Chapter Ix
The Appraisal
Pages
Generally 464
Consultation Necessary 469
Determining Value 476
Actual Cash Value: The Broad Evidence
Rule and Other Formulations 476
Replacement Value Policies 487
Outside Experts 495
Notice, Adjournments and Cancellations 498
Hearings and Inspections 500
Generally
As very little specific guidance is offered by most insurance policies with respect to how the appraisal should actually proceed once the principals are in place, the methodology utilized has been developed in practice and by trial and error. One of the basic tenets of the appraisal process, is the ability of the appraisers and the umpire to exercise discretion under the circumstances of the particular claim in an effort to do justice to the parties under the terms of the policy. It is generally accepted that the participants may proceed in such a manner that they think proper and are not bound by the strict rules of
judicial inquiry and issue resolution.883
The court in American Central Ins. Co. v. Landau,884 described the process of appraisal very plainly and succinctly in an often quoted excerpt from its decision.
The court stated:
The proceeding here is not an ordinary arbitration where the parties hear witnesses and appear by counsel and act upon sworn evidence only; but it is strictly an appraisal and ascertainment in a particular manner of the amount of the loss, made by two or three parties, as the case may be, in which they act on their own judgment, and with such information as they may obtain in an informal way, and in which the appraiser chosen by each party is supposed and expected, in a restricted sense, to represent the party appointing him and within reasonable limits to see to it that no
883 American Steel Co. v. German-American Fire Ins. Co., 187 F.730 (3d Cir. 1911); See also, Hall v. Norwalk Fire Ins. Co., 57 Conn. 105, 17 A. 356 (1988); Townsend v.
Greenwich Ins. Co., 86 A.D. 323, 83 N.Y.S. 909 (2d Dept. 1903), aff’d, 178 N.Y. 634, 71
N.E. 1140 (1904).
884 62 N.J. Eq. 73, 49 A. 738 (1901).
legitimate consideration favorable to the party so appointing him is overlooked by the other appraiser.
Max J. Gwertzman, a respected litigator on behalf of insurers and author of “A Legal Analysis of the Appraisal Agreement”885 quoted a Federal Court decision which further delineates the duties of the umpire and appraisers.
He quotes the following:
It is true that such proceeding by appraisers and an umpire does not demand the formalities of a trial in a court of law or equity, but it does demand a fair effort to ascertain the truth and the consideration of available evidence and information, and the deliberate judgment of the ones making the award, after due consideration and deliberation.
I take it that the appraiser, as well as the umpire should be not only competent, but fair and unprejudiced as between the parties to the award, and a
Max Gwertzman, The Insurance Advocate, 4th Printing, Roberts Publishing Corp. 1972.
determination of whose interests are confided to them. In the language of the policy of insurance, the appraiser is to be “disinterested” and this means “fair and unprejudiced.”
And it was the duty of these appraisers to consult together and, if they do not agree, to call in the umpire whose function it was to deliberate with them. It was improper for one or two to consider evidence or information not submitted to the other, or the others.886
In some states, the process can be either as formal or informal as the parties may agree. In this context, informal appraisals are generally faster and less expensive then a formal process which might include the use of a court reporter and the formal taking of evidence and testimony. However, California has codified this rule to the extent of limiting appraisals to informal affairs without discovery, court reporters, and the formal taking of evidence unless the parties agree otherwise.
On one hand the California legislature
Phoenix Ins. Co. v. Everfresh Food Co., 294 F. 51 (1923).
added language that makes the process more efficient defining the meaning of “informal,” precluding formal discovery like depositions, interrogatories, requests for admissions as well as formal rules of evidence and a court reporter.
On the other hand in the event of a government declared disaster, either party may request appraisal but it cannot be compelled.887
Generally, the methodology to be used at arriving at an award is for the appraisal panel to determine. Courts will properly decline to exercise discretion to micro-manage an appraisal or conclude that no case or controversy exists sufficient to warrant declaratory relief unless the issues raised prior to the award suggest a denial of due process or breach of the policy.888
Cal. Ins. Code § 10082.3, Loss Requirements, Appraisals and Adjusters.
Federal Ins. Co. v. Newby, 2013 WL 1285140 (N.D. Cal. 2013) (Disagreement was only whether the appraisers should consider the full cost to remodel while deducting unrelated work or, as the insured’s appraiser urged, a comparison of unit costs by type of material and labor. The court stated: “Nothing in the record suggest the appraisal panel would be unable or unwilling to resolve the issues presented...if [the insured] were to present them to the panel.
Consultation Necessary
Consultation between the appraisers is necessary for an award to be considered valid. However, the appraisers are not required to observe or inspect the property at the same time.889
The umpire and one appraiser may not ignore the second appraiser and make an award between them. This rule applies even if all three parties met on several occasions and failed to agree.890 It is the duty of the appraisers, if they cannot agree, to call in the umpire. It is improper for one or two of them to consider evidence not submitted to the others.891 The courts have held that two participants acting together without regard to the third, privately collecting information and examining witnesses, renders an award invalid.892
Each party must be permitted to present its views to the appraisal team.893 Where each party had the same opportunity to see the damaged property and the umpire considered each side’s submission, a claim of misfeasance
Kent & Purdy Paint Co. v. Aetna Ins. Co., 165 Mo. App. 30, 146 S.W.78 (1912). 890 Providence Washington Ins. Co. v. Gulinson, 73 Colo. 282, 215 P.154 (1923). 891 J.E. Davis Mfg. Co. v. Fireman’s Fund Ins. Co., 210 F. 653 (N.D.N.Y. 1914).
