Digitory Solutions Inc.


Appraisal, as conceived within the insurance industry, appears to be very different from its modern form. It was a creature of the insurance contract, but the courts in a number of jurisdictions have brought about an evolution of what was a favorable and easily utilized policy tool into a problem-rife forum that calls its use into question. The common approach of “splitting the baby” harkens back to King Solomon but does not resolve the issues any more efficiently. The courts have continually eroded the efficient use of the policy appraisal vehicle to the point that some insurers are contemplating the removal of the provision from policies.

Some policyholders resist appraisal because the policy provisions for appraisal require them to bear their own costs. In the traditional litigation context, a policyholder who obtains a judgment against her insurance company can usually recover attorney’s fees and costs, by virtue of statutory law or civil procedure rules. As such, the appraisal process, especially if attorneys are involved, is of no real benefit to many policyholders if they cannot recover their costs or attorneys’ fees from the insurer. This article will focus on the procedural aspects of the appraisal process, its substance or scope, and also its effect or enforceability. Other peripheral issues such as attorneys’ fees, costs, and pre-judgment interest will also be addressed.


Appraisal has often been described as a mechanism to resolve disputes between the parties to a contract. One specific definition is “[a] valuation or an estimation of value of property by disinterested persons of suitable qualification. The process of ascertaining a value of an asset or liability . . . .”

The definition continues with respect to an appraisal clause within an insurance policy “[c]lause in [an] insurance policy providing that the insurer has the right to demand an appraisal of the loss or damage.” Appraisal provisions have been included within insurance contracts for in excess of a century. Even the Supreme Court has ruled that appraisal clauses have “long been commonly used in fire insurance policies . . . and, when voluntarily placed in the insurance
contract, compliance with its provisions has been held to be a condition precedent to action on the policy.”
The same opinion explained that the appraisal process in the context of insurance claims does not violate constitutional protections of either due process or equal protection of the laws. Furthermore, the right to trial by jury is not infringed by the appraisal provision since such a beneficial substitute for the complicated and time-consuming process of common law has been recognized by all courts.


The touted purpose of utilization of the appraisal process is to allow a quick and inexpensive resolution of the value of the loss. However, with courts utilizing “appraisal” and “arbitration” interchangeably, and with the modern trend to expand the scope of the appraisal, the avowed purpose of efficient and less costly resolution seems to be fading away. If utilized in the traditional fashion envisioned by the insurance industry, appraisal proceedings can still expeditiously resolve the claim. However, before invoking it or agreeing to a demand to participate, an insurer must be cognizant of the jurisdiction and its interpretation of the appraisal process.


Over the years, a variety of provisions regarding appraisal have been included within insurance contracts. Residential policy samples are provided in an appendix to this article. As can be seen, there are common threads throughout these policy forms such as competent, independent appraisers, and even impartial umpires. Written demand and identification of appraisers by each party to the contract or policy are required to effectuate invocation of the appraisal remedy. Parties may enter into separate appraisal agreements to further clarify the procedures to be utilized by the appraisers, the issues to be determined, the definition of pertinent terms, and the like. Such written agreements should be signed by the parties, as well as by each of their respective appraisers, to be enforceable. The appraisers themselves should enter into a written agreement selecting the umpire before discussing the merits of the issues involved in the appraisal process in order to avoid confrontation and contention in that selection process. One party cannot insist upon any separate or different agreement or memorandum regarding either the procedures to be utilized or the substantive law to be applied.

However, should all parties be agreeable to the use of such a document, its content can be negotiated between the parties to the insurance contract or their authorized representatives. A sample memo of appraisal is included in an appendix to this article.


Timing and Conditions

The insurance contract generally speaks to the methodology of invoking the appraisal clause. Generally, either party to the insurance contract may initiate the request for the appraisal.

There are jurisdictions that do not allow a policyholder to force an insurer to participate in the appraisal process, based upon an interpretation that the clause is in the policy as a protection for the insurer. For example, in New York, the courts were traditionally unreceptive to claims by a policyholder to specifically enforce an appraisal provision. However, this attitude changed when the New York legislature enacted Section 7601 of the state’s Civil Practice Law and Rules. It provides as follows:

A special proceeding may be commenced to specifically enforce an agreement, other than one contained in the standard fire insurance policy of the state, that a question of valuation, appraisal, or other issue or controversy be determined by a person named or to be selected. The court may enforce such an agreement as if it were an arbitration agreement. . . . Where there is a defense which would require dismissal of an action for breach of the agreement, the proceeding shall be dismissed. However, the legislature left the New York courts with discretion.

A study by the Advisory Committee on Practice and Procedure, which was completed before this section was enacted, provides as follows:

Under [Civil Practice Law and Rules 7601], if the proceeding [is] not dismissed on the merits, the court could exercise its equitable discretion to refuse the remedy of specific performance, requiring the parties to sue at law, or under [Civil Practice Law and Rules 103(c)], it could treat the proceeding as an action for breach of contract; or it could hold the proceeding in abeyance pending some event, or it could condition-specific performance; or it could order the recalcitrant party to proceed with the appraisal under threat of contempt, or it could do some of the acts required by such party such as appoint an appraiser for him; or it could treat the agreement as one to arbitrate and enforce it under [Article 75].

In practice, it appears that many appraisal provisions, in insurance contracts as well as other contracts, are being specifically enforced if requested by either party to the contract. The demand for appraisal usually must be presented within a reasonable period of time. The definition of timeliness is often fact-specific. One example that evaluated the timeliness issue determined that a delay of eight months from notice of loss to demand appraisal by the insurer was not unreasonable, absent any showing of prejudice to the policyholder.

To avoid a problem, the demand should be in writing so its timing may be provable. The party invoking the appraisal clause can easily meet this burden by sending correspondence via certified or registered mail with an additional copy sent through regular mail channels. An express delivery service also establishes the time of the demand, as can a facsimile transmission or email version. The written demand must be sufficiently clear that a person of ordinary intelligence understands what is being requested. The question then becomes whether a policyholder must comply with the policy conditions regarding the duties of an insured before invoking the appraisal process. In the United States Fidelity & Guarantee Co. v. Romay the court addresses the timing of demands for appraisal, in conjunction with post-loss obligations such as the submission of proofs of loss and taking of examinations under oath. The court held that the policyholder must comply with all of the policy conditions before the appraisal clause is triggered. This would include:

(1) providing immediate notice to the insurer; (2) protecting the property from further damage;
(3) exhibiting the damaged property; (4) submitting to an examination under oath; and
(5) providing records and documents requested by the insurance company.

The court stated:

No reasonable and thoughtful interpretation of the policy could support compelling appraisal without first complying with the post-loss obligations. If that were so, a policyholder, after incurring a loss, could immediately invoke appraisal and secure a binding determination as to the amount of loss. That determination, in turn, could be enforced in the courts. Under that framework, expressed and agreed upon terms of the contract, i.e., the post-loss obligations, would be struck from the contract by way of judicial fiat and the bargained-for contractual terms would be rendered surplusage.

Other decisions in both state and federal courts across the country have followed the enforcement of policy duties and compliance by the insured as a condition precedent to the invocation of the appraisal clause.

