Expert Commentary

In Praise (or Not) of the Appraisal Clause in Homeowners Policies (Part 2)

The appraisal clause stipulates how to proceed in selection of the two appraisers (each party will select an appraiser); umpire selection (agreement by the two appraisers or, if they are unable to agree, selection occurs by a court of competent jurisdiction); and the final determination of insurer's payment responsibility (agreement by any two of the three).


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Two time limits are set: 20 days to complete appraiser choice and 15 days to choose the umpire; however, the 15-day limit merely establishes the amount of time that the 2 appraisers have to make the decision. No time limit is set for the judge's role, nor is there a time limit in which the three parties should arrive at a final decision regarding the insurer's obligation to pay. Do these omissions confer a disproportionate advantage to one party over the other? How do these omissions impact consumer protections incorporated in notions of fair claims handling?

Which Party Benefits?

I have experienced cases involving several weeks of delay between the time judicial intervention was requested and the time an umpire was named. In one case, once an umpire was appointed, he apparently took a sabbatical for almost 8 months, so the time between the date appraisal was demanded and the final report was 14 months. Such delays run counter to principles of fair claims handling.

"Prompt" or words of similar import appear throughout the National Association of Insurance Commissioners Model Unfair Claims Settlement Practices Act, reflecting the importance of speedy resolution of insurance claims.1 From a policyholder's position, a dwelling may be destroyed, rendered uninhabitable, or damaged in a manner that requires significant accommodation in one's daily routine. Further, once the act of repair is initiated, a policyholder may face weeks or months of agonizing selection and oversight of contractors. The Model Unfair Claims Settlement Practices Act recognizes this and underscores the importance of speed in fulfilling the promise of the insurance contract. Yet, the appraisal clause, serving as a joint insurer-insured agreement, effectively may suspend major provisions of Unfair Claims Settlement standards.

So, which party benefits from delay? The imbalance favors insurers. Assuming that an insurer has complied with all duties associated with fair, prompt, equitable claims handling up to the day appraisal begins, the potential delays from that day forward work no detriment to the insurer; likewise, delay presents little possibility of an insurer's claims department committing infractions between beginning and end of appraisal. Meanwhile, courts typically require the insured's satisfaction of all policy conditions as a condition precedent to appraisal. The insurer, on the other hand, doesn't waive any policy defenses irrespective of how the appraisal comes out. An insurer may still deny the claim.

Question of Fairness

These cracks in the appraisal window raise fundamental questions of fairness and equity. Insureds, relying on a policy provision in an adhesion contract, face the risk of unanticipated delays. If the insurer fails to act promptly before or after appraisal, there are remedies; however, without a standard of reasonableness, a clear agent-principal relationship among the selectors and the appraiser/umpires, authority to terminate a selection of appraiser or umpire, or other protections, insureds may get caught in a web of indecision. Under present policy provisions, this web of delay is difficult to disentangle because the insured and insurer jointly agreed to use appraisal in good faith. The consequences of delay to an insured are significantly more harmful than to an insurer, and there seems to be no means of recourse against errant umpires or appraisers.

This imbalance has not gone unnoticed or unchallenged. For example, challenges to the appraisal clause based on mutuality of obligation have experienced temporary success. In American Reliance Ins. Co. v. Village Homes at Country Walk, 632 So. 2d 106 (Fla. App. 3d Dist. 1994), a Florida district court held that "the insurer's reservation of its right to deny the claim destroys mutuality of obligation...." This view was reversed later by the Florida Supreme Court in State Farm Fire & Cas. Co. v. Licea, 685 So. 2d 1285 (Fla. 1996). Neither court, however, addressed whether mutuality of obligation is applicable to an insurance policy that is acknowledged to be a unilateral contract. As one authority notes, it is not mutuality of obligation at issue but mutuality of consideration embodied in the concept of mutuality.2

On this measure, certainly the appraisal clause, taken alone, has mutuality of consideration because both parties split the costs evenly. In the real world, however, the imbalance in the process arises from neither obligation nor consideration. The provision encourages insurers to lowball on claim estimates, especially on the less costly claims. Moreover, while it is an insurer's duty to investigate claims at its own expense, the appraisal clause recruits insureds as cost-sharing partners if they disagree with their insurer and demand appraisal. To use a football analogy, if football is a game of inches, claims administration may be characterized as a game of saving a few dollars here and a few dollars there from an insurer's perspective.3

Further, my reading of the rationale for upholding the appraisal clause on the mutuality issue is that (1) you, the insured, agreed to it, and (2) you and the insurer agreed to be bound by the outcome; ergo, (3) all is copacetic. What is your problem? This approach I view as the easy way out, amounting to a failure to scrutinize the appraisal clause in its broader context, including what the clause fails to say. It fails to hold appraisers to the same standards applicable to insurers in the claims process, enables insurers to legitimately discontinue investigation, and enhances an insurer's superior position in the process.

Attempts To Impose Order on the Process: Nailing Jello to the Wall?

