Appraisal clauses have been a common provision of insurance policies for more than a century. Usually appearing in the conditions sections of policies, these provisions are designed to provide a nonjudicial means of resolving disputes between insurers and insureds when the two parties are unable to agree on the amount of money an insurer should pay to settle a claim. However, in some instances, this good-intention alternative to lawsuits itself becomes the subject of litigation, and that is what provoked me to write about it. In many ways, this alternative dispute resolution is an example of "I thought I knew what it meant until the judges read (or misread) it and came up with that interpretation."
In this first article, I examine the language of selected examples of appraisal clauses and address a few of the linguistic challenges facing adjusters when the clause becomes part of the action in negotiating a claim settlement. While I am aware that appraisal provisions are part of insurance contracts covering other matters, the single focus here is on homeowners policies.
It is conventional wisdom that, in insurance contracts, "every word counts." An indispensable corollary to this principle is, "every omission also counts, including punctuation." Accordingly, I introduce my thoughts on appraisal clauses by taking a walk through commonly used dictionaries. While lawyers may prefer Black's Dictionary for establishing meaning, I prefer standard dictionaries, primarily because it is my experience that few home owners rely on specialized dictionaries, such as Black's, in everyday discourse.
To begin, Webster's New World Dictionary says "appraise," a transitive verb, means "to set a price for; decide the value of, esp. officially; to estimate the quality of; to judge the quality or worth of." Webster's Collegiate Thesaurus lists the following synonyms for "appraise": "assay, assess, evaluate, rate, set at, survey, valuate, value."
Appraisal is the product of appraising something. For lawyer readers, Black's makes no mention of "appraise" but defines "appraisal" as "The determination of what constitutes a fair price; valuation; estimation of worth." Maybe it takes a legal perspective to introduce an element of fairness to the meaning. These and other definitions will reappear later in discussions of court attempts to attach meaning to what appraisals are all about.
Highlighting Differences Among Appraisal Clauses
While there may be uniformity of thought about concepts of appraisal, examination of several examples of appraisal clauses reveals that they are not identical twins; that is, there is no such phenomenon as the appraisal clause. To illustrate the point, I choose four examples below to delineate commonalities and differences among appraisal wordings. My selections are the 165-line fire policy; a State Farm Insurance Company homeowners policy; the Insurance Services Office, Inc. (ISO), standard HO 3 language; and the appraisal provision in the National Flood Insurance Program (NFIP) dwelling form. Some of the differences are summarized in Table 1, which portrays wording with respect to (1) whether appraisers and umpires have to be competent, disinterested, or impartial; (2) the nature of the assignment—that is, to determine actual cash value (ACV), amount of loss, or replacement cost; (3) whether the final agreement must be in writing; (4) whether the appraisal has to be itemized; and (5) whether the clause contains any time limits for performance.
The Policies Examined
The 165-line fire policy, lines 123–140:
In case the insured and this Company shall fail to agree as to the actual cash value of the loss, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within twenty days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for fifteen days to agree upon such umpire, then, on the request of the insured or this Company, such umpire shall be selected by a judge of a court of record in the state in which the property covered is located. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him and the expenses of appraisal and umpire shall be paid by the parties equally.
State Farm's appraisal clause:
4. Appraisal. If you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. Each shall notify the other of the appraiser's identity within 20 days of receipt of the written demand. The two appraisers shall then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the residence premises is located to select an umpire. The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall set the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any two of these three shall set the amount of the loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the expenses of the umpire shall be paid equally by you and us.
The ISO form:
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 and impartial 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 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 appraisal and umpire equally.
The NFIP dwelling policy:
If you and we fail to agree on the actual cash value or, if applicable, replacement cost of your damaged property to settle upon the amount of loss, then either may demand an appraisal of the loss. In this event, you and we will each choose a competent and impartial 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 covered property is located. The appraisers will separately state the actual cash value, the replacement cost, and the amount of loss to each item. 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 to by any two will set the amount of actual cash value and loss, or if it applies, the replacement cost and loss.
ACV is defined in the policy as "The cost to replace an insured item of property at the time of loss, less the value of physical depreciation."