Thus, the courts generally find that there must be sufficient information exchanged to allow the formation of a disagreement or difference of opinion. One treatise described this as follows:

This means that the existence of a real difference in fact, arising out of an honest effort to agree between the insured and the insurer, is necessary to render operative a provision in a policy for arbitration of differences. Furthermore, there must be an actual and honest effort to reach an agreement between the parties, as it is only then that the clause for arbitration becomes operative, the remedies being successive. For example, a merely arbitrary refusal to pay the amount demanded, and the offer of a lesser amount, without any attempt upon the part of the insurer to ascertain and estimate the amount of loss and damage, do not constitute such a disagreement as is contemplated. Usually, the post-loss duties of an insured are contained within the same section of the
policy as the appraisal provision. The chronological sequence envisioned in the policy dictates that appraisal follows the point at which the policyholder has complied with the duties outlined. Otherwise, the insurer would be at a disadvantage as it would have little or no information as to the nature or amount of the claim when it participated in the appraisal process.

This principle can have unanticipated effects upon other terms of the contract, such as the contractual suit limitation provision, or upon the applicable statute of limitations. In Chimerakis v. Sentry Mutual Insurance Co.the court held that the statute of limitations on an insured’s action to compel appraisal does not begin to run until the insured has performed all of the policy conditions precedents to appraisal. Therefore, a suit to compel appraisal filed eight years after the loss was not barred by the five-year statute of limitations on contract actions where the insurer had rejected the insured’s allegedly belated attempts
to comply with the examination under oath provision.

Waiver/Estoppel Concerns

It is important to note that entitlement to appraisal can be waived through action or inaction by the insurance company; therefore, if an insurer is in doubt as to the amount of the loss and wishes to participate in an appraisal, it should be certain to make timely demand in conformance with the provisions of its policy. For example, in the case of Phillips v. General Accident Insurance Co, a Florida court ruled that a party can waive its right to arbitration (or appraisal) if it takes any action inconsistent with the use of such a mechanism to resolve the dispute. An example of such action includes the initiation of a lawsuit without previously seeking arbitration or appraisal. A court may find that the appraisal provision is, in fact, an arbitration provision; and in light of public policy favoring arbitration, order appraisal even after a suit is filed. Another example of such action includes the insurer exercising its right to repair a damaged vehicle, thereby rendering it impossible for both it and the insured to comply with the appraisal clause.

Other problems with waiver or estoppel involve reservations of rights regarding coverage issues. A majority of jurisdictions still appear to deem a denial of all liability under a policy of insurance as a waiver of the right to appraisal. 

In a recent Illinois case, Spearman Industries, Inc. v. St. Paul Fire & Marine Insurance Co., the policyholder submitted a claim for roof damage. The insurer denied the claim under the exclusion for wear and tear. When the policyholder filed suit, the insurance company sought dismissal on the grounds that appraisal must be completed before coverage is determined. The court disagreed, stating that,  “(1) the parties are disputing the cause of the damage and not the value of the damage and 2) the policy does not require an appraisal on the matter of causation.”

As such, the case was allowed to proceed without an appraisal as to the amount of loss. In Gilbert v. Southern Trust Insurance Co., a Georgia court held that the insurer had waived strict compliance with the requirement for timely choosing an appraiser. The court found that the insured had not materially breached the policy by refusing to name an appraiser until the eve of the expiration of the contractual suit limitation period, which was six months after the insurer had demanded an appraisal. Correspondence between the attorneys for the insurer and the insured during the six-month period suggested that the company
was not strictly relying upon the requirement that the insured name his appraiser within twenty days after receiving the written demand from the insurer.

Specific Performance

The majority view is that once the appraisal is properly demanded, the appraisal can be specifically enforced by either party. In Standard Fire Insurance Co. v. Fraiman, the court, while referencing Ohio, New Jersey, and Pennsylvania case law, concluded that “the insured has a right to rely on the plain language of his policy providing for the appraisal upon the ‘written demand of either party . . . .” Furthermore, the court stated, “the majority and better-reasoned opinions have held that appraisal provisions are specifically enforceable by either the insurer or the insured.” Likewise, in Opar v. Allstate Insurance Co., a Florida court concluded that once an insured demands appraisal, the insurance company must participate in said appraisal. Furthermore, the appraisal must be completed before the court can address any coverage issues, even if the insurer contends that the loss is not covered. The insurance company must bear the cost of the appraisal, which may ultimately be a futile effort, since “it has agreed to the appraisal process as part of the claim proceeding.” However, other courts have ruled that an agreement to submit a determination concerning the amount of loss to appraisal is an executory agreement, revocable until such time as the appraisal is completed. However, the party who breaches the agreement to participate in the appraisal may be liable to the non-breaching party for actual damages incurred.

Selection of Appraisers/Umpire

Qualification of appraisers or umpires is often guided by the policy provisions regarding appraisal. These provisions generally define the appraiser as competent and disinterested (standard 165 lines); competent and independent (BOP); competent and impartial (ISO) CA 01 28 (05/94 Ed.). Competency is generally defined as an appraiser who has a reasonable basis for reaching an intelligent decision. Competence is generally accepted by all parties, as it appears axiomatic that no one is going to select an incompetent to represent its own interest. Even lawyers have been deemed competent to act as appraisers. The more interesting controversies arise in the context of what is meant by “disinterested,”
“independent” or “impartial.” Generally these words are given their ordinary everyday meaning, that is, someone who has no so-called “ax to grind” and is not within the control of one of the parties to the insurance contract. The issue of independence, for example, has been applied to payment agreements for appraisers based upon a percentage of the outcome. Courts have gone both ways on the issue, some deciding that this presents “independence” problems and some deciding that it does not.

Categories of persons challenged over the years include public adjusters formerly representing the insured on other matters, the present public adjuster, accountants who serve the insured as an advisor (or who may have been the expert retained to determine the amount of the loss sustained), or other consultants regularly hired by the insurance carrier. The disqualifying interest can be small but must be direct, definite, and certain. Insurers should not select the adjuster who represented their interest as their appraiser, regardless of whether he or she is a so-called “independent adjuster.” Objections to the appraiser on grounds of competence or interest should be made promptly or may be waived. If the parties are unable to do so, a court may ultimately be required to resolve such disputes. As to the umpire, the appraisers should agree with the umpire before dealing with the substantive portion of the appraisal. This approach simply expedites the process in the event the appraisers cannot reach an agreement on the amount of the loss and require the services of an umpire. 

The umpire does not become involved in the discussions, however, until after the appraisers fail to reach agreement. If the appraisers cannot reach agreement
on an umpire, a court generally will select one, through the filing of an appropriate request or petition by one of the parties to the insurance contract. In the recent World Trade Center case, the federal judge threatened to appoint himself as the neutral umpire to whom the dispute was to be submitted if the appraisers could not agree. Generally, avoidance of the issues involved with “cronyism” through agreement upon an umpire better serves the insurer
and the insured. When appointed by the court for an appraisal proceeding, the umpire is generally not required to be a lawyer but any such umpire should have appropriate knowledge and expertise.

An umpire also must be competent and impartial. In Weinger v. State Farm Fire & Casualty Co.,50 the appraisal process was likened to an arbitration proceeding, the court considered a motion to vacate the appraisal award due to a challenge to the impartiality of the umpire; and, although the trial court did not do so, the appellate court reversed. The decision attempts to equate appraisal and arbitration with respect to the impartiality of the participants and explains as follows:

          In arbitration cases, it is now very clear that an arbitrator has an affirmative duty to disclose any dealings that might create an impression of possible                  bias. Failure to disclose such an association undermines the appearance of propriety and the confidence of the fairness of the proceedings and requires            the vacation of the award. State Farm argues, however, that this was not an arbitration proceeding but an appraisal to which the rules of arbitration do                not apply.

