Appraisals: Resolving Disputes over Valuing the Amount of Loss, Part I

Appraisals: Resolving Disputes over Valuing the Amount of Loss, Part I

This article appears in the American Bar Association’s Insurance Coverage Newsletter. G&K shareholder Karin Aldama co-authored the piece with Tred R. Eyerly, Rina Carmel, John S. Vishneski III, and Lauren Gubricky.

The article discusses key considerations for appraisals, including:

• Exercising care when selecting party appraisers and structuring their relationships with the parties involved.
• The importance of carefully reviewing relevant policy provisions before beginning the process.
• Addressing choice-of-law issues before conducting the appraisal.
• Recognizing that state laws governing appraisals can vary significantly.

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When coverage exists and is not excluded for a first-party property loss, insurers and insureds may disagree over the valuation of the loss. First-party property policies typically include an appraisal provision to resolve disagreements between the insurer and insured over valuation. This article, which will be published in two parts, reviews some of the issues that often arise in an appraisal proceeding. Part I discusses the logistics of appraisals, such as policies loss settlement and appraisal provisions, choice-of-law issues that can arise in the appraisal context, and the selection of party appraisers and umpires. Part II examines issues that can arise while conducting an appraisal, such as the scope of appraisals, procedures where the loss is disputed, appraisal protocols, and what can happen after the appraisal is conducted. Except where otherwise stated, this article assumes that coverage exists for the loss.

The Policy's Loss Settlement Provisions

Typically, in property policies, the method for determining how covered losses of property will be paid is set forth in the loss settlement provisions. Property policies usually offer benefits on an actual cash value basis, but the insured can sometimes purchase replacement cost coverage. Often, the actual cash value of the insured property will be less than the replacement cost.

A property policy usually provides that the insurer will pay actual cash value for damage caused to covered property when the loss is covered and exclusions do not bar coverage. Actual cash value is typically not defined in the policy but is understood to mean the actual, depreciated value of the damaged property.¹ Another definition of actual cash value is the cost to repair or replace lost or damaged covered property with new property of similar quality and features reduced by the amount of depreciation applicable to the lost or damaged covered property immediately prior to the loss.² Depreciation means a decrease in value because of age, wear, obsolescence or market value and includes ... the cost of materials, labor and services ... necessary to repair or replace lost or damaged covered property.³

Under replacement cost value coverage, after repair or replacement of the damaged property, the insurer will usually pay the replacement cost without deduction for depreciation, for like kind and quality property. Property policies frequently provide that, pending repair or replacement of the insured property, the insured may make a claim for actual cash value. The insured may repair the damage later and, once repairs are complete, claim the additional amount necessary to equal the replacement cost.⁴ The policy may provide that the insured must make repairs within a specified time frame to be eligible to seek replacement cost coverage. The policy may also require the insured to notify the insurer of the insured s intent to make a claim for replacement costs within a specified time after the loss or damage.⁵

Valuation provisions may be contained in other sections of a policy, and such provisions may allow for options other than repairing or replacing the property at issue. For example, an Insurance Services Office (ISO) Building and Personal Property Coverage form⁶ contains an Additional Coverage for Increased Cost Of Construction, which applies only if the insured has purchased replacement cost coverage.⁷ Under this Additional Coverage, the insured may elect to rebuild at another location.⁸ This Additional Coverage also recognizes that, for some losses, the ordinance or law may require[ ] relocation to another premises....⁹

Appraisal Provisions in the Policy

Most property policies offer appraisal as a solution to a disagreement between the insurer and the insured regarding the amount of the loss. Appraisal is a dispute resolution process set forth in the policy.