Observations about the Policies
Certain key words are either omitted or undefined in these examples. For example, all require appraisers to appraise "loss." However, there is no stipulation that the appraisers address covered losses only. In the real world, however, loss may entail a combination of covered and noncovered perils, and even novices learn that the popular notion of "full coverage" is myth. A reasonable inference is that the appraisers' assignment is to arrive at a number, an estimate, whether covered or not.
Thus, surprisingly, for an industry whose raison d'etre is to deal with loss, the word loss doesn't even get a tagline. In fact, when the term appears in insurance publications, it is often as an adjective, such as loss ratio, loss reserve, loss prevention, and similar expressions. One industry dictionary definition is "reduction in value," and a leading property-casualty insurance company's training materials cite "Any diminution of quality, quantity, or value of property" as the meaning. Among the definitions in Webster's, I note a view that it consists of "the damage, trouble, disadvantage, deprivation caused by losing something; any reduction, lessening." Black's cites "A decrease in value" followed by a laundry list of types of loss, thereby indicating that the meaning of "loss" is not self-evident.
Further, as will be discussed in a subsequent commentary, court interpretations show divisions as to how far appraisers may go in addressing coverage questions regarding loss. Disagreements often occur over whether "amount of loss" determinations are coverage or decisions or not.
Most homeowners policies provide replacement cost in some form or another; however, among the policies analyzed, only the flood policy directs appraisers to estimate replacement costs.
Some guidance can be inferred from the usual requirement that property damage arise from "direct physical injury to, destruction of or loss of use of tangible property" and variations thereof and the agreement to cover liability for bodily injury and property damages. Arguably, however, the concept of loss is much broader than these more limiting insuring agreements.
Itemization
Itemization of the loss, however determined, is not required by some policies but is a requirement in others. For the former, it appears that a simple one-page transmission will satisfy the contract, but the latter can be quite detailed. From a cost perspective, certainly the more detailed the requirement, the greater the cost. In fact, the cost apportioning of appraisal probably reduces the number of appraisal demands by policyholders.
According to the Insurance Information Institute Insurance Fact Book 2014, the average property damage claim is under $10,000. Therefore, when a policyholder with an $8,100 claim does a cost-benefit analysis factoring in the possibility of failure, invoking the appraisal clause is hardly worth it.
Time Limitation
Only State Farm includes a time limit on the process, and even it is limited to the work of the two appraisers. Once it reaches the umpire, no time limits apply. A reasonable inference is that appraisal can be a lengthy process. I also find it interesting that the ISO form does not require a written report, even though, in my experience, the written report is usually provided. However, a strict constructionist could be difficult to persuade on that point. Although not shown in the table below, only the 165-line fire policy stipulates the party to which the final report is to be delivered; it is to be "filed with this company." While this may be the practice among most companies, obviously there is no language directly on point for many policyholders.
In addition to this critique of the appraisal clauses, terms such as competent, disinterested, impartial, and amount of loss are also subject to differing interpretations. Adding to this diversity of views are several court decisions affecting the implementation and application of the various appraisal clauses. These issues will be the subject of later commentaries.
| Provision | 165-Line Policy | State Farm | ISO | NFIP |
|---|---|---|---|---|
| Adjuster must be | ||||
| Competent | Yes | Yes | Yes | Yes |
| Disinterested | Yes | Yes | No | No |
| Impartial | No | No | Yes | Yes |
| Umpire must be | ||||
| Competent | Yes A | Yes | No | No |
| Disinterested | Yes | No | No | No |
| Impartial | Yes | Yes | No | No |
| Assignment | ||||
| Set ACV | Yes | No | No | Yes |
| Amount of loss | Yes | Yes | No | Yes |
| Replacement cost | No | No | No | Yes |
| Itemization | Yes | No | No | Yes |
| Time limits | No | Yes B | No | Yes |
| Written agreement | Yes | Yes | No | Yes C |
|
A The text says "actual cash value and loss."
B Applies to the two appraisers only. Umpire not included.
C As in the ISO form, there is no specific requirement that the final agreement involving the umpire be a written one.
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