State Farm argued that this procedure was an appraisal and should be distinct; however, not only was that argument not preserved below; but, also, the motions and pleadings filed on behalf of State Farm used arbitration and appraisal interchangeably. In this case, the umpire selected was an accountant who had worked on a regular basis on behalf of State Farm, although he had not been associated with the analysis of this particular claim prior to being selected as umpire. Discovery disclosed that revenues collected by his business from State Farm varied between $11,000 in 1987 to $61,000 in 1989. These revenues constituted a substantial portion of his annual collected fees; and, furthermore, he testified that during the year in which he was appointed as umpire in this appraisal, he had been retained by State Farm on other matters. Thus, the court ruled that in view of this information, it would apply the same strictures of impartiality to the appraisal process as it would employ with respect to arbitration. The court referred to an earlier decision, International Insurance Co.v. Schrager, which had held “[t]he appearance of neutrality can be as important as neutrality itself because of the former’s impact upon confidence in the proceedings by the parties and by the public.”

In this regard, the Federal Arbitration Act allows for vacating an arbitration award if the arbitrators had “evident partiality.” The courts have interpreted this phrase broadly to include “information which would lead a reasonable person to believe that a conflict exists.” A recent California case has determined that the failure to disclose potential sources of conflict is a form of “corruption” that requires a court to vacate an appraisal award. In Michael v. Aetna Life & Casualty Insurance C., the court likened an appraisal to arbitration. Although Michael could also be addressed in this article’s section on post-appraisal challenges, it is mentioned here as it provides concrete examples of what a court has determined to constitute “corruption” of the appraisal process requiring vacating an appraisal award.

Section 2071 of California’s Insurance Code requires the standard fire insurance policy to contain the following language:

          In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each                  shall select a competent and disinterested appraiser. . . . The appraisers shall first select a competent and disinterested umpire. . . .”

The appellate court interpreted the term “disinterested.” First, the court determined that, “[a]n agreement providing for an appraisal is . . . considered to be an arbitration agreement subject to statutory arbitration law in the California Arbitration Act.” Section 1286.2(b) of the California Arbitration Act provides that if there is “corruption” injected into the appraisal process by any of the appraisers, the appraisal award shall be vacated. Section 1281.9(e) of the California Arbitration Act provides that, “[a]n arbitrator shall disclose to all parties the existence of any grounds, specified in Section 170.1 for disqualification of a judge; and if any such ground exists, shall disqualify himself or herself upon demand of any party made before the conclusion of the arbitration proceeding.”
59 Section 170.1 provides multiple grounds for disqualification, including, in part, disqualification in any situation wherein “a person aware of the facts might reasonably entertain a doubt that the judge would be able to be impartial.”

The interpretation of “disinterested” is an objective standard based upon what a reasonable person would think. Also, the California Arbitration Code does not require actual bias for disqualification to be proper. The court expressly ruled that:

          [W]here an appraiser or arbitrator fails to disclose matters required to be disclosed by section 1281.9, subdivision (e), and a party later discovers                         disclosure should have been made, that failure to disclose constitutes “corruption” for purposes of section 1286.2, subdivision (b) and thus provides a               ground for vacating an award. This is because the failure to disclose such matters, even if no actual bias is present, represents a kind of “corruption” by             creating the appearance that the appraiser or arbitrator is concealing something important and relevant to his or her impartial participation in the                         appraisal or arbitration proceeding.

As a guide to what would constitute “corruption” if it were not disclosed, the court provided the following examples:

          An appraiser or arbitrator who represents or performs services for a party or for the law firm representing the party while the appraisal or arbitration is                pending must disclose such activity. An appraiser or arbitrator must also disclose substantial prior or continuing business relationship with a party or                with a party’s representative, even if the business activity does not occur during a pending appraisal or arbitration. Social acquaintance, even of long                    duration and of a professional nature, without a substantial business relationship does not create an impression of possible bias. Membership in a                      professional organization does not provide a credible basis for inferring an impression of bias. Moreover, to create an impression of possible bias that                therefore requires disclosure, a business relationship must be substantial and involve financial consideration.

Thus, if not properly conducted, selection of appraisers as well as umpires can jeopardize the appraisal process. While public policy favors appraisal as a means of resolution of claims without the delay and expense of litigation, it will only continue to do so if all parties to the proceedings act fairly and in accordance with the terms and conditions of the insurance contract.

Hearing Procedures

Insurance policies are generally silent with respect to the procedures to be utilized by the appraisers. Thus, the procedural path becomes highly discretionary with the appraisers themselves. This very informality is often one of the advantages of utilizing the appraisal procedure in resolving disputes. However, many appraisals are being conducted on a formal basis. The parties should consider executing a procedural memorandum of appraisal setting out the rules to be followed in the particular claim. A sample memorandum of appraisal is attached as an appendix. This memorandum should also identify the issues so that neither party is surprised later to learn of new or different issues to be considered in the appraisal process. Generally, an appraisal is not subject to the same rules as used in arbitration.

For example, Florida courts have noted that an appraisal is fundamentally different from arbitration in as much as appraisals are designed and intended to be informal. One Florida court concluded that an insurance company was not entitled to a formal appraisal procedure similar to what would be provided in an arbitration setting. Another Florida court determined that an umpire did not threaten his neutrality by conducting ex parte communications with counsel for the policyholder during an appraisal in an effort to understand the policyholder’s position on this claim. This majority viewpoint is, however, contradicted in some jurisdictions. Hearings can be requested; and, if they take place, testimony may be accepted along with evidentiary exhibits. If a hearing takes place, it is often a good practice for the insurer to retain a court reporter to record the proceedings. Particularly, should anyone testify, this testimony may become pertinent in subsequent court proceedings. If a hearing is scheduled, most courts have held that interested parties are entitled to notice of the time and place of any hearing. However, other jurisdictions hold that no hearing is necessary, and therefore no party can complain of the lack of notice of any scheduled hearings.
As a practical matter, the appraisers should secure all the evidence necessary for a complete review and resolution of the issues. This information could include a site inspection; expert reports, as appropriate and available; other documents that may have relevance to the issues; and any statement transcripts, such as examinations under oath of the insured (if taken prior to appraisal).

If a formal hearing is agreed upon between the parties to the proceedings, it must then be decided whether to formally record the hearing through a court reporter or other means. Irrespective of the format undertaken to resolve the issues, once the appraisers agree, or, in the event of participation by an umpire, two of the three-panel members reach an agreement, a written appraisal award signed by at least one of the appraisers and umpire is necessary to conclude the process. The form of the award is often a bone of contention. Many policy forms require itemization, yet provide no definition or guidance as to the required degree of detail. Courts have considered segregation by category of coverage, as well as by separate buildings, adequate.


Appraisal v. Arbitration

Many courts confuse arbitration and appraisal. Due to that treatment by the courts, the two words are often used interchangeably and can even result in the application of state arbitration codes.

There are a number of jurisdictions that have specifically ruled that insurance appraisals are just another form of arbitration. However, the two proceedings are not the same. There are technical, as well as historical differences.

An appraisal is governed by and is a creature of the insurance contract. It is generally much more restricted in its scope than is an arbitration. For example, in most jurisdictions appraisal cannot determine issues of coverage, but is limited to a determination of damages. The following section of this article describes how complicated that principle becomes in practice.

