Appraisal Clauses Are an Effective – Yet Nuanced – Tool in Property Claim Disputes
Property insurers and policyholders don’t always agree on the amount of a loss. When that happens, most policies include an appraisal clause in an attempt to settle the dispute. But nothing is as clear as it seems.
Our Litigation Partner Sam Pipino explains the intricacies behind this effect and yet nuanced tool in his latest blog.
It’s not surprising that property insurers and policyholders don’t always agree on the amount of a loss. When that happens, most policies include an appraisal clause wherein an appraiser is called in to settle the dispute.
Sounds simple enough, but the appraisal clause is nuanced and can raise some thorny issues.
The appraisal clause typically allows each party to hire an appraiser. So, if a claim involves roof damage, for example, the insurer might select an engineer from a consulting firm that inspected the roof prior to the coverage being approved, and the policyholder might choose a local roofing contractor. If the two appraisers can’t come to an agreement on the amount of the loss, they can pick an “umpire” to evaluate their recommendations.
Think of the umpire as the tiebreaker on the two differing opinions. Whomever the umpire sides with wins, and both the insurer and policyholder must accept the result. Like in baseball, there are not a lot of grounds to appeal the umpire’s call.
Another sticky nuance is that while the appraisal process should only deal with the amount of the loss, the courts have been flimsy on enforcing this – often letting appraisers delve into coverage issues, such as what caused the loss. For example, the appraiser might determine the roof damage wasn’t caused by hail but by poorly made shingles. This can drive insurers crazy, because they don’t want appraisers making coverage decisions.
Conversely, policyholders can be frustrated to learn that, after the appraisal process is completed and a decision is reached, the insurer is now denying their claim. The insurer isn’t rejecting the appraisal, but denying payment on other grounds. This maneuver – while spelled out in most appraisal clauses – could supercharge the dispute and wind up in court.
A courtroom also might be needed if the two appraisers – unable to reach agreement on the loss – also can’t agree on an umpire. They can take the matter to a judge in the jurisdiction where the loss occurred, and ask the judge to appoint an umpire. Again, whomever the umpire agrees with wins.
The typical appraisal process plays out over a few months and usually there is no timeline set forth in the appraisal clause. When finished, the appraisers provide written opinions or estimates on the value of the property and the amount of the loss. Each party has to pay for its chosen appraiser and must split any other costs from the appraisal, including an umpire’s fees.
In my experience, umpires are needed most – but not all – of the time. And most insurers go along with the final decision rather than denying the claim.
But in property insurance disputes, nothing is certain. That’s why it’s prudent to have an appraisal clause handy and its many nuances understood in advance.