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. Part I of this article addressed issues related to getting appraisals started. Part II reviews some of the issues that can arise in the conduct of an appraisal, such as the scope of appraisals, appraisal protocols, disputes of the cause of loss, and what happens after an appraisal has concluded. Except where otherwise stated, this article assumes that coverage exists for the loss.
The range of what can be determined by an appraisal proceeding is typically limited to issues of valuation and the amount of loss. Notably, appraisals typically do not determine coverage issues.
As discussed in Part I of this article, an appraisal panel is selected to resolve a disagreement between the insurer and the insured regarding the amount of the loss. The appraisal panel cannot interpret the meaning of the insurance policy or define valuation terms in an award. Therefore, the appraisal process is bifurcated between the damages and any coverage disputes. Pursuing appraisal when clear and unambiguous instructions are not provided to the appraisal panel regarding the definition of values being sought may cause a court to refuse to confirm an award.
For example, the parties may disagree over the definition of replacement cost, particularly as it relates to the valuation date of an award. A policyholder may consider the date of an award as the date of valuation, while the insurer considers replacement cost valued as of the date of loss. Such disagreements must usually be settled by the court. If the issue is not decided prior to appraisal, the parties can request that the appraisal panel provide two separate valuations, allowing the court to decide the legal issue.
In Krafchow v. Dongbu Insurance Co., the Hawaii Intermediate Court of Appeals vacated the trial court s confirmation of an appraisal award that appraised what the panel believed was covered loss instead of determining the amount of loss.
The Krafchows held three property policies. The three insured structures and their contents were damaged by wildfire. The insurer tendered over $300,000 to the Krafchows pending the determination of final settlement figures.
There was disagreement over the amount of the Krafchows loss, and the appraisal provision was invoked. The appraisers chosen by the parties did not agree on the amount of loss. The umpire agreed with the determination made by the Krafchows appraiser. The appraisal established replacement cost value, depreciation, and actual cash value for various categories of loss, reduced the appraised amount by a deductible amount, and instructed, This award shall be payable within 20 calendar days.
The Krafchows then moved to confirm the appraisal. The circuit (trial) court entered orders granting the motion to confirm, recognizing that the insureds appraiser s and umpire s values included consideration [of] . . . scope of [insurance] coverage and exclusions.
The insurer appealed, contending that the circuit court erred by granting the motion to confirm because the appraiser and the umpire exceeded their authority by considering coverage issues and deciding whether the policies provided coverage for certain claimed losses.
The Intermediate Court of Appeals first acknowledged that appraisal provisions were arbitration agreements, subject to Hawaii s arbitration statute. By statute, an arbitration award could be vacated if the arbitrator exceeded his or her powers.
The appraisal provisions in the policies instructed the appraisers and the umpire to determine the amount of loss. Here, not all of the Krafchows loss was covered under the policies. The insurer s liability to pay for a loss was limited by the coverage provisions, exclusions, and other terms and conditions in the policies. The appraisal provision did not limit itself to covered loss; it did not preclude appraisal of non-covered or excluded loss, or loss for which the insurer was otherwise not liable; and it did not empower the appraisers to consider policy or coverage defenses. Nothing in the appraisal provision empowered the appraisers and umpire to determine whether any part of the loss being appraised was or was not covered under the policies.
Therefore, the appraisers and the umpire lacked the power to decide what amounts the insurer owed to the Krafchows. What, if anything, the insurer actually owed to the Krafchows depended on coverage issues that first had to be decided by the circuit court.
By stating how much the insurer was to pay the Krafchows and when payment was to be made, the award necessarily took into account the scope of coverage. The umpire and the Krafchows appraiser purported to appraise what they believed to be covered loss. Rather than directing the insurer how much to pay the Krafchows and when to do so, the Krafchows appraiser and the umpire should have appraised the entire value of the Krafchows loss due to the wildfire, irrespective of insurance coverage issues.