Most jurisdictions have rejected the position that appraisal clauses are arbitration agreements. They have usually followed the traditional distinctions between arbitration and appraisal. For example, in Hartford Lloyd’s Insurance Co. v. Post Independent School District, a federal district court judge, applying Texas law, held that the appraisal process was not the same as arbitration, because it cannot assess causation, coverage or liability. Because coverage issues cannot be addressed during the appraisal process, the insurance company has the authority to challenge coverage after the appraisal process is complete. This separation between “amount of loss” and “coverage issues” is the majority rule. The Tennessee Court of Appeals endorsed this distinction in Merrimack Mutual Fire Insurance Co. v. Batts. There the court addressed an appraisal provision in a homeowners insurance policy after a tornado loss. It noted the distinction between “arbitration” and “appraisal” as follows:

          [The policyholder’s] argument that the appraisal clause in her insurance policy is an arbitration agreement overlooks the fact that arbitration proceedings            and appraisal proceedings are not the same thing. Arbitration is a consensual proceeding in which the parties select decision-makers of their own                      choice and then voluntarily submit their disagreement to those decision-makers for resolution in lieu of adjudicating the dispute in court. Appraisal is                  something narrower. Appraisal is the act of estimating or evaluating something; it usually means the placing of a value on property by some authorized              person. Specifically, the object of appraisal in cases of casualty insurance is to quantify the monetary value of a property loss, not to decide questions of            liability.

Nevertheless, other jurisdictions, including California, Florida and Connecticut, have treated appraisal provisions in insurance policies as arbitration provisions.
In ACME Roll Forming Co. v. Home Insurance Co., for example, the court concluded that, “the law in Michigan is clear that appraisal ‘constitutes a common-law arbitration agreement.’”

In United States Fire Insurance Co. v. Franko, a Florida court held an appraisal provision in an insurance policy to be an arbitration agreement:

          As can be seen from the language of the contract between the parties, a written demand is required to trigger the arbitration clause. Once the clause is              appropriately invoked, arbitration becomes a condition precedent to the right of the insured to maintain an action on the policy.

Likewise, in State Farm Fire & Casualty Co. v. Feminine Fashions, Inc., there was a dispute between the insurer and the insured over the amount of loss sustained as a result of a fire. The Florida trial court denied the insurer’s motion to compel arbitration; however, the appellate court reversed the order, holding that the insured was required to arbitrate the dispute when the insurance policy gave either party an unambiguous right to demand appraisal.

While referring to appraisal and arbitration interchangeably, Florida courts have nevertheless addressed the differences between appraisal and arbitration. In Florida Farm Bureau Casualty Insurance Co. v. Shaeffer, the policyholders sued the insurer to recover for damages to their roof tiles by Hurricanes Erin and Opal. The issue revolved around replacement of the entire roof when only a few of its tiles were missing and required replacement; however, a match could not be made to the ones remaining on the roof. The insurer sought dismissal of the lawsuit so that the issues could be resolved through the appraisal process. The trial court determined that the issues concerned were coverage questions to be decided by the court, not by appraisal.

The appellate decision highlighted the traditional distinctions between the scope and purpose of appraisal as opposed to arbitration, and delineated the differences in the roles and procedures:

          Appraisers are generally expected to act on their own skill and knowledge; they may reach individual conclusions and are required to meet only for the                purpose of ironing out differences in the conclusions reached; and they are not obligated to give the rival claimants any formal notice or to hear                            evidence, but may proceed by ex parte investigation so long as the parties are given opportunity to make statements and explanations with regard to                 matters in issue. Arbitrators, on the other hand, must meet together at all hearings; they act quasi-judicially and may receive evidence or views of a party           to the dispute only in the presence, or on notice to, the other side; and may adjudge the matters to be decided only on what is presented to them in the               course of an adversary proceeding.

Despite its analysis of these distinctions, the Shaeffer court ruled that the appraisal clause constituted an agreement to arbitrate and was subject to the Florida Arbitration Code. Likewise, the Florida court in Allstate Insurance Co. v. Suarez recognized that Florida law treated appraisal clauses as arbitration clauses for most purposes, but nevertheless held that the formal hearing process required in an arbitration was not applicable to an appraisal. The Florida Supreme Court has now spoken to the manner in which appraisal proceedings are conducted in its decision of Allstate Insurance Co. v. Suarez. The court has resolved the conflict between the decisions of Allstate Insurance Co. v. Suarez, Hoenstein v. Start Farm Fire & Casualty Co., and Florida Farm Bureau Casualty Insurance Co. v. Shaffer.

The Suarez claim involved damage to a home from Hurricane Andrew on August 24, 1992. The policy issued by Allstate to Suarez contained an appraisal provision. Allstate initially paid the Suarez claim in September of 1992. In June 1997, the policyholder submitted a supplemental claim and disputed the adequacy of the amount of the initial payment. Allstate denied the supplemental claim believing that it had fully paid the hurricane damage covered by its policy in its initial September 1992 payment. Suarez filed suit for declaratory relief and to compel appraisal. The petition to compel appraisal was granted by the court. Allstate insisted that the appraisal umpire must apply the Florida Arbitration Code to the appraisal proceedings. The umpire denied that request and conducted an informal appraisal proceeding. Once an appraisal award was reached, the trial court entered final judgment on the basis of the policyholder’s motion to confirm the appraisal award. Allstate submitted a motion to vacate the award on the basis that the arbitration code should have been applied
to the appraisal hearing, but the court denied that motion. The Third District Court of Appeal affirmed the award and rejected Allstate’s claim that the arbitration rules should be applied. The Florida Supreme Court affirmed that decision. This confusion could be avoided if the courts stopped treating the appraisal clause contained in insurance contracts the same as an arbitration clause, and refrained from subjecting the appraisal clause to the state’s arbitration code. Meanwhile, insurers must be cognizant of the law in the jurisdiction where the appraisal is demanded.

Coverage v. Amount of Loss

Among the most frequent disputes arising with respect to the appraisal remedy is the line between amount/scope of loss/damage and coverage issues. There is a split of authority on the issue of whether coverage issues can be included in the determination of the “amount of loss” calculation. Some cases squarely hold that the appraisers may not consider causation, some take the opposite view, and still others cases express a more ambiguous view.

The majority viewpoint has generally been that appraisal is not a means of resolving coverage issues or liability, but is a means to determine values. As a practical matter, there often are differences of opinion regarding the definitions of valuation terms. For example, while amount of loss may mean to many the dollar amount of damages, that is, the dollars required to repair or replace the property, to others it may mean whether the property is capable of repair or must be replaced. More importantly, disputes over the “amount of loss” must sometimes consider coverage issues, such as causation issues, if the appraisal process is not to be meaningless. Under the majority rule, appraisal cannot be used to decide coverage issues. Appraisal determines the value and quality of damaged property, not the question of the carrier’s liability.

Although initially designed to address only the “amount of loss,” appraisals have been allowed by many courts to address issues of “causation,” where causation is so intertwined with the damage issue as to render an appraisal award meaningless if the causation issue is not addressed. Indeed, a fine line often exists between a dispute involving the amount of loss and one involving a coverage question. This results in contradictory decisions on what the scope of the appraisal should be. This is particularly true with those claims that include mixed questions of coverage and damage, requiring the appraisers to
make quantitative decisions as to causation of the damages. Accordingly, some courts have held that appraisal is an appropriate procedure for determining the issue of causation of damages. In Lakewood Manufacturing Co. v. Home Insurance Co., the court found that it was appropriate for the appraisers to determine whether the claimed damages were caused by fire, a covered loss, or by labor strike, which was not covered under the business interruption policy.

In CIGNA Insurance Co. v. Didimoi Property Holdings, N.V.,104 the Delaware court ruled that causation is a matter for an appraiser, not the court. In CIGNA, a fire started in a tenant file storage room of the insured building, causing severe damage and rendering the building unusable. A major dispute concerned damage to the building by asbestos and microbial agents. At the time of the fire, the building was undergoing asbestos removal. While the asbestos had been removed from much of the building, it had not been removed from the floor where the fire occurred. The smoke, soot and firefighting water distributed the asbestos throughout the building. In addition, the air handling equipment remained on during much of the time the fire burned, causing further disbursement of the asbestos fibers. After the fire, the wet materials were not promptly removed from the building, causing the growth of mold, mildew and other microbial agents. Following the fire, the insureds and the insurance company unsuccessfully attempted to reach an agreement on the amount of the insured loss, including the extent of the fire damage and the cost to repair or replace the building. Much of the disagreement concerned the issue of what damages should be covered by the policy. Notwithstanding their disagreement over the amount of loss, the insurance company paid more than $18 million to initiate repairs and $5 million for business interruption.

