Appraisal: Competent, Disinterested and Impartial. Are appraisers and Umpires Ever Actually Any of the Three?

Michael Buonocore | Property Insurance Coverage Law Blog | January 14, 2019

Recently, I presented at the Professional Public Adjusters Association of New Jersey educational conference on the area of insurance appraisal to roughly 30 public adjusters. During my preparation, I reviewed current and past appraisal provisions contained within standard insurance policies. In my research, I found some very interesting differences contained within insurance policy appraisal provisions concerning three key terms: competent, disinterested and impartial.

In analyzing four insurance policies: the 165-line, State Farm, ISO with standard HO3, and NFIP, I found that each policy contained very different uses and omissions of competent, disinterested and impartial as it pertains to appraisers and umpires during the appraisal process. Below you will see a chart1 that outlines, for each of the four policies, whether an adjuster or umpire involved must be competent, disinterested, and/or impartial during the process.

It is amazing to see that the insurance companies are writing appraisal provisions where the umpire need not be competent, disinterested or impartial such as the ISO HO3 and NFIP. These glaring omissions within each policy open up a host of issues which eventually make their way to the courts. However, depending upon the jurisdiction, the courts may rule differently.

In New York, an umpire under a standard fire policy is to be both competent and disinterested. However, the courts have ruled that using an appraiser or umpire who has had prior dealings with the insurer is not on its face evidence of being an interested party. In New Jersey, an appraiser must be impartial and disinterested. The courts have held that an appraiser in New Jersey can have previous dealings with the hiring party but must not have a pecuniary interest in the outcome of the appraisal process. In Pennsylvania, however, a contingency fee of an appraiser does not render them more biased than if paid on a flat fee basis.

Altogether, you can see from the above posted chart and changing language of appraisal provisions within insurance policies that you must be careful when invoking appraisal. Always read the policy, define the scope of the appraisal and put everything in writing.
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1 Tim Ryles, Appraisal Clause in Homeowners Policies, International Risk Management Institute (IRMI), October 2014.

Subsequent Claims for Items Not Considered by Appraisal Panel

Jonathan Bukowski | Property Insurance Coverage Law Blog | January 12, 2019

Appraisal provisions in property insurance policies are intended to provide an alternative dispute resolution process for resolving property insurance claim disputes involving the amount of loss. The amount awarded by the appraisal panel is, with limited exceptions, binding on both parties under the terms of the policy. While the appraisal process is intended to bring finality to a dispute, what happens when the appraisal panel fails to consider certain items due to limitations or restrictions on the scope of the appraisal or unanticipated factual issues not considered by the panel? Such a situation poses the question of whether Colorado appraisal awards preclude any further breach of contract claims for unanticipated circumstances.

Judge David Ebel of the United District Court for Colorado recently discussed such a situation in his 2016 order granting summary judgment in the case of Concept Restaurants, Inc. v. Travelers Indemnity Company.1 Located in Boulder, Colorado, Concept had suffered hail damage to its roof following a large hailstorm in the spring of 2011. Concept invoked the appraisal provision of the policy when the parties could not agree on the amount of loss caused by the hailstorm. Following the appraisal panel’s determination of the amount of loss, Concept alleged newly discovered costs (scaffolding, traffic control, and permitting). The carrier moved to dismiss, arguing that the appraisal award was binding and precluded litigation as to those matters within the scope of the appraisal.

While it was ultimately determined that Concept had offered nothing to demonstrate that the newly discovered costs had not been considered in the appraisal, Judge Ebel discussed an exception to the binding nature of appraisal awards for matters outside the scope of the appraisal. Judge Ebel first determined whether the additional items were appraisable, i.e., whether scaffolding, traffic control, and permitting were within the scope of the appraisal. Having determined these items were appraisable, the court next considered whether these items were actually appraised. In determining that the appraisal panel considered scaffolding, permitting, and traffic control costs, the trial court noted that Concept proposed no limitation on the scope of issues to be considered by the appraisers, exchanged notes on these costs, and finally, certification by the panel that they had heard and seen all of the evidence offered by both the insured and the insurance company and determined the amount of loss without offering qualifications, restrictions, or exceptions.

