The Case for Appraisal in Settling Claim Disputes

By Jonathan D. Mutch | October 25, 2004

Appraisal can be readily implemented, costs less than a trial, and can often be completed within a short time, for practically any valuation dispute.

As someone who makes his living representing people who sue each other, it may sound odd for me to say, but it’s true—a lawsuit is not the answer to every dispute.

A case in point is a typical dispute over the amount of an insurance claim resulting from the loss of property. Using appraisal instead of a lawsuit can often save time and money for both the claimant and the insurance carrier.

Appraisal (also called “reference”) is a fair and efficient way to settle most valuation disputes. It is a contractual remedy, binding on both parties, that either the claimant or the carrier can demand. It can only be applied to valuation disputes, not coverage issues. When coverage issues are being disputed, however, appraisal can still be used to address valuation issues, even if the coverage disagreement results in a lawsuit.

Appraisal can be used in virtually any valuation dispute, ranging from relatively mundane disputes up to losses from the attack on the World Trade Center.

The point of appraisal is to value the loss. Valuation depends on how the policy is written. It may be based on actual cash value or replacement cost, for example. Business interruption losses can also be measured by appraisal.

The policy language covering appraisals is usually straightforward. In some cases, it is drawn from a state’s statutory standard fire policy. Since the same language applies to both the claimant and the carrier, it does not favor one party over the other.

The insurance policy lists the requirements for demanding appraisal. Typically, either party may demand appraisal when there is (1) a failure to agree on the amount of a loss, and (2) a written demand for appraisal is tendered by either party.

Appraisal takes place before a three-member panel consisting of one appraiser for each party, plus an umpire chosen by the two appraisers. This is quicker and less expensive than involving a judge and jury. Not only are fewer people involved, but also the panel typically consists of three seasoned professionals who can quickly come up to speed on valuation issues with far less need for attorneys or expert witnesses. Small appraisals often take place without any attorneys. For larger cases, attorneys usually find candidates for the panel, take depositions or examinations, and prepare experts for the appraisal hearings.

While appraisal is typically beneficial to both parties, one party may fight appraisal if it believes a jury will act more favorably. Those who have never been through appraisal may also be hesitant to try something new. A typical approach is to argue that the other party waited too long before requesting appraisal, thereby “waiving” (i.e., abandoning) its contractual rights. How long is too long to wait? It depends, as the following two cases involving arguments of waiver demonstrate:

Chainless Cycle. One early case began when a fire loss at a manufacturing facility damaged Chainless Cycle’s bicycle parts. An insurer and an adjuster retained by the insurer ignored the manufacturer’s requests for appraisal. Rust and decay were reducing the value of any salvageable goods. The insured and the adjuster finally reached a verbal agreement on the amount of loss. Based on the verbal agreement, the policyholder sold many of the goods. Days later, the insurer refused to settle at the amount agreed, arguing that the adjuster acted without authority. At that time, the insurer demanded appraisal, even though many of the goods had been sold and over a year had elapsed. Ignoring the appraisal demand, Chainless Cycle sued and won. New York’s highest court found that the insurer waived its right to demand appraisal. Applying a standard still current today, the court said that appraisal must be sought within a reasonable time.

Terra Industries. The opposite outcome was reached in a more recent case involving Terra Industries, even though two-and-a-half years passed before the insurer requested an appraisal (Robins, Kaplan, Miller & Ciresi LLP represented the insurer). An industrial explosion caused claimed damages exceeding $360 million. The parties exchanged loss information and negotiated for a long time. Ultimately, after an impasse was reached, the insurer sought appraisal.

Even though more than two-and-a-half years had passed, the court rejected the insured’s claim of waiver and found that the parties had tried to agree on the amount before the insurer demanded appraisal, and that the case’s complexity made the delay reasonable.

There are no set rules about exactly when appraisal must be demanded—it is a window in time, not a specific point. Courts define the edges of the window by reviewing the facts. They consider whether and when a real valuation dispute crystallized, how much time passed before the demand, the reasons for the passage of time, and the actions and motivations of the parties involved. The reason for a waiver must be compelling for a court to deny a party its contractual right to appraisal.

Given that an appraisal can be readily implemented, that it costs less than a trial, and that it can often be completed within a short time, in practically any valuation dispute, appraisal is worth appraising.

Jonathan D. Mutch is an attorney in the Boston office of Robins, Kaplan, Miller & Ciresi LLP. He can be reached at (617) 267-2300.

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Insurance Journal West October 25, 2004
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