The Insurance Appraisal Clause as a Unique ADR Function
Written by Thomas Di Sieno, and Ashley Harris, Esq.
Business owners and home owners often encounter issues when submitting a claim to their insurance company. Even when represented by a public adjuster or an attorney, disputes regarding the value of the claim are common. Virtually all property insurance policy contracts include an appraisal clause which may be invoked if there is a dispute between the policyholder and the insurance company regarding a coverage determination; the claim handling process, or most commonly, the settlement amount. Often, after an insured makes a claim under their policy the insurance company will offer a dollar amount to allow the policyholder to ”become whole.” Unfortunately, the insured may find that this ”calculated” amount is insufficient, or even worse, may only realize this after the replacement/repair process has begun.
As the appraisal clause is an ADR (alternative dispute resolution) function, with a tribunal panel charged with issuing an award; which is binding on the parties for ”the amount of loss,” it is often associated with arbitration. The Courts are not immune to the confusion, such as Iin Cousino v. Stewart, 2005 WL 3120245 (Ohio App. 6th Dist. 2005). In this case, the court held that in the State of Ohio, the appraisal clause in a homeowner’s insurance policy constituted “arbitration” in order for the award to be enforced and allow for judicial review. However, most states recognize the distinct difference between appraisal and arbitration, as demonstrated by and expressed in the United States Court of Appeals for the 5th Circuit, as follows:
”Insurance appraisals are generally distinguished from arbitrations. While both procedures aim to submit a dispute to a third party for speedy and efficient resolution without recourse to the courts, there are significant differences between them. For example, an arbitration agreement may encompass the entire controversy between the parties or may be tailored to particular legal or factual disputes. In contrast, an appraisal determines only the amount of loss without resolving issues such as whether the insurer is liable under the policy. Additionally, arbitration is a quasi-judicial proceeding, complete with formal hearings, notice to parties, and testimony of witnesses. Appraisals are informal. Appraisers typically conduct independent investigations and base their decisions on their own knowledge, without holding formal hearings [emphasis added]” 55 Teachworth, 898 F.2d at 1061-62.
In short, the basic distinction between appraisal and arbitration is arbitration can resolve the entire controversy between the parties, while appraisal is limited to the resolution of specific issues in the valuation of a loss.
Contents Claims: With the insurance industry seeing drastic increases in claims being resolved by appraisal, during the last 10 years, a certain type of claim has recently started to saturate the appraisal market – Contents claims.
Within the capacity of personal property, Contents claims are subject to claims for damage of several thousand unique items. Moreover, with Residential Homeowner claims, the magnitude and scope is enormous, coupled with the time required to document and appraise each line item. This basic fact increases the chance of dispute ten-fold, as there can be a dispute on any of the thousand claimed items. This occurs because there is a lack of professional personal property experts available on the open market. At odds, often, is the homeowner’s own documentation as opposed to the carrier’s internal loss prevention methods. Common sense can predict the difficulties a policyholder faces when submitting a claim to a well versed and experienced insurance adjuster; an adjuster working to protect the interests of his or her employer.
Enter the Appraisal Clause: APPRAISAL, if you and we fail to agree on the amount of actual cash value or amount of loss, either one can demand a determination by appraisal. If either makes a written demand for appraisal, each shall select a competent, independent appraiser and notify the other of the appraiser’s identity within 20 days of receipt of the written demand. The two appraisers shall then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the resident premises is located to select an umpire. The appraisers shall then set the amount of the actual cash value and loss to each item. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall be the amount of the actual cash value and loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any two of these three shall set the amount of the actual cash value and loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire shall be paid equally by you and us.”
