When the amount of damages for a loss is in dispute, typical property policies allow either the insured or the insurer to invoke the appraisal process. In general, the purpose of the appraisal procedure in property policies is to avoid litigation when coverage is not in dispute, but valuation of the loss is in dispute. The appraisal panel is typically composed of one appraiser appointed by each party and an umpire chosen by the two appraisers (or by a court if the appraisers fail to agree on an umpire). Some courts have allowed a party-appointed appraiser to be closely tied to the party that appointed them and act as an advocate for that party, while other courts have required a greater degree of neutrality on the part of the party-appointed appraiser. The specific wording of the policy and relevant law in the applicable jurisdiction should be consulted in ascertaining what role a party-appointed appraiser should play and whether and the extent to which a party-appointed appraiser can serve as an advocate working with the party that appointed them, or must maintain neutrality.
It is relatively uncommon for a court to overturn an appraisal award based on a finding that a party-appointed appraiser lacked impartiality, but in Tamko Building Products, Inc. v. Factual Mutual Ins. Co., 2012 U.S. Dist. LEXIS 117622 at *20 (E.D. Mo. Aug. 21, 2012). the Eastern District of Missouri determined that the appraiser selected by Factory Mutual was “interested as a matter of law.” The policy provided that the party-appointed appraisers were required to be “disinterested,” a requirement that some other policies do not contain, and a requirement that courts have interpreted somewhat differently in different jurisdictions. The court based its decision on the fact that the appraiser selected by Factory Mutual:
- asked Factory Mutual for advice as to who he should select as an umpire;
- submitted his draft presentation for the appraisal hearing to Factory Mutual, which Factory Mutual edited;
- sought approval from Factory Mutual as to whether he should agree to the umpire’s calculations
- had personally worked on twenty-six matters for Factory Mutual
- had a nine percent ownership interest in his accounting firm, and work for Factory Mutual constituted between four and seven percent of the firm’s annual income;
- had outstanding accounts with Factory Mutual totaling $940,000
- and developed client relationships with Factory Mutual employees by hosting dinners, lunches, and sporting events
The court determined as a matter of law that the appraiser selected by Factory Mutual was biased and had a “financial interest in the outcome of the appraisal.” Id. at *20, *23.
Incidentally, the court granted Factory Mutual’s motion for summary judgment as to the claim for fraudulent misrepresentation associated with the appraisal process. The court recited the elements for fraudulent misrepresentation under Missouri law, which requires, inter alia, an ignorance of the misrepresentation and reliance on the misrepresentation by the complaining party. Id. at *26. Because Tamko voiced concerns about Factory Mutual’s appraiser during the appraisal process, and because the appraisal process was required by contract, the court found that Tamko was not ignorant of the misrepresentations and did not rely on any misrepresentations. Id. at *27.
Insurers should be aware that, while it is somewhat unusual for an appraisal award to be overturned based on a finding that a party-appointed appraiser was required to be disinterested and was biased or interested, some courts have not allowed party-appointed appraisers to act as advocates in a manner that other jurisdictions routinely allow. It is advisable to review the policy language and applicable case law before an appraisal proceeding begins in order to ascertain the applicable requirements. If there is uncertainty, it may be advisable to seek an agreement of the parties with respect to this issue before the appraisal proceeding begins.