Eventually, the insureds filed their proof of loss for approximately $92 million. The insurer invoked the policy’s appraisal provision. The insureds argued for a narrow construction of the phrase “amount of loss,” limiting the appraisers to determining the amount of money necessary to repair or replace the building without determining the cause of the loss or the amount of the “covered” loss. On the other hand, the insurer contended that an important issue was the extent of the damage caused by the fire, a question concerning the amount of loss and therefore appropriately determined by the appraisers. The court agreed with the insurance company, concluding that, “in the insurance context, an appraiser’s assessment of the ‘amount of loss’ necessarily includes a determination of the cause of the loss, as well as the amount it would cost to repair that which was lost.” The court reasoned that its conclusion was consistent with the dictionary “plain meaning” of the terms “amount of loss” and “loss,” commenting that the insureds confused “coverage” and “amount of loss.” It distinguished Auto-Owners Insurance Co. v. Kwaiser, a case relied upon by the insureds:,

Unlike the instant case, the parties in Kwaiser did not merely contest the scope or extent of the damage, rather the parties in Kwaiser raised the issue of whether that damage was excluded under the policy. Because questions involving the application of policy exclusions are legal questions concerning liability and coverage, they are not, as the Kwaiser court correctly concluded, within the appraiser’s authority. The distinction is appropriate. If the entire claim would be excluded based upon the appraisers’ determination of causation, then such a determination is more appropriately left to the court. But where the appraisers’ determination of damage is essentially useless because it never differentiates between what damages are covered and what are not, the courts are more inclined to allow the appraisers to consider causation issues, even though such issues may be determinative of coverage for certain damages. Florida courts have recently struggled with these issues in four decisions regarding the proper scope, or subject matter, of appraisals.

In Florida Farm Bureau Casualty Insurance Co. v. Shaeffer, the court ruled that the factual issue of whether a roof could be repaired, or should be replaced, when unique ceramic tiles which were used for the roof were no longer manufactured, was a proper determination to be made during an appraisal.

In Nationwide Mutual Insurance Co. v. Johnson, the policyholders contended that the loss was caused by a sinkhole, a peril covered under the policy. Nationwide, on the other hand, contended that earth movement, an excluded cause, caused the loss. The court ruled that causation was a proper consideration for an appraisal, “[t]he issue presented here is whether causation is a coverage question for the court or an amount of loss question for the appraisal panel. . . . [W]e hold that causation is an amount of loss issue for the appraisal panel.” The court went on to certify conflict with Opar v. Allstate Insurance Co.,111 a previously decided case that ruled coverage issues were not to be addressed during the appraisal process. In Gonzalez v. State Farm Fire & Casualty Co.,112 the court concluded that the appraisers had impermissibly decided whether the entire claim was within the coverage afforded by the policy. The insureds had submitted a claim to State Farm under their homeowners policy asserting that blasting in the vicinity of their home had caused cracks in the walls and tiles. There would have been coverage under the policy if blasting caused the loss. State Farm, however, resisted the claim based in part on its engineering report, which concluded that the cracking was attributable to minor settlement of the foundation, not blasting. Minor settlement was excluded from coverage under the homeowners policy.

The Gonzalez court determined that causation was not a proper issue to be decided during the appraisal process, when such a determination potentially resulted in no recovery whatsoever:

          Since State Farm’s position is that this entire loss falls within a policy exclusion, this defense is a judicial question and not a question for the appraisers.
          [W]hen the insurer admits that there is a covered loss, but there is a disagreement on the amount of loss, it is for the appraisers to arrive at the                              amount to be paid. In that circumstance, the appraisers are to inspect the property and sort out how much is to be paid on account of a covered peril. In            doing so they are to exclude payment for “a cause not covered, such as normal wear and tear, dry rot, or various other designated, excluded causes.”                    Thus, . . . if the homeowners’ insurance policy provides coverage for windstorm damage to the roof, but does not provide coverage for dry rot, the                        appraisers are to inspect the roof and arrive at a fair value for the windstorm damage, while excluding payment for the repairs required by preexisting                  dry rot.

The Gonzalez court acknowledged the conflict of its holding with Johnson, referenced above. In Johnson v. Nationwide Mutual Insurance Co.,114 the Florida Supreme Court attempted to resolve this conflict between the State’s Courts of Appeal by adopting the analysis of Judge Cope in the Gonzalez opinion where he stated: Very simply, the Licea court was saying that when the insurer admits that there is a covered loss, but there is a disagreement on the amount of loss, it is for the appraisers to arrive at the amount to be paid. In that circumstance, the appraisers are to inspect the property and sort out how much is to be paid on account of a covered peril. In doing so, they are to exclude payment for “a cause not covered such as normal wear and tear, dry rot, or various other designated, excluded causes.” Thus, in the Licea situation, if the homeowner’s insurance policy provides coverage for windstorm damage to the roof, but does not provide coverage for dry rot, the appraisers are to inspect the roof and arrive at a fair value for the windstorm damage, while excluding payment for the repairs required by preexisting dry rot. In the present case (unlike Licea) State Farm says that there is no coverage for the claim whatsoever, while the homeowners say that the claim falls within an applicable coverage. Whether the claim is covered by the policy is a judicial question, not a question for the appraisers.

Johnson and Gonzalez, the insurers denied that there was any covered loss under their respective policies. Thus, the Florida Supreme Court ruled that the appraisals would not be determining the amount of the loss that admittedly was covered, but, rather, the issue of whether the policies covered any of the losses for which the claims were presented. The court ruled that in concert with its opinion in the State Farm Fire & Casualty v. Licea, the coverage issues are to be judicially determined by the court and not subject to decision by an appraisal panel. The supreme court went further to state that to the extent
that prior decisions, specifically Florida Select Insurance Co. v. Keelean, and Opar v. Allstate Insurance Co. are inconsistent with the decision it was making, those cases would be disapproved. In its effort to make the waters clearer, it appears that the Florida Supreme Court has further muddied them. The only instance that becomes perhaps somewhat more clear, is that if an insurer does in fact deny the claim on the basis of an exclusion within the policy
before demanding appraisal, then the coverage issues are for the court and cannot be resolved by virtue of appraisal. It will be interesting to watch the continuing saga of utilization of appraisal proceedings in the Florida courts. 

Finally, in Delisfort v. Progressive Express Insurance Co., another Florida court concluded that appraisal could only be used to determine the amount of loss. The policy, which provided for automobile insurance, contained a provision that allowed the insurance company to “adjust for depreciation” in the automobile’s “physical condition.” The interaction of this policy provision with the provision providing coverage for “the amount necessary to repair or replace the . . . damaged property with other property of like kind or quality,” was a question of law for the court and not a question of the “amount of loss” for the appraisal process. A survey of the various jurisdictions on the question of the scope of issues that can be determined during appraisal was contained in the case of Merrimack Mutual Fire Insurance Co. v. Batts, wherein the court stated as follows:

          Without evidence of [some] agreement by the parties, there is no legal or factual basis for concluding that the appraisers were empowered to decide                  coverage questions.

