When coverage exists and is not excluded for a first-party property loss, insurers and insureds may disagree over the valuation of the loss. First-party property policies typically include an appraisal provision to resolve disagreements between the insurer and insured over valuation. This article, which will be published in two parts, reviews some of the issues that often arise in an appraisal proceeding. Part I discusses the logistics of appraisals, such as policies loss settlement and appraisal provisions, choice-of-law issues that can arise in the appraisal context, and the selection of party appraisers and umpires. Part II examines issues that can arise while conducting an appraisal, such as the scope of appraisals, procedures where the loss is disputed, appraisal protocols, and what can happen after the appraisal is conducted. Except where otherwise stated, this article assumes that coverage exists for the loss.
Typically, in property policies, the method for determining how covered losses of property will be paid is set forth in the loss settlement provisions. Property policies usually offer benefits on an actual cash value basis, but the insured can sometimes purchase replacement cost coverage. Often, the actual cash value of the insured property will be less than the replacement cost.
A property policy usually provides that the insurer will pay actual cash value for damage caused to covered property when the loss is covered and exclusions do not bar coverage. Actual cash value is typically not defined in the policy but is understood to mean the actual, depreciated value of the damaged property. Another definition of actual cash value is the cost to repair or replace lost or damaged covered property with new property of similar quality and features reduced by the amount of depreciation applicable to the lost or damaged covered property immediately prior to the loss. Depreciation means a decrease in value because of age, wear, obsolescence or market value and includes . . . the cost of materials, labor and services . . . necessary to repair or replace lost or damaged covered property.
Under replacement cost value coverage, after repair or replacement of the damaged property, the insurer will usually pay the replacement cost without deduction for depreciation, for like kind and quality property. Property policies frequently provide that, pending repair or replacement of the insured property, the insured may make a claim for actual cash value. The insured may repair the damage later and, once repairs are complete, claim the additional amount necessary to equal the replacement cost. The policy may provide that the insured must make repairs within a specified time frame to be eligible to seek replacement cost coverage. The policy may also require the insured to notify the insurer of the insured s intent to make a claim for replacement costs within a specified time after the loss or damage.
Valuation provisions may be contained in other sections of a policy, and such provisions may allow for options other than repairing or replacing the property at issue. For example, an Insurance Services Office (ISO) Building and Personal Property Coverage form contains an Additional Coverage for Increased Cost Of Construction, which applies only if the insured has purchased replacement cost coverage. Under this Additional Coverage, the insured may elect to rebuild at another location. This Additional Coverage also recognizes that, for some losses, the ordinance or law may require[ ] relocation to another premises. . . .
Most property policies offer appraisal as a solution to a disagreement between the insurer and the insured regarding the amount of the loss. Appraisal is a dispute resolution process set forth in the policy.
While arbitration statutes or rules may govern the conduct of the appraisal proceeding, a policy s appraisal provision differs from an arbitration provision in other types of contracts. A policy's appraisal provision generally provides for the following:
If the two appraisers selected by the parties agree on the amount of the loss, the umpire need not decide that amount. However, most policies provide that the umpire must be selected at the beginning of the appraisal process, so it is usually not possible to wait to select an umpire in case the party appraisers disagree. An appraisal must be concluded and there can be no impasse, so any disagreement over the value of the loss will require a decision by the umpire.
In one case, the insured condominium association filed suit to challenge an appraisal award. The insured submitted a claim for damage to the property s roof and other building components due to wind and hail. The insurer paid $60,989.54, which was the amount of its replacement cost estimate, minus the policy s $10,000 deductible. The insured estimated that damage was in excess of $1.3 million and demanded an appraisal. The appraisal award was $123,252.09.
The insured filed suit, alleging breach of contract for failure to adequately compensate the insured for damage to the property. The insurer s motion for judgment on the pleadings was granted. The court ruled that the parties were bound by the policy s appraisal provision. The word binding in the provision was sufficiently clear to constitute a waiver of a party s right to sue. The appraisal did not answer questions of contract interpretation or address any number of legal or factual disputes that could give rise to a claim based on the insurer s denial of liability. The binding appraisal provision simply meant that the insurer could still object to liability but could not object to the amount awarded in the appraisal process.
As in many other areas of coverage, there can be significant differences in state law regarding appraisals. If the policy was issued in a different state than where the property is located, as for a business s warehouses or a vacation home, then choice of law will likely be the first consideration in determining whether to seek an appraisal.
Most states employ the most significant relationship test to determine which state s law applies. Factors considered under the test include (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile [and] residence . . . of the parties. Factor (d) and, to a perhaps lesser extent, factor (c) suggest that the location of the insured property may be a key factor for choice of law in connection with an appraisal proceeding.
The governmental interest test is less frequently used. This test does not directly consider the location of the insured property. Even so, in California, the law of the state where the principal risk is located will be given particular emphasis in determining choice of law.
Tennessee has a unique choice-of-law statute. It provides that [e]very policy of insurance, issued to or for the benefit of any citizen or resident of this state . . . , by any insurance company or association doing business in this state, shall be . . . construed solely according to the laws of this state. This statute suggests that, if a policy is issued to a Tennessee insured for property located in another state, Tennessee law may nonetheless govern appraisal proceedings.
