For many, the only available option to resolve a dispute with your insurance company may be a clause buried deep within the homeowner's policy. It's a clause that is the result of attempts to curb the number of lawsuits filed against insurers where the loss amount is in dispute. The suits prompted state regulators to provide insurance companies with a less costly mechanism to resolve disputes. It was originally created to help insurance companies and in many cases, still does. In most, if not all states, you will find this rarely triggered vehicle known as the Appraisal Provision.

When, if Ever, is Appraisal an Option:

Before we begin our discussion on Appraisal, it's wise to point out that Appraisal is usually not a preferred option when a problem is dynamic in nature unless the Appraisal can conclude quickly. In other words, if a loss, let's say a fire, completely destroys a house and its contents, there is no continuing damage. In that situation, the Appraisal Process is fitting because there is no pressing time requirement. However, if water damage is involved and toxic mold develops and continues to overtake a property, the Appraisal Process should be hastened because the damage continues to mount as do the costs of remediation.

Appraisals are only applicable when the insurance company has not challenged coverage. In other words, if the insurer has denied a claim, the Appraisal process is probably not an option. Nor can the Appraisal process be used to interpret coverage and it is limited to property damage only (structures and/or contents), additional living expenses should they become necessary and/or an interruption in business (if commercial) causing monetary damages. There is no legal "evidence" heard in most Appraisals (i.e. if the policyholder is challenging the validity of policy limits because (a) there are multiple claims that caused damage or (b) the agent or insurer set or recommended a specific amount of coverage, evidence as to such limits will not be heard and policy limits may not be at issue.) Appraisal cannot address areas of bad faith and personal injury, either. Invoking the process does not eliminate the need to comply with the other policy provisions.

Appraisal is only applicable if there is a good faith dispute between the parties (insurer and policyholder) as to the amount necessary to repair or replace property. For example, if the insurance company is only willing to pay out $2,500 for damage and the policyholder has obtained legitimate bids in excess of $15,000 or more, Appraisal is probably not worth demanding because the cost of the Appraisal Process is probably greater than the amount in dispute. Usually, however, the discrepancies are far more alarming: insurance estimates of $50,000 vs. legitimate bids provided to the policyholder of $200,000 or more.

Selecting the Appraiser:

Either party to the policy (policyholder or insurer) can demand Appraisal but such a demand must be made in writing and usually within specific time limits set forth in the policy. When demand for Appraisal is made, each party -- insurance company and policyholder -- appoint an independent and competent party to serve as their Appraiser. If either party appoints an Appraiser whose income is dependent upon the appointing party, or if the Appraiser is not competent, the entire process will probably be found to be flawed and the ruling overturned.

It's important to understand that a good Appraiser is someone who understands insurance issues and who has firsthand knowledge of construction and replacement costs or can secure from reputable sources binding bids to repair and replace. Usually this entails an enormous amount of research: costs of thoroughly repairing a structure to its pre-claim condition, cost of replacing the structure with items of like kind and quality, cost of safely clearing the land or bulldozing the property (in cases of fire and/or major contamination), cost of repairing and replacing contents with items of like kind and quality, and in some cases, the additional living expenses incurred if the home becomes untenable.

The Appraiser is not a real estate appraiser. He or she is a gatekeeper of costs -- bids to repair and replace. But, given the complexities of the Appraisal Process and abuses that can occur by insurers during the process, we recommend appointing an Appraiser who comes from the following categories:

1. Structural engineer;

2. General contractor and/or construction superintendent;

3. A retired insurance adjuster whose loyalty no longer is to his/her former employer or a respected public adjuster; or

4. Construction attorney. (If you retain an attorney as Appraiser, remember, there is NO attorney/client privilege because the attorney is being hired as an Appraiser, not as an attorney.)

Regardless of background, the person appointed as Appraiser needs to be a skilled communicator and advocate. He or she should not be unreasonable.