Consequently, the Intermediate Court of Appeals vacated the decision below and remanded the matter for further proceedings.
Some courts have held that appraisal is inappropriate when causation is still at issue. For example, a federal district court in Alabama denied a motion to compel an appraisal after determining that the cause of the loss was still at issue. Buildings at the Enclave at Oak Hill, a residential condominium association, were damaged by Hurricane Sally. Enclave made a claim for the loss. Payment was made for some of the claimed loss, but the insurers disputed whether all of the claimed damages resulted from Hurricane Sally. Enclave then invoked the appraisal provision.
The insurers, however, contended that the dispute involved issues of causation and coverage that were not appropriate under the appraisal provision. While Enclave contended that Hurricane Sally caused damage to many other parts of its buildings, which had to be repaired and replaced, the insurers contended that those other parts either were not damaged at all or were not damaged by Hurricane Sally. The insurers argued that because the parties had agreed on neither causation nor coverage, and the court had not yet decided these issues, the appraisal request was premature.
The court noted that under Alabama law, appraisers did not have the authority to decide questions of coverage and liability in insurance disputes. Enclave acknowledged that there were factual disputes regarding whether some or all of the claimed damages were in fact covered losses. Therefore, because the parties dispute did not merely involve the amount of the loss but also addressed the threshold issue of the cause of the loss, appraisal was not appropriate at that time. Enclave s motion was consequently denied.
On the other hand, some courts have indicated that appraisal can determine certain coverage issues. In a case in which the party appraisers disagreed over the cause of loss and the valuation of the loss, the umpire agreed with the insured s party appraiser and determined the loss was caused by hail. An award was issued on that basis, and the insurer s challenge was rejected. The policy s appraisal provision reserved the insurer s right to deny the claim, and this provision was held to be unambiguous. Relying on a Seventh Circuit case, the court found that the umpire s scope-of-loss decision was binding.
Another federal district court granted an insured s motion to compel an appraisal that would include a determination of causation of the loss. The insured claimed its property suffered wind and hail damage from a storm on June 18, 2021. The parties disagreed over the value of the loss. The insurer opposed appraisal because it believed that the damage arose from a loss in 2019, not from the 2021 storm. The insured had submitted a claim in 2019 for damage that the insurer alleged was exactly the same as the damage claimed for the 2021 storm. Therefore, the insurer viewed the matter not as a dispute over an amount of loss, but rather over whether a loss even occurred on June 18, 2021.
The court agreed with the insured that appraisal was the appropriate remedy to resolve the factual disputes. Ohio courts had found that, where appraisal is used to determine the extent of a loss, doing so required appraisers to separate covered damage from uncovered damage. Further, where an appraisal provision was otherwise silent as to how an appraiser should measure the extent of a loss, courts in a variety of jurisdictions, including Ohio, interpreted the process to require a causation analysis. Where the policy was silent as to resolving issues of causation, appraisal was the appropriate remedy. Therefore, the insured s motion to compel appraisal was granted.
In another case, the appellate court agreed that the insured s supplemental claim was ripe for appraisal after the insurer had agreed the original claim arising from hurricane damage was covered. The insurer paid nothing on the claim, however, based on its determination that the amount of the loss due to roof damage was less than the deductible. The insured then submitted a supplemental claim with an estimate of $6 million in damages, including for the first-time costs to replace all the windows and sliding glass doors. The insured requested an appraisal, but the insurer argued the supplemental claim was not ripe for appraisal because no determination had yet been made on coverage for the loss. The appellate court disagreed and found that the claim was ripe for appraisal. The insurer had already admitted coverage for the loss as a whole and had determined the roof damage was a covered loss. Any disagreement as to whether the insurer was required to pay for the additional damage was an amount-of-loss issue properly determined by an appraisal, not a coverage issue.
