Introduction to Dispute Resolution
In the world of property insurance, the claims process does not always result in an immediate agreement between the insurer and the insured. Disagreements often arise regarding the financial value of a loss or the extent of coverage provided by the policy. To prevent these disputes from clogging the court system, insurance contracts include specific provisions for alternative dispute resolution.
Understanding the distinction between Appraisal and Arbitration is critical for the complete Property exam guide. While both aim to settle conflicts without litigation, they apply to different types of disagreements and follow distinct procedural paths.
The Appraisal Provision: Valuation Disputes
The Appraisal provision is specifically designed to handle disagreements regarding the amount of loss. It is important to note that appraisal does not determine if a loss is covered; it only determines how much the insurer should pay for a loss that is already admitted to be covered.
The process typically follows these steps:
- Demand: Either the insurer or the insured makes a written demand for an appraisal.
- Selection: Each party selects a competent and impartial appraiser within a specified timeframe (usually 20 days).
- The Umpire: The two appraisers select an "umpire." If they cannot agree on an umpire, a judge in a court of record may be asked to appoint one.
- Evaluation: The appraisers separately evaluate the loss. If they agree on the amount, that amount is binding.
- Resolution: If the appraisers disagree, they submit their differences to the umpire. An agreement in writing by any two of the three (Appraiser A, Appraiser B, or the Umpire) sets the amount of the loss.
Appraisal vs. Arbitration
| Feature | Appraisal | Arbitration |
|---|---|---|
| Primary Focus | Amount of Loss (Valuation) | Coverage and Liability |
| When Triggered | Dispute over repair costs/ACV | Dispute over policy interpretation |
| Decision Makers | Two Appraisers and an Umpire | One or more Arbitrators |
| Cost Responsibility | Each pays their own; split Umpire | Varies (often split equally) |
Exam Trap: Coverage vs. Value
A common question on the practice Property questions involves whether an appraiser can decide if a specific peril (like flood) is covered under a policy. The answer is NO. Appraisers only determine the dollar value of the damage. Legal questions regarding policy exclusions or coverage must be handled through arbitration or the court system.
The Arbitration Provision
Arbitration is a broader dispute resolution process than appraisal. While appraisal is limited to the value of a loss, arbitration can be used to resolve disputes regarding coverage and liability. In property insurance, this is frequently seen in Uninsured Motorist coverage or complex commercial property disputes.
In arbitration, a neutral third party (the arbitrator) reviews the evidence and testimony from both sides and renders a decision. Depending on the policy language and local laws, arbitration may be:
- Binding: Both parties must accept the arbitrator's decision as final; they waive their right to sue in court.
- Non-Binding: Either party can reject the arbitrator's decision and proceed to a jury trial.
Appraisal Process Costs
Legal Implications and Rights
Even when appraisal or arbitration is used, the insurer retains certain rights. For example, by participating in an appraisal, the insurer does not waive its right to deny the claim later based on a policy violation (such as fraud or failure to protect property from further damage). Furthermore, the Suit Against Us provision in most property policies dictates that an insured cannot bring a legal action against the insurer unless all policy terms (including appraisal, if demanded) have been fully complied with.