In-depth Analysis of Insurance Appraisal

The appraisal system, conceived as an intrinsic element of the insurance industry, has radically evolved from its original design due to judicial intervention. The practice, initially considered an effective tool for insurance policy implementation, has transformed into a complex forum fraught with numerous problems, casting doubt on its continued utility. Moreover, the customary approach of ‘splitting the baby,’ akin to the wisdom of King Solomon, does not sufficiently address the complexities involved. The courts’ persistent erosion of the effective application of policy appraisal has even prompted certain insurers to consider its removal from their policies.

A considerable number of policyholders resist appraisal given that the process necessitates bearing their own costs. This is a stark contrast to conventional litigation where a victorious policyholder can typically recover attorney’s fees and costs either through statutory law or civil procedure rules. Therefore, the appraisal process, particularly when attorneys are involved, offers little advantage to many policyholders if they cannot recoup their costs or attorney fees from the insurer. This essay seeks to delve into the procedural aspects of the appraisal process, including its substance, scope, and enforceability, in addition to addressing related issues such as attorney’s fees, costs, and pre-judgment interest.

Historically, appraisal is often depicted as a mechanism to resolve disputes between contractual parties. Specifically, it is “[a] valuation or an estimation of value of property by disinterested persons of suitable qualification.” An appraisal clause within an insurance policy denotes that the insurer reserves the right to demand an appraisal of loss or damage. Such provisions have been integral to insurance contracts for over a century. Even the Supreme Court acknowledges that appraisal clauses have “long been commonly used in fire insurance policies…” and are regarded as a requisite precedent to action on the policy, provided they are voluntarily included in the insurance contract. Furthermore, the Supreme Court stated that the appraisal process in insurance claims does not infringe upon constitutional protections of due process or equal protection laws. The appraisal provision has been deemed a beneficial substitute for the convoluted and lengthy common law process and has been universally recognized by courts.

However, the principal goal of the appraisal process, which is to provide a swift and economical resolution to the value of the loss, seems to be dissipating. This trend is due to courts’ increasing tendency to interchangeably use ‘appraisal’ and ‘arbitration’ and to widen the scope of appraisal. This trend suggests that the promise of a more efficient and less costly resolution might be gradually fading away. Even so, when utilized in the traditional fashion as envisaged by the insurance industry, appraisal proceedings can still effectively resolve the claim. But before initiating it or consenting to a demand to participate, insurers must be aware of the jurisdiction and its interpretation of the appraisal process.

Over time, a wide array of provisions regarding appraisal has been incorporated into insurance contracts. Some examples include competent, independent appraisers, impartial umpires, and the written demand and identification of appraisers by each party to the contract or policy to invoke the appraisal remedy. Parties may also enter separate appraisal agreements to further elucidate the procedures utilized by the appraisers, the issues to be resolved, the definition of pertinent terms, and more. Such written agreements should be endorsed by the parties and their respective appraisers for enforceability.

Timing and conditions related to invoking the appraisal clause are typically outlined in the insurance contract. Generally, either party to the contract can initiate the request for appraisal. Certain jurisdictions, however, disallow a policyholder from forcing an insurer to participate in the appraisal process. This restriction is based on the interpretation that the clause is primarily in the policy as a protective measure for the insurer. For instance, in New York, courts traditionally hesitated to allow a policyholder to enforce an appraisal provision specifically.

However, this hesitation shifted when the New York legislature passed Section 7601 of the state’s Civil Practice Law and Rules. This new law allows a special proceeding to be initiated to enforce an agreement, treating it similar to an arbitration agreement. Despite this legislation, the New York courts retain discretion, as indicated by a study by the Advisory Committee on Practice and Procedure completed before this section was enacted.

From a practical standpoint, many appraisal provisions in insurance contracts and other contracts are now specifically enforced if requested by either party to the contract. The demand for appraisal usually must be presented within a reasonable time frame. To avoid confusion, the demand should be clear and in writing, and the party invoking the appraisal clause can easily satisfy this by using certified or registered mail, express delivery service, fax, or email. The written demand must be sufficiently clear for a person of ordinary intelligence to understand.

To conclude, the appraisal process has become a convoluted system, gradually drifting from its original objective of providing a quick and economical resolution of loss valuation. The constant evolution of the process and the increasing blurring of lines between appraisal and arbitration have caused this. For appraisal to remain a useful tool in the insurance industry, it is essential to revisit its origins and its intended goals. A clear understanding of this can help both policyholders and insurance companies better utilize the appraisal process and potentially restore its former efficacy.

Waiver and Estoppel 

In the realm of insurance litigation, nuances related to waiver and estoppel pose significant complexities. When it comes to an insurer’s right to appraisal, actions or inactions can inadvertently lead to waiver. For insurers desiring to invoke appraisal in instances where the extent of a loss is under question, a timely demand in alignment with policy provisions is of paramount importance.

