Anyone who follows property insurance matters and especially reported court cases has no doubt picked up on a recurring theme of some courts in various jurisdictions and their decisions about the appraisal clause. Specifically the court’s interpretation of what can and cannot be undertaken by an appraisal panel has been under review and reformed. That is a good thing! These court decisions may have a significant impact on property policy disputes regarding the amount of the loss and damages from a coved loss and the process of the appraisal panels work in determining those criteria.  These decisions may also significantly change the landscape of disputed claims and the process to resolve them in a more cost effective and quicker manner for struggling property owners and at the same time save insurance companies and policyholders millions in legal fees.

For readers who may not be familiar with the concept of appraisal, it is a resolution dispute process written into most first party property policies that allows the insurer and their policyholder to resolve disputes regarding the amount an insurer should pay for the repair or replacement cost of a loss following a first party property claim. Typically, the process entails the choice of a panel of three. One picked by the insured, one by the insurer and then an umpire agreed to by the two or court appointed. For more background, see the appraisal process page from our website that provides an explanation and some history and evolution of this resolution dispute process I have witnessed over the years. 

Before I go further, it’s important to point out that the courts are not only changing the process but also shifting their thinking about what a panel of appraisers should be allowed to consider. In New York State, the legislature passed a law supporting the proposition that appraisal is the proper venue for policyholders and insurance companies to settle their differences on loss and damages, which is to include the amount of the loss as well as well the scope of the loss. This decision was reached by what I am told was a ten year effort to “change the rules on appraisal.” The Pennsylvania Courts have also weighed in on “What Is a Coverage Dispute for Appraisal Purposes.” Folks, this is a big step in the right direction and one that makes perfect sense given the nature of property loss adjusting.

So what exactly is the big deal about a reformed appraisal process? From the beginning appraisal of the loss was always about the amount of the loss or how much money an insurance company owed the policyholder following a fire, windstorm, or other covered peril. While on the surface that may seem simple and pretty straightforward, others factors often play a role in the loss adjustment process and ultimate settlement of a claim.

As an example, the question of how much to pay is almost always complicated by the scope of the loss. Consider if a fire occurs in an attic and burns some trusses, but leaves others charred along with roof decking and smoke damage. This may precipitate a fight that involves a scope of loss issue. What is the scope of the loss to replace the roof structure back to its pre-fire condition? Are there now other roof damage issues that must be dealt with, such as shingles on the topside or roofing membrane, and does the owner now have to comply with the new current building codes? What really is the full scope of this loss beyond burned trusses? Does the insurance company have to pay to match the roofing slopes if only one side is damaged? Does the insurance company owe for alleged heat damage to unburned roof covering?  A simple roof claim suddenly becomes quite complicated. And what about a causation issue that invokes a local building requirement to enforce building code upgrades? Did the fire cause the upgrade code requirement?

One of the classic issues in Florida on scope and causation can be best illustrated by typical roof disputes with a question of a patch repair or replacement of roof covering following a covered loss. As an example, a windstorm damages a part of a roof, but other sections may have been damaged. However, the signs are not so apparent. The part where the wind blew the roof off can be measured and priced. However, the rest of the roof damage becomes a scope question that may well turn on causation. Did the covered wind loss cause damage to the rest of the roof or was there a preexisting condition that would preclude coverage? Does the roof need to be replaced (scope of the loss) or repaired with a patch job?

The courts and legislature seem to be logically concurring that if disputed parties are truly going to use the appraisal forum as a true resolution dispute process, then this panel of experts needs to be able to address causation, (where some part of the loss is clearly covered), the scope of the loss and finally, the price of the loss.

Make no mistake about it, there will plenty of losses that are disputed because the cause of loss is not agreed to as being a covered loss. Those cases will need to litigated. From my experience, some courts and at least one state has made the right decision in allowing for a quicker and cost effective method of settling cases where at least part of the loss is a covered claim.      

Will other states follow this trend? It’s hard to tell. In Florida, because of what I believe to be widespread abuse especially after the 2004, 2005 hurricanes, appraisal has been taken out of many property policies or has become so convoluted by its limiting terms and restrictive language so as to render the process moot from the beginning. Thus lawyers have taken over the control of the process fighting over or limiting what the appraiser panel can and cannot do regarding causation and scope issues. Now in Florida we have a duel track process where if there is an appraisal clause in the policy, essentially the process is at the mercy of the courts and the endless fighting of lawyers over issue of scope and causation.

If you don’t think this is a big deal, consider Citizens Insurance Companies legal expense, which according to a Miami Herald article in October of 2013, claims they spent $100 million in legal fees in the prior two years! While not all of this cost would likely be attributed to first party property claims disputes, some of the expense could have been avoided with a sound appraisal process in place freeing the courts from appraisal disputes.

In conclusion, we need to reform the appraisal process in Florida now. A good first step would be to allow price, scope, and causation to be considered to arrive at what is owed to a policyholder. At the same time, appraisers and umpires need to be properly trained, certified, and licensed to avoid some of the abuses of the recent past. Let us know what you think?   #appraisal