The year 2021 saw the continued development of two trends in first-party insurance disputes: appraisal and arbitration. Raizner Slania LLP remained at the forefront as an advocate for policyholders, successfully resolving several matters that involved either appraisal or arbitration. In addition to representing property owners in lawsuits or arbitrations against their insurance carriers, Raizner Slania filed an amicus curiae (“friend of the court”) brief at the Texas Supreme Court on behalf of a policyholder advocacy group, United Policyholders, in a case that involved appraisal. As the calendar turns to 2022, the firm continues its representation of clients in arbitration and appraisal matters. Those clients include hotel owners, condominium homeowners’ associations, and school districts, to name a few.
The firm continues to monitor developments in these areas, and this newsletter is intended as a resource for attorneys, public adjusters, contractors, real estate owners and investors, and anyone else whose interests might be affected by these complex and constantly changing areas.
Arbitration and Appraisal: The Basics
Although they both start with the letter A, are often found in insurance policies, and involve the resolution of disputes, there are key differences between arbitration and appraisal in insurance policies. Here’s a brief rundown:
- Arbitration is a contractually binding dispute resolution tool that is now found in more and more insurance policies. Arbitration is intended to replace the court system as a method of resolving any and all disputes surrounding an insurance policy. In fact, if an insurance policy contains an arbitration clause, courts in Texas have held, with very few and limited exceptions, that the parties cannot litigate their disputes in court. Arbitration clauses cover disputes about coverage, underpayment, delays in payment, and bad faith issues – essentially, any and all disputes we would normally file as part of a civil lawsuit in court.
- Appraisal, like arbitration, is also a contractually binding resolution tool used to determine the amount of loss under an insurance policy. Typically, each party will choose their own appraiser and those appraisers will nominate a third person, known as an umpire, who will “break the tie” in case the two appraisers cannot agree on the amount of loss. Appraisal differs in a few key respects from arbitration. First, in the insurance context, unlike arbitration, an appraisal is designed only to resolve disputes about the amount of a loss. An appraisal is not intended to resolve disputes about coverage, bad faith, or anything else that arbitration or lawsuit might otherwise cover. Second, on a related note, the appraisal process itself does not require the involvement of lawyers. Many of you who are public adjusters have no doubt handled many appraisals. Third, one huge pitfall of appraisal is that even if an appraisal award sets the amount of a loss, the insurance company still retains its right to deny the claim. This is a feature (or, for policyholders, a “bug”) that insurance carriers have long abused in their favor.
Appraisal and the Texas Prompt Payment of Claims Act: Texas Law Now Favors Policyholders
Insurance companies have long abused the appraisal process by denying a claim after an appraisal panel entered an award the carrier didn’t like. Even worse, carriers would often litigate a case for months (or even years) before even invoking appraisal, thereby wasting precious time and money. And, compounding this further, if a carrier ultimately paid an appraisal award – no matter how many months or years after it had all the information necessary to decide the claim – Texas courts found the carrier did not have to pay penalty interest under the Texas Prompt Payment of Claims Act (TPPCA).
This all began to change for the better in 2019, when the Texas Supreme Court decided our client’s case, Barbara Technologies Corp. v. State Farm Lloyds. In Barbara Tech, the Court held that an insurance company’s payment of an appraisal award after the statutory deadline to pay a claim did not absolve it of liability under the TPPCA. Put simply, if a carrier delayed payment of a claim it accepted or was found liable for, the appraisal process was not relevant to the TPPCA statutory deadlines. This brought about a dramatic reversal of prior Texas precedent, which had allowed insurers a “get out of jail free card” for simply paying an appraisal award. Our firm represented Barbara Tech from trial all the way through the Texas Supreme Court and continues our representation at the trial court on remand.
The positive momentum continued two years later in Hinojos v. State Farm Lloyds. In that case, the Texas Supreme Court again ruled in favor of the policyholder. The Court ruled that a partial payment made by an insurer before an appraisal award was issued did not absolve the insurer from liability under the TPPCA. This effectively reversed state and federal cases that had held an insurer could make what courts deemed a “reasonable” payment – even one that was a small fraction of the amount ultimately owed as determined by the appraisal award – and avoid TPPCA liability. Raizner Slania filed an amicus curiae brief on behalf of United Policyholders in the Hinojos case.
After Barbara Tech and Hinojos: What are Policyholders’ Options if Appraisal Awards are Paid After the Statutory Deadline?
