Insights
“Appraisal” is a procedure typically mandated by state law or outlined in an insurance policy. Appraisal is a dispute resolution procedure intended to provide insurers and policyholders with a method to award the measurement of loss. The process is limited to disputed damages in first party insurance claims, including but not limited to real property, personal property, and/or time element damages. Appraisal is also a procedure used in other types of first party insurance, such as automotive, as a method to determine the cost to repair or replace motor vehicles.
The sole intent and purpose of appraisal is to measure and award damages sustained from a loss. The appraisal is typically conducted by a competent and disinterested three-person panel—one member chosen by the policyholder, another chosen by the insurer(s), and a neutral umpire chosen either by the appraisers or a court having jurisdiction over the matter. In some instances, the appraisers can determine and award damages without the input from or naming of an umpire, but this is increasingly rare. In even rarer instances parties, by mutual agreement, can dispense with the naming of appraisers and can agree on a single expert who determines the amount of damage.
Appraisal does not always bring finality to a claim; in some instances, the appraisal will precede determinations of coverage. In these cases, appraisal is often used as a method to inform the parties of the value of their respective positions in a coverage dispute. When used in this manner, the results of appraisal either set the damages in advance of a coverage determination or, more commonly, will provide the parties with values used to mediate coverage disputes.
The perceived advantages of appraisal, as opposed to litigation, are expedience, lower cost, and finality. However, the appraisal process is often criticized because of unpredictable awards that are not helpful in settling a disputed claim and, in some cases, because it can lead to further protracted litigation.
The purpose of this document is to provide interested parties with guidelines to produce useful and unambiguous awards regarding the amount (or amounts) of loss. Regardless of the size or complexity of a disputed claim, the appraisal process should always be approached in a thoughtful manner. 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 finalize valuation dispute(s).
Laws or statutes governing appraisal may 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, or reporting or enforceability of an award, etc., should be reviewed by counsel when appropriate. The intent of this paper is to provide parties to the appraisal process with an outline of issues to consider.
The intent of the process is to produce useful results, which will finalize disputes regarding the value of a loss.
Appraisal clauses have existed in property insurance policies for almost a century and are mostly unchanged over time. [1] The 1943 Standard NY Fire Insurance Policy contains the following appraisal provision:
“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.”
The intent of the appraisal provision is to provide a formal procedure to award the measurement of damages from a loss. In general, appraisal provisions provide for the following:
While insurance policy appraisal clauses present a procedure to award the measurement of a loss, policies typically contain little or no additional guidance regarding how and what to appraise. Further, they do not include instructions by which the disputed value(s) will be reported to the parties. There is typically 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.
Because appraisal provides a method to award damages in a disputed insurance claim, it naturally follows that the scope of the appraisal should be confined to the specific items of claim which were disputed and led to the appraisal demand. While this is generally understood and accepted, the process has been increasingly abused to the extent that the scope of the claim may be expanded in the appraisal process.
Appraisals can sometimes include awards for categories of claim which were never articulated, investigated, and adjusted prior to an appraisal demand. Consider, for example, a disputed building loss, wherein one party demands appraisal, and the subsequent award includes amounts of loss for building, personal property, and business interruption. This is an improper use of appraisal, because the insurer is prejudiced by an inability to investigate and measure the newly articulated claims in a typical manner. New claim categories submitted for the first time in the appraisal process cannot be considered “disputed,” since they were not articulated prior to appraisal. For this reason, parties agreeing to appraise disputed claims should limit the process solely to the claim categories presented and investigated during the claim adjustment.
The first step in any appraisal is to determine the scope of what is being appraised. Because the appraisers and umpire cannot determine coverage, valuation methods and other items which, when disputed, will require litigation to sort out, it is incumbent on the parties to identify not only the disputed values being sought, but also any other issues that might affect the outcome of appraisal. It is then recommended that the parties (or a court having jurisdiction over the appraisal) document the scope of appraisal in either an agreement or an order, which can eliminate any ambiguity in the specific valuation disputes being appraised.
