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June 18, 2003

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 17, #4, p. 20 (June 18, 2003). © Copyright Butler 2003.

Once again the annual “hold-your-breath” season is upon us. In Hartford, New York, and London weather channels are beating “sitcoms” on the “Nielson” ratings. Internet strikes on are out-numbering those for – well, maybe this is a slight exaggeration. But the point remains; that is, CAT losses, especially windstorm, commonly called Hurricanes, make or break a property insurer’s profitability, not just in the year of the occurrence, but typically with a two to three year tail.

The geographic focus is on that 500 mile peninsular of sea-level swampland protruding into the Gulf Stream – otherwise known as Florida – “the land of Flowers.” They just closed down Cypress Gardens, purportedly a result of the post-9-11 “economy.” Sadly, this may be a foreshadowing of things to come.

More than three years ago we wrote a commentary describing how the law of appraisal has developed insulating fraudulent claims while increasing a first-party property insurer’s exposure to “bad-faith” allegations.(1) Unfortunately, since then the law has not improved. In fact, it has actually worsened. The three published appellate decisions that contribute most to this abyss are: 1) Johnson v. Nationwide Mutual Ins. Co.;(2) 2) Allstate Ins. Co. v. Suarez;(3) and 3) Scottsdale Ins. Co. v. University at 107th Avenue, Inc.(4) When taken together, these cases arguably stand for the proposition that appraisal panels may determine causation (“coverage”), there are no due process rights in appraisal, and an insured cannot forfeit its “right” to appraisal.

I.   The Johnson Jigsaw

In Johnson, the Supreme Court of Florida held “that causation is a coverage question for the court when an insurer wholly denies that there is a covered loss and an amount-of-loss question for the appraisal panel when an insurer admits that there is covered loss, the amount of which is disputed.”(5) The Johnson case involved a first-party property claim for sinkhole damage. Florida requires a property insurer to provide insurance for sinkhole damage to the insured structure. However, Nationwide denied the claim contending that the loss was caused by earth movement, an excluded cause. In adopting the language of a lower appellate court’s decision, the Supreme Court of Florida, citing the Third District of Florida in Gonzalez v. State Farm Fire and Cas. Co.(6) stated:

When the insurer admits that there is a co loss, but there is a disagreement on the amount of loss, it is for the appraisers to arrive at the amount to be paid. In that circumstance, the appraisers are to inspect the property and sort out how much is to be paid on account of a covered peril. In doing so, they are to exclude payment for ‘a cause not covered such as normal wear and tear, dry rot, or various other designated, excluded causes.’

* * *

If the homeowner’s insurance policy provides coverage for windstorm damage to the roof, but does not provide coverage for dry rot, the appraisers are to inspect the roof and arrive at a fair value for the windstorm damage, while excluding payment for the repairs required by preexisting dry rot.

* * *

In the present case [the insurer] says that there is no coverage for the claim whatsoever, while the homeowners say that the claim falls within applicable coverage. Whether the claim is covered by the policy is a judicial question, not a question for the appraisers.

Thus, Johnson held that these coverage issues were to be judicially determined by the court and were not subject to determination by appraisers. That is, the determination of whether the entire loss was caused by a sinkhole or earth movement is an issue of coverage and thus an issue for judicial determination by a court. See contra, Munn v. National Fire Ins. Co. of Hartford, 115 So. 2d 54 (Miss. 1959) (nowhere in the standard form for submission to appraisal is any power vested in or conferred upon the appraisers to determine the cause of the loss, the value of which they shall appraise).

However, assuming the absence of a breach of contract argument against the insured, which even if it did exist may not bar appraisal (See Scottsdale v. University at 107th Avenue, Inc., infra), if an insured demands appraisal, resolution by appraisal can only be avoided if the insurer denies the existence of any covered damages. Johnson dealt with multiple fact patterns where the insurers denied the existence of any covered damages. That is, the insurers contended all the damages claimed were caused by perils excluded from coverage.

