The Texas Supreme Court ruled that coverage disputes do not defeat an insurer's contractual right to demand appraisal. The case is In re Ace Am. Ins. Co., 734 S.W.3d 887 (Tex. 2026).
Background
On June 12, 2022, a water line supplying a fire-suppression system of a Dallas food-distribution warehouse ruptured under the building's concrete slab, causing significant damage. The property was insured under a set of commercial-property policies, in effect from March 1, 2022, to March 1, 2023, and held by the insureds, Teachers Insurance and Annuity Association of America, Nuveen Alternatives Advisors, LLC, and USCIF Pinnacle Building B, LLC.
The insureds filed a claim with their insurers, who retained an independent adjuster to investigate. The insurers acknowledged the covered peril and paid approximately $1.2 million for mold remediation. The insureds contend they are owed the policy's full $10 million mold sublimit.
The parties also disputed the scope of necessary repairs, the costs required to comply with Dallas County building codes triggered by the repair work, and whether repairs should have been billed on a time-and-materials basis rather than a fixed price.
Appraisal
To resolve the dispute, the insurers invoked the policy's appraisal provision on two separate occasions. The appraisal provision stated that if the "insurers and the insured disagree on the amount of loss, either may make written demand for an appraisal of the loss."
The insurers first invoked the clause on January 30, 2023, asserting that "the parties are at an impasse with respect to the remaining scope of damage and costs related to the claim." The insureds refused to participate in the appraisal process, stating that it was "premature and unwarranted."
The parties continued negotiations but were unable to reach a resolution. On June 14, 2024, the insurers reaffirmed their demand for appraisal, but the insureds again refused.
The insurers then sued and moved to compel appraisal since the parties disagreed on the amount of loss, and the insurers asserted they had already paid what they owed. The insureds counterclaimed for breach of contract, Texas Insurance Code violations, bad faith, and declaratory relief, alleging the insurers did not conduct a reasonable investigation, and invoked appraisal to coerce the insureds into accepting a lowball settlement offer.
The trial court denied the insurers' motion to compel appraisal, and the court of appeals denied mandamus relief. The case was then brought before the Texas Supreme Court.
Texas Supreme Court
The court first looked at a case where it previously provided guidance "on evaluating whether a disagreement between an insurer and an insured falls within the scope of an appraisal clause." In State Farm Lloyds v. Johnson, the court held that the appraisal provision resolves disputes over the amount of loss, but does not extend to determining an insurer's liability.
The insureds argued that their disagreements with the insurer, such as building code compliance and the allocation of mold losses, were threshold coverage issues, and that there was no genuine disagreement on the amount of loss. They also contended that the insurers acted in bad faith, constituting a material breach of contract, which should excuse the insureds from complying with the appraisal provision entirely.
The court found that whether the insureds are entitled to the $1.2 million already paid or the full $10 million mold sublimit is clearly a dispute over the amount of loss, regardless of which party turns out to be right.
The insureds asserted that the mold issue implicates coverage because further payments may hinge on whether a separate, unrelated insurance policy provides mold coverage. The court rejected the argument, noting that the insurers consistently valued the mold claim at $1.2 million regardless of any other insurer's obligations, and that disputes over how mold losses are allocated among insurers don't erase the underlying amount of loss dispute.
The insureds also pointed to the fact that the two parties disagreed on whether the mold remediation should have been billed on a time-and-materials basis, rather than the fixed price from the contractor. The court found that the dispute is not a coverage dispute and is an issue to be resolved by the appraisers. Likewise, a dispute over the scope of repairs necessary to be compliant with building codes, was also deemed by the court to be an issue for the appraisers.
The insureds then argued that there was no genuine disagreement on the amount of loss so as to trigger the appraisal clause because the insurers' position on the amount was inconsistent and constantly shifting. The court rejected the argument, finding that the insurers' position was consistent in the claim that they had paid what was owed under the policy, and even if their valuation had shifted over time, nothing in the appraisal provision disallows that.
Editor's Note
The Texas Supreme Court held that the trial court erred in denying appraisal and conditionally granted the petition for writ of mandamus, directing the trial court to grant the insurers' motion to compel appraisal.
This case supports the right of either party to an insurance contract to trigger a policy's appraisal provision. The insureds attempted to argue that their disagreements with the insurers were coverage issues and not a genuine disagreement on the amount of loss, but the court found that not to be the case. The court ruled that many of the disagreements were not coverage issues, but an issue that should be resolved by appraisers.
A writ of mandamus commands an entity to perform as part of its duties or to refrain from performing an act if the law forbids that act. Here, the court insisted that the insured participate in the appraisal as outlined in the policy.
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Ray Sugrim
Ray Sugrim is an Insurance Editor with FC&S Expert Coverage Interpretation, a division of National Underwriter Company and Arc Network. Ray is responsible for helping develop and edit content for subscribers. Ray is a St John’s University graduate with a degree in Risk Management & Insurance and is a CPCU candidate.