Avoiding Power Grabs
An insurance appraisal panel only has the power to appraise value, not identify or set the scope of loss.
The standard property insurance policy contains a provision by which disagreements as to the amount of loss are to be submitted for appraisal, which is a type of arbitration. Although an appraisal pursuant to an insurance policy is arbitration, there are some significant differences from other contractual arbitrations. Key among them is that appraisers are permitted only to decide the specific valuation question presented to them.
This article focuses on appraisal law in California. The issues are the same throughout the country, and most states use a form of the New York standard fire policy that contains an appraisal clause (for example California Insurance Code § 2071 and New York Insurance Law § 3404). However, the courts in different states have different views on what appraisers are empowered to decide.
As the Supreme Court stated in Jefferson Ins. Co. of N.Y. v. Superior Court: Although arbitrators are frequently, by the terms of the agreement providing for arbitration, particularly in construction contracts, given broad powers … appraisers generally have more limited powers. As stated in Hughes v. Potomac Ins. Co., [199 Cal.App.2d 239, 253 (1962)]: “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 of the policy.”
In Kirkwood v. California State Automobile Ass’n., the court stated, “[T]he appraisal panel’s power is restricted to the factual task of valuing the items of property submitted for appraisal.” In Safeco Ins. Co. of America v. Sharma, the court stated that there is no authority “that an appraisal panel is empowered to determine whether an insured lost what he claimed to have lost or something different.”
If the appraisal panel does not decide the proper question, it has acted beyond its powers, and the court can so find. As specified in Jefferson, the court cannot rule on whether the appraisal panel’s valuation is correct: [The] court may examine the record to ascertain what the appraisers considered the factual issue to be, in order to determine whether they exceeded their powers.
In Sharma, the court held that the appraisal panel exceeded its powers when it decided whether or not artwork that was submitted for valuation was a matched set. Although the answer to that question impacted the value, the court held that it was beyond the panel’s power to make that decision. The insured in Sharma claimed the loss of a “set of 36 Rajput miniature paintings, Bundi School, India, late 18th Century.” The appraisal panel decided that the paintings were unmatched and not what the insured had claimed. The court held that making the determination of what was lost exceeded the appraisers’ powers.
The court held that when an insurer disputes an insured’s description of lost or destroyed property, it is claiming that the policyholder has misrepresented what was lost, whether innocently or intentionally. Deciding whether such a misrepresentation was made is beyond their powers, according to the court. Even though the appraisers cannot accurately determine value unless they know what they are valuing, the court held that determining what they are valuing is beyond their scope.
In Kacha v. Allstate Insurance Co., the court recognized that, in light of the rule discussed in Sharma, only if the parties waived the restrictions to the appraisal process and agreed to give the appraisal panel broader powers could an appraisal panel properly determine whether the insured loss caused the damages that were claimed to have occurred. Kacha involved a claim for damage that a wildfire caused to the insured’s house and personal property. The policyholder and insurer disagreed about whether the fire caused some of those damages. The claim was submitted for appraisal, and the appraisal panel decided the valuation of claimed damages. For the line items that they decided the fire had not damaged, the appraisal panel found a zero dollar value. The policyholder sought to overturn the appraisal award on the grounds that the panel had exceeded its authority by making this causation determination. The insurance company argued that the parties had agreed that the panel had this authority.
The court in Kacha ruled that the parties had not waived the limits to the appraisal panel’s powers. As a result, when the appraisal panel inserted a zero value to certain repair work in the agreed appraisal award form, the court held that they were improperly making a determination as to causation and, therefore, coverage. The court gave two examples of items that were damaged, which Allstate contended the fire did not damage. The appraisal panel agreed and awarded zero dollars for the cost to repair those items. The court said that, by doing so, “it is apparent that the appraisal panel made at least some coverage determinations, thereby exceeding its authority.”
Not all courts agree with the conclusion that making this causation decision exceeds the appraisal panel’s powers. For example, Florida’s Third District Court of Appeal, in Kendall Lakes Townhomes Developers, Inc. v. Agricultural Excess and Surplus Lines Ins. Co., held that, when an insurer accepts coverage for part of a loss but denies other parts of the loss, an appraisal panel can decide causation. According to the court, deciding which parts of a loss were caused by a covered cause of loss and which were not was an “amount of loss question,” not a coverage question. (However, the court held that the appraisal panel exceeded the scope of its powers that the court granted before the hearing and, therefore, vacated the appraisal award.)
In practice, the clearer it is made to the appraisal panel exactly what items to value, the better the chance that the award will be within the panel’s powers. Issues may arise where repair or reconstruction of a building is involved. The more specific the scope of work that is presented to the panel, the more likely it is to avoid these disputes. For example, if a house is damaged, what is the scope of repairs needed? Do cabinets need to be replaced, or can they be repaired? Can the hardwood floor be refinished, or must it be replaced? There are numerous questions when it comes to building repairs that can lead to a wide variance in value.
If an appraisal award form is too general to provide the insurance company with the information needed to decide which damage amounts relate to covered damages and which do not, it is more likely that the appraisal award will set off a larger battle. For this reason, efforts should be made to clearly define the precise scope of loss that is being appraised. If the appraisal involves personal property, a clear description of that property should be sufficient; although, as shown in Sharma, there may be certain attributes of the items about which the parties cannot agree. The panel is authorized only to appraise what is presented to them. If the parties agree, the panel may be presented with alternative descriptions of value. It then will be up to the insurance company to make a coverage decision as to what item they agree was lost and to pay the value the appraisers assigned. If the policyholder does not accept this, he can take appropriate action in court if no agreement can be reached, but the values will be set.
Similarly, when the item to be appraised is a building, the elements of that building should be set out clearly and submitted to the panel for valuation. If the appraisal panel provides a value that is beyond the scope of work presented to it, the appraisers have gone beyond their authority, and there would be grounds to vacate the award. If there is a disagreement as to the scope, as with personal property, if the parties agree, the alternate scopes can be submitted to the panel for valuation. The insurance company can pay the amount of loss that it agrees has occurred based on the values that the appraisers assigned. If there is disagreement as to the scope, the policyholder, again, can take appropriate action. But the appraisal panel has no power to determine the scope, only value. The panel cannot decide what needs to be repaired, only the value of the repairs that were submitted.
If the panel goes beyond this authority, the remedy is to vacate the award. Code of Civil Procedure § 1286.2(a)(4) states that the court “shall vacate the award if the court determines” that the appraisers exceeded their powers. Deciding what needs to be repaired, as opposed to the value of the repairs presented to them, exceeds their powers and provides a basis to vacate the award. Deciding what damages the event caused, as opposed to valuing only the scope of loss presented, also exceeds their powers and provides a basis to vacate the award.
Gene A. Weisberg is a principal with Gladstone Michel Weisberg Willner & Sloane in Marina del Rey, Calif. He has been a CLM Member since 2010 and can be reached at firstname.lastname@example.org.