892 Christianson v. Norwich Union Fire Ins. Society, 84 Minn. 526, 88 N.W. 16 (1901).
893 In re Delmar Box Co., 309 N.Y 60, 127 N.E.2d 808 (1955).
was rejected where the insured claimed its appraiser “did not have any input except for a 30 minute call with the umpire.”894
The insured is not bound by an award made by the company's appraiser and the umpire, without notice to the insured's appraiser or the insured.895 In the case of Zoni v. Importers and Exporters Ins. Co. of New York,896 the court held that an award reached by the umpire and one appraiser without conference with the other appraiser was invalid because it amounted to a deprivation of any representation in the appraisal proceedings. It should be noted that an insurance policy may declare that an award signed by the umpire and only one of the appraisers is valid although made in the absence of the other appraiser. Such provisions have been held to be valid,897 but are permissible only if the process has been consistent with the requirements of the statutory Standard Fire Policy in the local jurisdiction as to the necessary consultation.
The above stated rule does not mean that all parties to the appraisal must act in concert at all times. The courts generally allow
894 Transcapital Bank v. Merchants Mut. Ins. Co., 2013 WL 322156 (N.D. Ohio 2013).
895 Schmitt Bros. v. Boston Ins. Co., 82 A.D. 234, 81 N.Y.S.767 (1903).
896 338 Pa. 165, 12 A.2d 575 (1940).
897 German Ins. Co. v. Hazard Bank, 126 Ky. 730, 104 S.W.725 (1907).
the appraisers to act privately, so long as no conclusions are drawn until the parties meet. For example, it has been held that where two of the appraisers privately ascertain prices and discuss the amount of the award but did not come to a conclusion until the final meeting, when all three were together, the award was held to be valid. Similarly, the fact that an appraiser appointed by the insured immediately went to work to determine the value of the articles destroyed, did not render the appraiser ineligible.898
It has been stated that absent fraud or conniving actions, an umpire’s ex parte communications with an insured’s appraiser did not constitute an impeaching circumstance requiring the appraisal award to be overturned.899
One court declined to invalidate an award despite the fact that the umpire and appraiser met without the insured’s appraiser in order to sign the award. The insured admitted that its appraiser had submitted its position to the other two and the umpire had testified that he “fully considered all submissions” before rendering the award. The l imited
898 Hurst v. Hope, 152 Va. 405, 147 S.E. 222 (1929).
899 Harleysville Mut. Ins. Co. v. Narron, 155 N.C. App. 362, 574 S.E.2d 490 (N.C. App.
2002).
communication was not deemed sufficient to invalidate the award, as the insured was given both notice and an opportunity to be heard by both and did not show fraudulent intent.900
While some older decisions had left it unclear as to whether an umpire may properly have ex parte communications with either party during the appraisal in an effort to clarify a party’s position or for the umpire to obtain information, more recent cases generally hold that an umpire did not lose his neutrality by conducting an ex parte communication with representatives of the insured where the purpose was to clarify the insured’s position with respect to the claim. However, while this appears to be the majority view, it is not universal and prudence would suggest that the umpire endeavor to avoid ex parte communications without obtaining the consent of the other party. This would tend to avoid an appearance of impropriety and potential challenge to the umpire’s neutrality.901
In California, it has been held that private dealings between the appraisers selected by the parties while the appraisal procedure is pending may be grounds for vacating an appraisal award. The burden was said to be
900Glendale LLC v. Amco Ins. Co., 2012 WL 2917920 (W.D.N.C. 2012).
Hartford Lloyds Ins. Co. v. Teachworth, 898 F.2d 1058 (5th Cir. 1990); Columbia Cas. Co. v. Southern Flapjacks, Inc., 868 F.2d 1217 (11th Cir. 1989).
on the appraisers to show the significance of the business conducted and that the parties' interests were not prejudiced.902
Appraisers without knowledge of essential facts must give the parties an opportunity to produce available evidence. A failure in this respect may result in an award made in disregard of some relevant fact and in ignorance of others. Such a circumstance has been held to justify the setting aside of an appraisal award.903
In order to avoid such a result, the insured is entitled to timely and adequate notice of the specifics of the dispute by the insurer so that the insured can contest a denial of coverage prior to appraisal.904
An appraiser’s denial of an insured’s request to be heard regarding the value of stock before the loss constituted conduct sufficient to invalidate the award. 905
Conversely, an award of the insured's appraiser and the umpire was determined to be valid, where the appraisers disagreed as to
Figi v. New Hampshire Ins. Co., 108 Cal. App.3d 772, 166 Cal. Rptr. 774 (1980).
St. Paul Fire & Marine Ins. Co. v. The Tire Clearing House, Inc., etc., 58 F.2d 610 (8th
Cir. 1932).
See Hahn v. Allstate Ins. Co., 15 A.3d 1026 (R.I. 2011).
Aetna Ins. Co. v. Murray, 66 F.2d 289 (10th Cir. 1933).
whether the insurer's appraiser made his position known.906
Even in cases of total loss and regardless of whether any property remains to be inspected, the parties have the right to appraisal including the presentation of evidence by witnesses as to their knowledge of the value of what was destroyed as well as other documentary and photographic evidence. Anything else that might be available which tends to establish the condition and value of the property both pre and post loss should be considered in bringing the appraisal process to a proper conclusion.907
In case of total destruction, where the property is unavailable for inspection, the appraisers should give notice to the parties and let each in the other’s presence, present their respective evidence and positions.908
As ever greater amounts of information is stored and shared digitally, the use of these efficient methods may obviate the need for meetings and inspections. As long as each appraiser has an opportunity to share their
Twait v. Farmer’s Mut. Hail Ins. Co. of Iowa, 249 Iowa 1239, 91 N.W.2d 575 (1958). 907 Drescher v. Excelsior Ins. Co. of N.Y., 188 F. Supp. 158 (D.N.J. 1960); Stout v. Phoenix Assur. Co. of London, 65 N.J. Eq. 566, 56 A. 691 (1904).
908 Drescher, 188 F.Supp at 159; Standard Provisions, N.J. Stat. Ann. 17:36-5.20 (West
2003); Carlston v. St. Paul Fire & Marine Ins. Co., 37 Mont. 118, 94 P. 756 (1908); Franklin v. Fireman’s Fund Ins. Co., 4 Tenn. App. 688 (1927).
views and be exposed to competing ideas, the appraisal team is free to determine how the required consultation shall take place.
