State Farm Lloyds v. Johnson

• Decision Date: 03 July 2009
• Docket Number: No. 06-1071.,06-1071.
• Parties: STATE FARM LLOYDS, Petitioner, v. Becky Ann JOHNSON, Respondent.
• Court: Texas Supreme Court

290 S.W.3d 886

STATE FARM LLOYDS, Petitioner, v. Becky Ann JOHNSON, Respondent.

No. 06-1071.

Supreme Court of Texas.

Argued January 15, 2008.

Decided July 3, 2009.

Rehearing Denied August 28, 2009.

John Christopher Nickelson, Joseph W. Spence, Julia Ann Dobbins, Michael W. Huddleston, Shannon, Gracey, Ratliff & Miller, L.L.P., Fort Worth, TX, for Petitioner.

Russell J. Bowman, Scott Bowman & Staella, Dallas, TX, for Respondent.

Linda Jene Burgess, Winstead PC, Peter R. Meeker, Davis & Wilkerson, P.C., Austin, TX, for Amicus Curiae.

Justice BRISTER delivered the opinion of the Court.

Appraisal clauses have appeared in most property insurance policies in Texas for many years. Although they rarely detail the scope of appraisal, there has rarely been any litigation about it. The parties here agree that the scope of appraisal includes damage questions and excludes liability questions, but they disagree which is involved in this dispute about hail damage to a homeowner's roof. Because an appraisal has yet to take place, we agree with the insured that the record does not establish that it will exceed the permissible scope of appraisal. Accordingly, we affirm the court of appeals' judgment in favor of the insured.

I. Background

A hailstorm moved through Plano, Texas in April of 2003, damaging the roof of Becky Ann Johnson's home. She filed a claim under her homeowners insurance policy with State Farm Lloyds. State Farm's inspector concluded that hail had damaged only the ridgeline of her roof, and estimated repair costs at $499.50 (less than the policy's $1,477 deductible). By contrast, Johnson's roofing contractor concluded the entire roof needed to be replaced at a cost of more than $13,000.¹

To settle this difference, Johnson demanded appraisal of the "amount of loss" under the following provision in her standard-form policy:

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. . . . 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.

State Farm refused to participate in an appraisal, asserting that the parties' dispute concerned causation and not "amount of loss." Johnson filed suit seeking only a declaratory judgment compelling appraisal. On cross-motions for summary judgment, the trial court agreed with State Farm that no appraisal was warranted. The court of appeals reversed, holding that appraisal was required.² We granted State Farm's petition to decide whether the dispute here fell within the scope of this appraisal clause.³

While trial courts have some discretion as to the timing of an appraisal, they have no discretion to ignore a valid appraisal clause entirely.⁴ Accordingly, we review the entire record to decide whether either party was entitled to summary judgment as a matter of law.⁵

II. A Brief History of Appraisal Clauses

Insurance appraisal clauses have been around for a long time. In 1888 in Scottish Union & National Insurance Co. v. Clancy, this Court enforced an appraisal clause much like the one used here.⁶ It would be going too far to say the Court approved of such clauses, but we unequivocally found them enforceable:

However injudicious it may be for parties to bind themselves by such agreement, it seems to be well settled that, having done so, they cannot disregard it. . . . In the absence of fraud, accident, or mistake, the parties having agreed that the amount of loss shall be determined in a particular way, we are constrained to hold that such stipulation is valid. . . .⁷

Today, appraisal clauses "are uniformly included in most forms of property insurance policies."⁸ "Virtually every property insurance policy for both homeowners and corporations contains a provision specifying `appraisal' as a means of resolving disputes about the `amount of loss' for a covered claim."⁹ An appraisal clause like the one used here "appears in almost every homeowners, automobile, and property policy in Texas."¹⁰

Although the history of such clauses is both deep and wide, they have required this Court's attention only five times since Scottish Union: in 1892,¹¹ 1897,¹² 1919,¹³ 1965,¹⁴ and 2002.¹⁵ All of these cases concerned waiver or enforceability of the appraisal clause itself; we have never resolved a dispute about the scope of appraisal, or the meaning of "amount of loss." Accordingly, in addressing this issue for the first time we keep in mind that appraisals have apparently resolved such matters for many years without our aid.

