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The Appraisal Process: An Outline for Making Awards Useful and Final

Guidelines for Resolving Disputes in First Party Property Insurance Claims (Part I of III)

Appraisal is a frequently used and often maligned method to adjudicate disputes in the property insurance world. Typically, appraisal is used for the purposes of evaluation only and will not bring finality to a claim in which coverage, or, in certain jurisdictions, causation is also being disputed. Although the perceived advantages of appraisal versus litigation are that it is considered fast, inexpensive, and relatively final, the appraisal process is often criticized because of unpredictable awards that are not helpful in settling a disputed claim and, in some cases, can lead to further protracted litigation. If, however, an appraisal is conducted with appropriate guidelines, the process can be valuable in bringing finality to valuation disputes. The following three-part article is intended to outline a process which will result in unambiguous appraisal awards. Regardless of the size or complexity of a disputed claim, the appraisal process should always be approached in a thoughtful manner by the policyholder and insurer.

The Appraisal Process: An Outline for Making Awards Useful and Final Guidelines for Resolving Disputes in First Party Property Insurance Claims (Part I of III)

I. Introduction

Appraisal is a frequently used and often maligned method to adjudicate disputes in the property insurance world. Typically, appraisal is used for the purposes of evaluation only and will not bring finality to a claim in which coverage, or, in certain jurisdictions, causation is also being disputed. Although the perceived advantages of appraisal versus litigation are that it is considered fast, inexpensive, and relatively final, the appraisal process is often criticized because of unpredictable awards that are not helpful in settling a disputed claim and, in some cases, can lead to further protracted litigation. If, however, an appraisal is conducted with appropriate guidelines, the process can be valuable in bringing finality to valuation disputes.

The following three-part article is intended to outline a process which will result in unambiguous appraisal awards. Regardless of the size or complexity of a disputed claim, the appraisal process should always be approached in a thoughtful manner by the policyholder and insurer.

It is imperative that the disputed valuation(s) of loss be clearly and unambiguously communicated to, and understood by, the appraisers and umpire (the appraisal panel) who will decide the issue. It is equally imperative that the appraisal award be reported in such a manner as to ensure that the valuation dispute(s) is final.

Laws or statutes governing appraisal vary by jurisdiction and are not addressed herein. Issues regarding timeliness or enforceability of appraisal, disinterestedness of an appraiser or umpire, procedure for conducting the appraisal, reporting or enforceability of an award, etc., should always be reviewed by counsel when appropriate. The intent of this article is to provide parties to the appraisal process with an outline of issues to consider. The intent of the process is to produce a useful result, one that finalizes a dispute regarding the value of a loss.

II. The Insurance Contract

Insurance policies usually provide for appraisal as a means to settle disputes regarding loss and value following an event. Generally, the appraisal provision of any insurance policy provides that in the event the parties fail to agree on the amount of the loss, either party may make a demand to have the amount of loss determined by appraisal. Insurance policies typically contain appraisal provisions, which provide for the following in the event of a dispute:

  • Either party may demand that the loss and value dispute be submitted to appraisal.
  • Demands must be made in writing.
  • Each party selects its appraiser.
  • The appraisers then agree on a third party to act as an umpire.
  • If the appraisers fail to agree on the umpire, a court having jurisdiction over the matter will select the umpire.
  • The appraisers attempt to agree on the amount of loss and value.
  • If the appraisers fail to agree, their differences are submitted to the umpire.
  • An award in writing is required and considered final when at least two parties to the appraisal are signatories.
  • The parties pay their own appraiser fees and share equally in the cost of the umpire and any other costs of the appraisal.

Little has changed regarding appraisal provisions found in property insurance policies over the years. The following is the appraisal clause found in the 1943 Standard NY Fire Insurance Policy.[1]

“In case the insured and this Company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within twenty days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for fifteen days to agree upon such umpire, then, on request of the insured or this Company, such umpire shall be selected by a judge of a court of record in the state in which the property covered is located. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this Company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him and the expenses of appraisal and umpire shall be paid by the parties equally.”

In recent years, the words “competent” and “disinterested” are typically not included in insurance policy appraisal provisions. Some states recognize that the appraiser selected by each of the parties is likely to be an advocate, and some states have even allowed an appraiser to be compensated on the basis of a contingent and/or percentage fee. Other states have a much stricter view of who can act as a party appointed appraiser, and what constitutes “disinterestedness.”

