TMM Investments, Limited v. Ohio Casualty Insuranc

Citations: 730 F.3d 466; 2013 WL 5222625; 2013 U.S. App. LEXIS 19192Docket: 12-40635

Court: Court of Appeals for the Fifth Circuit; September 17, 2013; Federal Appellate Court

Original Court Document: View Document

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An insurance dispute arose between TMM Investments, Ltd., owner of the Liberty Square shopping center, and Ohio Casualty Insurance Company (OCIC), which insured the property. Following hailstorm damage on June 6, 2005, TMM estimated repair costs between $654,796 and $955,910, while OCIC's engineers assessed the damage at only $17,949. TMM filed a sworn proof of loss for $679,725.68, rejected OCIC's payment offer due to the significant discrepancy, and invoked the appraisal process as per their insurance policy. 

After appointing appraisers, the appraisal process experienced delays but proceeded with TMM and OCIC selecting Clifford Crites and Mitchell Butler, respectively, with Gary Boyd as umpire. In April 2009, discussions among appraisers revealed differing opinions on the nature of the damage, particularly regarding the roofing, with Butler asserting that the water damage was not storm-related and thus not covered by the policy.

The district court ultimately set aside the appraisal award, leading to a trial where findings concluded that OCIC breached the insurance contract, entitling TMM to damages, attorney’s fees, and prejudgment interest. OCIC appealed the decision to set aside the appraisal award, while TMM contested the ruling limiting its recovery to actual cash value instead of replacement cost and the denial of appellate attorney’s fees. The Fifth Circuit found that the appraisal award should not have been invalidated and reversed the district court's decision.

The policy in question only covers interior damage if there are no covered peril-related openings in the roof. The author seeks client confirmation before issuing an estimate for storm-related damages. On July 15, Crites resigned due to concerns about the appraisal process. On July 29, 2009, Boyd issued an appraisal award for Liberty Square, stating a 'Replacement Cost' of $73,014.83 and an 'Actual Cash Value' of $49,632.63. Notably, this award did not include estimates for damage to the roof membrane or skylights, nor did it account for $2,794.80 in damage to the HVAC system, despite previous appraisals acknowledging this damage. OCIC eventually tendered payment for the 'Actual Cash Value' minus the deductible, but TMM refused the payment due to issues with the appraisal. TMM filed a lawsuit on August 21, 2009, seeking a declaratory judgment against OCIC, claiming the appraisal process was flawed and that OCIC breached the insurance contract by failing to timely pay claims. The case was removed to federal court on diversity grounds, where depositions were taken, revealing differing opinions on the cause of skylight damage. On January 31, 2011, OCIC moved for summary judgment, while TMM sought partial summary judgment on February 1, arguing that the appraisers made several errors, including Boyd's exclusion of HVAC damage and improper consideration of causation and coverage issues. On March 25, 2011, the district court granted TMM's motion, declaring the appraisal award invalid, as Boyd was not authorized to exclude HVAC damage and the appraisers improperly evaluated damage causation.

The court decided that the case would advance to trial concerning causation, liability, and damages, rejecting the idea of a new appraisal. An advisory jury determined the repair and replacement cost for the Liberty Square Shopping Center, damaged by hailstorms, to be $654,795.84. Following a bench trial, the district court found that OCIC breached the insurance policy, awarding TMM $445,261.17 as the actual cash value of the damage, along with attorney’s fees, court costs, expert fees, and prejudgment interest from October 6, 2008. OCIC's motion for a new trial was denied, and both parties filed timely appeals. 

On appeal, the court noted that the appraisal award incorrectly omitted HVAC unit damage but upheld the validity of the remaining award. It determined that OCIC was responsible only for the awarded amount plus the HVAC repair cost, concluding that OCIC had complied with the insurance contract terms. Consequently, the district court's finding of breach was reversed, along with the associated awards to TMM. Issues in TMM’s cross-appeal were deemed moot. 