While appraisal awards in Colorado are typically binding on the parties as to the amount of loss,2appraisal awards do not necessarily preclude any further breach of contract claims in Colorado.3Judge Ebel’s order demonstrates the two-step analysis required to determine if an exception exists for matters outside the scope of appraisal such as unanticipated factual issues.
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1 Concept Restaurants, Inc. v. Travelers Indemnity Co., No. 1:16-cv-450, 2016 WL 8737773 (D. Colo. Dec. 2, 2016).
2 Wagner v. Phoenix Ins. Co., 348 P.2d 150, 152 (Colo. 1960); Tae Hyung Lim v. Am. Econ. Ins. Co., No. 13-cv-02063, 2014 WL 1464400, at *3 (D. Colo. Apr. 14, 2014) (unreported).
3 Hometown Community Association, Inc. v. Philadelphia Indemnity Ins. Co., No. 17-cv-00777, 2017 WL 6335656, at *4 (D. Colo. Dec. 12, 2017).

Insurance Appraisers May Determine the Cause of Loss

Mollie Pawlosky | Dickinson Law | November 1, 2018

In a case of first impression, Walnut Creek Townhome Association v. Depositors Insurance Company, the Iowa Supreme Court has held that insurance appraisers may determine the cause of loss in addition to the amount of damage.

Walnut Creek Townhome Association submitted a claim to Depositors Insurance Company for hail damage to the Association’s roofs.  Depositors felt that damage had been caused not by hail, but rather by defective shingles.  As part of the dispute, Walnut Creek exercised its right to an appraisal under the insurance policy.  Each party picked an appraiser, and an umpire was picked.  The three individuals then examined the roofs and prepared a report.

Two of the three on the panel opined that damage in the amount of approximately $1.4 million resulted from hail damage.  After a bench trial, the court found in favor of Depositors.  The trial court held that Walnut Creek had not proved that the storm was the only cause for damage.  The trial court also ruled that the appraisal award was not binding on the parties.

The Iowa Court of Appeals reversed, finding that the trial court was bound by the appraisal.  The Iowa Supreme Court granted further review, for the first time addressing whether parties are bound not only by appraisers’ decisions of valuation, but also by the appraisers’ causation decision.

The Court recognized the historical importance of insurance appraisal provisions, which can resolve insurance disputes without a formal lawsuit.  Since the 1940s, the Iowa Code has contained an approved appraisal provision for property insurance policies.  Iowa’s provision is similar to provisions adopted by 45 other states.  Courts are only allowed to set aside appraisal awards if the record demonstrates fraud, mistake, or misfeasance of the appraiser or umpire.  Depositors did not raise such arguments, so the appraisal award was binding.  The question was: Was the appraisal binding as to the amount of damage alone, or was the appraisal also binding as to what caused the damage?

Courts across the country are divided as to whether appraisers determine the cause-in-fact of damage.  The Iowa Supreme Court ultimately found that the “better-reasoned cases” hold that appraisers necessarily recognize causation when determining the amount of loss.  For example, if an appraiser is determining the amount of “storm damage,” the appraiser is not just assessing damage, but the appraiser is also stating that the damage is from a storm.

Without fraud, mistake or misfeasance, the district court was not free to make its own factual determination as to whether there was hail damage, even if the court disagreed.  The appraisers’ findings remained subject to coverage exclusions and limitations, which the trial court decides.  Thus, the Court remanded the case, with directions for the trial court to accept the appraisal award and then determine if any coverage defenses applied.

Much Needed Clarification of Appraiser Qualifications in Florida

Tamara Chen-See | Property Insurance Coverage Law Blog | October 23, 2018

The appraisal alternative dispute resolution procedure in most first-party property insurance policies in Florida is a valuable process for insureds. In our experience at Merlin Law Group, few states in the country have a greater need for an understandable, enforceable appraisal process than Florida. Since at least Hurricane Andrew in 1992, policyholders and insurers have resorted to appraisal as a quicker, more cost-effective, binding means to determine a critical issue under the policy – the amount of a loss.

Other states with fewer court rulings evaluating the standards of the appraisal remedy are now dedicating tremendous party and judicial resources to interpretation of the sparsely-worded appraisal provision in most policies. Practitioners in Florida share a concern that the confusion about the appraisal remedy evident in other states may be exported into the courts of Florida. Florida’s Third District Court of Appeal recently stilled some of those concerns in Brickell Harbour Condominium Association v. Hamilton Specialty Insurance Company,1 affirming long-standing precedent governing appraiser qualifications.

The Brickell Harbour Condominium Association suffered a large water loss after a water valve leak caused major damage to its building. The carrier made a substantial advance payment of $150,000 and another payment of $300,000. When the insured did not accept that its loss had been fully paid, the insurer demanded appraisal.