The above captioned quote is much like any standard appraisal clause found in an insurance policy. Said clause is something often overlooked during an impasse or dispute by the policyholder. When a policyholder is offered a substandard settlement offer, they often do not understand their rights under the policy contract. They may feel they have no other choice than to accept the amount calculated by the insurance company. There may also be an intimidation factor. For instance, when an inexperienced policyholder is faced with disputing a corporate super power such as the typical insurance carrier, the policyholder may feel they only have two options; accept the offer and move on or further delay their life by hiring an attorney to bring suit. Obviously, this belief can counteract and disable their proactive and assertive role in accepting the true amount of loss.
An Alternative Method: In theory, appraisal should only be used to provide a simple, speedy, inexpensive, and fair method of determining the amount of loss, such as Fire Ass’n vs. Ballard, 112 S.W.2d 532, 534 (Tex. Civ. App. – Waco 1938, no writ).
When the insured is faced with a settlement offer that they may feel is far less than what is needed, and they find that the company adjuster is not willing to ”re-adjust” the offer; they may invoke the appraisal clause. Upon invoking this clause, the many personalities involved with the claim are now removed, and fresh, new batches of individuals are appointed to determine the amount of loss. The ”me vs. the world” or the ”David vs. Goliath” feeling is now removed, and the entire claim is now transferred to a 3-person panel. Now, one appraiser represents the insured, and the carrier is represented by one appraiser, who will independently evaluate the loss, and calculate the amount of loss. The Supreme Court has attempted to clarify the role of the appraisal process, stating:
”The purpose of the clause is to secure a fair and impartial tribunal to settle the difference submitted to them.” The detached, disinterested tribunal should be able to produce a fair result in the appraisal process.”
Credentials of the Appraisers: Although there is a clear difference between appraisal and arbitration, many of the basic fundamentals of the appraisal process are rooted in the principles of the Uniform Arbitration Act:
Uniform Arbitration Act, §13-22-201 et seq., and in particular, §13-22-211 (2), which set forth the standard for impartiality of an arbitrator, essentially as: An individual with any kind of material interest in the outcome of the Arbitration is not considered neutral.
It is my opinion , an adjuster that either contracts with or is employed by the carrier shall not be considered a disinterested party; as it can be argued they have a substantial relationship with the party; this proven by an ongoing financial relationship with that party. It is also my opinion, the public adjuster, retained by the insured, may be, arguably, considered interested, as they are economically interested in the final amount issued to the insured. However, this is subject to current controversy. However, several courts have held that the insured’s Public Insurance Adjuster is not necessarily considered ”disinterested.” Whether an adjuster is considered interested or not hinges on possible changes made to the original contract; as the courts are diverse in their views on this. This topic is currently a heated debate within the appraisal industry. All legal issues pertaining to the appraisal process should be discussed with an attorney who is licensed to practice law in the state where the appraisal is being conducted.
Invalid Attempts for Removal: An issue which is currently gaining attention asks the question: If an individual was contracted as a third party during the claim process, such as a building estimator or inventory specialist, is he or she still considered disinterested to act as appraiser in that same claim? The appraisal clause does not state that if an individual conducted an inventory or building estimate of the loss prior to appraisal, he or she is now an ”interested” party. In fact, there are several cases where courts have decided prior involvement with a principal was insufficient to be considered not ”disinterested.” In at least one court decision, a handling public adjuster had relinquished further fees and was held to be ”disinterested” and eligible to serve as an appraiser. According to the court’s decision, to be considered disinterested ”disinterest prospective appraiser must have a pecuniary interest on the outcome of the appraisal or a personal or business relationship with his or her principal that might interfere with his or her ability to act impartially. The accusing party must place the burden of proof on the opposing party’s appraiser, which in turn is guilty of prejudicial misconduct or has an interest in the claim.
With reference to the legal opinion letter above, this supports the theory that an individual involved with the claim, prior to appraisal, does not limit his or her ability to be appointed as appraiser.
In my opinion, if the third party contractor was paid for their services on an hourly basis and his fee was not dependent on the recovery of insurance funds, and this fee was already paid, their involvement does not cause that individual’s disinterest to be compromised. Besides outside individual documents, items or areas that were physically on site during inspection, the third party contractors; they are not involved with the adjustment of the insured’s claim and his or her business with the insured was concluded prior to the appraisal.