Determining Value
Actual Cash Value: The Broad Evidence Rule and Other Formulations
The focus of the appraisal provision as contained in the Standard Fire Policy is a determination of actual cash value (ACV) and the amount of loss. However, many policies fail to define what the term actual cash value means and some jurisdictions have taken to defining the term through regulation, legislation or by judicial decision.
There has been much litigation with regard to the evidence to be considered in determining the actual cash value of the property insured under a first-party fire insurance policy. The New York Court of Appeals has held that in determining actual cash value, the finder of fact should consider all factors which may bear on the issue. Under the so-called Broad Evidence Rule, the parties should not limit the appraisers’ receipt of evidence to replacement cost less depreciation only, in determining the actual cash value of the damaged property.909 In McAnarney v. Newark Fire Ins. Co., the insurer had agreed “to insure to the extent of the actual cash value." The insurance company
909 247 N.Y. 176, 159 N.E.902 (1920).
argued that the only evidence to be considered should be replacement cost less depreciation. The Court of Appeals disagreed with the insurer and held that those charged with the responsibility of determining actual cash value should consider "every fact and circumstance which would logically tend to the formation of a correct estimate of the loss. It may consider actual costs and costs of reproduction; the opinions upon value given by qualified witnesses; the declarations against interest which may have been made by the insured; the gainful uses to which the buildings might have been put; as well as any other facts tending to throw light upon the subject." The court noted that this approach “requires the fact-finder to consider all evidence an expert would consider relevant to an evaluation, and particularly both fair market value and replacement cost less depreciation.” 910
In Michigan, it was held that an insurer acted pursuant to the subject insurance policy and state law when it used the Broad Evidence Rule to calculate the actual cash value of the insured’s building following a loss. The Sixth Circuit and state of Michigan require the application of this rule. Further, “‘Michigan courts recognize that no set method of valuation is necessary within the appraisal
910 Id. at 183-84.
context…Market value, replacement value, and other means of valuation are merely guides, rather than shackles compelling strict adherence.’” Precedent has confirmed that the application of the Broad Evidence Rule is required when actual cash value is not defined within an insurance contract. After the court observed compliance with the Broad Evidence Rule, the insured was precluded from contesting the valuation through Appraisal as it had waived this right by commencing litigation.911
It is important to note however, that the Broad Evidence Rule was formulated by the Court of Appeals as a default rule when the policy contains no definition of actual cash value. Thus, analysis of the appropriate definition of value should begin in the policy of insurance.912
In a later case, the New York Court of Appeals reaffirmed its decision in McAnarney by holding that appraisers may not limit their receipt of evidence to reproduction cost less depreciation cost.913 According to the court,
Commodity Resources, Inc. v. Certain Underwriters at Lloyd’s, London, 2013 WL 3716385 (E.D.Mich. 2013), citing Commodity Res. Inc. v. Certain Underwriters at Lloyd’s, London, 2013 WL 607772 (E.D. Mich. 2013) and Evanston Ins. Co. v. Cogswell Properties, LLC, 683 F.3d 684 (6th Cir. 2012).
S.R. Intern. Business Ins. Co., Ltd. v. World Trade Center Properties LLC, 445
F.Supp.2d 320 (S.D.N.Y. 2006).
Gervant v. New England Fire Ins. Co., 306 N.Y. 393, 118 N.E.2d 574 (1954).
the umpire and company appraiser may not arbitrarily refuse to consider evidence of the variety of facts which may enter into the determination of actual cash value, despite the fact that evidence of such factors was presented to them by the plaintiff's appraiser.914 The right of a party to have appraisers receive all pertinent evidence offered is a fundamental procedural right to which the insured is entitled and any conduct to the contrary by the company appraiser or umpire may invalidate an award.915
As the Broad Evidence method of ascertaining actual cash value has been adopted in most jurisdictions,916 it makes an excellent guideline for appraisers in making a determination of actual cash value, except in those states where another method is mandated. Practitioners are cautioned to consider the issue as the definition of actual cash value as the proper method of calculating it does vary from state to state and the use of the correct approach is fundamentally important to a proper outcome.
Id.
Strome v. London Assur. Corp., 20 A.D. 571, 47 N.Y.S.481 (2d Dept. 1897), aff’d,
162 N.Y. 627, 57 N.E. 1125 (1900); Kaiser v. Hamburg-Bremen Fire Ins. Co., 59 A.D.
525, 69 N.Y.S. 344 (1901), aff’d, 172 N.Y. 663, 55 N.E. 118 (1902).
916 Evanston Ins. Co. v. Cogswell Properties, LLC, 730 F.Supp.2d 248 (W.D. Mich. 2010)
In Pennsylvania it has been held that appraisers acted within the scope of their authority in determining actual cash value when they considered the actual use the property could be put to in the future. The court stated that appraisers have to make a variety of decisions in the course of setting a value for the property. One of these permissible decisions was the recognition that the subject property possessed a benefit under the pertinent zoning ordinances and that the existence of this benefit was relevant to a determination of valuation.917
The Connecticut Supreme Court has accepted three methods for determining actual cash value. The first is based upon the market value of the property at the time of the loss. The court stated that this method is useful where “[T]he property is of such nature that its market value can readily be determined.” The second method is based upon replacement or reproduction cost. The court said that this measure “[I]s merely a limitation on the insurer’s liability and not a substantive measure of damages which the insured can invoke.” The third method which the court has recognized is the “Broad Evidence Rule.” By this standard, the appraisal should consider “any evidence logically tending to the formation of a correct
917 Boulevard Assoc. v. Seltzer P’ship, 445 Pa. Super. 10, 664 A.2d 983 (Pa. Super. 1995).
estimate of the value of the destroyed or damaged property.”918
In California, it has been held that appraisal is appropriate to determine actual cash value even when the issue turns on whether the proper valuation method was used.919
The umpire may make his own election as to the method to be utilized so long as it is consistent with the Broad Evidence Rule and the insurance policy.920
In Michigan, it was held to be error for the appraisal team to utilize different valuation methods on the same claim; market value for the value of the property and replacement value minus depreciation to calculate the ACV of the loss. Calling this a “manifest mistake and an error of law requiring vacation of the award” the court determined that “the broad evidence rule provides no basis for the appraisers to employ one valuation method to determine the ACV of the property and another to determine the ACV of the loss.
