In Praise of Appraisal
Invoking alternatives to litigation in disputes over property catastrophe losses.
Litigating catastrophe claims can be costly. Recently, the Committee of Magistrate Judges appointed in the In Re Hurricane Sandy litigation in the Eastern District of New York commented that they were alarmed by one defense attorney’s prediction that the defense of roughly 1,200 flood cases could cost more than $100 million—a figure that likely exceeds the cost of settling all of the cases at full value. In the same order, the committee criticized some of the attorneys for acting in a manner that it described as objectively unreasonable or seemingly calculated to delay efficient resolution of the cases.
One example given by the committee to support this assertion was a defense attorney’s representation to the court, after mediation had failed to resolve a case, that the depositions of the plaintiffs, engineer, contractor, and public adjuster would be necessary to complete discovery. The committee found it highly unlikely that such discovery would be warranted given what it characterized as modest dollar amounts at stake, and commented that it was left to conclude that the defense attorney was seeking to unreasonably delay resolution of the cases in refusing to settle absent what it described as “extensive discovery.” Unsurprisingly, policyholder attorneys seized upon the opportunity to publicly criticize insurance carriers for defending the Superstorm Sandy lawsuits rather than simply paying the demands of the policyholders’ attorneys.
Insurance carriers often find themselves in this dilemma when defending catastrophe claims in litigation. The companies either can pay demands made by policyholder attorneys that are often excessive and supported by little or no evidence that the claim was denied improperly or underpaid, or they can face the wrath of judges who may be more focused on finding ways to move cases off their dockets rather than evaluating the merits of claims.
Litigation of catastrophe claims also often involves significant disputes over causation, such as flood versus wind. Or there may be disputes over the scope of covered damage, such as the extent of pre-existing damage, wear and tear, or the need for code upgrades. Typically, the policyholder also will assert extracontractual claims, although these may be made in boilerplate pleadings used routinely by policyholder attorneys with little regard for the actual facts of the case. The amount in dispute is rarely insignificant, and insurance companies have legitimate reasons for their reluctance to pay meritless claims.
To defend against the claims made in the lawsuit at trial, the insurance company certainly will need to engage in discovery. It will be necessary to take the depositions of the plaintiffs, their experts, and any other fact witnesses expected to appear at trial. Experts may need to be retained to opine on a variety of issues, including causation or scope of damage. There will be expenses associated with the development of the experts’ opinions and for their appearances at depositions and trial. The cost to defend and properly prepare a disputed catastrophe claim or bad faith lawsuit for trial easily can exceed the amount in dispute for repairs to a home or commercial building. This may leave judges who preside over these cases with the mistaken impression that the defense attorneys are seeking only to delay resolution of the cases or that the insurance companies are stubbornly refusing to settle.
When there is a high volume of claims following a catastrophe, inevitably some claims will not be resolved to the satisfaction of the policyholder. Disagreements with policyholders over the amount of loss should be anticipated, and an appropriate action plan should be developed for dealing with those situations in an effort to minimize the number of claims that find their way into litigation. For some policyholders, a detailed explanation for the claims decision alone might not suffice, particularly if there is a significant amount of money in dispute.
An unsatisfied policyholder may hire an attorney or a public adjuster who might refer the claim to an attorney, and then a relatively small dispute over the amount of loss could easily lead to a much larger demand followed by litigation. The stakes are raised when claims become lawsuits, particularly when there are allegations of bad faith. In some jurisdictions, the claims professionals handling the disputed claim can be joined as parties, defending allegations of unfair claims practices. The risks become greater, as do the costs.
Appraisal is a tool claims professionals can use to forestall litigation when disagreements with policyholders over the amount of loss cannot otherwise be resolved. Virtually all commercial and personal lines property policies contain some form of an appraisal clause. A typical appraisal clause will require each party to select a competent and impartial appraiser; each appraiser will state separately the amount of loss, and they submit any differences to an umpire. A decision agreed to by any two will be binding on both parties as to the amount of loss.
Depending on the facts or posture of the claim, claims professionals might be reluctant to invoke the appraisal clause. Like litigation, there are many variables that can make the outcome of the appraisal unpredictable. There is little that can be done to control the process after the appraisers have been designated. The appraisers and umpire typically work without substantive input from the parties, and any overt attempts to control the outcome could lead to allegations of tampering. This is not to suggest that the appraisal process is handled without communications between the parties and appraisers. The appraisers should be expected to provide regular status updates to the parties as they work through the appraisal process. The appraisers also may have requests for information or documents, such as repair receipts. They might need to consult with other experts.
Staying well informed during the appraisal process will minimize the risk of surprises. While risks in appraisal cannot be eliminated, it is important to understand that some claims might not otherwise be resolved short of litigation.
Serious consideration should be given to invoking the appraisal clause when there are unreasonable demands being made by the policyholder or the policyholder’s public adjuster or attorney, if there is a significant disagreement over the scope of repairs, or if litigation has been threatened. When a compromise cannot be reached on the amount of loss, an appraisal award provides certainty and is binding on the parties. The appraisal process itself will lead to a resolution of the majority of claims without litigation, either through compromise by the parties or by timely payment of an appraisal award.
When bad faith litigation does follow a claim, a claims professional’s timely decision to invoke the appraisal process often is viewed as one of the strongest defenses to the lawsuit. Policyholders who ignore an insurance company’s demand for appraisal or who otherwise refuse to participate in the appraisal process (choosing instead to file a lawsuit) could be deemed to have failed to comply with a condition precedent in the policy. A trial court can enter an order compelling appraisal over a policyholder’s objection. Arguably the policyholder is in breach of contract if there is an outright refusal to appraise the amount of loss.
Once the appraisal process is complete, the timely payment of an appraisal award ultimately can lead to the dismissal of some or all of the claims in litigation, even if payment is made after a lawsuit has been filed. The appraisal clause reflects the parties’ intent to resolve disputes over the amount of loss in appraisal rather than in litigation. There are costs associated with appraisal, including the cost of the appraiser designated by the insurance company and a shared cost of the umpire’s expense. But appraisal rarely is more expensive than litigation.
Appraisal awards often exceed the amount of the insurance company’s damage estimate. In many jurisdictions, the policyholder cannot maintain a breach of contract claim on the basis that an appraisal award exceeds the amount of the initial payment made on the claim. Participation in the appraisal process followed by timely payment of any additional amount that may be owed after an appraisal award is issued usually is viewed by the courts as evidence of compliance with the contract and good faith.
Depending on the particular facts, appraisal might not be the best option for resolution of the disputed claim. The law of the jurisdiction in which the claim is pending must be part of the analysis. Past experiences in the venue where a lawsuit may be filed also should be considered, as well as past experiences with the particular public adjusters or policyholder attorneys involved in the claim. Consultation with legal counsel may be necessary, preferably one who has had prior experience with the local appraisers, umpires, and judges.
The decision to invoke the appraisal clause should be made on a case-by-case basis. But the judiciary should have a more skeptical view of any claim in litigation that continues despite the timely payment of an appraisal award. If appraisal clauses were invoked more often by insurance companies, it would provide them additional defenses in litigation and, ultimately, would lead to fewer lawsuits.