate awards are insufficient under Texas law to prove whether damages were caused by a covered peril. This is true even where the award lists a specific date of loss and a specific type of loss, such as “Hurricane wind damage.”

The lessons of TWIA v. Dickinson ISD are also easily addressed. Both parties to the appraisal process can provide their appraisers with the specific questions or issues to be addressed by the panel consistent with the policy and applicable Texas law. For example, when there are questions as to date of loss and covered versus excluded damage, the appraisal panel could be asked:

  • Was there a [hail] event on the reported date of loss?
  • Did the [hail] event cause physical loss or damage covered by the policy?
  • State the replacement cost and actual cash value of the physical loss or damage caused solely by the [hail] event on the reported date of loss?

The parties could agree to use an agreed appraisal protocol that provides the appraisal panel with guidance as to the issues to be addressed, along with any other terms that could prove useful in ensuring that the panel issues a clear award that brings the dispute to conclusion. That objective serves the interests of all involved parties.

Absent such clarity, TWIA v. Dickinson ISD provides a basis to question awards that are not clear as to the issues addressed by the appraisal panel. However, the opinion does not give insurers a free pass to ignore an appraisal award anytime there is evidence of noncovered damages. Had Dickinson ISD timely submitted additional summary judgment evidence showing that the damages listed in the award were only for covered damages, the result may have been different. And nothing in the court’s decision precludes an insured from submitting such evidence at trial.

Insurers and insureds have remedies at their disposal to seek clarification of an appraisal award. Where the facts underlying an appraisal indicate that noncovered damages are included in an appraisal award, an insurer could first exercise its right to seek prelitigation depositions. Texas Rule of Civil Procedure 202 allows for depositions to investigate a claim or suit. The purpose of such a deposition in this situation would be to determine whether to file a lawsuit seeking to set aside an appraisal award.

But this approach is not without risk. It is currently well established under Texas law that full and timely payment of an appraisal award precludes recovery of penalties and interest under the prompt payment provisions of the Texas Insurance Code.[8] Whether seeking clarification prior to paying an award would expose a carrier to extracontractual damages appears to be an unresolved issue under Texas law. However, the reasoning set forth in TWIA v. Dickinson ISD, provides at least some support for the argument that seeking clarification prior to tendering payment of an appraisal award should not expose carriers to liability for extracontractual damages.

But the way to avoid all of these issues is very simple. The parties to the appraisal process should cooperate in educating the appraisal panel as to the issues they are being asked to address and the importance of issuing a detailed appraisal award identifying the cause of loss for each damage item, perhaps with the use of an appraisal protocol. As illustrated by TWIA v. Dickinson ISD, boilerplate awards can frustrate the very purpose of appraisal, which is to provide the parties with an efficient and effective means of resolving a dispute over the amount of a covered loss.


[1] Texas Windstorm Ins. Ass’n v. Dickinson Indep. Sch. Dist., 14-16-00474-CV, 2018 WL 2436924, at *1 (Tex. App.—Houston [14th Dist.] May 31, 2018, no pet. h.).[3] 290 S.W.3d 886 (Tex. 2009).

[2] Id. at *11.

[3] 290 S.W.3d 886 (Tex. 2009).

[4] Johnson, 290 S.W.3d at 890.

[5] Id. at 886.

[6] Dickinson Indep. Sch. Dist., 2018 WL 2436924, at n.13.

[7] Id. at *10.

[8] Nat’l Sec. Fire & Cas. Co. v. Hurst, 523 S.W.3d 840, 847 (Tex. App.—Houston [14th Dist.] 2017, pet. filed), reh’g denied (July 25, 2017).

Post-Menchaca: Is the Independent Injury Rule Dead or Alive?

Kay Morgan | Property Insurance Coverage Law Blog | June 17, 2018

Having undertaken to write about “all things Menchaca,” this month is a review of five cases post-Menchaca which contradict one another in deciding whether the independent injury rule is dead or alive. Looking at the first set of cases post-Menchaca, it appears that the answer to that question is a long way off.