The Supreme Court of Florida is not the only court struggling with distinguishing the concepts of “causation” and “coverage.” In the case of Wausau Ins. Co. v. Herbert Halperin Dist. Corp., 664 F. Supp. 987 (D. Md. 1987), the Court stated:

The insured cites Erickson v. Farmer’s Mut. Ins. Co., 311 N.W. 2d 579 (N.D. 1981) for the proposition that where an insurer admits causation, any remaining matters in controversy concerning the extent of loss are subject to appraisal. The fallacy in this argument is that although it appears that Wausau is not factually disputing the consequences of the occurrence, it is contesting the issue of legal “causation” on the basis that the policy exclusions apply so as to limit the scope of coverage. This issue is one of contract interpretation which is within the competence of the Court, not an appraiser, to resolve. Of course, to the extent that issues of design and construction relating to “the amount of loss” are ultimately presented, these will be properly referable to the appraisal process.

In Wells v. American States Preferred Ins. Co., 919 S.W.2d 679 (Ct. App. Tex. 1996), a Texas Appellate Court wrote:

Appraisers have no power to determine the cause of the damages. Their power is limited to the function of determining the money value of the property damage.

We conclude further that the appraisal section of the policy, as a matter of law, did not authorize and empower the appraisal panel to determine that the plumbing leak did not cause the loss to the Wells’ property.

It does not authorize or empower the appraisal panel . . . to determine what caused or did not cause that loss. Indeed, we hold that, absent an agreement to the contrary, questions of what caused or did not cause the loss or questions to be decided by the court. Moreover, we hold that participation by the insured in the appraisal process does not constitute an agreement by the insured to authorize and empower the appraisal panel to determine questions or what caused or did not cause the loss.

Nowhere in the standard form for submission to appraisal is any power vested in or conferred upon the appraisers to determine the cause of the loss, the value of which they are to appraise.

The Supreme Court of Florida in Johnson, however, holds that in many, if not most claims, causation can be determined by appraisal. For instance, how will Johnson impact the typical windstorm claim?

What happens when the next Category Four or Five hurricane strikes Florida? Since Hurricane Andrew (1992) and Hurricane Opal (1995), followed by the re-underwriting following 9-11, the windstorm deductibles in the state of Florida have increased dramatically. A $250,000 or 2% of insured value deductible is common. In the context of Johnson, envision multi-million dollar insurance claims where the insurer admits there is some “covered” windstorm damage, but it falls within the deductible. The insurer contends that although the property may have $10 million worth of damages, more than $9 million of it is pre-existing conditions, typically normal wear and tear, which is excluded from coverage. The insured, or more likely its public adjuster or attorney, writes back demanding appraisal. Assuming the insurer is not contending a breach of contract by the insured, can the insurer avoid appraisal? Under Johnson an argument could be made that the “insurer admits that there is a covered loss, the amount of which is disputed.” Thus, what most carriers would deem to be a coverage issue (application of its exclusions) that is excluded from appraisal and reserved solely for the courts to resolve, must now to be decided by an appraisal panel. To fully appreciate what this means, we recommend that you read further.

II.   The Elimination Of Due Process

Most adjusters, VPs, CEOs, CFOs, and counsel, would rightly presume that in America should there be a significant dispute as to what is owed under an insurance contract, specifically what is covered under an insurance contract, one could hire lawyers and have access to the court system which is full of checks and balances, judicial review, legal analysis, judgment by six or more citizens and consumers acting as jurors, and appellate review of fact and law by wise men and women. Such due process protections, however, no longer exist for a first-party property insurer in a windstorm claim.

Appraisal affords essentially no due process protections. The case of Allstate Ins. Co. v. Suarez holds that the appraisal clause is not arbitration and is not controlled by the Florida Arbitration Code. That is, the Florida Supreme Court has ruled that appraisal allows an insurer no voice in the appraisal process other than that provided by its designated appraiser. There is no hearing. There is no transcript. There is no taking of evidence. There are no witnesses. There are no arguments. There are no factual or legal briefs. There is simply whatever two of the three appraisers (one appraiser being designated by the insurer, another designated by the insured, and an umpire appointed by the court) deciding how much insurance proceeds the insurer must pay.

