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August 30, 2018 Practice Points

Appraisal Clauses: the Policyholder’s Friend or Foe?

The appraisal clause in your property policy may be a useful tool in proving both damages and causation

by Brent W. Huber and Christine D. Astbury

Although often overlooked, the appraisal clause in your property policy may be a useful tool in proving both damages and causation. Like all policy terms, appraisal clauses vary from policy to policy, but they typically allow the insurer or the insured to demand an independent estimate of the claimed loss. Many states – not exclusively including Texas, Minnesota, and most recently, Iowa – hold that appraisers may allocate damages between covered and excluded perils, thereby weighing in on the question of causation.

In Philadephia Indem. Ins. Co. v. WE Pebble Point, 44 F. Supp. 3d 813, 818 (S.D. Ind. 2014), an Indiana district court addressed these issues. The court explained that it “would be extraordinarily difficult, if not impossible, for an appraiser to determine the amount of storm damages without addressing the demarcation between ‘storm damage’ and ‘non-storm damage.’” In that case, the cause of roof damage to an apartment complex was disputed. The policyholder contended the damage was caused by Hurricane Sandy’s inland leftovers, while the insurance company claimed the damage was caused by construction defects. The policyholder challenged the insurer’s conclusions and demanded an appraisal under the policy’s appraisal clause, which, by its explicit terms, applied where the parties “disagree[d] on the value of the property or the amount of ‘loss’…” The insurance company refused and filed suit seeking a declaration that an appraisal was not appropriate because the parties’ dispute concerned the scope of covered damages, not just the amount of the loss. In rejecting this argument, the court clarified that “[t]o hold otherwise would be to say that an appraisal is never in order unless there is only one conceivable cause of damage—for example, to insist that ‘appraisals can never assess hail damages unless a roof is brand new.’” Id.

Not all courts and jurisdictions adhere to this analysis, however. Most recently, on June 1, 2018, the Iowa Supreme Court in Walnut Creek Townhome Ass’n v. Depositors Ins. Co., 913 N.W.2d 80, 92 (Iowa 2018), reh’g denied (June 19, 2018) reached a similar conclusion, again opting for a broader, more flexible and common sense construction of the appraisal clause. There, the court concluded that “[t]he better-reasoned cases . . . hold the appraisers necessarily address causation when determining the amount of the loss from an insured event.” Of course, allowing appraisers to weigh in on causation does not deprive the courts of their authority to determine coverage. Indeed, the court in Pebble Point clarified that insurers do not forfeit their right to deny coverage by submitting to an appraisal and doing so is “simply to honor the terms of the parties’ contract—with the incidental hope that the process may better narrow and frame the facts that underlie what remain of their disputes about causation and coverage.” Id.

So in summary, read your policies. Consider whether to use the appraisal clause. Review your jurisdiction’s law on the issue to determine if pursuing an appraisal is worthwhile. If so, do not delay, because “like any other contract right, the right to appraisal may be waived” if not pursued “within a reasonable time.” G&S Metal Consultants, Inc. v. Cont’l Cas. Co., 200 F.Supp.3d 760, 764 (N.D. Ind. 2016) (denying the insured’s right to an appraisal after seven years of litigation and discovery).

Brent W. Huber and Christine D. Astbury are with Ice Miller LLP.

Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).