Arbitration and Appraisal Clauses in Auto Policies

In the world of auto insurance, disagreements between the policyholder and the insurance company are inevitable. These disputes typically fall into two categories: disagreements over the financial value of a claim and disagreements over legal liability or coverage. To prevent every minor disagreement from escalating into a costly lawsuit, the Personal Auto Policy (PAP) includes specific provisions for out-of-court settlements.

Understanding the difference between Appraisal and Arbitration is a critical component of the complete Auto exam guide. While they may sound similar, they apply to different parts of the policy and address different types of conflicts. Mastering these concepts is essential for success on the practice Auto questions.

The Appraisal clause is primarily found in Part D (Coverage for Damage to Your Auto). It is triggered when the insurer and the insured agree that a loss is covered, but they cannot agree on the amount of the loss or the actual cash value (ACV) of the vehicle.

The appraisal process follows a specific structured sequence:

• Demand: Either party can make a written demand for an appraisal.
• Selection of Appraisers: Each party selects and pays for their own independent, competent appraiser.
• The Umpire: The two appraisers then select an umpire. If they cannot agree on an umpire, a judge in a court of record may be asked to appoint one.
• The Evaluation: Each appraiser evaluates the loss separately. If they agree on the amount, the matter is settled. If they disagree, they submit their differences to the umpire.
• The Decision: An agreement in writing by any two of the three (the two appraisers and the umpire) is binding on both the insurer and the insured.

Arbitration is most commonly associated with Part C (Uninsured Motorists Coverage). Unlike appraisal, which only looks at the checkbook value of a car, arbitration handles disputes regarding whether the insured is legally entitled to recover damages or the total amount of damages the insured should receive for bodily injury.

Key characteristics of the Arbitration clause include:

• Scope: It determines if the owner or operator of the uninsured vehicle is legally liable and, if so, what the dollar amount of the damages should be.
• Binding Nature: In many jurisdictions, the decision of the arbitrator(s) is binding regarding both the right to recover and the amount. However, some states allow for appeals if the award exceeds a certain statutory limit.
• Cost Sharing: Similar to appraisal, each party typically pays for their own chosen arbitrator and shares the expense of the neutral third arbitrator or umpire.

The umpire serves as the tie-breaker in both processes. It is important to note that the umpire does not simply pick a side from the start. Instead, the umpire only reviews the specific items where the two appraisers (or arbitrators) disagree. If the umpire agrees with either the insured's appraiser or the insurer's appraiser, a "majority of two" is reached, and the decision becomes binding.

Example: If the insurer's appraiser says the car is worth $10,000 and the insured's appraiser says $15,000, and the umpire agrees with the $15,000 figure, the insurer must pay based on the $15,000 valuation.