Questions of Law and Fact: There has been a recent strategy by part of the Insurance Carriers to allow their adjusters, and even independent appraisers, to challenge their opposing party’s appointment, sometimes months into the appraisal, on the basis of prior involvement resulting in lack of disinterest making them interested parties. Unfortunately, a disturbing pattern has developed with adjusters or appraisers assuming the authority to interpret the policy as fit in a disputed insurance matter. Unauthorized ”demands” for the insured to appoint a new appraiser, while deadlocking the appraisal proceedings has caught the attention of several high ranking members of the State Public Adjuster Associations. It is my opinion that a carrier or its representative cannot advise an insured of their rights, duties and/or remedies unless they are quoting from policy language. The proper forum for interpretation of coverage is a court of proper jurisdiction. Whether or not an appraiser should be dismissed is a matter for a court to decide, not an insurance adjuster or appraiser. Writing to an insured with unwarranted and unlawful demands that are inconsistent with the policy, might well be construed to be as a prime example of bullying and bad faith, in my opinion.
The Appraisal Clause allows for generous freedom to which the insured or insurer can decide who to appoint as their appraiser. Often, the lack of specific guidelines as to who can accept appointments ends up being like a boxing match without consideration to weight class, or a chess match between checker players. In order to ensure that your interests, or the interests of your client, are well protected and fairly advocated, consider the following skill-sets and attributes when choosing an Appraiser:
The extent of the appraiser’s experience as an appraiser. In my opinion, this is one of the most under rated aspects of a potential appraiser’s qualifications. Even though there may be a pool of individuals who have a great deal of experience, and even expertise, in a particular field subject to loss, or many years adjusting claims. This does not always equate to an effective appraiser. An expert in a certain discipline, such as a restoration contractor, accountant or estimator may often be the ”logical” choice when looking for an appraiser, however, this is often a critical mistake, as the appraisal process may be very intimidating to an individual who is not accustomed to conflict, psychological warfare, negotiation, and of course, arguing a position to the Umpire. I would argue that advocacy skills trump knowledge in the subject matter of the dispute.
Appraisal Related Certifications and Training
Although somewhat rare, appraisal training courses, and certifications, such as The WIND Umpire Certification Program, would substantiate an Appraiser’s dedication to the discipline as well as his or her knowledge of the process. Often, if the appraiser has also acted as Umpire, this can demonstrate a certain level of expertise in the appraisal process and a good reputation within the industry.
Knowledge and understanding of the issues needs to be resolved. This is relevant such as, when the argument is relating to the ACV of a contents loss and the carrier’s Appraiser presents a calculation based solely on a ”depreciation schedule” utilizing the age of the items. Can the policyholder’s appraiser articulate the case law relating to why this approach is invalid and calculate the loss utilizing the broad evidence rule? Can the appraiser defend, or make, arguments relating to policy endorsements or exclusions? An experienced appraiser should also understand when their appointment requires less reference to the Policy and more to the actual procedure of Appraisal. The appraiser’s extent of knowledge, skill and experience with the issues in dispute; the appraiser’s history with regard to types of losses, if he or she is appointed mostly by Insurance Carrier or policyholders, and the results of the appraiser’s appointment, such as the difference between the original offer and the Appraisal Award. A review of what Umpires has heard his or her cases, and the final outcome can be very important, especially if the local area has a small pool of possibilities. If possible, research should be done on the other side’s appraiser, in order to pick an individual who will not be outmaneuvered during the appraisal.
