“I Don’t Agree With My Insurance Company’s Damage Offer, Now What?”
Appraisal as an Insurance Policy Remedy
By Michael C. Perlmuter, JD, President & General Counsel
The insurer says, “Okay,” presenting you the workup of a damage estimate and hoping the amount will pass the blink test. But the number isn’t all right with you.
You have tried in good faith to resolve your insurance claim for the significant damage to your business, residential real estate or personal property, but the insurance company offered $x and you want/need/deserve and are actually insured for $x-plus-plus-plus!
Do you have to accept what your insurer offers?
Or, do you hire an attorney and begin running up exorbitant legal bills to move to the next step (or as I like to refer to it in the property insurance claim context, invoke the “nuclear option”)?
As someone who once made a living by representing people who sued each other (or were sued by each other), I have to confess that the better answer to both those question is “No”!
I will explain…
Nearly every property insurance policy contains what is known as an “Appraisal Clause” — some contain them as required by state statute and some by common insurance practice. And while the exact language of a given insurance company’s policy language regarding appraisal can and does differ, the typical one might read:
“If we and you disagree on the value of the property or the amount of the loss,either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraiserswill select an umpire. If they cannot agree, either may request that selection of an umpire be made by a judge of a court having jurisdiction. The appraisers willseparately state the value of the property and the amount of the loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed byany two will be binding.
Each party will:
- Pay its chosen appraiser; and
- Bear the other expenses of the appraisal and umpire equally.
If there is an appraisal, we still retain our right to deny the claim.”
Thus, appraisal is:
- A contractual remedy provided by policy language;
- Binding on both parties; and
- A mechanism that either of the parties — the insured or the insurer-can demand if there is a bona fide dispute as to the value of the damages.
A lot was stated in the preceding, so let’s break down one through three above.
In order to invoke appraisal by either the insured or insurer, the disagreement must concern the amount of the loss or damage. But, that issue itself, is, and has been subject to much discussion, and even court rulings. Historically, appraisal was not an appropriate method to determine disputes as to scope of the loss, causation or coverage issues. Rather, those “legal” issues were reserved for courts of law. However, what constitutes valuation and what constitutes scope, causation and/or coverage has been slowly, but surely, transitioning, so that today, a meaningful number of jurisdictions are recognizing that scope and causation are part and parcel to calculating damages.
A perfect example of that expanding view of the appropriate issues to be determined by an appraisal panel (vs. a court of law) was decided in 2012 by the Minnesota Supreme Court in Quade v. Secura Insurance Company. This matter considered the determination whether appraisal could go forward where the insured denied coverage for damage to a roof due to “continual deterioration over a period of time rather than a specific storm occurrence.”
The court held that “the [insureds] assert that the damage to the roofs is a covered loss for wind damage. The insurer asserts that the damage to the roof is due to wear and tear and is excluded under the policy. We believe that under the circumstances of this case a determination of the “amount of loss” under the appraisal clause necessarily includes a determination of causation . . .”
Bottom line, it will depend on the case law in the jurisdiction of the loss as to the expansiveness of the appraisal panel’s powers. Typically, the more expansive the powers, the more benefit to the insured, as an insurer would argue that the scope or the causation are questions of coverage and are, by law, reserved for courts of law, not appraisal panels.
How Does One Start the Appraisal Ball Rolling?
As stated above, either party — the insured or the insurer — can demand appraisal in writing where there is a disagreement as to the amount of the loss. Each party will then select its own appraiser. The determination of whom may be selected as an appraiser by each party can be found in the language of appraisal clause. That said, most appraisal clauses require an appraiser be “competent” and/or “impartial” and/or “disinterested.”
Competence aside, in reality and nearly almost universally so, the appraiser who is selected by each party will support the position of that party who appointed him. So, what does it mean to mean to be “impartial” or “disinterested?” That, again, is a question that has been heard by multiple courts in multiple jurisdictions, and again, the answer is dependent on the jurisdiction. But generally, it means that an appraiser should not have a direct or indirect financial interest in the outcome of the appraisal.
For example, in Missouri, a court found the fact an appraiser had an indirect financial interest where he worked on 26 matters for the insurer and held a significant ownership interest in an accounting firm whose business earned between 4% and 7% from the insurer. But, an appraiser need not be totally impartial, as is required by the umpire (we will get to that in a minute). It just requires that an appraiser act fairly. Or as one Michigan court put it: an “independent appraiser may be biased toward the party who hires and pays him as long as he retains the ability to base his recommendation on his own judgment.” Auto-Owners Ins. Co. v. Allied Adjusters & Appraisers, Inc. 238 Mich.App 394 (1999).