Certain issues typically require clarification for the appraiser and umpire to return an unambiguous award. At a minimum an appraisal agreement or order should include:
The parties should also be aware of local regulations that may affect the appraisal. For example, some states have residency or other requirements which may limit who may participate as an appraiser or umpire.
Prior to demanding appraisal, parties are cautioned to determine if an impasse has been reached and whether appraisal is an appropriate method to finalize the dispute(s). It is good practice for both parties to review their respective positions prior to either making or replying to a demand.
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 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 can often result in settlement of disputed items (or an entire claim) prior to an appraisal demand. On the other hand, this process can also be helpful in confirming a prior position and validating the decision to demand the appraisal. [3]
At a minimum an appraisal demand should include at least the following:
Replies to appraisal demands should include the following:
Where applicable, the parties are also well advised to reach agreements on finite claim items and to limit appraisal solely to the areas of differences. For example, imagine that a policyholder makes a claim for a fire at an insured grocery store. The insurer issues a policy covering building, contents, stock, and business interruption. The contents and stock loss are agreed, but the building loss (including code upgrades, 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, ACV is the measure. In this instance, the party making the demand must clearly state that appraisal is being demanded to determine the disputed claims only, excluding the contents and stock loss. The appraisal should be limited to the replacement cost and ACV 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 scope of the appraisal without ambiguity, which will increase the likelihood of executing a written appraisal agreement.
In many instances, and depending on the jurisdiction, the timeliness of an appraisal demand can be brought into question. Perhaps the best example of this is S.R. International Business Insurance Company vs. World Trade Center Properties (the World Trade Center 9/11 Litigation). [4] In this matter, Allianz Global Risks, one of almost two dozen market insurers who bound coverage at the World Trade Center prior to 9/11, made a demand for appraisal after litigation had already commenced and after the insured submitted an initial proof of loss, but before the insurers had completed their calculation of the amount of the loss. Prior to 9/11, although an agreement between the parties regarding policy language had not been finalized, Allianz was the only insurer who issued a policy, which, among other things, included an appraisal clause. The insured opposed Allianz’s demand citing (among other things) that appraisal was premature because although the matter was already in litigation regarding coverage issues, no negotiations between the parties regarding the issues of replacement cost loss, actual cash value loss, or rental income loss had taken place, and, therefore, it was unclear whether a dispute even existed. Subsequently, the Federal District Court found in favor of Allianz and ordered the appraisal as both appropriate and timely. [5] It is noted, however, that the issue of timeliness of demand or reply can vary by jurisdiction.
Setting aside the timeliness of demand issue, a failure of the parties to specify the required loss measurements being sought in appraisal can result in flawed awards that require post appraisal negotiation or even litigation, which is avoidable in many cases. For example, in a New Jersey case in the 1990s, an insured demanded an appraisal of a disputed fire loss to a six-family residential structure. The parties then entered into 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 determined the “amount of loss” in a timely fashion. After receiving the “replacement cost” award, the insurance company’s adjuster unilaterally attempted to determine the ACV to determine the undisputed loss. However, the insured did not agree with the valuation and filed suit against the carrier. Several years later, the court ordered a second appraisal [6] to determine the replacement cost and ACV 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 had sat for four years in an un-repaired condition, had by then deteriorated to the point it was essentially a total loss. Ultimately, the new panel issued an award that was almost $500,000 more than the original appraisal. This simple example illustrates that an unambiguous appraisal agreement will provide the parties with the necessary disputed measurement(s) of the categories of loss needed to finalize the claim. This would have eliminated the need to have two appraisals over the course of several years, at far greater expense to the parties, resulting in higher indemnity costs to the insurer.
The party-appointed appraiser should ideally be reasonably expert in the loss determination(s) that are the subject of appraisal.
Once an appraisal demand is considered, selection of the party appraiser should 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 effectively navigate the process. In many instances an experienced appraiser who conducts a review of the disputed items can highlight areas that will require specificity or definition in an appraisal agreement. In these instances, this can help avoid post appraisal disputes or litigation.
