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Avoiding Gamesmanship in Appointing Appraisal Umpires

Texas Law360
November 24, 2015

By G. Brian Odom
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Appraisal has long been utilized as a tool for resolution of disputes over the amount of loss at issue in property insurance claims. Unfortunately, the appraisal process has devolved in recent years. What was once considered an efficient means of resolving insurance claims is now a nonjudicial dispute resolution process largely devoid of procedural rules or ethical guidelines. An entire cottage industry of professional appraisers and umpires has emerged, many of whom have learned to manipulate the process for their client’s benefit and their own financial gain. While the appraisal process sometimes still works as intended, appraisal today is often capable of giving rise to more disputes than it ultimately resolves.

One example of the devolution of the appraisal process is found in the procedure for umpire selection. In the not-too-distant past, appraisers selected by the insured and insurer made a good faith effort to reach agreement on the selection of a neutral umpire to resolve any differences they have regarding the amount of loss. This still happens on occasion and the appraisal is able to move forward without delay. In today’s reality, however, if there is already a significant dispute regarding the amount of loss, the designated appraisers are frequently unable to agree on an umpire and court involvement is increasingly required.

Disagreements about umpire selection are often fueled by the growing role of appraisers in advocating the respective positions of the parties who hired them rather than serving as neutral, unbiased arbiters of the issues in dispute. In fact, the critical importance of the umpire’s role in appraisal, combined with a minimally defined process for obtaining court appointment of an umpire, actually compels many appraisers to choose impasse over agreement in an effort to gain a tactical advantage in the proceedings.

What is the perceived advantage?

In some instances, appraisers choose not to agree on an umpire based on the simple belief that virtually anyone alive would be a better choice than any umpire candidate proposed by the opposing appraiser. But in more egregious cases, appraisers seek to create an impasse so they can then game the system by winning the proverbial “race to the courthouse” to obtain appointment of a “preferred” umpire almost certain to agree with their position.

With increasing frequency, these efforts to obtain court appointment of an umpire are undertaken by one party or appraiser without notice to the other, at the expense of one party’s due process rights to notice and an opportunity for hearing before the court takes action. Even more concerning is the willingness of some courts to entertain such unilateral applications, often by nonlawyer appraisers communicating ex parte, with little, if any, regard for whether the party without notice is represented by counsel.

Despite the prevalence of such gamesmanship, there are a number of ways to ensure fundamental fairness in the umpire appointment process. For example, a simple revision of the typical appraisal clause would require the parties to jointly apply to the court for an umpire appointment. This simple change would end the race to the courthouse before it started.

Absent this sort of policy language, it is almost always in a party’s best interest to be the first to seek court appointment of an umpire, with proper notice to the opposing party, once the appraisers are at an impasse. This approach guarantees all parties receive contemporaneous notice of a request for the court’s involvement and ensures they each have equal opportunity to weigh in on the umpire appointment decision.

Parties to an appraisal proceeding can also add some structure to the umpire appointment process, and to the appraisal in general, through a separately negotiated appraisal protocol. Among other things, the appraisal protocol can specify exactly how and when the parties will seek court involvement in the process of umpire appointment in the event the appraisers reach an impasse, all before the appraisers are ever designated. Of course, it is not always easy to negotiate such a protocol in the throes of an insurance claim dispute, but savvy parties on both sides of the dispute will recognize the benefits of agreeing on these issues to ensure the appraisal process meets its intended purpose — the efficient and fundamentally fair resolution of a disputed claim.

Another safeguard often utilized by parties to an appraisal proceeding is to formally invoke the jurisdiction of the court by filing a lawsuit seeking an umpire appointment rather than merely making an informal application via letter, email or in-person request. A formal proceeding filed with a court invokes a constitutional promise of legality and fair procedure in addition to the application of canons of ethics and disciplinary rules for the judge and the attorneys involved. Once the court’s jurisdiction is invoked in a judicial proceeding, a judge must “accord to every person who has a legal interest ... the right to be heard” and “shall not initiate, permit or consider ex parte communications ...”[1] Similarly, lawyers must not “seek to influence a tribunal concerning a pending matter by means prohibited by law or applicable rules of practice and procedure” or, with few exceptions, “communicate or cause another to communicate ex parte with a tribunal for the purpose of influencing that entity or person concerning a pending matter.”[2]

Not surprisingly, parties looking for a level playing field in the process of seeking a court-appointed umpire find solace in these protections and choose to file a formal lawsuit. However, a recent decision by the San Antonio Court of Appeals unfortunately (and likely unintendedly) thwarts this objective and highlights the uncertainty that can accompany this practice.

In Texas Municipal League Joint Self-Insurance Fund, et al v. Housing Authority of the City of Alice,[3] the court considered an appeal from a trial court’s “Order Selecting Umpire” in the context of an appraisal proceeding. The underlying facts of the case are typical.

The Housing Authority of the City of Alice is a member of a joint self-insurance pool called the Texas Municipal League Joint Self-Insurance Fund, which provides liability and property self-insurance coverage to political subdivisions. After a dispute arose concerning the amount of loss sustained to its property as a result of a storm, the authority invoked appraisal under the terms of a controlling property coverage document that contained the following appraisal clause:

If the member and the fund fail to agree as to the amount of loss, each shall, upon the written demand either of the member or of the fund made within 60 days after receipt of proof of loss by the fund, select a competent and disinterested appraiser. The appraisers then shall select a competent and disinterested umpire. If they should fail for 15 days to agree upon such umpire, then upon request of the member or of the fund, such umpire shall be selected by a judge of a court of record in the county and state in which such appraisal is pending. Then, at a reasonable time and place, the appraisers shall appraise the loss, stating separately the value at the time of loss and the amount of loss. If the appraisers fail to agree, they shall submit their differences to the umpire. An award in writing by any two shall determine the amount of loss.