More than four decades ago, in a casualty insurance case similar to this one, the Mississippi Supreme Court held that appraisers did not have the authority to
decide liability and coverage questions because “nowhere in the standard [policy] for submission to appraisal is any power vested in or conferred upon the appraisers to determine the cause of the loss . . . .” Other courts construing standard appraisal provisions similar to the one involved in this case have consistently agreed that appraisers have no power to decide coverage or liability issues. One court has suggested that disputed coverage and liability issues are best submitted to the courts before any dispute regarding the amount of the loss is submitted to the appraisers. The plain language of [the] policy confines the role of the appraisers to determining the “amount of the loss.” In light of other courts’ interpretation of similar language, we have concluded that the trial court correctly held that [the appraisers] did not have the prerogative to determine whether any particular loss claimed … was caused by the tornado or whether [the insurer] was ultimately liable under its policy for the loss. The final responsibility for resolving disputes over those issues, assuming the parties cannot reach an agreement on their own, rests with the courts.

If it appears that causation issues will be analyzed during the appraisal process, more attention must be paid to the choice of appraisers, and each case must be carefully evaluated before appraisal demands are presented or responses drafted to demands for appraisals by insureds.

Post Appraisal Challenges and Procedures

Presumption of Validity

As a general matter, public policy favors alternate resolution procedures like the appraisal process. Appraisal provisions in insurance policies are consistent with public policy in that they encourage judicial efficiency by fixing the amount of recoverable damages through a more favorable means of dispute resolution than the courts. Appraisal clauses are valid and are binding upon the parties to the insurance contract, if they are appropriately invoked. Thus, if an insurer properly invokes the appraisal provision of its policy, the insured is required to submit the dispute to appraisal and any action brought by the insured prior to that time is subject to dismissal or abatement. In addition, an insurer may wish to file a motion to compel arbitration, if the insured refuses to comply after written demand for appraisal is made. Generally speaking, appraisal pursuant to a contract of insurance is binding upon the parties to the contract. Therefore, litigation in which the process or its components might be challenged should be infrequent. Exceptions would be a challenge to the award on the basis of qualifications or interest of the appraisers or umpire; allegations of bad faith by the insurer in seeking to invoke the appraisal clause; or, failure of an insurer to abide by the appraisal process and pay the award.

Since public policy favors resolution of disputes via appraisal as an alternative to litigation, admissibility in subsequent proceedings is rare. Generally, once the appraisal is concluded, an award signed and forwarded to the parties, and monies paid, the matter is finished. If someone is dissatisfied and pursues court action, the courts will generally enforce the appraisal clause. This has been true for more than a century. The award is presumptively valid and binding upon the parties, absent any terms or conditions of the appraisal clause, which might be in contravention of a statute. Through a series of decisions, Florida courts have only recently determined that an appraisal award is binding upon both parties – even though the insurer retains the right to deny coverage for the award after it is rendered. A divided Florida Third District Court of Appeal originally rejected the binding nature of an appraisal award in American Reliance
Insurance Co. v. Village Homes at Country Walk. It was there determined that the sentence, “if there is an appraisal, we will still retain our right to deny the claim,” was incompatible with the goals of appraisal and lacked mutuality of obligation. The court held that the appraisal provision of the policy was void; and, it confirmed the trial court’s denial of the insurer’s motion to compel arbitration. In a strong dissent, Judge Cope argued that the rules of contract construction preferred interpretation that gives a reasonable, lawful and effective meaning to all the terms of a contract, instead of an interpretation that leaves a part unreasonable, unlawful or with no effect. Judge Cope added “all of the provisions of a contract should be given their due meaning and should be so construed as to render them consistent and harmonious if possible; effect should be given to each provision if that can reasonably be done.” Judge Cope concluded that appraisal provisions are binding on the parties. “The purpose of the ‘right to deny’ sentence is to state, quite simply, that if the insured requests an appraisal and the insurer proceeds with the appraisal process, the insurer has not thereby abandoned any coverage defenses which may be available to it.” The Florida Supreme Court ultimately resolved the issue when it agreed that the rationale expressed in the dissenting opinion of Judge Cope in American Reliance was the
correct interpretation of the appraisal clause. In State Farm Fire & Casualty Co. v. Licea, the court ruled that, while an issue of whether coverage exists is to be decided by the courts, the dollar value reached through the appraisal process remains binding upon the parties. The Florida Supreme Court explained:

         Thus, where there is a demand for an appraisal under the policy, the only defenses which remain for the insurer to assert are that there is no coverage                 under the policy for the loss as a whole or that there has been a violation of the usual policy conditions such as fraud, lack of notice, and failure to                       cooperate. We interpret the appraisal clause to require an assessment of the amount of a loss. This necessarily includes determinations as to the cost               of repair or replacement and whether or not the requirement for repair or replacement was caused by a covered peril or a cause not covered, such as                   normal  wear and tear, dry rot, or various other designated, excluded clauses. For the reasons discussed, we hold that the appraisal clause at issue is not           void for lack of mutuality of obligation simply because of a retained rights clause, where we interpret the clause as retaining only the right to dispute the             issue of coverage as to the whole loss, or whether the policy conditions have been violated as specified above.

Challenges to an Appraisal Award

Although appraisal awards have a presumption of validity, many states provide limited means, via statutory law or common law, by which a completed appraisal award can be challenged. Bad faith, fraud and mistake are always grounds for challenging an appraisal award. Other grounds for challenge exist among the jurisdictions. For example, in the case of Jupiter Aluminum Corp. v. Home Insurance Co.,138 the Seventh Circuit Court of Appeals determined that, under Indiana law, “[a]n appraisal is binding unless it can be shown that the appraisal is infected with unfairness or injustice.” In fact, an appraisal award is binding irrespective of whether the policy explicitly provides that it is binding. In addressing the challenge to the appraisal award, the court determined that the mere fact that the umpire selected a value for the loss which was less than that submitted by the appraisers for either the insured or insurer did not constitute sufficient evidence of “unfairness or injustice.”

Another example of a post-appraisal challenge was addressed in Michael v. Aetna Life & Casualty Insurance Co., previously addressed in this article. Based upon this case and similar cases in other jurisdictions, both the insurance company and its insured should assume, in the usual case, that an appraisal award will not be vacated.

Pre-Judgment Interest, Attorney’s Fees and Costs

Once an appraisal award is finalized, disputes now seem more often to focus on claims for attorneys’ fees, pre-judgment interest and costs. The appraisal clauses generally state each party must bear its own costs and split evenly the umpire fees. Those clauses are usually silent with respect to attorneys’ fees and pre-judgment interest. Since the courts in some jurisdictions consider appraisal and arbitration to be interchangeable, some policyholders, public adjusters and attorneys are seeking to impose attorneys’ fees and pre-judgment interest upon the insurer. Generally, whether attorneys’ fees are sought or awarded is guided by individual statutes within the subject jurisdiction. Florida courts are struggling with these issues where some insureds, public adjusters
and attorneys have been attempting to use Section 682.15 of the Florida Arbitration Code to their advantage so as to attempt to recover pre-judgment interest, fees and costs. Florida has a statute that assesses attorneys’ fees against an insurer in the event of a “judgment” or “decree” in favor of the policyholder.

The question becomes whether an appraisal award is the equivalent of a judgment or decree. The courts have not yet specifically answered that question, although, as discussed later, an intermediate appellate court, in Nationwide Property & Casualty Insurance Co. v. Bobinski has denied a policyholder attorney fees following appraisal. Moreover, some insureds are attempting to utilize the procedures for confirming and modifying, correcting, or vacating an arbitration award to their benefit. For example, Florida Arbitration Code Section 682.14, dealing with modification or correction of award, and 682.13 dealing with vacating an award, require an application to be made to a court for correction, modification or vacating an award. This must be done within ninety days after the delivery of a copy of the award to the applicant. Accordingly, if an appraisal award contains a mathematical error or there are other grounds for the altering or vacating of the award, insurers must be aware that they only have ninety days in which to file an opposition to the award pursuant to the Florida Arbitration Code. In addition, insurers should be well aware that a party may seek to confirm an arbitration award at any time subsequent to the rendering of said award pursuant to Section 682.12.

