Even if an insurance company attempts to deny its coverage obligations, a policyholder still can explore processes, short of litigation or in conjunction with litigation, that can resolve a coverage dispute. Appraisal is an alternative dispute resolution process designed to efficiently narrow areas in dispute, resolve issues relating to the “amount of loss,” and streamline a coverage lawsuit—it may even limit the need for expert reports and depositions. Indeed, insurers have acknowledged that appraisal is “a less expensive, more efficient alternative to litigation” and that “appraisal clauses provide a valuable tool to resolve disputes about the amount of property loss, are enforceable, and should be strictly applied absent a finding of waiver,” “regardless of concerns that may exist about the scope of appraisal.”
There is strong public policy favoring appraisal throughout the country, not only because appraisal may provide a less expensive alternative to litigation, and could obviate the need for a trial on damages, but also because appraisal rulings are enforceable and strictly applied in court. Some states even require that standard form insurance policies include an appraisal clause requiring either party to submit, on demand, a dispute over the amount of a loss to an appraisal panel.
Different policies may contain different appraisal language and set forth different requirements and standards of review. Sample appraisal language may include the following terms:
If we and you disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. You and we must notify the other of the appraiser selected within 20 days of the written demand for appraisal. The two appraisers will select an umpire. If the appraisers do not agree on the selection of an umpire within 15 days, the insured or the insurer may apply in writing, for the appointment of an umpire, to the judge of the circuit court of the county or city in which the damaged or destroyed property was located at the time of the loss. The appraisers will state separately the value of the property and amount of loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will set the amount of loss. Any outcome of the appraisal will be binding on both parties.
. . .
If there is an appraisal, we will still retain our right to deny the claim.
Pursuant to the above language, once either party invokes appraisal, the process is mandatory. An appraisal panel is selected, with both the policyholder and insurer selecting an appraiser, and the appraisers jointly selecting an umpire. Such policies often state that a decision by two members of the appraisal panel “will set the amount of loss” and “will be binding on both parties.” Importantly, only disagreements are submitted to an umpire, who then calculates the categories that remain in dispute. The umpire’s findings are also binding on the parties. The appraisal provision expressly acknowledges that appraisal can move forward and an insurer still retains its right to deny a claim—in other words, appraisal can be conducted independently, even if the parties disagree on whether or not coverage is afforded for certain losses.
An appraisal provision may even include a fee-shifting requirement or success component. For example, in relevant part, an appraisal provision can state:
If the appraisers’ award is less than or equal to the amount offered by the Company prior to the award, the Insured shall pay 100% of the fees and expenses for each appraiser and the umpire for the appraisal.
If the appraisers’ award is equal to or more than the amount demanded by the Insured prior to the award, the Company shall pay 100% of the fees and expenses for each appraiser and the umpire for the appraisal. Otherwise, the Insured and the Company shall each pay its chosen appraiser and shall bear equally the other expenses of the appraisal and umpire.
Given that a party successful in the appraisal process (in terms of the amount of appraisal award) may also be able to recoup its fees and expenses incurred in the appraisal process, parties are further encouraged to cooperate in an expeditious appraisal and pursue only areas of dispute that warrant independent review.
Despite clear language in many policies, insurers have nevertheless sought to skirt appraisal requirements, perhaps with a view to delaying payments owed under the policy. For example, insurers have argued that appraisal may be premature because there are outstanding “coverage disputes,” that an insured’s request for appraisal improperly seeks a determination of “coverage issues” by the appraisal panel, or that the request for appraisal is untimely or has been waived. Such arguments are specious. As the Second Circuit Court of Appeals explained in one coverage case,
the presence of a coverage dispute does not preclude an appraisal demand. Only a coverage dispute that precedes the valuation of damages will prevent such a demand. Coverage disputes that are independent of the valuation of damages can stand in abeyance pending the appraisal.
Courts in other jurisdictions have reached the same conclusion, recognizing that questions of coverage, causation, and liability may be appropriately subsumed into the appraisal process. In addition, “[e]ven if an appraisal under the policy would not resolve th[e] case completely, it could eliminate or substantially narrow the significant issue of loss value, which might also facilitate settlement discussions.”
Parties can submit to appraisal and still litigate the outstanding coverage issues, even though a court may later determine that certain elements of damages are not covered. An insurer’s obligation to adjust a claim in good faith does not cease simply because a claim is disputed or a lawsuit is filed.
Even after a policyholder makes a written demand for appraisal, it may nevertheless be forced to file a motion to compel appraisal because the insurer may assert that coverage issues need to be resolved first or that a party has waived appraisal.
In Metropolitan Apartments at Camp Springs, LLC v. National Surety Corp., the Eastern District of Virginia granted Metropolitan Apartments’ demand for appraisal. The court held: “[W]hen parties have entered into an agreement that provides for an appraisal process, that agreement shall be enforced, unless the moving party has waived its contractual right to demand appraisal.” “The non-moving party ‘bears the heavy [] burden of proving waiver,’ which can be shown by actual prejudice.” The proof “must be concrete, not merely speculative.” Actual prejudice is a factual inquiry, and the pertinent factors include (1) significant delay in making the appraisal demand and (2) the extent of litigation activities. “[I]t is difficult to see how prejudice could ever be shown when the policy . . . gives both sides the same opportunity to demand appraisal. If a party senses that impasse has been reached, it can avoid prejudice by demanding an appraisal itself.”
Still further, even if an appraisal goes forward, an insurer may refuse to pay the award. Yet, appraisals are binding and courts enforce such awards.
An insurer’s actions and failures to act, including the failure to investigate and adjust a claim and failure to pay undisputed losses, are express violations of the clearly stated requirements of any insurance policy. Depending on the inclusion of an appraisal provision in a policy, an insurer’s failure to cooperate in an appraisal may be yet another policy violation.
While appraisal may not foreclose all disputes between a policyholder and its insurer, when used effectively, it provides a process for the parties to better understand the amounts in dispute and narrow the areas of disagreement. With quantum of loss undisputed, parties are often in a better position to mediate or discuss settlement because they are equipped with binding dollar amounts. Even if litigation continues, the process will be streamlined.
