According to the American Arbitration Association’s website, “arbitration—the out-of-court resolution of a dispute between parties to a contract, decided by an impartial third party (the arbitrator)—is faster and more cost effective than litigation.”

Yeah…don’t be too sure about that.  Insurance companies are slipping arbitration clauses into more and more policies, and many of these clauses can make life very difficult for policyholders. Often, the arbitration clauses require disputed claims to be arbitrated before a three-arbitrator panel (which can be extremely expensive), and sometimes the clauses provide that the arbitrators must be current or former insurance company executives. Any good trial lawyer will tell you that most cases are decided once the jury has been selected, so you can guess how that works out. Risk managers and brokers reviewing insurance policies often fail to notice these kinds of onerous arbitration provisions, I guess on the theory that “we’ll cross that bridge if we ever get to it.” Pro tip: don’t be that guy or gal.

But there’s one type of arbitration clause that’s been included in property insurance policies for many years, that insurance companies sometimes seem to hate. Specifically, standard property insurance policies include an “appraisal” clause, which typically reads as follows:

“If we and you disagree on the value of the property or the amount of the ‘loss,’ either may make written demand for an appraisal of the ‘loss.’ In this event, each party will select a competent and impartial appraiser. You and we must notify the other of the appraiser selected within twenty days of the written demand for appraisal. The two appraisers will select an umpire. If the appraisers do not agree on the selection of an umpire within 15 days, they must request selection of an umpire by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and the amount of the ‘loss.’ If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be the appraised value of the property or amount of ‘loss.’ If you make a written demand for an appraisal of the ‘loss,’ each party will: a. Pay its chosen appraiser; and b. Bear the other expenses of the appraisal and umpire equally.”

The purpose of this provision, of course, is to cut through the argle-bargle and the legal maneuvering and get the claim resolved quickly and efficiently. Cynical me says that’s why many insurance claims people hate it. Insurance companies, after all, operate on float. The great Oracle of Omaha, Warren Buffett, has repeatedly admitted this in the media. So, in the event of a contested claim, insurance companies may try to derail the appraisal process.

One way they do this is by arguing that, if there are coverage questions (as opposed to questions about the amount of loss), the appraisal process cannot be used. There’s not a lot of New Jersey law on that subject, but what law there is favors the policyholder. In Ward v. Merrimack Mut. Ins. Co., 332 N.J. Super. 515, 528 (App. Div. 2000), for example, the Court held: “The fact that Merrimack had disputed coverage did not necessarily preclude either party from invoking the appraisal process.”   You can read the Ward case here.

But whether a court will allow the appraisal when coverage is disputed is by no means clear, even in New Jersey. We’ve had requests for appraisal denied several times by New Jersey courts, irrespective of the ruling in Ward. And, in a recent federal Connecticut case, Ice Cube Bldg v. Scottsdale Ins. Co., which you can read here, the Court denied appraisal in a case involving building damage from a snowstorm, writing: “Where, such as here, coverage is in dispute, the [coverage] issue is ‘an antecedent question for the court,’ and not an issue for arbitration… Accordingly, [the policyholder’s] motion [to compel an appraisal] is premature and will be denied.” This ruling probably means that there will never be an appraisal, because the Court may later hold that by litigating the coverage issues, the policyholder waived its right to the appraisal process. The message for insurance companies is clear: If you don’t want to go to appraisal, simply dispute coverage. That’ll buy you some time, at least. From the policyholder side, though, review your appraisal clause carefully, and decide whether it makes sense to try to enforce it. It may get you to a claim resolution sooner rather than later.

Another battle can revolve around appointment of the appraisers.  In Allstate Indemnity Co. v. Gaworski, which you can read here,  the insurance company was unhappy that the policyholder appointed an appraiser who had engaged in “unprofessional conduct, aggressive rhetoric, and ominous emails.” (Isn’t that the way the insurance claim process generally works?  Kidding…) The carrier contended that the appraiser wasn’t “disinterested” as required by the law and the insurance policy. Specifically, the appraiser had sent “emails challenging the qualifications and potential bias of Allstate’s original appraiser, as well as the same for the second appraiser Allstate appointed.”

The Court disagreed with the carrier and permitted the policyholder to use the selected appraiser, noting: “An appraiser is not required to be entirely impartial. Instead, they may act as advocates for their respective parties without violating their commitments. Here, while [the appraiser’s] communications are certainly ‘aggressive,’ as noted by the trial court, they do not evidence a disqualifying bias against Allstate. Instead, [the appraiser’s] emails evidence his advocacy on behalf of the [policyholder] and his strong desire to be presented with an impartial, unbiased appraiser appointed by Allstate.”

The bottom line is that the appraisal process can an effective weapon in the policyholder’s arsenal. The insurance company, however, may not be thrilled about getting the claim resolved promptly and efficiently, so there may be a fight. Some courts, however, view any form of arbitration favorably, because it helps to get cases off their docket. So, this may be a fight worth fighting if you’re a policyholder.