Appraisal Demanded, Sworn Statement Refused
A fire destroyed a duplex in Spartanburg on February 12. The DP-3 was issued December 27, forty-seven days earlier, when the insured bought the property as an investment. The insured reports $220,000 in damage. The policy has a $250,000 dwelling limit, a $5,000 deductible, and actual cash value on personal property. The origin-and-cause report finds no accidental ignition source in the kitchen where the insured says the fire started. The insured's receipts from a big-box store bear consecutive register numbers and a date after the fire. He reported a $31,000 water loss at a different rental fourteen months ago. His mortgage is current and the mortgagee has filed its own loss notice. Asked to sit for an examination under oath, the insured refuses and demands appraisal instead.
1. What is the correct procedural response to the appraisal demand, and what can appraisal actually decide?
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Rule: Appraisal is a contractual method for resolving a disagreement about the amount of loss. It does not decide coverage, policy interpretation, or whether the insured committed fraud. Those questions remain with the insurer and, if litigated, the court.
Application:
- The insured disputes the amount of damage, so appraisal is available on that narrow question. Invoking appraisal does not waive the insurer's coverage defenses, but the insurer should say so in writing to avoid any argument of waiver.
- Send a reservation-of-rights letter that expressly preserves all coverage positions, including the fraud and misrepresentation defenses, while agreeing to proceed on valuation.
- The examination under oath is a separate policy condition. A refusal to submit can prejudice the insurer's ability to investigate. Do not treat the refusal as an automatic denial; document the request, the refusal, the reason given, and the material information the insurer still needs (financial records, statements, receipts).
- Do not let the appraisal proceed in a way that lets an award be used as a finding on coverage. Instruct the appraisers in writing on the scope.
Sequence matters: reservation of rights first, then scope the appraisal, then continue the coverage investigation in parallel.
2. What fraud indicators exist, and how should the adjuster act on them without exposing the insurer to an extracontractual claim?
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Indicators present:
- Policy issued 47 days before the loss, on an investment property, with no prior coverage history at that address.
- Origin-and-cause findings inconsistent with the reported ignition scenario.
- Receipts with consecutive register numbers dated after the loss, suggesting fabrication.
- A prior water loss at another property 14 months earlier.
- Refusal to sit for an examination under oath while pressing for appraisal.
No single indicator proves fraud, and a recent policy inception is not by itself suspicious. The correct response is disciplined investigation, not accusation:
- Refer the file to the special investigation unit and preserve all evidence, including the receipts, the origin-and-cause report, and the insured's recorded statements.
- Obtain the point-of-sale records directly from the retailer to test the receipts rather than relying on the insured's explanation.
- Request financial records consistent with the policy condition if the form permits; document the request and any refusal.
- Keep paying or denying decisions tied to specific policy provisions, and put each reason in writing.
- Avoid words such as arson or fraud in correspondence to the insured; describe the investigation and the information needed.
- Track the statutory and policy deadlines so that the investigation does not become an unexplained delay that is itself an unfair claim practice.
The file must show that the insurer investigated promptly and thoroughly, and that any denial rests on identifiable policy provisions and evidence.
3. What are the mortgagee's rights while the insured is refusing to cooperate, and what should the adjuster do about them?
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The mortgage clause in the standard dwelling form gives the mortgagee a separate right to receive loss payment to the extent of its interest, and that right is generally not defeated by the acts or neglect of the insured. The mortgagee has filed its own notice of loss, so it is a claimant in its own right.
Practical steps:
- Acknowledge the mortgagee's notice in writing and provide the policy documents and proof-of-loss forms it needs.
- Explain that the insured's cooperation is a condition the insurer is still pursuing, without disclosing the fraud investigation in a way that prejudices either party.
- Confirm the mortgage balance and whether the property is being repaired or will be reconstructed; the mortgagee may have its own repair requirements.
- Do not pay the insured while the mortgagee's interest is unresolved; any payment to the insured should account for the mortgagee's interest.
- If the insured's noncooperation ultimately bars the insured's recovery, the mortgagee's claim still needs a separate evaluation on its own terms, including whether the mortgagee submitted an acceptable proof of loss.
Keep the two tracks distinct in the file: insured versus mortgagee. Blurring them is the most common source of a later claim by the lender.