Ever Heard of the Appraisal Provision in your Homeowners and Flood Insurance Policies?
Every homeowners and flood insurance policy in the State of New Jersey contains a provision that mandates an appraisal procedure, when demanded, where the insured and insurance company cannot agree on the amount of damage sustained to property such as household furnishings, business personal property, and building structures, like a house or garage. When the insured and insurer dispute the dollar value of the property loss, employing the much underused appraisal policy provision can save an insured from having to establish the amount of damages in a lawsuit, and frequently use of the appraisal process spurs settlement of value of the loss disputes.
Check your homeowners or flood policy—it should have policy language similar to the following: If you or we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent and impartial appraiser within 20 days after receiving a written request from the other. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a court of record in the state where the “residence premises” is located. The appraisers will separately set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will set the amount of loss. Each party will pay its own appraiser; and bear the other expenses of the appraisal and umpire equally
As can be seen, the appraisal provision relates to amount of the loss — in other words, the dollar value of the claim, known as damages, not the liability of the insurance company. Whether or not the loss is covered under the policy or comes within an exclusion is a different question that must be resolved by a lawsuit if the insurance company denies liability.
The statutorily mandated appraisal procedure provides for what is known as “alternative dispute resolution [“ADR”], which is a method to settle a dispute quickly and efficiently, outside of the courtroom. Going to court is expensive, time consuming and very stressful. Where ADR is available and the covered claim is substantial and well-documented, it is always wise to consider it as a means to the end.
Here is an example of when an insured, in consultation with her or his attorney, might chose to invoke the appraisal process. As a result of Hurricane Sandy, the insured sustained covered damage to his or her vacation home at the shore. The homeowner’s contractor submits an estimate of $525,000 to rebuild. The insurance company hires its own contractor, who estimates the cost to rebuild at $375,000. The insurance adjustor has dug in his/her heels and presents a “take it or leave it attitude.”
The insured has the absolute right to invoke the appraisal procedure. Nine times out of ten, the adjustor is going to be surprised at the insured’s strategy because attorneys and insureds are frequently unaware of the statutorily mandated appraisal provision in the policy. The insured invoking the appraisal option often puts an end to the impasse with the adjustor and the parties can then move forward towards a negotiated settlement of the damage claim.
What happens if liability/coverage is also at issue? There are times when I will counsel my clients to pursue the appraisal avenue even when the carrier denies coverage, i.e. liability. In those disputes where I recommend litigation to impose liability/coverage, setting damages by appraisal forecloses discovery and litigation of damages issues. This saves time, money and is very helpful during settlement because it forecloses the insurance company from the tactic of low balling the amount it will have to pay out on the policy assuming coverage.
The results of the appraisal are binding – that is, neither the insured nor the insurer has the right to appeal if s/he or they are not satisfied with the result. While this is of course a risk, the process of selecting the appraisers and the umpire detailed in the policy language is designed to result in a fair and just result for both the insured and the carrier. The insured has input into the selection of the umpire and, if the parties cannot agree on the umpire, the court appoints a person who is independent and unbiased.
Finally, insurance companies have been known to refuse to participate in the appraisal process, which is a breach of the contract of insurance. If that happens, the insured’s attorney will go to court with a complaint and an order to show cause, requiring the insurance company to appear in court in short order to explain upon what legal basis it refused to comply with the appraisal provision of the policy. The insured’s complaint, in addition to requiring enforcement of the appraisal provisions, can also seek, where appropriate, punitive damages for bad faith on the part of the insurance company and/or relief under the NJ Consumer Fraud Act, which when applicable, affords a successful claimant treble damages, attorneys’ fees and costs.