One case that sheds light on this is Phillips v. General Accident Insurance Co. The court, situated in Florida, established that inconsistent actions concerning the right to arbitration or appraisal could result in waiver. Actions such as instigating a lawsuit without prior attempt at arbitration or appraisal or the insurer exercising its right to repair a damaged vehicle without due regard to the appraisal clause might be perceived as inconsistent.

Moreover, waiver or estoppel issues can crop up due to reservations of rights regarding coverage matters. It is prevalent among jurisdictions to interpret a complete denial of liability under an insurance policy as a waiver of the appraisal right.

An Illinois case, Spearman Industries, Inc. v. St. Paul Fire & Marine Insurance Co., provides a relevant illustration. Following a claim submission by the policyholder for roof damage, the insurer repudiated the claim based on a wear and tear exclusion. When the policyholder filed a lawsuit, the insurer argued that an appraisal should precede coverage determination. However, the court refuted this argument, highlighting that the dispute centered around damage causation, not value, and that the policy didn’t necessitate appraisal for causation matters. Therefore, the litigation proceeded sans an appraisal for loss quantification.

Similarly, in Gilbert v. Southern Trust Insurance Co., a Georgia court ruled that the insurer had relinquished strict adherence to timely appointment of an appraiser. This judgment was based on the insured party’s refusal to designate an appraiser until the final day of the contractual lawsuit limitation period, six months post the insurer’s appraisal demand. Throughout this period, the insurer’s correspondence with the insured signaled a departure from strict enforcement of the twenty-day timeframe for appointing an appraiser after receiving a written demand.

Turning to specific performance, a prevailing perspective is that appraisal, once rightfully demanded, can be specifically enforced by either party. As per the judgment in Standard Fire Insurance Co. v. Fraiman, the insured is entitled to rely on the policy’s clear language which allows appraisal upon ‘written demand of either’ party. This notion aligns with the majority of well-reasoned opinions declaring that appraisal provisions can be specifically enforced by either party to the insurance contract. Echoing this sentiment, in Opar v. Allstate Insurance Co., a Florida court decided that an insurance company must partake in the appraisal process if demanded by the insured, regardless of any coverage disputes. The insurer must bear the cost of appraisal, even if the process ends up being futile, as this commitment is an integral part of the claims process.

However, certain courts have deemed an agreement to submit a loss determination to appraisal as an executory agreement, revocable until the appraisal’s conclusion. But if a party breaches the agreement to participate in appraisal, they may be liable for actual damages incurred by the non-breaching party.

The process of selecting appraisers or umpires is usually dictated by the policy’s specific provisions related to appraisal. These provisions typically characterize an appraiser as competent and either disinterested, independent, or impartial, depending on the wording. The notion of competence, often accepted by all parties, suggests that the appraiser possesses a reasonable foundation for making an informed decision. Interestingly, even attorneys have been deemed competent to serve as appraisers.

The more intriguing debates emerge over the interpretation of terms like ‘disinterested,’ ‘independent,’ or ‘impartial.’ These terms are typically understood in their common usage, suggesting someone without any personal stake or bias and beyond the control of any party involved in the insurance contract. The independence criterion, for instance, has been scrutinized in situations where appraisers’ remuneration is contingent on the appraisal outcome, with courts delivering varying verdicts on whether such arrangements compromise independence.

Over time, various individuals’ qualifications have been questioned, including public adjusters who previously represented the insured, current public adjusters, accountants serving the insured as advisors, or other consultants frequently employed by the insurance carrier. The disqualifying interest, albeit potentially minor, must be direct, definitive, and unequivocal. Insurers should refrain from appointing their representative adjusters as appraisers, irrespective of whether they are termed ‘independent adjusters.’ Objections to the appraiser based on competence or interest must be raised swiftly or risk being waived. When parties fail to resolve such disputes, court intervention may be necessary.

As for the umpire, the appraisers should reach consensus on the selection before addressing the appraisal’s substantive elements. This process can expedite proceedings if the appraisers cannot agree on the loss amount and necessitate an umpire’s services. However, the umpire becomes involved only if the appraisers fail to agree. If a stalemate over umpire selection arises, a court will typically intervene to make a decision, triggered by a request or petition from a party to the insurance contract.

In a noteworthy case related to the World Trade Center, a federal judge indicated his willingness to self-appoint as a neutral umpire if the appraisers couldn’t reach a consensus. Generally, avoiding issues associated with favoritism by mutually agreeing on an umpire tends to serve both the insurer and insured more effectively. Court-appointed umpires for appraisal proceedings need not necessarily be lawyers, but they should possess relevant knowledge and expertise.

