California Subscriber

The appraisal determines only the monetary amount of the loss or damage, not the scope of the damage. So, in the case of the hail damage to the roof, the appraisal panel can only decide the amount of the loss; it cannot decide what the actual loss is, such as the entire roof versus a small portion.

 Editor's note: following publication of this Q&A, a few subscribers offered their own experiences with the appraisal clause, stating that it had been used to determine more than monetary value. Upon further research, the following information is added to this answer.

 It would stand to reason that one cannot get to the point where the amount of loss payable is determined without first establishing whether, and the extent to which, coverage applies. Unfortunately, however, there is no definitive answer. The undefined policy provision “amount of loss” is ambiguous. To the extent there is an answer, therefore, appears to hinge largely on how the courts view the situation, and of course, decisions are not imbedded in concrete. In this regard, some courts hold a strict line, whereas other courts have given appraisers some latitude on scope of coverage or loss.

 In the California case of Unetco Industries Exchange v. Homestead Ins. Co., 67 Cal. Rptr. 2d 784 (Ct. App. 2nd Dist, Div.1, Ca. 1997), the trial court held that only the amount of loss as stated in the policy applied and not the amount of loss covered by the policy. On appeal, however, the court stated, “While appraisal generally covers the amount of loss, replacement cost can be appraised, i.e., estimated or evaluated.”

 In Kirkwood v. California State Auto. Assn. Inter-Insurance Bureau, 193 Cal. App. 4th 49 (Ct. App. 1st Dist. Div. 4, Ca. 2011), the court stated that the Insurance Code section 2071 calls for an appraisal process to resolve disputes between the parties to a standard fire insurance policy over the actual cash value of property loss claims. It stated that the appraisal panel's power is restricted to the factual task of valuing the items of property submitted for appraisal. Matters of statutory construction, contract interpretation, and policy coverage should not be encompassed within the ambit of a section 2071 appraisal. This case was brought by the named insured against the insurer alleging that the insurer was improperly interpreting and applying the 2004 amendments to section 2051, which set out the precise method of determining actual cash value of lost or injured property under an open policy of fire insurance.

 The appeal in TMM Investments Limited v. Ohio Casualty Insurance Company, No. 12-40635 (U.S. Ct. App. 5th Cir. 2013), arose out of an insurance dispute between TMM, which owned a shopping center, and its insurer. An appraisal was conducted but the district court set aside the appraisal award and had the case proceed to trial where an advisory jury assessed a damage award. The court of appeals held that the appraisal award was incorrect in that it excluded damage to the HVAC unit from the award, but the rest of the award remained unaffected by this determination. The court stated that the appraisers did not exceed their authority when they considered causation issues; therefore, the appraisal award should not have been set aside.

 The Virginia case of Coates. v. Erie Ins. Exchange, No. CL-2009-1456 (19th Judicial Cir. of Va., County and City of Fairfax 2009) arose out of litigation of an insurance dispute concerning an appraisal following damage to electrical wiring, circuits, and other contents because of an electrical surge. The parties stipulated that the event was covered by the insurance policy. However, both the insured and insurer disagreed over the extent of repairs required to correct the damage. With the phrase “amount of loss” not defined in the policy, not construed by a Virginia court, nor defined in Virginia code, the court stated that this phrase had been construed in other jurisdictions that had adopted appraisal statutes nearly identical to the Virginia Code section 38.2-2105. The court stated that, while it was not bound by those other decisions, it would consider them nonetheless.

 The first case considered was CIGNA Ins. Co. v. Didimoi Property Holdings, N.V., 110 F.Supp.2d 259 (D. Del. 2000). The dispute here was over the extent of repair necessary to restore a building after a covered fire rendered a building untenable. Considering a policy with similar appraisal wording, the court held that “an appraiser's assessment of the 'amount of loss' necessarily included a determination of the cause of the loss, as well as the amount it would cost to repair that which was lost. The court found “amount of loss” to mean, at the very least, more than assigning an itemized cash value to each item of lost property. This rationale, it was said, was supported by the language of Va. Code sec. 38.2-2105, where the statute states that appraisal may be compelled if the parties disagreed as to “the actual cash value or the amount of loss.” Since “actual cash value” and “amount of loss” appeared in the disjunctive, the court explained that these two terms must have meaning apart from simply assigning an itemized cash value to damaged property.

 In Wells v. American States Preferred Ins. Co., 919 S.W.2d 679 (Ct. App. Tex. 1996), the question was whether a plumbing leak or another event caused or did not cause damage to the foundation. The court found that the appraisal section did not authorize the appraisers to make that type of causation determination. However, in State Farm Lloyds v. Johnson, 290 S.W.3d 886 (Tex. 2009), a hail storm damaged the named insured's roof. A dispute arose as to whether the appraisal was appropriate to determine which portions of the roof needed to be replaced under the policy. The Supreme Court of Texas held that the appraisal was the appropriate process not only for determining which portions of the roof were damaged, but also whether undamaged portions of the roof would need to be replaced in order to fix the damage caused by the event. [Court's emphasis added.]

 In the Coates case, the court required the insurer to participate in the appraisal process in accordance with the policy, which also involved the extent of repairs required to correct the damage.

 Another case where the scope of loss was held to be a necessary part of the appraisal process is Smith v. State Farm Fire and Cas. Co., 737 F. Supp. 2d 702 (E.D. Mich. 2010). In addition to this decision, the Office of Financial and Insurance Services, Department of Labor and Economic Growth of the State of Michigan issued Bulletin 2006-07-INS after learning that some insurers were refusing to submit disputes regarding the amount of loss. Such insurers had taken the position that claims involving the scope of repair and replacement cost were “coverage issues” and not subject to the appraisal process. In fact, some insurers refused to participate in appraisal unless the insured agreed in advance of appraisal to the scope of repairs calculated by the insurer.

 The Bulletin said, “Such conduct, it is stipulated, is contrary to MCL 5000.2833(1)(m) and also prohibited by the Uniform Trade Practices Act of the State of Michigan.” Thus, once an insurer determines a loss is covered under an insurance policy and a demand is made for an appraisal by the insured or insurer, disagreements over whether some of the damages claimed are part of the amount of loss are considered part of the appraisal process.

 It is not the intent here to research and discuss this subject on a state-by-state basis. In fact, that may be difficult because some of the disputes involve policy language that varies with the standard appraisal provision referring to “amount of loss.” For example, in more than one policy reviewed, the appraisal provision states in part: “If you and we fail to agree on the actual cash value, amount of loss, or cost of repair or replacement, either can make a written demand for appraisal.” Obviously, when an insurer uses terminology that exceeds “amount of loss,” the meaning appears to encompass scope of loss at least more clearly than when the provision is limited to “amount of loss.”

 In any event, until the term “amount of loss” is defined in the policy or a state has a statute, regulation, or insurance bulletin—such as in Michigan—specifically addressing the meaning of “amount of loss,” disputes will likely continue. What complicates matters is that the decisions of courts are based on the facts so that two decisions in one state can vary with one another. Based on the foregoing, the best that can be said is that whether reference to “amount of loss” in the appraisal provision of a policy without additional descriptions such as “actual cash value” or “cost to repair or replace” encompasses the scope of loss is open to question and based on case law. The answer to your question is anything but definitive.