In my last blog post, The Independent Injury Rule is Dead, the Fifth Circuit Court of Appeals in Aldous v. Darwin National Assurance Company, cited the April 13, 2018, USAA Tex. Lloyds Company v. Menchaca opinion and declared,

Menchaca repudiated the independent injury rule, clarifying instead that “‘an insured who establishes a right to receive benefits under an insurance policy can recover those benefits as ‘actual damages’ under the statute if the insurer’s statutory violations causes the loss of benefits.’”1

Aldous involved a legal malpractice suit with a multitude of issues, counterclaims and cross-appeals.2 The underlying suit concerned litigation over two trusts and following the finality of that litigation, Aldous’ client brought a malpractice suit against Aldous which triggered her professional liability insurer, Darwin’s involvement. Aldous was successful in the malpractice suit but then sued Darwin alleging that Darwin did not pay enough to fully cover the costs of her malpractice defense. Aldous alleged against Darwin breach of contract, breach of the duty of good faith and fair dealing and violations of the Texas Insurance Code, among others. The court found that Aldous’ Chapter 541 Texas Insurance Code claims were barred as a matter of law under Parkans International LLC v. Zurich Insurance Company3 because Aldous had not established an injury independent of the injury that would have resulted from a wrongful denial of policy benefits. Aldous appealed the results of her suit against Darwin and in particular, asked the Fifth Circuit to reverse Parkans. After finding that “Menchaca repudiated the independent injury rule” as quoted above, the Fifth Circuit wrote: “[p]ut simply, Parkans’s categorical bar does not hold up in the face of Menchaca.4

Subsequent to Aldous, the Amarillo Court of Appeals in Turner v. Peerless Indemnity Insurance Company,5 declared the opposite of the holding in Aldous by the Fifth Circuit. The Turner court held: “[t]he independent injury rule is alive and well, as reiterated by the Texas Supreme Court in its recent Menchaca opinion and recognized by us in Abdalla, 2018 Tex. App. LEXIS 3358, at *9-10.” Turner is the first appraisal case that has applied the April 13, 2018, Menchaca opinion. Following appraisal, as is the routine with all insurance companies, Peerless moved for summary judgment on all of Turner’s claims and the court granted it. The Amarillo Court of Appeals affirmed the trial court’s dismissal by summary judgment of Turner’s breach of contract and extra-contractual claims. In affirming the dismissal of the extra-contractual claims, the court determined that Turner had failed to provide any evidence of an independent injury upon which to base his extra-contractual claims aside from the damages represented by supposedly lost policy benefits. In affirming the trial court’s granting of summary judgment on Turner’s extra-contractual claims, the Turner court made an extensive review of Menchaca’s discussion of the independent injury rule.6 The court rejected Turner’s contention that the damages in the policy benefits he lost due to Peerless’ statutory violations can be recovered under the bad faith statute, and instead found:

As can be seen, his [Turner’s] argument remains focused on the benefits recoverable under the policy, which benefits have already been paid. But, under what we perceived to be Menchaca’s explanation of the independent injury rule, his injury cannot be so predicated. It must be independent of what he claims he lost ‘out on’ under the policy. Thus, the decision to grant summary judgment upon the extra-contractual claims urged by [Peerless] has the support of at least one ground, and we overrule the second issue.7

Thus, the Amarillo Court of Appeals in Turner finds that the independent injury rule is alive and well. The same panel of Amarillo judges in Turner wrote the opinion in Abdalla, another appraisal case, and in relevant part, stated:

The need of an independent injury to support extra-contractual causes of action was reaffirmed in Menchaca. After discussing its own precedent, the Supreme Court first reiterated that ‘an insured can recover actual damages caused by the insurer’s bad faith conduct if the damages are separate from and…differ from benefits under the contract.’” [Cites omitted.] Then, it observed that damages were recoverable ‘only if [they] are truly independent of the insured’s right to receive policy benefits.’8

Two more opinions citing Menchaca were handed down on June 6, 2018: another Fifth Circuit opinion, Certain Underwriters at Lloyd’s of London v. Lowen Valley View,9 and another Texas Supreme Court case, State Farm Lloyds v. Fuentes.10

In Lowen Valley, the insurer brought a declaratory judgment action that it owed no benefits under a commercial property insurance policy and the insured, Lowen Valley, counterclaimed for declaratory judgment, breach of the insurance contract, and violations of the Texas Insurance Code. The district court granted summary judgment in favor of the insurer on all claims and the Fifth Circuit affirmed. In reaching that decision, the Fifth Circuit found that Lowen Valley’s Texas Insurance Code claims were based on unpaid coverage benefits rather than some independent injury and when Lowen Valley’s breach of contract claim fell, so did its extra-contractual claims. The appellate court wrote:

See USAA Tex. Lloyds Co. v. Menchaca, 14-0721, 2018 WOL 1866041, at *5 (Tex. 13, 2018) (“[A]n insured cannot recover any damages based on an insurer’s statutory violation if the insured had no right to receive benefits under the policy and sustained no injury independent of a right to benefits.”).11

The final case this blog, State Farm Lloyds v. Fuentes, was a Hurricane Ike suit and following a trial, the trial court disregarded two jury’s findings that the Fuenteses had breached the insurance contract as well as State Farm and that the Fuenteses had breached it first. The trial court rendered judgment for the Fuenteses, awarding them $18,818.39 for amounts owed under the policy, $27,000 for mental-anguish damages, $7,527 in statutory penalties, and more than $300,000 in attorney’s fees. State Farm appealed. Houston’s Fourteenth Court of Appeals affirmed the trial court judgment. State Farm appealed again. The Texas Supreme Court held:

[We] conclude simply that the considerations that led us to remand for a new trial in Menchaca similarly dictate that State Farm’s first issue—whether the trial court properly disregarded some of the jury’s findings—should be remanded to the court of appeals for reconsideration in light of MenchacaSee TEX. R. APP. R. 60.2(f).12

Interestingly, both Fuentes and Menchaca involved a trial court’s disregarding specific jury findings in reaching their judgments and both have been remanded for new trial. In Fuentes, the trial court disregarded two jury findings that Fuentes breached the contract and breached it first before State Farm, who was also found to have breached the contract. The Fuentes court remanded the suit to the court of appeals in light of Menchaca. In Menchaca, the trial court disregarded jury question No. 1 in which the jury found that USAA had not failed to comply with its obligations under the policy. The supreme court found that that the trial court erred in disregarding the jury’s answer to question No. 1. The court also held that a plaintiff does not have to prevail on a separate breach of contract claim to recover policy benefits for a statutory violation. Menchaca was remanded to the trial court for a new trial.

In addition to these two appeals, more new cases relying on Menchaca will continue to trickle down and, no doubt, that trickle will bring more new interpretations. It is still too early to definitively declare whether the independent injury rule is dead or alive.
1 Aldous v. Darwin National Assurance Co., No. 16-10537 (5th Cir. May 11, 2018)(emphasis added).
2 See Aldous v. Darwin National Assurance Co., 851 F.3d 473 (5th Cir. 2017).
3 Parkans International LLC v. Zurich Ins. Co., 299 F.3d 514 (5th Cir. 2002).
4 Id. (emphasis added).
5 Turner v. Peerless Indemnity Ins. Co., 2018 WL 2709489 (Tex. App.—Amarillo June 5, 2018).
6 Id. at 2018 WL 2709489, at ** 3-5.
7 Id. at 2018 WL 2709489, at *5.
8 Abdalla v. Farmers Ins. Exch., 2018 WL 2220269, at * 5 (Tex. Civ.—Amarillo, May 14, 2018).
9 Certain Underwriters at Lloyd’s of London v. Lowen Valley View, LLC, No. 17-10914 (5th Cir. June 6, 2018).
10 State Farm Lloyds v. Fuentes, No. 16-369, 2018 WL 274919 (Tex. June 6, 2018).
11 Lowen Valley at 8. (emphasis in the original).
12 Fuentes, 2018 WL 2749719, at *2.

Texas Insurance Appraisal: Who is Grading Insurance Company Papers and the Policies They Sell?

Emily Marlowe | Property Insurance Coverage Law Blog | June 19, 2018

It is no secret that there are problems with the appraisal process. The ever-growing issues with appraisal include, but certainly are not limited to, exorbitant expenses pushed onto policyholders and insurance companies, gamesmanship, and the never-ending questions of:

  • When is appraisal appropriate
  • What can be addressed and assessed within appraisal, and
  • Whether a policyholder’s claims for bad faith, fraud, and violations of the Texas Insurance Code stand once appraisal is completed.

There are other burdens, problems, and uncertainties with appraisal, as discussed more in-depth in my previous article, The Status of Appraisal in Texas Insurance Policies & Claims.

If we look back over the past fifteen years of insurance claims and litigation in Texas, it becomes clear that appraisal was not a problem, solution, or commonly used tactic until around 2014. Since then, insurance companies have increasingly used the appraisal provision as a sword and shield – a sword to kill the claim, and shield to prevent liability for the bad acts of their own personnel.

This behavior is not okay!

