In the aftermath of a summer storm or hurricane, many commercial property owners find themselves in a stalemate with their insurance company. The insurer acknowledges that there is damage, but their estimate is hundreds of thousands—or even millions—of dollars lower than the owner's contractor. At this point, the insurer often suggests "Appraisal" as a faster, cheaper alternative to litigation. While appraisal can be a useful tool, it is also a potential minefield for the unwary policyholder.
At The Voss Law Firm, P.C., we have seen how insurance companies use the appraisal process to avoid their legal obligations and strip policyholders of their rights. Appraisal is not a simple "valuation" process; it is a quasi-judicial proceeding that can have a binding effect on your recovery. This article explains how appraisal works, the risks involved, and why you should never enter the process without professional guidance.
What is the Insurance Appraisal Process?
Most commercial property policies contain an "Appraisal Clause." This clause allows either the insurer or the policyholder to demand an appraisal if there is a disagreement over the amount of the loss.
The process typically works like this:
- Each party selects a "competent and disinterested" appraiser.
- The two appraisers select an "umpire."
- If the appraisers agree on the amount of loss, that amount is binding.
- If they disagree, they submit their differences to the umpire. An agreement between any two of the three (appraiser/appraiser or appraiser/umpire) sets the amount of the loss.
The Critical Distinction: Amount vs. Coverage
The most important thing to understand about appraisal is that it is only intended to determine the amount of the loss, not whether the loss is covered by the policy.
- Appraisal can decide: How much it costs to replace a roof.
- Appraisal cannot decide: Whether the roof damage was caused by a covered hailstorm or an excluded pre-existing condition.
Insurers often try to smuggle "coverage" issues into the appraisal process. They may instruct their appraiser to ignore certain types of damage, claiming they aren't covered. If the appraisal award doesn't clearly distinguish between covered and non-covered items, you could be left with a binding award that is far less than what you are actually owed.
The Risks of Appraisal for Commercial Owners
For a large commercial property, the risks of a poorly handled appraisal are significant:
- Lack of Discovery: Unlike litigation, there is no formal "discovery" process in appraisal. You cannot depose the insurer's experts or demand their internal emails.
- The "Disinterested" Appraiser Myth: While appraisers are supposed to be independent, many work almost exclusively for insurance companies. Finding a truly neutral umpire is also a major challenge.
- Binding Nature: Once an appraisal award is signed, it is extremely difficult to overturn in court. You generally must prove fraud, accident, or a manifest mistake.
- Loss of Bad Faith Claims: In some jurisdictions, paying an appraisal award can allow the insurer to argue that they have fulfilled their obligations, potentially wiping out your ability to sue for bad faith or prompt payment penalties.
Common Insurance Company Tactics in Appraisal
Insurers use appraisal strategically to their advantage:
- Invoking Appraisal to Stop Litigation: If you file a lawsuit, the insurer may immediately demand appraisal to "stay" (pause) the legal proceedings and avoid the discovery process.
- Selecting Biased Umpires: Insurers often maintain lists of "friendly" umpires who they know will trend toward lower valuations.
- Refusing to Pay the Award: Even after an appraisal award is issued, the insurer may still refuse to pay, claiming that the damage identified by the appraisers is not covered by the policy.
Common Mistakes Policyholders Make
Policyholders often enter appraisal thinking it's a friendly negotiation. They may:
- Select an Unqualified Appraiser: Using your local roofing contractor as an appraiser is often a mistake. You need someone who understands the legal and procedural nuances of the appraisal process.
- Enter Appraisal Too Early: If the insurer is still denying coverage for major parts of your claim, appraisal is premature and can be a waste of time and money.
- Fail to Document the Process: Everything that happens during the appraisal should be documented in writing to preserve your right to challenge the award later if necessary.
Relevant Legal Considerations
The law governing appraisal varies by state. In Texas, for example, the Supreme Court has issued several key rulings (such as State Farm v. Johnson and Ortiz v. State Farm) that define the boundaries of what appraisers can and cannot do. Understanding these precedents is critical for any attorney or appraiser involved in a Texas commercial property dispute.
When to Speak with a Policyholder Attorney
You should never agree to appraisal without first consulting an experienced policyholder attorney. We can help you:
- Determine if appraisal is the right strategy for your specific case.
- Vet potential appraisers and umpires to ensure they are truly neutral.
- Draft the "Appraisal Protocol" to ensure coverage issues are preserved for court.
- Hold the insurer's feet to the fire if they refuse to pay the final award.
Appraisal is a powerful tool, but in the hands of an insurance company, it can be a trap. For a commercial property owner facing a multi-million dollar loss, the stakes are too high to leave to a process that lacks the protections of a courtroom. Before you sign an appraisal demand, make sure you have an advocate who understands the "black box" of the appraisal process.
If your insurance claim has been denied, delayed, or underpaid, speaking with an experienced policyholder attorney may help you better understand your rights. The Voss Law Firm represents businesses and property owners nationwide on a contingency fee basis, meaning you pay nothing unless a recovery is made. Contact our office for a free consultation.