The appraisal provision in the policy required appointment by the parties of “competent and impartial” appraisers, who would then select an umpire. The insured contested that the insurance company’s appraiser, an employee of J.S. Held, was “impartial” because he was hired by J.S. Held, which was to be directly compensated by the insurer. The insured providing no evidence of the nature of the appraiser’s, or J.S. Held’s compensation.2

The District Court of Appeal recognized there is little authority evaluating the impact of appraiser compensation on meeting the “impartiality” standard of qualification under the policy – other than the Third DCA’s own 1998 opinion in Rios v. Tri-State Insurance Company3 determining that “an appraiser’s direct or indirect financial interest in the outcome of the arbitration,” including an arrangement for a contingent fee was not itself disqualifying, and merely required disclosure to the other members of the panel and the parties.4 The court decided disclosure remained a “workable approach.”5

The court also held that impartiality means “something other than the ‘dictionary definition’ as it relates to appraisers appointed and paid by the parties.”6 In recognizing this reality that the party-selected appraisers will have some bias favoring the party that appointed them, the court held that the jointly selected umpire provides the real impartiality in the appraisal process:

If an appraiser acts unprofessionally, skews what should be objective calculations regarding materials and labor costs, and puts the proverbial thumb on the scale, the umpire is the safeguard empowered to reject such efforts by siding with the other party-appointed appraiser. Alternatively, a professionally-qualified umpire may negotiate one or both of the party-appointed appraisers into a reasonable compromise.7

The decision in Brickell Harbour clarifies confusion in other state and federal opinions attempting to interpret Florida’s state law on this topic. In 2014, the Fifth District Court of Appeal had speculated that changes in the AAA and ABA Code of Ethics cited as a basis for merely requiring disclosure of a contingent fee compensation arrangement in Rios had been undercut when that Code of Ethics was later changed.8 And, the federal Southern District of Florida recently issued an opinion echoing this doubt whether Rios was still good law.9 The appellate court in Brickell Harbour acknowledged both cases in footnote discussions in its opinion, and then overrode the suggestion that its disclosure approach in Rios had been undermined:

Following a survey of decisions in other jurisdictions and a review of the Code of Ethics for Arbitrators in Commercial Disputes, this Court concluded that an appraiser’s ‘direct or indirect financial interest in the outcome of the arbitration,’ including an arrangement for a contingent fee, requires disclosure rather than disqualification in the case of an appraiser. This Court then ordered the appraisers to make the disclosures to each other and the parties as provided by the Code.

We conclude that this remains a ‘workable approach to this issue,’ and encourage such disclosures in the present case before the confirmation of the appraisal. On the record before us, we agree with the trial court that the Insurer’s appointment of Mr. Ison did not warrant disqualification.10

For whatever reason, appraisal challenges have become a cottage industry in property insurance disputes, much like litigation regarding examinations under oath was used by insurance carriers seeking a means to forfeit coverage following the 2004 and 2005 hurricanes in Florida.11 Given the value to both parties of the appraisal remedy, decisions like Brickell Harbour are important to the clarity of Florida’s state law governing appraisal, and enabling prompt, cost-effective, binding decisions on the critical issue of the benefit owed the insured under the policy.
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1 Brickell Harbour Condo. Assoc. v. Hamilton Specialty Ins. Co., – So.3d – , 2018 WL 4904927 (Fla. 3d DCA Oct. 10, 2018).
2 The insured also argued that the appraiser should be disqualified because his employer, J.S. Held, was being investigated by the Florida Department of Financial Services for alleged fraud. Since this investigation had apparently been initiated based on allegations of the Association’s own public adjuster for the claim, the Third DCA found the argument “circular.” It refused to rely on the allegations of an interested party to the appraisal, in effect, as a self-fulfilling prophecy leading to disqualification.
3 Rios v. Tri-State Ins. Co., 714 So.2d 547 (Fla. 3d DCA 1998).
4 Brickell Harbour, 2018 WL 4904927 *3.
5 Id.
6 Id.
7 Id.
8 See Florida Ins. Guar. Ass’n v. Branco, 148 So.3d 488, 495 (Fla. 5th DCA 2014)(dicta).
9 Verneus v. Axis Surplus Ins. Co., 2018 WL 3417905 *5-6 (S.D. Fla. July 13, 2018).
10 Brickell Harbour at *3 (citations omitted).
11 See Whistler’s Park, Inc. v. The Florida Ins. Guaranty Ass’n, 90 So.3d 841, 845 (Fla. 5th DCA 2012): “As discussed in Curran [83 So.3d 793 (Fla. 5th DCA 2011) aff’d 153 So.3d 1071 (Fla. 2014)], several of Florida’s district courts of appeal have concluded that the failure of an insured to appear for an EUO prior to filing suit to recover an unpaid claim is a material breach of contract, requiring forfeiture of coverage. These decisions have led to a cottage industry of EUO litigation. If an insurer can procure a failure to comply—or, even better, a refusal to comply—with the EUO requirement, they have a perfect defense to payment. Similarly, if counsel for insureds can bait the insurer into refusing payment without adequate justification, this may trigger a bad faith claim. The actual, if unglamorous, true purpose of the EUO—verification of the insured’s loss—has been lost in this larger battle. No doubt there can be genuine instances of insurance fraud, but the recent and ever—escalating number of EUO cases that have arisen all over the state appear to be more about strategy than truth.”

