EDM Office Services, Inc. v. Hartford Lloyds Ins. Co.
United States District Court,
S.D. Texas,
Houston Division.
EDM OFFICE SERVICES, INC., Plaintiff,
v.
HARTFORD LLOYDS INSURANCE
COMPANY, et al., Defendants.
Civil Action No. H–10–3754. July 1, 2011.

Opinion
MEMORANDUM AND ORDER
LEE H. ROSENTHAL, District Judge.
*1 This is a suit to recover insurance proceeds and damages
under the Texas Insurance Code and common law. The
insurer, Hartford Lloyds Insurance Company (“Hartford”)
has moved to compel appraisal under an insurance policy
issued to EDM Office Services, Inc. (“EDM”). (Docket Entry
No. 13). EDM opposes the motion on the grounds that
Hartford has not complied with the conditions precedent
identified in the insurance policy for appraisal because
it has not conducted a reasonable investigation of his
claims. Alternatively, EDM argues that Hartford waived its
contractual right to seek appraisal. EDM also argues that this
court should wait to order appraisal. (Docket Entry No. 19).
Based on a careful consideration of the record and the
applicable law, this court finds that this case involves a
dispute over the cost of repairing damaged property that is
subject to appraisal. This court also finds that EDM did not
waive its right to invoke appraisal or fail to comply with the
conditions precedent to do so. The motion to compel appraisal
is granted. The litigation is stayed pending the appraisal
process as to the valuation issues, but will proceed as to the
coverage issues.
The reasons for this ruling are set out below.
I. Background
EDM conducts its business operations from a building
in Houston, Texas. Hartford issued the insurance policy
covering the property. Hurricane Ike hit the Gulf Coast area
in September 2008. EDM claims that the hurricane damaged
the property roof and that water intrusion caused damage
throughout the building, including damages to its ceiling,
walls, insulation, flooring, and inventory. On September
22, 2008, EDM notified Hartford of the property damage.
Hartford sent Stephen Scott, an insurance adjuster, to EDM’s
property. Scott estimated that the property damages totaled
$8,136.57, though EDM points out that this estimate did not
include “overhead & profit.” (Docket Entry No. 19, Ex. C,
Scott’s First Estimate and Report); (Docket Entry No. 19, at
12). Scott’s report also stated that the damages were likely
related to “wind driven rain” and from water entering the
property under doors. (Docket Entry No. 19, Ex. C, Scott’s
First Estimate and Report). Hartford applied a recoverable
depreciation of $1,283.27 and the policy’s $50,160.00 and
did not issue payment for the building portion of the claim
because it was below the deductible.
EDM has also not been compensated for its businessloss
claims. The parties dispute the reasons for this. EDM
argues that Hartford denied the business-loss claims because
it determined that the losses were not covered under the
policy. Hartford responds that EDM failed to submit “all the
requested information from Plaintiff in order to adjust the
business personal property loss, including signed Release of
Information and/or documentation to support the cost paid by
Plaintiff for the items claimed.” (Docket Entry No. 13, at 4).
EDM filed suit in state court on September 2, 2010, and
Hartford removed to this court. The state-court petition
alleges both coverage and valuation claims. It alleges that
“Hartford wrongfully denied Plaintiff’s claim for repairs of
the property, even though the Policy provided coverage
for losses such as those suffered by Plaintiff. Furthermore,
Hartford underpaid some of Plaintiff’s claims by not
providing full coverage for the damages sustained by
Plaintiff, as well as underscoping the damages during its
investigation.” (Docket Entry No. 1, Ex. 2, State–Court
Petition, ¶ 20). The parties attempted to mediate their dispute,
but failed to reach an agreement.
*2 On May 25, 2011, Hartford moved to compel appraisal.
The policy’s appraisal provision states:
EDM Office Services, Inc. v. Hartford Lloyds Ins. Co., Slip Copy (2011)
© 2011 Thomson Reuters. No claim to original U.S. Government Works. 2
1. Appraisal
….
If we and you disagree on the amount of loss (or
net income or operating expense as regards Business
Income Coverage), either may make written demand for an
appraisal of the loss. In this event, each party will select a
competent and impartial appraiser and notify the other of
the appraiser selected within 20 days of such demand. The
two appraisers will select an umpire. If they cannot agree
within 15 days upon such umpire, either may request that
selection be made by a judge of a court having jurisdiction.
Each appraiser will state the amount of the loss. If they fail
to agree, they will submit their differences to the umpire.
