The Standard Steve Badger Appraisal Clause

Steve Badger published a proposed “Statutory Appraisal Process.” He noted on LinkedIn the following, in part:

My post last week about a proposed ‘Statutory Appraisal Process’ created a lot of discussion. Some supported the idea. Others hated it (for various predictable reasons). Everyone, however, agreed that the appraisal process is, or was at least intended to be, an efficient way to resolve disputed claims without the need for litigation.

Everyone also acknowledged that there are problems in the process that need to be corrected.

And here is my effort to address those problems……

…We are currently recommending that our clients include this revised appraisal provision in their policies. Several clients are now in the process of obtaining state regulatory approval of our proposed appraisal clause.

And some wonder why I say that policyholders need stronger and more protective voices within Departments of Insurance and the National Association of Insurance Commissioners (NAIC). Insurance companies have an army of professional lobbyists who work in concert to promote insurance industry policy wording and model laws. Policyholders are not in the business of insurance, and except for United Policyholders and a few key volunteers, have little or no say about policy wording and model law writing. The insurance regulators are supposed to be protecting the public, but they are often overworked and not trained on the nuances of what the insurance industry is trying to do. While most career insurance regulators are trying to do a great job, some regulators are on loan from the insurance industry or waiting for their second career with insurance companies or their lobbyists. I discussed some of these issues in Insurance Commissioners and Regulators Need to Protect Policyholders From Disappearing Actual Cash Value Benefits and The Revolving Door Connecting Insurance Regulators with the Supposedly Regulated Insurance Industry.  

To be fair to my colleague, Steve Badger, at least published the proposed policy language publicly and has asked for fair comment in a public forum. This is far different from many form filings made regarding policy language changes, which the public only finds out about after the changes have been approved. I also do not doubt that his heart is in the right place as he views the world. Here is the proposed revised language:

PROPOSED REWRITE OF STANDARD APPRAISAL CLAUSE

TO ADDRESS ALL KNOWN ABUSES

Appraisal: If there is a dispute as to the existence or extent of physical loss to covered property agreed to have occurred on the reported date of loss, or the cost to repair or replace such covered physical loss, either you or we may submit a written demand that these issues be resolved through the appraisal process. When appraisal is invoked, the parties agree to work cooperatively in completing the appraisal process in a manner that results in a timely and clear appraisal award, thereby avoiding the need for subsequent litigation regarding the issues addressed through appraisal.

We shall not submit a written demand for appraisal without providing a final measure of the covered physical loss. You shall not submit a written demand for appraisal without providing a signed sworn statement in proof of loss and, if requested, appearing for an examination under oath. If we request an examination under oath after receiving a written demand for appraisal from you, all time periods set forth in this section, including the time period for us to state the name of the individual appointed as our appraiser, shall be abated pending completion of the requested examination under oath.

Unless otherwise agreed in writing by the parties, you may not submit a written demand for appraisal more than 90 days after receiving a final claim measure and we may not submit a written demand for appraisal more than 90 days after receiving a sworn statement in proof of loss. In no event may either party demand appraisal after such party files a lawsuit. If either party files a lawsuit and the lawsuit is the non-filing party’s first notice that its claim measure is disputed, the non-filing party shall submit a written demand for appraisal no later than 90 days after formal service of process of the lawsuit.

A written demand for appraisal must be sent by email and first-class mail to the individual representative of the other party primarily responsible for the handling of the claim. If a response to the written demand for appraisal is not received within 14 days, additional reasonable efforts must be made to ensure the written demand is received. Any refusal by a party to participate in the appraisal process can only be addressed through legal proceedings before a court having jurisdiction and not by completing the appraisal process without the involvement of the other party’s designated appraiser.

A written demand for appraisal must include an initial written statement of the disputed issues the party requests be resolved through the appraisal process consistent with this section. Thereafter, the parties shall work cooperatively in reaching agreement in writing as to a final statement of the disputed issues to be resolved through the appraisal process. When agreement is reached, the parties shall jointly provide the final written statement to the appraisal panel. If after 30 days the parties cannot agree on a written statement of the disputed issues to be resolved through the appraisal process, they shall provide their respective positions to the appraisers, who during the course of the appraisal process and in working with the umpire, if necessary, shall prepare a written statement of the issues to be resolved through the appraisal process consistent with this section. A decision of any two panel members shall be binding as to the final written statement of the issues. The final written statement of the issues shall appear on the appraisal award.

The party demanding appraisal shall state the name of the individual appointed as its appraiser. Within 30 days, the other party shall state the name of the individual appointed as its appraiser. Both appraisers must be unbiased. The parties may make reasonable requests for information from the other party in investigating whether an appraiser is biased. Any objection to an appraiser based on bias must be made within a reasonable period of time after the appraiser is appointed. At such time, the party naming the allegedly biased appraiser may either name a different appraiser or stand by its previous appraiser appointment. The appraisal process should then move forward, with the issue of bias reserved for resolution in later legal proceedings if necessary.

