An Insurer’s Potential Fraud Claim Against Insured Was “No Reason to Stop or Stay Appraisal,” Court Rules

Iris Kuhn | Property Insurance Coverage Law Blog | November 1, 2019

On October 2, 2019, the U.S. District Court for the Middle District of Florida ruled that a dispute between an insurance company and its policyholder should proceed to appraisal despite insurance company’s allegations that it had discovered what it called evidence of fraud.

In 2017, Waterford Condominium Association of Collier County, Inc. (the “Insured”), suffered property damages as a result of Hurricane Irma. The Insured reported the loss to its insurance company, Empire Indemnity Insurance Company (“Empire”). Upon being notified of the loss, Empire inspected the property and found the anticipated repair cost to be $551,732.72. Empire issued payment to the Insured in the amount of $51,817.37, after subtracting depreciation and policy’s hurricane deductible.

The Insured submitted its own damage repair estimate to Empire in the amount of $2,144,858.31. Empire continued to investigate the loss and issued a second estimate for $595,098.00. A few months later, the Insured sued Empire in state court asserting a count for breach of insurance contract and a count for declaratory judgment. Empire acknowledged the damage to the Insured’s property was covered by the subject policy, however it disagreed regarding the extent and value of the damages.

The Insured moved to stay the case and compel appraisal under the policy. Empire raised the following objections: (1) a motion to compel appraisal must be supported by summary judgment evidence; (2) the Insured’s claim was not ripe for appraisal; (3) if the claim was ripe, appraisal should be limited to the amount demanded pre-suit; (4) the Insured waived its right to appraisal; (5) mediation must occur before appraisal; (6) Empire was entitled to a line-item appraisal; and (7) there was no reason to stay discovery. Over Empire’s objections, the district court granted the Insured’s motion. The district court’s rational for enforcing the policy’s appraisal provision can be found in its August 16, 2019, Opinion and Order.1

Empire then asked the district court to reconsider the Order Granting Motion to Compel Appraisal and Stay Litigation because it had allegedly discovered what Empire called evidence of fraud. Empire argued that appraisal should nevertheless be denied or stayed while Empire considered whether to assert a fraud defense, deny the claim, and seek to void the policy.

The district court concluded that:

Even if Empire decides to reverse course and deny the claim, appraisal is still appropriate to determine the amount of loss because a fraud defense would address the separate issue of coverage. In fact, the policy anticipates this situation: ‘If there is an appraisal, we still retain our right to deny the claim.’2

The sole purpose of the appraisal process is to determine the amount of the loss. It is not its function to resolve questions of coverage. Appraisers are precluded from determining whether a claim might be fraudulent or factually inaccurate.3 Simply put, the appraisal process was ordered to proceed despite Empire’s potential fraud claim against the Insured.
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1 Waterford Condominium Association of Collier County v. Empire Indemnity Ins. Co., No.: 2:19-cv-81 (M.D. Fla. Aug. 16, 2019).
2 Waterford Condominium Association of Collier County v. Empire Indemnity Ins. Co., No.: 2:19-cv-81 (M.D. Fla. Oct. 2, 2019).
3 Safeco Ins. Co. v. Sharma (1984) 160 Cal. App. 3rd 1060.

Payment of An Appraisal Award: Is There More?

Kay Morgan | Property Insurance Coverage Law Blog | September 19, 2019

The answer to the above question came, in part, on June 28, 2019, with the issuance of twin Texas Supreme Court opinions: Barbara Technologies Corporation v. State Farm Lloyds,1 and Ortiz v. State Farm Lloyds.2 The specific issue in these two decisions was what effect did an insurer’s full and timely payment of an appraisal award have on the insured’s various causes of actions and damages?