A decision agreed to by any of the two will be binding as
to the amount of loss…. If there is an appraisal … we will
still retain our right to deny the claim.
(Docket Entry No. 13, Ex. A).
In his response to the motion to compel, EDM argues that
Hartford cannot demand appraisal because it failed to conduct
a reasonable investigation of his claims, which EDM asserts is
a condition precedent to invoking appraisal. EDM argues that
the following language from the insurance policy obligates
Hartford to conduct a reasonable investigation before seeking
appraisal:
(1) Claims Handling
(a) Within 15 days after we receive written notice of the claim,
we will:
(i) Acknowledge receipt of the claim. If we do not
acknowledge receipt of the claim in writing we will
keep a record of the date, method and content of the
acknowledgment;
(ii) Begin any investigation of the claim; and
(iii) Request a signed, sworn proof of loss, specify the
information you must provide and supply you with the
necessary forms. We may request more information at a
later date, if during the investigation of the claim such
additional information is necessary.
(b) We will notify you in writing as to whether:
(i) The claim or part of the claim will be paid;
(ii) The claim or part of the claim has been denied, and inform
you of the reasons for denial;
(iii) More information is necessary; or
(iv) We need additional time to reach a decision. If we need
additional time, we will inform you of the reasons for such
need.
We will provide notification, as described in (b)(i) through
(b)(iv) above within:
(i) 15 business days after we receive the signed, sworn proof
of loss and all information we requested; or
(ii) 30 days after we receive the signed, sworn time to reach
a decision, we must then either approve or deny the claim
within 45 days of such notice.
If we notified you that we need additional time to reach a
decision, we must then either approve or deny the claim
within 45 days of such notice.
(Docket Entry No. 19, Ex. H). EDM also argues that
Hartford’s investigation was not reasonable because it did
not comply with sections 542.056 and 541.060 of the Texas
Insurance Code. Section 542.056 states:
*3 (a) Except as provided by Subsection (b) or (d), an
insurer shall notify a claimant in writing of the acceptance
or rejection of a claim not later than the 15th business day
after the date the insurer receives all items, statements, and
forms required by the insurer to secure final proof of loss.
(b) If an insurer has a reasonable basis to believe that a loss
resulted from arson, the insurer shall notify the claimant
in writing of the acceptance or rejection of the claim not
later than the 30th day after the date the insurer receives all
items, statements, and forms required by the insurer.
(c) If the insurer rejects the claim, the notice required
by Subsection (a) or (b) must state the reasons for the
rejection.
(d) If the insurer is unable to accept or reject the claim within
the period specified by Subsection (a) or (b), the insurer,
within that same period, shall notify the claimant of the
reasons that the insurer needs additional time. The insurer
shall accept or reject the claim not later than the 45th day
after the date the insurer notifies a claimant under this
subsection.
EDM Office Services, Inc. v. Hartford Lloyds Ins. Co., Slip Copy (2011)
© 2011 Thomson Reuters. No claim to original U.S. Government Works. 3
TEX. INS.CODE § 542.056. Section 541.060 states:
(a) It is an unfair method of competition or an unfair or
deceptive act or practice in the business of insurance to
engage in the following unfair settlement practices with
respect to a claim by an insured or beneficiary:
….
(2) failing to attempt in good faith to effectuate a prompt, fair,
and equitable settlement of:
(A) a claim with respect to which the insurer’s liability has
become reasonably clear;
….
(3) failing to promptly provide to a policyholder a reasonable
explanation of the basis in the policy, in relation to the facts
or applicable law, for the insurer’s denial of a claim or offer
of a compromise settlement of a claim;
(4) failing within a reasonable time to:
(A) affirm or deny coverage of a claim to a policyholder; or
(B) submit a reservation of rights to a policyholder;
….
(7) refusing to pay a claim without conducting a reasonable
investigation with respect to the claim; ….
TEX. INS.CODE § 542.060(a)(2)-(4), (7). EDM argues
that Hartford failed to comply with these contractual and
statutory duties by: “not send[ing] a written acknowledgment
of the claim within 15 days of notice”; “unreasonably delay
[ing] [denial of] Plaintiff’s building damage claim, although
Plaintiff had provided Defendant with all the information
and documents requested to evaluate and settle the claim
[and] [misrepresenting] on November 20, 2008 that it had not
received the Adjuster’s report even though it was received
on October 28, 2008”; “fail[ing] to include any amount for
overhead and profit in its estimate of the damages to Plaintiffs’
building”; “misrepresent[ing] to Plaintiffs that BPP claim
was covered under the policy when Hartford in fact denied
liability for lack of coverage”; and “unreasonably delay[ing]
in denying Plaintiff’s BPP claim by sending a denial letter
on August 11, 2009, although Hartford already decided on
January 23, 2009 that no coverage existed.” (Docket Entry
No. 19, at 20). Finally, EDM argues that Hartford’s delay in
paying the claim waived its right to appraisal because the
delay prejudiced him.
