Insurance Appraisal And Arbitration
Typically speaking an "Appraisal" will be the determination of what constitutes a fair cost, valuation, or estimation of worth with regard to an insurance claim. The majority of property insurance policies enable appraisal when the insurance company and policyholder are unable to agree concerning the quantity of loss to a covered property. Under most appraisal provisions, the party demanding appraisal and the other party must each name an appraiser within a specified number of days. Those appraisers are needed to value the loss and attempt to reach agreement. If there is a disparity among the figures found by the respective appraisers, those appraisers submit their differences to the third appraiser, identified as an Umpire, to resolve the discrepancy.
As the appraisal clause is an ADR (alternative dispute resolution) function, which includes a tripartite panel charged with issuing a binding award; for "the amount of loss," historically, it has been associated with arbitration. The Courts are not immune to the confusion, However, most states recognize the distinct difference between appraisal and arbitration, as demonstrated by and expressed in the United States Court of Appeals for the 5th Circuit, as follows:
“Insurance appraisals are generally distinguished from arbitration. While both procedures aim to submit a dispute to a third party for speedy and efficient resolution without recourse to the courts, there are significant differences between them. For example, an arbitration agreement may encompass the entire controversy between the parties or may be tailored to particular legal or factual disputes. In contrast, an appraisal determines only the amount of loss without resolving issues such as whether the insurer is liable under the policy. Additionally, arbitration is a quasi-judicial proceeding, complete with formal hearings, notice to parties, and testimony of witnesses. Appraisals are informal. Appraisers typically conduct independent investigations and base their decisions on their own knowledge, without holding formal hearings.”
In simple terms, the basic difference between appraisal and arbitration is arbitration can resolve the entire controversy between the parties, while appraisal is limited to the resolution of specific issues in the valuation of a loss.
How does the insurance appraisal process work?
In theory, appraisal should only be used to provide a simple, speedy, inexpensive, and fair method of determining the amount of loss. When the insured is provided an offer of settlement that they feel does not represent the actual costs of damages, and they find that the company adjuster is not willing to "re-adjust" the offer; the policyholder may invoke the appraisal clause. Upon invoking this clause, the many personalities involved with the claim are now removed, and fresh, new batches of individuals are appointed to determine the amount of loss. The "me vs. the world" or the "David vs. Goliath" feeling is now removed, and the entire claim is now transferred to a 3-person panel. Now, one appraiser represents the insured, and the carrier is represented by one appraiser, who will independently evaluate the loss, and calculate the amount of loss.
The Supreme Court has attempted to clarify the role of the appraisal process, stating:
"The purpose of the clause is to secure a fair and impartial tribunal to settle the difference submitted to them." The detached, disinterested tribunal should be able to produce a fair result in the appraisal process."
An appraiser should have extensive knowledge of the diverse contractual and legal issues that arise during an appraisal. Public Adjusters are often naturally a good fit as appraisers, given for their abilities to argue such points. However, as the Appraisal Process has its own body of laws and specific guidelines, this type of background should only be the basis, not replacement, for real world experience as an appraiser. An individual with a high degree of Insurance Policy knowledge claims experience and an understanding of arbitration would tend to be a good candidate for an appraiser, who without actual experience acting in the capacity of an appraiser, may prove to be effective.
Unfortunately, given the general lack of public knowledge on the Appraisal Process, many Policyholder's end up appointing the wrong type of individual to serve as their appraiser. For example, when an insured is met with an Appraisal Demand, without understanding the complexity and uniqueness of the process, quickly decide to appoint their building contractor, as they were the ones who put together the insured's estimate. When the carrier appoints a professional appraiser, one who understands the appraisal process, the governing laws and statues, and has a vast network of professional connections within the industry, the contractor quickly finds himself in a situation for which he is oblivious not ready for, and thus, is outmaneuvered, and with the realization that many of the opposing Appraiser's tactics were very well orchestrated. A professional appraiser, one who understands the appraisal process, the governing laws and statues, and has a vast network of professional connections within the industry, the contractor quickly finds himself in a situation for which he is oblivious not ready for, and thus, is outmaneuvered, and with the realization that many of the opposing Appraiser's tactics were very well orchestrated.
Simply put, when the two appraisers are chosen by their appointing parties, and complete all required documentation in order to start the process. Shortly after the initial contact, the two appraisers shall agree upon an Umpire. It is our opinion, that the two appraisers should have an Umpire in place before any matters of dispute are discussed. This aspect of the process, in our opinion, is one of the most important mechanics of the entire appraisal.
Appraisal vs. Arbitration
“One of the most important and balanced provisions found in the Standard Fire Insurance Policy and most other property insurance policies today is the Appraisal Clause. In fact, in most jurisdictions, it is one of the only provisions that afford protection to the interests of the insured in equal measure to those afforded the insurer.” Jonathan Wilkofsky, The Law and Procedure of Insurance Appraisal 3rd Edition
It has long been a valuable tool to all parties to the insurance contract in most states around the country. Appraisal is designed to provide for an efficient and timely method of resolving the differences between the policyholder and the carrier with regards to quantifying value and loss subject to coverage under the insurance policy. It provides these benefits equally to both parties. For the insurance company, there is a benefit in the ability to bring an expensive, challenging and contentious loss to a resolution, without incurring extensive legal fees and in many states, the potential for being accused of bad faith. For policyholders, it provides for some leverage in the adjustment process, to not have to accept a substandard offer. It also provides an alternative to litigation for issues of valuation and reduces the costs and time that would come along with a lawsuit.
Appraisal also benefits the courts by reducing their docket load and costs associated with the hearing of cases. States have long recognized that alternatives to litigation provides cost savings and efficiencies for the disputant parties involved as well as for an overburdened judicial system.
The effectiveness of the appraisal clause has been inconsistent for it’s 150+ year history and from each state to each state. For much of it’s younger years, the clause was not binding on the party who did not invoke appraisal, and/or to even invoke it. This caused it to have very little value, especially to policyholders. In 1949 the Appellate Division, Third Department held that an appraisal under a fire insurance policy was in the same nature of any arbitration agreement and could be enforced by the courts. New York State, as with all states, has a strong public policy in favor of arbitration. In fact, courts are statutorily pre-empted from deciding cases that fall within the scope of a valid arbitration clause.
The appraisal Clause is modeled after the standard arbitration clause, with a limited scope to the resolution of only valuation disputes with all other issues reserved for determination in a plenary action. It is so much similar to arbitration, that most Courts interpreted the appraisal clause to be an arbitration clause originally.
Although appraisal may be used as another form of alternative dispute resolution, it is not arbitration. Appraisal, in a general sense is defined as the “determination of what constitutes a fair price; valuation; estimate of worth.”
Some states currently have reduced the importance and effectiveness of the appraisal provision by making it voluntary, thus making it impossible to enforce. These states, such as Arkansas, California, Nebraska, Oklahoma, Oregon, South Dakota and West Virginia have left their insureds without the protection that the majority of states provide, and this causes significant problems to the policyholder being the financially disadvantaged party when compared to an Insurance Carrier’s available resources.