Appraisal and the Impartiality of Appraisers

Timothy Burchard | Property Insurance Coverage Law Blog | July 6, 2019

Recently, the Colorado Supreme Court issued its opinion in Owners Ins. Co. v. Dakota Station II Condominium Association,1 on appraiser impartiality. Specifically, the court discussed the meaning and interpretation of impartiality under the insurance policy and whether a contingent-cap fee agreement between the appraiser and Dakota Station rendered the appraiser not impartial as a matter of law.

The story starts off in a very familiar way. Dakota Station made two insurance claims for weather damage to its property, a dispute arose, and Dakota Station invoked the appraisal clause in the insurance policy. The appraisal clause stated:

If [Owners] and [Dakota] disagree on the value of the property or the amount of loss, either may make a written demand for an appraisal 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 value of the property and 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.

Both appraisers prepared estimates, but could not come to an agreement, so the appraisal decision went to an umpire. The appraisers’ estimates considered six total repair categories. The umpire agreed to four out of six repair categories in Owners appraiser estimate and agreed to two of six repair categories in the Dakota Station appraiser’s estimate, one of which was for the roofing system. The umpire drafted an appraisal award, which was signed by the umpire and Dakota Station’s appraiser. Owners paid the appraisal award.

Months later, “Owners called foul”2 and challenged the appraisal award in the lower courts. Owners challenged the appraisal award through a motion to vacate, claiming Dakota Station’s appraiser did not act impartially as required by the appraisal clause in the policy. The lower court disagreed, dismissed Owners motion to vacate, and a division of the court of appeals affirmed the dismissal. Owners then appealed to the Colorado Supreme Court.

The Colorado Supreme Court set out the issues it would review in the appeal:

[H]aving agreed to review the case, we must interpret the policy’s impartiality requirement and determine whether a contingent-cap fee agreement between Dakota and its appraiser rendered the appraiser partial as a matter of law.

Here are takeaways from the Colorado Supreme Court opinion:

  • The appraisal clause language noted above does not require appraisers to act with the same level of impartiality as arbitrators. Owners relied on Providence Washington Insurance Co. v. Gulinson3 to claim that it does, but the Colorado Supreme Court found that Providencedid not apply here. Further, the court stated Providence “didn’t establish a general duty of impartiality applicable to appraisers. We simply concluded that an [appraisal] award is invalid when one appraiser and the umpire agree to an award without notice to the second appraiser.”
  • The appraisal clause language noted above requires that appraisers do not advocate on behalf of either party and be unbiased, disinterested, and unswayed by personal interest. The Colorado Supreme Court said, “[t]he language of the appraisal provision doesn’t create an ambiguity as to whether the meaning of the word ‘impartial’ could encompass advocacy … [t]he provision certainly contemplates that the appraisers might submit conflicting values, but a difference in opinion could result for many reasons … [n]othing in the language suggests that values will be put forth on behalf of a party …” The Colorado Supreme Court remanded to the lower court to review whether Dakota Station’s appraiser acted impartially.
  • The contingent-cap fee agreement didn’t result in partiality on the facts presented in this case. While Dakota Station’s appraiser’s contract included a provision allowing a 5% contingent-cap fee, it required a Dakota Station representative to initial the contingent-cap fee clause. The clause was not initialed by Dakota Station and the court determined that no one believed the clause was applicable here. As such, the court provided an extremely narrow review of the contingent-cap fee agreement which unfortunately does not provide direction, generally. However, the court did offer that, “while we are wary of the possible incentives these [contingent-cap fee] agreements create, we decline to hold that they render appraisers partial as a matter of law.”

The Colorado Supreme Court opinion provides a distinction between appraisers and arbitrators and the definition of impartiality but falls short of a final decision on whether Dakota Station’s appraiser acted impartially or if the appraiser’s contingent-cap fee agreement impacted the appraiser’s ability to act impartially as a matter of law in this case. What this opinion does provide is that the actions of appraisers during an appraisal should be appropriately scrutinized and that taking a position with an estimate cannot be based on the interests of an appraiser’s client, whether the insured or insurer.
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1 Owners Ins. Co. v. Dakota Station II Condo. Ass’n, No. 17SC583, 2019 CO 65 (Colo. June 24, 2019).
2 Id.
3 Providence Washington Ins. Co. v. Gulinson, 215 P. 154, 155 (Colo. 1923).