Depending on which side invoked the appraisal process, and the situations behind that, it may be very possible two ”sober minded” individuals will resolve the issues without the need for Umpire involvement. One of the key ADR (alternative dispute resolution) aspects of appraisal is it brings an entirely new set of individuals to resolve the disputes, individuals who have not been waging war with each other for six months and allowing emotions to fuel their fire. Sometimes, this is all that is needed to resolve the differences. The appraiser’s knowledge of the process is important. Important qualities include knowledge of specific fundamentals of valuation techniques, claim documentation, legal principals and the adjusting process, such as:
• Actual Cash Value (ACV)
• Replacement Cost Value (RCV)
• Sales Tax
• Current and Local Specific Case Law
• Periods of Restoration
• Pre-judgment judgment Interest
• Petitioning for Judicial Intervention
• Proofs of Loss
• Website Substantiation
• Photographic Investigation
• Forensic Recreation
• Shipping/set-up Costs
• LKQ Replacement
Remember, insurance claims are essentially ”sale of claims” subject to contractual law, and the ”Appraisal Clause” is mechanically the Insurance Policy’s version of arbitration. An appraiser should have extensive knowledge of the diverse contractual and legal issues that arise during an appraisal. Attorneys and Public Adjusters are often naturally a good fits as appraisers, given for their abilities to argue such points. However, as the Appraisal Process has its own body of laws and specific guidelines, this type of background should only be the basis, not replacement, for real world experience as an appraiser. An individual with a high degree of Insurance Policy knowledge claims experience and an understanding of arbitration would tend to be a good candidate for an appraiser, who without actual experience acting in the capacity of an appraiser, may prove to be effective.
Unfortunately, given the general lack of public knowledge on the Appraisal Process, many Policyholder’s end up appointing the wrong type of individual to serve as their appraiser. For example, when an insured is met with an Appraisal Demand, without understanding the complexity and uniqueness of the process, quickly decide to appoint their building contractor, as they were the ones who put together the insured’s estimate. When the carrier appoints a professional appraiser, one who understands the appraisal process, the governing laws and statues, and has a vast network of personal connections within the industry, the contractor quickly finds himself outsmarted, outmaneuvered, and with the realization many of the opposing Appraiser’s tactics were very well orchestrated.
Mechanics of the Appraisal Process
Simply put, when the two appraisers are chosen by their respected parties, they usually make a contact with each other, and complete all required documentation in order to start the process. Shortly after the initial contact, the two appraisers shall agree upon an Umpire. It is our opinion, that the two appraisers should have an Umpire in place before any matters of the dispute are discussed. This aspect of the process, in our opinion, is one of the most important mechanics of the entire appraisal. It shall be duly noted, the selection of Umpire is essentially the agreement and election of the final authority in the matter of dispute. This sole individual will have the sole capacity to make the final decision, after both appraisers formally present their findings and supporting documentation. If the two party appointed appraisers cannot agree on an Umpire, either party can petition the court of record to put an umpire in place.
The Appraisal before the Appraisal
It is of my practice and opinion, to assert and demand a truly disinterested and neutral individual to serve in the capacity of Umpire, per the language of the policies policy’s appraisal clause. Our independent research demonstrates often, the carrier’s appraiser will recommend individuals who they have a healthy relationship or preexisting agreement with.
Clearly, the aforementioned traits could very well cause an individual to be bias, or at least, subject to preexisting opinions and views resulting from many years of protecting the interests of the carrier. In addition, it is our practice, to formally reject any attempt made by the carrier’s appraiser to elect a disinterested party to act in the capacity of Umpire. Any such attempt will provoke a strict warning of compliance, with regard to the terms and conditions of the clause. Once all parties understand the due process of the appraisal, a selection of a fair and disinterested Umpire will preclude all other issues and actions at hand, and be the priority. If the parties cannot agree on an Umpire, either side shall petition the local court of jurisdiction for the appointment of an Umpire. It should be noted, an Umpire should be very well versed in the appraisal process, as they will execute full authority over the panel.
