Scenario: A first-party insured with collision coverage brings his damaged car to you for repairs. Your estimate comes to $3,501. The insurer has “appraised” (a.k.a “estimated”) the cost of repair at $2,255. Reinspections and supplementals have been exhausted, and there’s still a sizeable gap between the actual cost of repair and what the insurer is willing to pay.

Before you throw up your hands and either eat the shortfall or attempt collection from the owner (leading to a possible replevin action), there is an alternative.

Some shops are aware of a clause in the policy whereby settlement value disputes can be resolved via “appraisal” or “arbitration.” While these shops are in the minority, the vast majority of even those shops don’t understand how the process works or how it can be utilized to benefit their customers and themselves.

Benefiting From the Appraisal Clause Process
Tip No. 1: You, as the repairer, shouldn’t attempt to represent your customer because you could be disqualified as not being “disinterested.” Find another individual in your area whom you can rely on to be a “competent and disinterested” appraiser. Your options here could include (but not be limited to) an independent appraiser, a former or retired appraiser, a body tech at a reputable competing facility, a former or retired body tech, a former or retired service writer or mechanic, an instructor at a local vo-tech training facility or any other individual who would meet the “competent and disinterested” requirement.

If the individual you select works with a competing repair facility, you could work out a cooperative relationship whereby he’d assist your customers in exchange for your assisting his customers – with the understanding that there’d be no attempts at recruiting or soliciting. Such a relationship could help to keep down the consumer’s costs relative to the appraisal process. It could also provide a supplemental revenue source for you, enhancing your cash flow and broadening your circle of influence without significantly increasing overhead.

Tip No. 2: Once an appropriate “competent and disinterested” appraiser has been found, share this article with him so both of you will be on the same page.

Tip No. 3: While there will be some costs involved in the appraisal process, you can minimize inconvenience to the customer by releasing his repaired vehicle back to him in exchange for him signing a 90-day note for whatever balance may be due – on the condition that he proceeds with the appraisal process and you agree to accept whatever balance is due based upon the results of the appraisal process.

Appraisal Vs. Arbitration
Probably one of the most common points of confusion over an auto insurance policy’s appraisal clause is the referencing of the appraisal clause as being “arbitration.” This is a common misconception. Let’s start out by clarifying the distinction between these two separate processes.

1. Appraisal clause – This applies to the Physical Damage portion of a Property & Casualty (P&C) insurance policy. It’s a contractually embedded process by which a dispute, relative to the settlement value of a first-party physical damage claim, may be resolved. For auto insurance, we’re talking about “collision,” “comprehensive” and/or “replacement cost” coverages.

2. Arbitration clause – Also found in the auto insurance contract verbiage, this sets forth a contractual guideline designed to resolve disputes relative to a personal injury an insured may have sustained that would be covered by uninsured motorist (UM), under-insured motorist (UIM) and/or auto med-pay benefits.

Arbitration is typically quite costly, time consuming, involves legal representation and oral arguments and is subject to Rules of Evidence and Rules of Civil Procedure. Generally speaking, arbitration is a genuine pain in the south end of a northbound elephant. Thankfully, this article only deals with the appraisal clause.

Examining the Appraisal Clause
An auto insurance policy is a P&C insurance contract. All P&C insurance contracts written in the United States are based upon what used to be referred to as the New York Standard 165 Line Contract. Today, that standardized contract is referred to as the ISO (Insurance Services Office) 165 Line Contract. That basic contract (or subtle variations thereof) is now the statutory foundation for all P&C contracts throughout the country. The appraisal clause in this standardized contract form begins on line #123 and continues through line #140 and reads as follows:

“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 20 days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for 15 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.”

The verbiage above is well over 200 years old. It seems very clear, specific and devoid of any ambiguity.

Contemporary Verbiage: USAA
Multiple variations on the above statutory verbiage are found in today’s auto insurance contracts. In an effort to create more contemporary “easy reader” policies, shortcuts have been taken in the verbiage that actually have the effect of creating ambiguity.

As an observer of the insurance industry for more than 30 years, I’m not persuaded that the ambiguity found in the more contemporary versions of the appraisal clause are either unintentional or incidental. Teams of lawyers and lobbyists are paid obscene sums of money to make sure insurance policies say exactly what the insurance industry wants them to say.

Using the guise of “easy reader,” lobbyists have had to convince legislators and/or Department of Insurance bureaucrats that the “new” form is “easier” for the consumer to understand. Yet, very often, the “easy reader” versions of the appraisal clause will contain the most subtle of distinctions as to escape the notice of (or be intentionally overlooked by) regulators. For example, the USAA auto insurance policy form #500AZ(01) edition 11-96/page #11 reads as follows:

“APPRAISAL. If we and you do not agree on the amount of loss, either may demand an appraisal. In this event, each party will select a competent appraiser. The two appraisers will select an umpire. The appraisers will state separately the actual cash value and the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each party will pay its chosen appraiser and share the expenses of the umpire equally. Neither we nor you waive any of our rights under this policy by agreeing to an appraisal.”