II. Analysis
*4 Texas insurance policies frequently include provisions
specifying appraisal to resolve disputes about the amount of
loss under the policy. See State Farm Lloyds v. Johnson, 290
S.W.3d 886, 888–89 (Tex.2009). “An appraisal clause ‘binds
the parties to have the extent or amount of the loss determined
in a particular way .’ “ Id. at 895 (quoting In re Allstate
County Mut. Ins. Co., 85 S.W.3d 193, 195 (Tex.2002));
see also Lundstrom v. United Servs. Auto. Ass’n–CIC, 192
S.W.3d 78, 87 (Tex.App.-Houston [14th Dist.] 2006, pet.
denied) (“The effect of an appraisal provision is to estop one
party from contesting the issue of damages in a suit on the
insurance contract, leaving only the question of liability for
the court.”). An appraiser must “decide the ‘amount of loss,’
not to construe the policy or decide whether the insurer should
pay.” Johnson, 290 S.W.3d at 890. “Unless the ‘amount of
loss’ will never be needed … appraisals should generally go
forward without preemptive intervention by the courts.” Id.
at 895.
A. Conditions Precedent
Assuming, but not deciding, that Hartford failed to comply
with the “Claims Handling” provisions of the insurance
policy and with provisions of the Texas Insurance Code, this
does not prevent it from seeking appraisal because alleged
noncompliance with the “Claims Handling” provisions and
the Texas Insurance Code does not allege a failure to meet a
condition precedent to exercising appraisal rights. “In order to
determine whether a condition precedent exists, the intention
of the parties must be ascertained; and that can be done only
by looking at the entire contract.” Solar Applications Eng’g,
Inc. v. T.A. Operating Corp., 327 S.W.3d 104, 109 (Tex.2010)
(quoting Criswell v. European Crossroads Shopping Ctr.,
Ltd., 792 S.W.2d 945, 948 (Tex.1990)). “In order to make
performance specifically conditional, a term such as ‘if’,
‘provided that’, ‘on condition that’, or some similar phrase
of conditional language must normally be included.” Id.
(citing Criswell, 792 S.W.2d at 948). “While there is no
requirement that such phrases be utilized, their absence is
probative of the parties intention that a promise be made,
rather than a condition imposed.” Id. (citing Criswell, 792
S.W.2d at 948). The appraisal clause does not use conditional
language and EDM has not identified any provision in the
contract showing that the parties intended that Hartford
fully comply with the “Claims Handling” provisions and
EDM Office Services, Inc. v. Hartford Lloyds Ins. Co., Slip Copy (2011)
© 2011 Thomson Reuters. No claim to original U.S. Government Works. 4
Texas Insurance Code before seeking appraisal. See also
Butler v. Prop. and Cas. Ins. Co., Civ. A. No. H–10–3613,
2011 WL 217495, at *1 (S.D.Tex. June 3, 2011) (finding
that a similar insurance-policy appraisal provision does not
require compliance with claims handling provision before
seeking appraisal). Compliance with the “Claims Handling”
provisions and the Texas Insurance Code is not a condition
precedent to compelling appraisal.
B. Waiver
*5 The contractual right to appraisal may be waived. See,
e.g., In re Slavonic Mut. Fire Ins. Ass’n, 308 S.W.3d 556,
561 (Tex. App .-Houston [14th Dist.] 2010, orig. proceeding).
Waiver is defined as the “intentional relinquishment of a
known right.” JM Walker LLC v. Acadia Ins. Co., 356
F. App’x 744, 748 (5th Cir.2009) (per curiam) (summary
calendar) (unpublished). Courts applying Texas law follow
the standard articulated long ago in Scottish Union & Nat.
Ins. Co. v. Clancey, 71 Tex. 5, 8 S.W. 630, 632 (Tex.1888),
to determine whether an insurer’s acts amount to waiver:
“To constitute waiver, the acts relied on must be such as are
reasonably calculated to induce the assured to believe that a
compliance by him with the terms and requirements of the
policy is not desired, or would be of no effect if performed.