918 B & D Molded Products, Inc. v. Travelers Cas. & Sur. Co., 2000 WL 1406860 (Conn. Super. Ct. 2000); Vogt v. Rhode Island Joint Reinsurance Ass’n, 1999 WL 1062207 (R.I. Super. Ct. 1999); Sayed v. Ohio Fair Plan Underwriting Ass’n, 1982 WL 6703 (Ohio Ct. App. 6th Dist. 1982); Sullivan v. Liberty Mut. Fire Ins. Co., 174 Conn. 229, 384 A.2d 384 (1978); Davis v. National American Ins. Co., 78 Mich. App. 225, 259 N.W.2d 433 (1977).
919 Enger v. Allstate Ins. Co., 407 Fed. Appx. 191, 2010 WL 5423566 (9th Cir., 2010).
920 Sullivan, Id.
While empowered to define ACV as they may choose, they must give the term a consistent meaning.921
The court further found that the meaning of ACV under the policy is ambiguous.922
In the state of California, the supreme court in Jefferson Ins. Co. of New York v. Superior Court of Alameda County,923 held that the term “actual cash value” as used in §2071 of the California Code does not mean replacement cost less depreciation, but instead is synonymous with “fair market value.” Where appraisers do not follow the accepted definition of the valuation provision of the policy, the appraisal award is subject to being vacated.924
Further, in California, it has been held that resort to declaratory relief was appropriate to obtain judicial clarification of the proper method’s compliance with the statute setting out such methodology.925
921 Evanston Ins. Co. v. Cogswell Properties, LLC, 730 F.Supp.2d 248 (W.D. Mich. 2010).
922 Id. at 753.
923 3 Cal.3d 398, 475 P.2d 880, 90 Cal. Rptr. 608 (1970).
924 Cheeks v. California Fair Plan, 2004 WL 2095622 (Cal. App. 2 Dist. 2004); See Cal. Ins. Code §2071.
925 Kirkwood v. California State Auto Ass’n Inter-Insurance Bar, 193 Cal. App. 49, 122 Cal. Rptr. 38,480 (Cal. App. 2011); Cal.C.C. §1060; Cal. Ins. Code §2051.
In Louisiana, it has been held that actual cash value is determined by calculating the cost of duplicating the damaged property with new materials of like kind and quality, less allowance for physical deterioration and depreciation.926 In The Perfect Co. v. Essex Ins. Co.,927 the District Court quoted approvingly from Black’s Law Dictionary, “Actual Cash Value is defined as the replacement cost less depreciation.” Black’s Law Dictionary, (7th ed. 1999).
The actual cash value should consider the cost of the item in the insured’s community or include the shipping costs of getting it there if its not available at the value determined in that community.928
Appraisers are generally expected to act on their own skill and knowledge. It has been held that they may reach individual conclusions and are required to meet only for the purpose of ironing out differences in the conclusions they reached. In most states, they are not obliged to give their rival any formal notice or to hear evidence but may proceed by ex parte investigation so long as the parties are given an opportunity to make statements
926 Bradley v. Allstate Ins. Co., 606 F.3d 215,227 (5th Cir 2010).
927 2010 W.L. 2835899 (E.D.La 2010).
928 See for example, De La Torre v. Allstate Ins. Co., 2011 WL 831426 (C.D.Cal.2011).
and explanations with regard to matters in issue.929
The award should be based on the appraiser's submissions, in combination with the umpire's own judgment.
In some jurisdictions, the umpire may utilize an expert to advise him as to the amount of the loss so long as the appraisers are on notice and the award is founded on the sole judgment of the umpire. 930
In New Jersey, the Broad Evidence Rule requires the appraiser to consider every fact and circumstance which would logically tend to the formation of a correct estimate of the insured loss so as to effectuate complete indemnity.931 A refusal of the appraisers to consider factors such as the actual cost to the insured of effecting repairs, the actual extent of repairs made, the age of the building, depreciation, the use to which the building had been put and the condition prior to the fire, in determining the actual cash value of a partial fire constituted legal misconduct and
929 Florida Farm Bureau Cas. Ins. Co. v. Sheaffer, 687 So.2d 1331 (Fla. 1st DCA 1997).
930 German Ins. Co. v. Hazard Bank, 126 Ky. 730, 104 S.W. 725 (1907).
Ward v. Merrimack Mut. Fire Ins. Co., 332 N.J. Super. 515, 753 A.2d 1214 (2000);
Elberon Bathing Co. v. Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978) (quoting
McAnarney v. Newark Fire Ins. Co., 247 N.Y. 176, 179, 159 N.E. 902, 905 (1928)).
justified vacating an appraisal award.932 Criteria such as fair market value and replacement cost less depreciation do not bind the fact finder, but instead become guidelines along with other relevant evidence the parties may present in cases of both total and partial loss in the state of New Jersey.933
Where actual cash value is defined by the policy as replacement cost less a deduction that reflects depreciation, age, condition and obsolescence, obsolescence refers only to functional obsolescence and did not consider economic obsolescence. To suggest otherwise would equate actual cash value and market value which i s impermissible.934
Actual cash value includes contractor’s overhead and profit even when the insured elects to make needed repairs personally, where the cost to repair or replace would typically require a general contractor.935
Ward, Id.; See also, Vacation of award; Rehearing, N.J. Stat. Ann. 2A: 24-8c (West 2003).
Elberon, supra; Insured, perils insured against; amount of insurance; assignment; N.J. Stat. Ann. 17:36-5.19 (West 2003).
Whitehouse Condominium Group LLC v. Cincinnati Ins. Co., 2013 WL 3895851 (Mich. Ct. App. 2011).