The typical appraisal provision is relatively short and may leave unanswered many questions arising in complex property coverage disputes. Therefore, parties should consider preparing an appraisal protocol or memorandum defining the scope of the dispute and setting out the course for a useful and final result. The protocol, the terms of which the parties are free to draft as long as it complies with the policy and applicable law, effectively establishes the ground rules for the appraisal process to avoid, hopefully, as many disputes as possible. Provisions addressing the value, the set of disputed values, or the amount of loss to be appraised should usually be specific to the nature of the loss, and the parties may wish not to rely on standard protocol language.
An appraisal protocol should usually address the following:
What do the parties agree on? What do the parties disagree on? What should the appraisal panel determine? Typically, the appraisal provision applies to the amount of loss or damage and leaves it to the parties to determine what loss or damage is in dispute. The protocol should attempt to answer these questions as clearly and unambiguously as possible, which will, of course, depend on the nature of the loss. For example, consider the valuation questions that arise in the context of hurricane damage to property. A party may demand an appraisal to determine the amounts of replacement-cost loss and actual-cash-value loss caused by the hurricane. To avoid calculations based on different categories of loss, the protocol might categorize the damage into the following buckets: mitigation / cleanup / dry-out / emergency response; roofing; balcony railings / slabs / finishes; exterior windows / sliding glass doors / glass doors; exterior stucco / paint / sealants; cooling tower; and interior finishes / components.
If the policy includes coverage for code upgrades, the protocol should usually require the appraisers to state separately the value of any increased cost of repair or reconstruction of the damaged property on the same site based on the requirements of any law or ordinance in force at the time of the damage.
Further, the protocol should usually state whether the categories of loss are all-in figures that include all necessary overhead, profit, taxes, permits, general conditions and requirements, as well as architect, engineering, consultant, and other professional fees. The protocol should usually specify a reasonable amount for overhead and profit, to prevent unreasonably excessive amounts from being charged simply because insurance is involved.
The protocol should usually require each party to provide the other party with copies of documents related to the loss at issue, including, for example, scope of repair, loss measurement, and project values. In addition, the protocol should state that the documents will be shared with the opposing appraiser within a certain amount of time and before presentation to the umpire.
The parties may want to limit each party s ability to communicate with the umpire or with the other party s appraiser, but they may want to permit ex parte communications between the parties and their own appraisers.
The protocol should usually identify each party s appraiser; declare that each appraiser is competent, disinterested, and impartial (or adopt the wording of the policy s appraisal provision or relevant statute); and explain the basis of such statements regarding the appraisers. The protocol should also state that each appraiser has experience determining the value of the type of loss to be appraised, has no financial interest in the outcome of the appraisal, and has no disqualifying conflicts of interest. Further, the protocol should usually address the appraisers fees and, as discussed below, provide that those fees are not contingent in nature.
The parties should usually determine the logistics in the event the appraisers are unable to resolve the value of any item in dispute. If the parties intend to send written submissions to the umpire, the protocol may set a page limit on the submissions and require certain evidence to be presented in a particular format. The protocol should usually also set forth the date and location of any hearing on the written submissions and the procedures for any witness testimony at the hearing.
Although the appraisal provision in the policy may identify who bears the costs of certain expenses associated with the appraisal, the protocol should usually be as specific as possible.
As discussed above, the appraisers cannot resolve any issue of insurance coverage, policy exclusions, compliance with policy terms and conditions, or issues of limits of insurance. However, it may be beneficial for the parties to determine the specific issues that are reserved for the court and ask that the appraisers determine the value of certain losses in the event the court determines they are covered. This may avoid another round of appraisal proceedings.
Sample appraisal protocols can be found in Appendices A and B to this article, downloadable as a PDF.
