When you file a commercial property or business interruption insurance claim with your insurance company, the insurer may agree to cover the claim but may also disagree with you over the dollar amount of your losses. In cases like these, some insurance policies contain an appraisal clause, which provides an alternative dispute resolution process to help both sides reach a settlement. But while the appraisal process provides some significant benefits for policyholders, it also has its downsides.
How the Appraisal Process Works
An appraisal clause is included in some insurance policies as a voluntary option for resolving disputes over the amount of loss in commercial property and business interruption claims. For instance, say your business property is damaged by a fire. The insurer agrees that the loss is fully covered under the terms of your policy. But while you estimate the value of your losses at $300,000, the insurance company is only willing to pay $200,000. The appraisal process would be an appropriate way to resolve this disagreement, since it is solely about the dollar figure. By contrast, the appraisal process is not intended to resolve disagreements over whether the insurance company covers the loss in the first place.
Appraisal clauses typically allow for either the policyholder or the insurer to invoke the appraisal option by making a written demand. When the appraisal option is invoked, each party will select a qualified, independent appraiser, such as an engineer or contractor to assess the amount of property damage, or an accountant to expertly valuate business interruption losses.
If the two independent appraises come to an agreement, that figure will be the amount of the settlement. Often, however, the appraisers will not agree. In such cases, the two sides will jointly choose a neutral third party – who is called an umpire – to make a decision, which is binding.
Each party is responsible for paying their appraiser, and the two parties split the cost of the umpire.
Benefits and Drawbacks of Appraisal
Compared to litigation, the appraisal process is generally considerably faster, less expensive and less complicated. However, the appraisal process may not be the best option for the policyholder in some cases.
Appraisal clauses are strictly designed to help parties reach an agreement over the amount of loss, not to resolve coverage questions. But insurance companies may invoke the appraisal process when the valuation involves disputed policy terms, whether directly or indirectly. The appraisal panel may be called in to inadvertently resolve these larger issues, and the policyholder would not benefit from certain favorable rules of policy construction that they enjoy in courts in most jurisdictions.
Further, insurance companies typically want to avoid litigation and the unknown result at the end of a trial. When policyholders invoke the appraisal process as a binding solution, they lose the leverage of the threat of litigation that they might be able to use to their advantage when negotiating directly with the insurance company.
The fact that the appraisal process is binding is a significant issue. If the umpire sides with the insurer, the policyholder has very limited appeal options.
Takeaway
Consider consulting an experienced insurance law attorney before invoking the appraisal option in your commercial property or business interruption claim. Additionally, an experienced insurance law attorney can advise you about your rights if your insurance company has invoked the appraisal option.
If your business insurance company has denied or is challenging your claim, contact Schwartz, Conroy and Hack, PC, for assistance. We have the expertise and tenacity to make insurance companies keep the promises they made to you and your business.
