Several case examples illustrate conventional wisdom that the sole purpose of an appraisal clause in insurance contracts is to determine value of the loss.1 The specific language in most versions of the appraisal clause is "amount of loss." As is true elsewhere, Georgia courts are longtime adherents to this view, which I characterize as a restrictive view of this popular insurance contract provision. Lam v. Allstate Indem. Co., 327 Ga. App. 151, 755 S.E.2d 544 (2014), a recent Georgia Court of Appeals case, is illustrative.
In Lam, the insured's home suffered wind and hail damage. Lam's insurer, Allstate Indemnity Company, sent an adjuster who investigated the damage, identified the number of shingles he adjudged to have suffered damage, and based a repair estimate on that number. Lam disagreed, contending that Allstate's adjuster had underestimated the amount of damage. Based on the disagreement, Lam invoked the appraisal clause.
Allstate did not deny coverage but disagreed that the damage extended beyond the few shingles its adjuster concluded were harmed. When Lam filed suit to enforce the appraisal clause, Allstate filed a motion to dismiss on the basis that the parties' disagreement was about coverage, a subject beyond the appraisal clause's scope. So, in Allstate's view, if the policyholder and Allstate disagree on whether 40 or 35 shingles were damaged by wind and hail, both covered causes of loss, the issue is about coverage, not amount of loss. In a 4–3 decision, the Georgia Court of Appeals agreed with Allstate's interpretation of "amount of loss." In its opinion, the court reasserted the Georgia Supreme Court's earlier finding that "an appraisal clause can only resolve a disputed issue of value," adding:
Here, although Allstate had conceded that there was wind damage to Lam's roof and agreed to pay for it, the parties could not agree upon the extent of the damage—how much of the roof was damaged by the wind. Their disagreement, therefore, was over coverage, which is not a proper basis for an appraisal.
To reinforce its reasoning, the majority opinion, also relying on Georgia Supreme Court precedent, concluded that allowing appraisers to decide how much of the roof was damaged would transform appraisal into an arbitration provision.2
The majority gave no further scrutiny to the appraisal concept while striking a knockout blow on behalf of the "good hands" people. In this article, I provide a critique of this interpretation of the appraisal clause and argue that the traditional, restrictive view of appraisal clauses is inappropriate for the following reasons:
The plain wording of appraisal clauses is inconsistent with the restrictive view that disagreement over amount of loss is a coverage issue. Stated more simply, the appraisal clause does not say what the court says it says.
Nothing in the appraisal clause restricts its application to amount of loss only.
Permitting appraisers to consider causes of loss and coverage issues will not, ipso facto, convert the appraisal clause into an arbitration provision.
The Appraisal Clause Does Not Say What the Lam Court Says It Says
The plain wording of the clause defies the restrictive interpretation, and the Lam court's own choice of wording, measured against common dictionary meanings, confirms the misreading. In the majority's opinion, "Amount of loss" becomes "extent of the damage" and "how much the roof was damaged by the wind." According to Webster's New World College Dictionary, 4th edition, 2005, "amount" is a measure of quantity, "the sum of two or more quantities; total." "Extent" refers to the "size, length, breadth" of a thing, and "how much" incorporates the same concepts. Example: "How much do we owe you?" These concepts incorporate the very reasons for appraisal clauses in the first place: to make use of outside parties to assist the insurer and insured working together to arrive at a settlement regarding amount of loss using dollars as the unit of measurement. It bears repeating that in Lam, there was no issue of coverage or cause of loss; only the amount was in dispute.
In articulating a broader view, the dissenting judges in Lam reminded the majority of what appears to be a trend among courts in construing the appraisal clause. Dissenters opined:
There is no dispute that Lam's dwelling incurred some loss that is covered by the policy and that Allstate is therefore liable to Lam to some degree. The dispute is the amount of that covered loss or damage—whether the covered loss or damage extends to the entire roof or only specific shingles.
