The Indiana Appraisal Process
Christopher A. Pearcy
Hume Smith Geddes Greed & Simmons
Appraisal is an arbitration process for setting the value of a loss under most insurance policies. It can be a valuable tool with an insurance company and its insured disagree over the value of the loss. Indiana law strongly favors enforcing appraisal awards. The seminal Indiana appraisal case is Atlas Const. Co., Inc. v. Indiana Ins. Co., Inc., 309 N.E.2d 810 (1974). In Atlas, the Court of Appeals stated:
“Generally, a court will not interfere with an appraisal award but, to the contrary, will indulge in every reasonable presumption to sustain it in the absence of fraud, mistake, or misfeasance. A court will not substitute its judgment for that of the appraisers or set aside an award for inadequacy or excessiveness unless it is so palpably wrong as to indicate corruption or bias on the part of the appraisers.”
Atlas, 309 N.E.2d 813-14 (quoting Lakewood Manufacturing Co. v. Home Ins. Co. of NY., 422 F.2d 796, 798 (6th Cir. 1970), cert. denied, 400 U.S. 827)). As a result, "one who voluntarily submits to 'arbitration' of the amount due upon a fire insurance policy, except in exceptional circumstances, is bound by the award which results from such 'arbitration' or appraisal." Id. at 814.
Nonetheless, Indiana courts "will not hesitate to set aside an appraisal award if it is tainted with fraud, collusion or partiality for appraisers...." Id.at 813. That's a fairly difficult standard to meet, and, indeed, it is rare to find cases where the appraisal award was overturned.
II. THE POLICIES
In any insurance case, the policy is always the first place to look. Appraisal provisions can vary, but are generally the same or similar to the following provision:
"Appraisal. If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent and disinterested appraiser within 20 days after receiving a written request from the other. The two appraisers will choose a competent and disinterested umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a court of record in the state where the Insured premises is located. The appraisers will separately set the amount of loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of loss. If they fail to agree within a reasonable time, they will submit their differences to the umpire. Written agreement signed by any two of these three will set the amount of the loss. Each appraiser will be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire will be paid equally by you and us."
This language sets out a fairly straight forward process with certain requirements/steps:
1. Disagreement between the insurer and insured;
2. Written demand for appraisal;
3. Selection of competent and disinterested appraiser within 20 days;
4. Selection of umpire; and
5. Statement by appraisers/umpires of values.
As with all insurance cases, the words used matter. Indiana courts generally apply policy language as it is written. Tate v. Secura Ins., 587 N.E.2d 665, 668 (Ind. 1992) (stating that where "policy language is clear and unambiguous, it should be given its plain and ordinary meaning"). So, knowing what the policy requires in an appraisal should be the first order of business.
III. PITFALLS: MOST LITIGATED APPRAISAL ISSUES
1. Timeliness of Appraisal Demand
The requirement that there be a dispute between the insurer and the insured is rarely in dispute. However, the timeliness of the appraisal demand has been litigated. Most policies generally don’t state a specific time for when the appraisal demand must be made.
Generally, any demand for appraisal before the insurance company has accepted coverage is likely premature. Further, demands for appraisal occurring after the policy’s one (1) or two (2) year contractual limitations period for bring suit are generally considered too late.
Otherwise, Indiana law holds that when the policy does not "state a specified time within which demand for appraisal must be invoked, demand for appraisal must be made within a reasonable time under the circumstances of the case or the right to demand appraisal is waived." Monroe Guaranty Ins. Co. v. Backstage, Inc., 537 N.E.2d 528, 529 (Ind. Ct. App. 1989).
Waiver can be found where "(I) good-faith negotiations concerning the amount of loss ceased and (2) prejudice resulted from the delay in demanding appraisal." Id. The party challenging the timeliness of the appraisal demand bears the burden to show that prejudice resulted from the delay. Id. So, demands for appraisals should be made promptly and before circumstances can arise that may cause prejudice.