Once the Umpire is in place, the (two) appraisers shall create a ”protocol,” to guide the panel in evaluating the loss. An example of a protocol is as follows:
• Agreement on scope of loss
• Disputed items of scope noted
• Agreement of RCV of loss, on line by line basis
• Disputed values noted
• Agreement of ACV of loss, on line by line basis
• Disputed values noted
• Confirmation of ”agreed” aspects of loss
• Confirmation of ”open” or disputed aspects of loss
• All open/disputed issues to be forwarded to Umpire
Per the protocol, each appraiser will begin the process of evaluating the loss, independently. All documentation, evidence and information available during the claim, pertaining to the loss shall be examined. Property subject to the dispute should be evaluated, witnesses and experts should be consulted, and formal presentation of Replacement Cost Value and Actual Cash Value should be determined. Often, costs associated with replacement or restoration of claimed items may not have been claimed by the insured; all costs should be evaluated and calculated during the appraiser’s evaluation. Claim documentation prepared by the policyholder should be researched and substantiated, due diligence should be conducted with regard to the accurate valuations and calculations.
It is my opinion, that neither appraiser is required to evaluate the amount of loss in the presence of the other, as held by the court in Florida Farm Bureau Cas. Ins. Co. v. Sheaffer:
”Appraisers are generally expected to act on their own skill and knowledge. It has been held that they may reach individual conclusions….” Florida Farm Bureau Cas. Ins. Co. v. Sheaffer, 687 So.2d 1331. (this line of reasoning is very common in all other states.)
With this being said, if the two appraisers find it mutually beneficial to meet at the loss site, and discuss the matters at hand, it can, of course, be a productive approach to reaching an agreement. As every appraisal is different, and personalities, practices, opinions and methods can clash, crash or follow a smooth process, the procedure shall be strategically executed to allow the most efficient, accurate and fair resolution. When it is impossible for the two appraisers to agree on some or all aspects of the loss, they are to regress, and submit all findings to the Umpire for ultimate decision.
It is our practice, research, support and to substantiate all aspects of our findings, to allow all other parties to understand and confirm our calculations. During Appraisal, knowledge is indeed power.
Table of Referenced Authorities and Quotations
• ”An Appraiser appointed by the insured was deemed disinterested and hence was not subject to disqualification where he had submitted an estimate of loss while previously under contract with the insured as a public adjuster. The circumstances were that the estimate was the first business relationship between the insured and the appraiser and no evidence of prejudicial misconduct was otherwise produced by the insurer.” ”The Law and Procedure of Insurance Appraisal” by Jonathan J. Wilkofsky, Esq., Second Edition
• ”..an appraiser is not necessarily interested because he was once under contract with the party who hired him to adjust the loss. The fact that he has previously made a calculation of the loss also does not automatically disqualify him in the absence of a showing of prejudicial conduct.””The Law and Procedure of Insurance Appraisal” by Jonathan J. Wilkofsky, Esq., Second Edition
• ” ..the fact that an appraiser appointed by an insured has previously made a computation of the loss does not automatically disqualify the appraiser, absent a showing of prejudicial misconduct.” 44 Am Jur 2d, Insurance, § 1716, p 628.
• “Under the previous statute, this Court held that an insured’s appraiser is not disqualified by the fact that he previously computed the loss as an adjuster, absent a showing of prejudicial misconduct.” Linford Lounge, Inc. v. Michigan Basic Property Ins. Ass’n, 77 Mich.App. 710, 713, 259 N.W.2d 201 (1977).
• “..this Court had construed ”disinterested” to include an appraiser who previously served as an adjuster, as long as he had not engaged in prejudicial misconduct.”Linford Lounge, supra at 713, 259 N.W.2d 201.
• “The issue in Linford Lounge was, simply, whether an appraiser can be disinterested within the meaning of the statute when he had a prior contract with the insured to adjust the loss.”See Iid. at 713, 259 N.W.2d 201.
• “Because ”independent appraisers” may feel biased toward the party who hired them, this construction leaves intact the rule that appraisers are not disqualified from their appointments on the basis of having previously served as adjusters.”- in Auto-Owners Ins. Co. v. Allied Adjusters