Once impaneled, the parties should ensure the appraisers are given clear instructions concerning what is expected of them, that is, specifically what they are supposed to be ruling.
It is common for appraisal to be invoked only upon a part of a claim. It could be the Actual Cash Value (ACV) of the building or the Replacement Cost (RC) of the contents, or anything else. But, without appropriate and specific direction, the panel is likely to extend its ruling into areas that are not in dispute or have already been resolved.
As for the standard that the appraisers should apply to determine a particular value, that is the subject of a previous Blog (Feb. 6, 2018 — “What is Actual Cash Value”); i.e., they should use the definition set forth in the policy or the standard set forth by the jurisdictional tribunals. It is highly suggested that the parties enter into an Appraisal Agreement that then details specifically:
- What the issue(s) of the appraisal are;
- Who the two appraisers are;
- The time period in which the appraisers have to prepare and submit their report to the other appraiser; and
- The “remedy” (i.e., timing and selection of an umpire) if the appraisers are unable to agree upon the value.
What if the Two Appraisers Cannot Agree on a Value for the Damages?
Not unusual. But as you read above in the sample appraisal language, the two appraisers should convene to select an umpire, who MUST BE totally unbiased, impartial and disinterested (notwithstanding competent in the subject matter). If the two parties cannot agree upon an umpire, then either party may petition any court of competent jurisdiction to appoint one.
Many courts have likened an umpire in an appraisal to an arbitrator in an arbitration. Umpires have the obligation to be unbiased and further to disclose any dealings that might create an impression of possible bias. Each appraiser then submits its report to the umpire with any evidence and materials. The umpire then, in most jurisdictions, should just remain focused on the differences between the parties and rule accordingly. Finally, an agreement by any two of the three, umpire and two arbitrators constitutes the ruling.
An Appraisal Award has been Agreed Upon (or ruled upon, as the case may be), Then What’s Next?
The Award is transcribed in writing and signed by at least two of three participants (umpire and at least of of the two arbitrators), shared with the parties (the insured and insurer), filed with the insurance company and the insurance company should immediately pay upon the award, taking care not to delay beyond the shortest period provided for in the policy, by regulation, or by statute.
A question often arises by insureds who consider the appraisal remedy set forth in the policy: Is appraisal binding? Generally speaking, appraisal is binding upon the parties so long as there has been no fraud or mistake. Courts throughout the United States have grappled with this issue, but most have come out with rulings that are consistent with the statement above.
Side Issues Concerning Appraisal:
As with most of the body of law regarding insurance policies and first party insurance, there are many more “gray” answers than “black and white” answers in regard to some of the side issues of appraisal, such as: the timing of appraisal; the coordination between appraisal and lawsuit; or the waiver of the right to demand an appraisal.
Let me just touch briefly on each of those.
As stated above, for a demand for appraisal to be timely, there must actually be some disagreement between the insured and insurer as to the amount of the loss or value. And there must have been an honest attempt made by the parties to attempt to resolve the disagreement. If both of those criteria are met, then a demand for appraisal, made in good faith, must be done within a “reasonable time” (and, of course, in compliance with the terms of the policy).
What constitutes a “reasonable time” again, has been construed by various courts in various jurisdictions. But the instances where courts have ruled that the “timeliness” requirement was not met (and therefore, one of the parties forfeited the right to appraisal) revolved around whether the opposing party was prejudiced by the lack of timeliness of the demand. Just because litigation has been commenced does not mean that one’s appraisal rights are waived. Interestingly, courts are split on whether or not appraisal may still be available for determination of strictly a valuation of damages issue once litigation has begun, as the fact patterns for the determination of what is “reasonable” under the circumstances is all over the board.
Importantly, especially for an insured, it appears to be a governing principle that the demand for appraisal is not done timely if the demand is made beyond the statute of limitations period for filing suit in the policy. The appraisal clause is not intended, said both Mississippi and Washington state courts, to extend the time period in which the insured could assert its rights under the contractual provisions of the policy. So, insureds, be aware, if you want to pursue appraisal, make sure you protect your right by demanding appraisal before the suit date statute of limitations contained in the policy.
This topic, like many others involving the satisfaction of claims, is another of the complicated issues which must be seriously considered and managed when contending with insurance companies seeking to underpay. In order to avoid a dispute regarding the timeliness of, the subject matter of, or the mechanism of appraisal, it is strongly advised an insured seek counsel of experts in this arena, such as the Alex N. Sill Company. Sill has navigated many an insured through the choppy waters of the appraisal process, resulting in the successful payments of that which was rightfully due.
Contact a Sill public adjuster near you for assistance in such matters.