III. The Scope of Appraisal: Damages vs. Liability

In Scottish Union, we referred to the scope of appraisal in the course of distinguishing it from arbitration:

But here the [appraisal clause] does not divest the courts of jurisdiction, but only binds the parties to have the extent or amount of the loss determined in a particular way, leaving the question of liability for such loss to be determined, if necessary, by the courts.¹⁶

In 1897, we repeated this distinction between damage questions for appraisers and liability questions for the courts:

It seems to be generally held that a stipulation that the question of liability shall be determined by arbitration is contrary to public policy and void, but it is otherwise, as we have seen, as to the ascertainment of the amount of the loss. There is neither repugnancy nor inconsistency in leaving the former question to the courts when the liability is disputed, and at the same time in providing that the amount of the recovery shall be settled by arbitration.¹⁷

While policies hostile to arbitration have largely been preempted,¹⁸ limiting appraisal to damages and not liability is surely still correct.¹⁹ Most appraisal clauses do not define the scope of appraisal in detail (as is the case here), but the ordinary meaning of the words serves that purpose.²⁰ The word "appraisal" itself generally means "[t]he determination of what constitutes a fair price; valuation; estimation of worth."²¹ The policy directs the appraisers to decide the "amount of loss," not to construe the policy or decide whether the insurer should pay.²² And the policy requires each party to select a "competent, disinterested appraiser," not a lawyer or insurance expert.²³

The line between liability and damage questions may not always be clear, as discussed below. But while appraisal clauses might be drafted more precisely, the scarcity of suits on the subject suggests the 1888 test is still adequate: the scope of appraisal is damages, not liability.

IV. The Scope of Appraisal: Causation

State Farm argues that no appraisal is needed here because appraisers cannot decide causation issues. Texas courts have split on this question,²⁴ as have the few courts elsewhere to address it.²⁵ But the record here does not establish as a matter of law either that this dispute is about causation or that it is beyond the scope of appraisal.

A. Is this a causation dispute?

First, the record does not prove that the dispute here is about causation.

In its motion for summary judgment, State Farm asserted that "the only shingles on Johnson's roof that were actually damaged by hail were the shingles on the ridge of her roof." A dispute about how many shingles were damaged and needed replacing is surely a question for the appraisers. If the parties must agree on precisely which shingles have been damaged before there can be an appraisal, appraisals would hardly be necessary. What's more, either party could avoid appraisal by simply picking a few extras. The cost of replacing shingles (or anything else) is a function of both price and number; appraisers must factor in both shingle prices and shingle numbers to decide the "amount of loss." To the extent the parties disagree which shingles needed replacing, that dispute would fall within the scope of appraisal.

On appeal, State Farm emphasizes it is disputing not just which shingles were damaged, but which were damaged by hail. But nothing in the summary judgment record establishes Johnson's roof was damaged by anything else. In State Farm's denial letter, its summary judgment motion, and even its briefs in this Court, there is neither evidence nor even a hint about what else caused the damage. The trial court could not conclude this was a causation dispute just because State Farm claimed it was.

Nor does the record conclusively establish that the parties' dispute is solely about how much of the roof was damaged rather than how much needs to be replaced. Sometimes it may be unreasonable or even impossible to repair one part of a roof without replacing the whole.²⁶ The policy provides that State Farm will pay reasonable and necessary costs to "repair or replace" damaged property, and repair or replacement is an "amount of loss" question for the appraisers.²⁷ On this record, the trial court could not conclude as a matter of law that the parties' dispute was about causation rather than something else.

B. Are causation disputes a question of liability or damages?

Even if the parties' dispute involves causation, that does not prove whether it is a question of liability or damages.

Causation relates to both liability and damages because it is the connection between them. For example, the Texas Pattern Jury Charges place causation in both the broad-form liability questions,²⁸ and in the broad-form damage questions that limit damages to those "resulting" from a...