2. Both Appraisers and The Umpire Must be “Competent” and “Disinterested”
Following the policy language above, each side is to select a "competent" and "disinterested" appraiser. Those words are loaded with meaning, and that makes selecting the right appraiser perhaps the most important part of the process.
a. Appraiser Competency
First, the competency requirement. Indiana has little case law on what constitutes
a "competent" appraiser in any context, much less insurance. The closest analogous case is Salin Bank & Trust Co. v. Violet U. Peden Trust, 715 N.E.2d 1003 (Ind. Ct. App. 1999). In Salin Bank, the lessor to a commercial lease had an option to purchase the property at the average price set by three appraisers, two appointed by each of the parties, and the third appointed by the parties' appointed appraisers. Id. at 1004. The Bank's appraiser, however, failed to disclose his marriage to the daughter of the Bank's chairman. Id. at 1005. That failure led the Court of Appeals to find the appraiser incompetent: "By virtue of his undisclosed personal connection with Salin, he rendered an appraisal that was not impartial, objective, or independent, and which accommodated his personal interests." Id. at 1008. As such, he could not be considered "competent," under the Uniform Standards of Professional Appraisal Practice ("USPAP"). Id. Since the Bank's appraiser was not competent, that relieved the other party from its obligation to appoint a competent appraiser. Id. Disclosure of any relationship with the parties is therefore necessary in order to avoid questions regarding competency.
To be “competent,” the appraiser must be licensed by the State of Indiana. By statute, all appraisals of real estate in Indiana are to be done by licensed appraisers. IND. CODE§ 25-34.l-3-2(a) (stating that "no person shall, for consideration, ... appraise real estate ... in Indiana or with respect to real estate situated in Indiana, without a license"). Moreover, a licensed appraiser is required, among other things, to pass an examination after sitting for a prescribed number of classroom hours, and to satisfactorily complete continuing education courses on various topics, including the USPAP. 876 IND. ADMIN. CODE 3-3-2; 3-3-3.1-3-3-5.1; 3-3-14 (2011); 3-5-1 (2011). The USPAP has been adopted as law in Indiana, and licensed appraisers, as well as any broker who appraises real estate in Indiana, must comply with USPAP. Id. at 3-6-2; 1-1-43. Thus, if the case involves appraising the value of real estate, ensuring both side's appraisers are licensed to perform such appraisals should be added to the practitioner's checklist.
b. Appraiser must be “Disinterested”
Questions of competence naturally spill over into impartiality, which requires that the appraisers "act free from bias, partiality, or prejudice in favor of either of the parties." Atlas Const. Co., Inc. v. Indiana Ins. Co., Inc., 309 N.E.2d 810, 813 (Ind. 1974).
“Disinterested” is further defined as “free from bias, prejudice, or partiality; not having a pecuniary interest.” Black’s Law Dictionary (7th ed.). “Disinterested” is synonymous with “impartial,” which is also a commonly used term in appraisal provisions. Both terms represent a higher standard than “independent,” which is merely requires the appraiser to be "not dependent; not subject to control, restriction, modification, or limitation from a given outside source." Id.
To avoid the appearance of partiality, insurance companies should avoid excessive use of the same appraisers, and it should never use any employee as it's appraiser. Insurers sometimes tend to utilize the same appraisers frequently, and that can lead to the appearance of partiality. See Farmers' Conservative Mut. Ins. Co. v. Neddo, 40 N.E.2d 401,408 (1942) (noting that "[w]hile prior service of an appraiser does not disqualify him as a matter of law, the fact that such appraiser had previously been employed by either the insurer or the insured is a circumstance that may properly be considered in determining whether he is disinterested. Previous service, together with other circumstances, may disqualify"). Appointing interested or partial appraisers can also lead to additional claims for breach of contract or fraud. See, e.g.,Huber v. United Farm Family Mut. Ins. Co., 856 N.E.2d 713 (Ind. Ct. App. 2006). Put simply, it's a good idea to spread the appraisal work around.
Insurance companies should take steps to ensure that the insured’s appraiser is also disinterested. I recently worked on a case where it was discovered that the insured’s appraiser had a majority ownership interest in the public adjusting company that was working for the insured on that same claim. The public adjusting company had a contingency agreement with the insured, and would be paid a percentage of what the insured recovered on the claim. Thus, the insured’s appraiser had a contingent interest in the outcome of his own appraisal. The more he could drive up the value of the appraisal, the more revenue his public adjusting company would receive. You can see how this would disqualify him from serving as a disinterested appraiser.
In order to ensure that the insured’s appraiser is disinterested, the insurance company can take the following steps:
· Request any fee agreements that the insured has with its appraiser and public adjuster. Contingency fee agreements are strictly prohibited, and reasonable hourly or flat fee agreements should be used;
· Obtain the online corporate records from the Secretary of State for both the appraiser and public adjuster to see if there is any overlap in officers/owners; and
· USPAP is adopted in Indiana and requires all appraisal to contain a sworn statement of impartiality. Always double-check to ensure this is part of each written appraisal.
