In many property-insurance policies, a party has a right to demand an appraisal, which is procedure in which the value of lost or damaged property is determined. Typically, an appraisal takes the form of what I call a 1 + 1 + 1 structure – each party appoints its own appraiser, and if the two party-appointed appraisers cannot agree on a number the two together then select an umpire (or a court will select an umpire to decide if the two cannot agree on one). That some form of alternative dispute resolution is used for valuation, however, does not mean that there is no room for judicial intervention in disputes involving insurance policies with appraisal provisions.
As with other forms of ADR, courts say they seek to minimize on review their own scrutiny of appraisal process and outcomes. E.g., Emmons v. Lake States Ins. Co., 284 N.W.2d 712 (Mich. App. 1992). Appraisal proceedings may be joint investigations or follow other informal processes. Litigated disputes concerning appraisal sometimes involve the proper scope of the appraisal proceeding, because appraisers determine only questions of valuation and not questions of “coverage,” Merrimack Mut. Fire Ins. Co. v. Batts, 59 S.W.3d 142 (Tenn. Ct. App. 2001). Within its scope, an appraisal generally is considered to be a final determination of whatever was decided, e.g., Jupiter Aluminum Corp. v. Home Ins. Co., 225 F.3d 868 (7th Cir. 2000), though the “coverage” issues and bad-faith issues may remain. See Darlow v. Farmers Ins. Exch., 822 P.2d 820 (Wyo. 1991).
Some disputes involve whether the appraisal provision has been waived by one side’s dilatoriness in invoking it, J. Wise Smith & Assoc. v. Nationwide Mut. Ins. Co., 925 F. Supp. 528 (W.D. Tenn. 1995), or whether the policyholder invoked appraisal too soon, which was the conclusion of the North Carolina Court of Appeal recently in Hailey v. Auto-Owners Ins. Co. (N.C. App. Feb. 20, 2007). In Hailey, although the policyholder disagreed with the insurer’s valuation and although the insurance company rebuffed commencing an appraisal proceeding – fighting the matter at both the trial court and later on appeal for more than two years – the court held that the policyholder “prematurely invoked appraisal,” since the disagreement between the policyholder and the insurer was only “unilateral” [sic?]. Slip op. at 13. As the court stated, “[w]e hold that the unsupported opinion of the insured that the insurer’s payment was insufficient does not rise to the level of a disagreement necessary to invoke appraisal,” id. at 13-14, even though the carrier offered no more money, issued a blanket denial of coverage for part of the claim, and repudiated any further steps toward appointment of an appraiser! (A more sensible result might have altered the insured’s right to obtain prejudgment interest, or its calculation, from the insurer on the ground that the insured failed to fully perfect its right to pursue appraisal. e.g., Airies Ins. Co. v. Hercas Corp., 781 So.2d 429 (Fla. Dist. App. 2001).)
Another type of dispute concerning appraisers centers on whether the appraiser or the umpire met the requirements of the qualifications clause in the policy or was otherwise an inappropriate appraiser (or umpire) for the dispute. It was this last type of dispute – over the appraiser himself – that confronted the Florida Court of Appeals in Citizens Property Ins. Corp. v. M.A. & F.H. Properties, Ltd (Fla. App. Feb. 21, 2007). In this case, after the insurance company tendered an amount approximating one-third of what the policyholder thought it was owed, the policyholder demanded an appraisal. The homeowner-selected appraiser, Mr. Pellet, determined the amount of loss to be nearly $800,000 (three times the amount offered by the carrier). An umpire was appointed, who sided with the homeowner-selected appraiser.
The insurer sought to vacate the award on the ground that Mr. Pellet was inappropriate to serve as an appraiser, for though he had conducted some 1800 appraisals and written articles in the field, the insurer contended that he was unduly biased against it. No doubt he was biased:
1. Pellet was compensated in the case based on the amount of money the policyholder collected from the insurer.
2. Pellet seems to have developed a bit of a personal animus against the insurer-selected appraiser and, as will be seen, with the insurer. Pellet sent a letter to the other appraiser reading in part:
“This letter is to inform you that you are expressly prohibited from telephonic contact with my office. ALL COMMUNICTAIONS SHALL BE REDUCED to writing . . . . All matters involving appraisal assignments will result in Court ordered umpire. I have zero intentions of discussing any negotiations, settlement, scope or unit costs with you EVER! . . . . Is there any part of this you are unclear about?”
3. Moreover, Pellet had his own personal lawsuit against the insurance company pending before the appraisal at issue, in which he was represented by the same attorney who represented the homeowner in the present case.
Finding that Pellet has “unquestionable personal bias” against the insurer, the Court of Appeal however rejected the challenge to his suitability to serve. The insurance policy’s qualifications clause (that is, the clause that identifies the characteristics of a suitable appraiser) required the appraiser to be “competent.” Compare Auto-Owners Ins. Co. v. Allied Adjusters & Appraisers, Inc., 605 N.W.2d 685 (Mich. App. 1999). (Indeed, other than following the terms of the appraisal clause, the insured is free to select someone who otherwise competent in the matter to serve as the party-appointed appraiser, even a lawyer. Glen Falls Ins. Co. v. Garner, 155 So. 533 (Ala. 1934).) The Florida Court found that Pellet had prior experience and expertise, and that “competence is not synonymous with neutrality or independence.”
Note that one difference between the Florida and North Carolina cases decided one day apart is that in Florida it was the appraiser who said that he would never negotiate with the insurer and instead would automatically seek appointment of an umpire, whereas in the North Carolina case it was the policyholder who sought to initiate appraisal without negotiating preliminarily with the carrier (even though the carrier had issued a blanket denial for at least part of the claim). Notwithstanding that neither law nor equity requires the insured perform idle acts, Cal. Civ. Code § 3532, prudence might dictate that the policyholder go a bit through the motions to satisfy the court that it has given the insurer a last clear chance to make good on its obligations to pay before the policyholder seeks appointment of appraisers.
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See generally Jonathan Wilkofsky, The Law and Procedure of Insurance Appraisal (Ditmas Park Legal Pub. 2003); Janet Brown and Michael Scroder, Appraisal, Federal of Defense & Corporate Counsel Q.303 (2003).