Understanding the Appraisal Clause in Your Insurance Policy

Nearly all insurance policies contain what is commonly called an “appraisal clause.” While the specific language differs from one policy to another, the idea is generally the same. This provision is designed to provide a mechanism to resolve disputes about insurance claims — but not all disputes are subject to being resolved by appraisal.

Typical language will say something like this:

“If you and we do not agree on the amount of the loss, including the amount of actual cash value or replacement cost, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of such demand . . . . The appraisers shall then appraise the loss, stating separately the actual cash value or replacement cost of each item, and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two of these three, when filed with the company shall determine the amount of loss.”

If you read this language carefully, it is clear that only disputes about the amount of the loss are subject to appraisal. But sometimes that is not the dispute. Sometimes the dispute involves whether the policy actually provides coverage for the claimed loss, or some part of the claimed loss. Disputes about coverage are not appropriately resolved by the appraisal clause.

If you have suffered a loss and have a dispute with your insurance company, it is very important to understand the difference between disputes over the amount of loss versus disputes about coverage. And, sometimes, it is difficult to tell the difference. If your insurance company demands appraisal, or if you are considering doing so, you should always consult with a knowledgeable insurance coverage attorney before making the demand or responding to one. If the appraisal clause is invoked when it shouldn’t be, it can cause unnecessary delay and can even jeopardize your right to recover under your policy.

The Importance of “Insurable Interest”

The time to be certain that your insurance policy has been issued correctly so that it actually insures what you intend it to insure is before you have a loss and make a claim.  An insurance policy is a contract, and as with all contracts, it is important to make sure the key provisions are written in a way that reflects the actual intentions of the parties.

A recent decision by the Indiana Court of Appeals demonstrates, in stark detail, what can happen if an insurance customer is not careful about how the policy is issued.  In the case of Nuell, Inc v. Property-Owners Insurance, the Court of Appeals affirmed the decision of the trial court which had found that the insurance policy did not cover damage to the building caused by a car that had driven into it.  Cars colliding with buildings is precisely the sort of thing a business owner wants to have insurance coverage for, so the question is why didn’t the Property-Owners policy provide coverage to Nuell?  The ultimate answer to this question was based on simple contract interpretation, and the fact that the insurance policy was issued to a company that did not in fact have an “insurable interest” in the building.

The Court of Appeals described the basic facts this way:

In 2015, Nuell, Inc. (“Nuell”) purportedly entered into a lease agreement as a tenant on a commercial property. Nuell obtained an insurance policy from Property-Owners Insurance Company (“Property-Owners”), and coverage under the policy required that Nuell have a financial interest in the property. Shortly thereafter, Timothy Marsillett drove his car through a concrete barrier wall and partially into the building on the property. Nuell filed a claim with Property-Owners. Property-Owners ultimately denied the claim on the ground that Nuell did not have a financial interest in the property as required by the policy. Specifically, Property-Owners concluded that Nuell lacked a financial interest in the property because Nuell had neither a legal or equitable interest nor a valid lease with the trust that owned the property.

Nuell, Inc v. Property-Owners Insurance, Feb. 16, 2021

The trial court and the Court of Appeals both agreed with Property-Owners that the company that bought insurance for the property — Nuell — “had neither a legal or equitable interest nor a valid lease with the trust that owned the property.”  Why not?  Because although the property was owned by a trust, there was no lease agreement signed between the trust and Nuell.  Instead, the lease was signed by a husband and wife as (allegedly) “owners” of the property and by Nuell as the tenant.  The lease required the tenant to buy insurance, and the tenant complied with this provision, but that fact was not enough for the court to find that Nuell had an insurable interest.  And, since the policy was issued only to Nuell and (apparently) did not include the trust as an additional insured, there was no coverage.

The result seems harsh in this case, particularly because Nuell was a closely-held corporation.  The owner of Nuell was also the trustee of the trust that owned the property, and there can be no doubt the intention was to insure the property against damage just like what occurred.  But since Nuell did not technically own the property and because the lease was held to be invalid, Nuell had no legal or equitable interest in the property and, thus, no insurable interest.To avoid bad outcomes like this, it is very important to work closely with your insurance agent to make sure the policy is written properly and to make sure the named insured on the policy is the correct named insured.  For help in situations like this, reach out to the insurance coverage litigation attorneys at Parr Richey.