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:
- The range of what can be determined by an appraisal proceeding is typically limited to issues of valuation and the amount of loss.
- The appraisal panel cannot interpret the meaning of the insurance policy or define valuation terms in an award.
- The appraisal process is bifurcated between the damages and any coverage disputes.
- Pursuing appraisal when clear and unambiguous instructions are not provided may cause a court to refuse to confirm an award.
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. Part I of this article addressed issues related to getting appraisals started. Part II reviews some of the issues that can arise in the conduct of an appraisal, such as the scope of appraisals, appraisal protocols, disputes of the cause of loss, and what happens after an appraisal has concluded. Except where otherwise stated, this article assumes that coverage exists for the loss.
What Appraisals Can Determine
The range of what can be determined by an appraisal proceeding is typically limited to issues of valuation and the amount of loss.1
What If the Cause of Loss Is Disputed?
As discussed in Part I of this article, an appraisal panel is selected to resolve a disagreement between the insurer and the insured regarding the amount of the loss. The appraisal panel cannot interpret the meaning of the insurance policy or define valuation terms in an award. Therefore, the appraisal process is bifurcated between the damages and any coverage disputes. Pursuing appraisal when clear and unambiguous instructions are not provided to the appraisal panel regarding the definition of values being sought may cause a court to refuse to confirm an award.
For example, the parties may disagree over the definition of replacement cost, particularly as it relates to the valuation date of an award. A policyholder may consider the date of an award as the date of valuation, while the insurer considers replacement cost valued as of the date of loss. Such disagreements must usually be settled by the court. If the issue is not decided prior to appraisal, the parties can request that the appraisal panel provide two separate valuations, allowing the court to decide the legal issue.
In Krafchow v. Dongbu Insurance Co.,2 the Hawaii Intermediate Court of Appeals vacated the trial court's confirmation of an appraisal award that appraised what the panel believed was covered loss instead of determining the amount of loss.3
The Krafchows held three property policies. The three insured structures and their contents were damaged by wildfire. The insurer tendered over $300,000 to the Krafchows pending the determination of final settlement figures.
There was disagreement over the amount of the Krafchows' loss, and the appraisal provision was invoked. The appraisers chosen by the parties did not agree on the amount of loss. The umpire agreed with the determination made by the Krafchows' appraiser. The appraisal established replacement cost value, depreciation, and actual cash value for various categories of loss, reduced the appraised amount by a deductible amount, and instructed, "This award shall be payable within 20 calendar days."
The Krafchows then moved to confirm the appraisal. The circuit (trial) court entered orders granting the motion to confirm, recognizing that the insured's appraiser's and umpire's values included consideration [of] ... scope of [insurance] coverage and exclusions.4
The insurer appealed, contending that the circuit court erred by granting the motion to confirm because the appraiser and the umpire exceeded their authority by considering coverage issues and deciding whether the policies provided coverage for certain claimed losses.
The Intermediate Court of Appeals first acknowledged that appraisal provisions were arbitration agreements, subject to Hawaii's arbitration statute.5 By statute, an arbitration award could be vacated if the arbitrator exceeded his or her powers.6
The appraisal provisions in the policies instructed the appraisers and the umpire to determine the amount of loss. Here, not all of the Krafchow's loss was covered under the policies. The insurer's liability to pay for a loss was limited by the coverage provisions, exclusions, and other terms and conditions in the policies.7 The appraisal provision did not limit itself to covered loss; it did not preclude appraisal of non-covered or excluded loss, or loss for which the insurer was otherwise not liable; and it did not empower the appraisers to consider policy or coverage defenses. Nothing in the appraisal provision empowered the appraisers and umpire to determine whether any part of the loss being appraised was or was not covered under the policies.8
Therefore, the appraisers and the umpire lacked the power to decide what amounts the insurer owed to the Krafchows. What, if anything, the insurer actually owed to the Krafchows depended on coverage issues that first had to be decided by the circuit court.9
By stating how much the insurer was to pay the Krafchows and when payment was to be made, the award necessarily took into account the scope of coverage. The umpire and the Krafchow's appraiser purported to appraise what they believed to be covered loss. Rather than directing the insurer how much to pay the Krafchows and when to do so, the Krafchows' appraiser and the umpire should have appraised the entire value of the Krafchows' loss due to the wildfire, irrespective of insurance coverage issues.10
Consequently, the Intermediate Court of Appeals vacated the decision below and remanded the matter for further proceedings.
...
- E.g., Harris v. Am. Modern Home Ins. Co., 571 F. Supp. 2d 1066, 1074 (E.D. Mo. 2008) (policy
provided for appraisal in case of disagreement as to the actual cash value or the amount of loss ); Owners Ins. Co. v. Dakota Station II Condo. Ass n, Inc., 2019 CO 65, 8, 443 P.3d 47, 48 (Colo. 2019) (policy provided for appraisal in case of disagreement on the value of the property
or the amount of loss ); Mich. Comp. Laws 500.2833(1)(m) (Michigan provides for appraisal when parties disagree over the actual cash value or amount of the loss ); Mass. Gen. Laws Ann.
ch. 175, 100 (Massachusetts provides for reference when parties disagree over amount of loss
). ↩︎ - Krafchow v. Dongbu Ins. Co., Ltd., 525 P.3d 697 (Haw. Ct. App. 2023), cert. rejected, No. SCWC-21-0000517, 2023 Haw. LEXIS 115 (Haw. June 30, 2023). ↩︎
- Krafchow, 525 P.3d at 699. ↩︎
- Krafchow, 525 P.3d at 701. ↩︎
- Haw. Rev. Stat. ch. 658A. ↩︎
- Haw. Rev. Stat. 658A-23. ↩︎
- Krafchow, 525 P.3d at 705. ↩︎
- Krafchow, 525 P.3d at 705. ↩︎
- Krafchow, 525 P.3d at 705. ↩︎
- Krafchow, 525 P.3d at 706. ↩︎
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.