Insurance companies need to be accountable for their actions. The truth is, the only party that suffers in appraisal is the policyholder – the people who were promised supplemental payment in December that they didn’t receive until June; those people whose claims have been unnecessarily delayed, who are still sitting in a home with a leaky roof at the beginning of another hurricane season; the people without the financial resources or the knowledge of who to use as their appraiser. People who have tried their darndest to get their claim resolved themselves, but are finally forced to retain an attorney because the insurance company continues to delay the claim.

The question becomes why. Why have problems with appraisal and the appraisal provisions continued to increase? What can we do about it? How can we change it? How did we get here?

For this problem we must look to the root of the cause: The appraisal provisions in insurance policies. Over the past several years, insurance companies have been amending their policies and changing the provisions to add language that limits policyholders rights, decreases their remedies, and forces them to pay for a service that should be included as part of the insurance contract they enter into.

The problem has been that policyholders – your run of the mill homeowner and business owner – do not realize that their policies have been changing little by little. The reason this has largely gone unrecognized is because these policy changes are not in exchange for a reduction in premium or deductible. Therefore, insurance agents may have not be aware that any substantive change to the policy and its provisions has occurred. With hundreds of policy forms used in Texas, it’s impossible for an agent to review every line of every policy they put in place. If there was a significant change in the deductible or premium amounts, it may tip the agent off that the policy is different, but if not, they may never know.

The insurance companies certainly aren’t telling policyholders that their policy is changing to reduce coverage and limit their rights and remedies. Yet, year after year insurance companies are filing policy endorsements and amendments with the Texas Department of Insurance to do just that – reduce policy coverage, limit policyholder rights, and impose greater burdens on policyholders if a loss occurs.

These policy changes generally aren’t obvious to an untrained eye – the changes are hidden in the fine print of the Amendments, Endorsements, and Exclusions.

The problem is that Texans aren’t aware of these issues and changes. How are insurance companies changing their policies without clearly alerting their insureds to the changes and their effect on future claims? For insurance companies the process is simple, they just submit their proposed policy changes to the Texas Department of Insurance for review and approval.

It’s a fairly simple process that has happened repeatedly the past many years. A simple search generates thousands of examples, where policy language was significantly altered to reduce coverage, reduce rights and remedies, and impose burdens on policyholders. Examples of this can be found below:

  • Exhibit 1 – In 2015, State Farm proposed to amend its policy language to significantly alter the appraisal provision. Here, you will see State Farm’s former appraisal provision, which was 1 simple paragraph in the left column compared with State Farm’s proposed amendment, which increased their appraisal provision from 1 paragraph to over 2 pages of text and added numerous conditions, stipulations, and burdens for the policyholder. This language was approved, and policyholders had no clue.
  • Exhibit 2 – In 2014, Foremost Insurance proposed to amend its policy language regarding loss settlement and appraisal. Page 2 says “old” at the top, which shows the previous policy, a single page of text regarding loss settlement. However, pages 3-4 that say “new” at the top and clarify that the underlined language is new added requirements. At the bottom left of page 3 the newly proposed appraisal provision begins, and continues on for the next 2 pages and includes extensive and burdensome appraisal impositions, requirements, and confusing rules. This language was approved, and policyholders had no clue.
  • Exhibit 3 – In 2015, Allstate proposed to amend its endorsements regarding duties after loss and appraisal. Page 3 of this Exhibit shows how Allstate added in nearly 10 requirements that a policyholder must comply with in the event of a loss, including sending a signed sworn to proof of loss, submit to an examination under oath, and to provide Allstate with access to the property “as often as we reasonably require” – this means Allstate could request to inspect the property 10 times, 20 times, 30 times never offering to pay, but policyholders are required to allow them to do so. The proposed amended language on appraisal starts on page 5 – its quite burdensome and continues on through the end of page 6. This language was not in their previous policy form, that’s why its all in red.

The foregoing are just a few examples that are publicly accessible through the Texas Department of Insurance. These proposed amendments were all approved and are now in effect. Maybe your policy provides less rights today than a few years ago – do you know?

Insurance policies can vary, but to consistently reduce rights, limit recoveries, and leave insureds empty handed with nowhere to turn is wrong. Someone needs to be accountable, someone needs to step up. It’s time to change this system, and facilitate a more transparent insurance process.

Where is the oversight?

Who is grading the insurance companies’ papers?

Who is protecting the rights of the policyholders?

How many rights does an insured have to lose before they realize it?

When will the mortgage companies wake up, and act to ensure that their interests in properties are protected?

Who is going to finally step up to do the right thing?