(Article from Insurance Law Alert, June 2026)
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Holding
The Texas Supreme Court held that a trial court abused its discretion by denying insurers’ motion to compel appraisal where the parties’ dispute concerned, at least in part, the amount of loss. The court reaffirmed that potential disputes regarding coverage, causation, or alleged bad-faith claims handling generally do not defeat a contractual right to appraisal. In re Ace Am. Ins. Co., No. 25-0461, 2026 Tex. LEXIS 411 (Tex. May 8, 2026).
Background
The dispute arose from property damage sustained by a food-distribution warehouse following a ruptured water line. After repairing the property, the insured submitted a claim under its property insurance policy. The insurers paid portions of the claim but disputed the full amount sought by the insured.
The policy contained an appraisal provision allowing either party to demand appraisal if the parties “disagree on the amount of loss.” The insurers invoked appraisal, asserting the parties had reached an impasse regarding the scope of damage and associated repair costs. The insured refused to participate, contending the appraisal was premature and unwarranted. Although the parties subsequently entered into a standstill agreement and engaged in further negotiations, they were unable to resolve their differences.
The insurers then filed suit to compel appraisal. The insured counterclaimed for breach of contract, violations of the Texas Insurance Code, bad faith, and declaratory relief, alleging that the insurers had failed to conduct a reasonable investigation, wrongfully refused to pay covered amounts, and invoked appraisal as leverage to force acceptance of an inadequate settlement. The trial court denied the motion to compel appraisal, and the court of appeals denied mandamus relief.
Decision
The Texas Supreme Court granted the insurers’ petition for mandamus relief and directed the trial court to compel appraisal.
The court began by reaffirming that appraisal clauses are “generally enforceable, absent illegality or waiver.” Citing State Farm Lloyds v. Johnson, 290 S.W.3d 886 (Tex. 2009), the court emphasized that appraisal is designed to resolve disputes concerning the amount of loss, while courts remain responsible for resolving questions of coverage and liability. At the same time, the court reiterated Johnson’s recognition that “any appraisal 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.” The court further noted Johnson’s admonition that “the fact that an appraisal may turn out to involve not just damage but also liability does not mean appraisal should be prohibited as an initial matter.” According to the court, Johnson establishes a “significant hurdle” for a party seeking to avoid appraisal. Unless the “‘amount of loss’ will never be needed” to resolve the parties’ dispute, appraisals should proceed without preemptive judicial intervention.
Applying these principles, the court concluded that the parties’ dispute involved, at least in part, the amount of loss. Although the insured attempted to characterize the dispute as one involving coverage and claims handling, the court found that the parties’ disagreement concerning mold remediation, building-code compliance expense, and replacement cost valuation all implicated the amount of loss and therefore fell within the scope of appraisal.
With respect to mold remediation, the court concluded that disputes regarding allocation of mold-related losses among insurers and whether remediation should have been priced on a time-and-materials basis or a fixed-price basis were disputes over the cost of loss, not the existence of coverage. Similarly, insurers’ contention that certain repairs were more extensive than necessary presented a disagreement regarding the proper scope and cost of repairs—an appraisal issue rather than a coverage issue. The court likewise concluded that disagreements concerning the replacement cost measure of loss implicated valuation questions appropriately raised through appraisal.
Finally, the court also rejected the insured’s contention that the insurers’ alleged bad faith claims handling and prior material breach excused compliance with the appraisal provision. The court emphasized that Texas law recognizes only “two specific, limited exceptions” to the enforcement of an appraisal clauses—illegality and waiver. Neither exception was present. The court further observed that the court of appeals had already rejected the insured’s prior breach theory because it effectively “puts the cart before the horse.” Determining whether the insurers materially breached the insurance policy would require a court to adjudicate the merits of the parties’ dispute before appraisal occurs, contrary to the role appraisal is intended to play in the claims adjustment process. As Johnson recognized, appraisal is designed to occur before suit is filed and before courts are asked to resolve the parties’ substantive disputes. Accordingly, the court held that allegations of bad faith or other purported breaches by the insurer do not create an independent exception to an otherwise enforceable appraisal clause.
Comments
The decision strengthens insurers’ ability to compel appraisal in Texas by reaffirming that appraisal should proceed whenever the parties’ disagreement concerns, at least in part, the amount of loss. The ruling also provides guidance on the proper sequencing of first-party property disputes. Even where the insured asserts coverage defenses, bad faith allegations, or other extra-contractual claims, those issues generally do not prevent appraisal from going forward. Instead, appraisal remains the mechanism for determining the amount of loss, with any remaining coverage and liability issues to be resolved afterward.