Credentials of the Umpire

An umpire, much like an appraiser, is required to be both competent and impartial. This was highlighted in the case of Weinger v. State Farm Fire & Casualty Co., where the court drew a parallel between the appraisal process and an arbitration proceeding. The court dealt with a motion to invalidate an appraisal award on grounds of umpire impartiality. While the trial court didn’t support the motion, the appellate court reversed the decision.

The court compared the requirements of impartiality in appraisal and arbitration, stating that an arbitrator has a clear duty to disclose any activities that might give an impression of possible bias. If not disclosed, it jeopardizes the integrity and fairness of the proceedings, warranting the award’s annulment. However, State Farm contended that the situation was an appraisal rather than an arbitration, suggesting the rules of arbitration should not apply.

Despite State Farm’s assertion that the appraisal should be distinguished from arbitration, this argument wasn’t preserved at the lower level. Moreover, State Farm’s own motions and pleadings blurred the line between arbitration and appraisal. The selected umpire in this case was an accountant who regularly worked for State Farm, although not directly related to this specific claim. Upon investigation, his annual fees revealed substantial income from State Farm, raising concerns over his impartiality. Consequently, the court decided to apply the same impartiality standards to the appraisal process as to arbitration.

This approach aligns with the Federal Arbitration Act, which allows an arbitration award to be vacated for “evident partiality” – a term broadly interpreted to include any information that might lead a reasonable person to suspect a conflict of interest. Failure to disclose potential conflicts of interest is considered “corruption,” as demonstrated in the California case, Michael v. Aetna Life & Casualty Insurance Co., prompting the court to invalidate the appraisal award.

Section 2071 of California’s Insurance Code outlines a standard fire insurance policy, stipulating that each party should select a competent and disinterested appraiser in case of disagreement over the actual cash value or the amount of loss. The term “disinterested” was interpreted by the appellate court to mean an agreement providing for an appraisal should be considered an arbitration agreement, subject to the California Arbitration Act. The Act necessitates that if “corruption” is introduced into the appraisal process by any appraiser, the appraisal award should be vacated.

The Act further requires an arbitrator to disclose any grounds for disqualification similar to those applicable to a judge, and if any such grounds exist, to recuse themselves upon the demand of any party before the conclusion of the arbitration proceedings. Among multiple grounds for disqualification, one key provision includes situations where “a person aware of the facts might reasonably entertain a doubt that the judge would be able to be impartial.”

The interpretation of “disinterested” is based on an objective standard, reflecting what a reasonable person might think. Importantly, actual bias is not necessary for disqualification under the California Arbitration Code. The court explicitly ruled that a failure to disclose required information under section 1281.9, subdivision (e), even in the absence of actual bias, constitutes “corruption” and grounds for vacating an award. This omission suggests the appraiser or arbitrator might be concealing crucial information pertinent to their impartial involvement in the appraisal or arbitration proceeding, thereby corrupting the process.

An umpire or appraiser must maintain a high degree of impartiality throughout an appraisal or arbitration process. As such, the court has delineated certain activities that could amount to “corruption” if not disclosed:

1. If an appraiser or arbitrator represents or provides services for a party or its legal representative while an appraisal or arbitration is in progress, this relationship must be disclosed.
2. Even if not concurrent with the appraisal or arbitration, a significant business relationship with a party or its representative must be disclosed by the appraiser or arbitrator.
3. A longstanding social acquaintance of a professional nature, without a significant business relationship, is not considered grounds for potential bias.
4. Membership in a professional organization does not inherently suggest bias.
5. To warrant disclosure due to potential bias, a business relationship must be both significant and involve monetary transactions.

Therefore, an improperly conducted selection process for appraisers and umpires can potentially compromise the appraisal process. Although public policy endorses appraisal as a mechanism for resolving claims without resorting to protracted and costly litigation, it is contingent upon all parties behaving fairly and abiding by the insurance contract’s terms and conditions.

As for hearing procedures, insurance policies usually do not provide explicit instructions for the appraisers, leaving the procedural course largely to their discretion. The inherent informality of the appraisal process is often seen as advantageous, although some appraisals are conducted formally. In such cases, the parties may find it beneficial to establish a procedural memorandum of appraisal, outlining the rules for the specific claim. This document should also clarify the issues, ensuring no party is blindsided by unforeseen matters during the appraisal process.

Courts, such as those in Florida, have emphasized that appraisals are intended to be less formal than arbitrations. Yet, this notion is not universally accepted, and in some jurisdictions, formal hearings may be requested, involving testimonies and evidentiary exhibits. If a hearing is held, it is generally advisable for the insurer to arrange for the proceedings to be recorded, particularly in case any testimony given becomes pertinent in future court proceedings.

The appraisers are expected to gather all the necessary evidence for a comprehensive review and resolution of the issues. This may include site inspections, expert reports, pertinent documents, and statements from examinations under oath of the insured, among other items. If a formal hearing is agreed upon, the method for formally recording the hearing must be decided.