At first glance, the USAA verbiage seams reasonable and consistent. However, upon closer examination, you’ll notice that there’s no mention of the “judge of a court of record” provision. The absence of this provision can be (and has been) used to derail the entire appraisal process.

Suppose, for the sake of this discussion, an insurer might actually choose to remain actively involved in the appraisal process (contrary to the intent of the appraisal clause) and attempt to control the activity of their chosen “competent” appraiser (note the absence of the word “disinterested” that appears in the statutory ISO 165 form). There have been cases where the appraiser for the insurer has been told to “not agree” to any umpire candidates proposed by the policyholder’s appraiser. Some insurers actually have a list of those whom they’ve pre-approved as “umpires.” That effort seems to have the intent of stacking two of the three participants against the insured.

If the insurer’s appraiser fails to agree to a truly “disinterested” umpire (and the insured’s appraiser declines to agree to the insurer’s preferred list), the process is stalemated – and the intent is defeated. Subtle distinctions in wording to be sure. But, the unintended (or perhaps intended) effect is the circumvention of the intent of the appraisal clause and the undermining of the rights of the policyholder.

Contemporary Verbiage: American Family
So as not to seem to be picking on USAA, I pulled my own personal auto insurance policy from American Family. According to AmFam Form No. U-5 (MO) Ed. 7/91 – Stock No. 12072 Rev 2/93 – Pages 1 – 6 the “Appraisal” clause reads as follows:______________________________________________________________How’s that for “easy reading”?

Can you believe it? This industry “expert” (me) has no appraisal clause in his own policy. There’s a lesson to be learned here. No matter how much you think you know – or how extensive your credentials – Read your own policy!Various Versions. A Singular Approach

Whether the subject insurance policy contains the ISO 165 verbiage, various “easy reader” versions or, for that matter, no appraisal clause verbiage at all, policyholders’ rights as expressed in the ISO 165 are protected.

I know of no state where the ISO 165 line contract hasn’t been adopted as the statutory foundation for P&C insurance. When DOI regulators “approve” various “easy reader” verbiage or policy contracts that vary in any way from the ISO 165, it’s typically done so with a caveat. In essence, that caveat says (paraphrased): “In the event of ambiguity or conflict with the statutory contract (typically the ISO 165), the terms and conditions of the statutory contract shall prevail.”

So, you see, the specific contract verbiage notwithstanding, the verbiage in the ISO 165 line (statutory) contract can be relied upon as the guideline for terms, conditions and procedures for implementing the appraisal process.

Though the caveat that typically accompanies approval of various “easy reader” or other modified verbiage policy contracts protects the interest of consumers, few know about that protection. The sad effect of the “easy reader” or modified verbiage appraisal clauses is that many, even some trained and experienced in insurance, will take the variant verbiage as governing and thus allow themselves or their clients to be abused.

If any of you find yourselves involved in an appraisal process and representatives from the insurer’s side try to hold to any of their own restrictive modified contract verbiage, provide those individual(s) with a copy of the ISO 165 verbiage (or give them a copy of this entire article), ask that they reconsider their position and require a written response from someone within their organization who’s earned their C.P.C.U. (College of Property and Casualty Underwriters) designation.

Part of the training to earn a C.P.C.U. designation involves a historical understanding of the prominence, authority and statutory status of the ISO 165 line contract and the caveat involved in the approval of variant contract verbiage. Requiring a response from a C.P.C.U. designate within the insurer’s organization will usually resolve any dispute as to how the appraisal process will proceed.

Choosing an Umpire
The potentially most difficult “sticking” point (and often the most critical element) of the process is the appointment of the “umpire.” This is especially true if it becomes necessary to seek appointment of the umpire by a “judge of a court of record.”

The first order of business in this situation is for the judge to determine whether he has the contractual authority to intervene and make such an appointment. If the insurer’s contract is ambiguous or silent as to this aspect of the appraisal clause, the judge may well accept that variant verbiage as governing and determine he has no such authority.

If the opposition in this appraisal process should take the position that the policy makes no provision for such a judicial appointment, it’ll become incumbent upon you to document the statutory status of the ISO 165 line contract as well as providing documentation as to the caveat attached to the variant verbiage. Prove to the judge that he has authority to do so and he’ll intervene.

FYI: You need not go to Superior Court for this appointment. A judge in “justice” or “small claims” court qualifies as a “judge of a court of record.” Also, go to a justice or small claims court in the area (the court need not have jurisdiction over the geographical location of the loss) and meet with the clerk of courts. The clerk will be able to help you with the procedural aspect of petitioning the court for appointment of an umpire. Such appointment will most likely involve brief oral presentations from both sides before the judge, typically in chambers. The judge will then probably issue a minute entry appointing an umpire.

