In the wake of a property loss, disputes often arise between policyholder and insurer regarding the value of the claim. The purpose of the appraisal process is to move the claim adjustment process forward even in the event of such disputes. Standard appraisal provisions provide that upon a disagreement between the insurer and the insured on the “amount of loss,” either party may demand an appraisal. After such a demand is made, each party has a designated time period in which to identify an appraiser.
In the wake of a property loss, disputes often arise between policyholder and insurer regarding the value of the claim. The purpose of the appraisal process is to move the claim adjustment process forward even in the event of such disputes. Standard appraisal provisions provide that upon a disagreement between the insurer and the insured on the “amount of loss,” either party may demand an appraisal. After such a demand is made, each party has a designated time period in which to identify an appraiser. The two appraisers then agree on an umpire or, if the appraisers cannot agree, an umpire is appointed by the court. Each umpire is required to “separately set the amount of loss” and attempt to agree in writing as t the amount agreed upon. If the appraisers cannot agree, they will submit their differences to the umpire. A decision agreed to by any two sets the amount of loss. Each party pays its own appraiser and the costs of the umpire and the appraisal expenses are divided evenly.
As noted above, the appraisal process is triggered when there is a dispute as to the “amount of loss.” While different states carve out more expansive roles for appraisers than others, Georgia courts have held the purpose of an appraisal clause is to resolve “a disputed issue of value” and “cannot be invoked to resolve broader issues of liability.” McGowan v. Progressive Preferred Ins. Co., 281 Ga. 169, 172–173, 637 S.E.2d 27 (2006). Stated another way, the parties must agree that coverage is afforded under the policy for that portion of the loss in order for appraisal to be appropriate.
In 2014, the Georgia Court of Appeals issued a hotly contested opinion regarding the scope of appraisal in the roofing context. In Lam v. Allstate Indemnity Co., the court held that the policyholder’s disagreement with the insured regarding the extent of the roof that was damaged by wind was a question of coverage, and therefore, not a proper basis for appraisal. 327 Ga. App. 151, 755 S.E.2d 544 (2014). In 2017, Missouri, Tennessee and New York courts provided further guidance as to which issues are, and are not, appropriate candidates for appraisal.
A Missouri district court faced an issue similar to that addressed by the Lam court and came to a different conclusion. In Taven Apartments, an insured building caught fire and the insured subsequently rebuilt the property. Taven Apartments Ltd. P’ship, et al. v. State Farm Fire & Cas. Co., 2017 WL 4778580 (E.D. Mo. 2017). A dispute arose after the rebuild was completed because State Farm contended that the new buildings were not “like kind and quality” as the original structures. The insured moved for appraisal, and State Farm refused, contending that the dispute involved a coverage issue, and therefore, was not appraisable. The court held that “it appears that the dispute is centered on the valuation and cost of damages, repairs and construction, which constitutes a ‘disagreement on the value or the amount of loss.’” Id at *3. Based on this determination, the court granted the insured’s motion to compel participation in the appraisal process.
Often times, it is clear that the parties and their appraisers have differing opinions as to the extent of coverage by looking at the amount of the loss proposed by each party’s appraiser. In Pear Tree Properties, the USDC for the Middle District of Tennessee evaluated whether an appraisal award was enforceable against the insurer where the award itself contained implicit coverage determinations. Pear Tree Properties, LLC v. Acuity, 2017 WL 3674845 (M.D. Tenn. 2017). In that case, after a commercial building suffered storm-related exterior and interior damage, the insurer Acuity issued a letter outlining the portions of the loss it contended were covered under the policy. The insured disagreed with this determination and sought appraisal. When Acuity denied this appraisal request, the insured filed suit. During litigation, Acuity agreed to participate in a “limited appraisal” with the insured. Thereafter, the appraiser for the insured and the umpire agreed upon an appraisal award of approximately $890,000.00. Pursuant to this award, Acuity issued payments totaling approximately $170,000.00 for the portions of the loss it contended were covered and prepared a list of appraised items that it contended were not covered under the policy. Acuity claimed that it was not bound by the appraisal award as it related to the portions of the award to which it denied coverage and sought a jury determination as to the question of coverage under the policy. The court sided with Acuity and held that absent a contractual provision to the contrary, appraisers do not have the power to bind coverage or determine issues of liability. Therefore, the portions of the award that represented areas of disputed coverage could not be enforced against Acuity.
While appraisers are required to be “competent,” policies generally impose little to no technical training or knowledge required to be an appraiser. As a result, builders, contractors, public adjusters and other sundry consultants and trades people are asked to estimate the cost to repair or replace damaged property. Many times, the cost of estimated repairs becomes intertwined with the appraiser’s opinion as to the proper method of repairs. Also in 2017, a lower court in New York evaluated whether the cause of damages and the extent of necessary repairs were proper issues for appraisal. Matter of Joseph Pottenburgh v. Dryden Mutual Ins. Co., 55 Misc. 3d 775, 48 N.Y.S.3d 885 (N.Y. Sup. Ct. 2017). This was a vandalism case in which black spray paint damaged interior and exterior elements of a property. The insurer issued payments for repairs, but the insured’s public adjuster disputed these payments, stating that additional interior components would be affected during the repair process. Among other things, the insured’s public adjuster contended that both the portions of the garage vinyl siding that were vandalized with spray paint and the unmarked portions needed to be replaced in order to achieve a matching affect. The insurer contended that only the damaged portions of the siding should be replaced. Ultimately, the court held that “the scope of repairs made necessary by a covered loss, and the cost of any such repairs, directly bear upon the valuation of the loss.” Id. at 799. Even so, the cause of the damage, and the determination as to whether the damage occurred in the vandalism incident, was not appraisable as the cause of damage is a coverage issue. Id.
In sum, when appraisal is triggered, insurers should preserve their coverage defenses by clearly outlining which portions of the loss are covered by the policy (and are subject to appraisal) and which portions of the loss are not covered (and are not subject to appraisal). If a dispute as to portions of coverage is identified prior to the invocation of appraisal, an insurer can agree to a “limited appraisal,” which only addresses the portions of the loss where the parties agree that coverage is afforded. Lastly, if an award is entered that exceeds the scope of coverage, an insurer should take guidance from its counterpart in Pear Tree Properties and issue payments pursuant to the award only for the undisputed portion of the loss and continue to litigate the disputed portions of the loss.