INTRODUCTION TO THE APPRAISALCOURSE
Welcome to the Appraisal course. In this course, you will gain relevant and adequate knowledge on matters pertaining to Appraisal so that you, as an insurance adjuster or insurance agent, can perform your job more effectively. If you complete this course, you should be able to comprehend the fundamentals of Appraisal.
This course should be read in conjunction with and seen as a continuation of the Arbitration course, even though most of the courses are interconnected. This is necessary in order for you to gain a thorough understanding of both Appraisal and Arbitration. As you will learn throughout this course, Appraisal is a complex and dynamic method; the law is frequently conflicting, and inadequate which leaves room for arguments, misinterpretations, and even lawsuits.
Please keep in mind that the contents of this course are intended to serve only as a guide and an overview of the course material. Due to the course’s dynamic nature, it will not be possible to cover all of the materials related to Appraisal in its entirety. As a result, you are encouraged to read additional materials on the subject in order to further your understanding.
The content of the course shall be as hereunder:
- Introduction to Appraisal
Introduction to Appraisal
As a starting point for this course, let’s go through what Appraisal is. According to the Merriam-Webster dictionary, it is “…a valuation of property by the estimate of an authorized person.” The Black’s law dictionary defines it as “1. an evaluation done to determine an items worth. 2. when an appraiser assesses market value, estimates damage, and determines loss. It is written and effects the value of the property. AKA valuation.” An Appraisal is a method of determining the value of an asset (valuation) for commercial or financial objectives. It is commonly used for insurance, commercial or personal real estate, and tax purposes, as well as to identify a potential selling price for a specific item or property.
An Appraisal is usually made up of three parts: a method for appraising an asset from numerous perspectives that is highly structured, a professional appraiser who is knowledgeable about the item and the market in which it will be bought or sold, and a set of professional methods and standards for determining the true value. The appraiser can utilize any variety of valuation methodologies to determine the appropriate value of an item, including comparing the current market worth of similar properties or objects to the one under consideration. The elements that determine an asset’s worth are evaluated throughout the Appraisal process, including property and asset value, market value, and possible future gains.
For the purposes of this course, we will limit ourselves to Appraisal in the Insurance Industry. An Appraisal clause is a provision in some policies that stipulates that a certain resolution or method shall be followed in determining the amount of damage or loss for a specific property. This is especially important when the insured and the insurer are unable to reach an agreement on the subject damage or loss which makes it difficult to determine how much should be paid by the insurer to settle a claim. An Appraisal provision in an insurance contract is meant to help the insurer and the insured solve a dispute out of court; this therefore means that it is an Alternative Dispute Resolution Mechanism. (ADR); an alternative to filing a lawsuit. It is mostly found in the conditions or loss settlement portion of the policy.
An Appraisal can be requested by the insurer or the insured. When legitimately demanded by a party, most policies will normally state that an Appraisal is mandatory and that the other party has no option but to participate in the Appraisal. In some instances, a party can refuse the Appraisal demand. An Appraisal is only binding on the parties if the process is not properly applied. Appraisal provisions were usually included for the advantage of the insurer, although they can be removed. In Insurance Serv. Co. v. Brodie, the Court held that the Appraisal clause should not be used oppressively or in bad faith by the insurer. Appraisals are frequently conducted without the involvement of attorneys, and just with the insurer and the insured.
An Appraisal is carried out by a professional; an Appraiser. Let us take a quick look at the education and experience requirements for becoming an Appraiser in various states; we shall limit our scope to real estate Appraisers.
The Uniform Standards of Professional Appraisal Practice (USPAP) is acknowledged as the ethical and performance standards for the appraisal profession in the United States. It has standards for all sorts of appraisal services such as real estate, personal property, business, and mass appraisal. As the names suggest, real estate appraisal involves real estate, personal property appraisal deals with personal property like fine and decorative arts, antiques, gems, jewelry, machinery and equipment while business valuation touches on businesses and the businesses’ tangible and intangible assets e.g. equipment, business name or logo. Mass Appraisal deals with different forms of real property or personal property.
Adherence is necessary for state-licensed and state-certified appraisers who are engaged in real estate transactions involving the federal government. Real estate Appraisers have to complete the 15-hour National USPAP course or a similar course. In addition, real estate Appraisers are required to complete the 7-hour National USPAP Update Course or a similar course once after every two years. Specifically for real estate Appraisers, the Appraiser Qualifications Board (AQB) issues the Real Property Appraiser Qualification Criteria (Criteria). State appraiser regulating bodies must enact real property appraiser license and certification standards that are no less demanding than those set forth in the Criteria by the AQB. The AQB defines the minimum education, experience, and examination criteria for real estate appraisers to earn a state license or certification under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
There are four levels to the licensing as per the Bureau of Real Estate Appraisers (Bureau) – Licensing Handbook, that is:
- AT – Trainee License. They may appraise any property that can be appraised by the supervising appraiser.
- AL – Residential License. They may appraise 1-4 family property with a $ 1 million transaction value that is not complex and property that is not residential with a $ 250,000 transaction value.