In some instances, the discreet items requiring valuation in appraisal can result in having separate appraisal “panels” or appraisers. In large, complex matters, the issues can be so varied that having separate appraisers to determine the discreet valuation elements of a loss is well advised. For example, a large international bank’s U.S. headquarters was destroyed on 9/11. The disputes involved claims in excess of $1.0 billion, which included, among other things:
In this case, the insured named a lawyer as their appraiser, but the insurers chose to name a building damages expert, a trading expert, and a real estate lawyer as separate appraisal panel members to “appraise” these varied and complex claim disputes. A retired federal district court judge was named as a single umpire, and appraisal proceeded successfully over the course of more than two years, awarding damages on a rolling basis, and ultimately helped the parties successfully mediate and conclude all remaining claims without protracted litigation. [7]
A qualified umpire can help ensure a smooth and efficient process and a timely and fair result. Umpires must be disinterested and disclose any potential conflicts. [8] Ideally, the umpire should be competent in the valuation issues being contested. Having a subject matter expert umpire will rarely result in an unfair award.
Acrimony between policyholders and insurers prior to appraisal can often result in an inability to mutually agree on an umpire. Thus, having to petition a court to name an umpire is not uncommon in many jurisdictions. However, this can often result in the appointment of an umpire having neither any expertise in the appraisal process nor any competence in the valuation disputes being decided by the panel. If the appraisers cannot reach agreement on the umpire, it is imperative that the parties jointly petition a court to name the umpire. Cases in which one party or the other unilaterally and without notice seeking to have an umpire named can result in contested awards and post appraisal litigation.
It is appropriate for the umpire to be named as soon as practical after appraisal commences. Waiting to determine if the appraisers disagree on the valuations to be awarded prior to naming an umpire is not good practice and 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 will agree on an umpire.
In large, complex cases, deferring the umpire selection can also result in a delay or additional expense in completing the appraisal.
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 can help to bring finality to claims even when there are coverage disputes. [9]
In non-complex matters selecting the umpire can be as simple as a discussion between two appraisers who present names to one another. [10] In cases where the appraisers have familiarity with one another or have previously participated in the same appraisal panel, the selection of an umpire is often not disputed.
The following is recommended for the umpire selection process:
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:
The importance of making unambiguous appraisal demands has been noted herein. The following is a brief discussion of how to construct an agreement to appraise disputed items of loss.
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 are often determined in an appraisal of a first party property loss:
After a demand for appraisal has been made, it is recommended that the parties enter into a written agreement to appraise the loss. This can happen either after a demand or, in some instances, after the parties have named their appraisers, regardless of whether the umpire has already been chosen. If there is any ambiguity in the scope of the appraisal, it is essential to reach an agreement, in writing, on what disputed values will need to be awarded by the appraisal panel, in addition to other issues which are pertinent to the appraisal. As previously noted, neither the insurance policy nor case law is likely to provide guidance in this area.
High value, complex matters that require numerous values to be awarded will typically require a detailed agreement prior to proceeding with the appraisal. In these cases, the parties, whether on their own, with help from the umpire, or as ordered by a court, should enter a written protocol that has the effect of an “order.” For an appraisal protocol to be useful, an understanding of the nature of the dispute(s) regarding loss and value, as well as clarity about how the values need to be reported by the panel, is required. At minimum, the appraisal protocol for a complex matter must include the following [14]:
In large, complex claims where there are multiple insurers with non-concurrent policies, or multiple insureds who have various insurable interests, further itemization of an award may be necessary and should be clearly articulated in the protocol.
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 finalize the claim. Having an award which is of no practical guidance to the parties and cannot be used as a mechanism to finalize a 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 appraisal agreement can be helpful to the panel. When the parties cannot agree on disputed methodology and coverage, guidance by a court may be required 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 only be resolved in three ways:
There is no practical guidance here 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 prior to the appraisal and thus cannot be resolved until after the appraisal has commenced.
In general, disputes that involve valuation methodology (when identified) should be resolved by a court either before or during appraisal. 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.