Once the appraisers or, if involved, at least two of the three panel members (including the umpire), reach an agreement, a written appraisal award must be issued to conclude the process. The award’s format can often be contentious, given that many policy forms mandate itemization but provide no specific guidance regarding the level of detail required. Courts have found that categorization by coverage type and by separate buildings is typically adequate.


Clarifying the Nature and Purpose of Appraisals and Arbitrations

There exists considerable confusion in several legal jurisdictions regarding the differences between arbitrations and appraisals, leading to these terms being mistakenly used interchangeably and sometimes even resulting in the application of state arbitration laws to appraisal proceedings.

While some jurisdictions, such as California, Florida, and Connecticut, have interpreted insurance appraisals as a form of arbitration, there exist historical and technical distinctions between these two processes that are critical to understand.

Appraisal, primarily, is a mechanism instituted and governed by the insurance contract itself. Typically, its scope is narrower compared to arbitration. In most jurisdictions, the purpose of appraisal is not to resolve coverage disputes but to establish the extent of damages. However, the practical application of this principle often introduces complexities.

In contrast to jurisdictions that blur the boundaries between arbitration and appraisal, many have maintained the traditional distinction between the two. For instance, applying Texas law, the federal district court in the case of Hartford Lloyd’s Insurance Co. v. Post Independent School District asserted that the appraisal process cannot determine causation, coverage, or liability like arbitration can, thus preserving the separation between “amount of loss” and “coverage issues”. This segregation is upheld in the majority of jurisdictions, including the Tennessee Court of Appeals in Merrimack Mutual Fire Insurance Co. v. Batts.

However, there are also instances where appraisal provisions in insurance contracts have been interpreted as arbitration agreements. The case of ACME Roll Forming Co. v. Home Insurance Co. saw a Michigan court declare appraisal to be a common-law arbitration agreement. Similarly, in the Florida case United States Fire Insurance Co. v. Franko, an appraisal provision was regarded as an arbitration agreement.

Nonetheless, even in these instances, some courts have elucidated the differences between appraisals and arbitrations. The Florida court in the case of Florida Farm Bureau Casualty Insurance Co. v. Shaeffer, for example, highlighted the traditional distinctions between these procedures and their respective roles and scopes, despite ultimately ruling the appraisal clause as an agreement to arbitrate.

In conclusion, there is an urgent need for courts to accurately define the nature of the appraisal clause contained in insurance contracts, distinguishing it from an arbitration clause to avoid confusion and misinterpretation. Until then, insurers must be aware of the specific laws in the jurisdiction where the appraisal is being demanded.

In navigating the complex intersections of appraisal remedies, frequent disputes tend to arise around differentiating between the scope and amount of loss or damage and coverage issues. There is no consensus across jurisdictions on whether appraisals should factor in coverage issues in “amount of loss” calculations, and the interpretations can be polarized or ambiguous.

The prevailing view asserts that appraisal isn’t a mechanism to adjudicate coverage issues or liability. Instead, it primarily serves to establish values. However, the understanding of what constitutes “amount of loss” varies. To some, it represents the monetary value necessary for repair or replacement, while others interpret it as determining whether the property can be repaired or if it necessitates replacement.

Consequently, disagreements around the “amount of loss” can inadvertently engage with coverage issues like causation. If ignored, such considerations could render the appraisal process futile. Under this widespread rule, appraisal is not an instrument to decide coverage issues. It establishes the value and the quality of damaged property rather than the carrier’s liability.

Even though the appraisal system was designed to address the “amount of loss” exclusively, many courts have allowed it to engage with causation issues, especially when it is closely linked with the damage issue. There’s often a thin line between disputes about the amount of loss and coverage questions. This results in conflicting rulings on the appraisal’s scope, particularly with claims that involve both coverage and damage issues.

It’s crucial to note that some courts have allowed appraisal to determine the causation of damages. For example, in Lakewood Manufacturing Co. v. Home Insurance Co., the court ruled that it was fitting for appraisers to discern whether the claimed damages were due to a covered loss (fire) or a non-covered loss (labor strike). Similarly, in CIGNA Insurance Co. v. Didimoi Property Holdings, N.V., the court affirmed that causation was an issue for the appraiser, not the court.

When Courts Limit the Appraisal’s Scope

In contrast, there are instances where courts lean towards limiting the appraisal’s scope. For example, in a disagreement over a $92 million insurance claim involving a fire-damaged building with asbestos and microbial issues, the court sided with the insurer’s broader interpretation of “amount of loss.” The court upheld that an appraiser’s evaluation of the “amount of loss” would necessarily include determining the cause of the loss and the repair costs, distinguishing it from the question of “coverage.”