The are some states which have residency requirements for appraisers, and other states have even required appraisers to be a licensed insurance adjuster. Although Washington State recently changed this requirement after the author testified at a hearing of the Washington State legislature, which unanimously passed a bill clarifying the definition of “adjuster” and removing the residency requirement from appraisals in Washington.

While insurance policies recognize that appraisal is a means by which an award of “value” can be finalized, policies contain little or no additional guidance regarding how and what to appraise. Neither do they include instructions by which the disputed value(s) will be reported to the parties. In fact, there is likely no other practical guidance about how to appraise a disputed loss in the policy of insurance. Thus, it is left to the parties, or, in litigated matters, a court, to sort out these issues.

III. Choosing to Demand Appraisal, Selecting an Appraiser, and Reacting to an Appraisal Demand

Policyholders and insurers considering appraisal are urged to follow the process described here prior to making a final decision to demand appraisal.

First, since it is generally assumed that if the parties have either reached an impasse or are reasonably certain that they will be unable to agree on the amount of loss,[2] consideration should be given to conducting a third-party review prior to demanding appraisal. In non-complex matters, the appraiser being considered by any party is likely to conduct this review. In larger complex cases, particularly where the appraisal may eventually involve using expert witnesses to present testimony to the appraisal panel, use of an expert witness to conduct a review is a good first step prior to making a demand. This review process, if conducted in an unbiased and objective manner, has the benefit of informing a party of the reasonableness of their position, and often can result in one side or the other becoming motivated to settle the dispute prior to an appraisal demand. On the other hand, this process can also be helpful to confirm a prior position and validate the decision to demand the appraisal.

Second, once an appraisal demand is considered, selection of the party appraiser should be weighed heavily based on the following criteria:

  • Familiarity and competency in the evaluation of the disputed loss(es) being appraised.
  • Familiarity and competency in navigating the appraisal process.
  • Ability to act as appraiser given the likely manner in which the appraisal will be conducted.[3]

Of the three criteria noted above, perhaps the most important is an appraiser’s ability to understand and work effectively through the process.

Third, there must be a clear understanding of what is being appraised. Once a decision has been made to invoke appraisal, a clear and unambiguous demand to appraise value or multiple sets of values must be made in such a way that the party receiving the demand fully understands the scope of the appraisal demand. While this appears obvious, there are countless cases where parties have engaged in an appraisal without properly defining the scope. While more will be made of this issue in the following sections, setting the correct course for a useful and final result must always be made at the time of demand. Thus, a demand for appraisal should contain:[4]

  • A statement that there is a disagreement on the amount of loss.
  • The appraisal clause contained in the policy of insurance.
  • A concise statement about the value or set of disputed values to be appraised, with reasonable specificity.
  • The name of the appraiser (or multiple appraisers, depending on the issues being appraised) including all necessary contact information.
  • An attached sample proposed appraisal memorandum (also called a protocol).

Example: A policyholder makes a claim for a fire to his insured grocery store. The insurer issued a policy covering building, contents, stock, and business interruption. The amount of contents and stock loss is agreed upon, but the building loss (including code upgrades and demolition and debris removal which are sub-limited) is disputed. Likewise, there is a dispute over the business interruption loss. The policy valuation for buildings is at Replacement Cost, but in the event not replaced, Actual Cash Value is the measure. In this instance, the party making the demand must clearly state that appraisal is being demanded to determine the replacement cost and actual cash value loss to the building, the amount of code upgrade loss, the amount of demolition and debris removal loss, and the amount of business interruption loss. In so doing, there will be no ambiguity about the valuation issues which are being submitted to the appraisal panel. Making a clear demand will allow the opposing party to understand the demand without ambiguity and will increase the likelihood that a written appraisal protocol can be reached without further disputes.

Case Study: In a New Jersey case in the 1990s, an insured demanded an appraisal of a disputed loss to a six-family residential structure. The parties then entered into a memorandum of appraisal, which provided limited information, except for the location, date and type of loss, and the identity of the appraisers. The appraisers promptly agreed on an umpire and set about determining the “amount of loss.” They subsequently rendered an award in a timely fashion. After receiving the “replacement cost” award, the insurance company’s adjuster attempted (on his own) to determine the actual cash value and arrived at his opinion of the “loss payable.” However, the insured did not agree and filed suit against the carrier. Several years later, the court ordered that a “new” appraisal panel[5] would be formed to determine the replacement cost and actual cash value loss, given the condition of the property as it then existed. Further, the court ordered that the loss would be valued by the panel at the “current” cost rather than at the date and time of loss. The building, which by now had sat for four years in an un-repaired condition, had by then deteriorated to the point where it was essentially a total loss. Ultimately, the new panel issued an award that was almost $500,000 more than the original appraisal.