Appointing an Umpire:

Once an Appraiser has been named by both parties, they either agree to, or the court appoints, an Umpire. At the earliest stages of the Appraisal Process, parties should appoint the Umpire and provide a written appraisal submission agreement (items to be discussed, negotiated, and stipulations such as no policy limit restrictions because the legitimacy of the limit is in dispute, taping or creating a transcript of the Appraisal hearing, etc.). The Umpire serves as the judge, if and only if the two Appraisers cannot agree to values of the loss. Usually, the Umpire is a mediator or arbitrator. Sometimes, the Umpire is a retired judge. Either way, the Umpire is supposed to be unbiased. Rarely, however, that is the case. As a practical matter, mediators and arbitrators are usually used repeatedly by insurance companies. Policyholders rarely have an occasion to hire a mediator or arbitrator. Therefore, the insurance companies typically have on-going relationships with various mediators and arbitrators. Because insurers provide a constant source of new business, mediators and arbitrators tend to favor insurers. After all, that's who butters their bread. That explains why it is usually the insurance company who demands appraisal, not the policyholder. But, if done properly and without accident, mistake, fraud or bias and if only independent parties are involved with the process, the Appraisal Process can work to everyone's advantage.

There are certain things you can do to level the playing field:

1. Require that any previous relationship (including all mediations, etc..) be disclosed by any Umpire being considered BEFORE the appointment of Umpire is made;

2. Require the other Appraiser to disclose any previous relationship (business or personal) with any Umpire being considered; and

3. Set certain ground rules: request a court reporter transcribe the Appraisal hearing or an audio or video tape be made of the hearing so that a record exists, agree to a specific role of the Umpire and/or limitations of authority, claim(s) to be appraised, set timing parameters in advance so that there is a schedule that must be followed, and address other issues relevant to your specific case well in advance. All of this needs to be done early on in the process to avoid abuses and disagreements later.

What if I Disagree with the Umpire:

If the Appraisers reach an agreement, the Umpire is not needed. Any agreement made (either by the Appraisers or by the Umpire) must be in writing and furnished to all parties. The Umpire's ruling only needs to be agreed to by one or the Appraisers so the Umpire has an enormous amount of power. One of the parties may go away from this process VERY unhappy, which is why we recommend that there be a record of the hearing. If there is reason to challenge the process (for fraud, accident, or mistake) documentation is available. If your Appraiser does disagree with the ruling, be sure to mandate he or she NOT SIGN the ruling. If and only if your Appraiser agrees with the ruling should they sign it.

After the ruling is made, you may be able to set it aside if the opposing Appraiser is not independent. This holds true for either side: policyholder or insurance company. That is why we always suggest that your Appraiser be independent.

If fraud, accident and/or mistake did not take place during the process, and if the opposing Appraiser was independent and competent, you are stuck with the order made by the Umpire. It is binding on both parties with few exceptions (NOTE: an exception does exist in certain states like Oklahoma, where the award is only binding on the submitting party; an exception may also exist if the policy language allows the insurance company the right to reject the claim even after Appraisal). While in most states the final signed award document is binding, it is not a judicial act and the instrument cannot be entered at the courthouse as a legal judgment.

Advantages to the Appraisal Process:

In some cases, the Umpire is not bound by policy limits when a ruling is made. If possible, and if the policy limits were set by the policyholder's agent and do not adequately cover the structure or contents or if multiple claims contributed to the loss, require that the Appraisers and Umpire not be bound by policy limits. Once a ruling is made, the insurance company usually has a very short period of time to make payment. Usually the payment excludes any payment made previously to the policyholder (make sure this is an issue taken into consideration in advance).

Sometimes, the Appraisal Process can actually help prove up bad faith, should that have occurred. For example, if the insurer offers $5,000 to repair a problem but the Appraisal results in a signed award of $30,000, arguments that bad faith (low-balling is an example) occurred may be bolstered.

Remember that the process can work if it is not abused. Moreover, it is a way to recover for property damage without having to resort to the legal system, which is more costly and time consuming.

Should I Demand Appraisal?

Because of its binding nature you should CAREFULLY weigh this option. If you go through this process and come out with a very disappointing ruling from the Umpire, you are stuck with it unless fraud, accident or mistake took place or if the opposing Appraiser was neither independent nor competent.

Nothing is risk free. No one can provide you a guarantee in this process but then again, no one can guarantee the outcome of any other option either. Be mindful of the time restrictions provided in your policy governing the Appraisal Process and carefully select an Appraiser and be even more careful when it comes to the Umpire. Work closely with your Appraiser in order that he or she represents your interests properly. The key to the entire Appraisal process is to better level the playing field so that the process works fairly for all parties -- not just the insurance company.

If and only if you are a member of Policyholders of America ("POA") and are interested in receiving names and numbers of individuals who POA recommends, please contact us. POA has spent an enormous amount of time and energy developing a list of POA-Approved Appraisers and we are very selective about who we recommend for this role.

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