Mazzocki v. State Farm Fire & Cas. Corp., 1 A.D.3d 9, 766 N.Y.S.2d 719, 2003 N.Y.
Slip Op. 17945 (2003); Gilderman v. State Farm Ins. Co., 437 Pa. Super. 217, 226, 649 A.2d
941, 945 (1944), appeal den’d 541 Pa. 626, 661 A.2d 874 (1995); Bond v. American Family Mut. Ins. Co., 2008 WL 477873 (D. Ariz. 2008); Tritschler v. Allstate Ins. Co., 213 Ariz. 505, 144 P.3d 519 (Ariz. App. Div. 2, 2006)
Indicia of such claims are those that involve use of multiple trades in performing claim- related demolition, repair and construction.
Once being exposed to all of the evidence of value which the parties have presented, however, it falls to the appraisers and umpire to exercise their independent judgment and make a determination as to the relative weight to be afforded each aspect of the evidence in drawing a conclusion.
A South Dakota appraisal provision which required appraisers to determine the amount of loss has been found unambiguous where a policy’s loss settlement terms contained the phrase “actual cash value.” The court declined to explore the meaning of amount of loss or actual cash value under the policy, reasoning that “‘ambiguity in an insurance policy is determined with reference to the policy as a whole and the plain meaning and effect of its words.’” There, the policy was unambiguous in expressing the parties’ rights and obligations thereunder: if property was not repaired or replaced the insurer may pay its actual cash value, and if it was, the insurer had the option to pay for the amount actually needed and spent to do so.936
Batiz v. Fire Ins. Exchange, 800 N.W.2d 726 (S.D.2011), citing National Sun Indust. Inc. v. South Dakota Farm Bureau Ins. Co., 596 N.W.2d 45, 1999 S.D. 63 (S.D. 1999)
It has been held that in determining actual cash value it refers to the value of the property at the time of destruction.937
Once it appears that these judgments have been made in good faith, they should not be disturbed absent evidence of misconduct (as discussed in greater detail in Chapter X[D].
Replacement Value Policies
When the Standard Fire Policy was first created decades ago, insurance policies generally were true indemnity contracts in that they calculated the insured’s recovery based upon such considerations as the age, condition, usefulness, original cost, cost to replace, market value etc. However, modern “Replacement Value” policies, purchased for a higher premium, offer benefits far beyond mere indemnity in that they compensate the insured upon the occurrence of a covered peril in a manner that actually places the insured in a better position then they had been prior to the loss. This is accomplished with what are known as replacement value, replacement cost, or guaranteed replacement value endorsements which amend the actual cash value” standard of loss calculation.
Northern National Bank v. North Star Mut. Ins. Co., 2012 WL 4052835 (Minn. App. 2012)
While policy provisions differ, they can generally be understood as follows:
A replacement value policy generally provides for the recovery of the replacement cost of the property damaged, lost or destroyed with items or material of like kind and quality without regard to the age or condition of the property lost or destroyed.938 These policies often provide for the initial payment of actual cash value until such time as the insured actually makes replacement, whereupon the carrier pays the difference.
In most states, it is the custom to “hold back” an amount representing the depreciated value of the claim until replacement occurs.
Guaranteed replacement cost policies are very similar in practice except that, under appropriate circumstances, they provide for payment of replacement value above and beyond the stated policy limit such that the property will be repaired or replaced regardless of cost but generally subject to certain conditions.
Subject to policy limits. Specific policy terms should be consulted as conditions and exceptions are common.
Some deluxe and premier policies also waive the holdback and pay the replacement value upon the adjustment of the loss.
It is crucial for the appraisers and umpire to fully comprehend and implement the value provisions of the specific policy purchased by the insured. In the modern insurance marketplace, policy language varies significantly from carrier to carrier and will define the rights of the parties, subject to statute.
A New York court deemed parties’ requests that the court limit or define an umpire’s assessment of damages to be beyond the scope of the parties’ application for selection of an umpire following a disagreement as to umpire selection. While the insurer under those circumstances sought to limit the appraisal determination to actual cash value of damages, the insured believed the umpire should act without limitations and the determination should encompass the value of the loss, Actual cash value, repair and replacement costs and incidental issues. However, the court held that “[p]ursuant to the policy terms, a decision agreed by any two, consisting of the appraisers and the umpire, sets the amount of the loss. The amount of loss shall be determined according to the policy
terms and applicable provisions of the Insurance Law by the appointed umpire.”939
It is patent that where the term Actual Cash Value is amended by another valuation, the value to be appraised should be that defined by the policy purchased by the consumer from the insurer and the appraisal provision should be read in such a manner that value determinations are consistent with the actual terms of the policy in existence between the parties.
Where the partes are not careful to specify in an appraisal agreement the precise formulation of the desired award, (i.e. allowances for both actual cash value and replacement cost), they may be disappointed with a less precise formulation. For example, in Arizona, where the appraisal agreement listed “actual cash value” and replacement cost” as steps in the appraisal process, an award which states a single amount “based upon replacement cost and actual cash value calculations”, the court denied the insured’s motion to reconvene the panel to enter a new award and rejected the insured’s claims that the award was unintelligible and did not respond to the issues submitted for appraisal. The court found that neither the policy nor the
In the Matter of Merrimack Mut. Fire Ins. Co. v. Seibert, 31 Misc.3d 523, 917 N.Y.S.2d 839, 2011 N.Y. Slip Op. 21060 (Monroe Cty. 2011).
appraisal agreement requires the appraisers to separate the award into “ACV and replacement value.” The decision does not quote the policy and it would seem most policies do provide such guidance.940
Some jurisdictions have excused compliance with the aforementioned condition precedent of actual replacement, where the insurance company failed to timely pay the claim or mandated an insured to commence proceedings in order to recover under the policy. In these cases, compliance with a provision requiring the insured to repair or replace the building in order to recover replacement cost is excused if the facts demonstrate that the insurer caused the non- performance.941 However, if the insured could not or would not have performed the conditions regardless of the insurer’s conduct,
T & B McDowell, LLC v. Peerless Ind. Ins. Co., 2013 WL 2287087 (D.Ariz. 2013) 941 Ward v. Merrimack, 332 N.J. Super 515; Zaitchick v. American Motorists Ins. Co., 554 F. Supp. 209, 217 (S.D.N.Y. 1982), aff’d, 742 F.2d 1441 (2d Cir. 1983): Pollock v. Fire Ins.