Presumably after the two appraisers tried and failed to agree on an umpire, the authority initiated litigation against the fund and its administrator by filing an “Application for Appointment of an Umpire” with the district clerk of Jim Wells County. The authority paid the requisite filing fee and arranged for formal service on the defendants. The authority’s application requested that the court appoint an umpire consistent with the controlling property coverage document. The trial court ultimately denied the fund’s plea to the jurisdiction based on governmental immunity, granted the authority’s application and signed an order appointing an umpire. The fund appealed.

On appeal, the fund again argued it had governmental immunity from the authority’s suit and the trial court erred in denying its plea to the jurisdiction. In response, the authority argued the trial court had not erred in denying the plea to the jurisdiction because the “authority did not file a ‘suit,’ did not make a claim against the fund, did not seek to compel the fund to engage in the appraisal process and did not seek any other relief against the fund.”[4] The authority contended “it merely requested the judge to select an umpire” and that “subject matter jurisdiction is not required to select an umpire.”[5]

After considering the parties’ arguments, the appellate court concluded the trial court did not have subject matter jurisdiction. The court agreed with the authority’s argument that the selection of an umpire by a judge in accordance with the property coverage document “does not require the filing of a lawsuit or invoking the subject matter jurisdiction of a court.”[6] However, the court determined the authority had not merely asked the judge to select an umpire. Rather, it filed a formal lawsuit against the fund and sought and obtained an order of the court. Accordingly, the appellate court concluded that subject matter jurisdiction of the trial court was essential for it to render a valid judgment.

In deciding whether the trial court had the requisite subject matter jurisdiction, the appellate court focused on what the authority’s application for appointment of an umpire did not allege:

The application did not purport to state a cause of action against either defendant, nor did it seek any relief from either defendant. It did not allege the defendants had attempted to prevent the housing authority from asking a judge to appoint an umpire. The application did not ask the trial court to declare that the housing authority had complied with the provisions of the property coverage document or had properly invoked the appraisal procedures, and it did not seek an order compelling the fund to do or to refrain from doing anything. Rather, it simply requested that the court appoint an umpire.

The appellate court ultimately held that “[i]n order for the trial court to have subject matter jurisdiction over a case, there must be a real, justiciable controversy between the parties that will be actually determined by the litigation.”[7] However, because the court concluded the authority’s application did not seek to resolve any dispute between the parties, it did not present any real controversy that would be decided by the litigation and the trial court’s subject matter jurisdiction was not invoked.

Even more troubling, and perhaps without an appreciation of the practical implications of the statement, the court made a point to state in a footnote that “nothing in this opinion prevents either party from making a request outside the judicial system to ‘a judge of a court of record in the county and state in which such appraisal is pending,’ as contemplated by the parties’ contract.”[8]

This holding certainly does nothing to engender confidence in litigants seeking a fair shake in the process of obtaining court appointment of an umpire. In fact, it arguably does just the opposite by endorsing a procedure for appointment of umpires “outside the judicial system,” a process that is fraught with gamesmanship that parties regularly look to courts and judges to deter. Nevertheless, even if one agrees that the process of seeking a court appointed umpire does not resolve a justiciable controversy as this court suggests, the court has seemingly created a roadmap for parties attempting to invoke a court’s subject matter jurisdiction in this context by highlighting the claims and causes of action that were absent from the authority’s pleading. A little creativity in pleading the request for umpire appointment might result in a different outcome.

Until that theory is tested, it would be wise for parties to proceed with caution in the process of umpire appointment. More importantly, to bring an end to the gamesmanship altogether, Texas insurers should consider amending their policy forms to require that the parties jointly apply to a court for the appointment of an umpire.

—By G. Brian Odom, Zelle Hofmann Voelbel & Mason LLP

Brian Odom is a partner in Zelle Hofmann's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Texas Code of Judicial Conduct, Canon 3.

[2] Texas Disciplinary Rules of Professional Conduct, Rule 3.05.

[3] Texas Municipal League Joint Self-Insurance Fund, et al v. Housing Authority of the City of Alice (Oct. 14, 2015)

[4] Id. at *2.

[5] Id.

[6] Id. (citing Barnes v. W. Alliance Insurance Co., 844 S.W.2d 264, 267 (Tex.App.—Amarillo 1992, writ dism'd by agr.); Fire Association of Philadelphia v. Ballard, 112 S.W.2d 532, 533 (Tex.Civ.App.—Waco 1938, no writ); Application of Roberts Co., 258 N.C. 184, 186, 128 S.E.2d 137, 138–39 (1962).

[7] Id. at *3 (citing Austin Nursing Center Inc. v. Lovato, 171 S.W.3d 845, 849 (Tex.2005); In re K.D.E., No. 01–04–00043–CV, (Tex. App—Houston [1st Dist.] Nov. 18, 2004, no pet.) (mem.op.); Paulsen v. Tex. Equal Access to Justice Found.,23 S.W.3d 42, 48 (Tex.App.—Austin 1999, pet. denied); Wallace v. Investment Advisors Inc., 960 S.W.2d 885, 888–89 (Tex.App.—Texarkana 1997, pet. denied).

[8] Id. at FN2 (emphasis added).

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