The court applied a de novo review standard for the summary judgment, emphasizing that Texas substantive law governed the case. The ruling highlighted the binding nature of appraisal awards in Texas insurance contracts, reinforcing that courts aim to reflect the parties' intentions as expressed in contract language.

Every appraisal award is presumed valid, with the burden on the party challenging it. An award will be upheld unless it lacks authority, results from fraud, or fails to comply with contract terms. An appraisal provision prevents one party from contesting damages, leaving only liability for the court. The district court ruled that the umpire improperly excluded HVAC damages from the award, as there was no disagreement between the appraisers. The umpire’s authority is contingent on such disagreements, and since both appraisers agreed on HVAC damages, the exclusion by the umpire was invalid. However, this error alone does not invalidate the entire appraisal award. The court did not address how to handle the situation if the HVAC omission were the sole error since it found that the award was invalid due to the appraisal panel's consideration of causation. Texas case law suggests that minor errors not impacting the entire award should not undermine the parties’ intent to abide by the appraisal provision. Previous cases indicate that if two appraisers agree, the award should be considered final, and only significant biases would necessitate setting aside the entire award.

Boyd was authorized to address the damage items disputed by Butler and Crites, and the absence of HVAC damage from the award does not undermine the parties' intent to submit damage issues to an appraisal panel. Appraisal clauses in contracts should be enforced. The district court previously set aside the appraisal award, claiming the panel exceeded its authority by attributing roof membrane and skylight damage to improper installation and external debris. This conclusion was largely based on the Texas Court of Appeals case, Wells v. American States Preferred Insurance Co., which established that appraisal panels should only determine the value of property damage and not causation, as these issues belong to the courts. In Wells, the appraisal panel assessed damage but could not attribute it to a covered cause, leading to a reversal by the appeals court. However, OCIC contends that the district court overlooked a Texas Supreme Court ruling in State Farm Lloyds v. Johnson, which clarified the appraisal panel's authority. The court affirmed that appraisers handle damage questions while liability issues are for the courts, acknowledging the complexity in distinguishing between the two. It noted that causation is tied to both liability and damages, with prior cases demonstrating that appraisers may overstep if they determine coverage based on causation.

The Johnson court clarified the role of appraisers in determining damages and causation in property insurance cases. Appraisers can assess repair costs related to specific damages but should not determine causation in a manner that eliminates the courts' role in liability questions. When multiple types of damage affect different property items, appraisers are tasked with distinguishing damage caused by each event before liability can be adjudicated by courts. In cases involving water or mold damage, while courts can assess coverage, they should not dictate the extent of damage, leaving that to appraisers. Additionally, if damage results from both a covered event and pre-existing conditions, such as wear and tear, appraisers must evaluate the causation to accurately assess damages. The court concluded that appraisal must include a causation element to determine the "amount of loss." This principle has been upheld in subsequent cases, indicating that appraisal panels are entitled to consider whether damage stems from a covered event or from non-covered conditions. The district court's decision to set aside an appraisal award was problematic, as it was unclear why certain damages were excluded and it misapplied the law regarding causation and liability. According to Johnson, when different causes are cited for a single injury, courts handle liability, while appraisers address damage distinctions among different property items.

The case involves damage claims related to a roof membrane and skylights, which are similar to those in the Johnson case, where roofs were also damaged by hailstorms. The court emphasizes the importance of maintaining reasonable presumptions to support an appraisal award, suggesting that the district court’s decision to set aside the award should be reversed. It is noted that since the appraisal award was valid, OCIC's payment, including an additional amount for HVAC system damage, satisfied the insurance contract obligations. Consequently, TMM did not establish a valid breach of contract claim, leading to the reversal of the district court's award of attorney’s fees and costs to TMM, as it was not considered a prevailing party. The claims in TMM's cross-appeal related to the breach of contract are deemed moot. The conclusion directs the reversal of the district court’s decision and mandates the reinstatement of the appraisal award, including the HVAC damage amount of $2,794.80.