If these disputes are not decided pre- or during appraisal, the only other alternative is to have the panel award values on each of the disputed methods, which will have the benefit of providing the parties with an “a la carte” menu of awards to be applied once coverage is determined. In large, complex cases, this may be impractical, since it could create unnecessary expense and delay.
The following is a brief list of the most common definition disputes which cannot be decided by an appraisal panel:
To illustrate the complexities associated with valuation definitions, during the appraisal of the World Trade Center 9/11 claim, disputes arose regarding how ACV and period of restoration would be calculated. Given that the appraisal was underway, it became necessary for the parties to seek guidance from the federal district court, who then decided these issues during the appraisal so that the appraisers and umpire had a clear understanding of criteria they could use to award these disputed categories of loss.
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, although the required measure of loss was ACV. The insurer’s appraiser refused to sign the award. The award was ultimately overturned because New Jersey follows the broad evidence rule to determine ACV, and the panel’s award was based on a different method. This clearly illustrates that even in those cases where there is no ambiguity regarding the scope of the appraisal, appropriate definitions or court rulings may be required for the panel to properly appraise a loss.
In certain instances, umpires will incur expenses for a variety of reasons, but it is 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 umpire’s retention expenses to decide a disputed issue. It is the author’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 awards regarding the amount of loss, 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 should be permitted to incur reasonable consulting expenses, and the parties must, therefore, share in the cost.
For example, the author was selected as an umpire in a valuation dispute over a total loss fire to an antique log home. 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. 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. To determine the appropriate valuation, the author first sought to determine if the home could have been replaced “as is” then retained an expert to determine what code upgrades would have been required if the property had been replaced as closely as possible to the existing home that was destroyed. The expert’s fees were shared equally by the parties as it was understood that this information was necessary for the umpire to render an impartial award, and the parties were satisfied with the result post appraisal.
In rare cases, the appraisers and umpire will be unable to render an award on a disputed loss or item. 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 or agree to an appraisal.
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 awards that are either incomplete or of little practical use to the parties, both policyholders and insurers are urged to clarify disputes and agree on the scope of the appraisal process. The use of clear, concise, and complete agreements to appraise any loss is a key element in ensuring the finality of any claim.
The PDF of this paper contains the following sample documents:
Jonathon C. Held is the Executive Chairman of the Board of Directors for J.S. Held LLC, a global consulting firm 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.
Jonathon can be reached at [email protected] or +1 516 621 2900.
[1] Some insurers have recently introduced new expanded appraisal clauses and/or appraisal endorsements to insurance policies in order to clarify both the intent and process of appraisal, and to prevent abuse.
[2] In those instances, in which disputes regarding coverage or method of valuation that are not decided pre appraisal, it is recommended that the appraisal include valuations for all disputed valuation methods.
[3] In numerous instances the author, acting as an appraiser, has assisted a client in bringing about settlement of issues and/or entire claim disputes at the onset of appraisal. In certain instances, these disputes have exceeded $100 Million.
[4] The author was named as the party appointed appraiser for those insurers that participate in the appraisal process.
[5] In his decision, the district court judge rejected the policyholder’s argument that that demand was premature because the insurers had not finalized their damage measurement. The opinion noted that the parties were highly sophisticated, and that Allianz clearly understood that the damages were disputed.
[6] The author was named an appraiser in the second appraisal.
[7] The author was named as one of the three appraisers for the insurers.
[8] 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 and agreed to by parties as an umpire after disclosing potential conflicts. The appraisals resulted in awards being finalized without post appraisal disputes.
[9] Where expanded appraisal clauses or endorsements are found in policies, they may require a written agreement as a precedent to commencing appraisal.
[10] The author has been successful in selecting umpires in high value complex matters without a highly formalized process.
[11] Several states, like have a history of courts overturning appraisal awards for unreported conflicts of interest by either an umpire or an appraiser.
[12] 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 effective umpire.
[13] A sample agreement for submission to appraisers is included in the PDF of this paper.
[14] A sample appraisal protocol in a large, complex case is included in the PDF of this paper.
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