What Comes First—The Appraisal or The Coverage Determination?

Does an appraisal panel determine the amount of the loss before the coverage issues are litigated? This question is a common issue. The answer results in imperfect and prolonged proceedings, which result in delayed payment to the policyholder. Every state seems to have its own answer to the question. Courts struggle with how to handle these issues.

A Tennessee federal court wrestled with this very issue last month.1 The court noted the facts leading to a dispute of what was owed:

On October 23, 2020, a storm caused severe hail and wind damage to the exterior and interior finishes of the Premises. The plaintiff filed a claim with BHHIC… in connection with the damages caused by the storm. Khushi employed a public adjuster to assess the damages and submitted written ‘Proof of Loss’ to BHHIC. According to the plaintiff, damages from wind and hail are covered by the Policy, and the defendant admitted that there was covered damage caused by wind, but the defendant ‘significantly undervalued the claim.’ In its Amended Answer, BHHIC admits that damages from wind and hail are covered by the Policy, ‘subject to all terms, conditions, limitations, and exclusions’ set forth in the Policy…Khushi has demanded payment under the Policy from BHHIC, but BHHIC has refused to pay.

The policyholder demanded appraisal, and the insurance company refused to participate in an appraisal claiming various coverage issues, including whether the hailstorm caused the damage. The insurance company contended that the coverage issues had to be decided first through litigation. The policyholder requested that the court order the parties to appraisal first and litigate whatever coverage issues exist later.

The court specifically noted:

The real issue is not whether to permit an appraisal, but whether the court, in the exercise of its discretion, should compel the appraisal now or wait until some later date, when the alleged coverage issues have been resolved.

The court then noted that this controversy is routinely presented to judges throughout the country:

Courts around the country have regularly granted motions to compel appraisals, with the caveat that, absent an express clause to the contrary in the insurance contract, ‘appraisers have no power to decide coverage or liability issues.’ Merrimack Mut. Ins. Co. v. Batts, 59 S.W.3d 142, 152-53 (Tenn. Ct. App. 2001) …. If the parties have already decided liability, then the appraisal process effectively resolves the dispute as to the amount of the loss. However, if liability is disputed, an appraisal on the ‘amount of loss’ would not ‘vest the appraisers with the authority to decide questions of coverage and liability.’ In other words, questions of coverage and liability are always questions that must be resolved by the courts, even when the amount of the loss is decided through the appraisal process. See, e.g., Kush Enters., LLC v. Mass. Bay Ins. Co., 2019 WL 13117568 (E.D. Tenn. Nov. 7, 2019) (noting that its decision granting a motion to compel an appraisal over the defendant’s objection ‘does not expand the scope of the appraisal process’ and confirming that appraisers cannot ‘make final determinations on the causation, scope, or liability under the policy, just the amount of the loss,’ and that the defendant retained the right to ‘dispute those issues after the appraisal is complete,’ in which event the court would decide them…

Of course, questions of coverage, causation, and liability are often intertwined with the question of the amount of loss involved. Accord, e.g., Hill v. Auto-Owners (Mut.) Ins. Co., No. 4:19-cv-78, 2020 U.S. Dist. LEXIS 223142, 2020 WL 7034321, (E.D. Tenn. Nov. 30, 2020) (‘[P]ractically speaking, it would be difficult to completely divorce causation and coverage findings from an appraised loss.’); State Farm Lloyds v. Johnson, 290 S.W.3d 886, 890 (Tex. 2009) (recognizing that ‘[t]he line between liability and damage questions may not always be clear.’). And courts in different jurisdictions have evolved different means of handling these situations. In some states, the courts have concluded that, while ‘[t]here may be a few times when appraisal is so expensive and coverage is so unlikely that it is worth considering beforehand whether an appraisal is truly necessary,’ ‘unless the ‘amount of loss’ will never be needed (a difficult prediction when litigation has yet to begin), appraisals should generally go forward without preemptive intervention by the courts.’

Other courts have held that, where coverage issues predominate over the question of the amount of loss, the coverage issues should be resolved first, before an appraisal is required. See, e.g., SSDD, LLC v. Underwriters at Lloyd’s, London, No. 4:13-cv-258 CAS, 2013 U.S. Dist. LEXIS 77467, 2013 WL 2420676, at (E.D. Mo. June 3, 2013) (applying Missouri law, finding that the dispute before it was ‘primarily one concerning coverage, as opposed to the amount of loss, and therefore enforcement of the appraisal provision is not appropriate’); Hawkinson Tread Tire Serv. Co. v. Ind. Lumbermens Mut. Ins. Co., 362 Mo. 823, 245 S.W.2d 24, 28, (Mo. 1951) (holding that, where ‘the amount of the loss was incidental to the actual underlying (legal) controversy between the parties as to the meaning of the insurance contract and its application to the facts,’ the legal issues should be resolved before an appraisal was required).

And still other courts appear to have held that it is appropriate to order an appraisal before resolving coverage disputes only if the insurer has admitted that there is a covered loss and the only issue to be resolved is the amount of loss. See, e.g., Williamson v. Chubb Indem. Ins. Co., No. 11-CV-6476, 2012 U.S. Dist. LEXIS 31648, 2012 WL 760838, at (E.D. Pa. Mar. 8, 2012) (‘A condition precedent to appraisal is that there be an admission of liability and a dispute only as to the dollar value of the loss.’ (citing Ice City, Inc. v. Ins. Co. of N. Am., 456 Pa. 210, 314 A.2d 236, 240 (Pa. 1974)).

Courts around the country seem to come to different conclusions about how to treat the situation. This may be great for insurance defense lawyers as they bill away on briefs and legal arguments. The insurers get to hold onto the float of potential monies owed. But the policyholder is having the claim payment delayed and effectively denied, waiting for the legal issue to be determined. One purpose of appraisal as a quick resolution process is lost when a case gets to this stage of legal entanglement without a clear path.

The federal court judge had to determine how Tennessee law would resolve the issue. That answer is anything but certain:

The Tennessee courts have not actually been confronted with the question, though the Tennessee Court of Appeals has noted, with apparent approval, a decision by a Michigan court ‘suggest[ing] that disputed coverage and liability issues are best submitted to the courts before any dispute regarding the amount of the loss is submitted to the appraisers.’ Merrimack Mut. Fire Ins. Co. v. Batts, 59 S.W.3d at 153 (citing Auto-Owners Ins. Co. v. Kwaiser, 190 Mich. App. 482, 476 N.W.2d 467, 469 (Mich. Ct. App. 1991)). The Tennessee federal district courts considering motions to compel appraisals have generally approached the issue with an eye toward whether the disputed amount of loss predominates over coverage and liability issues, or vice versa, and thus whether ordering an appraisal early in the litigation process or resolving disputed legal issues first would be more likely to further interests of judicial economy and party resources. See, e.g., Glob. Aerospace, Inc. v. Phillips & Jordan, Inc., 2015 WL 5514627, (E.D. Tenn. Sept. 17, 2015) (granting motion to compel appraisal, finding the appraisal provision in the policy valid and that compelling appraisal, besides being consistent with the policy, would ‘potentially save both party resources and judicial resources,” increase “the likelihood of the parties reaching a settlement will increase, because each party will know where it stands upon a return to litigation,’ ‘give both of the parties a target at which to direct their arguments either in support [of]or opposition’ to the umpire’s decision, ‘potentially eliminate the need for future litigation in this Court, and at a minimum, . . . streamline any future litigation’).