Foran Glennon Palandech Ponzi & Rudloff

December 2014

Initial Considerations in Evaluating Property Appraisal Demands

Brian Devilling

Insureds are increasingly demanding appraisal as a means of challenging insurers’ loss estimates, damage evaluations, and coverage decisions in property claims.  Before proceeding with appraisal, however, it is critical that insurers evaluate an appraisal demand to ensure that the proposed appraisal complies with the terms of the insurance policy’s appraisal provision.  Failing to do so can result in significant litigation expense from challenging the results of a flawed appraisal process.

Appraisal Provisions and Process.  Appraisal provisions permit either party to invoke appraisal if there is a dispute as to the amount of loss.  Once appraisal is invoked, each party designates an appraiser.  If the appraisers cannot agree on the amount of loss, they must choose an umpire.  The umpire then determines the amount of loss.  A typical appraisal provision provides as follows:

If we and you disagree on the amount of the ‚Äúloss,‚ÄĚ either may make written demand for an appraisal of the ‚Äúloss.‚ÄĚ In this event, each party will select a competent and impartial appraiser. You and we must notify the other of the appraiser selected within twenty 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, they must request selection of an umpire by a judge of a court having jurisdiction. The appraisers will state separately the amount of the ‚Äúloss.‚ÄĚ If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be the appraised amount of ‚Äúloss.‚ÄĚ If you make a written demand for an appraisal of the ‚Äúloss,‚ÄĚ each party will:

  1. Pay its chosen appraiser; and
  2. Bear the other expenses of the appraisal and umpire equally.

Courts differ widely in their interpretation of appraisal provisions, particularly with respect to (1) the extent to which appraisers can consider coverage issues; (2) whether appraisal may be used to determine the cause of a loss; (3) what defenses an insurer may reserve for determination by a court; (4) what constitutes a ‚Äúcompetent and impartial‚ÄĚ appraiser; and (5) what standard of review applies to an appraisal award.

Nonetheless, there is still enough agreement among courts and clarity from the language of the appraisal provision itself to guide insurers in evaluating an appraisal demand.  The following issues must be considered in any response to an appraisal demand.

What is the Disagreement?¬† Before all else, clearly identify the disagreement.¬† An appraisal provision can only be invoked ‚ÄúIf we and you disagree on the amount of the loss.‚Ä̬† An insurance claim can involve numerous issues, including the value of damaged property, whether damage occurred during the policy period, and whether damage occurred because of a covered or excluded cause of loss.¬† Many claims involve a combination of such issues.¬† If an insured invokes appraisal, the subject of the appraisal must be clear.¬† Is the insured disagreeing with the insurer‚Äôs valuation of the covered damage, with a decision on coverage, with a determination on causation, or with all bases of the claim decision?¬† If the parties proceed to appraisal without clarifying the subjects of disagreement, they risk having to spend considerable time and money dissecting the appraisal award in litigation.

Is The Insured Using Appraisal to Determine Coverage Issues?¬† Once the nature of disagreement is clear, insurers should evaluate the appraisal demand to determine whether it improperly seeks resolution of coverage issues.¬† Nearly all courts recognize that appraisers and umpires may not make coverage determinations.¬† Under the plain language of an appraisal provision, appraisers and umpires are empowered only to determine the ‚Äúamount of loss.‚Ä̬†¬† However, state laws vary as to whether the term ‚Äúamount of loss‚ÄĚ includes the extent of damage or just the value of damage.¬† Laws also differ as to whether appraisers can differentiate between covered and excluded causes of damage. ¬†For example, appraisers in some jurisdictions are permitted to determine whether damage was caused by hail (covered cause of loss) or by wear and tear (excluded cause of loss).¬† In other jurisdictions, this would be prohibited as an improper coverage determination.¬† ¬†Once it is clear that an appraisal demand involves issues of coverage, an insurer should consult with coverage counsel in determining an appropriate response under the laws of the jurisdiction.

Is The Insured‚Äôs Appraiser ‚ÄúCompetent and Impartial?‚Ä̬† Nearly all appraisal provisions require that appraisers be ‚Äúcompetent and impartial‚ÄĚ or ‚Äúcompetent and disinterested.‚Ä̬† Unlike litigation and arbitration, appraisal is not intended to be an adversarial process.¬† At a minimum, this means that an appraiser or umpire must not have a financial interest in the outcome of the appraisal.¬† An insured generally may not designate a public adjuster on a contingency contract or a contractor who has solicited work from the insured.¬† Upon receipt of an appraisal demand, insurers should diligently investigate potential financial interests, biases, and backgrounds of opposing appraisers.

What Is The Recourse?  State laws may limit an insurer’s options in response to an appraisal demand, even if the demand is improper.   In one of the leading cases on appraisal, State Farm v. Johnson, 290 S.W.3d 886 (Tex. 2009), the Texas Supreme Court affirmed that appraisers and umpires may not make coverage determinations, but held that insurers must nonetheless proceed with appraisal, reserving the right to later contest issues of coverage and causation in court.  Other jurisdictions, however, have permitted insurers to avoid appraisal altogether when it is not properly invoked.

Evaluating Options  An insurer’s options in responding to an appraisal demand vary greatly by case and jurisdiction.  A response must, however, involve consideration of the issues discussed above, as insurers that accept an appraisal demand blindly are destined to incur significant litigation costs challenging appraisal results.