In such cases, if an appraisal’s decision could potentially exclude the entire claim based on causation, then such a decision is better left to the court. Conversely, where an appraisal of damage is fundamentally futile because it fails to differentiate between covered and non-covered damages, courts are more likely to permit appraisers to address causation issues.

Florida courts have recently wrestled with these issues. For instance, the Florida Farm Bureau Casualty Insurance Co. v. Shaeffer case found that the decision on whether a roof could be repaired or needed to be replaced, due to the unavailability of unique ceramic tiles, was appropriate during an appraisal.

In contrast, the Gonzalez v. State Farm Fire & Casualty Co. case concluded that appraisers had overstepped by determining whether the entire claim was within the policy’s coverage. The court held that causation was not an appropriate issue for appraisal when such a decision could result in no recovery.

In summary, courts across various jurisdictions have grappled with delineating the scope of appraisals in insurance loss disputes. While some courts have expanded the ambit of appraisals to cover causation issues, others strictly confine it to determine the monetary value of the damage. The intersection of these issues often blurs the boundaries between the scope of the appraisal and coverage questions, leading to inconsistent rulings across different cases.

In Gonzalez v. Nationwide Mutual Insurance Co., the Florida Supreme Court took notice of the disparity in its ruling with that of Johnson. Johnson v. Nationwide Mutual Insurance Co., a ruling by the same court, sought to reconcile this conflict among the State’s Courts of Appeal by affirming Judge Cope’s viewpoint in the Gonzalez case. Judge Cope posited that in a scenario where an insurer recognizes a covered loss, yet a disparity exists regarding the loss amount, the task falls to the appraisers to determine the payable sum.

For instance, if an insurance policy covers windstorm damage but excludes dry rot, the appraisers’ role is to assess the damage and settle on a reasonable payment for the windstorm damage while not accounting for the repairs necessitated by preexisting dry rot. It is noteworthy, however, that the court has established that the question of whether the claim falls under an applicable policy coverage is a judicial query, not an appraiser’s task.

In both Johnson and Gonzalez, the insurers completely denied any covered loss under their respective policies. Hence, the Florida Supreme Court concluded that the appraisals wouldn’t determine the sum of an admitted loss. Instead, they would address whether the policies covered any losses related to the claims submitted. The court further asserted that the resolution of coverage issues should be left to the judiciary, not an appraisal panel, as it had held in State Farm Fire & Casualty v. Licea.

The Supreme Court made it abundantly clear that any past rulings, specifically Florida Select Insurance Co. v. Keelean and Opar v. Allstate Insurance Co., that disagreed with their decision would be overruled. It opined that an insurer’s outright denial of a claim based on a policy exclusion before requesting appraisal mandates that the court, not the appraisers, resolves coverage issues.

In Delisfort v. Progressive Express Insurance Co., the court upheld this notion, asserting that an appraisal could only be used to establish the amount of loss. This case dealt with an automobile insurance policy that allowed the insurer to adjust for depreciation in the car’s physical condition. The interaction of this clause with the one providing coverage for the necessary amount for repair or replacement was viewed as a legal question, not one for appraisal to decide.

In the landmark Merrimack Mutual Fire Insurance Co. v. Batts case, the court held that without proof of agreement by the parties, there was no basis to believe that appraisers could decide on coverage questions. This ruling reinforces the role of the judiciary in settling disputes over coverage, leaving the appraisal process solely to determine the “amount of loss.”

The aftermath of the appraisal should prompt a closer scrutiny of the choice of appraisers and case-by-case evaluation before appraisal demands are made.

When it comes to post-appraisal challenges and procedures, it’s vital to acknowledge that public policy generally supports alternative dispute resolution processes like appraisal. Insurance policy appraisal provisions align with this policy, fostering judicial efficiency by establishing recoverable damage amounts via more favorable dispute resolution methods than courts. These provisions are legally binding on the parties to the insurance contract if properly invoked.

Generally, insurance contract appraisals bind the parties involved, reducing the likelihood of litigation to challenge the process or its components. Exceptions might include challenges to the award based on appraisers or umpire’s qualifications or interest, allegations of insurer’s bad faith in invoking the appraisal clause, or an insurer’s failure to adhere to the appraisal process and pay the award.

Post-Appraisal Challenges and Procedures: The Presumption of Validity

As a rule, public policy is predisposed toward alternate dispute resolution mechanisms such as appraisal proceedings. This preference manifests in the inclusion of appraisal provisions within insurance policies, which align with public policy by promoting judicial economy. Specifically, these provisions simplify the determination of recoverable damages, offering a more efficient method than traditional courtroom adjudication.

Validly invoked appraisal clauses are binding on all contracting parties. Consequently, an insurer’s legitimate invocation of the policy’s appraisal provision mandates that the insured yield to the appraisal process. Any actions instituted by the insured before this point may face dismissal or abatement. Moreover, should the insured decline to comply post-insurer’s written appraisal request, the insurer can opt to file a motion to compel arbitration.

