CREJ - Property Management Quarterly - November 2015
The definition for “appraisal” depends upon the context in which it is used. Many are familiar with the word when used to estimate the value of a piece of jewelry, fine art or a home. However, in a property and casualty insurance policy, appraisal provides a dispute resolution forum, which can be invoked by either the insured property owner or the insurance company, if there are significant unresolved issues in a property claim. Rather than incurring costs to pursue litigation to resolve a claim, which may still be necessary, appraisal is a more cost-effective and time-efficient manner in which to resolve a claim. When appraisal is demanded, it is a clear reflection that one or, perhaps, both parties of the insurance contract are not open to a proper adjustment of the claim and a timely resolution. The use of appraisal to resolve claims is becoming more frequent. While less expensive than litigation, it is important to note that coverage for the damage has been acknowledged, yet the property owner is required to spend out-of-pocket funds to obtain the benefits owed under the policy. Many policies include standard forms drafted by advisory organizations such as the Insurance Services Office. Language used throughout each policy is critical and insurance companies choose to provide definitions to a very limited number of words. Often the language used limits the carrier’s obligation under the policy. Use of standard language lessens the carrier’s regulatory burden in having states approve the policy forms. The appraisal provision in most policies is found under the loss-conditions section of the policy. While the language in the provision is similar in many policies, distinctions exist. Following is a typical appraisal provision. “If you and we disagree on the value of the property or the amount of 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 the amount of loss. If they fail to agree, they will submit their difference to the umpire. A decision 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. a. If there is an appraisal, we will still retain our right to deny the claim.” Returning to the importance of language and the carrier’s choice of words in specific policy provisions, the word “coverage” is not found in the noted appraisal provision. The carrier already has acknowledged coverage for the cause of loss. Yet, it is not uncommon that after the insured demands appraisal to set the amount of loss, for the carrier to suggest it will not participate by citing a coverage issue. Coverage issues are not determined in appraisals. For example, consider hail damaged the roofs on a 30-building apartment complex, as well as gutters, downspouts, vents, windows, siding, lights, fencing, garage doors and more. You have credible information and records to support your submitted claim. Consider representatives of the insurance company assert only one side of the roofs were damaged by hail, “foot traffic” from previous work on the roofs and wear and tear the past five years caused noted damages, and asserts there was preexisting damage to garage doors and fencing in addition to the hail damage. Then after months of attempting to reach agreement and resolve the claim so repairs can begin, the insurance company assesses that repairs can be completed for $500,000 less than what your consultants have supported. Given the difference, you submit a written demand for appraisal to set the amount of the loss. At this point, many unanswered questions leave the insured vulnerable to a process made available in the policy. These questions include whether the insurance company will agree to participate, as well as whether the insurance company will attempt to limit the types of damages to be resolved in appraisal. Other questions include: Will the insurance company designate a “competent and impartial” appraiser; will the carrier’s appraiser recommend competent and impartial candidates to serve as the umpire; and will the carrier’s appraiser improperly seek direction and instruction from the other carrier representatives during the process? You may find yourself asking if the process is fair. Property owners and property managers in Colorado will want to be knowledgeable regarding the purpose and need for appraisal in property damage claims. Colorado’s Department of Regulatory Agencies, Division of Insurance, issued Property and Casualty Bulletins in efforts to address perceived abuses and to protect Colorado Consumers. Bulletin No. B-5.26 is specific to appraisal, and although it has been revised, abuses remain. The questions raised above will be addressed in a future article, specifically addressing competent and impartial appraisers and umpires and tactics employed by insurance companies during appraisal. If you have questions regarding your policy, the appraisal provision, coverage provided by your existing policy, or the property insurance claim process, contact a claim specialist or legal counsel before you sustain a loss.