From the moment a commercial property damage claim is filed, many steps must be taken by both the insured and the insurer to ensure the claim is properly processed. Though each claim and policy are unique to the needs of the insured, there are only a few ways claims can be resolved should a coverage dispute arise. Two such methods are insurance appraisal and arbitration. Despite being similar in name, both are used as means to resolve different types and degrees of insurance disputes. Policyholders must understand the unique distinctions between appraisal and arbitration to ensure their claims are properly investigated and resolved in a timely fashion.
Insurance Appraisal vs Arbitration
The commercial property insurance claims process can be quite complex and involves many different elements depending on the type and extent of the damage. Often, in these situations, appraisal and arbitration help the parties reach a final resolution regarding a disputed claim. While these processes may be used in tandem with each other, they work to help resolve different parts of a claim.
Understanding the Appraisal Process
Often, insurance carriers will include an appraisal or arbitration clause in each policy issued. Typically, these clauses stipulate that in the event the property owner and the insurance company cannot agree on the value of the loss, each party must agree to pursue an individual appraisal. It’s important to note that an appraisal cannot be used as a means to determine what is and isn’t covered under the commercial policy; it can only be used to determine the monetary values attributed to the damaged items. This process involves getting the opinion of a professional on the value of the property and the damages sustained. When insurers and policyholders are unable to agree on the value of a commercial property damage claim, invoking the policy’s appraisal clause can help resolve the dispute.
During the appraisal process, each party selects an appraiser to investigate the claim and come to an agreement on the value of the damaged property. In the event the appraisers cannot come to an agreement on the outcome of the claim, a mutually agreed-upon or court-appointed umpire will handle any disputes between the appraisers. Each party is responsible for paying its own designated appraiser and the parties bear any other related expenses and the costs of an umpire equally.
When selecting an appraiser, insureds must be sure they are an impartial and disinterested party who will evaluate the loss independently. Similarly, the umpire chosen to help resolve the claim if the appraisers cannot agree must also be a disinterested, impartial party with a good moral character and reputation. Once the umpire has been selected, the appraisers will each present their loss assessment for the umpire to review. The umpire will then provide a written decision to both parties. If the two parties agree with the umpire’s assessment of the amount of the loss, then that amount becomes the claim amount; however, if the insurer and the insured still cannot agree, then depending on the policy terms, the claim will next move into arbitration or litigation.
Settling Insurance Disputes with Arbitration
Arbitration is a form of alternative dispute resolution often used in place of litigation. Unlike an appraisal, arbitration works to determine whether or not a disputed claim is covered and how much value in terms of loss the policyholder is entitled to. In most cases, claim disputes that must be arbitrated occur due to the awarded amount being much lower than what it should be or a valid claim being wrongfully denied. Insurance companies favor arbitration over litigation; and, some commercial policies mandate arbitration. In this case, if a dispute arises, arbitration would be the only means of resolving it.
Similar to appraisers, arbitrators must be unbiased, independent, and unaffiliated with either side. The main difference between the two is that an arbitrator must be certified unless they are already a practicing attorney. For a professional to become an arbitrator in Texas, they must complete 30 hours of training on arbitration and alternative dispute resolution procedures from a college, university, legal trade association, or real estate trade association. The policyholder and the insurer can also choose to elect a panel of arbitrators or designate an organization to help provide arbitration services. However, some policies require the arbitrator(s) to have senior-level experience in insurance claims or underwriting.
Once selected, the arbitrator or arbitration panel will review the facts of the case as presented by both sides and come to an appropriate decision on an arbitration award for the claim. The arbitration award includes all of the information presented about the claim along with the arbitrator’s final decision on fees, damages, and/or any legal or disciplinary actions if needed. Depending on what the policyholder and the insurer agree to when pursuing arbitration, the award can either be binding or non-binding.
In binding arbitration, both parties agree that the award cannot be appealed regardless of the circumstances. Some policies contain language that mandates binding arbitration, and consumers should look for these clauses and ask about them before selecting the right policy to purchase. Once an award is handed down in binding arbitration, it stands as-is. In non-binding arbitration, however, either party can appeal the award in court in the event they are dissatisfied with the outcome.
The Negative Impacts of Mandatory Arbitration Clauses
While arbitration can be a beneficial process to the parties that choose to engage in it, more and more insurance carriers have implemented mandatory arbitration clauses into their commercial policies to the detriment of their policyholders. Such mandatory clauses are used to fix the amount of loss for certain property damage claims, helping insurers avoid legal repercussions for bad claims resolution practices. In recent years, some insurers have implemented mandatory, pre-dispute arbitration clauses in their policies to gain an unfair advantage in fighting lawsuits filed by their policyholders. This is because making the arbitration process mandatory leaves the policyholder without other means to further dispute a claim. Some insurance companies employ these clauses to immunize themselves from bad faith claims or wrongful claim denials.
Additionally, if arbitration is mandated under a commercial insurance policy, choice of forum and choice of law clauses may also apply. These clauses have the potential to force policyholders to travel to and apply the laws of a state where they do not reside and where the property in question is not located. This can effectively eliminate certain recoverable damages that would be available in a policyholder’s home state but are not available in the state where the arbitration is required to take place under the policy terms.
Commercial Property Insurance Claim Attorneys
Disputes over insurance claims are nothing new; however, over the years insurance providers have found a myriad of ways to thwart the claims process for their benefit. Because of this, it is often in the best interest of the commercial policyholder to retain legal counsel when a claims dispute arises.
At Raizner Slania, our team of experienced insurance coverage attorneys is well-versed in both arbitration and appraisal and has successfully represented countless commercial policyholders who have been taken advantage of by their insurers.