The requirements to be competent and disinterested also apply to umpires. However, these umpire qualifications are rarely challenged in court because the appraisers (and indirectly, the attorneys) are the ones selecting the umpire. If the issues surrounding the umpire are known by both sides at the time of selection, any later challenge based on known issues are likely waived. However, umpires are subject to the same challenge if undisclosed conflicts, interests, of lack of competency were unknown at the time of selections and were only later discovered.
3. Methods used by the Appraisers and Umpire
The appraisal process typically involves some exchange of information and documents and then one or more inspections of the damaged property. The appraisers and the umpire, if necessary, will then prepare and submit their appraisal awards. Since this is the point at which a loss is converted into a dollar figure, it's not surprising that a good bit of the case law concerns the process used to reach that figure. In general, appraisers and the umpire are granted a large degree of deference in the appraisal methods they use.
Atlas Construction Co. v. Indiana Ins Co. is the seminal Indiana appraisal case because it deals with three important concepts in appraisal challenges. In Atlas, the insured lost a building due to fire. 309 N.E.2d at 813. The policy limited the amount payable to the "actual cash value" of the building, but did not define the term. Id. at 812. Once the appraisal was done, the insured challenged the method used, asserting that since "actual cash value" was not defined by the policy, and the insured was entitled to submit evidence of replacement value. Id. The insured conceded that evidence of replacement value is a possible alternative factor a jury might properly consider in determining the "actual cash value" of the destroyed property- a concession that proved fatal to its argument: "Quite clearly, the mere fact that the umpire and one appraiser utilized a market value approach, rather than a replacement cost method, does not provide a basis for setting aside an appraisal award." ld. at 814.
The Court of Appeals held that it was not permitted to set aside an award merely because an arguably permissible method was not used. Id. Permitting re-litigation of the matter of actual cash value would subvert the purpose of appraisals in such cases. Id.
The insured's second complaint was that the appraiser it selected was not present at the meeting between the other two when the award was signed and that the "Umpire" did not merely resolve differences between the parties but rather made an independent appraisal which formed the basis of the award. Id. at 815. The court was not persuaded and held that neither failure of notice, nor absence of one appraiser from a meeting at which the other appraiser and "umpire" sign the award, are cause for setting the award aside. Id. The three had met previously, and their evaluations had been completed prior to the signing. Id. The signing of the award by the third appraiser and one of the original appraisers fully met the requirements of the law and the policy.
The insured's final issue was that the award was defective because the appraisers did not submit separate awards or list item-by-item the differences reflected in their respective appraisals. Id.at 816. The loss appraised, however, was the total destruction of a building, and the differences were as to the value of the entire building. Id. The court held there was no basis to submit differences with respect to various component parts of the structure. Id.
As shown by Atlas, Indiana courts will strongly defer to the appraisers' methodology and how they execute awards. Subsequent cases have expanded on this deference. In Ohio Casualty Ins. Co. v. Ramsey, 439 N.E.2d 1162 (Ind. Ct. App. 1982), the insurer appealed an $11,900 judgment for the insured, claiming that the trial court erred in using replacement cost as the standard of recovery under a fire insurance policy rather than actual cash value at the time of the loss. Id. at 1163. Because of "economic obsolescence" and the undesirability of the location, the insurer argued, the cost of replacement was much higher than the destroyed home's fair market value before the fire. Id. at 1164.
The insurer further argued that replacement cost, as a method of valuation, violates the principle of indemnity upon which contracts are based, and the failure to consider depreciation in assessing damages places the insured in a better financial position than he would have been had no loss occurred. Id. at 1165.
The insured claimed the appraisal should be cast aside because, among other things, the umpire allowed the insurance company's appraiser to pick the award amount, the umpire never visited the insured's aluminum mill, and made other mistakes in his calculations. Id. at 876. At the very least, the insured argued, it should be able to explore these alleged problems at trial and, "if true," the problems would make the appraisal nonbinding. Id. The Seventh Circuit held, however, that the insured did not provide sufficient evidence to substantiate its claims. Id The insured’s best argument was that the umpire allowed the insurance company's appraiser to "pick" the award amount, but that allegation, standing alone, did not establish a material fact regarding the proprietary of the appraisal. Id. The fact that each of the umpire's three independent calculations were lower than those submitted by the parties' appraisers didn't help, either.
Indiana strongly favors the appraisal process, and will generally only set aside appraisal awards when there are gross violations in appraiser qualifications or the process. Insurers and insureds must take care to carefully select competent and impartial appraisers and ensure that the appraisers do the job they are hired to do-all according to what the policy requires. When that happens, Indiana courts will honor the result of the appraisal process.