Does Payment of an Appraisal Award Wipe Out Claims Handling Insurance Code Violations?

J. Ryan Fowler | Property Insurance Coverage Law Blog | July 5, 2019

The Texas Supreme Court recently answered the question above in two cases with different results depending on what type of insurance code violations the insured is alleging. The court addressed Texas Insurance Code chapter 542 violations (often called prompt payment of claims) in Barbara Technologies Corporation v. State Farm Lloyds.1

In Barbara Technologies, the court held that an insured may proceed on a claim under Chapter 542 even after the insurance company invokes the policy appraisal provision and ultimately pays the appraisal award.

However, on the same day, the Texas Supreme Court addressed violations of Chapter 541 of the Texas Insurance Code (often called bad faith claims practices) in Ortiz v. State Farm Lloyds.2 In Ortiz, the court held that an insurance company’s payment of an appraisal award bars the insured’s breach of contract claim and the insured’s common law and statutory bad faith claims to the extent that the only actual damages sought are lost policy benefits.

Both cases involved the insurance company invoking appraisal during litigation and ultimately paying the appraisal award after it was issued. Reading the two cases together highlights the differences in Insurance Code violations and what claims are still viable after appraisal. To simplify, the court held that:

  1. An insured’s breach of the insurance contract claim is barred;
  2. An insured’s common law bad faith claims are barred when the insured is only seeking policy benefits;
  3. An insured’s Chapter 541 claims are barred when the insured is only seeking policy benefits; and
  4. An insured’s Chapter 542 claims remain viable.

The court made it clear however to prosecute Chapter 542 violations and ultimately recover damages under the statute the insured must still carry the burden of proof and establish that it is entitled to the prompt payment of damages. The court rejected the insured’s argument that when an insurer pays an appraisal award, it accepts liability on a claim and pays policy benefits as actual damages that it is strictly liable for statutory penalties under the prompt payment of claims act.3

Ultimately the court has attempted to clarify the law as it relates to the payment of appraisal awards and Texas Insurance Code violations. If you have a question relating to an insurance claim that has been through the appraisal process contact an experienced insurance attorney.
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1 Barbara Technologies Corporation v. State Farm Lloyds, No. 17-0604 (Tex. June 28, 2019).
2 Ortiz v. State Farm Lloyds, No. 17-1048 (Tex. June 28, 2019).
3 Barbara Technologies.

When Does Pre-Award Interest Begin to Run on an Appraisal Award?

Christina Phillips | Property Insurance Coverage Law Blog | June 25, 2019

I recently had a public adjuster reach out to me asking me how pre-award interest on an appraisal award was calculated. Coincidently, in Creekview of Hugo Association v. Owners Insurance Company,1 the United States District Court for the District of Minnesota recently addressed the application of pre-award or pre-judgment interest under Minnesota Law.

Under Minnesota Statute §549.09, subd. 1(b), except as otherwise provided by contract or allowed by law, prejudgment interest on an appraisal award begins accruing “from the time of the commencement of the action or the demand for arbitration, or the time of a written notice of the claim, whichever occurs first.” The Minnesota Supreme Court, in Poehler v. Cincinnati Insurance Company,2 held that §549.09 provided for pre-judgment interest on appraisal awards.

In Creekview, the claim dispute proceeded to appraisal which ultimately resulted in an award being entered for the insured for approximately $450,000 more than the replacement cost value determined by the insurer’s independent adjuster. Creekview filed suit seeking confirmation of the appraisal award, as well as pre and post-award interest. The parties disputed the date on which pre-award interest began to accrue.

The insured submitted written notice of its claim via email to Owners approximately one week after the hailstorm event, requesting that Owners open a claim stemming from the hail damage that had occurred. Owners disputed that this constituted “written notice of claim,” arguing that such notice was not provided until the insured submitted its proof of loss.

