A legal and ethical approach to appraiser-client relations in the insurance claims sphere

By Brian S. Goodman, Esq.
Summarized by Justin R. Skipton, SPPA


Appraisal is a process under an insurance policy to resolve a dispute as to the amount of a covered loss. As an alternative to arbitration, and especially to litigation, appraisal provides insureds a needed avenue for qu Introduction icker, more cost-effective relief. Unfortunately, of late, appraisal has come to the forefront as a result of rare but serious instances of abuses in the process. This paper explains appraisal, identifies current issues, and proposes a common-sense approach to maintaining appraisal as a fair system or resolving valuation disputes.

Appraisal History and Background

Appraisal is an informal process for property insurance carriers and policy holders to resolve disputes concerning the value of a loss relatively quickly and inexpensively, without resorting to far more expensive and time-consuming litigation. See, e.g., In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404, 407 (Tex. 2011). Appraisal clauses are included in most forms of property insurance policies. Johnny C. Parker, “Understanding the Insurance Policy Appraisal Clause: A Four-Step Program,” 37 U. Tol. L. Rev. 931, 931 (2006). Some states have enacted appraisal clauses as part of statutory form property insurance policies. See, e.g., Mich. Comp. Laws § 500.2833(1) (m); N.Y. Ins. Law § 3404(e). Avoiding excessive legal fees and the possibility of bad faith claims benefits both sides in first-party disputes. Courts also have favored appraisal because, in most cases, it minimizes the need for judicial intervention. CIGNA Ins. Co. v. Didimoi Property Holdings, N.V., 110 F. Supp. 2d 259, 269 (D. Del. 2000).

The appraisal process itself is straightforward. Each side appoints an appraiser of its choosing to determine the loss value. The two appraisers appoint a third individual – a neutral umpire – to resolve any disputes between them or, if they cannot agree on an umpire, a court will appoint one. An award must be agreed to by at least two of the three whether by the two party-appointed appraisers or, in the case of any disagreement between them, by one party- appointed appraiser and the neutral umpire. See the 165 lines of the 1943 New York Standard Fire Policy. The chief advantage of appraisal is that it is less expensive and faster than litigation. Appraisal omits discovery and other costly features of ordinary litigation. Appraisers, who are often subject matter experts, are focused solely on determining the value of a loss. They do not determine causation or liability. Each party’s appraiser uses his own independent judgment to arrive at a loss value and, if the appraisers are unable to agree, any disagreement is submitted to the neutral umpire for a decision.

The chief disadvantage of appraisal from the perspective of the insured is that insurance companies and their appraisers are repeat participants in the appraisal process. Appraisers may feel loyalty to an insurer because of longstanding business relationships or may even feel dependence on insurers for a substantial part of their income. And, because of the large number of claims that insurance carriers may handle in a given subject area or geographic area, insurers likely have a wealth of information in their files on which they may conduct statistical analysis regarding loss values or even likely outcomes to be expected from particular umpires. Without discovery, these issues may remain hidden from policyholders in most claims. Although on the policyholder side appraisers may also be frequently engaged by the same public adjusters or law firms, they generally represent different insureds, as the average insured would be involved in an appraisal only infrequently, after sustaining a major property loss.

In light of these problems – the disparity of information and loyalty between appraisers engaged by insurance carriers and policyholders – the main safeguard on the integrity of the appraisal system is the ability of each side’s appraiser to advocate its respective positions, whether to the opposing appraiser or to the umpire if necessary. The umpire’s neutrality or impartiality serves as a final check that ensures a fair and accurate decision. See, e.g., Brickell Harbour Condo. Ass’n v. Hamilton Specialty Ins. Co., 256 So. 3d 245, 248 – 49 (Fla. Dist. Ct. App. 2018).

1.   Appraisers are Required to be ‘Competent’ and Either ‘Disinterested’ or ‘Impartial’

Appraisers play a unique role as “disinterested” or “impartial” experts on behalf of the parties who appoint and pay them. As a leading treatise explains: “Appraisers can and should advocate on behalf of the party who appointed them, but must maintain a sufficiently independent mind so as to bring the matter to a conclusion by a reasonable exercise of judgment under the circumstances.” Jonathan Wilkofsky, “The Law and Procedure of Insurance Appraisal” 396 (3d ed. 2015). Thus, the hallmark of appraisers is that they are advocates who retain and exercise their independent judgment.

There are two categories of qualifications for appraisers. Appraisal clauses generally require that appraisers be (1) “competent” and (2) either “disinterested” or “impartial.”

First, competency ensures the accuracy of the result. “In order to perform competently as an appraiser for this purpose, and to be designated by a party or by other appraisers or the court (as an umpire), logic and common sense require that an appraiser must have experience in the estimation of materials and labor costs for the repair and replacement of damaged property.” Noa v. Fla. Ins. Guar. Ass’n, 215 So. 3d 141, 143 (Fla. Dist. Ct. App. 2017).

