The North Carolina Court System employs alternative dispute resolution methods on a routine basis in an effort to handle a continuing overcrowded court docket. As such, avenues such as arbitrations and mediated settlement conferences are utilized in virtually every case now filed in our District and Superior Civil Courts. However, these mechanisms are employed only after litigation is instituted by one party or the other.
Many insurance contracts provide for similar “alternative dispute resolutions.” Automobile policies often provide a procedure for settling disputes through arbitration. For first-party issues as to the amount of loss, appraisal is the mechanism by which to resolve disagreements between the insured and the insurance company. However, appraisal is only to be used to determine the amount of loss and not issues or determinations of coverage. Appraisal is an appropriate remedy that can be very effective. In many cases there is a legitimate disagreement regarding the amount of loss whether covered or not by the terms and provisions of the insurance contract. In the event that the issue is the amount of loss, appraisal can be a cost effective approach to reach an equitable result for both the insured and the insurer.
Recently, our North Carolina appellate courts have examined the appraisal provisions of both the insurance contract and that of the “Standard Fire Policy” as provided by N.C.G.S. § 58-44-16. In light of these recent case decisions, our office has prepared a brief primer of the basics involved when dealing with appraisal proceedings.
A. Appraisal vs. Arbitration
1. Courts often call the two (2) proceedings the same and use the terms Appraisal and Arbitration interchangeably. However, the two proceedings are vastly different.
2. Arbitration is a dispute resolution often used to settle/determine issues regarding the amount of damages AND liability.
3. Appraisal is used only to determine the amount of damages. Appraisal is NOT used to settle issues of liability.
B. Appraisal as a Condition Precedent to Initiation of Civil Litigation:
1. Our Court of Appeals recently ruled in Champak Patel d/b/a Liberty Inn v. Scottsdale Insurance Company, 728 S.E.2d 394, 2012 N.C. App. LEXIS 813 (2012) that participation in the appraisal process is a condition precedent to filing suit when the disagreement concerns the amount of loss.
2. The Court found that an insurer defined “actual cash value” to allow an insurer to pay “either the cost of repairing or replacing the [structure] or the amount that a reasonable purchaser would have paid for the [structure] at the time of the loss.”
3. The insured and the insurer disagreed as to the proper calculation as to the amount of loss. The Court found that, in that situation, the terms of the policy of insurance controlled and concluded that the appraisal proceeding was appropriate.
4. The Court reviewed the insurance contract and noted that the insurer had “no obligation to make a loss payment until the parties have either agreed on the amount of loss or the appraisal process has been completed.”
5. The Court concluded that the insured, after disagreeing with the amount of loss and instituted litigation, should have participated and completed the appraisal process first. The Court found that the appropriate remedy was to stay the pending litigation and require the parties to participate in the appraisal process.
6. This is the first case in North Carolina to hold that completion of the appraisal process constitutes a condition precedent to filing suit. There has been a split in other jurisdictions as to whether this was necessary. This case further exemplifies the fact that our courts are looking to other avenues for the resolution of disputes. Accordingly, it is necessary to fully understand the terms and procedures as contemplated by the appraisal provision.
C. The policy of insurance provides the procedure for the appraisal process:
Appraisal – If “you” and “we” do not agree as to the value or amount of any item or loss, either may demand an appraisal of such item or loss. In this event, “you” and “we” will each select a competent and disinterested appraiser within 20 days after receiving a written request from the other. The two appraisers will select a competent and impartial umpire. If they do not agree on an umpire within 15 days, “you” or “we” may ask a judge of a court of record of the state where the “described location” is located to make the selection.
A written agreement of the two appraisers will set the amount of loss. If the appraisers fail to agree, they will submit their differences to the umpire. The written agreement of any two of these three will set the amount of loss.
“You” will pay the expense of “your” appraiser and “we” will pay the expense of “our” appraiser. “You” and “we” will share equally the expense of the umpire and the other expenses of the appraisal. Under no circumstance will an appraisal be used to interpret policy “terms,” determine causation, or determine whether or not any item or loss is covered under this policy. “We” retain the right to deny a claim even if there has been an appraisal.
D. Under North Carolina law, parties to a fire insurance policy with provision establishing appraisal procedure for determining amount of loss when in dispute are contractually bound by results of appraisals, in absence of evidence of fraud, mistake, duress or other impeaching circumstance. High Country Arts and Craft Guild v. Hartford Fire Insurance Company, 126 F.3d 629 (4th Cir. 1997).
