Viewpoint: Licensing Mandate for Appraisers Will Increase Costs

In a recent motion to intervene in a petition filed with the Florida Department of Financial Services, Citizens Property Insurance Corp. supports a state regulation requiring appraisers to be licensed adjusters. If enacted, this would have detrimental consequences for a process intended to resolve quantum disputes in first party property and auto physical damage claims.

The appraisal provision in property and auto insurance policies provides a process to resolve disputes regarding the amount of loss and value. The process is not intended as a method to resolve coverage disputes, which are typically adjudicated by courts or, in some cases, arbitration panels. Florida and other states are considering requiring members of an appraisal panel (the designated appraisers by the parties) to have an adjuster’s license. This movement is not in the best interest of either insurers or policyholders to the extent that a state adjuster’s license requirement will significantly reduce or, in some cases, eliminate the pool of potential experts who are best served to evaluate the amount of loss. This will also likely result in increased costs to policyholders and insurers who will be forced to hire experts in addition to having a licensed adjuster act as appraiser.

Appraisals can be demanded by either a policyholder or an insurer and, in most jurisdictions, are binding upon the party from whom appraisal is demanded. When appraisal is demanded, the party appointed appraisers attempt to agree on a neutral “umpire.” When they cannot agree, a court having jurisdiction over the matter is asked to appoint the umpire. The appraisers then determine the amount of loss, and if they cannot agree, the differences are submitted to an umpire. The appraisal becomes final when at least two members of the “appraisal panel”— either the two appraisers or one appraiser—and the umpire execute an award.

The appraisal process can be useful and, in many jurisdictions, results in a fair and equitable determination of the amount of loss. In certain jurisdictions the process has been abused, with appraisal awards that are unfair and, in some cases, fraudulently obtained. Proponents of the adjuster licensing requirement believe that in the event of a fraudulent award, disciplinary action to sanction, suspend, or revoke the license of the bad actor will improve the process.

Washington State had an adjuster licensing requirement for participation in the appraisal process, which was changed in 2021, when the state legislature introduced a bill to correct the problem created by the requirement. The bill was supported by the Washington State Office of the Insurance Commissioner (OIC). Both the author and a designee of the OIC testified at the state legislature in support of the change in the law. The bill passed unanimously.

Appraisals involve diverse disputes that develop post loss. The amount of a property loss, auto physical damage, stock, contents, equipment, business interruption, rental value loss, law and ordinance upgrades, jewelry and fine art, and other types of valuation disputes can be finalized through appraisal. Because the process is used to determine the “amount of loss” and not coverage, “appraisal” is not “adjustment”. If enacted the legislation would, for example, prevent a CPA from acting as an appraiser to determine the amount of a business interruption claim or a fine art expert could not act as appraiser to determine the amount of damage to a painting. This makes no sense in the context of seeking an equitable quantum award.

Ironically, in a highly publicized case in Colorado several years ago, a licensed Florida public adjuster was disqualified after an appraisal award which he executed was issued. It was only after the insurer brought a legal action that a court vacated the award. Thus, enacting a licensing requirement may be a case of, “Be careful what you wish for.”

The appraisal process can be improved through other legislative means than simply adopting a licensing requirement that will not improve the chance for equitable outcomes. A long look at the appraisal provision found in property policies and the adoption of “rules” for conducting appraisals are long overdue. This can have a far greater impact on insuring that the process is no longer abused in jurisdictions like Florida, in which outlier awards can occur. But outlier awards are just that—outliers. The process will be far better served by having competent and unbiased appraisers as panel members. Attempts to limit the most qualified potential appraisal panel members don’t seem to make reasonable sense and will only increase the likelihood of incorrect measurements of loss.