New Appraisal Rules for Puerto Rico Property Insurers

by Zelle LLP

Zelle  LLP

Insurance Law360
February 7, 2019

In response to the extremely active 2017 Atlantic hurricane season, Puerto Rico’s governor signed into law[1] six bills that amend or introduce new provisions to the Insurance Code of Puerto Rico, 26 L.P.R.A. § 101 et seq. These bills address the newly established appraisal process, expedited payment requirements and additional civil remedies against insurers. They also address requirements for insurers, surplus carriers and micro-insurance providers.

Though the six enacted bills became effective on Nov. 27, 2018, they are difficult to find in English-language platforms.[2] The focus of this article is PS 1054,[3] the bill that codifies the use of a provision frequently found in many insurance policies: the appraisal clause.

Property Insurance Policies Must Include an Appraisal Clause

Article 11.140 of the Insurance Code of Puerto Rico (26 L.P.R.A. § 1114) enumerates the items that every insurance policy must include (e.g., material contract terms, benefits, conditions). Article 11.150 (26 L.P.R.A. § 1115), on the other hand, allows insurers to add additional terms to insurance policies so long as these additional terms are not incompatible with the Insurance Code and are (a) required by laws of the insurer’s domicile or (b) “appropriate, on account of the manner in which the insurer is constituted or operated,” to indicate contractual parties’ rights and obligations. If an insurer is a mutual or reciprocal insurer, the policy shall include a declaration of the contingent liability, if any, of the insured or the policyholder.

PS 1054 amended Article 11.150 to include a new section which states that every commercial or personal property insurance shall include a stipulation or clause for an appraisal process in which disputes regarding the value of the loss or damages in a claim may be resolved. Under the statute, the availability of an appraisal process creates an option for insured, but does not limit insured’s ability to seek recourse in a trial court or administrative forum in the first instance.

This is a big change — neither alternative dispute resolution nor appraisal processes were permitted previously under the Insurance Code of Puerto Rico because they were viewed as a limitation on insureds’ rights. In June 2018, the Office of the Commissioner of Insurance for the Government of Puerto Rico issued a ruling letter[4] allowing and formally establishing “appraisal procedures for insurance claims for commercial property related to catastrophic events.” However, PS 1054 expands the procedures of the June 2018 ruling letter to require appraisal clauses in personal and commercial property insurance policies (not just commercial property insurance) in relation to any claim, not just “catastrophic events.”

To ensure uniformity, Article 11.150 provides that an insurer will be considered to have met this appraisal clause requirement when the insurance policy contains the appraisal clause language established by the Insurance Services Offices Inc., if insurer is a member of said organization or when it uses the guides published by the National Association of Insurance Commissioners. The appraisal clause must also comply with the newly enacted Article 11.190, Section 3, discussed below.

Requirements for Appraisal Clauses

Article 11.190 of the Insurance Code (26 L.P.R.A. § 1119) dictates what limits may be placed on the coverage provided by an insurance policy. Pursuant to Article 11.190 Section 1, no policy issued in Puerto Rico and “covering a subject of insurance resident, located, or to be performed in Puerto Rico” shall have any condition, stipulation, or agreement that (a) deprives an insured of the right to pursue legal action in court to determine his or her rights under a policy; (b) deprives Puerto Rican courts from jurisdiction in actions against an insurer; (c) limits the right to commence an action against a property insurance, marine insurer or transportation insurance “to a period of less than one year from the date of occurrence of the event resulting in the loss,” or against any other type of insurance “to a period of less than one year from date cause of action accrues;” or (d) requires a policy be governed by the laws of another jurisdiction except as necessary for certain vehicle and disability insurance.

PS 1054 amended Article 11.190, Section 2 to establish that any clause or provision in an insurance policy that places conditions on an insured’s right to seek judicial action against an insurer shall be considered null (not just the clauses or provisions that violate Article 11.190). The newly added Section 3 reiterates this concept in the context of appraisals: appraisal clauses will be considered valid under the Insurance Code so long as these clauses do not abrogate or eliminate an insured’s right to commence legal action against its insurer in court. In other words, appraisal processes are no longer considered prohibited limitations on insureds’ property insurance rights, as long as insureds’ rights to seek judicial intervention are not infringed.