The answer to that issue was found to depend on the particular cause of action analyzed. In Barbara Technologies, the Texas high court held that following an insurer’s payment of an appraisal award, an insured can still pursue a violation for delay in payment under Chapter 542 of the Texas Prompt Payment of Claims Act (“TPPCA”).3 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.4

Recently, in light of Barbara Technologies, a Federal Southern District trial court granted a reconsideration in Shin v. Allstate Texas Lloyds.5 There, the trial court had granted summary judgment on plaintiff’s Prompt Payment Act claim on the ground that under Texas law, “full and timely payment of an appraisal award under the policy precludes an award of penalties under the Insurance Code’s prompt payment provisions as a matter of law.”6 That ruling in Shin preceded Barbara Technologies by just a couple of days which again, as noted above, held that an insurer’s payment of the appraisal award did not foreclose TPPCA damages.7 In granting the reconsideration, the court requested supplemental briefing on two issues: whether the “reasonableness” exception in Mainali Corp. v. Covington Specialty Insurance Company,8 survived Barbara Technologies; and, in particular to the Shin case, whether the initial payment before appraisal — pre-appraisal payment — was “reasonable.”

In Mainali, the Fifth Circuit Court of Appeals held that there is no statutory violation of the Prompt Payment Act if the insurer’s pre-appraisal payment was “reasonable.” The pre-appraisal amount in Mainali was found to be undeniable reasonable because it exceeded the appraisal award amount found by the appraisal panel. Finding that Barbara Technologies actually cited Mainali with approval, and therefore, Mainali had not been overruled, the court in reconsideration in Shin held; reading the two cases in conjunction with each other, they stand for the proposition of law that to avoid a Prompt Payment Act violation, an insurer must have made a “reasonable” pre-appraisal payment within the statutorily-provided period.9

Applying the above, the court in Shin looked at the appraisal award amount of $25,944.94 which was 5.6 times greater than the initial pre-appraisal payment of $4,616.63, but nonetheless, found that the pre-appraisal payment was “reasonable” for two reasons.10 First, Allstate had complied with the Prompt Payment Act requirements of responding to the claim and requesting additional information, evaluating and investigating the claim. Second, the difference between Allstate’s pre-appraisal and appraisal payments was no larger than the difference in other cases in which courts had made a similar “reasonableness” finding.11 Based on this analysis, the court in Shin affirmed its prior ruling of granting summary judgment for Allstate on Plaintiff’s Prompt Payment Act claim.

After Shin, the answer to the title question of “After Payment of an Appraisal Award: Is there More?” is a “maybe” under the Prompt Payment Act depending on how each individual court determines or finds “reasonableness” of the pre-appraisal payment.

A new question, however, that may follow this holding is: Will insurers outright deny claims for a zero-pre-appraisal payment which under Shin, no doubt, would be found to be “unreasonable” when compared to any amount of an appraisal award and thereby subject insurers to possible violations under the Prompt Payment Act or will insurers low-ball pre-appraisal payments, move for appraisal, and roll-the-dice on “reasonableness”? Time will tell.
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1 Barbara Technologies Corp. v. State Farm Lloyds, No. 17-0640, 2019 WL 2710089 (Tex. June 28, 2019).
2 Ortiz v. State Farm Lloyds, No. 17-1048, 2019 WL 2710032 (Tex. June 28, 2019).
3 Barbara Technologies, 2019 WL 2710089, * 12.
4 Ortiz, 2019 WL 2710032, *8.
5 Shin v. Allstate Texas Lloyds, No. 4:18-cv-01784, 2019 WL 4170259 (S.D. Tex. Sept. 3, 2019).
6 Nat’l Sec. Fire & Cas Co. v. Hurst, 523 S.W.3d 840, 847 (Tex. App.—Houston [14th Dist.] 2017) (emphasis in original).
7 Barbara Technologies, 2019 WL 2710089, *12.
8 Mainali Corp. v. Covington Specialty Ins. Co., 872 F.3d 255, 259 (5th Cir. 2017).
9 Mainali, 872 F.3d at 259.
10 Id.
11 Id.

