Over the past decade, appraisal has become a popular method to settle disputes regarding the value of a loss. Its main perceived advantages over litigation are that it is considered fast, inexpensive, and relatively final. But one of the most widely held criticisms of the process is that appraisals can produce awards which are unpredictable, and of little use to the parties.
The following is intended as an overview, a “how to” manual intended to make the process completely understood and useful to the parties. Whether you are an insurer or policyholder, and regardless of the size or complexity of a matter, the appraisal process should always be approached in the same way. First, the dispute must be clearly and unambiguously communicated to and understood by the appraisers and umpire who will decide the issue. Second, the appraisal should provide for a simple manner in which to report the results, so that the valuation issue(s) are final.
This paper is not intended to refer to the “law” governing appraisal, which is clearly jurisdiction specific. Issues regarding timeliness or enforceability of appraisal, disinterestedness of an appraiser or umpire, procedure for cond ucting appraisal, reporting or enforceability of an award, etc. should always be reviewed by counsel when appropriate. Regardless of the legal issues, what follows is a clear and logical way to proceed with settling disputes through the appraisal provision of the policy of insurance.
Insurance policies usually provide for appraisal as a means to settle disputes regarding loss and value. 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. In most cases, insurance policy appraisal provisions provide for the following in the event of a dispute:
Little has changed regarding appraisal provisions found in property insurance policies over the years. The following is the appraisal clause found in the Standard NY Fire Insurance Policy, a/k/a the “165 line” policy.
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 rarely found in insurance policy appraisal provisions. In fact, many states recognize that the appraiser selected by each of the parties is likely to be an advocate, and some states even allow an appraiser to be compensated on the basis of a contingent and/or percentage fee.
While insurance policies recognize that appraisal is a means by which an award of “value” can be finalized, there is little or no additional guidance regarding the issues of how and what to appraise. Neither is the method by which the 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 these issues out.
Policyholders and insurers who are considering appraisal are well advised to go through the following step-by- step process 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, consideration should always be given to conducting a third party or peer review, prior to demanding appraisal. In non-complex matters, the appraiser being considered by any party should be asked to conduct this review. In larger complex cases, particularly where the appraisal may involve using expert witnesses to present testimony to the appraisal panel, use of a potential expert witness to conduct a peer review is a good first step prior to making a demand. This peer 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 must be weighed heavily based on the following criteria:
Of the three criteria noted above, perhaps the most important is an appraiser’s ability to understand and work effective through the process. This is probably even more true in today’s environment where it is becoming increasingly accepted that a “disinterested” appraiser is permitted to be an advocate for his or her client.
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 set of values must be made in such a way that the party receiving the demand fully understands the scope of the appraisal. While this appears obvious, there are countless cases where parties have engaged in an appraisal without properly defining the scope of appraisal. While more will be made of this issue in 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:
Example: A policyholder makes claim for a fire to his insured grocery store. The insurer issued a “package” policy covering building, contents, stock and business interruption. The amount of contents and stock loss is agreed, but the building loss (including code upgrades and demolition and debris removal which are sub-limited), is disputed, as is 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 other party to understand without ambiguity what the appraisal will encompass and will increase the likelihood that a written appraisal protocol can be reached without further disputes.
Case Study: In a case several years ago, an insured demanded an appraisal of a disputed loss to a 6 family residential structure. The parties then entered into a “standard” memorandum of appraisal, which provided limited information, including the location, date and type of loss, and 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 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 4 years in an un-repaired condition had by then deteriorated to the point where it was essentially a total loss. Ultimately, the new panel (the author was one of the new appraisers) issued an award that was almost $500,000 more than the original appraisal.
It nothing else, the preceding example and case study illustrate the importance of demanding appraisal in such a fashion so as to frame the nature of the disputed items and preserve the record regarding the intention of the party demanding the appraisal.
Reacting to an appraisal demand, regardless of whether you are the policyholder or insurer should always be the same, and include.
Determining who will act as an umpire in an appraisal is usually the single most important factor to finalizing any disputed valuation issue. An umpire must be “disinterested” and should almost always 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 issues being sought.
With respect to the timing of the umpire selection, it is important that this be the first order of business for the appraisers. Although there is a school of thought that suggests the appraisers should first meet to determine their differences prior to selecting an umpire, this is impractical for several reasons. First, the best chance for the appraisers to agree on the identity of the umpire is prior to attempting to reach agreement on the amount of loss. Once they fail to agree on the disputed loss values, there will be little likelihood that they can then agree on the umpire. Second, in large complex cases, it would create a hardship to attempt to bring an umpire “up to speed” after disputes have developed. Third, and 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 their way through the process, steering them (and sometimes the parties) toward consensus on issues. This can often have the benefit of expediting the appraisal process, and indeed help to bring finality to claims even when there are coverage disputes. Finally, the umpire can also be used to assist the parties in finalizing the protocol, which will govern the appraisal.
Case Study: In an extremely large and complex matter (excess of $1.0 Billion) involving building damage, personal property, extra expenses, business interruption, claim preparation costs, etc. the parties were unable to reach 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 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. In the same case, and near the end of a two year appraisal process, the umpire acted as mediator at the urging of the parties and attempted to bring about resolution of the entire claim.
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 made by the appraisers to one another immediately after both appraisers identities are known and disclosed. It is a good practice for an appraiser to send a letter to the opposing appraiser nominating two or three potential candidates, with contact information, and an invitation to discuss a potential umpire’s qualifications with him or her. 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. Clearly, failure to do so will clearly provide an unsatisfied party with a simple reason to petition a court to vacate an award based on umpire bi as and nondisclosure of a conflict.
