Appraisal provisions are included in commercial and personal property insurance policies as a means of resolving disputes between an insured and an insurance company over the amount of a covered loss. Appraisal proceedings are similar to an arbitration proceeding, in which the dispute is resolved by a panel of appraisers and the award is binding on the insured and insurance company. In some states such as Connecticut, an insurance appraisal proceeding is governed by the arbitration statutes.

A typical insurance policy appraisal provision may state that if the insured and insurer fail to agree on the amount of loss, either party can demand that the amount of the loss be set by appraisal.  Under an appraisal provision, the insured or insurance company may submit a written demand for appraisal when the amount of the loss is disputed.  Once a written demand for appraisal is submitted, the appraisal clause may provide:

Each party will select a qualified, disinterested appraiser and notify the other of the appraiser’s identity within 20 days of receipt of the written demand.  Each party shall be responsible for the compensation of their selected appraiser.  The two appraisers shall then select a qualified, disinterested umpire.  If the two appraisers are unable to agree upon an umpire within 15 days, the insured or insurer can request that the umpire be selected by a judge of a court of record in the state where the insured property is located.  The appraisers shall resolve the issues surrounding the loss, appraise the loss, stating separate the actual cash value or replacement cost of each item, and , failing to agree, shall submit their differences to the umpire.  An award in writing, signed by any two of the tree, shall be binding on the insured and insurance company.

Policyholders who suffer damage to insured property sometimes retain a public insurance adjuster to assist with the loss calculation and loss submission to the insurance company.  The insurance adjusters may be retained under a contingent fee agreement, pursuant to which the insured and the adjuster agree in writing that the adjusting firm will be paid a percentage of the amount recovered from the insurance company.  If the insured identifies an insurance adjuster retained on a contingent fee basis as its appraiser, a question may arise as to whether the appraiser is disinterested under an insurance policy appraisal provision that requires appraisers to be disinterested.  In Parrish v. State Farm Florida Insurance Company, No. SC21-172 (Feb. 9, 2023), the Florida Supreme Court ruled that an insurance policy appraisal provision requiring appraisers to be disinterested was unambiguous and that an insurance appraiser cannot be disinterested if they, or the firm in which they have an interest, is to be compensated on a contingent fee basis. 

After the insured in Parrish suffered damage to his home in Hurricane Imra, he hired an insurance adjusting firm to adjust the damage and the repair costs.  The insured agreed to pay the adjusting firm a fee of 10% of the amount recovered on the claim from State Farm.  When the insured and State Farm were unable to resolve a dispute concerning the amount of the insured loss, the insured submitted a demand for appraisal to State Farm under the terms of his policy, and notified State Farm that the president of the adjusting firm would serve as the insured’s appraiser.  The appraisal proceeding in the insurance policy stated that “[e]ach party will select a qualified, disinterested appraiser and notify the other of the appraiser’s identity within 20 days of receipt of the written demand.”  State Farm objected to the insured’s appraiser on the grounds that he could not be considered a disinterested appraiser since his firm was serving as the insured’s insurance adjuster and the firm agreed before appraisal was demanded to be compensated based on a percentage of the recovery amount from the State Farm. 

The trial court ruled that the president of the adjusting firm could serve as the insured’s appraiser because the contingent fee arrangement was disclosed to the insurance company.  The Florida Supreme Court affirmed the appellate court’s reversal of the trial court decision.  The Supreme Court concluded that the term “disinterested” in the appraisal provision was unambiguous and applying common ordinary meaning of the term, a “disinterested” person cannot have a pecuniary interest in the matter at hand.  The court ruled that the appraiser had a pecuniary interest that prevented him from serving as an appraiser due to the contingent fee agreement to which his firm agreed before appraisal was requested.  The court rejected the insured’s argument that the appraiser was “independent” notwithstanding the fee agreement, concluding that “independent” and “disinterested”, while similar, are not the same and the policy required “disinterested” appraisers, not “independent” appraisers.  Because the proposed appraiser and insured’s economic interests were aligned under the contingent fee agreement, the appraiser was not disinterested as that term was used in the policy.    

The dissenting opinion in Parrish, arguing that the term “disinterested” is ambiguous and that the holding of the majority opinion may result in a financial burden on insureds of limited economic means, raises a legitimate issue for policyholders who may hire a public adjusting firm on a contingent fee agreement to investigate and adjust the loss shortly after an insured loss occurs.  If a dispute over the amount of the loss ensues which the insured and insurance company are unable to resolve, the insured may be forced to retain a separate appraiser under a separate fee agreement if the insurance policy requires that an appraiser be disinterested.  Questions may also arise whether a policyholder can challenge an insurance appraiser hired by the insurance company as one who is not disinterested if the appraiser serves in multiple appraisals for the same insurance company for which they receive compensation from the insurance company.  Whether an insurance adjuster is truly disinterested such that they may serve as an appraiser depends on the particular facts, the exact terms of the insurance policy at issue and the law governing the particular dispute.  Policyholders need to understand the law of appraisal proceedings and insurance contract interpretation in order to effectively navigate insurance policy appraisal clauses.