Second, disinterestedness or impartiality ensures the integrity of the process. But the impartiality required of party-appointed appraisers is not the same as the impartiality required of judges. Indeed, appraisers “are not considered to be quasi-judges.” White v. State Farm Fire & Cas. Co., 809 N.W.2d 637, 429 (Mich. Ct. App. 2011). In the context of insurance appraisals, impartiality means that the appraiser may not have a pecuniary interest in the outcome of the dispute, whether by contract, an employment or other longstanding relationship with a party, or otherwise. See, e.g., Tiger Fibers, LLC v. Aspen Specialty Ins. Co., 571 F. Supp. 2d 712, 718 – 19 (E.D. Va. 2008); Gebers v. State Farm Gen. Ins. Co., 45 Cal. Rptr. 2d 725, 728 (Cal. Ct. App. 1995); Gen. Star Indem. Co. v. Spring Creek Vill. Apartments Phase V, Inc., 152 S.W.3d 733, 737 (Tex. App. 2004). In some states, appraisers have been required to make appropriate disclosures in this regard. See, e.g., Tex. Admin. Code §§ 5.4212, 5.4213.

2.   Appraisers Play a Unique Role as Advocates Within Limits

The Supreme Court of Iowa correctly expressed the current state of the law on appraiser advocacy as follows:

The intent of the appraisal procedure is not to provide appraisers who possess the total impartiality that is required in a court of law. The appraisers do not violate their commitment by acting as advocates for their respective selecting parties. However, appraisers should be in a position to act fairly and be free from suspicion or unknown interest.

Central Life Ins. Co. v. Aetna Cas. & Sur. Co., 466 N.W.2d 257, 261 (Iowa 1991) (emphasis added). Recognizing that “the object and purpose of an appraisal is to secure a fair and just evaluation by an impartial tribunal,” id. at 260 – 61, in interpreting a policy calling for “disinterested” appraisers, the court found no problem with an appraiser’s advocacy. “Even though advocacy may make an appraiser partial, it does not implicate disqualification as does a pecuniary interest in the outcome of the appraisal.” Id. at 261.

Iowa’s view is consistent with that of other states and with earlier generations of cases. In Dennis Standard Fire Ins. Co., 107 A. 161, 162 (N.J. Ch. 1919), the court complimented the appraisers in that case for being “partisans, within bounds, but … nevertheless unbiased and unprejudiced and disinterested within the meaning of the contract of insurance.” The court confirmed its earlier view:

The appraiser chosen by each party is supposed and expected, in a restricted sense, to represent the party appointing him, and within reasonable limits to see to it that no legitimate consideration favorable to the party so appointing him is overlooked by the other appraiser. Mr. Goodman goes on to cite many more cases on point to the items referenced above.

3.   States Have Recognized a Distinction Between

Party-Appointed Appraisers and Neutral Umpires

Some states have highlighted the clear, common sense distinction between party-appointed appraisers and neutral or impartial umpires.

For example, Michigan law “allows for the likelihood of a party- appointed appraiser’s being biased towards the party that retained the appraiser.” White, 809 N.W.2d at 642 (citing Auto-Owners Ins. Co. v. Allied Adjusters & Appraisers, Inc., 605 N.W.2d 685, 689 – 90 (Mich. Ct. App. 1999) (per curiam)). Michigan law states expressly the difference between appraisers and umpires that often is implicit in the law of other states: in Michigan, appraisers must be “independent,” whereas umpires must be “impartial.” White, 809 N.W. 2d at 639. This recognizes the reality that appraisers and public adjusters are “more similar to attorneys than to judges and umpires. Attorneys and appraisers are hired by one party to assist in presenting that party’s position, while judges and umpires must take the proposals of both parties and decide which one is to prevail.” Id. at 642. Indeed, “the independent appraiser may be biased toward the party who hires and pays him, as long as he retains the ability to base his recommendation on his own judgment. The umpire, in contrast, may not favor either party; he must serve only equity, fairness, and justice.” Allied Adjusters & Appraisers, Inc., 604 N.W.2d at 689. If appraisers were required to be neutral in the same way arbitrators, jurors, or judges are, then “virtually all party-appointed appraisers would have to be disqualified and the entire appraisal mechanism, which has fairly served all sides for decades, would come to a screeching halt. The result would be more unnecessary litigation.” White, 809 N.W.2d at 644 (Shapiro, J., concurring).

Colorado similarly provides by regulation that appraisers must be “fair and competent,” whereas umpires “must remain neutral.” Colorado Department of Regulatory Agencies (“DORA”), Division of Insurance Bulletin B-5.26 (2015). Appraisers must not be a party, must have no financial interest in the outcome of the appraisal, must not be a current employee of a party, and must not have a family or other personal relationship with the insured that could suggest bias. Id. at III.A.1. Appraisers have certain disclosure obligations. Id. at III.A.2, And, appraisers are permitted to communicate with each other and with their appointing parties, but an appointing party may not communicate with an opposing appraiser. Id. at III.A.4. By contrast, “[t] he umpire may not have an existing direct and/or material relationship with any party to the appraisal and must remain neutral.” Id. at III.B.1.