In the grand scheme, appraisals within an insurance contract context are binding on the contract’s parties, making litigation involving the process or its constituent elements an uncommon occurrence. Exceptions might emerge in the form of challenges to the award based on the appraisers or umpire’s qualifications or interests, accusations of bad faith on the insurer’s part in initiating the appraisal clause, or an insurer’s failure to adhere to the appraisal process and fulfill the award.

In line with the public policy favoring alternate dispute resolution, admissibility of concluded appraisals into subsequent proceedings is a rarity. Once an appraisal is finalized, an award signed and disseminated to the parties, and payments made, the matter is typically considered resolved. Even if a party is dissatisfied and seeks judicial redress, courts usually uphold the appraisal clause—a norm that has persisted for over a century. Consequently, the award is presumed valid and binding on the parties, unless the appraisal clause contradicts statutory provisions.

In a series of rulings, Florida courts have recently held that an appraisal award is binding on both parties, albeit the insurer maintains the right to deny coverage post-award. The initial dispute over this issue occurred in American Reliance Insurance Co. v. Village Homes at Country Walk, where the majority opinion rejected the binding nature of an appraisal award. The court deemed the phrase, “if there is an appraisal, we will still retain our right to deny the claim,” to be at odds with appraisal objectives and lacking mutual obligation, thereby voiding the policy’s appraisal provision.

However, dissenting Judge Cope offered a different viewpoint, advocating for a contractual interpretation that preserves a reasonable, lawful, and effective meaning for all contractual terms. He argued that appraisal provisions should be binding, with the ‘right to deny’ sentence merely asserting that the insurer, even when proceeding with the appraisal process, retains its coverage defenses.

Ultimately, the Florida Supreme Court adopted Judge Cope’s perspective, holding that while coverage existence is a court-decided issue, the appraisal process’s monetary value is binding on both parties. In State Farm Fire & Casualty Co. v. Licea, the court clarified that a demand for policy appraisal only leaves the insurer with defenses such as no policy coverage for the loss entirely, or policy condition violations like fraud, lack of notice, or failure to cooperate. The court maintained that the appraisal clause’s core objective is loss assessment, which implicitly involves determinations about repair or replacement cost and whether such requirements result from a covered peril or an uncovered cause. Thus, the clause is not void due to lack of mutual obligation, as it only retains the right to dispute the coverage issue as a whole or whether specified policy conditions have been violated.


Post-Appraisal Contestations and Methodologies

Affirmation of Authenticity

In a general context, public policy is aligned towards alternative dispute resolution mechanisms, including the appraisal process, fostering judicial efficiency by expediting the determination of recoverable damages in a less contentious environment than the courts. Appraisal clauses embedded within insurance policies not only harmonize with this public policy but also bind the contractual parties when properly invoked. Thus, if an insurer duly employs the policy’s appraisal clause, the insured party must subject the dispute to appraisal. Any legal action initiated by the insured prior to this is liable for dismissal or abatement. In instances where the insured fails to comply post the written demand for appraisal, the insurer may contemplate filing a motion to compel arbitration.

In principle, an insurance contract’s appraisal is deemed binding upon the contracting parties, hence litigation to challenge the process or its components should be infrequent. Exceptions could arise when the award is contested on the grounds of appraisers’ or umpire’s qualifications or vested interests, allegations of the insurer’s bad faith in invoking the appraisal clause, or the insurer’s non-compliance with the appraisal process and non-payment of the award.

Given that public policy advocates dispute resolution through appraisal over litigation, the admissibility in subsequent proceedings is an exception. Once the appraisal is concluded, an award issued, conveyed to the parties, and the agreed amount paid, the matter is typically considered settled. If a party expresses dissatisfaction and opts for legal action, courts generally enforce the appraisal clause, a practice well-established for over a century. The award is deemed presumptively valid and binding upon the parties, barring any terms or conditions of the appraisal clause that might conflict with a statute.

Recent developments in Florida’s legal system have concluded that an appraisal award binds both parties, despite the insurer’s right to decline coverage for the award post-rendering. A split decision from the Florida Third District Court of Appeal initially negated the binding nature of an appraisal award in the case of American Reliance Insurance Co. v. Village Homes at Country Walk. The court concluded that the statement, “if there is an appraisal, we will still retain our right to deny the claim,” was incongruous with the goals of appraisal and lacked mutuality of obligation. This led to the annulment of the policy’s appraisal provision and affirmed the trial court’s denial of the insurer’s motion to compel arbitration.

However, a counterpoint came from Judge Cope’s strong dissent. He advocated that contract interpretation should favor a reasonable, lawful, and effective meaning to all contractual terms, as opposed to leaving a part unreasonable, unlawful, or without effect. All contract provisions should be harmoniously construed, he asserted, with each given its due meaning if possible. Judge Cope proposed that appraisal provisions are binding on the parties, and the ‘right to deny’ statement merely implies that the insurer reserves the right to leverage any available coverage defenses, even if the insured requests an appraisal and the insurer proceeds with the appraisal process.