The dissent relied on State Farm Lloyd's v. Johnson, 290 S.W.3d 886 (Tex. 2009).3 In this Texas case, a hailstorm damaged Becky Ann Johnson's roof. State Farm's adjuster viewed the damage and made two decisions: (1) State Farm should repair, not replace, the roof, and (2) the repair cost was estimated to be $499.50, well below the policy's $1,477 deductible. Conversely, Johnson's roofing contractor asserted that the entire roof was damaged and replacement was in order at a cost of $13,000.
Johnson invoked the appraisal clause to settle the dispute, and State Farm refused to participate in the appraisal by framing the disagreement as a dispute over causation, not amount of loss; ergo, the issue as framed by State Farm (what I call the restrictive view) fell outside the scope of appraisal.4
In reviewing the case, the Texas Supreme Court acknowledged that State Farm and Johnson disagreed about how many shingles needed to be replaced. This was precisely the point of disagreement between Lam and Allstate. In contrast to the Georgia court, however, the Texas Supreme Court determined that this is "surely a question for the appraisers." Continuing, "If the parties must agree on precisely which shingles have been damaged before there can be an appraisal, appraisals would hardly be necessary. What's more, either party could avoid appraisal by simply picking a few extras." Therefore, "The cost of replacing shingles (or anything else) is a function of both price and number; appraisers must factor in both shingle prices and shingle numbers to decide the 'amount of loss.'"
The Appraisal Clause Is Not Limited to Determining Amount of Loss
In its analysis, the Texas court offered clarification between causation and liability, opining that "[c]ausation relates to both … because it is the connection between them." When a case involves different causes of a single injury, causation determination is a question for the courts. However, "when different types of damage occur to different items of property, appraisers may have to decide damage caused by each before the courts can decide liability." Applying the analysis to the Johnson claim, the court noted that wear and tear was excluded in State Farm's policy; however, "If State Farm is correct that appraisers can never allocate damages between covered and excluded perils, then appraisers can never assess hail damage unless the roof is brand new…."
The court then added, "Appraisers must always consider causation, at least as an initial matter."
Other jurisdictions are in step with the Texas court. In Quade v. Secura Ins., 814 N.W.2d 703 (Minn. 2012), the Minnesota Supreme Court dealt with a case in which the insured adopted more restrictive State Farm Lloyd's and Allstate arguments in opposing appraisal clause use while the insurer argued for a broader view. The Quades filed a breach of contract case against Secura when the insurer sought to exclude a wind damage claim on the basis of the policy's "inadequate maintenance" exclusion. The court found no ambiguity in the amount of loss language, concluding, "[I]n the insurance context, an appraiser's assessment of the 'amount of loss' necessarily includes a determination of the cause of the loss, and the amount it would take to repair that loss." Moreover, the court said:
The Quades are incorrect that appraisers can never allocate damages between covered and excluded perils. In this case, the causation question involves separating loss due to a covered event from a property's preexisting condition. Adopting the Quades' interpretation would render appraisal clauses inoperative in most situations, and that is in direct conflict with the public policy behind the appraisal process….
They [appraisers] must determine the quantity of property covered by the policy, the quantity destroyed, the quantity damaged, whether the damage resulted from causes covered by the policy or from other causes not covered thereby, and various questions, both of law and fact, upon which the parties may differ.
Iowa's Court of Appeals found the Minnesota decision persuasive in North Glenn Homeowners Ass'n v. State Farm Fire & Cas., 854 N.W.2d 67 (Iowa Ct. App. 2014), on July 16, 2014, concluding:
[T]he appraiser must consider what damage was caused by hail, and what damage was not, or damage with which they are unconcerned, such as normal wear and tear. We are convinced to hold otherwise would improperly limit the appraisal process to situations where the part/ies agree on all matters except the final dollar figures.