In large complex matters the selection of the umpire can be a costly, time consuming and closely scrutinized endeavor. In general the following guidelines should almost always be followed, which will insure that there can be no claim of mischief in the umpire nomination and selection process:
It can also be useful to limit the number of nominees, and agree that in the event the appraisers can not agree on the umpire, that the sides will jointly petition a court to name the umpire from the party’s nominees (or one finalist for each party).
By now it should be clear that understanding what to appraise, and how to go about communicating the issues to the appraisers and umpire who will make the award, is vital in making the process useful. Failure to clearly and unambiguously define the scope of an appraisal can often serve to compound the problem. Therefore, it is absolutely crucial that the scope of appraisal be clearly defined in a written agreement that does not leave what will be awarded, and how it will be awarded to chance. While it is probably true that in non-complex matters, experienced appraisers and umpires can often determine what should be decided in the appraisal process, this is not their role, and to expect them to do so is bad practice.
Earlier, the necessity to make an unambiguous demand for appraisal was noted. Here, the discussion of how to construct an agreement to appraise a loss is outlined.
The scope of coverage and appraisal is determined in the first instance by the applicable policy language. Where the policy is silent (and most policies are silent on this issue), the following is a typical, but by no means complete, list of values that can be determined by appraisal:
After a demand for appraisal has been made and both sides have named their appraisers, regardless of whether the umpire has already been chosen, the next logical step is to reduce an “agreement” to appraise a loss to writing. (As previously noted, neither the insurance policy nor case law is likely to provide guidance in this area). A simple “Agreement for Submission to Appraisers” like the one presented below is often used in non-complex matters.
(Please see the PDF Overview for example and full addendum)
The above sample memorandum of appraisal (also called an appraisal protocol) illustrates that no matter how small or large the dispute, a simple agreement with instructions governing the appraisal is necessary to establish clarity, and to avoid post-appraisal valuation disputes and/or litigation over the meaning of the award.
High value, complex matters which require numerous values to be awarded will require a detailed agreement prior to proceeding with the appraisal. In this regard, the parties, whether on their own, with help from the umpire, or as ordered by a court must enter into a written protocol that has the effect of an “order”. For an appraisal protocol to be useful, both an understanding of the nature of the dispute(s) regarding loss and value, and clarity about how the values need to be reported by the panel is required. At a minimum, the appraisal protocol for a complex matter must include the following:
It should be clear that where there are issues surrounding coverage, sub-limits, division of insurable interest, etc. a detailed protocol setting out the issues is mandatory. This is necessary because if a single award stating the “amount of loss” results from the appraisal, the award will be of no practical guidance to the parties.
The same may be true in cases where there are disputes regarding coverage on how a particular valuation is to be calculated. In some cases, “definition” or guidance by the court is actually required in order for the panel to determine the amount to be awarded. Because the appraisal panel can not interpret the meaning of the insurance contract or define valuation terms in an award, the appraisal process is often nothing more than a bifurcation of liability and damages disputes.
Coverage or definition disputes can be resolved in three ways:
There is no good guidance that can be offered here about the optimal time to resolve these issues, though it must be stressed that in some cases, the “coverage” or “definition” dispute may not even be identified by the parties prior to appraisal, and thus can not 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.11 In most cases, these specific issues are likely to surface prior to the appraisal, since they are generally at the heart of the difference which led to the dispute in the first place. Sometimes, however, parties will proceed to appraisal without providing clear and unambiguous instructions to the appraisal panel about the definition of values being sought. For this reason, when it is possible to agree on definitions of terms such as “replacement cost”, “actual cash value”, “period of restoration”, “period of indemnity”, (or a myriad of others) parties are urged to do so.
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 insured’s appraiser and court appointed umpire awarded replacement cost as the actual cash value loss. The insurer’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 panel’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.
Sometimes parties will demand separate appraisals for each finite coverage dispute that may arise in any given loss. For example, it is not uncommon for a disputed claim to involve separate disputes for building, personal property, and business interruption loss.
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 their own decision regarding whether to name multiple appraisers.
Case Study: In a very 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 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 a professional who can aid him or her in making an informed decision. In some cases, one side or the other will object to the umpire’s retention of “help” to decide an issue.
Regardless of any concern or objection, an umpire should not be constrained in his or her ability 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 “on point” expertise to determine which appraiser’s (or party’s) position is correct. In these cases, an umpire must be allowed to incur reasonable consulting expenses as he or she sees fit, and the parties must therefore share in the cost.
In very rare cases, the appraisers and umpire will be unable to render an award on a disputed loss or item.12 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 actual 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. In order 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 agreement on the scope of the appraisal process. Use of a clear, concise and complete protocol to appraise any loss is a key element in insuring finality of any claim.
Jonathon C. Held is President and CEO of J.S. Held LLC. He is a frequent guest speaker on the appraisal process at many insurance industry conferences and educational seminars, and has extensive experience as both an appraiser for insurers and policyholders. Mr. Held has also frequently acted as both an umpire and sole appraisal panel member (by mutual agreement of the parties). He has been an appraisal panel member in the three largest matters ever to be submitted to appraisal: The World Trade Center Dispute; the 7 World Trade Center dispute; and the 130 Liberty Street (Deutsche Bank Building) dispute; each arising from the 9/11 tragedy.
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