While “written notice of claim” is not defined, the court in Creekview held that such a notice need not identify a specific amount of damages to trigger pre-award interest. Rather, the only reason an insured would open a claim with its insurance carrier was because it believed its loss was covered under the policy and that it claimed some amount of payment from the insurer for that damage.3 In that regard, the association’s email which had referenced the “community” suggested that the extent of the damages was not confined to a single building, but rather provided information from which Owners could have determined its potential liability.

More specifically, the court noted that Owners’ interpretation of Minn. Stat. §549.09, requiring that an insured submit a proof of loss before pre-award interest is triggered, would allow insurers to largely control whether and when pre-award interest is triggered. In other words, the insured could delay or not ask for a proof of loss, whereby avoiding altogether its pre-award interest obligations. Such conduct would be inconsistent with and defeat the dual purposes of the pre-award interest: (1) compensating the plaintiff for the loss of use of the money; and (2) promoting settlement.4

The court concluded that the better approach, consistent with the intent of Minn. Stat. §549.09, is that pre-award interest began accruing when Creekview opened its claim, triggering Owners’ “affirmative duty to inquire into the particular benefits that [Creekview was] claiming and to provide [it] with a position on [its] claim.”5

The court went on to explain that while the depreciation holdback should be included in the interest computation, the amount of Owners’ initial payment (before appraisal occurred) should be excluded from the computation. The court’s reasoning went back to the dual purposes of the pre-award interest statute. First, once Owners made its initial payment, the insured had the money in hand and needed no compensation for the loss of its use of these funds. Second, inclusion of such funds in the calculation of the pre-award interest would also disincentivize insurers from making such payments, curbing settlement.
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1 Creekview of Hugo Association, Inc. v. Owners Ins. Co., No. 19-487, 2019 WL 2283693 (D. Minn. May 29, 2019).
2 Poehler v. Cincinnati Ins. Co., 899 N.W.2d 135 (Minn. 2017).
3 Creekview, 2019 WL 2283693 *7.
4 Id. at *8.
5 Id.

Delayed Insurance Payment? Texas Does Not Allow Insurers To Profit From Nonpayment During Appraisal

Chip Merlin | Property Insurance Coverage Law Blog | June 29, 2019

Rene Sigman of Merlin Law Group’s Houston office was getting some pretty good results for clients this week when she sent me a Texas Supreme Court appraisal case which makes delaying insurers more accountable for inaccurate or plain wrongful estimates of the benefits owed to policyholders. All this Texas good news had me thinking “Yippee-Yi-Yo-Ki-Yay!”

The ruling is simple, but the reasoning is complex and at time restrained. Indeed, and respectfully, it is my opinion that aspects of the decision are simply wrong if one had studied and cited insurance adjustment treatises rather than relied upon insurance law cases about how property insurance adjustments are to be made. Here is the ruling:

[A]n insurer must pay damages in the form of 18% interest on the amount of the claim and reasonable and necessary attorney’s fees if it delays payment of a claim for more than the applicable statutory period or sixty days…..We hold that neither State Farm’s invocation of the policy’s appraisal process for resolution of a dispute as to the amount of loss, nor State Farm’s payment based on the appraisal amount, exempts State Farm from TPPCA damages as a matter of law. And without State Farm having accepted liability under the policy or having been adjudicated liable, we hold that Barbara Tech is not entitled to TPPCA damages as a matter of law.

The bottom line is that policyholders may be entitled to interest but must prove entitlement. To prove all this, policyholders should not hire second rate Texas insurance attorneys because proving the entitlement is a lot easier said than done.

Post-Lawsuit Payment of Appraisal Awards

Shane Smith | Property Insurance Coverage Law Blog | June 15, 2019

A recent Florida 4th District Court of Appeal decision, Bryant v. Geovera Specialty Insurance Company,1 addressed the issue of whether an insurance carrier’s payment of an appraisal award above a sublimit constituted a “confession of judgment.”

