Help: My Insurance Company Refuses to Participate in the Appraisal Process!

A Recent Letter I Wrote to An Insurance Company That Did Not Want to Participate in Appraisal

I wrote the above letter in response to a letter I received from an insurance company claiming that it would not consider appraisal under the terms of the policy because the differences between our estimates were not differences in price but rather differences in scope.

What is the Appraisal Process in an Insurance Policy?

Most property insurance policies, including homeowners and commercial property policies, contain appraisal clauses. An appraisal clause provides that if there is a dispute as to the “amount of loss” then each party will appoint an appraiser to determine the amount of the loss; the appraisers will try to reach an agreement between them; and if they cannot reach an agreement, then they will select a third appraiser to act as an umpire.

What is the Purpose of an Appraisal?

Appraisal is designed to be a quicker, less-expensive, extra-judicial method for determining the amount of damage caused by a covered peril when liability is not disputed. In its purpose, it is similar to arbitration.

What May Be Decided in the Appraisal?

Unlike an arbitration, an appraisal cannot decide whether the insurance company is liable for a loss. Courts frequently hold that appraisers may not decide questions relating to coverage, liability, or the meaning of policy language. Rather, the focus of an appraisal is determining only the amount of damage. A closer question arises when addressing whether appraisers may determine whether certain damage was caused by a covered loss. The better reasoned view on this question is that appraisal necessarily includes some questions of causation as they relate to the extent of damage caused by a covered cause of loss vs. whether there was damage caused by a covered loss at all.  For instance, an appraisal could not decide that a damaged foundation was caused by ground settlement instead of a tornado. If on the other hand, the insurance company and policyholder agreed that damage was caused by a tornado, the appraisal could decide to what extent the basement needed to be repaired or replaced and with what materials. This makes sense because disagreements on the extent of damage  go directly to the issue of “amount of loss.” Seen in this context, an insurance company should not be able to argue that it does not have to participate in appraisal because there are “differences in scope.”

Who May Be an Appraiser?

The standard ISO language states that the parties must appoint appraisers who are “competent and impartial” but doesn’t provide much greater detail. The State Farm provision goes into greater detail and provides that individuals who have performed services in connection with the claim at issue or who have a financial interest in the outcome may not serve as appraisers. It further elaborates than an appraiser or umpire must be an architect, engineer, adjuster, public adjuster, or contractor who has experience with the type of property at issue.

To get the best results, you will want an appraiser who has experience, can communicate effectively, will hold firm on properly supported opinions, but can also admit mistakes and maintain an open mind.

What are Some of the Advantages and Disadvantages of an Appraisal?

An appraisal may be a quicker and less expensive way of deciding how much is owed by an insurance company when the company admits liability. It also has the advantage of having individuals with knowledge relating to constructions costs involved in setting the loss as opposed to the adjuster armed with Xactimate that usually initially determines the estimate for the insurance company.

However, once appraisal is performed, there are few grounds for challenging it other than by arguing that it was the result of corruption, bias or flawed methodology. Challenges go to the process itself, not the result. In addition, a policyholder generally will have to pay their own appraiser’s fees and half of those of the umpire. This may mean that the process is not affordable for some valid claims or for some policyholders.

If you have any questions relating to insurance appraisal, please contact us at (205) 894-8900.