The Appraisal Process
An Outline for Making Awards Useful and Final (Part III 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. This final 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.
This is the third of a three-part article on The Appraisal Process. This article presents other considerations and includes a number of sample documents, including: a sample appraisal demand letter, sample response to an appraisal demand letter, sample umpire nominee letter in a simple matter, sample umpire introduction letter for a complex case, sample agreement for submissions to an appraiser in a simple case, and sample protocol for a complex case, which can be found here.
I. Other Issues to Consider
Clarifying Disputes Regarding Valuation Definitions or Coverage
It should be clear that where there are issues surrounding coverage, sub-limits, division of insurable interest, etc., a detailed protocol setting out the agreement to appraise is advisable. It is imperative that the parties seek to avoid unnecessary post appraisal litigation over an award that is either ambiguous or does not provide enough detail to either finalize the claim or valuate coverage issues that may be litigated post appraisal. Having an award which is of no practical guidance to the parties and cannot be used as a mechanism to finalize the claim is an improper use of the appraisal process.
The same is often true in cases where there are disputes regarding how to calculate a particular valuation. For this reason, including definitions (if agreed) in the protocol can be helpful to the panel. When the parties cannot agree on disputed methodology and coverage, guidance by a court may be required in order for the panel to determine the amount to be awarded. Because the appraisal panel cannot interpret the meaning of the insurance contract or define valuation terms in an award, the appraisal process essentially bifurcates the damages and liability disputes in those cases where coverage or valuation methods are also disputed.
Coverage or definition disputes can be resolved in three ways:
- Before the commencement of the appraisal
- During the appraisal
- Post appraisal
There is no practical guidance that can be offered regarding the optimal time to resolve these issues, though it must be stressed that in some cases, the coverage or definition disputes may not be identified by the parties prior to the appraisal and, thus, cannot be resolved until after the appraisal has commenced.
In general, disputes that involve valuation methodology must be resolved by a court either before or during appraisal.14 In most cases, these specific issues are likely to surface prior to the appraisal since they are generally at the core of the difference which led to the dispute. Unfortunately, parties will sometimes proceed to appraisal without providing clear and unambiguous instructions to the appraisal panel about the definition of values being sought.
The following is a brief list of the most common definition disputes which cannot be decided by an appraisal panel:
- Replacement Costâ€”It is not uncommon for the parties to dispute the definition of replacement cost, particularly as it relates to the valuation date of an award. Sometimes a policyholder or their appraiser will consider the date of the award as the date of valuation. An insurer is likely to define replacement cost as being valued at the date and time of loss. When disputes of this nature arise, they must be settled by a court. If this matter is not decided prior to appraisal, the parties can ask the appraisal panel to provide two separate valuations so that the matter can be finalized once a court decides the legal issue.
- Actual Cash Valueâ€”Disputes regarding the method of calculating actual cash value, which is jurisdiction specific, are not uncommon in appraisal. Setting aside the issue of whether the loss is in a state that follows the broad evidence rule, the market value rule, or the replacement cost minus depreciation rule, there can also be disputes about whether policy definitions of actual cash value change the jurisdiction specific law.
Case Study: Perhaps the best example of the need to clearly define terms for the appraisal panel is found in Elberon Bathing Co., Inc. v. Ambassador Insurance Company. Here, there was a disagreement on the amount of loss, and the parties elected to settle the valuation dispute by appraisal. The insuredâ€™s appraiser and court-appointed umpire awarded replacement cost as the actual cash value loss. The insurerâ€™s appraiser refused to sign the award. The award was ultimately overturned because New Jersey law requires consideration of a broad spectrum of evidence to determine ACV, and the panelâ€™s award was based on a method that did not apply the New Jersey broad evidence rule. This clearly illustrates the problem that even in those cases where clear instructions are given, appropriate definitions or court rulings are required for the panel to properly appraise the loss.
- Period of Restoration and Period of Indemnityâ€”The appraisers and umpire cannot make a coverage or legal determination of these terms. It is not uncommon for a policyholderâ€™s appraiser to claim that the period of restoration and period of indemnity should include the elapsed time between the date of loss and when/if the property is rebuilt after the appraisal amounts are awarded. Conversely, insurers might take the position that the period begins on the date of loss and ends when the physical damages have been repaired/replaced, assuming the exercise of due diligence and dispatch. Unless these issues are agreed as part of an appraisal protocol, it is the authorâ€™s experience that the appraisers first award the length of time it will take to make physical damage repairs without a specified construction commencement date, then award a monthly business interruption or rental value award for the claimed period. In such a case, the award should note that the parties dispute the method of valuation but are providing enough detail for the matter to be concluded once the legal policy interpretations are finalized.
