The Court "Values" the Policy Appraisal Provision by Requiring the Insured to Participate In an Appraisal Before Commencing Suit
By Jennie Philip, Esq. and Edward Louka, Esq.*
Appraisal is a very important condition in property policies. Despite its importance, it is often misunderstood, abused and, at the same time, underutilized. The appraisal process provides the insured and insurer an opportunity to resolve a dispute over "the amount of a loss" when coverage is not at issue. In theory, appraisal establishes a procedure to allow contested amounts to be resolved by disinterested parties.
While simple on its face, the appraisal process is wrought with many potential pitfalls, from courts allowing the insured's public adjuster to name themselves as an appraiser (Hozlock v. Donegal Casualty Insurance Co., 745 A.2d 1261 (Pa. Super. 2000)) to an umpire including items in the appraisal excluded from coverage. Perhaps the most common area of contention deals with insureds demanding to appraise "coverage" issues, including "matching," or areas of the home that did not sustain a "direct physical loss."
It is widely recognized that an appraisal is limited to determining the amount of the loss, with all other issues reserved for settlement by either negotiation or litigation. Riley v. Farmers Fire Insurance, 735 A.2d 124, 127 (Pa.Super. 1999) (citing Ice City, Inc. v. Ins. Co. of North Amer., 314 A.2d 236, 240 n.12 (Pa. 1974)). Thus, coverage issues should not be part of the appraisal process.
When the demand for appraisal contains "excluded" items not subject to appraisal, confusion can arise, especially in light of the policy's provisions requiring compliance with policy conditions prior to filing suit. Such a situation arose in a recent court opinion.
The U.S. District Court of the Eastern District of Pennsylvania recently weighed in on the appraisal requirement in Correnti v. Merchs. Preferred Ins. Co., 2013 U.S. Dist LEXIS 13053 (E. D. Pa. Jan. 31, 2013). The plaintiffs, Armand and Marry Correnti, brought suit against their insurer, Merchants Preferred Insurance Company, for failing to indemnify their claim of $104,749.77 in home repairs. Merchants' policy contained an appraisal clause that provided in pertinent part: "If you or we fail to agree on the amount of loss, either may demand an appraisal of the loss." The policy also contained a legal action clause that precluded the plaintiffs from bringing suit unless there was full compliance with the terms of the policy.
By way of background, the Correntis sustained damage to their home in October of 2011. Merchants acknowledged coverage and estimated home repairs in the amount of $21,897.17 and lost contents in the amount of $5,493. The plaintiffs hired a public adjusting firm to represent them and sought coverage in the amount of $83,387.08 for estimated repairs and $21,362.69 in contents. Since Merchants disagreed with the plaintiffs as to the loss amount, it included a letter invoking the appraisal provision, along with its checks for payment, as required in the policy.
Without explanation, the insureds brought suit. Merchants moved for summary judgment, arguing that the plaintiffs brought suit without first participating in the appraisal process. Merchants argued that, since the parties disputed only the "amount of loss," the policy required appraisal. The plaintiffs argued that appraisal was inappropriate because the parties disagreed as to the scope of damages. The court found the plaintiffs' contention "frivolous." Because Merchants did not dispute coverage and invoked the policy's appraisal requirement, the court agreed with the insurer that the plaintiffs were required to participate in the appraisal process before commencing suit.
In doing so, the court relied upon an earlier decision in Sydney v. Pacific Indem. Co., 2012 U.S. Dist. LEXIS 107594 (E.D. Pa. Aug. 1, 2012) (applying Pennsylvania state law). The Sydney court sided with the defendant-insurer when the plaintiffs filed suit prior to complying with the policy's appraisal provision. In Sydney, the plaintiffs' premises suffered physical damage due to a broken drainage line on the third floor of the house and the weight of ice and snow on the roof. The insurer, Pacific, paid $25,691.36 on the ice and snow claim and $50,133.03 for the broken drainage line claim. Approximately one year later, the plaintiffs informed Pacific that the claim now included replacement of the entire roof. The plaintiffs' public adjuster estimated the combined total of both losses at $187,727.28. Pacific did not agree with the revised valuation. The plaintiffs alleged that Pacific acknowledged that the loss to the property was covered under the terms and conditions of the policy, but that they failed to indemnify the loss completely. Thus, the plaintiffs brought suit and contended that Pacific breached its contractual obligations under the insurance policy when it denied complete coverage for the claim. Pacific, meanwhile, maintained that there was no dispute of coverage and that only the valuation of certain items of the loss were in dispute. Pacific then invoked the policy's appraisal clause, which provided:
If you or we fail to agree on the amount of loss, you or we may demand an appraisal of the loss. Each party will select an appraiser within 20 days after receiving written request from the other. The two appraisers will select a third appraiser. If they cannot agree on a third appraiser within 15 days, you or we may request that the selection be made by a judge of a court having jurisdiction.
Similar to Merchants' policy in Correnti, Pacific's policy stated, "You agree not to bring legal action against us unless you have first complied with all conditions of this policy…" The plaintiffs never responded to the demand for appraisal and subsequently pursued claims through litigation prematurely. Pacific, in turn, moved to dismiss the breach of contract claim and asked the court to compel the plaintiffs to comply with the appraisal clause.
In granting Pacific's motion to dismiss and compelling the plaintiffs to proceed with an appraisal, the court was clear. It stated, "Under the terms of the contract, the plaintiffs waived their right to sue for a breach of the policy until exhausting all the remedies outlined in the policy, such as the appraisal clause…The plaintiffs failed to appoint their appraiser within 20 days as required by the policy and have not fully complied with the terms of the contract. The plaintiffs improperly pursued their claims at the time that they sought legal remedies and did so in violation of the insurance policy." The court stated that the plaintiffs, by not complying with the appraisal clause, cannot bring suit under the policy's "legal action clause." Furthermore, when an insurance policy requires the plaintiffs to comply with an appraisal clause prior to seeking resolution through litigation, and the plaintiffs have failed to comply, they have not stated a claim upon which relief may be granted.
It is important to note that Merchants chose to waive any coverage issues in demanding appraisal. The outcome may be different if an insurer limits the scope of appraisal to only include covered damages. These cases are significant in that they demonstrate the willingness of the courts to enforce compliance with policy provisions, including appraisal provisions, prior to allowing litigation to proceed.
Defense Digest, Vol. 19, No. 3, September 2013
Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Copyright © 2013 Marshall Dennehey Warner Coleman & Goggin, all rights reserved. This article may not be reprinted without the express written permission of our firm.