This interpretation eventually won favor with the Florida Supreme Court, which agreed with Judge Cope’s dissent in the American Reliance case. In State Farm Fire & Casualty Co. v. Licea, the court ruled that while the existence of coverage is a matter for the courts, the monetary value determined through the appraisal process remains binding on the parties. According to the court, any defenses the insurer can assert post an appraisal demand pertain only to whether there is no coverage under the policy for the loss in its entirety or whether typical policy conditions such as fraud, lack of notice, and failure to cooperate have been violated. The court interpreted the appraisal clause to require a quantification of the loss, including determinations regarding the cost of repair or replacement and the necessity of such repair or replacement due to a covered peril or an uncovered cause such as normal wear and tear or specifically excluded clauses. The court held that the appraisal clause is not void due to the lack of mutuality of obligation simply because of a retained rights clause, which it interpreted as reserving only the right to dispute the issue of coverage for the entire loss or whether the policy conditions have been violated as specified above.


“Contesting an Appraisal Award: Perspectives and Challenges

The appraisal awards are customarily acknowledged as valid, however, most jurisdictions offer limited provisions, either statutory or common law, for challenging a finalized appraisal award. Gross misconduct, fraud, and error remain unfailing grounds for challenging an appraisal award, while other legal grounds for contestation vary across jurisdictions. A case in point is the Seventh Circuit Court of Appeals’ decision in Jupiter Aluminum Corp. v. Home Insurance Co., which ruled that an appraisal under Indiana law is binding unless proven to be inherently unfair or unjust. Furthermore, the binding nature of an appraisal award does not hinge on an explicit provision in the policy stating it to be binding.

In evaluating the challenge to the appraisal award, the court ruled that the umpire’s assignment of a loss value lower than the estimates proposed by the appraisers for both the insured and the insurer doesn’t necessarily indicate “unfairness or injustice.” This insight, among others from jurisdictions nationwide, implies that both insurers and insured individuals should typically expect that an appraisal award will likely not be vacated.

Post-Award Interest, Attorney’s Fees, and Costs

After the finalization of an appraisal award, disputes commonly pivot toward claims for attorney’s fees, pre-judgment interest, and costs. Generally, appraisal clauses mandate that each party covers its own costs and equally shares the umpire fees. However, they are often silent on attorney’s fees and pre-judgment interest. This lacuna in the clauses has led to some policyholders, public adjusters, and attorneys seeking to impose attorney’s fees and pre-judgment interest on the insurer, driven by respective statutes within the jurisdiction.

Florida, for example, is wrestling with these issues. Certain policyholders, public adjusters, and attorneys are trying to leverage Section 682.15 of the Florida Arbitration Code to recover pre-judgment interest, fees, and costs. Notably, Florida has a statute that awards attorneys’ fees against an insurer in the event of a “judgment” or “decree” favoring the policyholder. The ambiguity arises when defining if an appraisal award is synonymous with a judgment or decree, which remains unclear. This legal grey area, however, didn’t prevent an intermediate appellate court, in Nationwide Property & Casualty Insurance Co. v. Bobinski, from denying a policyholder attorney fees following appraisal.

Consequently, some insured parties are seeking to utilize the procedures for confirming and modifying, correcting, or vacating an arbitration award to their advantage. According to Florida Arbitration Code Sections 682.14 and 682.13, an application for correction, modification, or vacation of an award must be submitted to a court within ninety days of award delivery. Insurers must stay vigilant about this timeframe if an appraisal award contains an error or there are other grounds for modifying or vacating the award.

Impacts of an Award on Future Bad-Faith Claims

Appraisal is a preferred remedy as it expedites the determination of valuation issues economically, and its usage often represents a good faith act by the insurer or insured. Conversely, improper utilization of the appraisal process may be indicative of bad faith. If an insurer forces the insured through an appraisal only to later deny any liability based on a known defense such as arson, this may be construed as bad faith.

Situations in which appraisal proceedings may become relevant in future bad faith allegations include cases where appraisal appears appropriate but the insurer fails to timely demand; the insurer neglects to appoint an independent or impartial appraiser; the insurer refrains from paying an appraisal award or promptly doing so; or attempts to resolve coverage issues via appraisal.

Despite these, courts have shown hesitation in endorsing bad faith claims arising out of the appraisal process, primarily due to the view of appraisal as a rapid alternative to litigation. As with other bad faith allegations, courts usually examine the specifics of the claim and endeavor to apply rational judgment.”