- AR – Certified Residential License. They may appraise 1-4 family property regardless of the transaction value or complexity and property that is not residential with a $ 250,000 transaction value.
- AG – Certified General License. They may appraise all real estate regardless of the transaction value or complexity.
The Education and experience qualifications for the different levels are as follows:
- The Trainee (AT) – “150 hours, covering specific modules including the 15-hour National USPAP Course (or its equivalent as determined by the Appraiser Qualifications Board (AQB). Trainee applicants must also complete an approved Supervisory/ Trainee Appraisers course prior to obtaining a Trainee Appraiser license. All initial applicants must complete an approved California state and federal laws course prior to obtaining a license.”
- Residential (AL)- “150 hours, covering specific modules including the 15-hour National USPAP Course (or its equivalent as determined by the AQB). All initial and reciprocal applicants must complete an approved California state and federal laws course prior to obtaining a license. 1,000 hours and encompassing no less than 6 months of acceptable appraisal experience.”
- Certified Residential (AR)- “200 hours, covering specific modules, including the 15-hour National USPAP Course and meeting the criteria of one of the options listed in the next table labeled “College Level Education Options for Certified Residential”. All initial and reciprocal applicants must complete an approved California state and federal laws course prior to obtaining a license. 1,500 hours and encompassing no less than 12 months of acceptable appraisal experience.”
- Certified General (AG)- “300 hours, covering specific modules, including the 15-hour National USPAP Course; and a Bachelor’s degree or higher from an accredited college or university. All initial and reciprocal applicants must complete an approved California state and federal laws course prior to obtaining a license. 3,000 hours and encompassing no less than 18 months of acceptable appraisal experience, of which 1,500 hours must be non-residential.”
When necessary, the Bureau of Real Estate Appraisers (BREA) applies disciplinary measures, which may include: public reprimand; additional schooling requirements; fines; probation; suspension; revocation of a license; special licensing conditions. Under § 3733, Disciplinary Guidelines, some of the violations that may trigger disciplinary actions are: failing to inform BREA of a felony charge, conviction, or discipline, violating USPAP minimum standards, practicing without a license or certificate, unauthorized use of title, conflict of interest, receiving compensation based on the value they place on an item, failing to provide copies of Appraisals, failing to respond to request for information, failing to inform BREA of changes of contract information, altering completed Appraisal Reports, having a prohibited interest in an appraised property and Failing to cooperate with audits.
In addition, the following factors may contribute to increased penalties (aggravating factors): intentional violations, inducement of a trainee to commit or aid in committing violations, a history of disciplinary issues especially those similar to the one in question, threat to or actual financial damage caused to clients or other consumers (the loss suffered may be an additional aggravating factor), violation of BREAs stipulation or final order, lack of accountability for violations, failure to cooperate with BREA, numerous violations, taking advantage of the client e.g. due to the ignorance, age or lack of sophistication of the client, presenting false statements or evidence or other deceptions such as adding to work file after complaint filed, and intimidating or threatening witnesses or other parties to the investigation.
In Texas, someone who has been permitted by the Texas Appraiser Licensing and Certification Board (TALCB) to receive Appraisal experience while being supervised by a Certified General or Certified Residential Real Estate Appraiser is referred to as an Appraiser Trainee. The next stage after the Appraiser Trainee is to complete the requirements to become a Licensed Residential Appraiser, Certified Residential Appraiser and Certified General Appraiser.
For the Appraiser Trainee, they should have the following education qualifications: 75 QE Hours; Basic Appraisal Principles – 30 hrs, Basic Appraisal Procedures – 30 hrs and15-hr Nat’l USPAP Update or Equivalent. No experience or college education is needed. Both the Trainee Appraiser and the Supervisory Appraiser must complete a course that meets the AQB’s course content standards. The Trainee Appraiser must finish the course before getting a Trainee Appraiser credential, and the Supervisory Appraiser must also complete the course before supervising a Trainee Appraiser.
The Licensed Residential Appraiser should possess the following educational requirements: 150 QE Hours; Basic Appraisal Principles – 30 hours, Basic Appraisal Procedures – 30 hours, 15-hour Nat’l USPAP or Equivalent, Residential Market Analysis & Highest and Best Use – 15 hours, Residential Appraiser Site Valuation and Cost Approach – 15 hours, Residential Sales Comparison and Income Approaches – 30 hours, and Residential Report Writing and Case Studies – 15 hours. Moreover, there is need for experience; 1,000 hours of acceptable Appraisal experience within 6 months but there is no requirement for a college-level education. A Licensed Residential Appraiser, who has been licensed and in good standing, void of disciplinary matters that would affect their Appraisal ability, for more than 5 years, may upgrade to a Certified Residential Appraiser void of any college coursework.
