AUSTIN (LN) — The Texas Supreme Court on Friday ordered a Dallas warehouse owner to participate in an insurance appraisal process, rejecting the argument that alleged bad faith excused compliance with the policy’s mandatory dispute-resolution clause.
Justice Debra Lehrmann, writing for the unanimous court, held that the trial court abused its discretion in denying the insurers’ motion to compel appraisal. The ruling reinforces the enforceability of appraisal provisions even when parties disagree over complex engineering costs, mold remediation, and building code compliance.
The dispute stems from a June 2022 water-main rupture that damaged a food-distribution warehouse in Dallas. The insured, a collective of three entities including Teachers Insurance and Annuity Association of America, alleged the insurers failed to conduct a reasonable investigation and invoked appraisal to coerce a lowball settlement.
The insurers, including ACE American Insurance Company and Endurance American Specialty Insurance Company, argued the parties were at an impasse regarding the scope of damage and repair costs. They had paid approximately $1.2 million for mold remediation, which they contended was the full value of that claim. The insured sought the policy’s full $10 million mold sublimit.
The insured refused to participate in the appraisal, asserting the dispute centered on coverage and causation rather than the amount of loss. The insured also claimed the insurers engaged in a pattern of bad-faith conduct, which it argued constituted a prior material breach of the policy that discharged its obligation to appraise.
Lehrmann rejected the bad-faith argument, noting that the court of appeals in a prior case described such an argument as putting the cart, because determining whether a breach occurred would require resolving the very issues the appraisal is designed to address.
Lehrmann wrote that if an insured could avoid appraisal by alleging a dispute over coverage or claims handling, appraisal clauses would be virtually a nullity, citing a federal district court decision that relied on the Texas Supreme Court’s 2009 decision in State Farm Lloyds v. Johnson.
The court found that the parties’ disagreements over whether the insured spent more than necessary to restore the warehouse, and whether specific repair methodologies were required, were squarely within the appraisers’ purview to determine the amount of loss.
The Texas Supreme Court conditionally granted the insurers’ petition for writ of mandamus, directing the trial court to compel the appraisal. The writ will issue only if the trial court fails to comply.