The Appraisal Clause in Alabama: What Can Insurers Appraise?
By: Brandon Clapp
In the midst of hurricane season, property damage claims are at the forefront of the minds of many in the insurance industry. The recent damage from Hurricane Ian alone is expected to be between $28 and $47 billion according to one analyst. While causation of the damage is often at issue in storm claims, many contested claims are limited to a dispute over the amount of the loss or repair costs. When the dispute centers on the amount of loss at issue and not questions of coverage, appraisal, rather than litigation, may be the appropriate tool for resolving the claim, as it can provide a more efficient way to resolve disputes over value.
Standard property insurance policies contain an appraisal clause that allows either the insurer or the insured to make a written demand for an appraisal if the parties disagree on the amount of the loss or cost of repair. Once appraisal is properly invoked, appraisal is required and a non-participating party may be in breach of the policy. The typical clause allows each party to select an appraiser at their own cost. Then, the two appraisers determine the amount of the loss. If they disagree, they submit their respective opinions to an umpire who is compensated by both the insurer and the inured. A decision agreed upon by any two of the three sets the amount of the loss and is binding on the parties.
While the appraisal process may appear straightforward, insurers should be mindful of its potential pitfalls. First, insurers should only invoke appraisal to resolve valuation disputes. If the dispute is over whether the property is covered or whether damage was caused by a covered peril, appraisal is not appropriate. Disputes over what constitutes a covered loss must be resolved by the court or jury. This is true in both Georgia and Alabama. Lam v. Allstate Indem. Co., 755 S.E.2d 544 (Ga. Ct. App. 2014); Ex parte Tower Ins. Co. of New York Inc., 140 So. 3d 456 (Ala. 2013).
While this rule seems straightforward, the amount of loss may be driven by the cause of the damage. In Rogers v. State Farm Fire & Cas. Co., 984 So. 2d 382 (Ala. 2007), the plaintiffs made a claim under their homeowner's insurance policy after a tornado damaged their house. The insurer's engineer concluded that certain damage to the property had been caused by a settling foundation, not the tornado, so there was no coverage for that aspect of the damage. State Farm demanded appraisal, but the insureds declined to participate. Ultimately, the trial court ordered the parties to participate in the appraisal process. The Alabama Supreme Court reversed the order compelling appraisal, holding questions of coverage and liability should be decided only by the courts, not appraisers. Rogers, 984 So. 2d at 391-92. Because the evidence in Rogers showed the parties were not in agreement about whether damage to the house's brick veneer and foundation was caused by the tornado (a covered event) or by settling of the foundation (not a covered event), the court opined that “[t]he determination of the causation of these matters is within the exclusive purview of the courts, not the appraisers.” Id. at 392-93.
On the other hand, extent of loss disputes may be properly subject to appraisal in Alabama. While the lines between cause of loss and extent of loss disputes can be murky, that issue was addressed in Cole v. Owners Ins. Co., 326 F.Supp.3d 1307 (N.D. Ala. 2018). In Cole, the insureds argued the owners breached the insurance contract by failing to comply with their demand to use the appraisal provision to determine the amount of loss. The dispute generally centered on the extent to which the insureds’ home was damaged by a fire. Owners argued the dispute was not subject to appraisal because it involved a dispute about the extent the home was damaged by a covered loss. However, the court resolved the issue in the insured’s favor and ordered the parties to submit to an appraisal because “the parties agree that a fire occurred and that things damaged by the fire would be covered under the Policy. Owners and the Coles, therefore, only disagree about the extent and value of the loss. That subject is primed for appraisal.” Id. at 1325. Thus, Alabama courts will permit an appraisal if there is simply a dispute over the extent of the damage caused by the covered loss, but it would be inappropriate to request an appraiser to delineate between damages caused by a covered peril versus a non-covered peril.
Second, insureds may wish to challenge the insurer’s invocation of the appraisal process by arguing waiver. This often occurs if the insurer invokes the appraisal clause after the insured files suit. In Rogers, the Alabama Supreme Court adopted the waiver of arbitration standard for questions regarding waiver of an appraisal provision. Rogers, 984 So. 2d at 386-87. Generally, Alabama’s two-part test requires evidence the insurer acted inconsistent with the appraisal right and evidence of prejudice to the insured. Krinsk v. SunTrust Banks, Inc., 654 F.3d 1194, 1201 (11th Cir. 2004). Under Alabama law, a court may find waiver if the insurer engages in discovery prior to invoking appraisal. Thus, it is important to make a prompt decision to invoke appraisal. That said, an insurer will be estopped from invoking appraisal if it previously denied coverage for the claim.
While the above is not an exhaustive list of the potential issues that can arise when an appraisal is invoked, this article is illustrative of the issues that may arise as a result of an invocation of the appraisal clause. Insurers wishing to resolve disputed claims with an appraisal should be mindful of the limited function and potential pitfalls. Specifically, insurers should avoid using appraisal when it involves questions of coverage and an appraisal should be invoked promptly to avoid potential waiver issues when contemplating the use of the appraisal process.
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