Dig a Little Deeper

By Bruce Hicks, CPCU

RAIN ON THE ROOF—AND INSIDE THE HOUSE

Are appraisal provisions contained within insurance policies meant to settle coverage issues?

The Court Decisions column is one of the most popular features of Rough Notes magazine. One reason is that the courtroom is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mere mental exercises. In this column, the editors of PF&M Analysis, a publication of The Rough Notes Company, will dig a little deeper into one of those court decisions to identify a coverage problem and then provide possible solutions.

In this case, one might ask whether home owner Garcia was poorly served by her insurer and ultimately by the courts. Her dispute revolved around damage to her home due to a roof leak.

Her insurer, after reviewing the loss, advised her that the interior water damage was covered but the exterior (roof) damage was not eligible for coverage. The insurer also advised that, if Garcia did not agree, their differences should be settled according to the endorsed homeowners policy’s appraisal provision.

Appraisal and its peer provision, arbitration, are both methods of alternative dispute resolution. They are meant to be used as faster, cheaper tools to settle arguments that would otherwise move to litigation.

Garcia filed suit for breach of contract while the insurer argued that the appraisal provision should be relied on to settle its obligation to Garcia. The insurer appealed when the trial court ruled against it. On appeal, the lower court ruling was reversed and the disputed issue of coverage had to be resolved through appraisal.

What should be understood about appraisal is precisely what was missed by both the insurer and the higher court: The provision is not meant to settle coverage issues. Appraisal and its peer provision, arbitration, are both methods of alternative dispute resolution. They are meant to be used as faster, cheaper tools to settle arguments that would otherwise move to litigation.

Both appraisal and arbitration offer limited options compared to lawsuits. Lawsuits are the ultimate method for handling disagreements among parties to an insurance contract when they involve either coverage or coverage amounts. Appraisal and arbitration may be used only to handle disagreements over coverage amounts. The difference between arbitration and appraisal? The results of appraisals are not binding.

As a contract, an insurance policy works best when its obligations and provisions can be properly relied on. Disagreements involving insurance protection are common, so policies provide guidance on how to resolve disputes.

Garcia should have been able to rely on the appraisal provision to ascertain whether a possible coverage amount was sufficient. Both her insurer and the higher court improperly viewed the provision, forcing the use of the provision to determine whether coverage existed for one portion of a loss.

In one way, the situation was a form of semantics, but being loose with policy language and structure is a recipe for litigation via allegations of bad faith. Fulfilling the obligation of an insurance policy means applying policy provisions correctly and consistently. Doing so is the best way to support an insurer’s response to claims and to meet the expectations of both first- and third-party claimants.

Ideally, an appraisal involves a mechanism for handling disagreements regarding the amount of a loss. Traditionally, appraisal was a voluntary process in which one party requested an appraisal, and it took place only when the other party agreed.

The process moves ahead when each party selects a qualified appraiser and those two representatives select a third appraiser. When those persons review the loss, an amount is determined when any two of the representatives agree on a figure. The parties may accept the established award, or the dispute could end up in litigation. But it is important that appraisals are available and are attempted in good faith as a step that may avoid lawsuits.

Clarity is an essential element of any insurance contract. While disputes are a common consequence after a loss occurs, it is vitally important that all parties be able to rely on the policy language and the scope and nature of coverage that the insurer intends to provide.

Actions that disregard intent and traditional understanding of policy provisions erode trust and, in the end, fail to serve both insurers and policyholders.

The author

Bruce D. Hicks, CPCU, CLU, is senior editor for Technical and Educational Products at The Rough Notes Company. He has more than 30 years of property/casualty insurance experience, including personal and small business underwriting as well as compliance duties for several national and regional insurers. Active in the CPCU Society, Bruce served as a Governor of the organization from 2007 through 2010 and currently serves on its International Interest Group Committee.