The “Undisputed Portion”
Though the appraisal clause of the ISO 165 line contract is silent on this point, there’s a generally accepted practice that involves the insurer paying to its insured the “undisputed portion” of the claim “promptly” when the appraisal clause is invoked. By way of explaining what’s “Undisputed,” let’s assume the insurer is offering settlement in the amount of $7,000, but the insured feels he’s due $9,000.

There’s no “dispute” up to the $7,000 figure. The “dispute” involves the extra $2,000 it’d take to get to the $9,000 figure. In this example, the “undisputed portion” would be the $7,000 the insurer was offering.

There’s case law defining an insurer’s failure to pay the “undisputed portion” as “bad faith.” While I’ve made no attempt to research such case law on a state-by-state basis, I can provide one specific case to shepardize* to see if there’s case law applicable in your state. Borland v Safeco Ins. Co. of America – – – (709 P.2d 552).

West Key 602.5 “Where coverage is not contested but amount of loss is disputed, insurer is under a duty to pay any undisputed portion of the claim promptly: failure to do so amounts to bad faith.”

Thanks to this case law precedent, insurers may no longer withhold partial payment in an effort to leverage an insured into foregoing his rights under his insurance contract or as an act of punishment for having exercised their rights.

* Shepardize – to take a point of case law precedent and research it to determine how many times it may have been cited in other cases to determine whether it’s been upheld, modified or possibly overturned. Such a research process determines whether a case law precedent still represents valid law. The shepardizing process also determines whether or not a case precedent point of law has even been explored or addressed in a given jurisdiction – hence the possibility for creating new law.Settlement Lien

As a point of practical application, if you’re going to be representing the interests of an insured in an appraisal process, have your client sign a service/representation agreement specifying the terms and conditions of your participation and your relative compensation.

If it should happen that a portion of your compensation is deferred until the completion of the appraisal process, you should know that you may well have a right to place a lien on any supplemental payment made as a result of the appraisal process. If such liens are enforceable in your state (check with your attorney), notify the insurer of your lien interest in any supplemental payment and ask that they protect your interests on the supplemental payment document.

Procedural Points
For those of you looking to get involved in the appraisal process, read the ISO 165 appraisal clause referenced earlier in this article. Then read it again and again and again. If you’re going to play the game, know the rules!

For those Reader’s Digest devotees, here’s a quick rundown of procedural points that you need to be aware of:

• Invoke the “appraisal” clause in writing.
• Demand the “undisputed portion” be paid to insured “promptly.”
• Notify other side of appointment of appraiser within 20 days.
• Notify the insurer of any lien interest you may have (if applicable).
• Work with opposing appraiser to select “umpire.”
• If there’s no agreement on “umpire” within 15 days, petition a “court of record” for appointment.
• Complete itemized appraisal of loss/damage.
• Meet with opposing appraiser to define items/amounts of agreement.
• Sign “items/amounts of agreement.” (Both appraisers do this.)
• List separately items/amounts of DIS-agreement.
• Submit items/amounts of DIS-agreement to “umpire.” (Each appraiser does this separately.)

• Provide documentation in support of your appraised values in DIS-agreement. (Each appraiser does this.)
• Pre-pay your half of “umpire’s” fee when documentation submitted.
• Sign in agreement (or decline to agree) with “umpire’s” valuation findings. When you or your opposing appraiser signs in agreement with “umpire,” the dispute is settled.
• Provide resolution documentation to your client (cc: to insurer if appropriate).

• Notify the insurer as to the amount of your lien interest (if applicable).

A Third Option
The sooner shop owners like yourself know about and understand the appraisal process and the procedures involved, the less likely you’ll have to “roll over” and take the loss or (alternatively) become “hard nosed” about full payment.

A roll over cheats a shop out of rightful compensation, while being hard nosed hurts a shop’s reputation in the community, discourages future customer referrals and exposes the shop to potential replevin actions (and the related legal expenses). Neither is a particularly good option.

However, when a shop understands the appraisal clause, it presents a third option that allows for full compensation (in cooperation with the policyholder), fosters consumer respect for the shop’s knowledge and professionalism, and develops a “They do good work and know how to make the insurance company pay for proper repairs” reputation for the shop.

I’ve attempted to write this article in such a way as to introduce and/or elevate a basic understanding of the appraisal clause process. Though there have been some obscure subtleties left unexamined, the information shared here should serve you well in the vast majority of appraisal clause situations.

And I promise, I’ll never write an article examining the “arbitration” clause. I doubt I could write that article in such a way that it’d make sense even to me.

Writer Dennis Howard is a retired adjuster continuing his consumer advocacy efforts from a wheelchair in his home in Branson, Mo. He received his paralegal certification in 1974 after having spent two years as Defense Litigation Supervisor for TransAmerica Insurance Group (now TIG). Howard founded the Insurance Consumer Advocate Network in 1994 and took his efforts online in 1997. The iCan Web site can be accessed at www.iCan2000.com. Howard also owns and administers an industry-friendly discussion board at www.ProDiscussions.com.