The Policy's Appraisal Clause

One of the most important and balanced provisions found in the Standard Fire Insurance Policy and most other property insurance policies today is the Appraisal Clause. In fact, in most jurisdictions, it is one of the only provisions that afford protection to the interests of the insured in equal measure to those afforded to the insurer. It has long been a valuable tool to all parties to the insurance contract in most states around the country

In the absence of a binding appraisal provision, the consumer must either accept the insurance company’s figures or retain counsel and proceed to litigation. Insureds would be forced to resort to the legal system to have these differences resolved. The litigation process is often expensive and time-consuming, with insureds paying in legal fees, the very benefit they were fighting to recover from the insurance company.

The Benefits of The Policy’s Appraisal Clause

From the insurer’s perspective, an insurance carrier might benefit from the ability to bring a difficult, expensive and contentious adjustment to a satisfactory conclusion, without incurring extensive legal fees and accusations of bad faith.

Among the primary benefits favoring the appraisal process is the savings of time and money for the parties to the insurance contract as well as the courts. States have long recognized that litigation avoidance results in many efficiencies and monetary savings for the parties involved as well as for an overburdened judicial system.

"The clear intent of the appraisal provision is to avoid undue formalities, delays, expense and the vexation of litigation.”

Ginsberg v. Coating Products, Inc., 152 Conn. 592, 210 A.2d 667 (1965) Tweet


Lines 123 through 140 of the New York Standard Fire Policy state the following:

“Appraisal. In case the insured and this Company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within twenty days of such demand.

The appraisers shall first select a competent and disinterested umpire; and failing for fifteen days to agree upon such umpire, then, on request of the insured or this Company, such umpire shall be selected by a judge of a court of record in the state in which the property covered is located. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and failing to agree, shall submit their differences, only, to the umpire.

An award in writing, so itemized, of any two when filed with this Company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him and the expenses of appraisal and umpire shall be paid by the parties equally.”

New York Standard Fire Policy

The many states that have adopted the Standard Fire Policy (also known as the New York Standard Fire Policy and less formally as the “165 Lines”), this language sets forth the minimum standards enjoyed by the policyholder.

In these states, the carrier may amend the statutory language but may not diminish the rights of the insured as granted by the Standard Fire Policy. For example, the Standard Fire Policy has been mandated by statute in New York for many years. It was originally enacted in 1853, and its present form has been in use since 1943.

Further, the appraisal clause has been held not to be ambiguous and many jurisdictions have used very similar provisions.
“Appraisal” is a common term used in an insurance contract, with Black’s Law Dictionary defining “appraisal clause” as

“[a]n insurance policy provision allowing either the insurer or the insured to demand an independent estimation of a claimed loss.”

Black’s Law Dictionary

The strength and effectiveness of the appraisal provision has been inconsistent from state to state and year to year. In 1954, in a decidedly anti-consumer decision, the New York Court of Appeals in Happy Hank Auction Co. v. American Eagle Fire Ins. Co., held that despite the mandatory language of the Standard Fire Policy, the New York courts had no power to require an insurer to take part in an appraisal demanded by an insured. This had the effect of making the appraisal clause almost irrelevant in the processing of insurance claims within the state. Few claims went to appraisal after this decision and New York became one of the few states in the nation to leave its consumers unprotected in this manner.

Litigation became the only alternative to resolve disputes as to the amount of loss and damage. In countless cases, consumers accepted less than they merited under the policy due to the anticipated delay and expense involved in litigation. Others incurred extensive legal fees litigating the value of loss and damage, often negating any hard won monetary victory.

In 1990, the New York legislature appeared to have restored to the insured the power to compel compliance with the appraisal clause, originally taken away by the Court of Appeals in the Happy Hank decision.

This was accomplished by the legislature’s enactment of an amendment to §3404 of the New York State Insurance Law. The amendment provided that the appraisal provision shall be binding on all parties.

Current Situation

The great majority of states reject the Happy Hank line of cases. In fact, in Standard Fire Insurance Company v. Fraiman, the Texas Court of Appeals, while discussing other similarly minded decisions stated:

“To the extent that Happy Hank Auction Co. v. American Eagle Fire Ins. Co. holds that the insurer may raise as a defense the failure of the insured to submit to an appraisal, but the insured may not coerce the insurer to appraisal but he may file suit on the policy, we reject that line of reasoning. The insured has the right to rely on the plain language of this policy providing or appraisal upon the written demand of either party, which language may have formed in his own mind a part of the consideration for the premiums he paid for.”

Standard Fire Insurance Company v. Fraiman

Appraisal Clause and Judicial Intervention

Such a demand does not negate jurisdiction of the courts and leaves the general question of liability to be judicially determined. It simply provides a reasonable method of estimating and ascertaining the amount of the loss and value of the property damaged and insured.

Max Gwertzman, a well known attorney that authored “A Legal Analysis of the Appraisal Agreement” in the 1970s stated:

“This provision of the policy clearly and unequivocally manifests the intent and agreement of the parties to the contract of insurance that any difference arising between them as to the amount of loss or value of the property insured shall, at the request of either party, be submitted to the appraisal process.
The appraisal is to be by an umpire and two appraisers to be chosen as therein provided, whose award shall be conclusive as to the amount of such a loss and value only but shall not determine the question of liability of the company.”

Some states currently have reduced the importance and effectiveness of the appraisal provision by making it voluntary, thus precluding any successful attempt at enforcement by litigation. These states, such as Arkansas, California, Nebraska, Oklahoma, Oregon, South Dakota and West Virginia have left their insureds substantially unprotected by requiring the insured to retain counsel and litigate the issues of actual cash value and the amount of loss.

Without a binding appraisal provision, an aggrieved insured can either accept the carrier’s best offer or litigate. By undermining this important process, as for example by permitting the insured to challenge the carrier’s position on the issue of the amount of loss, only if the insurer agrees to be challenged, these states will ultimately experience increased litigation as well as customer dissatisfaction.

Even in states that recognize the appraisal provision as a condition precedent to suit, this will only be so where there has been an actual demand for appraisal.

As an example to this, we can refer to the case of Duane Reade, Inc. v. St. Paul Fire and Marine Insurance. In this case, the court disagreed with the carrier’s argument that an appraisal was required before suit could be brought based on the plain language of the policy’s appraisal clause which stated that neither party was required to submit to an appraisal until a written demand for appraisal had been issued.

In this matter, the Second Circuit Court of Appeals sitting in New York and ruling on a matter arising out of the destruction of the World Trade Towers found the “no-suit” provision of the policy to be ambiguous with respect to the appraisal provision. The court concluded that while the clause may plausibly be read as precluding suit until an insured satisfies every contractual obligation as the carrier asserted, it is equally amenable to being read as precluding suit only if the insured failed to satisfy those obligations which have accrued before suit is filed. Thus, the court concluded that appraisal is not a condition precedent to suit if it had not been demanded.

“Completion of the appraisal process is a precondition to a suit by either party. However, if an appraisal demand is not made before litigation is commenced, a lawsuit “cannot be barred as premature, because appraisal is not then a precondition to suit.”

North Glenn Homeowners Ass’n v.State Farm Fire and Cas .Co., No. 13-0859 (Court of
Appeals, July 16, 2014).38