The Certified Residential Appraiser license requires: 200 QE Hours; Basic Appraisal Principles – 30 hours, Basic Appraisal Procedures – 30 hours, 15-hour Nat’l USPAP or Equivalent, Residential Market Analysis & Highest and Best Use – 15 hours, Residential Appraiser Site Valuation and Cost Approach – 15 hours, Residential Sales Comparison and Income Approaches – 30 hours, Residential Report Writing and Case Studies – 15 hours, Statistics, Modeling and Finance – 15 hours, Advanced Residential Applications and Case Studies – 15 hours, and Appraisal Subject Matter Electives – 20 hours. Moreover, there is need for experience; 1,500 hours of acceptable Appraisal experience within 12 months.
When it comes to college education for the Certified Residential Appraiser, the following apply: a bachelor’s degree in any subject; associate’s degree in a specialized field, such as business, economics, or real estate; conclusion of 30 semester credit hours in itemized topics successfully; conclusion of College-Level Examination Program (CLEP)1 tests corresponding to a minimum of 30 semester credit hours in specified subject matter areas successfully; or any combination of the aforementioned 30 semester credit hours in itemized topics and the College-Level Examination Program (CLEP)1 tests that comprises all of the identified subjects.
The Certified General Appraiser has 300 QE Hours; Basic Appraisal Principles – 30 hours, Basic Appraisal Procedures – 30 hours, 15-hour Nat’l USPAP or Equivalent, General Appraiser Market Analysis & Highest and Best Use – 30 hours, General Appraiser Site Valuation and Cost Approach – 30 hours, General Appraiser Sales Comparison Approach – 30 hours, General Appraiser Report Writing and Case Studies – 30 hours, Statistics, Modeling and Finance – 15 hours, General Appraiser Income Approach – 60 hours and Appraisal Subject Matter Electives – 30 hours. They also possess experience of 3,000 hours of acceptable Appraisal experience within 18 months and a minimum of 1,500 hours of which will be in non-residential Appraisal work. For the college education, they should possess a minimum of a Bachelor’s degree or higher qualification.
The Texas Administrative Code also states that the Appraiser before undertaking any assignment should ensure that he or she is;
“(1) is competent in the property type of the assignment;
(2) is competent in the geographical area of the assignment;
(3) has access to appropriate data sources for the assignment;
(4) will immediately notify the AMC if the appraiser later determines that he or she is not qualified under paragraph (1), (2), or (3) ….; and
(5) is aware that misrepresentation of competency is subject to the mandatory reporting requirement in §1104.160 of the AMC Act.”
*AMC is used above to refer to the Appraisal Management Company
Let us take a quick look at how different states handle Appraisals now that we know what an Appraisal is, who conducts it, and when it’s done.
Typically, an Appraisal is only binding on the parties in terms of the amount of loss suffered and coverage is not determined by the Appraisal. Moreover, as soon as the appraisal clause is applied, the Appraisers for the insured and those of the insurance company will approximate the damage and attempt to reach a compromise on the actual loss. If the Appraisers are unable to reach an agreement, they will present their disagreements to the umpire for resolution. The amount of loss will be determined by a detailed determination taken by two of the three parties. Such a decision shall be binding. Each side will pay for its own appraiser and will split in equal proportion the other Appraisal and umpire costs. There are however frequently disagreements over the extent of the Appraisal, the items of claimed damage that should be addressed, and which factual concerns the appraisers can resolve, and as will be discussed below, the umpire might be a mandatory requirement and no longer optional to the parties.
In Bonbeck Parker, LLC v. Travelers Indem. Co. An insurance claim was filed against Travelers Indemnity Company of America after a hailstorm destroyed three buildings covered by a commercial property insurance policy. The case was heard by the Tenth Circuit on October 1, 2021. There was a disagreement between the insured and the insurer over whether the hailstorm was responsible for all of the damage claimed. A portion of the claimed damage was reimbursed by the insurer, but the insurer denied coverage for other claimed damage on the grounds that it was caused by non-covered factors such as wear and tear. The insured filed a claim for appraisal.
The insurer stated that it would only engage in appraisals subject to some conditions. The insurer desired to limit the scope of the appraisal to solely uncontested hail damage. As a result, the appraisal panel would only be able to determine how much repairs would cost, rather than determining what caused the roofs to require repairs in the first place. The insured expressed his dissatisfaction with the same and filed a lawsuit seeking a declaratory judgment. The district court concurred with the insured on summary judgment and agreed that the appraisal clause permits the appraiser to determine causation.
An insurer is required to declare any existing relationships with an Appraiser in California. The more the number of Appraisals performed and the longer the relationship between an Appraiser and the party who appointed them, the higher the chances of prejudice or bias been discovered, or at the minimum, an issue will arise preventing the implementation of an Appraisal award.
The California Court of Appeal issued an opinion, Lee v. California Capital Insurance Company on June 18, 2015, on appraisal in the context of loss from a fire in an Oakland apartment building. Although the fire started on the ground floor, the insured argued that smoke damage to the upper units necessitated restoration. The point of contention was whether the appraisal panel was required to appraise the scope of loss provided by the insured. The only thing that could be assessed, according to the insurance company, is the value items of property damage that the parties agree is within the scope of damage and is included under the policy. The court disagreed, with this position stating that Appraisal does not have to be limited to a scope that the parties agree on.
