Almost every property policy issued in the United States requires disputes about the amount of loss to be resolved in appraisal, an alternative dispute resolution mechanism. Appraisal has been used to resolve property insurance disputes for well over 100 years.
A typical appraisal provision in a property insurance policy reads as follows.
If we and you do not agree on the amount of loss, either may make a written demand for an appraisal of the loss. When this occurs, you will select and pay a competent and impartial appraiser; we will select and pay a competent impartial appraiser. The two appraisers will select an umpire. If the appraisers cannot agree on an umpire, either may request that a judge or a court having jurisdiction make the selection. Each appraiser will state the amount of loss. If the appraisers do not agree, they will submit their statements to the umpire. Agreement by the umpire and either of the appraisers will be binding. We and you will equally share any appraisal expenses and the expense of the umpire. Even though we may submit to an appraisal, we will retain our right to deny the claim.
One key feature of appraisal is that it is limited to determining only the amount of loss. If there are any coverage defenses, such as cause of loss or the applicability of an exclusion, they must be determined in a different forum. However, even if there are coverage defenses, there are circumstances where a party may demand appraisal, have the appraisal panel determine the amount of loss, and then proceed to have the validity of the coverage defenses determined in court.
Many risk managers and insurance professionals have never had to go through appraisal and are unclear about its exact scope and purpose. This two-part series will provide general information on this topic. This first part will address the scope and key limitations of appraisal. The second part will discuss ways to manage the process so as to realize its full benefits.
Appraisal offers certain benefits in comparison to litigation. First, as shown in the example above, most policies require that appraisers be competent. Even where the policies do not specifically so require, parties usually appoint appraisers who are familiar with the specific issue in dispute, whether it is specific types of property damage, process equipment, or time element issues. For example, it is not uncommon for the parties to appoint as appraisers in a business interruption dispute, accountants familiar with preparing and analyzing insurance time element claims. Generally, competent appraisers should result in a more informed award than if the issue was left to a jury. Another significant advantage is that the cost of an appraisal, particularly an informal proceeding, is usually far less than the cost of litigation. Finally, because it is usually a less formal process and outside of court, appraisal is generally a much faster process than litigation.
The law governing the various aspects of appraisal varies, sometimes significantly, state by state. However, there are certain basic principles generally applicable across the country. These include the following.
In large losses, where the amount in dispute can be in seven figures, appraisal will decide significant amounts of money. However, in most states, the process is extremely informal. In those states where the informal process is customarily followed, the two appraisers in a property damage or time element dispute will generally prepare their own estimates, or review the estimates of the parties, reach their individual conclusions, and determine which areas are in dispute. They will then sit down with the umpire, go over everything, and the umpire will decide on the amount of loss, sometimes on a trade-by-trade basis. The award is usually little more than a replacement cost figure, an actual cash value figure, and the signatures of two of the three panel members. The process is very much like the selection of candidates for political office in the olden days when professional politicians would sit down in a "smoke-filled room," negotiate, and decide matters of great import free of scrutiny or interference. Informal appraisals usually take place without the parties or their counsel present, without testimony from witnesses, without any formal presentation of evidence, and without cross-examination. In some states, the appraisers and the umpire may not even be deposed to later use their testimony to attack the award. In addition, many states require that motions to vacate an award (the procedural mechanism used to challenge an appraisal award) be filed within 30 days of the award, a very limited time frame within which to obtain the evidence necessary to provide the basis for a motion to vacate.
In some states, appraisals routinely proceed much like arbitration, with formal presentation of evidence, direct and cross-examination, and transcripts of the proceeding. However, this occurs only in a minority of jurisdictions. In those jurisdictions, one of the main benefits of appraisal, significantly reduced cost, is lost.
However, the fact that custom and practice allow for an informal proceeding does not mean that either the insurer or the insured must accept the informality. As noted above, one of the few bases for overturning an award is denial of a hearing. To the extent that the amount in dispute warrants the additional cost and effort, a party is well within its rights to demand a more formal hearing and the right to present evidence in some way. While this does not necessarily require a formal trial-like hearing, some hearing should be required because denial of a hearing may be a basis for vacating the award and having a new appraisal.
The scope of review of an appraisal award is extremely limited. Courts generally will not review for errors of fact or law. They review only for fraud, denial of a hearing, or equivalent misconduct. This is very important because it means that, for all practical purposes, the award of the appraisal panel is binding and will determine the amount of loss. Consequently, it is very important to pick a qualified appraiser who is respected in the industry and knows the particular subject matter of the appraisal.
The binding nature of the award also makes the selection of the Umpire, who may well be the one ultimately deciding the amount of loss, of paramount importance. The parties should try to pick someone known to be fair and well-versed in the subject matter of the appraisal. If the parties cannot agree, the umpire is chosen by a local judge, who frequently appoints a lawyer friend with no experience in the relevant field.
Because the scope of review is so limited, to the extent that a party has complaints about the other party's appraiser, it is better to bring that to the attention of the court early, before the appraisal award is entered, to avoid any later claim of waiver. Denial of a hearing should also be brought to the court's attention before the award is entered. It is usually easier (although not easy) to obtain relief before an award is entered, rather than after.
The next installment on this topic addresses some of the methods appraisers, umpires, and parties use to make the process proceed more smoothly, maximize the likelihood of a fair award, and minimize the chance of appeal.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.