The Iowa court also could have found support in a 2000 US District Court of Delaware case upholding Cigna Insurance Company's argument that extent of damage is a question concerning the amount of loss and, therefore, represents a proper subject for appraisers. See Cigna Ins. Co. v. Didimoi Prop. Holdings, N.V., 110 F. Supp. 2d 259 (D. Del. 2000).5
Additionally, other courts in reviewing the language have noted that if the appraisal clause intends to place limits on the appraisers' work, the actual wording "makes no mention of any exception for 'causation' issues." In short, if limits are intended, the language should state what limitations are intended, but it doesn't. See Philadelphia Indem. Ins. Co. v. W.E. Pebble Point, 2014 U.S. Dist. LEXIS 123713 (S.D. Ind. Sept. 3, 2014).
A Colorado District Court, in agreeing with Didimoi, decided, "Although undefined in the policy, the term amount of loss must mean something different than merely how much it will cost to replace damaged property." In rejecting the assertion by Auto Owners that amount of loss meant valuation of the property damage that both Auto Owners and the insured agreed was damaged by a hailstorm, the district court held that such an interpretation would render appraisal language "useless surplusage." See Cochran v. Auto-Owners Ins. Co., District Court, City and County of Denver, Colo., 2nd No. 11CV8434 (Oct. 22, 2012).
Regulatory Basis for an Expansive View of Appraisal
Property damage involves more than observable destruction because damage, even when repaired, may impact appearance. For example, many of the cases involving appraisal stem from disputes over roof damage, and while none of the disputes specifically mention it, avoiding an unsightly mix of new and old shingles is one reason for repairing an entire roof instead of a few damaged portions of it. This is sometimes referred to as stigma damage, or what is recognized in Georgia as diminished value in real property. See Royal Capital v. Maryland Cas. Co., 291 Ga. 262 (2012).
Regulators address this problem in Section 9 of the National Association of Insurance Commissioners Unfair Property/Casualty Claims Settlement Model Regulation, which states at A.(2):
When a loss requires replacement of items and the items do not match in quality, color, or size, the insurer shall replace all items in the area so as to conform to a reasonably uniform appearance. This applies to interior and exterior losses. The insured shall not bear any cost over the applicable deductible, if any. (Emphasis added.)
In Javits, cited above, the State Farm adjuster's estimate of the fire damage from a kitchen fire included the cost of painting "all of the cabinets in the kitchen, including those that were not damaged by the fire, to insure a uniformity of color." This is the correct procedure; however, neither State Farm nor the judge recognized any inconsistency between this solution to the cabinet damage and the insurer's coverage defense.
If Limiting the Appraisal Process to Value Determination Is the Sole Intent, Say So; Some Policy Forms Do
In my review of several appraisal clauses, the American Association of Insurance Services (AAIS) homeowners form is alone in listing specific limitations in an appraisal clause, stating, "Under no circumstance will an appraisal be used to interpret policy 'terms,' determine causation, or determine whether or not a loss is covered under this policy." The fact that AAIS sees fit to clarify the appraisal clause's scope implies that someone at the drafting stage thought the usual wording was loosely constructed.
Permitting Appraisers to Consider Causation and Coverage Does Not Convert Appraisal into an Arbitration Arrangement
The Georgia Court of Appeals concluded without elaboration that if appraisers examined coverage issues, such acts would convert the appraisal clause into arbitration. Well, maybe not. Take for example the activities of an insurance company in settling a claim. In the claims investigation, an insurance company, acting through adjusters and possibly any supplemental experts and computer software it chooses, may engage in the following activities. An insurer is allowed to make coverage decisions; allocate its liability to the appropriate coverages; determine cause of loss; decide scope of loss; interpret its own two-party contract; require a signed proof of loss statement from an insured; require an insured to show damaged property as often as it deems necessary; take recorded statements from insureds; conduct examinations of insureds under oath; require production of documents, including financial records from insureds; and access insurance industry databases to document the claim history of its policyholder.
Do these activities transform a homeowners insurance policy into an arbitration arrangement? No. At least, no Georgia court has so determined to date, so one might reasonably wonder why cause of loss and coverage determinations could have such a dramatic effect in an appraisal process.
