Escape Clauses Ruin Appraisal Process

Several states have adopted consumer unfriendly commercial property appraisal provisions. What these states have done is to remove the teeth from the appraisal provision by making participation in the appraisal process voluntary.

The way the appraisal currently works is this (quoting the commercial property policy): If the insurer and the insured “disagree on the value of the property or the amount of loss, either may make a written demand for an appraisal of the loss”–and either and demand are the operative words here.

The other party must then agree to enter into the appraisal process. Both parties choose their own appraiser and the two appraisers choose an umpire. When any two of the three agree on the value of the property or the amount of loss, the dispute is settled. And the matter of valuation is closed.

However, some jurisdictions have changed their laws regarding appraisal (Arkansas, Kansas, Nebraska, Oklahoma, Oregon, Puerto Rico, South Dakota, Virginia, and West Virginia). Those changes are reflected in the language of each jurisdictions amendatory endorsement.

The language from Arkansas typifies the new wording: “However, an appraisal will take place only if both you and we agree, voluntarily, to have the loss appraised.”

In other words, the insured may challenge the insurer only if the insurer agrees to be challenged–a perplexing conundrum.

In Virginia, the amendatory endorsement states that “any outcome of the appraisal will not be binding on either party.”

Meanwhile, Puerto Rico has taken the process to the “nth” degree–it has removed the appraisal provision.

In the jurisdictions that have modified the appraisal provision–regardless of how wrong the company adjuster might be in setting the value of a loss–the insured is left without any policy defenses.

The insured must then hire a lawyer and take the insurer to court–resulting in higher costs for all parties. This after just recently hearing considerable objections from the insurance community about insurance rates going up because of increased participation in the legal system.

Under the new “voluntary” appraisal clause, the insurer is getting off easy in several ways:

The insurer does not have to explain its estimate to the insured. Now, like the rest of the insurance contract, the estimate is offered on a “take-it-or-leave-it basis.”

The insurer does not have to equip its adjusters with the latest estimating software. Since the insurers figures, in effect, cannot be challenged, there is no need to invest in that software.

Only the insurers preferred vendors will be used, possibly keeping the insured from accessing the best workmanship available. More than likely it will be only those preferred vendors who will do the job at the adjusters estimate.

The insurer drafted the policy with no input from the insured and included a remedy to resolve disputes–the appraisal provision. In looking at many of the letters that “The FC&S Bulletins” has received over the years, disputes often occur because the adjuster either fails to properly evaluate the loss or misapplies coverage. Unfortunately, I have seen too many cases of the adjuster just saying: “This is my opinion. This is all I am going to pay.”

The insured certainly has a right to disagree with the adjuster. And that disagreement may be settled by demanding appraisal. My experience has been that by demanding appraisal, the insured can get a proper settlement.

Without a binding appraisal provision, the insured must either accept the insurers figures or go to court. The new appraisal provision can only result in higher insurance costs, as insureds are forced to resort to the legal system to have their differences resolved.

Insurance companies know that full-blown litigation is a major deterrent to an insured pursuing a claim. Individuals and corporations that have just suffered a tremendous property loss do not want to spend the next several years reliving the loss while going through a trial.

The way I see it is this: the changes already adopted in the appraisal provision by the above states will force most individuals to settle. These changes equate to the insurance company picking the losses that go to appraisal. In a state that has little or no bad-faith law, insurance companies could simply refuse to go to appraisal and take every case to court, where they have little or no additional exposure.

As an aside: Im wondering just how insurance companies got this language past the regulators in those states. Supposedly insurance departments are watchdogs for the consumer. The departments mentioned earlier certainly let their guard down on this issue.

The current wording in the appraisal provision is just fine. It provides the insured a well-defined means of challenging an adjuster. It also provides insurers with a way to have their work reviewed by an independent team of outsiders (the appraisers and the umpire).

In addition, the newest version of the commercial property policy has built in some extra protection for the insurer. It adds the caveat: “If there is an appraisal, we will still retain our right to deny the claim.” This allows the insurer a reasonable time to more fully investigate coverage issues and to look for fraud.

Michael K. McCracken, CPCU, ASLI is Associate Editor of The FC&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. The FC&S editors welcome comment and questions and may be reached by fax at 859-692-2237 or via e-mail at FCS@NUCO.COM.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Escape Clauses Ruin Appraisal Process

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