The court further stated that although “disputed items” can be appraised, a court cannot order Appraisal of non-existent items or items that have been revealed by inspection not to have been damaged. There is discrepancy in the court findings since a question of who would decide if property was damaged and in existence or not, if not the appraisal panel. Moreover, there are instances when property may be damaged but made good during the appraisal, rendering an “inspection” to determine damage of limited utility. A case in point may be where there has been damage by smoke but the smoke is cleaned up to make the place habitable. The determination of whether there was smoke damage is usually difficult to conclusively make during the Appraisal once there has been remediation. To show damage in such instances where remediation has been done, there is need to adduce evidence on the damage sustained at the time of loss before the place was cleaned up in addition to the remediation steps made by the insured.
In Safeco Ins. Co. v. Sharma, on the existent or non-existent items, the court held that it is beyond the appraisal panel’s mandate to determine if an insured “lost what he claimed to have lost or something different.”
The Court in this case, Lee v. California Capital Insurance Company, tries to put the aforementioned conflicting provisions, by distinguishing “identity and quality or condition” of the appraised property. Notwithstanding the fact that the distinction is not clear, the case proposes that where “the identity of property damaged . . . is at issue,” an appraisal panel may elect to “place more than one value on the loss . . .based on assumptions concerning the property’s pre-loss condition.” Moreover, the court stated that even though the appraisal panel does not have the mandate to make “causation or other coverage determinations,” the panel can refuse to value the loss for items of property it determines “were not damaged or never existed.”
The appraisal procedure is required by the California Insurance Code to be included in every fire insurance policy. The appraisal procedure was obligatory prior to 2001. The Code’s Section 2071 was changed in 2001 to limit the conditions in which parties might be forced to participate in an appraisal, this however produced a sense of ambiguity. As per the Code, when there is an occurrence that is termed to be a disaster by the government, an insured or insurer may ask for an Appraisal but the requesting party cannot mandate that the Appraisal must be conducted. This amended section however leaves out the part where it states whether Appraisal in other instances not covered by the government declared disaster may be voluntary or not.
Under the Code, in Section 2071, the appraisal proceedings are to be informal, there are to be no formal discovery, formal rules of evidence or a court reporter unless this is otherwise overruled by the parties’ decision (Coopers & Lybrand v. Superior Court). Notwithstanding the fact that a formal evidentiary hearing isn’t needed, the parties are allowed to submit their evidence and cross-examine witnesses and ask that witness testimony be under oath. Moreover, the parties may opt to be represented by an attorney. The Appraisers are not tied to only the evidence submitted in a hearing; they may conduct investigations per their discretion subject to sending a notice to the parties.
The pendency of a law suit notwithstanding, parties may ask for an Appraisal and the right to a Appraisal shall not act as a waiver through engaging in limited discovery in a lawsuit. The court should however stay a pending lawsuit until the Appraisal is concluded. (Keating v. Superior Court, Lake Communications, Inc. v. Kollgel Co., Ltd., and Cook v. Superior Court).
An appraisal panel made the decision that some paintings were not a matched set and their value was lower than the amount claimed. The insured had stated that a set of 36 matched paintings had been stolen. It was the Court of Appeal’s decision that the appraisal panel went beyond their mandate by determining whether the paintings claimed by the insured to belong to him actually belonged to the insured (Safeco Ins. Co. v. Sharma), viz “When an insurer disputes an insured’s description and identification of the lost or destroyed properly, it necessarily claims that the insured misrepresented … the character of the loss in filing a proof of loss. … This claim opens the door to allegations of fraud. Were an insurer permitted to include the former issue within the scope of an appraisal, a determination in the insurer’s favor would foreclose a court from determining one essential element of fraud at any subsequent litigation.”
In Hughes v. Potomac Ins. Co., the court held that “The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions in the policy.” An Appraiser also does not have authority to decide if a claim is fraudulent, factually inaccurate or not.
An Appraiser is also not mandated to decide what caused the loss, or whether coverage exists.
The insured in Kancha v. Allstate Ins., presented a personal property damage in a wildfire claim. The appraisal panel decided that the loss was caused by fire and included this in the award, loss to property that was not caused by fire as per the appraisal panel’s determination was not attributed in the award. It was held by the Court of Appeal that the appraisal panel exceeded their mandate since they are not authorized to take into consideration causation and coverage issues.
There was contention in Turnstone Consulting Corp. v. United States Fidelity & Guarantee Co, on how long a business was interrupted when the insured presented a business interruption loss caused by a burglary. The insured contended that the interruption period was around eight weeks while the insurer contended that it was two weeks. The insured went to court to force the insured to take part in a binding Appraisal to ascertain the amount of business interruption loss. It was ruled by the court that an appraisal panel did not possess the mandate to decide on the issue. The court stated that “The appraisal panel’s role is only to determine the monetary value of the interruption to [the insured’s] business. The panel’s role is not to determine whether the policy covers that interruption.”
