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By Seth V. Jackson and Jeffrey Gordon
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Like Gertrude Stein’s “rose”, an appraisal is an appraisal is an appraisal except in Massachusetts. Massachusetts’ version of appraisal is a statutory process named “reference.” Although a reference proceeding is very similar to the appraisal process that many insurers and insureds may be familiar with, references can also be vastly different. This article will highlight those differences and similarities as well as identify the pitfalls parties should understand when navigating the reference process in Massachusetts.

When Does Reference Apply?

Pursuant to Massachusetts General Law Chapter 175, § 99, reference should be contained and is in fact incorporated into all Massachusetts insurance policies covering Massachusetts’ property. The statutory language states that reference can be demanded where “a claim is presented under any policy of fire insurance issued on property or interests in the commonwealth in the standard form, and if the parties fail to agree as to the amount of loss.” This is quite similar to appraisal.

When a loss arises from property located in Massachusetts, the applicable Massachusetts’ reference statute should govern the claim. Specifically, the parties shall proceed to reference where there are disagreements as to the “amount of loss” arising from the Massachusetts’ claim. In such an instance, an insured can demand reference.

Similar to most state appraisal procedures, the scope of reference only relates to disputes as to the amount of loss and questions of coverage are reserved for the court. The Massachusetts’ statute (M.G.L. 175, § 101(e)) expressly states that insurers do not waive legal defenses, including coverage defenses, by submitting to a reference and that “such proceedings shall fix only the amount of loss sustained by the insured.” One Massachusetts federal court did appear to uphold a reference panel’s decision regarding the cause of loss, but held that the issue of whether the insured fraudulently overvalued the claim was beyond the scope of reference and remained for decision by the court. Federal Insurance Co. v. Klinck, No. 91-133347-Z, 1993 WL 291733 (D. Mass. July 6, 1993)

Notably, the statutory language is written in a way to make it appear that only insureds can demand reference. However, Massachusetts courts have interpreted that this procedure is also available to insurers. E.g., Kiley v. Metro. Prop. & Cas. Insurance Co., 159 F. Supp. 3d 135, 143 (D. Mass. 2016) (holding that the reference statute “does not limit the right to invoke the provision to the insured”).

A reference is a condition precedent to an action. M.G.L. c. 175, § 99. Thus, both parties must submit to a demanded reference prior to filing a lawsuit. Kiley, 159 F. Supp. 3d at 143 (“Both the language of the policy provision and the language of the statute provide that the parties to the contract mutually agree that … partaking in a reference proceeding is a condition precedent to the insured bringing suit”).

Panel Selection Process

Although the composition of a reference panel is the same as an appraisal panel (two referees/appraisers and the third referee/umpire selected by the first two referees/appraisers), the selection process is very different. Unlike appraisal, reference provides its own, specific panel selection process. Under the reference statute, each party provides the other side with a list of three proposed referees. M.G.L. c. 175, § 100. The opposing party then selects one name from that list. Thus, in reference, the parties do not fully control their own referee. Rather, both sides have input. Each side has a very short window to provide its referee list — 10 days. So, both insureds and insurers should be prepared with names to propose as soon as reference is demanded. Like appraisal, referees must be “disinterested”. However, pursuant to the statutory language, a referee must be a Massachusetts resident and cannot have acted as a referee for either party within the last four months. Much like the famous quote by the Speaker of the House and Massachusetts resident, Tip O’Neill, “all politics is local,” the reference statute attempts to make reference a “local” process without the participation of referees outside of Massachusetts.

Once the parties select the two referees, the two referees work together to select a third referee. If the referees cannot agree on a third referee (who acts as the umpire), then another major difference from appraisal is triggered. The reference statute provides that either the referees or parties may request that the commissioner of the Massachusetts Department of Insurance appoint the third referee. This option carries risk because the parties have no control over the appointment and the commissioner could name anyone. Such an appointment may be pro-policyholder, pro-insurer or have little relevant background knowledge. Thus, it behooves the parties to reach an amicable resolution as to the third referee and not take a gamble with a commissioner appointment. Each party pays the fees of the referee it appointed and the parties split the costs of the third referee.

The “Mysterious” Reference Hearing

Although the statute provides great detail with respect to many aspects of the reference process, it remains eerily silent regarding the actual hearing itself. It provides only that the panel “must meet to hear the evidence in the case … ten days after the selection or appointment of the third referee.” M.G.L. c. 175, § 101. Since this is a short timeframe, especially for a complicated valuation issue such as a business interruption loss, most referees obtain an agreement from the parties to waive the 10 day requirement.

Since there is little statutory guidance on the reference hearing itself, as with appraisal, it is recommended that the parties agree to as many aspects of the reference proceeding as possible, either formally in a written protocol or informally. In a written protocol, the parties may want to reaffirm that the sole “purpose” of the reference is to “determine the amount of loss sustained” by the insured arising from a loss for whatever claim items are in dispute. It is advisable that insurers repeat that, consistent with the statute, the panel shall not make any determination regarding coverage. The written protocol should also identify as many prehearing parameters as possible including the number of hearing days contemplated, whether a site visit is required and whether information and discovery requests shall be served or witnesses disclosed.

With respect to the hearing itself, the protocol should provide the length of opening/closing arguments, page limits for briefing, rules regarding the questioning of witnesses (whether re-cross examination is allowed) and the format (usually live testimony). If the scope of the reference is not agreed upon by the parties in advance of the hearings, it adds risk and uncertainty to the process. If an opposing party/counsel does not want to cooperate, reference can be frustrating and a difficult process to navigate.

In addition to the timing of the hearing, the reference statute also specifies that all awards by the panel must be in writing. M.G.L. c. 175, § 101A. Like appraisals, these written awards can be a simple oneline ruling which merely lists the amount awarded, or a more complex decision that outlines the categories of loss for the claim and provides the reasoning for each decision. The reference panel’s decision is “conclusive and final” upon the parties as to the amount of loss or damage. M.G.L. c. 175, § 99. Thus, the panel’s decision cannot be appealed.

Seth V. Jackson is a partner with Zelle LLP in Boston. Jeffrey Gordon is an associate in that office.

The opinions expressed are those of the author(s) 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.