Defense Research Institute (DRI) | Insurance Law Committee newsletter; Issue 7 -- July 29, 2013
A frequent issue in first party property insurance claims is whether a party has waived the right to invoke the appraisal process in the adjustment of a property claim. Appraisal is the mechanism for determining the amount of the property loss. The typical scenario goes like this: weather catastrophe (think Superstorm Sandy) destroys building; before anyone demands appraisal, insurer or insured files coverage action, the defendant then demands appraisal, and plaintiff responds by arguing the appraisal right has been waived. What follows is an analysis of how the courts approach the waiver issue.
Property insurance policies often include provisions specifying appraisal to resolve disputes about the amount of loss under the policy. The common appraisal clause reads as follows: “If we [insurer] and you [insured] disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss.…” An appraisal clause “binds the parties to have the extent or amount of the loss determined in a particular way.” In re Allstate County Mut. Ins. Co., 85 S.W.3d 193, 195 (Tex. 2002). A demand for appraisal is optional - it is not a precondition to filing a lawsuit. Lyon v. American Family Mut. Ins. Co., 617 F.Supp.2d 754, 758 (N.D.Ill. 2009). But once a party demands appraisal, assuming first that the parties cannot agree on the amount of the loss, the appraisal process becomes mandatory. Id. “The effect of an appraisal provision is to estop one party from contesting the issue of damages in a suit on the insurance contract, leaving only the question of liability for the court.” Lundstrom v. United Servs. Auto. Ass'n–CIC, 192 S.W.3d 78, 87 (Tex.App. 2006).
The disagreement necessary to trigger appraisal cannot be unilateral. The appraisal provision contemplates that the parties would engage in some meaningful exchange of information sufficient for each party to arrive at a conclusion before a disagreement could exist. United States Fidelity & Guar. Co. v. Romay, 744 So.2d 467, 470 (Fla. 3d DCA 1999); Hailey v. Auto-Owners Ins. Co., 181 N.C. App. 677, 679, 640 S.E.2d 849, 850 (2007) (insured failed to produce documentation requested by insurer to support his claim for insufficient payment, and thus, no disagreement existed yet to give rise to the appraisal right). Further, under the appraisal clause the relevant event is not the existence of a difference of views as to the loss amount, but rather the parties’ inability to resolve that difference despite their attempts to do so. Lyon, 617 F.Supp.2d at 758 (insurer continued to make efforts to reach some sort of agreement without resorting to appraisal or court intervention). Determining whether the parties have reached an impasse “requires an examination of the circumstances and the parties’ conduct, not merely a measure of the amount of time involved in seeking appraisal.” In re Universal Underwriters of Tex. Ins. Co., 345 S.W.3d 404, 408 (Tex. 2011). “An impasse is not the same as a disagreement about the amount of loss. Ongoing negotiations ... do not trigger a party’s obligation to demand appraisal. Nor does an insurer’s offer of money to cover damages necessarily indicate a refusal to negotiate further....” Id.
But assume the necessary disagreement or impasse as to the amount of loss has occurred and someone has demanded an appraisal. At that point, invoking the right to appraisal often is met with the challenge that the right was been waived.
Waiver is the intentional relinquishment of a known right, or intentional conduct inconsistent with claiming that right. In re General Elec. Capital Corp., 203 S.W.3d 314, 316 (Tex. 2006). Waiver can be shown by the affirmative acts of a party, or can be inferred from conduct that supports the conclusion waiver was intended. Continental Casualty Co. v. G.R. Kinney Co., Iowa, 258 Iowa 658, 660, 140 N.W.2d 129, 130 (1966). In Texas, for implied waiver to be found through a party's actions, intent must be clearly demonstrated by the surrounding facts and circumstances. Jernigan v. Langley, 111 S.W.3d 153, 156–57 (Tex. 2003). In Iowa, the standard may be lower: when waiver is implied, intent may be inferred from the facts and circumstances constituting the waiver. Continental, 140 N.W.2d at 130.
Waiver is generally a question of fact for the jury, but when the evidence is undisputed the issue is one of law for the court. Scheetz v. IMT Ins. Co., 324 N.W.2d 302, 304 (Iowa 1982). However, although courts recognize that waiver can be a matter of fact, courts often determine whether appraisal has been waived as a matter of law, at least in part as a matter of practicality, because the question arises at the preliminary stages of litigation. Keesling v. Western Fire Ins. Co. of Fort Scott, Kan., 10 Wash.App. 841, 520 P.2d 622, 628 (1974) (“The determination of the timeliness of the demand, in this case, was for the court”); Hanby v. Maryland Cas. Co., 265 A.2d 28, 31 (Del.1970) (“Whether [the insurer] has a contract right to have the amount of loss determined by appraisal preliminary to the filing (or prosecution) of an action was fairly and necessarily addressed to the Court at the pretrial stage”).
