I’m not a big fan of arbitration.  I think it costs too much (which kind of goes against its main marketing point), and I don’t particularly like the fact that there’s no right of appeal absent the arbitrator committing fraud. Having said that, and with so many Sandy-related claims still pending in New Jersey, I thought I might point out that most first-party property insurance policies contain a form of “arbitration” provision that can help bring claims to closure. I’m talking about the so-called “appraisal” procedure.

A typical appraisal clause reads as follows:

“If you and we fail to agree on the amount of loss, either party may make a written demand that each selects an independent appraiser. In this event, the parties must notify each other of their selection within 20 days. The independent appraisers will select an arbitrator within 15  days. If an arbitrator is not agreed upon within that time, either party may request the arbitrator be selected by a judge. The independent appraisers will then appraise the loss and submit any differences to the arbitrator. A decision in writing agreed to by the two appraisers or either appraiser and the arbitrator will be binding. Each appraiser will be paid by the party that has selected the appraiser. You and we will share the expenses of the arbitrator equally.”

The first question that clients often ask is: What, exactly, gets decided by the appraisal process? Basically, the process (a kind of expedited arbitration hearing) results in a decision as to the allowable damages under the claim. Does that mean that the insurance company waives its right to present coverage defenses in court later, such as, say, late notice?  Or that the policyholder waives its bad faith claims?  No.  In Hala Cleaners v. Sussex Mutual Ins. Co., 115 N.J. Super. 11 (Ch. Div. 1971), for example, the Court ordered that an appraisal process take place, even though the carrier argued that it had valid defenses to the claim, leaving the argument as to the so-called “valid defenses” for another day. The thinking of most Courts is that if the appraisal takes place, the case is likely to settle –  and judges love it when cases settle.

Let’s look at a couple of recent decisions involving appraisal procedures.  In both cases, the carrier moved to compel an appraisal process.  (Our post-Sandy experience, on the other hand, is that carriers tend to fight the appraisal process tooth-and-nail.)  I guess the lawyers for the policyholders  thought that they would do better on damages with a jury.  

In SCVT v. National Fire and Marine (S.D. Texas Aug. 18, 2014), an apartment complex was damaged by fire, and the apartments were uninhabitable while they were being renovated. The carrier (National Fire) and the policyholder (SCVT) disagreed on the amount of loss, including SCVT’s entitlement to lost rental income; the amount of loss per unit; and the date upon which SCVT’s entitlement to lost rental income ended. SCVT argued that National Fire had waived its right to an appraisal by waiting an unreasonable amount of time before making the demand.

National Fire had demanded an appraisal almost a year after SCVT’s coverage lawsuit had been commenced. The Court, however, held that the important date to consider was not the date a coverage lawsuit was filed, but the date when the parties “became aware that additional negotiation would be futile.” Here, National Fire supposedly did not become aware that further negotiation would be futile until an unsuccessful mediation took place in the context of the lawsuit; and National Fire filed its request for mediation only a month later. So, the Court wrote: “National’s demand for appraisal, less than one month [after the mediation], was within a reasonable time and does not indicate that National intentionally relinquished its right under the Policy to demand an appraisal.…It is difficult to see how prejudice could ever be shown when the policy, like the one here, gives both sides the same opportunity to demand appraisal. If a party senses that impasse has been reached, it can avoid prejudice by demanding an appraisal itself.”

Another recent case,  Orhan Redzepagic v. CSAA General Insurance (D. Nev. Aug. 18, 2014), involved an auto accident resulting in damage to a Lexus LS 400. The policyholder argued that the carrier was obligated to pay the “actual cash value” of the vehicle, while the carrier offered only “market” value. The carrier then sought to compel appraisal, which the policyholder resisted.  The Court granted the carrier’s motion to dismiss the coverage suit in favor of appraisal, writing as follows: “Here, the policy terms are clear and unambiguous. The policy contains an appraisal provision that allows either the insurer or the insured to demand an appraisal of the loss and prescribes the process for appraisal. The policy also contains a ‘legal action against us’ provision that states in relevant part:  ‘We may not be sued unless there is full compliance with all the terms of this policy…’  The policy makes no exceptions as to the source of the dispute and applies so long as the parties cannot agree on the amount of loss. Plaintiff does not dispute that on June 11, 2014, [the carrier] invoked the appraisal provision.”

The Orhan Court also stated:  “Until an appraisal is completed, it is impossible to know whether [the insured’s] claim in fact was undervalued, such that her claims for breach of contract, breach of the covenant of good faith and fair dealing, and [violation of the state’s unfair competition code] are viable.”  (Citations omitted.)

The takeaway:  Always consider the appraisal provision of the policy.  Under certain circumstances, it can be an effective weapon.