Appraisal run Amok: The Policyholder's Perspective
On November 13, 2014 I was a lecturer at University of Texas Continuing Legal Education seminar on Insurance law. The format was a debate between myself and Steve Badger. Steve represented the views of the insurance company. I represented the views of the policyholder. In connection with the conference I wanted to share my view of the current landscape for Appraisals in the commercial property insurance context.
Texas has seen a fair share of natural disasters the past decade but none have generated more uncertainty or chaos in property insurance coverage issues than a certain man-made disaster that struck in 2009. State Farm Lloyds v. Johnson,290 S.W.3d 886 (Tex. 2009)created a maelstrom for insurers and policyholders alike.
In Johnson, the Texas Supreme Court considered whether State Farm could be forced to participate in appraisal even though it had denied a homeowner’s hail damage claim. The short answer: yes. The reasoning and language of the opinion, however, has interjected a great deal of uncertainty into a previously staid process.
What is appraisal? Most property insurance policies contain an appraisal clause which reads:
If we and you disagree on the value of the property or the amount of the “loss,” either may make written demand for an appraisal of the “loss.” In this event, each party will select a competent and impartial appraisal. You and we must notify the other of the appraiser selected within twenty days of the written demand for appraisal. The two appraisers will select an umpire. If the appraisers do not agree on the selection of an umpire within 15 days, they must request selection of an umpire by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and the amount of the “loss.” If they fail to agree, they will submit their differences to the umpire a decision agreed to by any two will be the appraised value of the property or amount of “loss.” If you make a written demand for an appraisal of the “loss” each party will:
- Pay its chosen appraiser; and
- Bear the other expenses of the appraisal and umpire equally.
Appraisal evolved over the years as a simple means to resolve issues related to the amount of loss. Simple, right? So….what is “loss”?
Most policies define “loss” as “a reduction in value of an insureds property by a covered peril.”
Prior to Johnson there was a presupposition that appraisal was used when coverage was not an issue. The only disagreement was over how much it would cost to repair the damage (i.e. the amount of loss).
Now it’s a free for all. This paper will not explore in great detail the holding(s) in Johnson. Suffice it to say, there’s a little bit in there for everyone. Bottom line: It can now be argued that appraisal is appropriate to determine more than just the amount of loss.
So, as a practical matter, how should you deal with appraisal in the aftermath of Johnson?
The following are a few appraisal pitfalls (and suggestions about how to handle them).1. What are we appraising?
Short answer: Whatever you want. Scope of damage, cause of damage, date of damage etc. If you want to know what your appraisal will address, address it. Here are just a few of the issues the parties should determine before appraisal.
- Date of loss. Do the parties agree on the date of loss? Will the appraisers be asked to determine when the loss occurred? What if the property has been insured by the same carrier for longer than the policy period when the claim occurred? Will the appraisal consider concurrent causes or apportionment?
- Expense. Appraisal may also involve unanticipated expense for your client such as coring or infrared. How much will your appraiser charge? How much will the umpire cost? What will they do? How much will it cost?
- Time limits. Appraisal is intended to reach a quick, efficient resolution. This doesn’t always happen. If you fail to agree to time limits the appraisal may drag on for months. An appraisal should be able to be completed within 3-4 months barring some unforeseen circumstance. Insist on a narrow window with a 30 day extension if warranted.
What is a “competent and independent appraiser”? What about an appraiser who has done numerous appraisals for the same insurance company? Case law does not require an appraiser be completely independent. Rather the appraiser must be unbiased. The showing of a preexisting relationship without more does not support a finding of bias. See Franco v. Slavonic Mut. Fire Ins. Ass’n, 154 S.W.3d 777, 786 (Tex. App.—Houston 2004, no pet.).
At a minimum, appraisers need to be someone who do not have a direct interest in the outcome. For example, your appraiser must not be affiliated with the insured in business or be the insured’s contractor. Likewise, the appraiser for the insurer must not be an in-house adjuster. The appraiser should not be working on a contingency basis.
Where does a policyholder find an appraiser? This is a relatively narrow area of practice. We see many of the same experts on both sides. Since an appraiser must now be equipped to argue the cause (and sometimes even the date) of damage as well as the scope of repairs, finding a qualified single appraiser can be difficult. The only advice I can give is to ask other lawyers for referrals and choose someone who has a track record.
What about the Umpire? The appraisal clause states that the appraisers “will select an umpire.” My experience has been that good appraisers can usually agree on an umpire. Once in a while you will see a party try to race to the courthouse and get an umpire appointed without proper notice to the other side. Don’t do this. Most courts know this process and will insist on proper notice.
From a Policyholder’s perspective, finding an Appraiser and Umpire you feel comfortable with is more difficult. This is an unfamiliar area and very likely your client’s only experience with appraisal. As a result it is important to involve your client in the process and in the ultimate decision. Get the credentials of the appraiser and umpire candidates. If the loss is large enough, you might even interview appraisers with your client.
Remember, you will not be able to challenge the impartiality or qualifications of an opposing appraiser or umpire after the fact. If you have a problem with one or the other, don’t wait.3. Oversight.
One way to bring a level of certainty to the process is to seek involvement of the court. This can be achieved by first asking the court to appoint an umpire. If you want to try to avoid appraisal you should be prepared to file suit once the claims process has reached an impasse. In either event, it is often a good idea to involve a court in the process.
This will also allow a party to choose a favorable forum and have a court help set the parameters for the appraisal. This will add an extra level of certainty to the process.4. Bye Bye Bad Faith.
Appraisals will not determine bad faith issues or prompt pay issues. By agreeing to appraisal you effectively acquiesce to the notion that the insurance company had a good faith basis for denial of the claim.5. So we went through appraisal and we received the decision. Are we finished?
Maybe. Maybe not. Here is the most interesting language from the Johnson case: “Finally, even if an appraisal award is flawed, that can be easily remedied by disregarding it later.” Johnson at 895.
In Amtrust Ins. Co. v. Starship League City, LP 4:11-CV-00672 (E.D. Texas, July 23, 2012) the insurance company filed a declaratory judgment action after finding itself on the wrong end of an appraisal. The defendant policyholder filed a Motion to Dismiss. The Court refused to dismiss the suit. The Court interpreted Johnson as holding that “appraisals are intended to take place prior to filing suit, and are a condition precedent to filing suit.” (Emphasis added).Conclusion
I like mulligans. In other words, if the appraisal goes against my client I want to have an out. So does the insurance company. But if you’re going to commit to the process, give it teeth.
Appraisals can be an efficient means of dealing with a loss but only if the parties agree to a strict protocol and agree to be bound by the outcome.
Contact Hoch Law Firm if seeking legal support.