The party asserting waiver of the appraisal right bears the burden of proof. Met–Coil Sys. Corp. v. Columbia Cas. Co., 524 N.W.2d 650, 654 (Iowa 1994) (a party seeking to escape the effect of provisions of an insurance policy must prove that compliance was excused or waived, or that disregarding the terms of the policy would not prejudice the other party).
The predominant test for waiver of the appraisal right after commencement of litigation is whether the party demanded appraisal within a reasonable time. When faced with the issue, courts consider the timeliness of the appraisal demand in light of the circumstances as they existed at the time the demand was made. Terra Indus. Inc. v. Commonwealth Ins. Co. of Am., 981 F.Supp. 581, 602 (N.D.Iowa 1997). Pertinent circumstances include (1) the time between the breakdown of good faith negotiations concerning the amount of the loss suffered by the insured and the appraisal demand; and (2) whether there would be any prejudice to the other party resulting from the delay in demanding an appraisal. Id.
Decisions finding waiver focus on unreasonable delays. In Gray Mart, Inc. v. Fireman's Fund Ins. Co., 703 So.2d 1170, 1172 (Fla. 3d DCA 1997), the insurer waived its right to appraisal where it engaged in litigation for fourteen months before it sought appraisal only one month before trial. The insurer should not have waited until its motion for summary judgment was denied. The Arizona Court of Appeals found that an appraisal demand had been unreasonably delayed when the insurer waited about two months from the time that negotiations halted or at least slowed considerably before demanding an appraisal. Meineke v. Twin City Fire Ins. Co., 181 Ariz. 576, 892 P.2d 1365, 1372 (Ariz.Ct.App.1994). In Coker v. Fireman’s Fund Ins. Co., 2011 WL 5152192, *3 (D.S.C. October 31, 2011), any right to invoke the appraisal process was waived in the six months between when the action was filed and when the demand was first made because the insurer made its demand for appraisal on the last day of the fact-discovery period. Id.
The appraisal right has also been upheld when faced with a waiver challenge. In Massachusetts, the insurer's demand for appraisal was deemed timely when it was asserted as an affirmative defense in answer to the insured's complaint and the court concluded that appraisal was a condition precedent to any lawsuit. F.C.I. Realty Trust v. Aetna Cas. & Sur. Co., 906 F.Supp. 30 (D.Mass.1995). In Washington, an appraisal demand was determined to be timely when it was made several weeks after suit was filed, where “as the record shows, until the insured filed suit, the frame of mind of both parties welcomed additional communications and negotiations rather than confrontations.” Keesling, 520 P.2d at 627. Where a demand for appraisal was made approximately three weeks after suit was filed, the Delaware court held the demand was timely because the court found the parties were negotiating at least until one month before suit was filed. Hanby, 265 A.2d at 30–31. A Florida court held that where an insurer failed to request appraisal during lengthy negotiations but made such a demand in response to the insured's complaint, the trial court erred by denying the insurer’s motion to compel appraisal, because the insurer had not waived appraisal by acting inconsistently with that right at any point in the proceedings or by unreasonable delay. Preferred Mut. Ins. Co. v. Martinez, 643 So.2d 1101, 1102 (Fla.Dist.Ct.App.1994). In Terra, 981 F.Supp. at 599, although the insurer did not demand appraisal until three months after the complaint was filed, the Iowa court refused to find waiver because the insured and insurer continued to attempt negotiations over the amount of loss even after suit had been filed.
Various courts include prejudice as a factor in the analysis of a claim of waiver of appraisal. See e.g. Bard's Apparel Mfg. Inc. v. Bituminous Fire & Marine Ins. Co., 849 F.2d 245, 249 (6th Cir.1988) (prejudice found -- the damaged property had been disposed of between the filing of the claim and the demand for appraisal, and thus the delay in demanding appraisal was unreasonable); Gray Mart, 703 So.2d at 1172 (insured would be prejudiced if it was forced to proceed with appraisal process one month before trial was set to begin); Monroe Guaranty Ins. Co. v. Backstage, Inc., 537 N.E.2d 528, 529 (Ind.Ct.App.1989) (appraisal demand was within a reasonable time more than six months after the failure of good-faith negotiations where there was no prejudice to the insured from the delay); Terra, 981 F.Supp. at 604 (no prejudice because insured was willing for jury composed of laypersons, not appraisal experts, to determine the amount of loss, in absence of actual damaged property).
In closing, whether insurer or insured invokes appraisal after the other party has filed a coverage action, it is quite likely that waiver of the appraisal right is going to be litigated. Whatever side you are on, know the case law for your jurisdiction and be prepared to argue it.