What Constitutes a True "Coverage" Issue in Appraisal?

With the proliferation of appraisal demands, the ins and outs of appraisal in Tennessee will begin to take shape through the judiciary. In Artist Building Partners v. Auto-Owners Mut. Ins. Co., the Court of Appeals recently made clear that it will not disturb the binding nature of an appraisal award.

For a little history lesson, one of the key cases controlling insurance appraisals in Tennessee is the Merrimack Mut. Fire Ins. Co. v. Batts case, in which the Court of Appeals held that a policy giving an appraisal panel the authority to determine the "amount of the loss" does not vest the appraisers with the authority to decide questions of coverage and liability. The issue of what constitutes a true coverage question has been a gray and murky area for quite some time.

In the Artist Building Partners case, one of the issues to be decided by the appraisal panel was the "period of restoration," which the appraisal panel ultimately concluded should end approximately 2 and a half years after the loss. In reviewing that decision, the Court of Appeals noted with approval that it was appropriate for the appraisal panel to take into consideration the fact that the insurer did not pay the full amount owed prior to the appraisal award in calculating the period of restoration. The Court also seemed to give significant weight to the fact that the insurer placed restrictions on the insured's ability to alter the damaged building for a period of time due to the possibility of a subrogation claim. In the end, the court upheld the policy's language that the appraisal panel's findings would be binding, and seemingly granted them broad discretion in reaching a decision without digging too deep into the bases for the panel's decision.

This case is an important one because it shows that Tennessee courts are loathe to overturn an appraisal panel's findings. The parties bargained and had a contract to allow appraisal to make a binding decision, and courts will generally shy away from invalidating an award just because one of the parties is unhappy. In my opinion, the Court got it right here. There were no true "coverage" issues and the parties had essentially agreed to let the appraisal end the dispute.

What is the Proper Scope of Appraisal in Tennessee?

In the past ten (10) years, we have seen much litigation arise concerning the proper scope of the appraisal clause. Although different policies have different provisions, the “gist” of an appraisal clause can be seen in the following policy provision:



If we and you disagree on the amount of loss, either may make written demand for an appraisal of the amount of loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately 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. 


These “simple” provisions have created a myriad of issues. Chief among them is – just what exactly is this appraisal condition supposed to decide? It is important for all to understand what binding effect an appraisal award has, and what effect it does not have. The most common dispute centers over questions of coverage and causation. Does the appraisal clause resolve questions of coverage? What about questions of whether a particular element of damage was caused by a particular covered, or non-covered, event.


In Tennessee, the case of Merrimack Mutual Fire Insurance Company v. Batts, 59 S.W. 3d 142 (Tenn. Ct. App. 2001), perm app. denied, established that the appraisal process does not resolve questions of causation or coverage. The appellate court specifically noted:


·        “An appraiser’s authority is limited to the authority granted in the insurance policy or granted by some other express agreement of the parties.” Id. at 152.


·        “The appraisal clause in Mrs. Batts’s homeowners policy is limited to determining the ‘amount of the loss’-the monetary value of property damage.” Id.


·        [The appraisal clause] “does not vest the appraisers with the authority to decide questions of coverage and liability.” Id.


In the case, in which I represented the carrier, an appraisal award was entered. The company went through the award, and declined to pay for certain things because they (1) were not covered and/or (2) the damage was not caused by the particular tornado loss at issue.


The Court indicated that questions of coverage and causation were not within the authority of the appraisal panel. These issues could be resolved by the court, if necessary. The court also established that appraisal is NOT arbitration.


That is the right answer, I submit. The Court did note that it would also have been appropriate to go through the claim before entering appraisal, and simply decline to enter appraisal on issues of coverage and causation.