Generally, appraisal awards are final and binding on the parties. However, an appraisal award may be vacated or modified if a party failed to comply with the appraisal process as set forth in the policy. For example, that a party fails to select a disinterested party appraiser may be grounds for vacating the award. Thus, in Parrish v. State Farm Florida Insurance Co., the court held that a public adjuster who accepts an assignment on a contingent fee basis is not a disinterested appraiser under a standard homeowner s insurance policy. Another example is when the appraisal panel decides questions of contract interpretation, which are outside the scope of the appraisers authority.
That said, in some instances it may become necessary for an appraiser to consider complicated coverage questions to determine the amount of loss or damage. For instance, in Lee v. California Capital Insurance Co., the court addressed an appraisal panel s authority to decide valuation disputes with respect to property insurance losses and offered guidance on reaching a valid award. The court held that parties were not precluded from appraising a loss that involved coverage disputes. In those situations, the award form must show that those issues were not decided and, instead, that the panel determined only the dollar value of the loss.
Even though the panel cannot determine coverage issues, in some jurisdictions, appraisers can make determinations about the cause in fact of a particular loss, in addition to the amount of damage. In Walnut Creek Townhome Ass n v. Depositors Insurance Co., the Iowa Supreme Court held that the parties were bound not only by the appraisers decisions of valuation but also by their causation decision. The insured submitted a claim for hail damage to its roofs. The insurer contended defective shingles, not hail, had caused the damage. The insured demanded appraisal, and the appraisal panel found that hail had caused damage in the amount of approximately $1.4 million. The court noted the disagreement among lower courts as to whether appraisers can determine the cause in fact of damage and found that the better reasoned cases hold that appraisers necessarily recognize causation when determining the amount of loss. Without fraud, mistake, or misfeasance, the district court was not free to make its own factual determination as to whether there was hail damage, even if the court disagreed.
In a case before the Eleventh Circuit, the court held that the district court s order compelling appraisal and staying the proceedings pending appraisal was an interlocutory order that was not immediately appealable under 28 U.S.C. 1292(a)(1).
Positano Condominium Association suffered damage from Hurricane Irma. The association notified its insurer seven months later. The insurer investigated the claim and inspected the property. The association sent a written request for appraisal. The insurer did not respond, and the association filed suit, alleging that the dispute was not a coverage dispute but a dispute over the amount of the loss. The association moved to compel appraisal and to stay the suit pending completion of the appraisal.
The district court adopted the magistrate s report and recommendation to grant the motion. It noted that participation in the appraisal process would not remedy the damages caused by Hurricane Irma; it would simply be one step in the process, supplying an extra-judicial mechanism to calculate the amount of the loss. The appraisal would not dispose of any of the claims or defenses.
The insurer appealed. The parties were asked to address the basis of appellate jurisdiction to review the order compelling appraisal, as well as whether orders compelling appraisal are treated the same as orders compelling arbitration for purposes of appellate jurisdiction.
The Eleventh Circuit noted that [f]or an order to be appealable, it must either be final or fall into a specific class of interlocutory orders that are made appealable by statute or jurisprudential exception. The Eleventh Circuit concluded that the order compelling appraisal was not a final order that was appealable under 28 U.S.C. 1291. As the district court had noted, further proceedings were anticipated, and the appraisal would not be conclusive of either party s contentions, including the insurer s coverage defenses. The appellate court further reiterated that the purpose of appraisal is limited to determining amount of the loss. Moreover, an order compelling appraisal is not among the classes of appealable interlocutory orders under 28 U.S.C. 1292, such as interlocutory orders regarding injunctive relief.
The insurer claimed the order compelling appraisal was injunctive in nature. The Eleventh Circuit disagreed, ruling that the parties and court did not comply with the procedural requirements for injunctive relief. In addition, appraisal is not remedial in nature; instead, it is a means of calculating amounts of loss.
Both the preparation for and the actual conduct of appraisal proceedings may present unique challenges, even as they provide a means for resolving disputes over valuation. Understanding what issues can and cannot be resolved by appraisal, and negotiating a fair and useful appraisal protocol, may assist in making the process as efficient as possible.
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).