The Appraisers, before 2001, selected by the insured and insurer could select an umpire where those aforementioned selected Appraisers fail to agree on loss or damage; now however, the umpire must be selected in all Appraisals whether or not there is conflict between the Appraisers. This is found under section 2071 of the Code.
The California Standard Form Fire Insurance Policy, CA Ins Code § 2071 (2014) states as follows;
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 request of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of the request. Where the request is accepted, the appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon the umpire, then, on request of the insured or this company, the umpire shall be selected by a judge of a court of record in the state in which the property covered is located. Appraisal proceedings 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 appraisal and umpire shall be paid by the parties equally. In the event of a government-declared disaster, as defined in the Government Code, appraisal may be requested by either the insured or this company but shall not be compelled.”
Although the timeline for requesting for an Appraisal is not usually stated in a policy, courts in Texas have stated that the demand must be made within a reasonable period once it is established that an Appraisal is needed, failure to which the party seeking the Appraisal risks having the Appraisal waived (American Fire Ins. Co. v. Stuart). The Appraisal should also be made in accordance with the policy terms.
In Insurance Serv. Co. v. Brodie; the insurer made the mistake of appointing one individual and two companies as appraisers since this was not in accordance with the terms of the policy. According to the court, this appointment did not conform with the terms of the policy in question. Brodie filed a lawsuit 42 days after the insurer wanted an Appraisal of his property. In this case, the demand for Appraisal occurred 72 days after the adjuster had seen and investigated the loss. The court concurred that the demand for Appraisal was made too late, had been waived, and was otherwise not in accordance with the policy in place.
Waiver of Appraisal may also occur in the following ways: acceptance of a proof of loss, keeping of a proof of loss for an unjustified period of time without requiring Appraisal, non-participation of an insured who asked for an Appraisal and where a claim is categorically denied by the insurer. In the event that an invalid Appraisal is performed, no further Appraisal is required. (Springfield Fire & Marine Ins. Co. v. Cannon, Gulf Ins. Co. v. Carroll, Northern Assur. Co. v. Samuels, and Security Ins. Co. v. Kelley)
Appraisal has typically only been used to determine the amount of loss and appraisers and umpires did not have the mandate to decide issues of causation, coverage, or culpability in an appraisal. The Supreme Court’s decision in State Farm Lloyd’s v. Johnson, 290 S.W.3d 886 (Tex. 2009), has however changed this situation slightly. The court is this case held as follows “appraisers can never allocate damages between covered and excluded perils, then [they] can never assess hail damage unless a roof is brand new.” …Such a result “would render appraisal clauses largely inoperative, a construction we must avoid.” I addition, the court also held stated “Indeed, appraisers must always consider causation, at least as an initial matter. An appraisal is for damages caused by a specific occurrence, not every repair a home might need. When asked to assess hail damage, appraisers look only at damage caused by hail; they do not consider leaky faucets or remodeling the kitchen. When asked to assess damage from a fender-bender, they include dents caused by the collision but not by something else. Any appraisal necessarily includes some causation element, because setting the “amount of loss” requires appraisers to decide between damages for which coverage is claimed from damages caused by everything else. This of course does not mean appraisers can rewrite the policy. No matter what the appraisers say, State Farm does not have to pay for repairs due to wear and tear or any other excluded peril because those perils are excluded.”
Texas law mandates that appraisers be skilled, independent, unbiased and unprejudiced. The appraiser is under no obligation to either party, and he or she is under no obligation to represent either party’s ideas or stance. They are not the expert or independent contractor of the party who appointed them. The term used is “disinterested”. Under Texas law, Appraisers who provide Appraisals on behalf of the same party on a regular basis bring into question their lack of objectivity and predisposition. Unlike in Texas, the Appraiser’s action of providing appraisals on behalf of the same party on a regular basis is not evidence of their lack of objectivity and predisposition in Michigan. This is however not the case in Pennsylvania. Neither party will be barred from seeking redress in the court of law where the Appraiser falls short of these requirements (Pennsylvania Fire Ins. Co. v. W.T. Waggoner Estate and Delaware Underwriters v. Brock).
The insurer attempted to enforce an Appraisal award as an affirmative defense to plaintiff’s breach of contract and extracontractual claims in Holt v. State Farm Lloyd’s. Whether Tim Marshall of Haag Engineering, who derived nearly one quarter of his salary from State Farm Appraisal work, was biased and/or prejudiced was the subject of debate. Given the plaintiff’s evidence, the District Court refused to give State Farm’s summary judgment, concluding that a fact question for the jury should be decided having looked at the plaintiff’s evidence.
Among the findings in the W.T. Waggoner Estate case is that an Appraisal was dismissed because the Appraiser and umpire were prejudiced. It was held that the inadequacy of an award may be taken into consideration when analyzing the bias and prejudice of an Appraiser or umpire.
It has however been determined that this criterion alone is inadequate to show bias and prejudice. An appellate court in Texas disallowed execution of an Appraisal award founded on the insurer’s summary judgment motion due to the existence of an ongoing business relationship between the insurer and the appraiser (May v. Foremost Ins. Co.). Specifically, the insurer was accused of colluding with the Appraiser in an effort to raise objections to an umpire who had earlier been decided upon.