Each party may provide its own designated appraiser with estimates, expert reports, and other information relevant to its claim measure. All such information must be shared with the other party’s appraiser and umpire upon request.

The appraisers shall first exchange names of proposed unbiased umpires. The appraisers shall then work cooperatively in resolving the disputed issues. This includes providing their respective positions in writing at least 10 days prior to the appraisers’ joint inspection of the property. Thereafter, the appraisers shall meet at the loss location for a joint inspection. After the joint inspection, the appraisers shall attempt to reach agreement on any disputed issues.

If the appraisers reach agreement on any disputed issues, the appraisers shall state in writing both the replacement cost and actual cash values of those items at the time of the loss. The appraisers shall also state in writing the issues on which there was disagreement that must be resolved with involvement of the umpire.

If the appraisers identify issues in disagreement, they shall then attempt to reach agreement on the selection of an unbiased umpire. If the two appraisers are unable to agree on the selection of an unbiased umpire within 15 days, the parties, through their respective counsel, shall jointly apply to a district court in the county where the insured property is located to appoint an unbiased umpire. Any objections to the court-appointed umpire, based on bias or otherwise, shall be made within 10 days of the objecting party’s receipt of notice of the umpire appointment.

Once an umpire is appointed, the appraisers shall submit their respective positions on the remaining disputed issues to the other appraiser and the umpire. Such respective positions shall be submitted in writing at least 10 days prior to the joint inspection. Thereafter, the appraisers and umpire shall meet at the loss location for a joint inspection. The umpire shall then work cooperatively with the appraisers in resolving the remaining disputed issues.

If at any time during the appraisal process the appraiser for a party significantly changes that party’s claim measure or includes additional damage components not previously at issue in the adjustment process, the other party may request a stay of the appraisal process to allow a reasonable period of time for the issues to be addressed in the claim adjustment process. The appraisal panel shall honor any reasonable request for such a stay.

An appraisal award signed by two of the three members of the appraisal panel shall be binding on the parties. The appraisal award shall identify all issues resolved either by the appraisers alone or with the involvement of the umpire, stating both the replacement cost and actual cash values of those items at the time of the loss. The appraisal award shall be provided by the umpire to the parties.

We will pay any additional covered amounts owed on the claim pursuant to the appraisal award within 15 business days after receiving the appraisal award.

Each party shall bear the cost of its appraiser. The cost of the umpire shall be split evenly between the parties. The appraisers and umpire shall be paid on a straight hourly-rate basis, using a reasonable hourly rate for the nature of the work being provided. The appraisers and umpire shall keep a record of the number of hours worked. Upon written request, the parties shall disclose the hourly-rate of the appraisers, the total fees and costs invoiced by the appraisers, and the total fees and costs actually paid to the appraisers. The parties shall directly incur the cost of the appraiser and umpire. No third-party may assume responsibility for these costs.

The parties retain the right to address all other issues of coverage, causation, and liability outside of the appraisal process, including through appropriate legal proceedings in a court having jurisdiction. The parties retain the right to jointly agree in writing to modify any terms of this section.

This language is a major change from the standard language, which usually provides:

APPRAISAL – If you and we fail to agree on the amount of loss, either may demand that the amount of loss be set by Appraisal. If either makes a written demand for Appraisal, each shall select a competent, independent 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 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.

If the language is allowed, smaller claims, less than $100,000, are going to be a lot more expensive and delayed. This will be true for larger claims, but those claims have larger sums at stake, so the increasing appraisal fees and time may not be as ominous. The language requires policyholders to submit proofs of loss and conduct a much greater and more thorough evaluation of damages before the appraisal process. Policyholders who face this language and may go to appraisal would be crazy not to hire professional public adjusters to prepare their claims.     

This language is similar to the State Farm language, which attempts to have numerous issues listed specifically in the award form, which will increase the time and cost of the appraisal. It will invite a lot more subsequent litigation as insurers “cherry pick” those issues for non-payment or reduction. The concept of having the panel simply state “the amount of the loss” is under attack as insurers and their counsel increasingly fight their policyholder customers on every line and issue of an estimate.

“Keep it simple, stupid” is not helpful to keeping claims payments as low as they can go. So, insurers are adding bulk and more policy requirements, thereby making it increasingly difficult to make property claims adjustments fast and easy. Appraisal language like this is perfect for insurance carriers with a culture of “not paying a penny more than what the literal terms of the insurance policy provides.” It allows them to pay lip service to “not paying a penny less than what is reasonably owed.” Put your hard hats on and your teeth protectors in. This language promotes a lot more fighting during and after the appraisal process.

Thought For The Day              

If you can’t explain it simply, you don’t understand it well enough.

—Albert Einstein