The acts relied on must amount to a denial of liability, or
a refusal to pay the loss.” 1 See, e.g., Woodward v. Liberty
Mut. Ins. Co., No. 3:09–CV–0228–G, 2010 WL 1186323,
at *4 (N.D.Tex. Mar.26, 2010); In re Sec. Nat’l Ins. Co. .,
No. 14–10–00009–CV, 2010 WL 1609247, at *5 (Tex.App.-
Houston [14th Dist.] Apr. 22, 2010, orig. proceeding) (mem.
op., not designated for publication); In re Slavonic Mut. Fire
Ins. Ass’n, 308 S.W.3d at 563.
1 Other cases quote similar language from Scottish Union
& Nat. Ins. Co. v. Clancey, 83 Tex. 113, 18 S.W. 439,
441 (Tex.1892): “[T]he acts relied on as constituting
a waiver should be such as are reasonably calculated
to make the assured believe that a compliance on his
part with the stipulations providing the mode of proof
of loss, and regulating the appraisement of the damage
done, is not desired, and that it would be of no effect
if observed by him.” See, e.g., JM Walker LLC, 356
F. App’x at 748; Sanchez v. Prop. & Cas., Ins. Co.
of Hartford, No. H–09–1736, 2010 WL 413687, at *4
(S.D.Tex. Jan.27, 2010).
“[W]hile an unreasonable delay is a factor in finding
waiver, reasonableness must be measured from the point of
impasse.” In re Universal Underwriters of Tex. Ins. Co.,
––– S.W.3d ––––, 2011 WL 1713278, at *3 (Tex. May
6, 2011). Determining whether the parties have reached an
impasse “requires an examination of the circumstances and
the parties’ conduct, not merely a measure of the amount of
time involved in seeking appraisal.” Id. “An impasse is not
the same as a disagreement about the amount of loss. Ongoing
negotiations … do not trigger a party’s obligation to demand
appraisal. Nor does an insurer’s offer of money to cover
damages necessarily indicate a refusal to negotiate further ….“
Id. “[M]ere delay is not enough to find waiver; a party must
show that it has been prejudiced.” Id. at *5. “Prejudice to
a party may arise in any number of ways that demonstrate
harm to a party’s legal rights or financial position.” Universal
Underwriters, ––– S.W.3d ––––, 2011 WL 1713278, at *5.
The Texas Supreme Court has observed that “it is difficult to
see how prejudice could ever be shown when the policy …
gives both sides the same opportunity to demand appraisal. If
a party senses that an impasse has been reached, it can avoid
prejudice by demanding an appraisal itself.” Id. at *7.
Waiver is an affirmative defense, and the party alleging
waiver has the burden of proof. JM Walker LLC, 356 F.
App’x at 748; Sanchez, 2010 WL 413687, at *4. Whether
certain circumstances constitute waiver is a question of law.
JM Walker LLC, 356 F. App’x at 748; see also Sanchez, 2010
WL 413687, at *4 (holding that although waiver is typically
a fact question, when the relevant facts are undisputed and
clearly established, a court may decide whether a party has
waived its contractual right to appraisal as a question of
law). “The trial court may determine whether an appraisal has
been waived as a matter of law at the preliminary stages of
litigation.” Sanchez, 2010 WL 413687, at *4 (quoting Laas v.
State Farm Mut. Auto. Ins. Co., No. 14–98–00488–CV, 2000
WL 1125287 at *6 (Tex.App.-Houston [14th Dist.] Apr. 22,
2010, orig. proceeding) (unpublished)).
*6 The parties have reached an impasse. They could
not successfully mediate their claims. EDM argues that
Hartford delayed seeking appraisal. EDM, however, has not
demonstrated prejudice. See Universal Underwriters, –––
S.W.3d ––––, 2011 WL 1713278, at *5 (“[M]ere delay is not
enough to find waiver; a party must show that it has been
prejudiced.”).
The Texas Supreme Court has explained that:
[to] constitute waiver the acts relied on must be such as
are reasonably calculated to induce the assured to believe
that compliance by him with the terms of the policy … is
not desired, or would be of no effect if performed. The acts
EDM Office Services, Inc. v. Hartford Lloyds Ins. Co., Slip Copy (2011)
© 2011 Thomson Reuters. No claim to original U.S. Government Works. 5
relied on must amount to a denial of liability or refusal to
pay the loss.