This appraisal process has no rules and no requirements. The appraisers and umpire may get together by phone and never meet. They may review all or none of the documents available. They may or may not visit the insured premises. They may decide the $10 million question over beers and a twenty-dollar lunch or they may take months to review and discuss. The umpire may meet with one appraiser outside the presence of the other. Note, by definition, the umpire decides the outcome of the appraisal award.(7) There are neither requirements for the written appraisal award nor limitations. When the written appraisal award is rendered whether signed by all three appraisers or just one appraiser and the umpire, that award is sacrosanct. That is, absent evidence of fraud or collusion, the award is not appealable. The chances of setting aside such an award based upon fraud or collusion are almost nil. An appraiser can be the public adjuster who actually takes a percentage of the award as a fee, just as long as that interest is disclosed prior to the appraisal process. Rios v. Tri-State Ins. Co., 714 So. 2d 547 (Fla. 3d DCA 1998).

Now, in the context of a substantial windstorm claim, where you have multi-million dollar estimates for sliding glass doors, tile roofs, water intrusion, water extraction, and mold remediation, involving twenty years of construction, defects, maintenance, repairs, and prior weather events, do you expect your appraiser to provide a compelling and persuasive argument for the application of contractual exclusions based upon “faulty workmanship” or “wear and tear” to an umpire who is willing to analyze the insurance contract to determine the application of such exclusions? Or, do you envision, at best, an umpire who patiently listens to both appraisers, and then, when tired of the particular “sticks and stones” commentary, seeks a compromise solution based upon dollars, not damages? Most umpires are neither experts in property damage nor property law.

Are property underwriters taking into account this phenomena where your exclusions are not given effect, but are essentially ignored? We doubt the present premiums charged for windstorm, even given the substantial increase in deductibles and self-insured-retentions take this “coverage-by-appraisal-fiat” into account.

Keep in mind, in this appraisal process, you will never know why the appraisal panel awarded what it did. There is no record. There is no opinion. There are no findings of fact or conclusions of law. There is nothing to appeal or argue against. The appraisal panel speaks and the insurer must pay, regardless of whether the damages were actually caused by the covered event or not. In the case of North Carolina Farm Bureau Mut. Ins. Co. v. Harrell, 557 S.E.2d 580 (Ct. App. N.C. 2001), a North Carolina Appellate Court stated:

Arbitrators are not required to articulate reasons for their award.

In arbitration, errors of law or fact . . . are insufficient to invalidate an award fairly and honestly made.

An arbitrator who errors as a matter of law, exceeding his powers, is not subject to the vacating of his award because such an erroneous decision of a matter submitted to arbitration is insufficient to invalidate an award fairly and honestly made.

An award is intended to settle the matter in controversy, and thus save the expense of litigation. If a mistake be a sufficient ground for setting aside an award, it opens the door for coming into court in almost every case; for nine cases out of ten some mistake either law or fact may be suggested by the dissatisfied party. Thus . . . arbitration instead of ending would tend to increase litigation.

Subsequently, in the case of Harleysville Mut. Ins. Co. v. Narron, 574 S.E.2d 490 (Ct. App. N.C. 2002), another North Carolina Appellate Court wrote:

We further find that there was no reason to invalidate the appraisal award based upon what Plaintiff alleged was O’Leary’s mistake in setting the amount of loss to include non-hurricane damage. We have previously held that mistakes by appraisers, like those made by arbitrators, are insufficient to invalidate an award fairly and honestly made.

Obviously, many courts see appraisal as alternative dispute resolution, and absent corruption, the results of which will not be disturbed.

