The Scope of Appraisal Clauses

posted by Michael Fortney  |  Feb 2, 2012 3:24 PM in Insurance Law

The Scope of Appraisal Clauses

Many insurance policy holders may not know that their policies contain a mechanism to resolve disputes over the value of a loss that takes the valuation determination out of the hands of the insurance company.  This mechanism is known as appraisal.  A typical appraisal clause reads as follows:

"If we and you disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss.  In this event, each party will select a competent and impartial appraiser.  The two appraisers will select an umpire.  If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction.  The appraisers will state separately the value of the property and amount of loss.  If they fail to agree, they will submit their differences to the umpire.  A decision agreed to by any two will be binding.  Each party will:

a. Pay its chosen appraiser; and

b. Bear the other expenses of the appraisal and umpire equally.

If there is an appraisal, we will retain our right to deny the claim." 

By timely invoking appraisal, an insured can obtain a loss valuation greater than that determined by the insurer.  The insurance company, however, separately retains the right to deny some or all of a claim based on the coverage and exclusion provisions contained in the insurance policy.

The appraisal clause is designed to determine the value of the loss, without resolving other issues in dispute between the parties.  The appraisal clause only speaks in terms of value and is totally devoid of any grant of authority to the appraisers to determine causation and coverage.   Nothing in the appraisal policy empowers or directs the appraisers to determine anything other than value. However, insurers sometime try to interject issues of causation, confusing the limited scope of an appraisal with an arbitration. 

The fundamental difference between appraisal and arbitration was recognized by the Ohio Supreme Court over a hundred years ago in Royal Ins. Co. v. Ries in which the Court stated that:

"The distinction between an agreement for appraisement and an agreement to submit to arbitration may not always be plain.  But when the question of liability of the company under the policy, and every other question is reserved, and the only submission provided for is an appraisal of the property at and after the time of the fire to determine the single question of the amount of the loss, it would seem to be an agreement for an appraisement and not an arbitration."

The difference between appraisal and arbitration was further explained in Guider v. LCI Communications Holdings Co.:

"Insurance appraisals are generally distinguished from arbitrations. * * * 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 parties or it may be tailored to a 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 an 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."

Because appraisers insurance policies typically require the selection of a “competent and impartial appraiser,” not a lawyer or insurance expert, the appraisal process should be limited in scope to valuation only.  Efforts to interject other issues such as causation should be resisted to prevent the insurer from perverting the purpose of the appraisal clause to prejudicially include other matters which appraisal is not designed to include or resolve.

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