E. Requirements for Appraisal
1. There must be a disagreement.
2. The North Carolina Court of Appeals has ruled that “the unsupported opinion of the insured that the insurer’s payment was insufficient does not rise to the level of a disagreement necessary to invoke appraisal. Hailey vs. Auto-Owners Insurance Company, 181 NC App 677, 640 SE2d 849 (2007).
3. The appraisers named by the insured and the insurance company are to be disinterested. Oftentimes an insured will name a shareholder, director, or owner of the public adjusting firm that may be representing them. As the public adjusting firm has a financial interest in the outcome of the appraisal proceeding, the insurer should object to the named appraiser and demand that another appraiser be named.
F. The appraisers are to meet and conference regarding the selection of an independent umpire. If they fail to agree on an umpire within 15 days, the parties may petition a resident Superior Court Judge in the county for the appointment of an umpire pursuant to N.C.G.S. § 58-44-35.
G. The appraisers are to state separately the value of the property and the amount of loss. If they fail to agree, they will submit their differences to the selected umpire. The appraisers only submit their determinations of the amount of loss to the umpire in the event of a disagreement. Should the two (2) appraisers agree as to the amount of loss, the umpire need not be involved. See Glendale LLC v. Amco Insurance Company, 2012 LEXIS 56335 (W.D.N.C. 2012) (holding that the appraisers’ agreed amount of loss regarding a claim for perishable food “was binding before [the umpire] even became involved).
H. The appraisal process is NOT an appropriate forum to determine issues regarding coverage provided by the policy of insurance. Appraisal cannot be used to circumvent the express policy exclusions and broaden coverage not otherwise provided by the insurance contract.
I. The North Carolina Supreme Court expressly held that the appraisal provision was limited to determination of the amount of loss and was not intended to interpret the amount of coverage or resolve a coverage dispute. The Court found that the policy “both provides for and constrains the appraisal process, and that process cannot exceed the scope of the contractual provisions authorizing it.” The Court recognized that the insurance company is not obligated to pay any amount of a purported appraisal award which may be denied by policy exclusions. North Carolina Farm Bureau Mutual Insurance Company v. Sadler, 365 N.C. 178, 711 S.E.2d 114 (2011).
J. It is important to submit issues to the appraisers for their consideration and to “direct” them to determine the amount of loss. Do not allow the appraisers to set the issues because in doing so they are making coverage decisions which may become binding. These issues are often as simple as the following:
1. What is the Replacement Cost Value for the property directly damaged by a peril (water, fire, etc)?
2. What is the Actual Cash Value for the property directly damaged by a peril (water, fire, etc.)?
Naming a peril allows the loss to be separated wherein the coverage issues, limitations and exclusions can be applied.
K. Oftentimes there may be issues of coverage “intermingled” with determinations regarding the amount of loss. In that event, it may become necessary to itemize portions of the claimed loss and damage for determinations as to the amount of loss. Pursuant to North Carolina Farm Bureau v. Sadler, the insurer is not obligated to pay that portion of an appraisal award that may be denied by policy exclusions.
1. Example: An insured structure is partially destroyed by reported fire loss and damage. There is reported loss to a portion of the roof not damaged by fire and there are questions as to whether this reported damage would be covered by the terms of the insurance contract. The issues submitted to the appraisers should be “split up” separating the roof repairs from the rest of the fire damaged structure.
2. The itemization of issues allows the appraisers to simply determine the amount of loss for the specific issues. If an insurer then asserts a coverage defense for one or more of the issues, the insurer may, pursuant to Sadler, pay only that portion of the appraisal award for which coverage is provided by the insurance contract.
3. “This circuit employs a blue pencil approach to overreaching appraisal awards…any valid loss valuation within [an] award is binding.” Glendale LLC v. Amco Insurance Company, 2012 U.S. Dist. LEXIS 56335 (W.D.N.C. 2012). Our courts will “save” portions of an appraisal award if those provisions were calculated pursuant to the appraisal provision. “Any valid portion of an appraisal binds the parties, even if some other part of the award is missing or improper.” See Glendale LLC, 2012 U.S. LEXIS 56335, citing High Country Arts and Craft Guild v. Hartford Fire Insurance Company, 126 F.3d 629 (4th Cir. 1997).
4. The appraisers do not have to “separately set out each fork, knife, table, or cooking appliance damaged.” However, it is recommended that some itemization be considered so as to avoid a reviewing court during any subsequent litigation that may arise from declaring the entire award void due to inappropriate determinations of coverage.
L. When facing contentious appraisal proceedings, it is important to timely respond to all correspondence received from the insured, legal counsel, public adjuster, appraiser, or all the above. These responses help to establish, or “create a record” of the objections of the insurance company may have regarding any alleged improper use of the appraisal process in the event of future litigation.