By: Charles W. Miller, III

One of the most potent weapons in an insured’s arsenal is the ability to demand an appraisal when the issue of the amount of a loss under an insurance policy is in dispute. An appraisal involves the valuation or estimation of the value of a property loss by disinterested persons of suitable qualifications. The appraisal process provides a means of resolving disputes that is less time-consuming and expensive than going to court.


In New Jersey, the standard fire insurance policy appraisal provision states:

In case the insured and this Company shall fail to agree as to the actual cash value or the amount of the 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. N.J.S.A. 17:36-5.20

The purpose of the appraisal clause is to remove the valuation of damages issues from the court and provide a speedy, cost effective and efficient method of determining damage issues by allowing either the insurer or the insured to select this alternate means of valuing the loss. Elberon Bathing Co. v. Ambassador Ins. Co., 77 N.J. 1 (1978).


The first step for a policyholder, then, when agreement cannot be reached with its insurance company on the amount of a loss, is to select an appraiser and submit that appraiser’s name to the insurance company.

In an ideal world, the next step in the procedure is that the insurance company will respond with the name of their appraiser and the matter can move forward. Unfortunately, there seems to be a recent trend among insurance companies to balk at selecting an appraiser. We have seen insurance companies reject their policyholder’s demand for an appraisal on the grounds that the demand is “premature” and on the grounds that liability is in dispute. Neither of these grounds is a legal basis for an insurance company to reject a demand for appraisal.


The standard appraisal provision does not contain any requirement that a certain amount of time pass before an appraisal demand may be made, nor does it set forth that a certain amount of effort needs to have been made to attempt to resolve the dispute over the amount of the loss. Rather, the standard appraisal provision merely states that appraisal is available “[I]n case the insured and this Company shall fail to agree as to the actual cash value or the amount of the loss,…”. Thus, the insurance company has no legal basis on which to reject a demand for appraisal as being “premature.”


An insurance company can also not reject a policyholder’s demand for appraisal on the grounds that liability is in dispute. This issue was first addressed by the New Jersey courts in 1971 in the case of Hala Cleaners, Inc. v. Sussex Mutual Insurance Company, 115 N.J. Super. 11 (Chan. Div. 1971). In that case, the insurance company had rejected the policyholder’s demand for appraisal on the grounds that liability was in dispute and that the issue of damages that the policyholder would have to bring to establish a right to be paid at all could include appropriate issues concerning the dollar value of the losses sustained. The court there noted that no New Jersey courts had yet addressed the issue of whether a dispute over liability would nullify the policyholder’s right to demand an appraisal. The court in Hala Cleaners held that the insurance company must go through the appraisal process listed in the policy even though the issue of the amount of the loss could also be raised in a legal liability action. The court’s ruling in Hala Cleaners has been cited with approval in numerous recent decisions (see, for example, Rastelli Brothers, Inc. v. Netherlands Ins. Co., 68 F. Supp. 2d 440 (D.N.J. 1999); Ward v. Merrimack Mut. Fire Ins., 332 N.J. Super. 515 (App. Div. 2000).1


What are a policyholder’s options if an insurance company rejects their demand for an appraisal?

If an insurance company rejects the policyholder’s demand for an appraisal and refuses to select an appraiser under the statute, the policyholder’s remedy is to file a declaratory judgment action with the New Jersey courts. The courts have recognized that a declaratory judgment action is proper in the interpretation of an insurance contract. DiFrancisco v. Chubb Ins. Co., 283 N.J. Super. 601 (App. Div. 1995); Hartford Accident and Indemnity Co. v. Selective Risks Indemnity Co., 65 N.J. Super. 328 (App. Div. 1961). In the declaratory judgment action, the policyholder can request that the court order the insurance company to name an appraiser within a certain number of days.

But what if the insurance company still will not name an appraiser? Under the New Jersey statute, N.J.S.A. 17:36-5.20, the court can appoint a disinterested umpire where the appraiser for both sides cannot agree on one. The refusal of an insurance company to appoint an appraiser has been found by the courts to, in effect, amount to the failure of the parties to select the disinterested umpire which is essential to the appraisal proceedings. The courts have determined that they have the power to appoint the disinterested umpire under such circumstances. Drescher v. Excelsior Insurance Company of New York, 188 F. Supp. 158 (D.N.J. 1960).

Once the umpire is appointed, the umpire, together with the appraiser for the policyholder, can then move forward with the appraisal and make a determination as to the value of the loss under the contract of insurance.

1 Similar rights apply under New York statutes. Recently, the United States District Court for the Southern District of New York, in the yet unpublished opinion of the Honorable John S. Martin, Jr. in a case entitled SR International Business Insurance Co., Ltd., et als. v. The World Trade Center Properties, LLC et als., 01-Civ. 9291 (JSM), sustained the parties’ right to compliance with the appraisal provisions of a policy of insurance despite disputed liability under the policy of insurance.

Reprinted from Burning Issues/Winter 2003.