Exchange, 167 Mich. App. 415, 423 N.W.2d 234 (1988); Bailey v. Farmer’s Union Co-op
Ins. Co .of Nebraska, 1 Neb. App. 408, 498 N.W.2d 591, 598 (1992) (where insurer’s refusal to pay the actual cash value of a structure was waived under the rule that “a condition is excused if the occurrence of the condition is prevented by the party whose performance is dependent upon the condition.”); McCahill v. Commercial Union Ins. Co., 179 Mich. App. 761, 775, 446 N.W.2d 579, 585 (1989); State Farm Fire & Cas. Ins. Co. v. Miceli, 164 Ill.
App.3d. 874, 518 N.E.2d 357 (1987); See also, Randy R. Koenders, Annotation, Construction and Effect of Property Insurance Provision Permitting Recovery of Replacement Cost of Property, 1 ALR 5th 817, 855 (1992); Partner, Replacement and Cost Coverage: A Legal Primer, 34 Wake Forest Law Review 295, 321 Note 201 (1999).
the condition has been held not to be excused.942
In Louisiana, it has been held that where the policy required repairs to be complete and the cost of repairs to be in excess of the ACV paid on the claim in order for the RCV to be recoverable, it was held where repairs had not been completed, the claim for the holdback was not yet ripe.943
In Indiana, an insurer could not raise the defense that the insured failed to comply with conditions precedent for replacement cost of her property. There, the insurer allowed appraisal to proceed without mentioning the reason for the difference between its estimate and the insured’s: that it had valued the loss at actual cash value while the insured did so at replacement cost value. It “permitted [the insured] to incur the personal expense of the appraisal process and the further delay it caused to her receiving any payment under the policy. Such expense and delay represented tangible prejudice to [the insured] caused by [the insurer]’s silence regarding its alleged policy defenses.” The insurer’s misconduct arose from both its notice that the
Ward, Id.; Zaitchick, Id. ; Maine Mut. Fire Ins. Co. v. Watson, 532 A.2d 686, 688 (Me. 1987).
Cedar Plantation Condo Ass’n v. Modern Select Ins. Co., 2012 WL 5364235 (M.D. La.
2012).
insured sought replacement cost coverage and failure to assert its position that the insured failed to give timely notice of intent to seek this coverage or wasn’t entitled to it because she had not actually completed the replacement of her home.944
Under the plain language of the insurance policy, the fact that the property was not repaired or replaced does not preclude the matter from being submitted to appraisal.945 The insurer was not liable for the difference between the actual cash value and replacement cost until the insured actually replaced the property.946
This issue was dealt with in Woodworth v. Erie Insurance Co., where the insurer argued that it had no obligation to engage in appraisal concerning replacement cost unless and until the insureds actually rebuilt, which they had not yet done. In its analysis, the court mistakenly suggested that because provisions of the appraisal clause are binding on all parties under N.Y. Insurance Law §3404, then the law could not intend for appraisals to provide advisory or hypothetical calculations of replacement cost.947 This is an incorrect
Westfield Nat. Ins. Co. v. Nakoa, 963 N.E.2d 1126 (Ind. Ct. App. 2012).
Mish, Inc. v. American County Ins. Co., 2003 WL 22905161 (Conn. Super. 2003).
Casey v. Hastings Mut. Ins. Co., 2006 WL 1688082 (Mich. App. 2006).
Woodworth v. Erie Ins. Co., 2011 WL 98494 (W.D.N.Y. 2011)
interpretation of both the Insurance Law and
N.Y. case law. As previously explained above, the appraisal amount concerning replacement cost is most definitely binding on all parties. However, it is only binding as to amount and is only payable to the insured once the property is actually repaired or replaced. Appraisers routinely appraise replacement value but only actual cash value gets paid until the property is repaired.
Outside Experts
As there is no provision within the Standard Fire Policy or most other policies for the hiring of outside experts by either the appraisers or the umpire, the practice should only be utilized with the consent of both parties.
One can certainly imagine many situations in complex claims where the parties would benefit from the contribution of experts such as accountants, mold and remediation professionals, architects, engineers, builders, real estate appraisers, and others.
The issue of whether to retain an expert or experts and the terms and conditions of the retention are matters which would benefit from discussion between the parties and should be specified in the appraisal agreement between them.
Certainly each party should be free to adduce such proof and evidence as he or she may deem appropriate in best presenting that party’s position. However, taken to its extreme, this practice can become abusive and unfair as the relative resources of the parties may be quite different with the insurer able to afford an array of experts while the insured may be of
limited means particularly after suffering a severe casualty loss.
The appraisal process should not be allowed to deteriorate into a barometer of the parties’ relative wealth.
Similarly, the umpire should refrain from hiring or consulting outside experts without the consent of both parties. Initially, as the parties will have to bear the cost of the expert(s), they should be the ultimate arbiters of what that expense will include. Additionally, the umpire is brought into the process to make an independent judgment and help in resolving the differences between the parties’ appraisers. As there is no contractual contemplation of the umpire’s reliance upon experts, this practice should not be forced on either party.
To the extent the parties approve of the hiring of an outside expert or consultant to lend assistance to the umpire in drawing his conclusions, the umpire must be mindful of avoiding the retention of experts who are beholden to one party or the other or whose judgment may be affected by the prospect of future business with one of the parties, past dealings or other considerations.
