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By Steven J. Badger and Kristin C. Cummings
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Almost all property insurance policies contain a provision specifying “appraisal” as a means of resolving disputes over the amount of loss associated with a covered claim. Historically, appraisal provided a method for an insured and insurer to efficiently resolve a dispute over the amount of a covered loss when both parties agreed about the existence of coverage. It was generally a quick, inexpensive and amicable process.

Unfortunately, that’s no longer the case. The appraisal process has devolved into a nonjudicial dispute resolution process rife with abuse and manipulation by individuals — other than the insured — with a monetary incentive to engage in and prolong the process.

A typical appraisal provision provides as follows:

If we and you disagree on 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 and notify the other of the appraiser selected within 20 days of such demand. The two appraisers will select an umpire. If they cannot agree within 15 days upon such umpire, either may request that selection be made by a judge of a court having jurisdiction. Each appraiser will state the 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 as the amount of loss.

Historically, the purpose of appraisal was clear: when an insured and insurer agreed there was coverage for a claim but disagreed as to the value of the damaged property, appraisal provided a simple alternative to hiring lawyers, filing a lawsuit, retaining experts, engaging in discovery and ultimately having a court or jury decide the value of the property.

By including an appraisal provision in the insurance policy, the parties agreed that if a dispute arose over the amount of loss, it would be decided by one or more disinterested third parties (generally, two appraisers and an umpire) tasked with simply placing a value on the damaged property, thus promptly resolving the claim and avoiding the cost of litigation.

In recent years, the landscape of appraisal in insurance disputes has changed significantly in three specific ways: the historically limited scope of appraisal is broadening; appraisers and even some umpires are, in many cases, less and less “impartial;" and appraisal has become a nonjudicial dispute resolution process devoid of procedural rules and codes of conduct.

The Limited Scope of Appraisal Is Broadening

Although the scope of appraisal varies from state to state, there is a trend whereby courts have begun to broaden the scope of appraisal. Most appraisal provisions, like the one above, refer to a disagreement over “the amount of loss.” Historically, this was all an appraiser could decide — the monetary value of damaged property. However, recent cases have broadened the scope to allow appraisers to determine the cause of loss.

For example, in 2009, the Texas Supreme Court held that appraisers can allocate damage between covered and excluded causes of loss. State Farm Lloyds v. Johnson, 290 S.W.3d 886, 889-90 (Tex. 2009). Texas courts have since interpreted this holding as permitting appraisers to resolve questions of causation. MLCSV10 v. Stateside Enterprises Inc., No. H-10-4186 (S.D. Tex. Mar. 30, 2012).

Other states have relied on the Texas Supreme Court’s decision in Johnson to hold that questions regarding causation can be decided through appraisal. Quade v. Secura Ins., 814 N.W.2d 703 (Minn. 2012); Underwriters at Llloyd’s of London Syndicate 4242 v. Tarantino Props. Inc., No. 4:12-CV-00167-DGK (W.D. Mo. Sept. 4, 2012).

Similarly, the Second Circuit held earlier this year that under New York law, appraisers can determine the causes of lost business income under a property policy. The court held that questions such as whether the insured’s lost income was attributable to the covered loss or other, independent business conditions unrelated to the loss was a factual question appropriate for the appraisers. AMEREX Group, Inc. v. Lexington Ins. Co., 678 F.3d 193 (2d Cir. 2012).

While courts are still citing to the age-old rule that questions regarding coverage must be reserved for the court by extending the appraisers’ role of determining the “amount of loss” to include determination of causation, courts are broadening the scope of appraisal beyond simply determining the “amount of loss.” This has greatly increased use of the appraisal process to resolve claims.

Appraisers and Even Some Umpires Are Less and Less Impartial

Most policies require that each appraiser be “impartial” (sometimes “disinterested”). While appointed appraisers will always attest to their impartiality, the practical reality of appraisals today is that seldom does an appraiser disagree with the position of the party who appointed him.

Not surprisingly, the insured’s appraiser almost always agrees with the insured’s position. Likewise, the insurer’s appraiser almost always agrees with the insurer’s position. Does this mean that the appraisers are not impartial? Not necessarily.

However, it does indicate that appraisers — though perhaps still “impartial” as defined by the policy — are now essentially advocates for their client’s positions in a prelitigation dispute resolution process.

With almost no appraisals resolved by the appraisers themselves, the appointment of an umpire is a virtual certainty. Most policies specify that if the appraisers cannot agree on the amount of loss, they are to work together to agree on an umpire. Historically, there had been a good faith effort by the two appraisers to reach agreement on a neutral umpire. Or, if such agreement couldn’t be reached, they would jointly ask a judge in a local court to appoint an umpire of its choosing.

That has also changed. Now, it’s a race to the courthouse to get a favorable umpire appointed, often unilaterally and without proper notice to the other party. It is not uncommon for a party to file a motion to appoint an umpire without notifying the other side that it intends to do so. In many jurisdictions, a court can grant such a motion before the other side even has had a chance to respond.

As a result, an umpire in a specific dispute is increasingly not a person agreed to by the appraisers but rather the name submitted by one side in its unilateral motion to appoint an umpire. While this appointed umpire might also be “impartial” as defined by the policy, it should not be surprising that the umpire eventually sides with the party who won the race to the courthouse and obtained their appointment.

Appraisal Is Being Used as a Nonjudicial Dispute Resolution Process Devoid of Procedural Rules and Codes of Conduct

Appraisal was developed as an alternative to the expensive and time-intensive litigation process when the only dispute between two parties was a legitimate dispute as to value. Respected professionals in the field at issue would, from time to time, agree to serve as an appraiser or umpire and bring their expertise to assist in resolving the dispute. This wasn’t their primary job but a secondary and occasional one, resulting from the expertise developed during years working in a particular industry. These professionals would work cooperatively with the umpire in resolving the disputed valuation issue.

Not anymore. Because appraisals, unlike judicial methods of resolution, are not governed by established procedural rules or ethical codes of conduct, there are few impediments to maneuvering, manipulation, bullying and sometimes outright fraud. And with appraisers having essentially assumed the role of nonattorney advocates for their clients, the boundaries of acceptable advocacy are often pressed.

So what is to be done when such conduct takes place, and there is no “man or woman in the robe” to address such conduct? The process cannot be abandoned as the insurance policy requires completion of the appraisal process. Seeking judicial intervention might prove difficult as appraisal is, by its very nature, a nonjudicial process. Unfortunately, there is no good answer for the party faced with such conduct other than: fight back!

Regardless, one practical answer should be very clear. Given the changing role of the appraisal process and the issues that are now arising, it is time for insurers to evaluate their appraisal provisions and make appropriate changes to address these issues.

--By Steven Badger and Kristin Cummings, Zelle Hofmann Voelbel & Mason LLP

Steven Badger and Kristin Cummings are attorneys in the Dallas, Texas, office of Zelle Hofmann Voelbel & Mason.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.