Envision this all too common scenario: A residential hurricane claim is reported by an insured two weeks after the date of loss, adjusted by the insurance carrier, and paid within a couple of months from the date of loss. After payment, the insurer closes the file. Fast forward many months or even years later, when the insured reappears, invoking the policy’s appraisal clause, providing the carrier with a copy of a representation agreement from a public adjuster, an estimate for hurricane damages that is usually much higher than the original adjustment, and a letter claiming there is a dispute over the amount of loss.
More than three years have passed since Hurricane Wilma hit South Florida, yet new and supplemental claims are filed every day related to this and other 2004 and 2005 storms. Many of these claims are pushed into appraisal, a procedural device contained in most policies to facilitate a binding alternative dispute resolution for claims where coverage has been acknowledged but the amount of loss is in dispute. This article focuses on how insurance carriers should respond to similar appraisal demands in supplemental hurricane claims and what steps carriers should take to prevent the appraisal of non-covered items.
Generally, the appraisal clause is the same or similar from one policy form to another. The following is the appraisal clause from the Conditions portion of an HO3 policy, which states as follows:
6. Appraisal. 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 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:
a. Pay its own appraiser; and
b. Bear the other expenses of the appraisal and umpire equally.
The policy clearly states that appraisal is appropriate if “you or we fail to agree on the amount of the loss,” and Florida courts have analyzed what is considered an amount of loss question appropriate for the appraisal panel. When the insurer admits there is a covered loss, but there is a disagreement on the amount of loss, it is for the appraisers to arrive at the amount to be paid.1 However, where coverage was denied as a whole by the insurer, a question of whether the loss was caused by a covered peril is not appropriate for determination by appraisal.2
Coverage issues are exclusively judicial questions.3 However, if the insurer acknowledges a covered loss to the insured’s property, then causation of the damages becomes an amount of loss question for the appraisal panel.4 In Kendall Lakes, there was a large discrepancy between the insured’s and the insurance carrier’s estimate of the loss (the insurer said the loss was below the $1,000 deductible and the insured provided a $716,000 estimate), but because the insurer had not wholly denied that there was a covered loss, causation became an amount of loss question for the appraisal panel and not a coverage question.5 Therefore, once the insurer acknowledges that there is a covered loss by making payment on the original adjustment of the claim, then the amount of the loss, scope of the loss, and the cause of the loss, whether a covered or non-covered cause, becomes appropriate for the appraisal panel’s determination.
Although appraisal of the claim may be appropriate, the insurance carrier may still compel the insured to comply with their post loss obligations prior to agreeing to appraisal. In these supplemental hurricane claims, it is essential that the insurance carrier conduct an investigation prior to agreeing to appraisal to allow for an equal footing during the appraisal process. The carrier should acknowledge the appraisal demand in writing but advise that appraisal of the claim is premature because the insured has not complied with their post loss obligations, and the insured’s compliance with their post loss obligations is necessary for there to be a dispute as to the amount of loss.
The courts have held that the existence of a real difference in fact, arising out of an honest effort to agree between the insured and the insurer, is necessary to render operative a provision in a policy for appraisal of differences.6 Furthermore, there must be an actual and honest effort to reach an agreement between the parties, as it is only then, that the clause for arbitration becomes operative, the remedies being successive.7 The exchange of information sufficient for the insurance carrier to arrive at a conclusion is accepted as a matter contemplated by the parties.8 The courts have held that property insurance policies are not ambiguous as to the insureds’ obligation to comply with duties after a loss before compelling appraisal, even though the appraisal clause does not mention the duties after loss; the policies were not susceptible to interpretation in opposite ways.9 In reaching its decision, the USF&G Court stated that no reasonable and thoughtful interpretation of the policy could support compelling appraisal without first complying with the post-loss obligations.10
If the insured was not required to first comply with post loss obligations, then a policyholder, after incurring a loss, could immediately invoke appraisal to secure a binding determination as to the amount of loss. Accordingly, if there is additional information the insurer needs from the insured prior to engaging in appraisal, a request for this information should be made in response to the appraisal demand, advising that the insured is not entitled to appraisal until he has complied with his post loss obligations. The investigation should consist of an examination under oath and document request, focusing on the repairs that have been completed since the original adjustment of the loss, as well as the current damages being claimed. A proof of loss should also be requested, which requires the insured to commit to the public adjuster’s estimate and prevents the insured’s appraiser from submitting a higher estimate to the umpire during appraisal. Finally, a reinspection should be completed. In anticipation of the appraisal, the insurance carrier can have the reinspection completed by their expected appraiser. Ideally, the reinspection can be completed prior to the examination under oath and the appraiser can advise what information he/she needs to assist in their presentation to the umpire. All of the information gathered during the investigation should be provided to the appraiser for their use during the appraisal process.
As previously discussed, issues of coverage are to be resolved by the courts. In order to preserve any coverage defenses under the policy, the carrier can first request that the opposing appraiser agree to a memorandum of appraisal outlining the scope of the appraisal. While the opposing appraiser will often not agree to any limitations of the appraisal scope, the insurance carrier can file a Petition to Delineate or Limit the Scope to the appraisal, requesting that a court issue an order limiting the scope of the appraisal to the items in which the carrier has acknowledged coverage or requiring the umpire derive an amount of the total loss, breaking down that amount by exclusion causes. Appraisal awards issued in lump sums, with no explanation of how the amount was reached, precludes the insurance carrier from challenging specific coverage issues because there is no way of knowing whether the award included non-covered damages. Therefore, the insurer can argue that a delineation of the appraisal award is necessary, asserting that the courts have held that coverage issues are exclusively judicial questions and a lump sum award prevents the court from being the ultimate decided of issues of coverage.
Finally, a Petition for the Appointment of a Neutral Umpire can be used as an opportunity to spur the court to require the limitation of the scope of the appraisal or the umpire to delineate the scope of appraisal. The appraisal clause states that if the appraisers 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.” Therefore, the carrier can essentially “kill two birds with one stone” by asking the court to issue an order limiting the scope of the appraisal to the items in which the carrier has acknowledged coverage or requiring the umpire derive at an amount of the total loss and to breakdown that amount by excluded causes as well as appointing the umpire. Therefore, when the umpire is notified of their court appointment, the carrier can also present them with the court’s order regarding the scope or delineation of appraisal.
Even though the insurance carrier may be surprised when a demand for appraisal is received several years after they believed the claim to be paid and closed, it does not mean that insurance carriers have to enter the appraisal process blind and at the mercy of whatever information the insured’s appraiser submits to the umpire. A simple but thorough investigation prior to engaging in the appraisal can help narrow the issues and ensure that the appraisal only addresses covered items, limiting the insurer’s exposure to additional losses.
1 State Farm Fire & Cas. Co. v. Licea, 685 So. 2d 1285 (Fla. 1996).
2 Johnson v. Nationwide Mutual Insurance Company, 828 So. 2d 1021 (Fla. 2002).
4 Kendall Lakes v. Agricultural Excess and Surplus Lines Ins. Co., 916 So. 2d 12 (Fla. 3d DCA 2005).
5 Id. at 16.
6 United States Fidelity & Guaranty Company v. Romay, 744 So. 2d 467 (Fla. 3d DCA 1999).
10 Id. at 471.
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