The umpire also has disclosure obligations. Id. at III.B.2, 3. And, the umpire is prohibited from having ex parte communications with either side or either appraiser. Id. at III.B.4.

There are notable exceptions to this rule. In California, for example, not only are party-selected appraisers treated similarly to arbitrators, but California courts have interpreted applicable statutes as requiring that appraisers be held to “a higher [standard] of impartiality than are party arbitrators.” Mahnke v. Superior Court, 180 Cal. App. 4th 565, 575 (Cal. Ct. App. 2009). NAPIA disagrees with this view, which appears to be against the clear weight of authority among other states.

4.    Current Issues in Appraisal – Appraiser Bias

Despite the long and established history of appraisal, the process has only recently become an area of major focus. In the past, parties invoked appraisal more as a last resort, when coverage was not in dispute but the policyholder and carrier had reached an impasse on the value of the damage. Indeed, when litigation has arisen out of appraisal, courts have sometimes noted the dearth of case law on the topic.

In recent years, however, we have seen appraisal used increasingly as an offensive tactic. In Colorado and Texas, where hail and wind damage claims are common, appraisal has particularly increased in frequency over the last decade. Even with increases in the invocation of the appraisal process, most appraisals proceed as intended, toward a speedier, less expensive resolution. However, appraiser bias has become a major issue.

The proliferation of appraisals in major losses has led, in some instances, to appraisers working full time as such, and in some instances with the same law firms and carriers in dozens of losses. When close business relationships are not disclosed, and appraisers are portrayed to other parties and tribunals as impartial, disinterested or independent, the appraisal process is subverted by crossing the line from advocacy within limits into bias. Although such incidents of abuse are aberrational, they have the potential for very serious effects on the process and must be promptly put to an end.

NAPIA’S Response and Action Plan

NAPIA wishes for insurance departments, legislators, attorneys general and the industry as a whole to recognize the benefits of appraisal when conducted properly, address the emerging issues and encourage transparency in the continued development and use of the appraisal process.

First, we as an industry must acknowledge head-on the issues that have recently emerged. It must be made clear that appraisers, under any policy or statutory definition, must not be biased. That means ensuring that appraisers do not have a financial interest in the outcome of a particular loss. In particular, contingent fee arrangements improperly give appraisers the incentive to inflate loss estimates so their percentage fee is also higher. Using an hourly rate that is capped at a percentage of the award, ostensibly to limit the fee an appraiser may earn, can have the paradoxical effect of driving up the appraiser’s estimate so that the cap does not negate any of the appraiser’s billed hours.

Nor should appraisers have a financial interest by virtue of an extensive relationship with a particular client. The industry should make sure that the “repeat players” are not repeating so often that they are really advocating for the client who keeps hiring them, rather than the client’s position on that particular loss. Transparency as to any such relationships is essential to a fair process. The neutral umpire should be able to assess the award in light of the extent any prior dealings might bear on the appraiser’s estimate.

Correcting the bias-related problems that have arisen, however, does not require fundamental changes to appraisal. Rather, preventing this rather isolated problem from spreading merely requires that appraisal be practiced as it was intended, and for the most part has and does. What the industry needs to avoid is an over- correction based on an unrealistic definition of appraiser impartiality, disinterest, or independence. Appraisers advocate for their clients’ measure of the damages in a loss. In doing so, appraisers naturally must, within proper limits, advocate for the parties who hired them.

This is how it is supposed to work. Thus, NAPIA seeks to reinforce the role of appraisers as advocates within limits, based on established criteria and robust disclosure requirements.

Enforcement Opportunities

It is NAPIA’s position that it is not consistent with the purpose and intent of appraisal for an appraiser to present himself as independent, disinterested, or impartial (depending on the statutory or policy language that applies) when the appraiser actually has a significant past relationship with a party to an insurance contract. Such conduct is improper, whether by the appraiser or umpire, as well as by the party hiring that individual. Similarly, failure to disclose a fee arrangement that is contingent in any form on the amount of the appraisal award should be considered wrong.

Only full disclosure can allay this problem – so the other party can challenge the appraiser’s impartiality, so the neutral umpire can consider the past relationship or contingent- fee interest, and if necessary, so a court can evaluate the bias, vel non, of an appraiser or umpire.

Reporting requirements dovetail with the need for such disclosure. Basically, if an appraiser makes a living by appraising losses for a particular client or a particular side of the insurer/insured relationship then others involved in adjusting and evaluating the loss have a right to know.


In sum, NAPIA hopes to work cooperatively with all industry stakeholders to preserve appraisal as a fair, speedy form of alternative method to resolve disputes as to the value of a covered loss.

As published in Consumer Claims Journal – Spring/Summer 2021