If nothing else, the preceding example and case study illustrates the importance of demanding appraisal in such a manner as to frame the nature of the disputed items and preserve the record regarding the intention of the party demanding the appraisal. In other words, the demand for and ultimate agreement to appraise the disputed loss should include language that unambiguously describes the necessary valuations sought so that the matter can be concluded post appraisal. This is the very definition of a “useful” award.

Reacting to an appraisal demand, regardless of whether you are the policyholder or insurer, should typically include:

  1. An acknowledgement of receipt of the demand.
  2. A statement regarding whether the appraisal is an appropriate forum to settle the dispute(s).
  3. A definition of the issues to be appraised (or simply an agreement to the issue(s) as outlined in the appraisal demand).
  4. The name of the appraiser, if appraisal is agreed to.
  5. An invitation to further communication on a written memorandum or protocol to govern the appraisal process.

IV. Finalizing the Appraisal Panel—The Umpire Selection

Determining who will act as an umpire in an appraisal is among the most important decisions that can ensure any disputed valuation issue can be finalized. An umpire must be disinterested, disclose any potential conflicts,[6] and should ideally be competent in the valuation issues being contested. In reality, an unfair award is rarely the result of an appraisal in which the umpire was an “expert” in the valuation issues being determined. In many cases, and because of an increasing sense of distrust between policyholders and insurers, umpires are often appointed by a court having jurisdiction over the appraisal, although this can often result in the umpire having neither any expertise in the appraisal process nor any competence in the valuation disputes being decided by the panel.

Regarding timing, it is prudent to first name the umpire prior to proceeding with the appraisal. While there is a belief that the appraisers should first meet to determine their differences prior to selecting an umpire, this can be impractical for several reasons. Typically, the best opportunity for the appraisers to agree on the umpire is at the onset of appraisal. Once appraisers have disagreements on disputed loss values, there may be little likelihood that they can then agree on an umpire.

In large complex cases, deferring the umpire selection can result in a delay or additional expense to resolving the appraisal decision.

Perhaps the most compelling reason to select an umpire at the onset of appraisal is that an experienced and effective umpire can help the appraisers negotiate the process, steering them (and sometimes the parties) toward consensus on process and other issues. This can sometimes have the benefit of expediting the appraisal process and indeed help to bring finality to claims even when there are coverage disputes. An experienced umpire can also be helpful in assisting the parties in finalizing the protocols in the appraisal agreement as illustrated in the following case study.

Case Study: In an extremely large and complex matter (excess of $1 billion) involving building damage, personal property, extra expenses, business interruption, claim preparation costs, etc., the parties were unable to reach an agreement on an appraisal protocol. The umpire, a retired federal circuit court judge who had been nominated by the policyholder and accepted by the insurer’s appraiser (the author), was asked to assist in finalizing the appraisal protocol. The disputed protocol issues involved such matters as items to be appraised, order of issues to be heard by the panel, timing, discovery, and others. The umpire assisted in finalizing all issues so that the appraisal could then move forward on an orderly basis.

Umpire Selection in Non-Complex Matters

Selection of an umpire in non-complex matters may be as simple as a discussion between two appraisers, who present names to one another, then agree on the identity of the umpire. In those cases, in which the appraisers have familiarity with one another or may have actually been members of the same appraisal panel in the past, the selection of an umpire is usually a simple matter.

In most cases, umpire nominations should be made by the appraisers to one another within a reasonable time after both appraisers’ identities are known and disclosed.[7] It is good practice for an appraiser to offer more than one potential umpire candidate. Contact information and an invitation to discuss a potential umpire’s qualifications with the umpire nominee is considered good practice.[8]

An umpire, once nominated, has an obligation to the appraisers and the parties to immediately determine whether any conflicts of interest exist and, if so, to disclose those conflicts to the parties. Failure to do so will clearly provide an unsatisfied party with a simple reason to ask a court to vacate an award based on umpire bias and non-disclosure of a conflict. Several states, like Missouri, Colorado, and Texas have a history of courts overturning appraisal awards for unreported conflicts of interest by either an umpire or an appraiser.