III.   Conditions Precedent Are Actually Conditions Subsequent

In this frightening context of non-appealable appraisal awards arises the recent case of Scottsdale Ins. Co. v. University at 107th Avenue, Inc. In that case, a Florida Appellate Court held that an insured may fail to comply with its post-loss contractual obligations, including providing the information necessary for the insured to evaluate the insured’s claim, and still have a right to appraisal. In fact, the issue of whether the insured failed to comply with its post-loss contractual obligations before filing suit was still at issue, yet the Appellate Court stated that the insured was still entitled to appraisal. The Appellate Court “reasoned:”

. . . Scottsdale had obtained what ‘Scottsdale wanted post-loss and pre-suit during the course of the suit’ and that ‘the documents that [Scottsdale] asked for post-loss and pre-suit [were] now in [their] possession through discovery.’ There was, therefore, an exchange of ‘adequate information’ from which Scottsdale could make a determination as to University’s loss.

This is not a misquote. The Appellate Court stated that since the insurer through the use of the discovery rules and the subpoena power forced the information from the insured in the breach of contract litigation, initiated by the insured before the insured complied with conditions precedent to appraisal, such information so obtained constituted sufficient “compliance” for that insured to be entitled to appraisal. The fact that there was a “no-suit” clause in the contract and the insured pleaded in its initial lawsuit that it had complied with all conditions precedent apparently were immaterial. How that appraisal award affects the litigation, however, remains to be seen.

Interestingly, the trial court ordered appraisal to go forward, but ordered the appraisal panel not to determine causation. This was before the Supreme Court had spoken in Johnson. Thus, the cost to renovate the subject property was, more than three years after the alleged windstorm damage, determined to be in excess of $1.7 million. This is on a claim where the adjuster had determined the actual windstorm damage to be less than $7,000. Now we have a trial court wondering what to do with this $1.7 million appraisal award not related to any particular event, occurrence, cause, peril, or coverage.

IV.   The Appraisal Award As Evidence Of Bad-Faith

Florida does not recognize common law bad-faith causes of action in a first-party claim. However, such a cause of action has existed by statute since 1982. One of the prerequisites to possessing legal standing to pursue such a cause of action is the serving of a Civil Remedy Notice of Insurer Violation on a form provided by the Florida Department of Insurance. If the underlying contract claim is resolved within sixty (60) days of receipt of that Notice, there is no legal standing to pursue a “bad-faith” claim. If the underlying is not resolved within sixty (60) days, and ultimately the insured prevails on its breach of contract claim, then the insured has legal standing to pursue a “bad-faith” claim. Talat Enterprises, Inc. v. Aetna Casualty & Surety Co., 753 So. 2d 1278 (Fla. 2000). How will this statutory “bad-faith” scheme work in our windstorm claim?

The insured serves a Civil Remedy Notice of Insurer Violation well in advance of any appraisal award, maybe even simultaneously with its demand for appraisal. The Civil Remedy Notice of Insurer Violation can be served before the insured demands appraisal. Essentially that Civil Remedy Notice demands payment of some unspecified dollars for insurance proceeds under the first-party property insurance contract. The insurer does not pay, responding that the covered damages do not exceed the deductible and that the appraisal process will determine the amount of insurance proceeds that should be paid, if any. Nine months later the appraisal award is reversed for $5 million, well above the $250,000 windstorm deductible, but $5 million below the actual claim and policy limits. The insurer, having no recourse, pays the appraisal award within the time prescribed by the Loss Payable clause. The insurer does not pay any interest, costs, or attorney fees, and certainly does not pay for any alleged consequential or punitive damages. The insured then serves and files a suit for “bad-faith” pursuant to the Florida statutory scheme and proceeds to conduct burdensome and intrusive discovery upon the insurer.

The cornerstone of the insured’s argument is that the appraisal award of $5 million awarded pursuant to the terms of the insurance contract, which is more than $4.75 million than that contended by the insurer as covered damages, and which was signed by the insurer’s appraiser as well, is evidence of the insurer’s bad-faith. The insured argues that the insurer knew or should have known that the covered damages were $5 million, but chose to argue otherwise. The two appraisers and umpire knew no more than the insurer knew or should have known nine months before, yet the insurer, the expert in determining property damages and adjusting insurance claims pursuant to the terms and conditions of the insurance policy, wrongfully, if not maliciously, argued that the damages did not exceed the $250,000 deductible.