Sometimes parties will demand separate appraisals for each finite coverage dispute that may arise in any given loss. For example, it is common for a disputed claim to involve separate disputes for building, personal property, and business interruption loss, among other things.
Surely, the virtue of having each finite dispute determined by separate panels, each with its own competency to award fair and objective values for each disputed area of coverage, is easily understood. However, one party or the other may decide that this is not practical. Whether for a perceived tactical advantage or to avoid unnecessary expense, in such a case, the parties can either agree to appraise disputed coverage parts separately with a dedicated panel for each or agree to use one umpire and multiple appraisers per party. This allows each party to make its own decision regarding whether to name multiple appraisers.
Case Study: In a large complex matter involving building loss, extra expenses, business interruption, leasehold interest, personal property, and claim preparation expense, the author was one of three appraisers for the insurers. In the same case, the insured named one appraiser, and the parties reached an agreement on one umpire to hear all disputed issues.
In certain instances, umpires will incur expenses for a variety of reasons, but usually to seek guidance from an independent professional who can assist them in making an informed decision. In some cases, one side or the other will object to the umpireâ€™s retention expenses to decide a disputed issue.
It is the authorâ€™s opinion that regardless of any concern or objection, an umpire should not be constrained in their attempt to render a fair and impartial decision. Since the appraisal process is designed to produce fair and impartial valuation awards, there are cases in which an umpire may not possess direct or â€śon pointâ€ť expertise to determine which appraiserâ€™s (or partyâ€™s) position is correct. In these cases, an umpire should be permitted to incur reasonable consulting expenses, and the parties must, therefore, share in the cost.
Case Study: The author was selected as an umpire in a valuation dispute over a total loss fire to an antique log home owned by a well-known actress. At the time of the appraisal, the home had already been reconstructed with a similar, but larger home. During the rebuild, the local municipality mandated a series of costly zoning requirements and upgrades that were included in the claim and, in the opinion of the appraiser for the policyholder, should have been included in the award, in which enforcement of local laws and ordinances (code upgrades) was agreed by the parties as a matter to be decided by the appraisal panel. The appraiser for the insurer argued that no code upgrades would have been required if the home had been reconstructed exactly as it existed prior to the total loss fire. In order to determine the appropriate valuation, the author first sought to determine if the home could have been replaced â€śas isâ€ť and then retained an expert to determine what code upgrades would have been required if the property had been replaced as close as possible to the existing home that was destroyed. The expertâ€™s fees were shared equally by the parties as it was understood that this information was needed for the umpire to render a fair award of value.
Failure of Appraisal
In rare cases, the appraisers and umpire will be unable to render an award on a disputed loss or item.15 Usually, this can result when there is a question of fraud, misrepresentation, or bad faith in the underlying claim. In such a case, it can be difficult for the panel members to sort out the facts and/or circumstances which will lead to a clear, informed, and unbiased award. In cases where arson or fraud is alleged, the parties are usually well advised not to demand appraisal or agree to an appraisal demand.
Although the appraisal process is a useful tool to settle disputes regarding loss and value, it is absolutely necessary to approach the process in a thoughtful manner. To avoid confusion, post-appraisal litigation, and the possibility of an award that is incomplete or of little practical use to the parties, both policyholders and insurers are urged to clarify the dispute and reach an agreement on the scope of the appraisal process. The use of a clear, concise, and complete protocol to appraise any loss is a key element in ensuring the finality of any claim.
This article was previously published by J.S. Held in JDSupra, August 25, 2022, and is republished here by permission.
14 The only other alternative is to have the panel award values on each of the disputed methods, providing the court with an â€śa la carteâ€ť menu of awards to be applied once coverage is determined. This is not usually practical in large complex cases since it could create unnecessary hardship and additional unwarranted expenses.
15 Failure to reach an award is merely the inability to have two members of the appraisal panel sign an award, or in very rare cases, where the appraisal panel unanimously agrees that it cannot decide the issue of causation and value.
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 email@example.com.