Situations may occur where a building damage appraiser is brought in as a consultant by the umpire who may hope to win future appraisal business from the insurance carrier, or perhaps, where a building contractor is retained to render an opinion for the umpire who may have aspirations of actually obtaining the reconstruction job and making the repairs at the conclusion of appraisal. Either circumstance would destroy their independence and disqualify them.
While experts retained by the appraisers may properly advocate on behalf of the party that hired them, experts retained by the umpire should bring to the table the same level of impartiality and neutrality as required by the umpire. Therefore, information regarding past dealings with the parties, the prospect of future business, and other related issues should be disclosed and discussed prior to the retention of the expert by the umpire himself.
Notice, Adjournments And Cancellations
Notice of any appraisal, hearing or meeting should be given to the parties as a matter of good practice. However, there is a divergence of opinion as to whether formal notice of such hearing or meeting is mandatory. Several cases have held that appraisers must give notice to the parties of their meeting.948 However, other courts have come to the opposite conclusion.949
In more formalistic states such as Florida or Connecticut, absent emergency, adjournment of the appraisal hearing may be made only upon reasonable notification to all parties and only a reasonable number of times.
It has been held where an appraiser refused to attend a meeting based on his assertion that the insurance company’s appraiser was biased, the award that the insurance company's appraiser made alone was valid. Generally, the reviewing court will look to see whether or not both appraisers had
Aetna Ins. Co. v. Hefferlin, 260 F. 695 (9th Cir. 1919); Drescher v. Excelsior Ins. Co. of N.Y., 188 F. Supp. 158 (D.N.J. 1960).
Pacific Nat. Fire Ins. Co. v. Beavers, 87 Ga. App. 294, 73 S.E.2d 765 (1952); In re
Falloon, 161 Cal. App.2d 522, 327 P.2d 18 (1958); See also, D.E. Ytreberg, Annotation, Insurance: Necessity and Sufficiency of Notice of and Hearings in Proceedings Before Appraisers and Arbitrators Appointed to Determine the Amount of Loss, 25 ALR 3d 680 (2003).
notice of a proposed meeting. Although one elects not to appear, such non-appearance may not invalidate an award subsequently made.950
If one appraiser resigns, withdraws or refuses to act further, the umpire may complete the proceeding and make a valid award or seek immediate appointment of a replacement, if this can be accomplished without undue delay or prejudice.
In re Falloon, Id.
Hearings And Inspections
The procedure to be followed for an appraisal hearing is not outlined by most insurance contracts. Generally, if either party to an appraisal seeks an opportunity to present evidence, the request is normally honored. A request to present evidence at a certain time and place allows the appraisal to move forward expeditiously.
In almost all states, there is no requirement that a formal “hearing” actually take place and in fact, an appraisal award can properly be made without the parties being given an opportunity to appear at a specific place and time to present their respective positions. Massachusetts and Connecticut are noteworthy exceptions.
As most policies generally do not offer guidance as to the procedures to be used during the appraisal, the umpire and appraisers enjoy significant discretion in determining how the appraisal shall proceed. It is patent that in order to do justice to the intent of the appraisal provision, a procedure should be agreed upon that allows for the sharing of information as well as ideas and opinions in an expeditious and efficient manner. An expeditious effort is made so that agreements and disagreements can be clarified and issues refined for presentation to
an umpire should a disagreement remain after their consultation.
Once the umpire enters the discussion as a result of the failure of the appraisers to agree, the umpire is free to suggest a process and procedure for the resolution of the balance of the appraisal as long as it is not at odds with the Standard Fire Policy, or the terms of the contract between the parties.
In order to avoid confusion and disagreement as well as subsequent challenge, it is often appropriate for the parties to execute an appraisal agreement setting forth the rules, definitions and procedures to be followed in the particular claim. It is appropriate for this agreement to set forth the matters to be determined by the appraisers. These should include the level of specificity to be required in the award. The parties should resolve whether a breakdown by type of coverage (i.e. building, personal property, etc.) or by trade shall be sufficient or whether the actual cash value or the amount of loss as to each board and nail will have to be stated. Further, the appraisers should consider providing for a determination of the amount of time to restore the damaged property if this element would be
appropriate to a calculation of the economic loss.951
With the advent and wide-spread use of replacement cost policies, the parties should agree to a determination of a proper calculation of depreciation if the policy makes this a factor in the calculation of a holdback until the damage is repaired.
In any event, the goal of the process should mirror the terms of the policy insofar as they relate to definitions and determinations of value and loss.
The procedures to be followed may be as formal or informal as the parties may agree so long as they do not abrogate the contract of insurance.952
However, as discussed more fully in Chapter I[C] some jurisdictions equate appraisal with arbitration and mandate statutorily the specific procedures to be followed before, during and after an appraisal hearing. In these jurisdictions, great care must be taken in educating both the appraisers and the umpire with respect to the mandated
Such as economic claims, claims for lost rent, additional living expenses, business interruption or extra expense.
See, 6 Appleman Insurance Law and Practice §3931 (1972).
procedures for a valid and binding appraisal to take place.
Even some of these jurisdictions have begun to recognize the unambiguous principle of the appraisal clause and have concluded that the formal procedures of the local arbitration code were inapplicable.953
It may be advisable for each of the appraisers to present the umpire with a detailed, but concise and understandable tabbed and indexed presentation including expert reports, laboratory results, photographs, diagrams, inventories, building estimates, etc. in order to present the parties’ positions in their best light and in their most understandable format.
In more formalistic jurisdictions, it is customary for appraisals to be conducted in adherence with procedural requirements more akin to arbitrations. It is not unusual in these states for formal hearings to take place with testimony and documentary evidence received and a stenographic record created. In fact, some jurisdictions require that
Allstate Ins. Co. v. Suarez, 786 So.2d 645 (Fla. Dist. Ct. App. 3d Dist. 2001), aff’d, 833 So.2d 762 (Fla. 2002) (overruling, Hoenstine v. State Farm Fire & Cas. Co., 736 So.2d 761 (Fla. 5th DCA 1999); and Florida Farm Bureau Cas. Ins. Co. v. Sheaffer, 687 So.2d 1331 (Fla. 1st DCA 1997).
appraisers hear evidence as a matter of course during all appraisal proceedings.954
An example of this is illustrated by California Code of Civil Procedure § 1282.2(g) which provides in relevant part, “[I]f a neutral arbitrator intends to base an award upon information not obtained at the hearing, he shall disclose the information to all parties to the arbitration...”.