Universal Underwriters, ––– S.W.3d ––––, 2011 WL
1713278, at *2 (quoting Scottish Union, 8 S.W. at 632). “Or,”
as the court “more recently concluded, ‘[w]aiver requires
intent, either the intentional relinquishment of known right or
intentional conduct inconsistent with claiming that right.’ “
Id. (quoting In re Gen. Elec. Capital Corp., 203 S.W.3d 314,
316 (Tex.2006). The court has also explained that prejudice
can rarely be found on facts similar to those present here.
Id. at *5; see also Perry Homes v. Cull, 258 S.W.3d 580,
597 (Tex.2008) (defining prejudice for purposes of waiver
of arbitration as “the inherent unfairness in terms of delay,
expense, or damage to a party’s legal position” (quoted
in Universal Underwriters, –––S.W.3d ––––, 2011 WL
1713278, at *5)); In re Tyco Int’l Ltd. Sec. Litig., 422 F.3d
41, 47 n. 5 (1st Cir.2005) (“[A] party should not be allowed
purposefully and unjustifiably to manipulate the exercise of
its arbitral rights simply to gain an unfair tactical advantage
over the opposing party.” (quoted in Universal Underwriters,
––– S.W.3d ––––, 2011 WL 1713278, at *5); Menorah Ins.
Co., Ltd. v. INX Reinsurance Corp., 72 F.3d 218, 222 (1st
Cir.1995) (finding prejudice where party “incurred expenses
as a direct result of [opponent’s] dilatory behavior” (cited and
quoted in Universal Underwriters, ––– S.W.3d ––––, 2011
WL 1713278, at *5)). EDM has not shown prejudice. 2
2 EDM argues that Hartford’s delay prejudiced it because
“any appraisal award at this juncture would be
outside of the policy deadline for making a claim for
replacement cost.” (Docket Entry No. 19, at 24). EDM
points to a provision in his insurance policy stating that
an insured who elects, as EDM did, to make a claim
on an actual-cash-value basis has 180 days to change
the claim to a replacement-cost basis. EDM argues that
Hartford’s motion to compel appraisal prevents it from
exercising this right. EDM has identified no provision
in the insurance policy stating that an appraisal prevents
it from making its claim on a replacement-cost basis,
or that it cannot ask for a replacement-cost basis at
appraisal. This is not prejudice.
C. Whether to Stay the Litigation Pending Appraisal
EDM argues that this court should allow it additional
discovery pending appraisal on its claims that Hartford
violated the Texas Insurance Code and on its coverage claims.
“While [a] trial court has no discretion to deny the appraisal,
the court does have some discretion as to the timing of the
appraisal.” In re Allstate, 85 S.W.3d at 967. In many cases,
the litigation is stayed while appraisal is completed. See, e.g.,
Molzan, Inc. v. United Fire & Cas. Co., Civ. A. No. H–09–
01045, 2009 WL 2215092, at *5 (S.D.Tex. July 23, 2009); cf.
Johnson, 290 S.W.3d at 895 (“Unless the ‘amount of loss’ will
never be needed … appraisals should generally go forward
without preemptive intervention by the courts.”); Universal
Underwriters, ––– S.W.3d ––––, 2011 WL 1713278, at *2
(“Appraisals can provide a less expensive, more efficient
alternative to litigation ….”). But courts have held that when
a dispute involves both coverage and valuation disputes,
a court should stay the valuation portion of the case and
proceed with the coverage portion. See Glenbrook Patiohome
Owners Ass’n v. Lexington Ins. Co., 2011 WL 666517, at *10
(S.D.Tex. Feb.14, 2011) (“In this case, however, the record
makes clear that there are issues of both coverage and of loss
valuation. Under such circumstances, the part of the litigation
that involves loss valuation is appropriately stayed. The
part of the litigation that involves coverage issues, however,
should continue pending the appraisal.”). In this case, the
record makes clear that there are issues of both coverage
and of loss valuation. Under such circumstances, the part
of the litigation that involves loss valuation is appropriately
stayed. The part of the litigation that involves coverage issues,
however, should continue pending the appraisal.
III. Conclusion
*7 Hartford’s motion to compel appraisal, (Docket Entry No.
13), is granted. During the appraisal, this case will proceed on
coverage issues; the litigation on the loss valuation issues is
stayed. 3 The parties must notify this court when the appraisal
is concluded and the result within 14 days after the appraisers
issue their report.
3 In light of this court’s ruling, Hartford’s motion for
protection, (Docket Entry No. 14), is denied as moot.
EDM’s motion for leave to file excess pages, (Docket
Entry No. 18), is also denied as moot.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance defense law attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.