On March 16, 2023, the United States District Court for the Southern District of Texas granted the insured’s motion to compel appraisal notwithstanding the insurer’s position that the damage was not a covered loss.  In Chen v. Amguard Ins. Co., No 4:22-CV-3673, 2023 WL 2541704 (S.D. Texas—Houston, March 16, 2023, mem. op.), Chen made a claim for roof damage under his insurance policy with AmGuard. After an investigation, AmGuard denied the claim, asserting that the damage was excluded under the policy because it resulted from wear, tear, and deterioration. Consequently, Chen’s counsel sent a letter to AmGuard demanding appraisal, which AmGuard rejected on the ground that the issue was a coverage issue and not a price/scope issue. The operative provision in the policy provided: “If you and we fail to agree on the amount of loss, either may demand appraisal of the loss.” Chen subsequently sued AmGuard asserting contractual and extra-contractual claims.  

The U.S. District Court began its analysis by noting that the language of the appraisal clause made the parties' disagreement “on the amount of loss” a condition precedent that required Chen to show that the parties failed to agree on the amount of loss before appraisal was warranted. The Court concluded that “AmGuard's attempt to avoid appraisal by focusing on the cause of the asserted loss [did] not comport with the Texas Supreme Court's decision” in State Farm Lloyds v. Johnson, 290 S.W.3d 886, 893 (Tex. 2009), wherein the Supreme Court concluded that the appraisal process “necessarily includes some causation element, because setting the ‘amount of loss’ requires appraisers to decide between damages for which coverage is claimed from damages caused by everything else.” “This is true when—as here—the causation question involves separating loss due to a covered event from a property's pre-existing condition. And even when an insurer denies coverage, appraisers can still set the amount of loss in case the insurer turns out to be wrong. Moreover, nothing indicate[d] that coverage [was] so unlikely here that appraisal will never be needed. AmGuard therefore cannot avoid appraisal at this point merely because there might be a causation question that exceeds the scope of appraisal. Appraisal is warranted to determine the amount of loss, even if the ultimate causation and coverage determinations are reserved to the Court post-appraisal.”

In sum, the Court concluded that the parties “[had], in fact, disagreed about the ‘amount of loss,’ notwithstanding AmGuard's position that the damage to Chen's property stem[med] from a non-covered cause.” Thus, “because the condition precedent to invoking appraisal had been satisfied, the Court grant[ed] Chen's motion to compel appraisal.”

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