J. Randolph Evans and J. Stephen Berry of McKenna, Long & Aldridge, LLP on “Property Damage Appraisals: Process, Law, and Strategies”
In their article appearing in the May/June issue of Coverage, J. Randolph Evans and J. Stephen Berry of McKenna, Long & Aldridge, LLP observe that the appraisal process to determine the amount of loss in property damage claims increasingly is seen as a predicate to litigation. For instance, delays have resulted in allegations that the insured failed to cooperate and/or the insurer committed bad faith. Appraisal awards too low in the insured’s estimation have led to wrongful refusal to pay claims while excessive awards from the insurer’s perspective have led to fraudulent claim allegations. To return to the alternative claims dispute resolution process contemplated by the insurance contract, the authors note the emergence of a focus on court orders and memoranda of understanding that “(a) vest jurisdiction in the appraisal panel (specifically the umpire); (b) channel disputes about the progress of the appraisal (specifically including the speed of the process) back into the appraisal itself; and (c) specify the award form in order to eliminate disputes regarding what the panel decided and what it did not.” The object is to create better opportunities to resolve all the claims issues within the appraisal process. The article reviews each phase of an appraisal and imparts warnings, recommendations and opportunities along the way. The authors note that while the amount of loss awarded is binding on the parties, other issues may remain, including the application of exclusions, sub-limits and ― notably, issues of causation.
The article points out that if the parties failed to provide for the appraisal to resolve issues as to damages as for example where the loss is the result of multiple causes, some excluded by the policy, this could be grounds for litigation. The article proceeds to discuss cases ruling on the proper scope of appraisals and notes that the majority of states do not allow appraisals to determine causation. In contrast, assertions of bad faith claims handling can ― and the authors state “should” ― be addressed within an appraisal process. The article examines court decisions addressing the interaction between appraisal clauses and bad faith claims by focusing on pre-appraisal bad faith claims, allegations of bad faith during the appraisal process, and post-appraisal bad faith claims.
The article presents an outline of steps that can facilitate a dispute resolution process that maximizes accuracy and minimizes litigation. The authors state that the objectives are “parity and clarity.” The steps include orders of referrals that transfer jurisdiction from a court to an arbitration panel and empower the umpire in an appraisal panel to make decisions needed for the orderly and timely progress of the appraisal and appraisal documents designed to ensure a fair process. Appendices to the article present samples of such appraisal documents ― a memorandum of appraisal and an appraisal award.