Choosing the Panel in First-Party Property and Business Interruption Appraisals
By Imperium Consulting Group
Insurance industry professionals often tout the ability of claimants and insurers to resolve first-party property claims without litigation. And for the vast majority of claims, this is accurate. When insurance professionals and policyholders work collaboratively to follow the mandates of the policy, namely, to identify scopes of loss and damage, and investigate business income losses candidly, claims can be adjusted and settled. If a dispute arises concerning the value of the damage or the extent of income loss, the property policy requires, upon the demand of one party, the carrier and policyholder to resolve that valuation dispute in appraisal. Given that an appraisal process is binding, the single most important decision a party can make in appraisal is selecting the panel that will value the loss and damage related to the event. Most lawyers will tell you the most important part of a trial is jury selection. In appraisal, with no right of appeal, appraiser and umpire choices matter as much as the underlying facts.
Choosing the Appraiser
Appraisal provisions normally permit each party to appoint an appraiser of their choosing, an industry expert who generally needs only to be “competent” and “disinterested.” Policyholders are generally somewhat at a disadvantage in finding a good appraiser; insurance companies have much more experience at handling claims and have a wider selection of industry professionals. Policyholders should seek input from those within the insurance community they trust, perhaps their insurance broker or agent, attorney or property management team, and meet with potential appraisers to gauge their ability. To identify an effective appraiser, consider their:
- Demonstrated ability to analyze data facts, and the various components of the claim.
- Resources within their firm to provide technical assistance, technology platforms and administrative support.
- Experience with similar claims or issues.
- Comprehensive understanding of the appraisal process and their experience in acting as a party-appointed appraiser. If a candidate cannot tell you the likely path the appraisal will follow, that may be a sign of inexperience in this venue.
- Ability to translate complex concepts into an easily understood narrative.
Too often, appraisers rely solely upon industry experts such as building consultants, engineers, code experts, industrial hygienists and others to support the evaluation. It rarely proves effective to simply submit experts’ sophisticated reports and expect an umpire to dissect it and fully appreciate the nuances of the various positions. Imagine if a trial lawyer presented engineering concepts to a jury without explanation. The most effective appraisers can break down concepts into fundamentals that an ordinary person can understand and apply to the given circumstances. In choosing an appraiser, parties should evaluate their written and oratory skills to ensure they can explain their findings in the context of the loss, and persuade a neutral umpire to follow the findings.
An effective appraiser must always remain unbiased, disinterested and open-minded, and provide an independent assessment of the value of loss and damage. That independence is threatened by an appraiser who feels s/he has a client to serve and the interest of the client to advance. Each party pays its own appraiser and certainly has the right to expect its appointed appraiser to fully support and defend their findings to the panel. But if each appraiser simply advocates for a previous position asserted by an insurer or policyholder, the appraisal process becomes a continuation of the failed adjustment process, often accomplishing nothing. In some states such as Colorado, if the property policy requires the appraiser to be impartial, advocacy for one side or another is specifically forbidden. The Colorado Supreme Court stated, “[w]e conclude that the plain language of the policy requires appraisers to be unbiased, disinterested, and unswayed by personal interest. They must not favor one side more than another, so they may not advocate for either party.” (Owner Insurance Company vs. Dakota Station II Condominium Association, 2019 CO 65, 2019).
Selecting the Umpire
Once the appraisers are appointed, together they must select a neutral umpire to complete the panel, determining the expertise and experience of the umpire. Does a subject matter expert make sense? For example, selecting an engineer if the focus of the appraisal is structural in nature; or an accountant if business income loss is the main issue. Or would a retired judge experienced at hearing and evaluating conflicting positions and rendering unbiased and detached decisions be better suited for the appraisal? Either option can work, depending on the needs of the parties and the complexity of the issues. It’s important to note that the appraisers select the umpire, however the policy does not prevent the appraisers from seeking input from the party that appointed them on an umpire candidate.
The umpire selection process works best when appraisers can narrow their choices and interview candidates, often done by phone for time and cost efficiency. An effective appraiser will begin to establish a relationship with the umpire during the interview process, much like a good trial lawyer connects with juror candidates during voir dire. Above all else, the umpire ultimately should be able to rely upon and trust the appraisers to work in the best interests of the parties, despite honest disagreements on the subjects at hand. Trust begins to develop when the appraisers first speak with the umpire candidate. Setting expectations with the umpire, then not meeting those expectations during appraisal will resonate with the umpire.
To avoid an unending selection process, the policy dictates that if the appraisers are unable to agree upon an acceptable umpire, either party can make an application to a court of competent jurisdiction (generally where the loss occurred) to have the court appoint an umpire. This is the least desirable way to complete the panel. Having someone forced upon the parties with little or no say in their selection should only be the last resort. Again, an appraisal is binding, so the parties would be best served by agreeing to a neutral umpire they find mutually acceptable. Fees for the umpire are shared equally between the parties, and once officially selected, the umpire becomes the chair of the appraisal panel. Property and business interruption claims should be adjusted and resolved in good faith between the insured and the carrier. They are in the best position to evaluate, investigate and adjust losses. When a consensus cannot be reached, appraisal is the mechanism by which loss valuation is finalized. The appraisers and umpire are essential cogs in that mechanism and knowing how to choose them can be the difference between an effective outcome and an unsatisfying result.
To learn more, contact Imperium to speak with one of our experts.