If an appraiser is deemed incompetent, the party who believes the Appraiser is incompetent should have the option to dispute the award. It is necessary to show the Appraiser’s competency in a summary judgment case to enforce an Appraisal determination because the policy mandates that the Appraiser be competent (E.I. Dupont de Nemours & Co., Inc. v. Robinson). Where the insured wishes to get extra-contractual damages or other statutory penalties, the Appraisal procedure, or its absence, may be a stumbling block. The court in Amine v Liberty Lloyd’s, ruled that the insurer’s culpability was not sufficiently evident for the reason of ill faith before the Appraisal. Because the responsibility to pay did not arise until after the Appraisal process was completed, the court concluded that the insurer’s payment of the Appraisal award stopped the accrual of any statutory penalties for late payment.
The Appraiser is held to high esteem especially due to the duties they undertake, the Texas Administrative Code, under Section 159.201, Guidelines for Revocation, Suspension, or Denial of a License, provides instances when the Appraiser’s license may be revoked, suspended or denied, viz: (AMC is used below to refer to the Appraisal Management Company)
“The Board may suspend or revoke a license issued under provisions of the AMC Act, or deny issuing or renewing a license to an applicant, any time it is determined that the person applying for, renewing, or holding the license or the AMC’s primary contact:
(1) disregards or violates a provision of the AMC Act or Board rules;
(2) is convicted of a felony;
(3) fails to notify the Board not later than the 30th day after the date of the final conviction if the person, in a court of this or another state or in a federal court, has been convicted of or entered a plea of guilty or nolo contendere to a felony or a criminal offense involving fraud or moral turpitude;
(4) fails to notify the Board not later than the 30th day after the date of incarceration if the person, in this or another state, has been incarcerated for a criminal offense involving fraud or moral turpitude;
(5) fails to notify the Board of the following with regard to any professional or occupational license held by the person in Texas or another jurisdiction not later than the 30th day after the date:
(A) disciplinary action becomes final against the person; or
(B) the person voluntarily surrenders any professional or occupational license;
(6) fails to comply with the USPAP edition in effect at the time of the appraisal or appraisal practice;
(7) acts or holds any person out as a registered AMC under the AMC Act or another state’s act when not so licensed or certified;
(8) accepts payment for appraisal management services but fails to deliver the agreed service in the agreed upon manner;
(9) refuses to refund payment received for appraisal management services when he or she has failed to deliver the appraiser service in the agreed upon manner;
(10) accepts payment for services contingent upon a minimum, maximum, or pre-agreed value estimate;
(11) offers to perform appraisal management services or agrees to perform such services when employment to perform such services is contingent upon a minimum, maximum, or pre-agreed value estimate;
(12) makes a material misrepresentation or omission of material fact;
(13) has had a registration as an AMC revoked, suspended, or otherwise acted against by any other jurisdiction for an act which is an offense under Texas law;
(14) procures a registration pursuant to the AMC Act by making false, misleading, or fraudulent representation;
(15) has had a final civil judgment entered against him or her on any one of the following grounds:
(B) intentional or knowing misrepresentation; or
(C) grossly negligent misrepresentation in the making of real estate appraiser services;
(16) fails to make good on a payment issued to the Board within 30 days after the Board has mailed a request for payment by certified mail to the license holder’s primary contact as reflected in the Board’s records;
(17) knowingly or willfully engages in false or misleading conduct or advertising with respect to client solicitation;
(18) uses any title, designation, initial or other insignia or identification that would mislead the public as to that person’s credentials, qualifications, competency, or ability to provide appraisal management services;
(19) requires an appraiser to pay for or reimburse the AMC for a criminal history check;
(20) fails to comply with a final order of the Board; or
(21) fails to answer all inquiries concerning matters under the jurisdiction of the Board within 20 days of notice to said person’s or primary contact’s address of record, or within the time period allowed if granted a written extension by the Board.”
Under Florida Statutes Title APPRAISALXVII. Insurance § 627.7015, Alternative procedure for resolution of disputed property insurance claims, the insurer is obligated to have personal lines and commercial residential policies matters mediated before referring it to Appraisal or going to court. The provision states in part that “There is a particular need for an informal, nonthreatening forum for helping parties who elect this procedure to resolve their claims disputes because most homeowner and commercial residential insurance policies obligate policyholders to participate in a potentially expensive and time-consuming adversarial appraisal process before litigation. The procedure set forth in this section is designed to bring the parties together for a mediated claims settlement conference without any of the trappings or drawbacks of an adversarial process.”
Only the policyholder, as a first-party claimant, or the insurer may request the mediation. Legal counsel is allowed to participate if the policyholder requested for the mediation. Litigants referred to the department by a county court or circuit court are also eligible for mediation under this section. Commercial coverages, private passenger motor vehicle insurance coverages, and disputes over liability coverages in property insurance contracts are not covered by the provision. The insurer must advise the policyholder of its entitlement to participate in the mediation program when the policyholder files a first-party claim. A reasonable amount of money will be charged for the mediation, and unless otherwise stated, the insured shall be liable to pay for the mediation. If an insured is forced to go to mediation by an insurer, the insurer may lose their right to later seek an Appraisal.
