CHAPTER 10 APPRAISAL

• Jurisdiction: United States

Almost all property insurance policies contain an "appraisal" clause similar to that in the Standard Fire Insurance Policy that provides:

In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon such umpire, then, on request of the insured or this company, such umpire shall be selected by a judge of a court of record in the state in which the property covered is located. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him and the expenses of and umpire shall be paid by the parties equally. ¹

This provision is, in many states, considered an arbitration proceeding. Even when it is not called an arbitration it looks like one, acts like one, and ends with the issuance of an award just like an arbitration. The difference is that it is a very limited arbitration where the appraisers are allowed to resolve only the value of the property and the actual cash value loss.

When submitting a dispute over the amount of loss to appraisal, the submission to the appraisers should be in writing, instructing that the parties do not want the appraisers to follow hard and fast, arbitrary, or fictitious rules in determining actual cash value, but to consider all evidence presented to them so that their award will serve to fully indemnify or compensate the insured for the actual loss he or she has sustained. At the same time the appraisers must be instructed to not place the insured in a better position than he or she was in just before the fire.

By the appraisal provision the insured and the company promise that if they cannot agree as to the amount of loss, they can submit their differences to a panel of three impartial arbitrators, called "appraisers." The decision of the appraisers regarding the amount of loss is binding on both parties and should be used as a last resort when all efforts to reach an agreed amount of loss with the insured have failed. The provision is optional, and neither the insured nor the insurer is obligated to invoke that provision.

California, by statute, has limited the process under certain situations by changing the statutory standard fire policy. The 2001 statute provides:

[P]roceedings are informal unless the insured and this company mutually agree otherwise. For purposes of this section, "informal" means that no formal discovery shall be conducted, including depositions, interrogatories, requests for admission, or other forms of formal civil discovery, no formal rules of evidence shall be applied, and no court reporter shall be used for the proceedings. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him or her and the expenses of and umpire shall be paid by the parties equally. In the event of a government-declared disaster, as defined in the Government Code, may be requested by either the insured or this company but shall not be compelled. ²

The change was designed to cure a perceived use of appraisal as a device to beat into submission insureds making claims during disasters like earthquakes. It uses a battle tank to destroy a tricycle and deprives the insured and the insurer of the right to compel appraisal during disasters, thereby forcing insureds or insurers to litigate their differences if an agreement cannot be reached.

Jurisdictions differ on whether an appraisal is also an arbitration. The clause has been found to be an arbitration agreement (an agreement to arbitrate a dispute under the statutes governing arbitration) in California and many states. In New York, the appraisal clause was found not to be an arbitration provision in Delmar Box Co. v. Aetna Ins. Co., 309 N.Y. 60, 127 N.E. 2d 808 (1955). The New York court stated that the New York statutes relating to arbitration do not act to convert the informal appraisal provided for in the standard fire policy to an arbitration proceeding.

A. Appraisal Is Arbitration

In Klubnikin v. California Fair Plan Ass'n, 84 Cal. App. 3d 393, 148 Cal. Rptr. 563 (Cal. Ct. App. 1978), the California Court of Appeal found that an insurance appraisal is an arbitration under California law.

The court of appeal concluded that:

1. "appraisers" empowered by the terms of a policy of fire insurance to determine the "cash value" and "loss" utilized to ascertain the amount payable on the policy are arbitrators within the meaning of Code of Civil Procedure § 1280;

2. an award of the appraisers unchallenged within the time provided by Code of Civil Procedure sections 1288 and 1288.2 and confirmed by the superior court is final; and

3. because Klubnikin failed to file and serve a petition to vacate the award of the appraisers within that period, and because that award has been confirmed by the superior court, Klubnikin's independent action upon the contract seeking damages in excess of the amount granted in the award of the appraisers is barred.

The court noted that the binding res judicata effect of the confirmed award here bars the relief that Klubnikin seeks on this appeal. Klubnikin's remedy if he was dissatisfied with the award was a proceeding pursuant to vacate or correct the award. If Klubnikin did not serve and file a petition to vacate or a response to California Fair Plan's petition to confirm within the 100-day period from the date of service of the award as prescribed in Code of Civil Procedure sections 1288 and 1288.2, the award must be treated as final.

The judgment of the trial court was affirmed.

In Opar v. Allstate Ins. Co., 751 So. 2d 758 (Fla. App. 2000), the Florida Court of Appeal was called upon to decide whether an insurer must comply with the appraisal provision in an insurance policy which requires disputes involving the "amount of loss."

The trial court found nothing in the record indicating that there was a disagreement regarding the amount of loss, and, because the clause requires appraisal only if there is a dispute as to the "amount of loss," the trial court determined that the clause was not implicated until it was first decided whether the loss was covered. The trial court...