I acknowledge similarities between arbitration and appraisal, but even with appraisers making causation and coverage decisions, the two processes are distinctly different. To cite a few differences: In arbitration, witnesses may be called and cross-examined; in contrast, while insureds may be subjected to detailed questioning under oath, an insured does not enjoy a right to cross-examine insurer representatives. Arbitration panels must act together; appraisers are free to act independently and separately; arbitrators may not engage in ex parte discussions, but appraisers face no such restrictions. Further, after conducting its investigation using the powers noted above and completing the appraisal process, an insurer may still deny coverage. In contrast, arbitrations usually settle all issues. More importantly, binding arbitration cuts off access to the courts. Appraisal doesn't.6
Determining "amount of loss" under an appraisal clause is in many ways a Rorschach blot for insurers, judges, and insureds to read into it whatever they "see." Some insureds and insurers argue that valuation only—the restrictive view—is the authority conferred by the language, and many judges concur; on the other hand, both insureds and insurers have argued that measuring the amount of loss is not a coverage issue but an essential component of appraisal. Further, policyholders and insurers have both argued that causation and coverage issues are permitted in appraisals and an increasing number of judicial bodies side with this more expansive view. What strikes me as an oddity is that, no matter which view a court takes, "amount of loss" is not viewed as ambiguous. Amount of loss is plain and unambiguous, no matter what a court determines it to mean. Nevertheless, the gravitational pull of the restrictive view of appraisal seems to be weakening.
Arbitration and appraisal have similarities, but they are fundamentally distinct. Recognizing the appraisers' authority to consider more than valuation questions would not transform appraisal into an arbitration provision.
Finally, so far as I am able to determine, courts have remained oblivious to one of the possible side effects of the restrictive school of thought about appraisal provisions; namely, allowing insurers to define amount of loss disputes as coverage issues is a court-sanctioned license to engage in lowballing. Lowballing is the practice whereby an insurance adjuster intentionally arrives at an estimate below what he or she knows is a fair estimate of loss in order to gain advantage over a policyholder in negotiating the insurer's liability. From a bad faith perspective, permissible lowballing is tantamount to placing the insurer's economic interest above the insured's. For some courts, though, that seems to be okay.
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1 For a discussion of the traditional, restrictive view of appraisal clauses, see Rogers v. State Farm Fire & Cas. Co., 984 So. 2d 382 (Ala. 2007).
2McGowan v. Progressive Preferred Ins. Co., 281 Ga. 169, 637 S.E.2d 27 (2006), is an automobile case involving multiple issues. Georgia bans arbitration "in any contract of insurance" at O.C.G.A. 992 (c) (3).
3 See also Johnson v. Nationwide Mut. Ins. Co., 828 So. 2d 1021 (Fla. 2002). Florida has probably had more experience construing the appraisal clause than any other state. One might infer that the Johnson family has made a name for itself in insurance appraisal litigation.
4 In another Georgia case, State Farm won this argument in a federal district court ruling by Judge William Duffey, in Javits v. State Farm Fire & Cas. Co., 2014 U.S. Dist. LEXIS 119085 (N.D. Ga. Aug. 26, 2014). Javits came 5 months after Lam.
5 In Didimoi, the Federal District Court ordered appraisers to make determinations of the following: (1) the replacement cost of the fire-damaged building on date of loss; (2) the actual cash value of the building; (3) the cost to repair and/or replace the fire damage to the building; (4) the amount of the loss caused by the enforcement of any ordinance or law; (5) cleanup costs to remove asbestos; (6) the period of time required to repair the building to its pre-loss condition without regard to when construction begins; and (7) the length of time required to complete the work required by enforcement of any law or ordinance.
6 For a discussion of the distinctions between arbitration and appraisal, see especially Citizens Prop. Ins. Co. v. Mango Hill #6 Condo. Ass'n, Inc., 117 So. 3d 1226 (Fla. Dist. Ct. App. 3d Dist. 2013).