Are Property Insurance Appraisers Regulated? – A Reminder of Recently Enacted HB 911 for Those Heading to Florida to Assist with Hurricane Michael

Deborah Trotter | Property Insurance Coverage Law Blog | October 12, 2018

House Bill 911, effective January 1, 2018, was filed by Representative Sean Shaw and enacted by the Florida Legislature to amend Fla. Stat. § 626.854, which protects policyholders through the regulation of public adjusters. Chip Merlin discussed this new law in detail in his post on July 2, 2017. In requiring public adjusters to be licensed by the State of Florida and defining the scope of their services, the Florida Legislature also excluded the growing practice of unlicensed public adjusting and the unauthorized practice of law. By defining what a licensed public adjuster can do for policyholders, the amended law notifies contractors, vendors, accountants, and others known after a catastrophe to unlawfully solicit business to act in the scope of a public adjuster. One service to policyholders that was recently questioned was whether an appraiser is required to be licensed in Florida. In the answer to this question, many others will find the answer to other services related to public adjusters, which do require a license.

The appraisal provision in property insurance policies generally require a fair and competent or disinterested appraiser, with some policies defining those terms. But, is that all that is required, and how far can the appraiser go in determining the amount of damages? Does the appraiser also determine the cause of the damage in calculating the amount of covered damages? To answer these questions, many states have developed statutory law governing insurance and a body of caselaw grounded in fair notions of public policy.

Many states do not directly regulate property insurance appraisers through a specific licensing statute. Florida legislators made several attempts at appraiser licensing before a bill introduced by House Representative Sean Shaw, now a candidate for Florida Attorney General, succeeded in accomplishing this in House Bill 911, where the Legislature found “that it is necessary for the protection of the public to regulate public insurance adjusters and to prevent the unauthorized practice of law.”1

States vary in the scope of appraisal, some allow appraisers and public adjusters to negotiate claims on behalf of policyholders; others find that negotiation of the claim or settlement is in the purview of law and an appraiser or public adjuster attempting to negotiate or settle the claim would be engaging in the unauthorized practice of law. Further, most states now have statutes regulating the practice of public adjusting, including statutes regarding licensing requirements and contract provisions with policyholders. But where do appraisers fit in? Sometimes the answer may be in the who by statute can present, investigate, and adjust the policyholder’s claim.

Florida’s recently amended adjuster statutes,2 effective January 1, 2018, have further clarified the who:

Section 1. Subsection (1) of section 626.015, Florida Statutes, is amended to read:

626.015 Definitions.—As used in this part:

(1) “Adjuster” means a public adjuster as defined in s. 626.854, a public adjuster apprentice as defined in s. 626.8541, or an all-lines adjuster as defined in s. 626.8548.

Section 2. Subsections (7) through (19) of section 626.854, Florida Statutes, are renumbered as subsections (6) through (18), respectively, subsection (1) and present subsections (6), (7), (11), (18), and (19) are amended, and a new subsection (19) is added to that section, to read:

(1) A “public adjuster” is any person, except a duly licensed attorney at law as exempted under s. 626.860, who, for money, commission, or any other thing of value, directly or indirectly prepares, completes, or files an insurance claim form for an insured or third-party claimant or who, for money, commission, or any other thing of value, acts on behalf of, or aids an insured or third-party claimant in negotiating for or effecting the settlement of a claim or claims for loss or damage covered by an insurance contract or who advertises for employment as an adjuster of such claims. The term also includes any person who, for money, commission, or any other thing of value, directly or indirectly solicits, investigates, or adjusts such claims on behalf of a public adjuster, an insured, or a third-party claimant. The term does not include a person who photographs or inventories damaged personal property or business personal property or a person performing duties under another professional license, if such person does not otherwise solicit, adjust, investigate, or negotiate for or attempt to effect the settlement of a claim.

