Friday’s theme, once again, was contractual ways to avoid litigation. But the featured special is an “appraisal clause” in an insurance contract, which lets either party demand a third-party process to fix the amount of property damage. As the Texas Supreme Court’s opinion notes, it has only dealt with these appraisal clauses a handful of times.

This weekly orders list did not contain any new grants of review.

Appraisal clauses in insurance contracts

In re Universal Underwriters of Texas Insurance Co., No. 10-0238 (Jefferson, J.) (DB).

The question before the Court was: “When has a party to an insurance contract waived its rights under an appraisal clause?”

The answer, it turns out, is “almost never.”

In this case, the two sides disagreed for several months, leading to a lawsuit being filed by the insured. Only then did the insurer try to invoke the appraisal clause. The trial court held that the insurer’s delay had waived these contractual appraisal rights.

The Texas Supreme Court agreed at a surface level with the idea that waiver was possible. But it stated two key holdings that make these waivers elusive:

  • The Court held that any measure of “delay” has to start after the parties reach a true impasse, with a breakdown of good-faith negotiations. The reason appears to be the nature of appraisal clauses, which are meant to be triggered only after those less formal attempts at negotiation have failed. On this record, the Court held, there was not evidence that the negotiations had sufficiently broken down prior to the lawsuit.

  • The Court also held that, even if there had been delay, Texas law would have required a showing of prejudice in order to waive an appraisal clause. This holding is new — the Court explains that novelty as “a function of the paucity of cases in which we have addressed waiver of appraisal.” The Court drew support from an analogy to the arbitration context and from the general background law of equitable waiver.

The first holding makes good sense, although a complete breakdown of negotiations may sometimes be difficult to show given the cagey way that pre-suit correspondence is written. The second holding — that prejudice is necessary — also seems expected.

But the Court then threw in a paragraph that deserves more thought. (Your thoughts, too, are welcome in the comments.) It was an effort to give clear guidance to future trial courts — but it may have painted with too broad a brush:

Moreover, it is difficult to see how prejudice could ever be shown when the policy, like the one here, gives both sides the same opportunity to demand appraisal. If a party senses that impasse has been reached, it can avoid prejudice by demanding an appraisal itself. This could short-circuit potential litigation and should be pursued before resorting to the courts.

The last sentence may explain the Court’s motive here. But I’m not sure the first two sentences get us there. If anything, they suggest how litigants can invoke appraisal later and later into the litigation process.

In trying to unravel this paragraph, the place to start is right in the middle. The second, pivotal sentence frames “prejudice” as being limited to the lack of an appraisal (“…[a party] can avoid prejudice by demanding an appraisal itself”). But surely each party has the option not to invoke the appraisal clause. Some disputes may be inappropriate for the intermediate step and expense structure of appraisal. (( Unlike arbitration, appraisal focuses on the amount of damage rather than legal questions about whether there is coverage or how a policy’s “occurrence” clause should be interpreted. The appraisers are property experts, not necessarily legal experts. )) So far as the Court says (or I understand appraisal clauses generally), they are not mandatory prerequisites to suit. They are just sticks in each side’s bundle of contract rights, giving each side the option to invoke it — or not to do so. (( This is where the Court’s analogy to arbitration clauses reaches its limit. The cases interpreting arbitration clauses have been shaped by federal and state statutes, which limit the discretion of courts and have led to strong presumptions against waiver. Appraisal clauses do not have that quasi-statutory property. )) If one side would prefer to take a more direct approach to reaching a comprehensive final judgment (such as filing suit), it is hard to see how they “avoid prejudice” by giving up that right.

Without this assumption, the easy logic of this paragraph gets much harder. Viewing “prejudice” as merely the “delay” in appraisal seems, if anything, to be blurring two distinct elements into one.

I don’t think the Court truly meant to limit “prejudice” in the way this concluding paragraph suggests. Other places in the Court’s opinion acknowledge the contrary (and I think correct) rule: “Of course, prejudice to a party may arise in any number of ways that demonstrate harm to a party’s legal rights or financial position.”

And, to be sure, the Court hasn’t yet seen a case where a party even tried to show prejudice in not invoking appraisal. This wasn’t that case. In polite academic company, some would call this paragraph “dicta.” But it is worded as, and will be read as, guidance for future cases.

The Court expressed the hope that a stronger enforcement of appraisal clauses might “short-circuit potential litigation.” The worry is that demanding too much showing of prejudice may also “short-circuit” ongoing litigation if opportunistic litigants, based on a broad reading of Friday’s case, start to invoke appraisal clauses deeper into pretrial proceedings or even trial itself.

If that happens in a big enough case, we may see a mandamus petition to test these principles.

Arbitration clauses in employee contracts

The Court also granted a stay of trial court proceedings in a new petition by an employer seeking to enforce an arbitration clause written into an employee handbook. The petition is Weekley Homes L.P. v. Len Rao, No. 11-0275 (DB).