Using Insurance Appraisals To Resolve Insurance Coverage Disputes

Insurance policy coverage disputes can be frustrating. Not only do you have to fight just to get the type of loss covered, but then sometimes you have to argue with your insurance company over the amount of the loss. There's not much you can do when coverage is completely denied except take that issue to court, but there's often a shorter process in your insurance policy, an "appraisal," for resolving issues over the amount of a covered loss.

It is not uncommon for an insurance policy to have an appraisal provision to resolve such disputes in lieu of more expensive and time-consuming legal action. An appraisal is a supplementary arrangement to arrive at a resolution of a dispute without a formal lawsuit. Provisions for appraisal of an insurance loss, whether under policy terms or pursuant to independent agreement, are valid and binding on the parties. 

Although the language differs from policy to policy and the actual provisions for an appraisal will be governed by the policy's appraisal provision, generally an appraisal provision has been a method for an insurer and a policyholder to resolve a dispute of the amount of a covered loss. A typical appraisal clause in an insurance policy will require the insurer and the policyholder to each select a competent and impartial appraiser. The two appraisers then select an umpire. The appraisers then reach their respective conclusions about the amount of the loss. If they agree on the loss amount, then their joint decision is binding on the insurer and insured. If the appraisers can't agree, their dispute will be submitted to the umpire, who will decide which of the appraisers is correct. The umpire's decision in that regard is also binding on the insurer and policyholder. 

What is the proper scope of appraisal in property insurance claims? Strictly read, your average appraisal provision only contemplates resolution of the amount of the loss. But courts are divided over whether more intensive questions, such as the cause of a loss that an insured contends is covered under the insurance policy. A growing trend among the courts is to allow the appraisal to include questions of not just the amount of a covered loss, but also whether the loss is covered under the insurance policy in the first place.

The Iowa Court of Appeals recently gave a preliminary answer to the question of whether an appraiser has the authority to determine causation or issues of coverage. That decision is preliminary because it may be subject to review by the Iowa Supreme Court, which may overrule the Court of Appeals. The Iowa Court of Appeals concluded that insurance appraisals can include a review of causation and whether an asserted loss is even covered under the terms of an insurance policy.

The Court of Appeals noted that as part of the appraisal process, appraisers must determine what the amount of “loss” is, which often requires consideration of causation. Loss means the financial detriment caused by damage, for which the insurer becomes liable. Causation is an integral part of the definition of loss, without consideration of which the appraisers cannot perform their assigned function. During the appraisal process, the appraisers must consider what caused the damage. Handling appraisals in any other manner would improperly limit the appraisal process to situations where the parties agree on all matters except the final dollar figure.

Once the appraisers conclude their work, the issue of coverage may be further litigated by the parties. Additionally, the causation determinations by the appraisers may be subject to further review by the district court. This process gives force to the appraisal process but reserves to the courts the authority to decide coverage questions.

Harley Erbe