The Florida Supreme Court, in Scottsdale Insurance Co. v. DeSalvo, addressed the issues of attorney fees and interest in regards to an offer of judgment in an appraisal context. It upheld the prior decision of the First District Court of Appeal. In this case, the insured initially filed suit. The insurer had the case abated while the appraisal process was completed. During the appraisal process, the insurer filed three offers of judgment above any proceeds already paid to the insured. The insured claimed he was a prevailing party based upon an award through appraisal. The insurer argued that the appraisal award did not meet the value of the offer of judgment. The Florida Supreme Court found that attorneys’ fees and interest were awardable through the date of filing an offer of judgment which amount the insured did not meet through an appraisal process.

Concerning the awarding of pre-judgment interest following an appraisal, a Florida Court of Appeal had stated in the State Farm Fire & Casualty Co. v. Albert decision that pre-judgment interest should be awarded from the date of the insured’s loss following the rendition of an appraisal award. However, the Eleventh Circuit Court of Appeals, in Columbia Casualty Co. v. Southern Flapjacks, Inc., concluded that the date from which prejudgment interest is due with respect to appraisal proceedings is calculated according to the applicable loss payment provision of the insurance policy. The rationale for the decision was based on the fact that Florida has long adopted the loss theory for awarding pre-judgment interest in property damage cases. Under this loss theory, interest begins to run from the time of the wrongful deprivation. In other words, Florida law entitles a party subject to a wrongful deprivation to pre-judgment interest from the date of the loss.

The court quoted from the decision of Biscayne Supermarket, Inc. v. Travelers Insurance Co., stating in cases concerning the recovery of insurance proceeds for property losses, Florida courts have equated the date of loss with the date that the proceeds would have been due under the policy. Accordingly, the court concluded that it must construe the date of loss in conjunction with the particular policy language providing when the insurer is required to pay proceeds under the policy.

In Aries Insurance Co. v. Hercas Corp., the court held that the insured was only entitled to interest from the date of the appraisal award, refusing to follow
Albert. In Lib- erty Mutual Insurance Co. v. Alvarez, the same result was reached. Likewise, in Allstate Insurance Co. v. Blanco, the court held that prejudgment interest would not be owed until the date of the appraisal award, plus the sixty days allowed by the policy for the payment of the award. It appears, therefore, that the confusion created in Florida by the Albert decision has been reconciled. Moreover, the Aries decision held that the insured was not entitled to a award of costs for the appraisal, since the policy provided that each party was to bear its own expenses. A unpublished California decision awarded the insured prejudgment interest as of the date the insurer received a “rough estimate” of the repairs from one of its engineers, not from the date of the appraisal award, which was issued three years later. In Fearnehough v. California Department of Veterans Affairs, the court reasoned that the insurance company owed interest from the date it received “an abundance of information” from which it could determine that the amount of the damages exceeded its policy limit, even though the appraisal process was not concluded. This was an exception to the general rule in California.

In Nationwide Property & Casualty Insurance v. Bobinski, a Florida court squarely addressed the award of attorney’s fees in the context of an appraisal. In this case, the parties determined the amount of a covered loss, wherein the insurance company did not contest coverage, pursuant to the following policy provision:

          If we and you disagree on 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 amount of loss. If they fail to agree, they will submit their differences to the umpire.           A decision agreed to be 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.

After an appraisal award was returned in favor of the policyholder, and after Nationwide paid the award, the policyholder filed suit seeking a “declaration determining the right to recover attorney’s fees.” The court denied the request for attorney’s fees pursuant to Florida Statutes section 627.428(1), which provides as follows:

         Upon the rendition of a judgment . . . by any of the courts of this state against an insurer and in favor of any named . . . insured . . . under a policy . . .                   executed by the insurer, the trial court . . . shall adjudge . . . against the insurer and in favor of the insured . . . a reasonable sum as fees . . . for the                         insured’s . . . attorney prosecuting the suit . . . . 

In denying the request for attorney’s fees, the court stated as follows:

         Attorney’s fees have been awarded when suit was filed prior to payment of the appraisal or arbitration award or to compel an insurer to participate in an             appraisal. Attorney’s fees may also be awarded for litigating entitlement to attorney’s fees. However, the instant appeal has none of the elements of                     those cases. . . . We find that no final judgment has been rendered for the purposes of section 627.428(1), Florida Statutes . . . .

Effects of an Award on Subsequent Bad-faith Claims

Since appraisal is a favored remedy due to its ability to determine quickly and inexpensively the dollar/valuation issues, its use is regarded as evidence of good faith on the part of the insurer or insured. Conversely, in the event of improper utilization, introduction of the appraisal proceedings may be relevant to show bad faith. An explanation of some of the complications appears as follows:

          If the insurance company has a good faith belief that there is a coverage question (e.g. arson) providing a complete defense to any claims under the                    policy, it might be construed as bad faith to force the insured through an appraisal to determine the extent of the loss and then to later deny any liability              based on some defense such as arson. Forcing the insured to proceed with an appraisal and then subsequently denying liability on facts within the                      knowledge of the insurance company at the time of the demand of the appraisal might very well be argued to be a form of hassling the insured and a                  badge of bad faith.

Bad faith, fraud and mistake are always grounds for challenging an appraisal award.

Means by which appraisal proceedings may become pertinent in subsequent actions alleging bad faith on the part of the insurer include situations in which appraisal appears appropriate, but there is no timely demand from the insurer; failure of an insurer to appoint an independent or impartial appraiser; non-payment of an appraisal award or failure to promptly pay one; failure to pay the undisputed amounts of damages when invoking the appraisal clause, as well as potentially attempting to resolve coverage issues through appraisal. Thus far, courts have proven reticent in sanctioning bad faith claims arising out of
the appraisal process, most likely because they do view appraisal as an expeditious alternative to litigation. Generally, as with other bad faith allegations, the courts look to the specific circumstances of the claim/suit and attempt to apply common sense. For example, when an insurer acknowledges that the claim presented a total loss early in its investigation, yet did not pay the claim until an umpire entered the appraisal award, a bad faith suit seeking extra-contractual damages was allowed to proceed.

In Gopp v. Legion Insurance Co., the insurer demanded an appraisal after the insured refused to accept the independent adjuster’s offers to settle his property damage claims. The adjuster allegedly told the insured that he could not contact witnesses or even communicate with his own appraiser during the process. The insured was not given notice of the appraisal hearing, and was otherwise hampered in the presentation of this case. The court found that these facts suggested that the insurance company had not conducted the appraisal in good faith, and therefore stated valid fraud and conspiracy causes of action
against the insurance company and its independent adjuster.

On the other hand, a bad faith verdict against an insurer for wrongful refusal to pay a structural damage appraisal award was reversed in Central Life Insurance Co. v. Aetna Casualty & Surety Co. estimated by its appraiser, and then appealed, contesting the process and award, not coverages or liability. The Supreme Court of Iowa determined that the lower court should have granted the directed verdict requested by the insurer with respect to the claims of bad faith:

          The issue becomes whether Aetna’s act of partial payment of the appraisal award constituted evidence of bad faith. As Central claims in its brief, Aetna            is judged by the evidence available at the time it repudiated the award. At that time, Aetna had a right to fairly debate the issue of whether the appraisal              award was grossly excessive. The court found that the evidence established that the actions of Aetna in challenging the award were sufficiently                            reasonable to defeat any claim of bad faith on its part. In this case, the appraisal award was actually set aside due to a finding that the insured’s                          appraiser was not disinterested because the compensation arrangement was via a contingency fee agreement.

