It’s Your Move

It is common to hear people say: “Nothing is simple anymore.” Professional property claims adjusters know this all too well: the level of complexity associated with even the simplest property claim has amplified due to increased consumer awareness, hectic lifestyles, and the range of choice available at every stage of the restoration and replacement process.

Underwriters look for a reduced file shelf life and appropriate indemnity payments. Loss adjusters and claims managers assess damages and identify quantum. But some files rarely seem to settle smoothly. Disputes often arise, and both insured and insurer are adamant that their position on the amount is correct.

Letters go back and forth between insurers and insured; as a result, the claims file languishes rather than moving forward to settlement and resolution. The insured, not accustomed to settling claims, seeks representation from counsel. Counsel, in protecting the insured’s legal rights, issues a statement of claim, seeking payments at policy limits – and potentially throwing in allegations of aggravated and punitive damages for good measure.

Settlement does not have to happen this way. Insurers and insureds have recourse to a statutory condition called “Appraisal Under the Insurance Act.” This is a cost-effective, transparent and efficient Alternate Dispute Resolution (ADR) method.

USING ADR FOR GOOD MEASURE

Under the statutory conditions of every property policy issued, both the insured and the insurance company have the right to elect appraisal when there is a disagreement as to the:

* value of the property insured,

* value of the property saved, and

* amount of the loss.

The following scenario illustrates how this process works. In this hypothetical scenario, an insured’s secondary recreational property is destroyed by fire. The insurer is able to come to an agreement on the quantum of the building damages. But, when the insured files a proof of loss seeking in excess of $600,000 for the contents loss, a dispute arises as to the extent of the contents claimed.

The insured retains a public adjuster, who eventually elects appraisal to resolve the dispute as to the actual cash value (ACV) of the contents claimed.

The public adjuster approaches the valuation of the contents’ ACV using the traditional method of replacement cost less depreciation. He or she attributes only nominal depreciation to content items, with little supporting information to establish the depreciation attributed.

At the appraisal hearing, the insurer’s appraiser strongly advocates that the contents claimed were older goods consistent with a secondary or seasonal residence; in addition, the insurance contract in force took into account market value in determining the measure of the ACV.

The umpire is convinced the appropriate approach to establishing the value of these goods is indeed their market value. A lengthy appraisal hearing takes place, after which the parties finally agree on the market value of each of the 400-plus items listed on the schedules of loss. At the end of the hearing, an agreement is reached for $110,000.

THE SELECTION PROCESS

Choice of Appraiser

Insureds can choose whomever they wish to act as their appraiser. Some policyholders act on their own behalf; others elect to use a relative, contractor or a lawyer. More often than not, a public adjuster represents the policyholder.

The insurer can also have any appraiser it wants, keeping in mind the wrong choice of appraiser can significantly impact the efficiency of the process and the outcome. Insurers should consider the following when selecting an appraiser:

* The appraiser should have strong advocacy skills and the ability to argue a position before an umpire. Being an expert in the subject matter of a certain discipline does not necessarily make someone the best choice.

* What is the appraiser’s practical field experience handling property damage claims? Is he or she arguing based on practical experience or something learned from a legal case?

* Who is the appraiser for the policyholder? What are his or her competencies? You need to match strength against strength.

* How experienced is the appraiser in doing appraisals? How many cases has the person handled? Does he or she have any references? What issues has he or she dealt with in the process? Has he or she taken any courses in mediation or arbitration?

* Should the adjuster handling the file carry on, or is a fresh approach required to move ahead? A new face in the process may resolve matters without going to the umpire. Never doubt the power of a personality dispute in trying to settle a claim.

* Think of the issues that need to be resolved. To determine ACV, do you pick a real estate expert to act as appraiser? Could the real estate expert argue other approaches to determine ACV and then jump into case law and contract arguments relating to endorsements or exclusions?

* Does your appraiser have knowledge of other issues in appraisal such as statutory conditions, proofs of loss, pre-judgement interest, sales tax, proscription periods, current case law, etc?

When you consider the number of contractual and other issues that may arise during the appraisal session, it makes sense to use an appraiser who has extensive knowledge on as many of the points listed above as possible. If the other appraiser is a lawyer or public adjuster, keep in mind their abilities to argue on all these points.

It is incumbent on the appraiser to advocate the position on the strength of the information and evidence assembled. Creativity is important but credibility is mandatory. The argument must relate to:

* the insurance contract;

* the statutory conditions;

* the opinions and reports of experts;

* the statements of “non-expert” sources; and

* common sense.

Choice of Umpire

Many of the criteria involved in selecting an appraiser also apply when choosing an umpire. A number of other points to consider include:

* The individual should be impartial and unbiased. If the umpire has any potential conflicts of interest, they should be declared up front. For example, the umpire may have done past work for the insurance company.