We are proud that our efforts have helped shift the Texas insurance appraisal law in favor of policyholders. Not long after Barbara Tech was decided, we were retained by the owner of 14 commercial properties in Texas and Missouri to pursue interest and attorneys’ fees owed under the TPPCA. We filed suit in the Western District of Texas in May of 2020. See Woodcrest Capital v. Zurich Am. Ins. Co., No. MO:20-CV-00130-DC, 2021 U.S. Dist. LEXIS 221321, at *1 (W.D. Tex. 2021).
Our client had previously filed insurance claims with its carrier due to significant wind and hail damage to its various properties. All but one of the claims were sent to appraisal. Ultimately, the insurer ended up paying all of the policy benefits due to our client, in amounts set by appraisal awards. But for those claims, we alleged that the insurance company failed to timely pay the awards and thus owed penalty interest and attorneys’ fees under the TPPCA. We sued to recover those damages.
After a significant legal briefing on various issues, the Court entered a 28-page summary judgment order that held our client was entitled to TPPCA damages for several of the properties. Not long after that order was entered, and shortly before trial was scheduled, the parties reached a confidential settlement.
The Woodcrest case represented a new frontier: after Barbara Technologies, it is clear that courts will award TPPCA damages, even if policy benefits have been fully paid when those benefits are paid after the statutory deadline and regardless of whether the appraisal process is invoked.
Arbitration Creeps Into More Insurance Policies
On the arbitration front, we have seen more and more commercial policies that contain arbitration provisions. Although the format varies depending on the policy, certain trends have emerged:
- Most policies we are seeing with arbitration clauses were put together by either AmRisc, LLC or Velocity Risk Underwriters. Those companies are not insurance companies, but call themselves a “general agent” or “managing general agent,” and build insurance portfolio policies from retail agents and wholesale brokers.
- The AmRisc “Compass” form contains one of the most burdensome arbitration clauses in the business. Not only does it prevent a policyholder from suing in court, it also requires arbitration to take place in New York and apply New York law. This is no accident; New York is one of the most insurer-friendly jurisdictions in the country. The arbitration clause, and clauses requiring New York law and New York as a venue, have consistently been found valid by Texas courts, leaving a Texas-based policyholder no choice but to commence arbitration in New York under an unfavorable jurisdiction’s laws.
- The Velocity form, for its part, does not contain a choice of law provision. And so, the good news is a Texas policyholder can still avail themselves of the protections and benefits of the Texas Insurance Code. But the Velocity clause does require arbitration to take place in Nashville, Tennessee, where Velocity is based.
- In almost all instances where we represented (and continue to represent) clients whose insurance policies contain arbitration clauses, the client was unaware of the clause until it came time to bring suit. If you or your clients have a policy issued by AmRisc or Velocity, check closely for an arbitration provision, because one likely exists.
These arbitration programs appear to be here to stay. When the arbitration agreement involves a foreign insurer, and they almost always do, an international agreement called the United Nations Convention on the Recognition and Enforcement of Arbitral Awards (the “New York Convention”) applies, and federal courts are empowered to enforce arbitration agreements even in states where such agreements are prohibited. The Ninth Circuit Court of Appeals just did precisely that in CLMS Management Servs. Ltd. Partnership, et al. v. Amwins Brokerage of Georgia, LLC et al., No. 20-35428, 2021 U.S. App. LEXIS 23996 (9th Cir. 2021), and the United States Supreme Court subsequently denied certiorari, thus declining to consider the matter further. CLMS Management. Servs. Ltd. Partnership, et al. v. Amwins Brokerage of Ga., LLC et al., 2022 U.S. LEXIS 545 (U.S., Jan. 18, 2022) (writ. denied).
Though arbitration clauses have gained popularity among insurance companies in the past couple of years, Raizner Slania has successfully resolved cases containing arbitration provisions containing the AmRisc arbitration provision, Velocity form, or those substantially similar to them for various targeted property types, such as multi-family properties, office buildings, hotels, and school districts
Currently, Raizner Slania has been retained by multiple school districts in the Rio Grande Valley that have dozens of campuses—some even across several counties—that were damaged during Hurricane Hanna. These school districts have policies with arbitration provisions through AmRisc and the Velocity program.
Arbitration and appraisal are two areas of insurance law that are constantly evolving. Raizner Slania LLP remains at the forefront, monitoring new decisions and developments as they happen. For further information about our insurance arbitration and appraisal practice, contact us at (713) 554-9099 or visit our website at raiznerlaw.com.
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