When an insured suffers property damage or a business interruption loss for which they seek insurance benefits, most property insurance policies include provisions governing how the loss is to be resolved.  Property policies generally include an appraisal provision that may be invoked to resolve disputes over the amount of an insured’s loss.  Although the terms of an appraisal provision vary depending on the policy, a typical appraisal provision generally provides:

If we and you disagree on the value of the property or the amount of the loss, either may make written demand for an appraisal of the loss.  In this event, each party will select a competent and impartial appraiser.  The two appraisers will select an umpire.  If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction.  The appraisers will state separately the value of the property and 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.  Each party will: (a) pay its chosen appraiser; and (b) bear the other expenses of the appraisal and umpire equally.

The appraisal process is a form of alternative dispute resolution. An appraisal is generally intended to take place before suit is filed, does not require attorneys and can generally be completed in less time than a lawsuit.  Appraisers are often contractors familiar with repair costs for particular property but who may not be familiar with legal concepts or insurance policy interpretation.  Significantly, unlike arbitrators in an arbitration proceeding who may decide issues of liability, causation or damages, the authority granted appraisers under a property policy is generally limited to determining the value of the insured property or the amount of the loss in accordance with the valuation methods described in the policy.  The appraiser selected by each party is also charged with separately stating the value of the property or the amount of loss and submitting any differences to an umpire.  If an umpire is needed to resolve disputes as to the value of property or the amount of loss, appraisers are usually authorized under the insurance policy to select the umpire or the court will do so if the appraisers are unable to agree on an umpire.  While an umpire may be a lawyer or a mediator, there is no requirement that they be one and there is no requirement that an umpire have any experience in property insurance coverage or insurance claims.

Because the terms of an insurance policy generally limit the appraisers’ authority to determining the value of the property or the amount of loss, courts generally hold that appraisers are precluded from resolving issues of law concerning coverage for a claim, liability, or any applicable exclusions.  Those issues are generally reserved to the courts.  When there are questions of coverage or liability to be decided by a court, questions may arise concerning the right of either party to the insurance contract to proceed with an appraisal while those issues are outstanding.  Recently, a federal district court in New Jersey denied an insurance company’s attempt to delay an appraisal proceeding until after disputed coverage issues were resolved.  The court in DC Plastic Products Corp. v. Westchester Surplus Lines Insurance Co., Docket No. 2:17-cv-13092 (D.N.J. May 19, 2021), granted the insured’s motion for summary judgment for the appointment of an umpire for an appraisal proceeding notwithstanding that there were outstanding issues as to whether the insured’s claim was covered.  The court ruled that because the parties disputed the amount of the loss in addition to coverage and the appraisers and umpire’s authority under the insurance policy was limited to determining the amount of the loss, there was no basis to conclude that the coverage issues must be decided before the appraisal process.  The court recognized that the insurance policy at issue limited the appraisal proceeding to a determination of the amount of loss arising from the insured’s property and machinery damage claims and that the insurer retained the right to deny the claim.  The court therefore  concluded that there was no reason to delay determining the amount of the loss through an appraisal proceeding  notwithstanding the outstanding issues of liability under the policy.

A particular insurance claim may involve disputed issues as to the cause of particular loss or damage.  Whether appraisers may decide issues of causation in an appraisal proceeding varies from jurisdiction to jurisdiction and depends on the facts of a particular claim.  Even in jurisdictions in which the issue of causation may be an issue for the court and not the appraisers, however, the fact that there may be a dispute as to causation does not necessarily preclude the parties to an insurance contract from proceeding with an appraisal to determine the amount of the loss.  As courts have recognized, if an insurer denies coverage or disputes whether a particular loss was caused by an insured event, appraisers can still determine the amount of the loss in the event the insurer is wrong.  See e.g. State Farm Lloyds v. Johnson, 290 S.W.3d 886, 893-94 (Tex. 2009).

Understanding the appraisal provision in an insurance policy and the rights and obligations of each party to the insurance contract regarding an appraisal proceeding is an important element of resolving property insurance claims.  Although there may be disputed issues of coverage or liability to be resolved by a court, pursuing appraisal on a parallel track to, or before, litigation in order to resolve disputes over the amount of the loss may lead to a resolution of a property insurance claim sooner rather than awaiting a decision from the court on a legal issue before proceeding with appraisal or litigation over the amount of the loss.  Policyholders must understand that they are not necessarily precluded from pursuing appraisal under their insurance policy in the event the insurance company disputes coverage or liability for a particular claim.