* The umpire must be very clear as to his or her role. This is not an arbitration, nor is he or she hearing evidence in the fashion of a courtroom setting. The umpire is present to bring his or her own experience and knowledge to bear on the issues in dispute.

* At the end of the process, the umpire should ensure both sides felt they were treated fairly. Both sides should feel they had an appropriate opportunity to present their cases and argue their points of view.

The process of selecting an umpire has proven to be an interesting one. Both sides without question engage in some ‘shopping’ to select an umpire. The shopping list, however, is an informal one; it is really created through word of mouth. At present, the busiest umpires are semi-retired loss adjusters and property litigation lawyers.

PUBLIC ADJUSTORS

Public adjusters are hired to get the policyholder the ‘best result’ from the insurer. Fee arrangements may vary, but often the size of the fee is tied to the gross amount of the settlement. This is similar to a contingent fee arrangement.

The following, hypothetical scenario helps illustrate the role of the public adjuster and how an insurer might respond.

Consider a situation in which an electrical fire spreads throughout a large hotel complex, creating damages exceeding $1 million. Within minutes of the media broadcast announ
cing the fire, public adjusting firms are on the phone trying to establish contact with the building’s owner. By 11 a.m. the next morning, two public adjusters arrive at the site and take turns pitching to the owner. They are polished and professional; they warn the owner he is “not going to get a fair shake from the insurance company.”

The independent adjuster hired by the owner’s insurance company arrives at 2 p.m. Within minutes, the owner asks the adjuster when he can expect an advance payment. The adjuster explains he has just arrived and needs to orchestrate a site investigation to determine the cause of the fire. He tries to explain the process he will follow in handling the claim, but the owner seems to get more upset with each comment. The independent adjuster has no idea he has just been playing into the ‘script’ laid out by the public adjusters. The owner decided he needed to protect his investment and called one of the public adjusting firms.

The public adjuster’s first step was to bring in a construction estimator who estimated building repair costs to be worth more than $900,000. An employee of the public adjusting company catalogued all of the contents, concluded everything was destroyed and a claim was made for $400,000. They filed a settlement package totaling more than $1.7 million.

The insurer’s independent adjuster uses a structural engineer, a chemist, and several competent general contractors to complete a scope of damage and solicit competitive bids. The hotel owner and his public adjuster refuse to be part of the process. The building repair estimates obtained from the independent adjustor’s circle of experts leads to a tight grouping of prices in the $600,000 range. Two contents cleaning firms estimate that only 20% of the contents were destroyed; the rest would respond to cleaning. They say the cost to clean and replace the destroyed contents would total $100,000.

The insurance company is aware of its obligation to act in good faith. It sifts through the building and contents claims, determining what it feels is an appropriate ACV. It immediately issues a cheque and sends the funds to the hotel owner along with a lengthy letter, spelling out the terms of the replacement cost endorsement that existed on this policy. Then the insurer sits back and waits for the policyholder’s next step.

A letter soon arrives from the public adjuster announcing that the insured had elected to resolve the damage issues through appraisal.

As the above scenario involving the public adjustor suggests, it is important that the insurer’s loss adjuster performs consistent, quality work on every loss. The involvement of a public adjusting firm should have no impact on how the insurer handles a claim.

WHAT’S OLD IS NEW AGAIN

Appraisal under the Insurance Act has been a part of the insurance contract for many years. Only in recent years, however, have claims professionals awakened to the option as a highly cost-effective, fair and common-sense approach to a wide range of property claims situations. Handled properly and with professionalism, the option provides a tremendous opportunity for policyholders and claims adjusters truly looking for a win-win solution.

How Does Appraisal Work?

The specifics of the appraisal mechanism are set out in each province’s Insurance Act. A typical timeline follows:

* Insurer must file a proof of loss.

* If quantum or the amount of loss is disputed, either side may invoke the appraisal process in writing.

* Once invoked, each side has seven days to appoint their appraiser.

* The appraisers have 15 days to mutually agree upon an umpire. If the appraisers cannot agree, a motions court judge can make the selection.

* An agreement by any two of the three parties involved resolves the dispute.

* The appraisal process deals with issues of quantum only; it does not take into account coverage or legal interpretation.

* Disputes over claims for rental income, business interruption and additional living expense are not subject to the appraisal process, although they may be resolved through an agreement between the parties.

* Once invoked, the process is mandatory; the eventual agreement or appraisal award is binding.

* The policyholder and insurer are required to pay 100% of their appraiser’s costs; each side is required to pay 50% of the umpire’s costs. Unlike the litigation process, there is no award of costs against the unsuccessful side.