Appraisal and Its Limits

April 25, 2018

Almost all property insurance policies contain “Appraisal” clauses. These clauses establish procedures for settling claims out of court. Here’s a sample from a homeowners insurance policy:

 

Appraisal

 

If we and you do not agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will select a competent and disinterested appraiser within 20 days after receiving a written request from the other. The two appraisers will select a disinterested umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a court of record in the state where your residence premises is located. The appraisers will state separately the 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 own appraiser; and

 

b. Bear the other expenses of the appraisal and umpire equally.

 

We do not waive any of our rights under this Segment by agreeing to an appraisal.

 

Short version: Both sides pick their appraiser. The appraisers pick an umpire. They look at the damage. When two out of three agree on a dollar sign amount, then that’s the award. Relative to litigation, this takes almost no time and money.

 

Not surprisingly, I find most policyholders want appraisals. Policyholders tend to be cost and time sensitive. But not every lost is appraisable.

 

In general, Maryland will allow appraisals of factual disputes, but not legal disputes. Disputes about the value of damaged goods or whether an insured loss caused certain damage are appraisable. Disputes about coverage (like the applicability of exclusions) are not.

 

That exception is a gigantic window for insurers seeking to avoid appraisals. Maryland’s leading case on this is Wausau Ins. Co. v. Herbert Halperin Dist. Corp., 664 F.Supp. 987 (D. Md. 1987). Herbert Halperin involved a dispute about a roof collapse. A roof collapsed because of long-term decay from moisture exposure. Collapses are covered. Mold damage and wear-and-tear are not. The policyholder wanted their insurer to replace the entire roof because it argued that it couldn’t fix the collapse without fixing the whole roof. The insurer wanted to fix just the collapse because it argued that the exclusions applied to the rest of the roof.  

 

Herbert Halperin held that this dispute was not appraisable because it involved the applicability of exclusions. A factual dispute (like whether the roof needed a patch or a complete replacement) would have been appraisable.

 

So if an insurer wants to avoid appraisal, they can just assert an exclusions and done? Only probably. Maryland had another earlier case that rejected that tactic.

 

In Aetna Cas. & Sur. Co v. Insurance Commissioner, 445 A.2d 14, 293 Md. 409, 412-13 (Md., 1982), an insurer tried to avoid appraisal by claiming a coverage issue existed.  Aetna argued that the dispute was therefore “a question of coverage and not amount of loss” and thus not subject to the appraisal clause. Aetna, 293 Md. at 412-13. The Court rejected this argument without discussion. In footnote 9, it noted that Aetna’s argument that the dispute was un-appraisable because it involved coverage was “without merit” and that the record showed the dispute involved the “amount of loss”.

 

Aetna suggests that courts may order appraisals if the policyholder can show that the insurer isn’t seriously asserting a coverage issue. But this holding isn't dispositive in practice. Aetna is older than Herbert Halperin which makes it less persuasive. It also rejects the argument without much discussion and in a footnote. That weakens its persuasive value. Herbert Halperin, by contrast, is on-point and discusses the issue in detail. Courts are more likely to follow Herbert Halperin's clear holding than expand upon Aetna's footnote.

 

So will a policyholder make this argument and try to clarify / expand what's appraisable? Probably not. Policyholder incentives don’t support trying to make new law.

 

Almost all policyholders are one-time players in Insurance litigation. Most don't make major claims ever. Very few make them twice. Policyholders therefore don't have a "next time" for insurance claims law. This removes any long-term benefit from establishing a new rule. 

 

In that light, the cost of the new rule outweigh its benefits. Supposing the policyholder filed suit to compel appraisal and won, the insurer could appeal. This raises costs and creates delays. It's probably cheaper and faster for policyholders to file suit for breach of contract than to litigate an appeal over appraisal. That holds true even if the policyholder believes it has an outsized chance of winning in the end.

 

If the policyholder had long term interests, it might pay the added costs in the hopes of getting more appraisals down the line. But almost no policyholder has long term interests. They'd win one appraisal and never benefit again. All they'd do is help the next policyholder get an appraisal. 

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