Appraising Appraisers and Appraisals
By Marc Mayerson
In many property-insurance policies, a party has a right to demand an appraisal, which is a procedure in which the value of lost or damaged property is determined. Typically, an appraisal takes the form of what I call a 1 + 1 + 1 structure—each party appoints its own appraiser, the two select an umpire (or obtain a court appointment if they cannot agree on one), and differences the appraisers cannot resolve are submitted to the umpire, as the policy provides. That some form of alternative dispute resolution is used for valuation, however, does not mean that there is no room for judicial intervention in disputes involving insurance policies with appraisal provisions.
As with other forms of ADR, courts say they seek to minimize on review their own scrutiny of the appraisal process and outcomes. E.g., Emmons v. Lake States Insurance Co., 484 N.W.2d 712 (Mich. Ct. App. 1992). Appraisal proceedings may be joint investigations or follow other informal processes. Litigated disputes concerning appraisal sometimes involve the proper scope of the appraisal proceeding, because appraisers determine only questions of valuation and not questions of “coverage,” Merrimack Mutual Fire Insurance Co. v. Batts, 59 S.W.3d 142 (Tenn. Ct. App. 2001). Within its scope, an appraisal generally is considered to be a final determination of whatever was decided. E.g., Jupiter Aluminum Corp. v. Home Insurance Co., 225 F.3d 868 (7th Cir. 2000). That does not necessarily resolve questions outside the appraisal’s scope. Nor does eventual payment necessarily dispose of a claim for bad-faith delay or denial. Cf. Darlow v. Farmers Insurance Exchange, 822 P.2d 820, 826 (Wyo. 1991) (automobile medical-payment benefits).
Some disputes involve whether the appraisal provision has been waived by one side’s dilatoriness in invoking it, J. Wise Smith & Associates, Inc. v. Nationwide Mutual Insurance Co., 925 F. Supp. 528 (W.D. Tenn. 1995), or whether the policyholder invoked appraisal too soon, which was the conclusion of the North Carolina Court of Appeals recently in Hailey v. Auto-Owners Insurance Co. (N.C. Ct. App. Feb. 20, 2007). In Hailey, although the policyholder disagreed with the insurer’s valuation and the insurer resisted appraisal through the trial court and appeal, the court held that the policyholder “prematurely invoked appraisal.” The disagreement, it said, was only “unilateral” [sic?]. The court required the insured to substantiate an amount exceeding what the insurer had paid and to comply with requested post-loss duties before demanding appraisal. As it stated, “[w]e hold that the unsupported opinion of the insured that the insurer’s payment was insufficient does not rise to the level of a disagreement necessary to invoke appraisal.” Slip op. at 13–14. The trial court had treated the insurer’s letter as a blanket denial of the ice-storm claims; the appellate court declined to decide that characterization and held that even a blanket denial would not excuse the missing substantiation. That is the remarkable feature: the carrier could maintain its payment position and resist appraisal, yet the policyholder’s disagreement still did not count as the contractual disagreement! (A more sensible result might have altered the insured’s right to obtain prejudgment interest, or its calculation, from the insurer on the ground that the insured failed to fully perfect its right to pursue appraisal. E.g., Aries Insurance Co. v. Hercas Corp., 781 So. 2d 429 (Fla. Dist. Ct. App. 2001).)
Another type of dispute concerning appraisers centers on whether the appraiser or the umpire met the requirements of the qualifications clause in the policy or was otherwise an inappropriate appraiser (or umpire) for the dispute. It was this last type of dispute—over the appraiser himself—that confronted the Florida District Court of Appeal in Citizens Property Insurance Corp. v. M.A. & F.H. Properties, Ltd., 948 So. 2d 1017 (Fla. Dist. Ct. App. 2007). In this case, after the insurance company tendered an amount approximating one-third of what the policyholder thought it was owed, the policyholder demanded an appraisal. The homeowner-selected appraiser, Mr. Pellet, determined the amount of loss to be nearly $800,000 (three times the amount offered by the carrier). An umpire was appointed, who sided with the homeowner-selected appraiser.
The insurer sought to vacate the award on the ground that Mr. Pellet was inappropriate to serve as an appraiser, for though he had conducted some 1,800 appraisals and written articles in the field, the insurer contended that he was unduly biased against it. No doubt he was biased:
1. Pellet was compensated in the case based on the amount of money the policyholder collected from the insurer.
2. Pellet seems to have developed a bit of a personal animus against the insurer-selected appraiser and, as will be seen, with the insurer. After the appraisal, Pellet sent a letter to the other appraiser reading in part:
“This letter is to inform you that you are expressly prohibited from telephonic contact with my office. ALL COMMUNICATIONS SHALL BE REDUCED to writing . . . . All matters involving appraisal assignments will result in Court ordered umpire. I have zero intentions of discussing any negotiations, settlement, scope or unit costs with you EVER! . . . . Is there any part of this you are unclear about?”
3. Moreover, Pellet had his own personal lawsuit against the insurance company pending before the appraisal at issue, in which he was represented by the same attorney who represented the homeowner in the present case.
Finding that Pellet has “unquestionable personal bias” against the insurer, the Court of Appeal nevertheless rejected the challenge to his suitability to serve. The insurance policy’s qualifications clause (that is, the clause that identifies the characteristics of a suitable appraiser) required the appraiser to be “competent.” Compare Auto-Owners Insurance Co. v. Allied Adjusters & Appraisers, Inc., 605 N.W.2d 685 (Mich. Ct. App. 1999). (Indeed, other than following the terms of the appraisal clause, the insured is free to select someone who is otherwise competent in the matter to serve as the party-appointed appraiser, even a lawyer. Glens Falls Insurance Co. of New York v. Garner, 155 So. 533 (Ala. 1934).) The Florida court found that Pellet had prior experience and expertise, and that “competence is not synonymous with neutrality or independence.”
Note the contrast between the Florida and North Carolina cases decided one day apart: in Florida, the court upheld an award despite an appraiser’s bias and his later declaration that future assignments involving the insurer’s appraiser would go straight to a court-appointed umpire; in North Carolina, the court refused to permit appraisal before the insured substantiated its higher demand and complied with requested post-loss duties. Notwithstanding that neither law nor equity requires the insured to perform idle acts, Cal. Civ. Code § 3532, prudence might dictate that the policyholder go a bit through the motions to satisfy the court that it has given the insurer a last clear chance to make good on its obligations to pay before the policyholder seeks appointment of appraisers.
Later development—different words, different qualifications
In Parrish v. State Farm Florida Insurance Co., 356 So. 3d 771 (Fla. 2023), the Florida Supreme Court held that a proposed appraiser could not satisfy a policy’s requirement of a “disinterested” appraiser when he or a firm in which he had an interest was to receive a contingent fee for public-adjusting services. Disclosure did not cure that financial interest. Citizens construed a different promise: it required the parties’ appraisers to be “competent” and reserved the additional independence requirement for the umpire. The point remains to read the qualifications clause, not to treat competence, independence, and disinterestedness as interchangeable.
See generally Jonathan Wilkofsky, The Law and Procedure of Insurance Appraisal (Ditmas Park Legal Publishing 2003); Janet Brown and Michael Scroder, Appraisal, Federal of Defense & Corporate Counsel Q. 303 (2003).
Originally published in Insurance Scrawl on March 2, 2007. Republished with updated citation information, editorial revisions, and a separately identified discussion of Parrish v. State Farm Florida Insurance Co. (2023). This post is not a comprehensive survey of subsequent law.
Topics: Property insurance; Appraisal; Appraiser qualifications; Policy interpretation
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