Defining Occurrence – When Policy Definitions Do Not Apply To All Coverages
September 24, 2020
Most first-party property coverage policies contain an appraisal provision that allows either the insured or the insurer to make a written demand for appraisal when the parties agree that covered property was damaged by a covered cause of loss, but disagree on the value of that damaged property. North Carolina, South Carolina, and Georgia lack the wealth of appraisal law that states such as Florida and New York enjoy. Accordingly, this seemingly straightforward process can be fraught with risks. This blog post addresses several, but by no means all, salient appraisal issues in North Carolina, South Carolina, and Georgia, while also addressing certain risks present in these States.
As noted above, after the parties disagree on the value of a Covered Loss and at least one of the parties has demanded appraisal, in writing, then each party selects a competent and impartial appraiser to value the property. If the two appraisers cannot agree on the property’s value, then they (or the court) select an umpire. Each appraiser determines the value of the property, before submitting any disagreement to the umpire, at which point, a decision agreed to by any two is binding. While this process should be straightforward, it often is not.
Per the policy, an appraiser should be disinterested or impartial; “each party will select a competent and impartial appraiser.” But, what does that actually mean in practice? How does an insurer or policyholder know if their chosen appraiser fits the bill or will be subject to disqualification if challenged? There is no “one size fits all” – it is a true state-by-state issue, depending on whose law applies.
For example, in Georgia, its Appellate Court ruled that the insurer’s appraiser was not impartial, because he refused to consider estimates unfavorable to the insurer and previously performed certain adjustment activities in the claim. National Fire Insurance Co. of Hartford v. Bennett, 36 Ga. App. 586, 137 S.E. 570 (1927). Similarly, in L.D. Jennings Co. v. North River Insurance Co., the South Carolina Supreme Court questioned the impartiality of an appraiser, who had already expressed judgment of the amount of damage and had helped prepare the insured’s proof of loss prior to acting as an appraiser. See Id., 175 S.C. 407, 179 S.E. 621 (1935). North Carolina, though, has explicitly stated that to qualify as a disinterested appraiser, one must “not only have a lack of pecuniary interest in the outcome of the matter, but also [demonstrate] freedom from ‘bias and prejudice.’” See Hill v. Star Insurance Co. of America, 200 N.C. 502, 157 S.E. 599 (1931). Repeated and frequent use of an appraiser may compromise an appraiser’s impartiality, and accordingly the validity of any appraisal awarded by the appraiser, while disclosing prior use of an appraiser from the onset may protect against such arguments. Young v. New York Underwriters Insurance Co., 207 N.C. 188, 176 S.E. 271 (1934). Such disclosure was required by a judge in a case in Colorado, with insufficient disclosure leading to disqualification of the appraiser, vacatur of the appraisal award, and sanctions against the insured and the insured’s counsel. See Auto-Owners Insurance Co. v. Summit Park Townhome Association, 886 F.3d 852 (10th Cir. 2018); Auto-Owners Insurance Co. v. Summit Park Townhome Association, 886 F.3d 863 (10th Cir. 2018).An insurance practitioner must be wary of the governing state’s standards on the issue.
Appraisal should only resolve value, typically called “the amount of loss”. The Georgia Supreme Court has clearly held appraisal “can only resolve a disputed issue of value” and “cannot be invoked to resolve broader issues of liability.” McGowan v. Progressive Preferred Insurance Co., 281 Ga. 169, 637 S.E.2d 27 (2006). Similarly, in South Carolina and North Carolina, appraisal must have “no impact on the determination of coverage or [an insurer’s] liability for the loss.” Vagish, LLC v. Seneca Specialty Insurance Co., 2016 WL 7638134 (D.S.C. Sept. 1, 2016); see also North Carolina Farm Bureau Mutual Insurance Company v. Sadler, 365 N.C. 178, 711 S.E.2d 114 (2011).
These seemingly simple standards get dicier when “the amount of loss” is potentially driven by the cause of the damage and the applicability of policy exclusions or limitations on that damage. Is causation a “coverage” or an “amount of loss” issue? Volumes have been written in states such as Florida on this very question. Many insurance policies allow for coverage determinations to be made after the amount of loss is set, which is also a nod to the fact that appraisal panels should not make “coverage” determinations.
Courts in North Carolina, South Carolina, and Georgia have grappled with the question of whether a properly invoked appraisal must occur prior to litigation. In the North Carolina decision of Patel v. Scottsdale Insurance Co., the court ruled that the “initiation of, participation in, and completion of the appraisal process is a condition precedent to the commencement of litigation” where policy language did not obligate an insurer “to make a loss payment until the parties have either agreed on the amount of loss or the appraisal process has been completed” and the insurer had invoked appraisal prior to the insured’s suit. Id., 221 N.C. App. 476, 728 S.E.2d 394 (2012). While on its face Patel seems to require appraisal before suit, it rarely has been cited in subsequent appellate rulings, and many breach of contract suits have ensued without appraisal ever occurring. It is more likely that Patel’s legacy will be consistent with the general rule nationally – to restrict litigation from occurring prior to an invoked appraisal, rather than requiring it in every case before going into suit.
In South Carolina, an insured likewise attempted to avoid an insurer’s proper invocation of appraisal. See Harwell v. Home Mutual Fire Insurance Co., 228 S.C. 594, 91 S.E.2d 273 (1956). Similar to Patel above, the South Carolina Supreme Court ruled that “where the policy expressly . . . forbids the insured from bringing suit until after the amount of the loss has been submitted to arbitration or appraisal, compliance with such provision, if demanded by the insurer, is a condition precedent to the right of insured to maintain an action on the policy.” This holding has also been echoed by the Georgia Court of Appeals. See Government Employees Insurance Co. v. Hardin, 108 Ga. App. 230, 132 S.E.2d 513 (1963) (holding that appraisal may be a condition precedent to litigation).
While appraisal can be an effective tool for resolution, numerous issues may arise during an appraisal. The relative dearth of recent case law in North Carolina, South Carolina, and Georgia, the risk that the appraisal process may impinge upon coverage analysis, and the high standard required to vacate an adverse appraisal award (i.e. fraud, duress, or impeaching circumstance) all add risk to the appraisal process. We stand ready to help insurers and adjusters navigate the myriad issues that an appraisal entails.