Advantages and Disadvantages of Appraisal

Advantages to utilization of the appraisal clause as conceived within an insurance policy include economical and expeditious resolution of a dispute. Appraisal was contemplated as a simple mechanism to assess the amount of loss without incurring the expenses and delays, which are endemic in the litigation system. It remains a powerful tool to resolve disputes between insureds and insurers.

Disadvantages or criticisms include a lack of procedural safeguards for the parties, that is, rules of evidence, notice requirements, witness and document discovery, and the like. Further issues include lack of control over the format of the award, which can lead to confusion and payment of damages which would not come within the terms and conditions of the insurance policy, had the basis for the award been known (i.e. inclusion of damages to non-covered property in a lump sum award). The development of a corps of “professional” umpires or appraisers has also injected more bias or favoritism with “jockeying” for
selection of the participants. Furthermore, use of mediators as umpires is becoming more common and often results in compromise findings, rather than an assessment of the actual damages or loss.


In the first party property insurance arena the well used and familiar tool of appraisal to resolve disputes is no longer a consistent friend. In light of greater opportunity for abuse of the process and also the concomitant uncertainty surrounding appraisal proceedings, some insurers may consider removal of the appraisal clauses from property insurance policies. Of course, if the clause is statutorily required to be included, such a solution would not be allowed. Suffice it to say that insurers in jurisdictions utilizing the appraisal clause in the traditional manner should be cognizant that the system is moving toward a more formal arbitration style process, with all its attendant risks and disadvantages. Each claim should be fully investigated and evaluated as to whether utilization of the appraisal process remains a viable means of dispute resolution.


This memorandum is entered into by and between Policyholder __________________ and the Insurer _______________________.

WITNESSETH: that whereas the policyholder claims to have sustained a loss by occurring on the _____ day of ___________, _____ to and upon the following described property to wit:

WHEREAS Policy No. _______________ issued by _______________________ to ____________________________ provides as follows:

(Quote Appraisal Clause of Policy)

WHEREAS, a disagreement has arisen between the parties hereto as to the following issues:
The scope or amount of damages caused by or included within the terms and conditions of the _________________________ Policy No. ___________.

THEREFORE THIS MEMORANDUM WITNESSETH: that in conformity to the terms and conditions of the policy of insurance, _________________ and _________________ have been selected and are hereby appointed appraisers, to appraise, the replacement value/cost and resolve all issues set forth in this memorandum, in accordance with the terms and conditions of said policy of insurance.

It is further mutually agreed that the _______________________ (insurer) shall not be held to have waived any of its rights by an act relating to appraisal. It is further mutually understood and agreed that the appraisers will attempt to resolve the issues in dispute through the informal procedures utilized and provided for within the policy of insurance, and without the necessity of formal hearings or proceedings as governed by the Florida Arbitration Code. If, however, either appraiser for a party; or, in the alternative, the selected and agreed upon umpire, should determine that formal proceedings in accordance with the Florida Arbitration Code are necessary to resolve the issues, a minimum of thirty (30) days written notice shall be given to the appraisers, umpire and parties of such a determination so that any necessary hearings can be coordinated and attended by all those persons who choose to be present. Likewise, should either appraiser or the umpire elect to have input from an expert witness, the identity of said expert shall be disclosed between the appraisers and umpire with a curriculum vitae or resume accompanying the disclosure of the name and location, as well as the written report, if any, or a summary of the areas to be evaluated and presented, at least fourteen (14) days in advance of any deliberations during the appraisal process.

WITNESS our hands (in duplicate) at this __________ day of _____________________, 2002.

_______________________________ _______________________________
Name of Insured as representative of (Name of Insurer)

_______________________________ _______________________________
Name of Appraiser Name of Appraiser Appraiser for insured Appraiser for insurer

_______________________________ _______________________________
Attorney for (Insured) Attorney for (Insurer)


We, the undersigned, pursuant to the within appointment, DO HEREBY CERTIFY that we have truly and conscientiously performed the duties assigned us, agreeably to the foregoing stipulations, and have appraised and determined and do hereby award as to the amount of loss due to _________ which occurred on the ____ day of _______________,

2002 the following sums to wit:
Less Policy Deductible $

The above award further has not taken into consideration any claims for attorneys’ fees, costs and interest that may have been applicable in this claim. 

Witness our hands this ____ day of _____________, 2002.

Appraiser Appraiser


Standard Fire Policy 165 Lines

123 Appraisal
124 In case the insured and this company shall fail to agree as to the
125 actual cash value of the amount of loss, then, on the written
126 demand of either, each shall select a competent and disinterested
127 appraiser and notify the other of the appraiser selected within
128 twenty days of such demand. The appraisers shall first select a
129 competent and disinterested umpire; and failing for fifteen days to
130 agree upon such umpire, then, on the request of the insured or this
131 company, such umpire shall be selected by a judge of a court of
132 record in the state in which the property covered is located. The
133 appraisers shall then appraise the loss, stating separately actual
133 cash value and loss to each item; and, failing to agree, shall submit
135 their differences, only, to the umpire. An award in writing, so
136 itemized, of any two when filed with this company shall
137 determine the amount of actual cash value and loss. Each
138 appraiser shall be paid by the party selecting him and the expenses
139 of appraisal and umpire shall be paid by the parties
140 equally.
(ISO) HO 00 03 (04/91 Ed.)


If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent appraiser within 20 days after receiving a written request from the other. The two appraisers will choose an 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 the “residence premises” is located. The appraisers will separately set the amount of loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed upon by any two will set the amount of loss.

Each party will:
a. Pay its own appraisers; and
b. Bear the other expenses of the appraisal and umpire equally.
(ISO) HO 01 02 (02/95 Ed.)

Mediation or Appraisal

If you and we fail to agree on the amount of loss, either may:

Demand an appraisal of the loss. In this event, each party will choose a competent appraiser within 20 days after receiving a written request from the other. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request the choice be made by a judge of a court of record in the state where the residence premises is located. The appraisers will separately set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of the loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will set the amount of loss.

Each party will:
(1) Pay its own appraiser; and
(2) Bear the other expenses of the appraiser and umpire equally.
(3) If however, we demanded the mediation [as provided in the mediation provision in
the policy] and either party rejects the mediation results, you are not required to
submit to, or participate in, any appraisal of the loss as a precondition to action
against us for a failure to pay the loss.
Retailers Package Policy Commercial Insurance FA-3R84 (1/87)


If we cannot agree with you on the amount of the loss, either of us can demand that the following procedure be used to settle the amount.

  1. You or we will request in writing that the dispute be submitted to appraisal within 60 days from the time we receive your proof of loss. Each will then select an appraiser and notify the other of that choice within 20 days of the initial request.
  2. The appraisers will select an impartial umpire, if they cannot agree on an umpire within 15 days, either you or we can ask that an umpire be appointed by a judge of the court of record in the county where the property is located.
  3. The appraisers will appraise each item for its value at the time of loss and the
    amount of loss. If they can’t agree, they will submit any differences to the umpire. An agreement in writing by any two of these three will determine the amount of the loss.
  4. You will pay your appraiser and we will pay ours. Each will share equally any
    other costs of the appraisal and the umpire.
  5. We will not surrender our rights by any act we take relating to an appraisal

WRITTEN BY: Janet L. Brown and Michael H. Schroder