The purpose of the confession of judgment doctrine, which allows an insured to seek statutory attorney fees, is to prevent insured parties from needing to resort to litigation to collect benefits to which they are entitled under their insurance contracts.

In this case, the insureds suffered damage to their residence due to a pipe leak. Their surplus lines homeowners’ insurance policy from GeoVera Specialty Insurance Company (“GeoVera”) contained an endorsement with a $5,000 sublimit for mold and a $1,000 combined sublimit for a covered loss caused by water seepage or leakage that occurs over a period of 14 days or more. After the loss, the insureds spent $6,600 on emergency water-remediation services. A few weeks later, the insureds reported the loss to their insurance carrier, GeoVera. Two days later, the adjuster inspected the property and issued a repair estimate of $21,372.31, allocating $3,597.11 as subject to the ensuing water loss endorsement and $17,775.20 as subject to the mold endorsement. GeoVera paid the insureds $6,000 due to the policy’s sublimits.

The insureds filed suit against GeoVera asserting three causes of action: (1) breach of contract; (2) petition for appraisal and (3) statutory bad faith in violation of section 624.155, Florida Statutes. The insureds argued the sublimits did not apply. GeoVera moved to stay the claims for breach of contract and petition for appraisal and to abate the bad faith claim. The trial court entered an agreed order, staying the case, pending an appraisal. The order required, in part, that the appraisal award would include an itemization of any damages coming within the leakage sublimit, any damages coming within the mold sublimit, and any covered damages that did not fall within those sublimits.

The appraisal award itemized the following damages: $30,963.62 for “dwelling,” $14,477.99 for “mold” and $6,600 for “EMS.” The appraisal award did not identify any damages subject to the $1,000 leakage sublimit.

GeoVera paid $29,963.62 to the insureds and $6,600 to the water mitigation company for the EMS. The total amount paid was the balance due under the appraisal award after deducting the $6,000 prior payment and $5,000 mold sublimit.

GeoVera filed a motion for summary judgment arguing it was not liable for breach of contract or bad faith, in part, because the insureds never disputed GeoVera’s adjustment of the loss pre-suit. (GeoVera also sought a summary judgment ruling that the insureds failed to comply with GeoVera’s demand for a sworn proof of loss. That issue will not be addressed in this blog post.)

The court granted final summary judgment in favor of GeoVera. The insureds appealed and argued GeoVera’s payment of the appraisal award constituted a confession that it breached the policy by erroneously invoking the $1,000 leakage sublimit.

The appellate court agreed, holding that GeoVera’s payment of the appraisal award demonstrated an abandonment of its pre-suit coverage position that the claim was subject to the sublimit for long-term water leakage:2

GeoVera’s response to the claim invoked coverage defenses. And there was a pre-suit refusal by the insurer to pay a portion of the claim—that is, any amount of water damage (aside from mold) that exceeded the $ 1,000 leakage sublimit. By invoking the $ 1,000 leakage sublimit, GeoVera raised a coverage issue that only a court could resolve. This coverage issue went beyond a mere dispute about the valuation of the loss, so the insureds could not have simply invoked the policy’s appraisal provision before filing suit.

Because GeoVera invoked the $1,000 leakage sublimit to deny coverage for a portion of the claim, it was of no consequence whether the insureds notified GeoVera pre-suit that they were disputing GeoVera’s coverage position or damage valuation. Once GeoVera incorrectly invoked the $ 1,000 leakage sublimit and notified the insureds that it would not pay any non-mold-related water damage above that amount, GeoVera committed an anticipatory breach of the policy and created an immediate right of action for the insureds, even though GeoVera’s repudiation took place before the time prescribed for the promised performance under the policy’s loss-payment provision. See Peachtree Cas. Ins. Co. v. Walden, 759 So.2d 7, 8 (Fla. 5th DCA 2000) (holding that an insurer’s notice that it would no longer pay benefits constituted an anticipatory breach of its agreement to provide those benefits).

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1 Bryant v. Geovera Specialty Ins. Co., No. 4D18-189, 2019 WL 2017972 (Fla. 4th DCA May 8, 2019).
2 Id. at *5.