“In the case of Gopp v. Legion Insurance Co., the insurer initiated an appraisal after the insured party rejected independent adjuster’s settlement proposals for their property damage claims. The adjuster allegedly restricted the insured party from contacting witnesses or even communicating with their own appraiser during the proceedings. Furthermore, the insured party did not receive notice of the appraisal hearing and faced additional hindrances while presenting their case. Consequently, the court held that the insurance company’s conduct was not in good faith, thus validating the insured party’s allegations of fraud and conspiracy against the insurer and its independent adjuster.

Contrastingly, in Central Life Insurance Co. v. Aetna Casualty & Surety Co., the insurer was acquitted from a bad faith verdict for wrongfully refusing to pay a structural damage appraisal award. The insurer had initially made a partial payment based on its appraiser’s estimation, but later contested both the process and award while not disputing the coverages or liability. The Supreme Court of Iowa ruled that the lower court should have granted the insurer’s request for a directed verdict concerning the bad faith allegations, as the insurer had a right to debate whether the appraisal award was egregiously excessive. In this case, the appraisal award was eventually dismissed due to the finding that the insured’s appraiser was not impartial due to the contingency fee agreement.

Advantages and Drawbacks of Appraisal

The benefits of invoking the appraisal clause within an insurance policy include an economic and swift resolution to a dispute. Appraisal is conceived as a straightforward means of estimating the amount of loss without the costs and delays typically associated with the litigation system, rendering it an effective tool to resolve conflicts between insurers and insured parties.

However, the appraisal process has its criticisms and potential pitfalls. These include a lack of procedural safeguards such as adherence to rules of evidence, notification requirements, witness and document discovery, among others. There may also be confusion stemming from the lack of control over the award’s format, leading to payment of damages not covered under the insurance policy’s terms and conditions. The emergence of a professional cadre of umpires or appraisers has also heightened concerns of bias and favoritism.


Appraisal as a resolution mechanism within first-party property insurance disputes is no longer an unerringly reliable ally. Given the increased opportunities for misuse of the process and the growing uncertainty surrounding appraisal proceedings, insurers may contemplate omitting appraisal clauses from property insurance policies unless statute mandates their inclusion.

Insurers operating in jurisdictions adhering to traditional appraisal clauses should be mindful of the shift towards a more formal arbitration-style process, replete with all its associated risks and drawbacks. Therefore, it is crucial for each claim to be thoroughly examined to ascertain if invoking the appraisal process remains a viable means of dispute resolution.”



This Appraisal Memorandum (“Memorandum”) is executed by and between the policyholder, identified herein as ____________________, and the insurer, represented herein as _____________________.

RECITALS: WHEREAS, the policyholder purports to have incurred a loss on the _____ day of ___________, _____, affecting the property described herein:

AND WHEREAS, Policy No. _______________, underwritten by _______________________ and issued to ____________________________, contains the following provision:

(Insert Appraisal Clause of Policy Here)

AND WHEREAS, a divergence in understanding has emerged between the parties hereto concerning:

The extent or quantum of damages attributable to or encompassed within the parameters of the _________________________ Policy No. ___________.

NOW, THEREFORE, THIS MEMORANDUM PROVIDES THAT: In adherence to the stipulations of the insurance policy, _________________ and _________________ have been designated and are hereby appointed as appraisers. Their mandate includes appraising the replacement value/cost and adjudicating all matters delineated in this memorandum, consistent with the terms and conditions of the aforementioned policy of insurance.

ADDITIONALLY, it is agreed upon by both parties that the _________________________ (insurer) shall not be considered to have relinquished any of its entitlements by virtue of any act pertaining to appraisal.

FURTHERMORE, it is comprehended and accepted by both parties that the appraisers will endeavor to reconcile the contested matters through the informal procedures established and set forth in the insurance policy, obviating the need for formal hearings or proceedings under the prevailing state’s Arbitration Code. In the event, however, that either appraiser acting for a party or, alternatively, the jointly selected and ratified umpire, deems it necessary to invoke formal proceedings in accordance with the applicable Arbitration Code to reconcile the issues, a notification in writing of at least thirty (30) days shall be extended to the appraisers, umpire, and parties, enabling coordination of and attendance at any requisite hearings by all interested parties. Similarly, should either appraiser or the umpire opt to seek the perspective of an expert witness, said expert’s identity, curriculum vitae or resume, along with the written report (if any) or a summary of the areas to be assessed and presented, must be disclosed to the appraisers and umpire at least fourteen (14) days before any appraisal process deliberations commence.

IN WITNESS WHEREOF, our signatures (in duplicate) affix hereto on this __________ day of _____________________, 20__.

_______________________________ _______________________________
(Name of Insured) (Representative of Name of Insurer)

_______________________________ _______________________________
(Name of Appraiser for Insured) (Name of Appraiser for Insurer)

_______________________________ _______________________________
(Attorney for Insured) (Attorney for Insurer)”


Leave a Reply