Failure of Insured to Provide Requested Documents Triggers Appraisal Under First Party Insurance Policy

Paul Ferland | Property Insurance Law Observer | October 14, 2019

Those familiar with first party insurance policies have undoubtedly encountered a recurring issue with the interpretation of appraisal provisions – what does it mean to disagree on the amount of loss?  In Valvano Realty Co. v. American Fire and Casualty Co., the United States District Court for the Middle District of Pennsylvania recently held that a disagreement on the amount of loss encompasses situations where an insurer claims it needs additional documentation before it can determine whether a disagreement exists.  Valvano involved a December 18, 2015 fire at the Plaintiff’s property in Dickson City, Pennsylvania, which was insured by American.  American’s adjuster, working with a retained construction consultant and structural engineer, determined the replacement cost value of the loss to be $140,920.61, and the actual cash value to be $110,608.34.  Plaintiff disagreed, claiming the building was a total loss, and demanded the policy limit for property damage of $850,113.  American paid its adjuster’s determination of the actual cash value of the loss ($110,608.34) and, in response, Plaintiff indicated its intent to invoke the policy’s appraisal provision to settle the dispute.  The relevant provision states as follows:

If we and you disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the 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 the 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.

American refused to proceed to appraisal, and Plaintiff filed suit alleging breach of contract and statutory bad faith.

During the lawsuit, Plaintiff maintained its interest to move forward with appraisal.  Accordingly, Defendant filed a motion requesting that the Court appoint an appraiser for American.  American argued that its failure to pay the amount demanded by the Plaintiff does not trigger the policy’s appraisal provision.  Further, American argued that Plaintiff had failed to provide requested documentation, the receipt of which was necessary for American to determine whether a disagreement over the amount of loss actually exists.  For its part, Plaintiff claimed it provided information to American’s counsel and, as a result, the parties should proceed with appraisal.

The Court granted Plaintiff’s motion, finding the parties essentially disagreed on the amount of the loss, thereby triggering the policy’s appraisal clause.  In arriving at its decision, the Court referenced several general points of law regarding appraisal provisions relevant to its analysis, chief among them being that in order for a case to be  appropriate for appraisal, two conditions must be met:  (1) the defendant has admitted liability for the loss; and (2) there must be a dispute only as to the dollar amount of the loss.  Here, the Court found that American never raised an issue of coverage, and indeed admitted the loss occurred and the policy applied.  Significantly, in stressing that appraisal is an inappropriate forum for coverage disputes, the Court adopted a rather narrow view of what constitutes a coverage dispute:  “[a] dispute of coverage, improper for appraisal, occurs when an insurance company claims an exclusion of a loss under the terms of the insurance policy.”  Accordingly, the Court rebuffed American’s argument related to its failure to receive relevant documents.  “American’s contention that it needs additional documentation to decide the extent of the loss is just another way of saying that there is a fundamental dispute as to the amount of loss.”  Thus, the Court held that a lack of documentation was not a coverage dispute, but rather a dispute over the extent of the fire damage, which was appropriately resolved via appraisal.

Insurance Appraisal and Umpire Association – State of Appraisal

J. Ryan Fowler | Property Insurance Coverage Law Blog | October 3, 2019

I spent October 1st and 2nd in San Antonio at the Insurance Appraisal and Umpire Association (IAUA) meeting. The IAUA is made up of appraisers and umpires from both the policy holder and insurer sides.

One of the presentations was a titled a “Global Perspective on Appraisal” and one of the speakers stated that appraisal has been around for over 110 years in Texas. He then pointed out that in the first 100 years prior to 2009 there were 18 reported cases dealing with appraisal but that in the 10 years starting in 2009 there are now over 200 reported cases. I have never taken the time to count the cases, but I assume the numbers are correct and the trend is clear to anyone that practices in the area of first party insurance claims – appraisals have become much more prevalent and led to more litigation than ever before.

Another of the presentations dealt specifically with recent developments in Texas on appraisal and focused on recent Texas Supreme Court and 5th Circuit Court of Appeals opinions. Both presentations allowed the attendees to ask questions and it became abundantly clear that while everyone agrees appraisal is needed at times and should be about finding the proper amount of loss that in reality that is not always what is happening. Without finger-pointing and blaming the other side the questions dealt with delays, umpire selection, causation issues, changes in policies, legal effects of appraisal, who can be an appraiser/umpire, and how to deal with inherent bias for one party. The take-away was often both sides (even both attorneys from different sides) agree conceptually on what should happen in a perfect world but that in reality the courts will still have issues to sort out and much of the growing pains in appraisal are taking place right here in Texas.

