Insurance Policy – Appraisals – Waiver

Insurance lawyers seem to have a lot of confusion regarding insurance contracts with appraisal provisions contained within them and how to interpret and handle them.  This issue was addressed in a January 2020 opinion from a Southern District of Texas, Houston Division.  The opinion is styled, William A. Linnus and Sarah J. Linnus v. Metropolitan Lloyds Insurance Company of Texas.

Texas insurance policies frequently include provisions requiring or allowing appraisal to resolve disputes about loss amounts.  An appraisal clause binds the parties to have the extent or amount of the loss determined in a particular way.  An appraiser must decide the amount of loss, not to construe the policy or decide whether the insurer should pay.  Unless the amount of loss will never be needed appraisals should generally go forward without preemptive intervention by the courts.

The contractual right to appraisal may be waived.  The Texas Supreme Court in the opinion styled, In re Universal Underwriters of Texas Insurance Co., explained that: to constitute waiver of the right to appraisal the acts relied on must be reasonably calculated to induce the assured to believe that compliance by him with the terms and requirements of the policy is not desired, or would be of no effect if performed.  The acts relied on must amount to a denial of liability, or a refusal to pay the loss.  As the Court more recently concluded, waiver requires intent, either the intentional relinquishment of a known right or intentional conduct inconsistent with claiming that right.

When an insured argues that the insurer’s delay waived its appraisal right, the issue is when the insurer knew that the appraisal clause could be invoked, whether it timely acted on that knowledge.  While an unreasonable delay is a factor in finding waiver, reasonableness must be measured from the point of impasse.  An impasse is a mutual understanding that neither party will negotiate further.  Determining whether the parties are at an impasse requires an examination of the circumstances and the parties’ conduct, not merely a measure of the amount of time involved in seeking appraisal.  An impasse is not the same as a disagreement about the amount of loss.  Ongoing negotiations do not trigger a party’s obligation to demand appraisal.  Nor does an insurer’s offer of money to cover damages necessarily indicate a refusal to negotiate further.

Mere delay is not enough to find waiver; a party must show that it has been prejudiced.  Prejudice to a party may arise in any number of ways that demonstrate harm to a party’s legal rights or financial position.  A party should not be allowed purposefully and unjustifiably to manipulate the exercise of its arbitral rights simply to gain an unfair tactical advantage over the opposing party.

Waiver is an affirmative defense and the party asserting it bears the burden of proof.  Waiver may be a fact question, but it becomes a question of law when the facts are undisputed or clearly established.  The trial court may determine whether an appraisal has been waived as a matter of law at the preliminary stages of litigation.

In this case the relevant facts as to waiver are undisputed, allowing the court to resolve waiver as a matter of law.  The Linnuses argue that the parties reached an impasse on April 8, 2019, when the Metropolitan Lloyds supervisor reviewed the public adjuster’s estimate and decided that “no additional action is required.”  The Linnuses contend that because the insurance company “was aware of the impasse” on April 8, but did not invoke appraisal until June 13, it waived its right to appraisal.  But courts have held that when, as here, an insurance company denies a claim because its adjuster’s damage determination falls below a policy deductible, and part of the dispute is about the amount of covered damages, the denial of payment in itself does not waive a contractual appraisal right.  The Linnuses do not object to the length of the delay, which was approximately two months.

The Linnuses contend that Metropolitan Lloyds’s refusal to pay was prejudicial because, in response, the Linnuses “had to” retain counsel who would take a “percentage of any potential recovery on the claim.”  The Linnuses also argue that Metropolitan Lloyds used the delay in invoking appraisal to “gain an unfair tactical advantage” by waiting to “see if they would not pursue the claim and . . . go away.”  The Linnuses cite an opinion from the U.S. Court of Appeals for the First Circuit, which the Texas Supreme Court quoted, finding prejudice when a party “incurred expenses as a direct result of an opponent’s dilatory behavior.

Assuming an impasse on April 8, 2019, the Linnuses’ prejudice argument fails.  They did not have to hire counsel after Metropolitan Lloyds denied their claim.  Under the policy, either the Linnuses or the insurance company could demand appraisal if they “failed to agree on the amount of loss.”  As the Texas Supreme Court explained, “it is difficult to see how prejudice could ever be shown when the policy . . . gives both sides the same opportunity to demand appraisal.  If a party senses that an impasse has been reached, it can avoid prejudice by demanding an appraisal itself.”

On this record, the court holds that Metropolitan Lloyds did not waive its right to demand appraisal.