What to Appraise

The biggest problem with the appraisal process is that sometimes even experienced insurers and their adjusters have absolutely no idea what they are trying to accomplish. Even worse, by failing to define the scope of an appraisal, they often can compound the problem.

It is absolutely crucial that the scope of appraisal be clearly defined for the appraisal panel. Neither the umpire nor appraisers should be in the position of deciding what they should be doing, although far too often this is the case. It is an unfortunate reality that those who cannot agree on the value of a loss must be willing and able to set aside their differences in order to reach an agreement on what to appraise.

Appraisal is a contractually mandated process unique to the first-party property insurance world. Insurance policies generally contain language that contemplates the value of a loss in a dispute and provides for naming an appraiser by each party. The appraisers then name an umpire who hears and decides only their differences. If appraisers cannot agree on an umpire, a court decides the issue.

The real problem, however, is that insurance policies really don't give the parties any further guidance about what to do or how to do it. Quite often, the parties are unable to clearly articulate exactly what the appraisal panel is supposed to do. Therefore, the single most overriding and important point is that the parties must always agree on the scope and rules governing the appraisal.

Whether you are about to demand appraisal or have just received an appraisal demand, you must be able to agree on what it is you are about to appraise. If, for example, you are involved in a dispute regarding a homeowner's claim and the only differences are a few finite scope items, you should consider limiting the scope of the appraisal to these items only. Why make a big deal when it is not necessary?

Entering into Agreement

Careful definition of the scope of the appraisal and the valuations that are being sought ultimately will result in an award that is useful to both parties and will help finalize the claim. It makes no sense to demand an appraisal without defining exactly what is being appraised, particularly when there are multiple values that need to be determined.

The scope of coverage and appraisal is determined in the first instance by the applicable policy language. Where the policy is silent, the following is a typical but incomplete list of values that can be determined by appraisal:

1. Replacement Cost Loss – Scope and value
2. Replacement Cost Loss – Value only (when scope is agreed)
3. Limited Replacement Cost Loss – When a single or finite set of items needs to be determined
4. Actual Cash Value Loss
5. Period of Restoration
6. Demolition Cost
7. Code Upgrades/Law and Ordinance
8. Extra Expenses
9. Expediting Expenses
10. Rental Loss
11. Business-Interruption Loss
12. Other (usually as agreed by the parties)

After agreeing on what is going to be appraised, the next step is reducing the “agreement” to appraise a loss to writing. (As previously noted, neither the insurance policy nor case law is likely to provide guidance in this area.) Typically, a basic preprinted memorandum of appraisal is used, which is little more than a fill-in-the-blank form. Usually, these are useless because they do little more than state the name of the parties, reiterate that there is a dispute regarding loss and value, and name the appraisers.

In a case several years ago, an insurer and insured entered into an appraisal agreement to determine the amount of loss sustained to a six-family residential structure. The agreement stated little more than the location, date and type of loss, and identity of the appraisers. The appraisers promptly agreed on an umpire and set about determining the amount of loss, and an award was rendered in a timely fashion. After receiving the replacement-cost award, the adjuster attempted to determine the actual cash value and arrived at his opinion of the loss payable. Unfortunately, the insured did not agree and filed suit against the carrier. Three years later, a court ordered that a “new” appraisal panel should be formed to determine the replacement cost and actual-cash-value loss, given the condition of the property as it currently existed. Further, the court ordered that the loss would be valued by the panel at the current cost, rather than at the date and time of loss. The building, which by now had sat for four years in an unrepaired condition, had deteriorated to the point where it was essentially a total loss. Ultimately, the new panel (including this author) issued an award that was almost $500,000 more than the original appraisal.

Can I Get That in Writing?

The above case illustrates that no matter how small or large the dispute, a simple agreement with instructions governing the appraisal easily avoids post-appraisal mayhem. A written agreement is absolutely vital in cases where there are issues surrounding coverage or the applicability of sub-limits. In those instances, a single award stating the amount of loss will provide the parties with no practical guidance, unless the award is exceedingly detailed. But why leave this to chance?

There are numerous instances, even in cases where a suit already has been initiated, that the parties will agree (or a judge will order) that the values should first be established. In those cases where a judge orders appraisal, there is a greater likelihood that the panel will receive guidance on the scope of loss and procedure for valuation. This usually comes in the form of a judge's order or written appraisal agreement entered into with “help” from the court.

In rare cases, further definition or guidance by the court is required in order for the panel to appraise the loss. This can result from disputes on the valuation method used for certain coverage items in cases where it will produce an undue burden on the panel to determine the value of the item, which may later be deemed as not covered or limited. For example, in a complex case where the parties disputed the application of law and ordinance to the rebuilding of the appraised property, the panel asked for the court's intervention to determine coverage in order to focus the process in a useful and orderly fashion. Another example might involve the determination of actual cash value, and whether the jurisdiction requires the application of broad evidence to establish actual cash value.

Perhaps the best example of this is found in Elberon Bathing Co. Inc. v. Ambassador Insurance Company. In this case, there was a disagreement on the amount of loss, so the parties elected to settle the valuation dispute by appraisal. The insured's appraiser and court-appointed umpire awarded replacement cost as the actual-cash-value loss. The insurer's appraiser refused to sign the award. The award was ultimately overturned because New Jersey law requires consideration of a broad spectrum of evidence to determine actual cash value, and the panel's award was based on a method that did not apply the New Jersey broad-evidence rule.

Elberon clearly illustrates the problem that, even in cases where clear instructions are given, appropriate definitions or court rulings are required for the panel to properly appraise the loss.

Structure of the Agreement

A written agreement to appraise the loss requires both understanding of the nature of the dispute regarding loss and value, and clarity about how the values need to be reported by the panel to the parties. At a minimum, the appraisal agreement will do the following:

Identify the name of the parties and the date and type of loss.

State the scope of the appraisal and clearly list the values that are going to be determined by the process. It may be appropriate to identify legal issues and make clear that the appraiser and umpire cannot decide questions of law or coverage in this section. (In large claims where there are multiple insurers with non-concurrent policies, or multiple insureds who have various insurable interests, further itemization of an award may be necessary and should be described here.)

• Name the appraisers.
• Determine the procedure for selecting the umpire, if not already agreed upon.
• Set out the procedure for appraisal, which may include:
• Timetable and location.
• Discovery issues and subpoena power of the panel.
• Use of experts.
• Manner in which the loss will be appraised.
• Sample award form or instructions on how the award will be reported.
• Definitions of terms and coverage.
• Determine general items
• Communication between parties and appraiser.
• Communication between appraisers and umpire.
• Confidentiality issues.
• Hold-harmless language protecting the appraisers and umpire.

Without proper foresight, the appraisal process can be likened to a hike in the wilderness without a compass. In order to avoid confusion, post-appraisal litigation, and the possibility of producing an award that is incomplete or of little practical use to the parties, policyholders and insurers are urged to reach agreement on the scope of the appraisal. Use of a clear, concise, and complete agreement to appraise a loss is a key element in ensuring the finality of a claim.

Jonathon C. Held is president of J.S. Held, a construction consulting firm. He has worked both as an appraiser and an umpire in numerous matters, including the World Trade Center dispute and the 7 World Trade Center dispute.