Umpire Selection in High Value and Complex Appraisals

In large complex matters, the selection of the umpire can be a time-consuming and closely scrutinized endeavor. In general, the following guidelines for selecting the umpire should be considered:

  • Parties should research umpire candidates to determine their competency to serve on the panel.
  • No ex parte (one sided) contact should be permitted at any time by a party, an appraiser, or counsel involved in the matter, even to request a resume or determine interest or availability.
  • The parties should agree to a simultaneous exchange of candidate names, when practical.
  • The parties should agree on the language of a joint introductory letter to be sent by the appraisers to the umpire candidates (the nominating party should not be disclosed to the umpire candidate). The letter should include at least the following:
    1. That the nominee is being considered to act as umpire of a disputed insurance claim (name the matter without specific detail).
    2. That the appraisers desire to meet jointly with the umpire nominee to determine qualifications and willingness to serve.
    3. That the umpire nominee should provide the appraisers with requested information to help determine competency.
    4. That the umpire nominee should review the conflict list[9] and be prepared to report on any potential conflicts during the initial interview.
    5. Dates and potential times for an interview with the appraisers.

It can also be useful to limit the number of nominees and agree that in the event the appraisers cannot agree on the umpire, the sides will jointly petition a court to name the umpire from the party’s nominees (or one finalist for each party). In the experience of the author, this can often lead to the selection of an umpire that serves the parties well in the process.

Case Study: In valuation disputes arising from the September 11, 2001 terrorist attack, the author was named a party appointed appraiser in four matters in which the disputed values ranged between $250 million and $5 billion. In two of the matters, the umpire selection process recommended above resulted in the umpire being selected by a federal district court judge from the names provided by the parties. In both instances, the umpires were widely praised by the parties in their ability to fairly and professionally adjudicate the disputed values. In the other two matters, the process produced candidates nominated by the policyholder that were deemed acceptable to the author. In these cases, the umpires were competent, fair, and helped bring about settlement of the matters.

Conclusion

In the second of the three articles, the author discusses the importance of understanding the scope of the appraisal, the pertinent issues, and identity of the umpire.

This article was previously published by J.S. Held in JDSupra, August 25, 2022, and is republished here by permission.

[1] Lines 123 through 140.

[2] Clearly, the issue of whether an appraisal demand is timely can be a concern in many cases. An impasse may simply be nothing more than one party disagreeing with another party’s position. Perhaps the most extreme example of this is found in S.R. International Business Insurance Company vs. World Trade Center Properties (the consolidated World Trade Center 9/11 Litigation). Here, Allianz Global Risks, one of 24 market insurers who bound coverage at the World Trade Center prior to 9/11, made its own demand for appraisal after litigation had already commenced and after the insured submitted an initial proof of loss but before the insurers had even completed their calculation of the amount of the loss. The insured opposed Allianz’s appraisal demand citing (among other things) that the demand was premature. Subsequently, the Federal District Court found in favor of Allianz and ordered the appraisal as both appropriate and timely.

[3] For example, if a matter will involve a contested evidentiary hearing in a virtual trial format, the appraiser must be competent to represent a party depending on the chosen appraisal format.

[4] Sample demand and reply letters are attached hereto.

[5] The author was a member of the newly formed appraisal panel.

[6] If conflicts exist, they must be disclosed and waived by all parties. It is appropriate for the parties to enter into an agreement whereby the conflict alone cannot give rise to a post appraisal action to overturn the award. The author has been selected by parties as an umpire, has disclosed a conflict, and it was not an issue in the successful completion of the appraisal.

[7] Suggested umpire nomination letter attached hereto.

[8] The Parties should never participate in an interview of umpire candidates, and there should be no ex parte communication with any nominee for umpire.

[9] The parties should agree on a comprehensive conflict list to include with any introductory letter.


Jonathon C. Held is President and CEO of J.S. Held, LLC, a consulting company with more than 1,500 professionals on five continents. During his tenure of more than 45 years with the company, Mr. Held has been responsible for the growth of the firm from two employees to a multi-disciplinary consulting firm with global reach. Mr. Held has acted as a consultant and expert on numerous high value, high profile cases during his career, including many of the highest valued property claims in history. He has handled assignments in all 50 U.S. states, in more than 20 countries, and on five continents. He has been an expert witness and dispute resolution panelist on numerous matters throughout the United States. Mr. Held has also authored many published papers and spoken at numerous educational conferences including (among others) the PLRB, LEA, ABA, the Wind Network conference, the Lloyds Market Association, and the Property Insurance Coverage Group Conference at Lloyds.

Mr. Held can be contacted at (516) 621-2900 or by e-mail to jheld@jsheld.com.

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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