Many property policies set forth the procedures for selecting the party appraisers and the umpire. The basic provisions instruct each party to select its own party appraiser, and the two party appraisers then select the umpire.
Party appraisers must usually be competent. Competent in this context typically means that the appraiser is capable of rendering a fair judgment. One court has noted that [t]he appraisers the parties select[ed] have technical, substantive expertise in the relevant areas. Appraisers are usually required to also be disinterested, impartial, or independent.
In Colorado, a policy s impartiality provision requires the appraiser to be unbiased, disinterested, without prejudice, and unswayed by personal interest. She must not favor one side more than another. In Owners Insurance Co. v. Dakota Station II Condominium Ass n, the insured s appraiser was deemed not to be impartial because she had advocated for the insured s position, meaning her actions [were] motivated by a desire to benefit a party. However, the appraiser s contingent-cap fee agreement with the insured, which capped the appraiser s fees at 5 percent of the appraisal award, did not render the appraiser impermissibly partial because 5 percent was significantly higher than the actual amount billed by the appraiser, meaning the agreement s cap provision was not invoked.
Missouri courts have been stricter regarding the appraiser s financial interest in the outcome. In short, an appraiser becomes interested or biased by having a direct or indirect financial interest in the outcome of the appraisal. In the case giving rise to that statement, the insured home sustained a windstorm and hailstorm loss, and the insured contended that the insurer s payment was too low. The court ruled that the following factors were unequivocal in showing that the insured s appraiser was not disinterested, as required by the policy: Shortly after the loss, the appraiser entered into a contract with the insured under which the appraiser agreed to perform an appraisal of the damaged home and a second property, and to act as the insured s attorney-in-fact ; the insured paid the appraiser a flat fee and agreed to pay the appraiser 15 percent of the final appraised value of the property; the appraiser helped the insured write the appraisal demand letter; the appraiser later helped the insured write a letter demanding payment of the appraisal award; the appraiser referred the insured to an attorney who filed suit against the insurer; and at the time the suit was filed, the appraiser had not yet completed the appraisal of the second property.
Some states employ unique procedures. Massachusetts s fire or fire and lightning insurance statute provides for a proceeding known as a reference. Instead of two appraisers and an umpire, there are three referees. The referees must be disinterested, residents of Massachusetts, and willing to act as referee. The selection of the referees differs significantly from other states appraisal procedures, because in Massachusetts, the parties exercise some control over each other s selection of referee. Each party submits the names and addresses of three proposed candidates for referee to the other party, and the other party selects one of the three. In addition, the referee cannot have served as a referee for either party within four months prior to the date of nomination or specification for appointment. . . .
The role of the umpire may be crucial; if the appraisers are not able to agree, the umpire may cast the deciding vote.
The appraisers first task is usually to select an umpire. Often, the policy requires the umpire to be competent and disinterested, impartial, or independent.
The requirements for the appraisers and the umpire may be framed differently. For example, Michigan s fire insurance policy statute requires competent and independent appraisers, but it requires a competent and impartial umpire.
Some policies, however, do not specify such requirements for the umpire. In this situation, a federal court in Texas reasoned that [b]ecause appraisal proceedings have little structure imposed by the policy, the umpire s role of assuring fairness of the process is at least as important as subject-matter expertise. The court selected an attorney mediator who
has years of experience and expertise in providing fair resolution processes for complex commercial disputes, including disputes over property valuation and damage. [The mediator s] experience and expertise fully qualify him to evaluate and weigh disputed and conflicting evidence, including technical evidence presented by warring experts.
As noted above, the parties in this case selected appraisers with technical, substantive expertise in the relevant areas. It is possible that, if the parties had selected appraisers without technical expertise, a court could have selected an umpire with that expertise.
As raised in Glenbrook Patiohome, there may be a lack of agreement between appraisers on the selection of an umpire. Many policies provide that if the appraisers are unable to agree on an umpire within a certain number of days, the court will decide.
In Massachusetts, if the parties referees cannot agree on the third referee, the parties may make a written request to the commissioner of the Massachusetts Division of Insurance. The application to the commissioner cannot specify any person whom either party nominated as a party referee. The commissioner shall, after such summary inquiry or hearing, if any, as [the commissioner] may deem expedient, appoint a person to serve as the third referee. . . . If the commissioner appoints the third referee, that referee cannot have acted as referee within four months before the date of specification for appointment, unless both parties consent.
Getting ready for an appraisal requires careful review of the relevant policy provisions. In addition, choice-of-law issues can arise that should be resolved before the appraisal is conducted because, as with many other matters, state law governing appraisals can vary significantly. And care needs to be taken in selecting party appraisers and structuring the parties relationships with their selected appraisers in order to ensure that the appraisers do not run afoul of states differing standards for assessing appraisers independence.
Part II of this article will address issues that can arise during and after the actual appraisal procedures.
This is an academic discussion. The views and opinions expressed in this article do not necessarily reflect the opinions of all of its authors on everything expressed herein, nor do they reflect the views and opinions of their firms or clients. This article is partly based on T.R. Eyerly et al., Appraisals: What s My Loss? (ABA Insurance Coverage Litigation Committee CLE Seminar, March 8, 2024).