The legal profession likes rules and established protocols—sort of a Ten Commandments to serve as a benchmark. However, the appraisal clause has few rules to follow, no definitions of key terms, no style manual for how reports are to be developed, and so on. In an industry whose function involves risk management, highly important measures are left to, well, chance.

Instead of just accepting this as fact about appraisal and sending its authors back to the drawing board to clarify its draftsmanship, courts often take it upon themselves to impose order and certainty on an amorphous construct. Reasoning by analogy is one way a court can get enough footing to impose order. The effort often goes something like this. Appraisal is an alternative dispute method, as are mediation and arbitration. Arbitration is widely practiced and beloved by corporations and some consumer advocates; appraisal is "like" arbitration, so why not just call it that and treat it as such?

The easy answer is because it is not arbitration, and if the drafters had intended it to be, they most likely would have said so. Confusing arbitration with appraisal is akin to suggesting that a plane is like a bird because they both fly. Planes, however, can't land on power lines and tree limbs, and mockingbirds have a difficult time surviving at 35,000 feet. Also, some states prohibit arbitration provisions in insurance contracts (Georgia, for example), so it would be inappropriate to sneak it in through the back door by disguising it as appraisal.

Industry sources add to the confusion by failing to recognize the distinctions between appraisal and more widely recognized forms of conflict resolution. In fact, some Insurance Services Office, Inc., policy forms—HO 01 02, 1995 edition for example—have used a subheading of "Mediation or Appraisal" to introduce the appraisal clause. State Farm's provision cited in Licea used the same language.

Whereas arbitration is orderly and has rules of evidence, a presiding official or officials, sworn witnesses, and formal decisions, appraisal is informal and largely rule free. As the Florida Supreme Court eventually determined in settling issues regarding the distinction between the two, arbitration is a "wholly different proceeding." Allstate Ins. Co. v. Suarez, 833 So. 2d 762 (Fla. 2002).

California has officially acknowledged this distinction and codified it. Following the Northridge earthquake, the legislature amended the appraisal requirements in the insurance code to state that "appraisal proceedings are informal unless the insured and this company mutually agree otherwise." According to the statute, informal means that "no formal discovery shall be conducted, including depositions, interrogatories, requests for admission, or other forms of civil discovery, no formal rules of evidence shall be applied, and no court reporter shall be used for the proceedings."

Negotiation, mediation, and arbitration are recognized as alternative means of conflict resolution, and insurance literature usually emphasizes the claims process as one of negotiation; furthermore, adjusters are trained in the art of negotiation.4 When negotiation fails (the topic of a future article) in setting amount of loss, appraisal may be the next step.

In my experience, "appraisal" is not among the types of conflict resolution commonly taught or acknowledged, thereby confirming its uniqueness.5 Generally, I see "appraisal" as a practice common to the real estate market. Accordingly, it might be more appropriate to place the appraisal clause in that genre rather than attempt to fit it into the more legalistic concepts regarding conflict management, such as arbitration.6



1The Georgia version of the Act requires promptness regarding communications and adoption and implementation of procedures for prompt investigation and settlement of claims; when liability is clear, an insurer must follow good faith attempts to effectuate prompt, fair, and equitable settlement of claims; and the insurer has 15 days to provide proper forms for claim filing. See O.C.G.A. 33–6–4. The National Association of Insurance Commissioners Unfair Property/Casualty Claims Settlement Practices Act Model Regulation adds to these requirements.

2Joseph M. Perillo, Calamari and Perillo on Contracts (West: 2009), 176–186.

3I also acknowledge the possibility that appraisers may recognize that costs are being shared and may be tempted to pad the appraisal to reimburse the insured.

4Donna J. Popow, Claim Handling Principles and Practices (Malvern, PA: AICPCU/IIA, 2006), Chapter 7.

5On a personal note, I am trained as a mediator, as commissioner of insurance, and as administrator of the Governor's Office of Consumer Affairs, engaged in mediation and conciliation of many disputes. In my familiarity with labor-management disputes, arbitration was the conflict resolution procedure. My instructor in the mediation course never mentioned appraisal clauses. I came to see fundamental distinctions among mediation, conciliation, and arbitration. The Internet also offers access to several sources providing in-depth discussions of how these conflict resolution methods differ.

6I have conducted research into the standards of practice governing licensed appraisers in the Statutes and Regulations of the Georgia Real Estate Appraisal Board. According to these standards, among other factors, an appraiser is subject to disciplinary action for the following: (1) failing or refusing without good cause to exercise reasonable diligence in developing an appraisal, in preparing an appraisal report, or in communicating an appraisal report; (2) engaging in negligence or incompetence in developing an appraisal, in preparing an appraisal report, or in communicating an appraisal; (3) failing to employ correctly methods and techniques that are necessary to produce a credible appraisal; and (4) committing a substantial error of omission or commission that significantly affects the appraisal. These standards are so plainly clear that Georgia's Court of Appeals ruled that no expert testimony is necessary to establish proof of appraiser negligence. (See Georgia Real Estate Appraisers Bd. v. Krouse, 299 Ga. App. 73, 681 S.E.2d 737 (2009).)


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.

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