Homeowners and businesses purchase insurance to protect their property in the event of damage. Once insured, the assumption is usually that if damage occurs, insurance coverage will be in place to provide funding to repair or rebuild. What policyholders usually do not know, however, is that most property insurance policies include mandatory appraisal clauses. The typical language reads something like this:
If you and 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 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 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:
a. Pay its own appraiser; and
b. Bear the other expenses of the appraisal and
So what does this mean? First, it means that the policyholder is required to pay, out of pocket, to participate in the appraisal process. This always comes as a shock the the insured, who is expecting to receive a payment from the insurance company consistent with the amount of the loss, without having to “pay to play” to become eligible to receive payment. The cost of appraisal is significant: most qualified appraisers will charge thousands dollars depending on the complexity of the claim. The cost of the umpire can be also be several thousand dollars. Thus, the insured may be paying thousands of dollars to complete the appraisal process with no ability to recoup those expenses, resulting in the insured being left without sufficient funds to restore their property even if the appraisal award would otherwise cover the amount of the loss.
The qualification of a person to be an appraiser is not well defined in most policies or Florida law. Rather, an appraiser must be “competent” and sometimes “impartial.” Competency can come from experience as an insurance adjuster or contractor familiar with submitting insurance claims. However, beyond what is considered standard in the world of insurance claims and litigation, “competency” should be more well defined in the policy or by statute. For instance, without restrictions to the contrary, the insurer could use its own adjuster to both investigate the claim, make the initial claim determination, and then serve as appraiser when the insured disputes the claim determination. Obviously this appraiser is going to advocate for the insurance company and want to support his or her previous claim determination. The insurance company would also not be required to pay its employee anything additional for serving as appraiser, while the insured is forced to retain his or her appraiser and pay substantial amounts out of pocket with no guarantee that any recovery will be made through appraisal. At a minimum, appraisers should be required to be “impartial” and have no involvement in the insurer’s initial claim decision.
The second big surprise is that most appraisal clauses are mandatory. This means that the insurance company can unilaterally demand appraisal of a loss and the insured is required to participate in the appraisal process. If the insured refuses to cooperate, then coverage for the claim may be forfeited entirely. In other words, if an insured files a claim, and the insurance company thereafter demands appraisal, the insured is forced to pay to participate and complete the appraisal process. Otherwise, the insurer will not be required to make any payment. This is not what most people expect when making an insurance claim.
Third, appraisal decisions are binding. Once a decision is reached, neither party can challenge the decision in Court unless there is evidence of fraud which can be next to impossible to prove. The binding nature of the decision is extremely important because the insured has no recourse to challenge the amount awarded in appraisal, even if the appraisal umpire sides entirely with the position of the insurer’s chosen appraiser, who is inevitably going to advocate for the interests of the insurance company even if they are required to be “impartial.” Appraisal can be shockingly informal, sometimes including only a brief site inspection, casual conversations between the parties’ appraisers, and arguments to the umpire. Given that the decision is final and will determine how much money, if any, the insured will receive, more detailed parameters and requirements should be provided in the policy, and the insured should have recourse beyond proving fraud if the decision is not favorable.
Fourth, mandatory appraisal provisions serve to prevent insureds from access to Court. In Florida, access to Court is a constitutionally guaranteed right. Although rights can be “contracted away” be mutual assent of the parties, it is hard to believe that most policyholders have any idea they are giving up valuable rights be “agreeing” to be bound by mandatory appraisal provisions in form insurance policies that most policyholders never read, much less understand, prior to sustaining a loss. There are legitimate reasons for contracting parties to be bound by an agreement even if it was never read by one of the parties; however, in the realm of insurance where insurers are required by statute to provide express notice of important aspects of coverage, such as the availability of Ordinance & Law Coverage, replacement cost coverage, and potentially high hurricane deductibles, insurers should be equally required to provide express notice the policy includes a mandatory appraisal provision which the insured should have to acknowledge it is aware of in accepting the policy. Even then, constitutional issues remain if the insured cannot afford the cost of appraisal.
One exception to the otherwise mandatory nature of appraisal clauses is coverage. Florida Courts have consistently held that coverage questions, meaning whether the policy provides coverage for the loss, are exclusively for the Court to answer. Thus, if coverage has been denied, appraisal cannot be invoked. Certain insurance companies, such as First Protective Insurance Company (“Frontline”) seem to demand appraisal in every dispute, even if they have previously denied coverage for the damage. In these instances, the insured should challenge the demand for appraisal and protect their right to have the Court decide all coverage questions. However, several Court decisions have held that so long as the insurer has conceded coverage for some part of the claim, the claim can be forced into appraisal for the appraisal panel to determine the extent of covered damages. In cases of a partial denial, including claims that are essentially denied outright when no payment is made because the insurer says damages do not exceed deductible, this may allow the insurer to force appraisal even though the main issue is coverage.
In sum, appraisal clauses in property insurance policies can be economically burdensome for the insured and inequitable in outcome. Insureds, who have paid premiums to have coverage, should not be required to pay to participate in a costly appraisal process to become eligible for payment. Appraisal decisions should not be binding on the insured unless the insured actually knew it was contracting away his or her constitutionally guaranteed right to Court access, which should be demonstrated by the insurer giving express notice to the insured that the policy includes a mandatory appraisal provision.