The clear intent of this provision is to give the parties an opportunity to confront contrary information and rebut it if possible.
However, early California common law held differently. The California Supreme Court had stated that arbitrators may educate themselves by “consulting price lists, examining materials, and receiving cost estimates,” on an ex parte basis, determining that it is entirely proper for appraisers to obtain such information from disinterested persons expert with respect to such information.955
California has amended its appraisal provision to impose a much less formal approach then had been in previous practice.
See e.g., Schoenich v. American Ins. Co., 109 Mn. 388, 124 N.W. 5 (1910); Mason v.
Fire Assoc. of Philadelphia, 23 S.D. 431, 122 N.W. 423 (1909).
955 Sapp v. Barenfeld, 34 Cal.2d 515, 521, 212 P.2d 233, 238 (1950).
The relevant portion of the newly adopted standard form states the following:
“Appraisal proceedings are informal unless the insured and this company m u tu a l l y agree otherwise. For purposes of this section, informal means that no formal discovery shall be conducted, including depositions, interrogatories, requests for admissions, or other forms of formal civil discovery; no formal rules of evidence shall be applied, and no court reporter shall be used for the proceedings. In the event of a government-declared disaster, as defined in the Government Code, appraisal may be requested by either the insured or this company but shall not be compelled.”
Except in those states that view insurance appraisals like arbitrations, appraisal meetings are not quasi-judicial proceedings and can be conducted without the formalities of a formal arbitration. In the majority of jurisdictions, the viability of an appraisal award will turn on whether all sides had an opportunity to be heard and share information.
Additionally, the process could and should include site inspections where possible, the review of building damage estimates, appraisals, engineering reports, and other information relevant to a determination of loss, damage and value. 956
In the state of Massachusetts, statute requires a reference procedure whereby referees determine the amount of loss and actual cash value by holding a “hearing,” impliedly requiring an opportunity for both parties to be present and offer evidence.957
A very good practice is exemplified by the process used in the Province of Ontario. The procedure is for each appraiser to prepare a brief which includes all documentation supporting the appraiser’s position. Two copies of the brief are provided to the umpire which he then shares with the other appraiser so that each has a copy of the other’s brief. Thereafter, a meeting is conducted where the appraisers can bring witnesses or experts to assist in their presentation. If expert testimony is anticipated, it is customary for the appraiser’s counterpart to be advised in advance so that
956 D.E. Ytreberg, Annotation, Insurance: Necessity and Sufficiency of Notice of and Hearings in Proceedings Before Appraisers and Arbitrators Appointed to Determine the Amount of Loss, 25 ALR 3d. 680 (2003).
957 Referees; Meetings, Mass. Gen. Laws Ch. 175 §101 (2003); Ritson v. Atlas Assur. Co., 272 Mass 73, 171 N.E. 448 (1930).
he may do likewise. The appraisal process is informal though premised on full disclosure and an opportunity to be heard.
If the property to be appraised, whether real or personal, has been lost or destroyed so as to make personal observation impossible, the parties should discuss alternative means of verifying the amount of loss and value under the specific circumstances of the claim. Indeed, by the very nature of the business of insurance, the unavailability of the property to be appraised is all too common and with respect to some claims, is all but inevitable. Nevertheless, the parties to the contract are entitled to have these issues appraised and a fair and equitable result achieved in order to do justice to the contract between the parties.
Photographs, videotapes, building department records and plans, and computerized inventory records or records of purchases and sales as well as the calculation of a book-to-physical reconciliation of the insured’s inventory may all be utilized to assist in verifying an out-of-sight claim. Indeed, the parties to the appraisal should be free to present whatever probative methods and means of calculating the loss that are available as long as they are not inconsistent with the terms of the policy or local statutes.
Logic and reason would dictate that the absence of a hearing should only result in a successful challenge to an award where a hearing would have been beneficial in the first place. In Aetna Ins. Co. v. Murray,958 the court concluded that an appraisal hearing was not necessary where the appraisers had from their own knowledge and experience, the information necessary to determine the issues before them. This was found to be distinct from the situation where appraisers might be required to do fact finding in coming to a conclusion, such as where the property insured had been lost or damaged to the point where it is out-of-sight and unavailable and the appraisers require evidence of the property’s age, condition, size and description.
Courts have been reluctant to impose their will or judgment retrospectively on the appraisal process and overturn an appraisal award based on the procedure utilized as long as the result was obtained honestly and in good faith.959
It has been held that an opportunity to introduce evidence of value is essential where the appraisers are unacquainted with the insured property or are selected to estimate a
958 66 F.2d 289 (10th Cir. 1933).
959 Mitchell v. Aetna Cas. & Sur. Co., 579 F.2d 342 (5th Cir. 1978); Atlas Const. Co., Inc.
v. Indiana Ins. Co. Inc., 160 Ind. App. 33, 309 N.E. 2d 810 (1974).
loss arising from the total destruction of the property. But where experts had been sent to estimate the value of an insured building before its destruction or after it had been only partially destroyed and sufficient portions of it remained to disclose the size, general character of the architecture and quality of material used, a hearing was not deemed essential.960
960 Carlston v. St. Paul Fire & Marine Ins. Co., 37 Mont. 118, 94 P. 756 (1908); St. Paul Fire & Marine Ins. Co. v. The Tire Clearing House, 58 F.2d 610, (8th Cir. 1932); Franklin v. Fireman’s Fund Ins. Co., 4 Tenn. App. 688 (Tenn. Ct. App. 1927) (old wood house with exceptionally fine details was totally destroyed and hearing was necessary to acquaint the appraisers with the quality of construction).