Under Article 11.190, either party shall be allowed to demand in writing that a dispute regarding the value of a loss or damages be submitted to an impartial and objective umpire. Unlike the appraisal process in some jurisdictions, which allow the insured and insurer to each appoint an appraiser to assess the value of the loss and, if those appraisers are at an impasse, seek an umpire, the appraisal process described in the Insurance Code of Puerto Rico calls for the parties to immediately assign an umpire to assess the claim. The umpire must be competent and impartial (details as to who can act as an umpire are addressed in the newly enacted Article 9.301, which is discussed below), and shall be selected to resolve disputes exclusively related to the value of a loss or damage in one or more claims for commercial or personal property insurance policies.

The umpire shall be selected by mutual agreement of the insured’s appraiser and the insurer’s appraiser. If within 15 calendar days from the date of the appraisal demand the appraisers cannot agree on an umpire, the Office of the Commissioner of Insurance shall select the umpire. The umpire does not have authority to determine issues of coverage or insured’s rights. The umpire’s decision regarding the insured’s property’s value will be binding when two out of the three members of the appraisal panel reach an agreement, without prejudice to the dissatisfied party’s right to challenge the appraisal award in a trial court. The umpire’s fees shall be disclosed prior to the commencement of the appraisal and shall be split equally among the parties. Each party shall pay its own appraiser’s fees. 

Umpires’ Duty to be Impartial and Objective

In addition to rules regarding the general appraisal process, PS 1054 added Article 9.301 to the Insurance Code of Puerto Rico. Under this provision, any person who acts as an umpire for an appraisal must exercise his or her duties “with absolute impartiality and objectivity.” The kinds of activities that indicate an umpire is not impartial are quite specific. In fact, under Article 9.301, engaging in any of the following will constitute a violation to the duty of impartiality and objectivity:

  • Have a direct or indirect economic interest in the claim or the outcome of appraisal process;
  • Establish fee payment structures based on the outcome of appraisal process;
  • Be currently an employee, stockholder, member, associate, official director or representative of the insurer, the insured, or the appraisers participating in the appraisal;
  • Have family ties within a fourth degree consanguineous relationship (i.e., related by blood) or a second degree affinity relationship (i.e., related by marriage), or reside with one of the parties or appraisers participating in the process;
  • Omit from the parties any previous professional relationship or personal circumstances with any of the parties or appraiser which might create doubts as to the umpire’s impartiality; or
  • Not duly inform the parties or not refraining him or herself from her duties when a potential conflict of interest arises.

PS 1054 does not state that it is an exhaustive list or that the actions enumerated in this list are the only behaviors that would indicate an umpire is not impartial or objective. However, the list does provide very specific examples to guide insureds, insurers and appraisers when selecting an umpire.

Moving Forward

PC 1054 does not address whether appraisal awards are meant to be binding. The June 2018 ruling letter, however, notes that the umpire’s decision will not be binding on the parties unless the parties mutually agree in writing otherwise. Since, under Section 3 of Article 11.190, the insurance commissioner is authorized to adopt the rules he or she deems necessary to regulate (a) the appraisal processes and (b) the aptitude and competency criteria of individuals that act as appraisers or umpires in said process, it is likely that there will be forthcoming ruling letters from the commissioner providing more guidance as the appraisal process becomes more common in Puerto Rico.

Finally, it appears from the language of the Article 11.190 that the appraisal process is intended to be used in pending Hurricanes Irma or María claims, not just claims that occurred on or after Nov. 27, 2018 (the date of enactment). The newly added Sections 4 through 6 of Article 11.190 note that for the purposes of an insured’s direct action to recover damages under an insurance policy, a claims notification from insured to insurer will toll the statute of limitation, even if the claim was raised as a consequence of September 2017’s Hurricanes Irma and/or María.

This new appraisal process has been in place for less than three months, so it is still unclear how often parties will use the process, how effective it will be or if insureds and insurers will encounter issues with the process. Given the sheer number of property insurance claims that arose after the 2017 hurricane season, however, this new process brings a much-needed mechanism to resolve value disputes outside of the courtroom — if an insured so wishes.


[2] Beyond legal search-engines, you can find copies of Puerto Rico bills in both English and Spanish at The Office of Legislative Services’ enacted laws webpage; however, the six bills enacted in November 2018 regarding the Insurance Code of Puerto Rico have not been uploaded in English as of the writing of this article. 




DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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