The Appraisal Process

Even when an insurer agrees to cover an insurance claim, disputes often arise between the insurer and the insured as to the valuation of the loss, particularly for claims under commercial property and business interruption policies.  In these circumstances, policyholders should consider whether and to what extent the dispute could be resolved through an appraisal process before resorting to litigation.

“Appraisal” is an alternative dispute resolution process that is included in many insurance policies as a voluntary option that can be invoked by either party in the event of a disagreement.  The typical appraisal clause allows either the carrier or the policyholder to make a written demand for an appraisal if the parties agree as to the scope of coverage under the policy but fail to agree on the amount of loss that the insured is entitled to.  The appraisal process is generally not an appropriate forum to resolve issues as to coverage, such as the interpretation or application of policy terms and conditions.  Those coverage questions must be adjudicated only by a judge or a jury.  Rather, the appraisal process is typically only appropriate to resolve issues as to quantum of the loss, such as the cost to repair or replace damaged property or the calculation of lost profits during a period of business interruption.  Even then, to the extent the calculation of losses involves disputed interpretations of the policy, then an appraisal may not be the appropriate forum.  Nevertheless, there are many disputed claims that ultimately come down to solely a numbers question, where an appraisal would be an option to consider.

As discussed further below, there are benefits and drawbacks to electing an appraisal for a policyholder.  So, it is important that a policyholder considering an appraisal, or faced with an appraisal demand from an insurer, consult with its insurance advisors and coverage counsel to determine the best path forward.

Appraisal Basics

The typical appraisal clause allows each party to select a competent and impartial appraiser (which can be an adjuster, contractor, or an engineer who is competent to determine the amount of loss) to separately and independently evaluate the amount of the loss at issue.  If the party appraisers can come to an agreement, the amount agreed upon will be the settlement.  If they cannot agree, they will submit their differences to a jointly selected neutral umpire who will then arrive at a settlement decision.  Together, the two party-appointed appraisers and the umpire make up the “Appraisal Panel.”  Each party is responsible for paying its own appraiser and splitting the cost of the umpire.

In the event of a disagreement among the party appraisers, the Appraisal Panel will typically collectively draft a “Loss Appraisal Protocol” to help streamline the appraisal process.  Among other things, it is common for the Loss Appraisal Protocol to set forth the scope of the appraisal, the details of how the appraisal proceeding will be conducted, and whether the parties request a formal written decision from the Appraisal Panel.  To the extent the parties determine that an appraisal hearing is necessary, the parties will often collectively agree on a set of documents to be used by the Appraisal Panel at the hearing.

Potential Benefits of Invoking the Appraisal Clause

Initiating an appraisal process has many benefits, including being expedient, relatively less costly, and generally less adversarial as compared with coverage litigation.  When the dispute is simply a battle of competing forensic accountants or valuation experts, an appraisal will allow the parties to resolve the dispute without needing months of fact and expert discovery, and then a jury trial.  Further, in some circumstances, an appraisal might result in higher payouts for the policyholder, particularly if the insureds’ valuation arguments are complex or difficult to calculate, and therefore would be difficult for a judge or jury without an accounting background to comprehend.  In the appraisal process, a policyholder has the ability to select an impartial and competent appraiser who is familiar with the specific dispute at hand and can help the policyholder advocate for recovery of the highest possible amount.  For disputes over business interruption claims, for example, accountants that are familiar with preparing and analyzing time element claims can be particularly beneficial for policyholders.  Accordingly, when a policyholder does find itself involved in an appraisal, it is essential to appoint a qualified party appraiser.

Potential Drawbacks of the Appraisal Clause

However, for many disputes, the appraisal process will not be the most favorable forum for a policyholder, and the insured should consider pushing back on an appraisal demand for high-value claims particularly when the valuation directly or indirectly involves the application of disputed policy terms.  In most jurisdictions, a policyholder has the benefit of favorable rules of policy construction, which a policyholder would likely lose in an appraisal process where the Appraisal Panel is called on (perhaps, improperly) to resolve policy interpretation questions.  Moreover, as a general principle, insurers want to avoid the risks associated with a trial in front of a jury, which typically do not view insurance companies favorably and are inherently more unpredictable.  Therefore, electing an appraisal process may take away some leverage as a policyholder to resolve the dispute favorably through settlement.

Below are a few additional drawbacks to invoking an appraisal clause:

  • There are no assurances—appraisal awards are binding.  Once an award is signed, there are few possibilities for increasing the amount or altering the award other than suing the insurer for a contract violation or acting in bad faith.
  • Appraisals may, inadvertently, end up taking longer.  Because each side needs to interview and select its own nominated appraiser, and potentially jointly agree on the selection of a neutral umpire, getting the appraisal process going could take several months upfront.
  • Difficulty finding neutrality.  Experienced party appraisers willing to work for policyholders are less common than those who work for insurance carriers.  Additionally, it is more challenging to locate impartial umpires who the insurance carrier’s appraiser will accept.

While invoking an appraisal clause can have many benefits for policyholders, insurers may still attempt to deny, delay, and underpay valid claims.  Thus, appraisals are best used to resolve a genuine dispute over how to quantify a loss amount and should be used sparingly, with a full understanding of the considerations and consequences involved in invoking the same.