* * * *

(19) Except as otherwise provided in this chapter, no person, except an attorney at law or a public adjuster, may for money, commission, or any other thing of value, directly or indirectly:
(a) Prepare, complete, or file an insurance claim for an insured or a third-party claimant;
(b) Act on behalf of or aid an insured or a third-party claimant in negotiating for or effecting the settlement of a claim for loss or damage covered by an insurance contract;
(c) Advertise for employment as a public adjuster; or
(d) Solicit, investigate, or adjust a claim on behalf of a public adjuster, an insured, or a third-party claimant.

Section 4. Section 626.8548, Florida Statutes, is amended to read:

626.8548 “All-lines adjuster” defined.—An “all-lines adjuster” is a person who, for money, commission, or any other thing of value, directly or indirectly is self-employed or employed by an insurer, a wholly owned subsidiary of an insurer, or an independent adjusting firm or other independent adjuster, and who undertakes on behalf of a public adjuster or an insurer or other insurers under common control or ownership to ascertain and determine the amount of any claim, loss, or damage payable under an insurance contract or undertakes to effect settlement of such claim, loss, or damage. The term also includes any person who, for money, commission, or any other thing of value, directly or indirectly solicits claims on behalf of a public adjuster, but does not include a paid spokesperson used as part of a written or an electronic advertisement or a person who photographs or inventories damaged personal property or business personal property if such person does not otherwise adjust, investigate, or negotiate for or attempt to effect the settlement of a claim. The term does not apply to life insurance or annuity contracts.

Section 6. Subsection (3) of section 626.8584, Florida Statutes, is amended to read:

626.8584 “Nonresident all-lines adjuster” defined.—A “nonresident all-lines adjuster” means a person who:

(3) Is licensed as an all-lines adjuster and self-appointed or appointed and employed or contracted by an independent adjusting firm or other independent adjuster, by an insurer admitted to do business in this state or a wholly owned subsidiary of an insurer admitted to do business in this state, or by a public adjuster or a public adjusting firm other insurers under the common control or ownership of such insurer.

Section 8. Subsection (3) of section 626.864, Florida Statutes, is amended to read:

626.864 Adjuster license types.—

(3) An all-lines adjuster may be appointed as an independent adjuster, public adjuster apprentice, or company employee adjuster, but not more than one of these both concurrently.

The amended statutes have made clear that the who is only a public adjuster and/or an attorney at law that may for money, commission, or any other thing of value, directly or indirectly, prepare, complete or file and claim for an insured; negotiate or effect the settlement of a claim; or investigate, or adjust a claim on behalf of the insured. Since the task of an appraiser is to investigate, adjust, prepare or complete the claim, and negotiate or effect the settlement of a claim, an appraiser that is not a licensed adjuster may regrettably be found to be adjusting without a license or engaging in the unauthorized practice of law.

Under Fla. Stat. § 626.8738, public adjusting without a license in the State of Florida is a third-degree felony:

626.8738 Penalty for violation.—In addition to any other remedy imposed pursuant to this code, any person who acts as a resident or nonresident public adjuster or holds himself or herself out to be a public adjuster to adjust claims in this state, without being licensed by the department as a public adjuster and appointed as a public adjuster, commits a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084. Each act in violation of this section constitutes a separate offense.

Florida has been a front runner in protecting its policyholders. The need for setting a standard for well-trained and qualified policyholder advocates to aid policyholders in presenting, investigating, and adjusting their claims to level the playing field with the insurance companies’ adjusters was recognized by the Florida State Legislators. Public policy demands that policyholders are protected from those that would seek to prey upon their misfortune and provide less that honorable services in the adjustment of their insurance claim. Well done, Sean.
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1 House Bill No. 911, Chapter 2017-147, Section 2. Subsections (7) through (19) of section 626.854, Florida Statutes, are renumbered as subsections (6) through (18), respectively, subsection (1) and present subsections (6), (7), (11), (18), and (19) are amended, and a new subsection (19) is added to that section, to read: 626.854 “Public adjuster” defined; prohibitions.—The Legislature finds that it is necessary for the protection of the public to regulate public insurance adjusters and to prevent the unauthorized practice of law.
2 Underlines are added text; strikes are deleted text.