Often, Florida courts have held that appraisal is waived when the insured or insurer participates in: litigation actively or behavior that is incompatible with the right to Appraisal. When assessing if an appraisal has been waived, courts will consider the period of elapsed time between when coverage was approved by the insurance company and when the request for an appraisal was made. During that time period, they will also examine the actions that the policyholders made in order to assess whether or not they were involved in substantial legal activity.
In addition to relying on the Uniform Standards of Professional Appraisal Practice (USPAP), Florida also has Supplemental Appraisal Standards for Board of Trustees. Specifically for real estate appraisers, they are governed by the Florida Real Estate Appraisal Board. This Board, as per 475.613 of the Florida Statutes, consists of the following:
“nine members appointed by the Governor, subject to confirmation by the Senate. Four members of the board must be real estate appraisers who have been engaged in the general practice of appraising real property in this state for at least 5 years immediately preceding appointment. In appointing real estate appraisers to the board, while not excluding other appraisers, the Governor shall give preference to real estate appraisers who are not primarily engaged in real estate brokerage or mortgage lending activities. Two members of the board must represent the appraisal management industry. One member of the board must represent organizations that use appraisals for the purpose of eminent domain proceedings, financial transactions, or mortgage insurance. Two members of the board shall be representatives of the general public and shall not be connected in any way with the practice of real estate appraisal. The appraiser members shall be as representative of the entire industry as possible, and membership in a nationally recognized or state-recognized appraisal organization shall not be a prerequisite to membership on the board. To the extent possible, no more than two members of the board shall be primarily affiliated with any one particular national or state appraisal association. Two of the members must be licensed or certified residential real estate appraisers and two of the members must be certified general real estate appraisers at the time of their appointment.”
A Managed Repair Appraisal Provision may be invoked by some insurers. This entails mandating the insured to use a contractor selected by the insurer. An example of such a provision is as provided below:
“Appraisal”. The following is added to the policy:
Where “we” elect to repair: 1. If “you” and “we” fail to agree on the amount of loss, which includes the scope of repairs, either may demand an appraisal as to the amount of loss and the scope of repairs. 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 and scope of repairs. If the appraisers submit a written report of an agreement to “us”, the amount of loss and scope of repairs agreed upon will be the amount of loss and scope of repairs. 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 and the scope of repairs. Each party will pay its own appraiser, and bear the other expenses of the appraisal and umpire equally.
2. The scope of repairs shall establish the work to be performed and completed by [Carrier’s Preferred Contractor]. Such repair is in lieu of issuing any loss payment to “you” that otherwise would be due under the policy. The amount of loss shall establish only the initial amount paid to [Carrier’s Preferred Contractor”] by “us”, and any additional amounts required to complete repairs shall be Includes copyrighted material of Insurance Services Office, Inc. with its permission “our” responsibility and will be paid to [Carrier’s Preferred Contractor”] without regard to policy limits or the amount of initial payments.
3. If we demanded mediation under Condition G. Mediation of Section I – Conditions and either party rejects the mediation results, “you” are not required to submit to, or participate in, any appraisal of the loss as a precondition to an action against us.”
An example of a commercial insurance contract Appraisal provision will be as follows:
“Appraisal If we and you disagree on the value of the property or the amount of loss either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each party will:
- Pay its chosen appraiser; and
- Bear the other expenses of the appraisal and umpire equally. If there is an appraisal, we will still retain our right to deny the claim.”AND“The appraisal award must be defined and delineated in such detail so that the loss and damages are described using the following categories:
(1) Actual Cash Value / Replacement Cost Value;(2) Building;
(4) Non-covered items and/or excluded items;
(5) Mold and mold remediation;
(6) Contents and personal property;
(7) Cause of loss / cause of peril;
(8) Other expenses;
(9) Business income / extra expense; and
(10) Ordinance or law.”
Sample Appraisal Clauses
A demand for an Appraisal is made in writing. In most cases, there are time restrictions for appointing appraisers and umpires, as well as how Appraisals are to be completed, who is responsible for Appraisal charges, and the selection of an umpire. In some cases, insurers have the appraisers and umpires sign a written memorandum of appraisal. The property damaged, when the loss occurred, the reason for the loss, or perhaps an oath for an appraiser to sign are all included in the memorandum. A memorandum of Appraisal is not required in most policies. The wordings used in most Appraisal clauses is similar. Let us look at the following Appraisal clauses:
- “If you and we fail to agree on the actual cash value, amount of loss, or cost of repair or replacement, either can make a written demand for appraisal. Each will then select a competent, independent, appraiser and notify the other of the appraiser’s identity within 20 days of receipt of the written demand. 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 district court of a judicial district where the loss occurred. The two appraisers will then set the amount of loss, stating separately the actual cash value and loss to each item.”
