Thomas Fahrenholz’s home was badly damaged by fire in 1999. The adjustment of the loss did not proceed smoothly; among other issues, the insurance company felt that the public adjuster Mr. Fahrenholz had retained had not submitted a sufficiently detailed estimate. The public adjuster recommended that Mr. Fahrenholz demand an appraisal, which he did expecting that this would expedite the settlement and would be less expensive and quicker than a lawsuit. The insurance company, however, refused the request for an appraisal. In the court actions that followed, it argued that it was not compelled to participate in an appraisal, rather that a lawsuit to settle the dispute was Mr. Fahrenholz’s proper recourse. In 2002, the court agreed with the insurance company.i

 

The appraisal provision has been a universal feature of property insurance policies since the first standard fire insurance policy law was enacted at the end of the 19th century. It’s a short provision that has changed very little from its formulation in the 165-line standard fire policy. (See a discussion of the Standard Fire Policy—SFP— in my column the April 19th issue of the Insurance Advocate.) The current ISO Business and Personal Property form (BPP) appraisal provision reads as follows:

 

Appraisal

 

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

 

If there is an appraisal, we will still retain our right to deny the claim.

There are a number of key points worth noting:

• Both the insurance company and the insured have the right to demand appraisal

• Appraisal only applies to a disagreement over the value of the property or the amount of the loss. It cannot be used to resolve coverage disputes.

• Each party selects and pays its own appraiser. The appraisers select an umpire. If they cannot agree on an umpire, either the insurance company or the insured may ask for a courtselected umpire. The costs of the umpire and other appraisal expenses are divided equally.

• The appraisers separately state the value of the property and the amount of loss. If they agree, the amounts they have agreed upon are binding on the insurance company and the insured. If they disagree, they submit their differences to the umpire. A decision agreed to by any two is binding.

• The last sentence “If there is an appraisal, we will still retain our right to deny the claim” does not appear in the SFP version. It reinforces the position that appraisal does not serve to settle coverage issue.

 

When the insured and the insurer are at loggerheads as to the value of the property or the amount of the loss, the appraisal procedure can be quicker and less expensive than a lawsuit. For many years it was used infrequently in New York because the courts would not compel an insurance company to participate in the appraisal process. In most states, courts will compel the parties to go to appraisal if the insured or insurer demands it.ii In New York if the insurer would not participate in the appraisal, the courts ruled that the insured should commence a lawsuit for breach of contract rather than going through appraisal.

 

Insureds and their representatives petitioned the Legislature to correct this interpretation. In 1990 the Legislature enacted a law providing that the appraisal provision was binding on both the insurer and the insured. Thereafter most insurance companies agreed to participate in appraisal proceedings, which led to a marked increase in the number of claims that went to the appraisal. However, in the case involving Thomas Fahrenholz in 2002 mentioned at the start of this article, the court ruled that the 1990 change did not give the insured the right to require specific performance of the appraisal process by the insurer, in essence returning to the pre-1990 situation.

 

In what one commentator feels was an implied invitation to the Legislature to act, the Fourth Department added that “[F]urther legislative action is required to eliminate that prohibition.”iii The Legislature has now taken such action. Senate Bill 2088- A, which gives either party the right to compel the other to participate in appraisal, took effect when Governor Paterson signed the bill on March 30, 2010. The portion of the bill most pertinent to this discussion, reads as follows:

 

[I]n the event of a covered loss, whenever an insured or insurer fails to proceed with an appraisal upon demand of the other, either party may apply to the court in the manner provided in subsection (a) of this section for an order directing the other to comply with such demand. If an appraisal is so ordered, it shall be limited to a determination of actual cash value and/or replacement cost, or the amount of loss which shall be determined as specified in the policy and shall proceed pursuant to the terms of the applicable appraisal clause of the insurance policy and not as an arbitration.

 

The Legislative summary that accompanies the bill reads as follows: “[A]llows court to compel the parties to submit to the appraisal process as set out in a standard fire policy regardless of any dispute raised concerning scope of coverage or scope of loss.”

 

(Legislative summaries are intended to provide a general overview. They are not relied upon as a substitute for the actual bill language, but they do provide courts with an insight into the legislative intent when the court is faced with interpreting a law.) Although either party may compel the other to participate in the appraisal, as a practical matter insurance companies will most likely just refuse payment if the insured does not respond to its request for an appraisal. If the insured commences a legal action, the insurer can respond by then requiring the appraisal. If no action is commenced within the two-year statute of limitations, the claim will be extinguished. For insureds and their advisers, the new law provides an efficient way to resolve disputes over value. It is not, however, fail-safe. I know one insurance practitioner who is involved in a dispute between an insured and its insurer for a claim that occurred in August of 2001. Two years ago the insurer demanded an appraisal, which is still going on. The appraisal process has been time consuming and expensive—my friend’s guess is that the insured’s costs for the appraisal will exceed $250,000.

Nevertheless insured’s should consider an appraisal to break a deadlock over loss valuation. The advantages of the appraisal process from the insured’s point of view are:

• Offers a generally less expensive way to resolve a valuation dispute.

• No attorney is required to commence appraisal proceedings—although an insured should probably retain counsel if it is necessary to go to court to have an umpire named. Insureds may want to consult an attorney in any event. If they do, they should look for one with property-insurance law expertise.

• Experienced appraisers and umpires can often quickly iron out disputes that involve differences concerning the cost of materials or the interpretation of construction plans.

The disadvantages from the insured’s point of view are:

• Insureds often have difficulty in finding qualified and reasonably-priced appraisers. (Insurers regularly employ contractors who estimate losses giving them a ready source of appraisers.)

• Appraisals can sometimes be as timeconsuming and expensive as a lawsuit.

• Appraisers sometime exceed their authority and deal with coverage issues even though that is beyond the scope of an appraisal.iv

An excellent source for more detailed information about the appraisal process is the “The Law and Procedure of Insurance Appraisal.” by Jonathan J. Wilkofsky, Esq.v The learning points for us are:

• Tell insureds about the availability of the appraisal provision as a way to resolve value disputes

• Point out to them the advantages that the procedure can offer as well as the possible pitfalls. i Fahrenholz v. Security Mut. Ins. Co., 291 876 (4th Dept. 2002) There was another issue, not pertaining to appraisal, but of interest to us. The insurance policy was in the name of Timothy Fahrenholz, Thomas’s brother, who had died seven years earlier. As Timothy’s executor, Thomas, in accordance with the will, transferred the property to himself. Thomas lived in the house. This issue was resolved in Thomas’s favor.

 **

ii Florida is permitting some insurance companies to eliminate the appraisal clause for property policies written in that state.

iii Roy A. Mura “Compelling Appraisal—New York State Legislature Amends Insurance Law §§ 3404 and 3408 and CPLR § 7601” http://nycoveragecounsel.blogspot.com/2010/0 4/compelling-appraisal-new-york-state.html

iv Adapted from “Policyholders Can Will in Appraisal” What’s UP Summer 2006 http://www.uphelp.org/pdfs/PolicyholdersCan WininAppraisal.pdf

v Jonathan J. Wilkofsky, The Law and Procedure of Insurance Appraisal Ditmas Park Legal Publishing, Nov 2009