While arbitration statutes or rules may govern the conduct of the appraisal proceeding, a policy's appraisal provision differs from an arbitration provision in other types of contracts. A policy's appraisal provision generally provides for the following:

• Either party may demand an appraisal in writing.
• Each party chooses and pays for the appraiser it selects (called a party appraiser).
• The two appraisers select an umpire; the parties will equally share the cost of the umpire.
• A mechanism for selecting an umpire is to be followed if the two appraisers cannot agree.
• The appraisers separately set the amount of loss.
• If the appraisers agree on the amount of loss, it will be paid to the insured.
• If the appraisers fail to agree, they submit their differences to the umpire.
• A decision by which any two agree will set the amount of loss, and the decision is final.

If the two appraisers selected by the parties agree on the amount of the loss, the umpire need not decide that amount. However, most policies provide that the umpire must be selected at the beginning of the appraisal process, so it is usually not possible to wait to select an umpire in case the party appraisers disagree. An appraisal must be concluded and there can be no impasse, so any disagreement over the value of the loss will require a decision by the umpire.

In one case, the insured condominium association filed suit to challenge an appraisal award.¹⁰ The insured submitted a claim for damage to the property's roof and other building components due to wind and hail. The insurer paid $60,989.54, which was the amount of its replacement cost estimate, minus the policy's $10,000 deductible.¹¹ The insured estimated that damage was in excess of $1.3 million and demanded an appraisal. The appraisal award was $123,252.09.¹²

The insured filed suit, alleging breach of contract for failure to adequately compensate the insured for damage to the property. The insurer's motion for judgment on the pleadings was granted.¹³ The court ruled that the parties were bound by the policy's appraisal provision. The word binding in the provision was sufficiently clear to constitute a waiver of a party's right to sue. The appraisal did not answer questions of contract interpretation or address any number of legal or factual disputes that could give rise to a claim based on the insurer's denial of liability. The binding appraisal provision simply meant that the insurer could still object to liability but could not object to the amount awarded in the appraisal process.¹⁴

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Click here to view the full article published by the American Bar Association (subscriber access required).

1. Stephens & Stephens XII, LLC v. Fireman's Fund Ins. Co., 231 Cal. App. 4th 1131, 1137 (2014). ↩︎
2. Walker v. Auto-Owners Ins. Co., 517 P.3d 617, 619 (Ariz. 2022) (quoting policy definition). ↩︎
3. Walker, 517 P.3d at 619 (quoting policy definition; emphasis by court deleted). ↩︎
4. Stephens & Stephens XII, LLC, 231 Cal. App. 4th at 1137. ↩︎
5. Stephens & Stephens XII, LLC, 231 Cal. App. 4th at 1137 (noting policy required insured to notify insurer of intent to claim replacement costs within 180 days after loss or damage). ↩︎
6. ISO, Business and Personal Property Coverage Form No. CP 00 10 06 07. ↩︎
7. ISO, Business and Personal Property Coverage Form No. CP 00 10 06 07, p. 4, A.4.e.(1). ↩︎
8. ISO, Business and Personal Property Coverage Form No. CP 00 10 06 07, p. 5, A.4.e.(7)(b). ↩︎
9. ISO, Business and Personal Property Coverage Form No. CP 00 10 06 07, p. 5, A.4.e.(7)(c). ↩︎
10. The Courtyards at Prairie Fields Condo. Ass n v. W. Bend Mut. Ins. Co., No. 1:22-cv-04854, 2023 U.S. Dist. LEXIS 169458, 2023 WL 6198818 (N.D. Ill. Sept. 22, 2023). ↩︎
11. The Courtyards, 2023 U.S. Dist. LEXIS 169458, at *2. ↩︎
12. The Courtyards, 2023 U.S. Dist. LEXIS 169458, at *3. ↩︎
13. The Courtyards, 2023 U.S. Dist. LEXIS 169458, at *5. ↩︎
14. The Courtyards, 2023 U.S. Dist. LEXIS 169458, at *9. ↩︎

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about the co-author

Karin Aldama handles complex commercial and business litigation and insurance coverage matters for mid-size to Fortune 500 companies in hospitality, finance, utilities, aerospace, and semiconductors. She helps corporate clients and governmental entities find insurance programs that meet their needs and obtain the coverage to which their policies entitle them.