Is the appraisal award itself admissible evidence in the “bad-faith” trial? If so, can the appraisers and umpire be deposed and their fact gathering process and decision making process be disclosed through deposition and trial testimony? Is the insurer estopped from asserting that the actual covered damages are indeed less than the $5 million awarded by the appraisal panel? Presently the authors are unaware of any published decision addressing such issues. However, as long as the law on appraisal remains as is, and property insurers issue policies with appraisal clauses, these issues will eventually be addressed by the courts.

V.   Tomorrow

If appraisal cannot be avoided and a property insurer wants to be heard on coverage (causation) issues, it better appoint an appraiser who is persuasive in making such arguments to the umpire. Otherwise, essentially there are no exclusions.

A property insurer should carefully consider any coverage or forfeiture issues that may wholly preclude coverage because in the absence of such, appraisal will not be avoidable. That is, an appraisal panel will determine whether any exclusions apply and the resulting award must be paid.

A property insurer should give serious and immediate consideration to removing its appraisal clause.


  1. John and John M. Odom, “Armageddon,” Mealey’s Litigation Report: Insurance Bad Faith, Vol. 13, #18 (January 18, 2002):
    For over one hundred years the appraisal clause has been efficiently resolving disputes between insured and insurer over the amount of the claim. There is, however, a disconcerting trend of invoking appraisal in an attempt to circumvent the terms and conditions of the insurance contract, conceal fraud, and ‘create’ evidence of ‘bad faith.’ This paper warns of the calamity and complexities that will occur if this issue is not properly addressed by insurers, insureds, and the courts.
  2. 828 So. 2d 1021 (Fla. 2002).
  3. 833 So. 2d 762 (Fla. 2002).
  4. 827 So. 2d 1016 (Fla. 3d DCA 2002).
  5. Not all states agree. In the Illinois case of Stratford West Homeowners Assoc. v. Country Mut. Ins. Co., No. 3—02—060A (3d Dist. App. Ct. Ill. April 4, 2003), the Court stated:

    The provision in question is essentially an arbitration clause, and we acknowledge that the Uniform Arbitration Act applies. The Act states that a written agreement to submit an issue to arbitration is ‘valid, enforceable, and irrevocable.’ However, non-binding arbitration exists in Illinois as a means of resolving disputes, and neither the Act nor Illinois case law mandates that all arbitration must be binding.

    * * *

    Any waiver of the right to file suit must be clear and unambiguous. Without language requiring binding arbitration, a policy will be construed as an agreement to submit to non-binding arbitration. Nothing in the insurance contract indicated that, by participating in the appraisal, Stratford was forfeiting its right to seek redress in court. We declined the opportunity to lower the standard under which parties relinquish their right to sue. A party’s waiver of that right must be evident from the agreement. In this case, the appraisal does not operate as a final and binding resolution of the parties’ over the dispute of the amount of the loss and does not foreclose either party from maintaining an action in a court of law.

  6. 805 So. 2d 814 (Fla. 3d DCA 2000).
  7. See “Armageddon:” “What is likely to happen is that the umpire, looking to avoid conflict, and seeking consensus and credibility, goes to appraiser number one and says: ‘I am going to sign-off on appraiser number two’s proposal of $1 million, unless you agree to sign-off on a compromise of $5.5 million.’ Devoid of an actual choice, appraiser number one agrees. The umpire then goes to appraiser number two and says: ‘I am going to sign-off on a $7.5 million award unless you agree to sign-off on a $5.5 million award.’ Devoid of choice, appraiser number two agrees. All three sign-off on an appraisal award of $5.5 million, notwithstanding the fact that not one believes that it is the actual covered damage. Such a process is frightening, especially when one considers the potential consequences.”