- “In case the insured and this Company shall fail to agree as to the actual cash value of the 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 twenty days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for fifteen days to agree upon such umpire, then, on the 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 appraisal and umpire shall be paid by the parties equally.”
- “If you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. Each shall notify the other of the appraiser’s identity within 20 days of receipt of the written demand. The two appraisers shall then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the residence premises is located to select an umpire. The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall set the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any two of these three shall set the amount of the loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the expenses of the umpire shall be paid equally by you and us.”
- “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 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 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:
1. Pay its own appraiser; and
2. Bear the other expenses of the Appraisal and umpire equally.”
- “If you and we fail to agree on the actual cash value or, if applicable, replacement cost of your damaged property to settle upon the amount of loss, then either may demand an appraisal of the loss. In this event, you and we will each 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 covered property is located. The appraisers will separately state the actual cash value, the replacement cost, and the amount of loss to each item. 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 actual cash value and loss, or if it applies, the replacement cost and loss.”
Appraisal vs Arbitration
A similarity between the two is that Arbitration just like Appraisal, is an Alternative Dispute Resolution Mechanism (ADR), as highlighted above. In the Arbitration course, we stated in part that “Arbitration is an alternative dispute resolution mechanism. Any way of resolving conflicts without resorting to litigation is referred to as Alternative Dispute Resolution (“ADR”). Alternative Dispute Resolution (ADR) is a general term that refers to any method of settling disputes that does not involve going to court. ADR encompasses any conflict resolution processes and techniques that occur outside of the purview of any governmental entity. Mediation, arbitration, conciliation, and negotiation are the most well-known ADR processes. All alternative dispute resolution (ADR) methods share some characteristics – namely, that they allow the parties to reach admissible solutions to their disputes outside of normal court proceedings, they are however regulated by different rules.”
Arbitration has however been held to be different from an Appraisal. All disputed matters are submitted to an arbitrator(s) for determination in arbitration, but in appraisal, only the amount of loss is usually decided by two appraisers and, where applicable, an umpire. Moreover, when contrasted with Arbitrators, Appraisers are portrayed as having less powers (Jefferson Ins. Co. v. Superior Court). The courts have held that the difference between Appraisal and Arbitration is on how the procedures are done and the effect of the findings (Hartford Fire Ins. Co. v. Jones). Arbitration is a formal process that functions similarly to a court, whereas Appraisal is a more informal process by the two appraisers and umpire. As discussed above, if the two appraisers disagree, the parties choose an umpire (or one is appointed at the time of appointing the appraisers) to settle their disagreements; if the appraisers cannot agree on an umpire, the appraisers typically petition the court to appoint one.
Conflict exists between the two, ie Arbitration and Appraisal, for example, the California Code of Insurance states that an Appraisal is a form of Arbitration yet there have been distinctions between Appraisal and Arbitration. (Louise Gardens of Encino Homeowners’ Ass’n., Inc. v. Truck Ins. Exch., Inc.). As per the Code, and as previously discussed, when there is an occurrence that is termed to be a disaster by the government, an insured or insurer may ask for an appraisal but the requesting party cannot mandate that the Appraisal must be conducted. This may be contrasted with Arbitration where the process may be made mandatory when a party requires it.
In Arbitration, Arbitrators may be neutral or non-neutral but in Appraisal, the Appraiser and umpire must be “disinterested” i.e., unbiased and unprejudiced. See Gebers v. State Farm Gen. Ins. Co. that held that the Appraisers and the umpire are “held to a higher standard of impartiality than are arbitrators generally,”. The court further ruled that a section of a policy that needed the Appraisers to be independent did not adhere to the “disinterested” test. The insurer changing of the language contained in Section 2071 was held to be incapable of watering down the guaranty of impartiality. The court held that the continuing litigation was a “direct pecuniary interest, which casts considerable doubt on the appraiser’s ability to act impartially.” and that the appraiser who had been appointed by the insurer had to be held ineligible because in two pending court actions, the appraiser was simultaneously engaged by the insurer as an expert witness.
The above case was based on Fiji v. New Hampshire Ins. Co where the issue was whether the umpire needed to be rendered ineligible since he had worked as an accountant for one of the appraisers appointed by the insurer. In this case, the umpire was held to not be “disinterested.” However, mere past business relationships between the appraiser and the party does not invoke disqualification. In practice however, the insurer and insured often go for persons they reasonably suppose will lean more to their side since in an appraisal, it is often that a compromise is reached.
Where there is an agreement between two out of the three appraisers, the Appraisal award must be put in writing separately and stipulate the monetary value and loss of each item. A party may thereafter make a petition to the court for confirmation of the award. It has been held that notwithstanding the fact that the court is mandated to enter a judgement per the award, a monetary judgment cannot be entered, only the amount of loss and not if the loss is covered or not is determined by the award. If a party wants to dispute the appraisal award, they should forward their grievance within 100 days from the date the award was made. (Koubnikin v. California Fair Plan Ass’n.)
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