Ultimately the ability to discuss the issues with experts from the other side of the claim allows everyone to learn new ideas and understand some of the problems and maybe some solutions (personally I have had discussions with an appraiser who represents the other side on a couple of my cases and two umpires that I have seen on my cases). One of them said maybe the most important thing to remember, “we all represent the insured ultimately… the insurance company and the policy holder advocates…we all should have the goal of making sure the policyholder gets paid properly after the disaster that damages their property.” With that being said I highly recommend IAUA to anyone that wants to learn more about the appraisal process.

It doesn’t look like appraisal is going away anytime soon. If you have a question about the current state of appraisal law in a specific venue feel free to contact a Merlin Law Group attorney.

Colorado Supreme Court Decision Could Tarnish Appraisal Process for Policyholders

Michael V. Pepe | SDV Insights | July 23, 2019

On June 24, 2019, the Colorado Supreme Court ruled that the plain language of appraisal provisions in insurance policies, requiring “impartial appraisers,” direct appraisers to be “unbiased, disinterested, and unswayed by personal interest,” regardless of who hires them, and prohibits the party-appointed appraisers from acting as advocates.

A common and attractive alternative dispute resolution option, the appraisal process usually entails the policyholder and insurer each hiring their own appraiser, who estimates how much the claim is worth. These appraisers also select a third-party umpire, and if they cannot agree upon one, a court appoints one. The umpire analyzes the conflicting estimates and presents a number to resolve the dispute. If two of the three parties agree with the outcome, the number becomes binding.

Owners Ins. Co. v. Dakota Station II Condo. Ass’n, Inc.began when Dakota Station II Condominium Association Inc. (“Dakota”) and its insurer, Owners Insurance Company (“Owners”) could not agree on how to value two claims arising out of weather damage. To settle the differences and come to a resolution, Dakota invoked the appraisal provision in the insurance policy instructing each party to select its own “competent and impartial appraiser.” Ultimately, a court-appointed umpire considered six cost categories in dispute and adopted four of Owners’ estimates and two of Dakota’s.

Owners filed a petition to vacate the award, alleging that Dakota’s appraiser “acted improperly by entering into a contract … that capped her fees at five percent of the insurance award (allegedly giving her a financial interest in the outcome).” Under this fee arrangement it was possible that the appraiser would collect more fees for a higher award. Owners argued that the appraiser’s potential financial interest meant that the appraiser was not “impartial” as required by the policy.

After two lower courts held in favor of the insured, the Colorado Supreme Court granted certiorari and considered two issues: (A) the meaning of the language “impartial” in the appraisal provision, and (B) whether the fee arrangement meant that Dakota’s appraiser was not impartial as a matter of law.

The Court affirmed the lower court’s holdings in part, holding that appraisers were not necessarily held to the same strict standards of impartiality as arbitrators. On the other issues, the Court overturned the lower court. The Court held that the appraisal provision is not ambiguous, and that the plain meaning of “impartial” is “[n]ot favoring one side more than another; unbiased and disinterested; unswayed by personal interest.” In comparing this with the plain meaning of “advocate” – “[s]omeone who assists, defends, pleads, or prosecutes for another” – the court concluded that an appraiser cannot simultaneously advocate for a party and be impartial.

The Court relied on the fact that there is nothing in the provision suggesting that an appraiser would put forth values on behalf of a party that hired it. “[W]e can’t endorse a reading of the impartiality requirement that suggests one can simultaneously be an ‘advocate’ for one of the parties and be ‘impartial.’”

The Court also concluded that in this case, the contingent-cap fee arrangement did not render the appraiser biased as a matter of law. The fees did not reach a level that would have been capped, even under Owner’s appraiser’s valuation, and thus the contingent-cap did not affect what the appraiser was paid. The appraiser did not “believe the cap was in effect and there is seemingly no relationship between the fees billed by the appraiser and the estimates she put forth, we can’t say that hypothetical incentives rendered her partial.”

Several judges dissented from the majority opinion, warning that the holding further “tips the scale in favor of the insurance industry,” widening the imbalance of power in this area.

The holding may be impractical, requiring humans to ignore their natural instincts, because “when an appraiser advocates for her own work and final valuation, she essentially advocates for one party, and it’s human nature to expect (and want) an appraiser to advocate for her own work and final valuation.” It seems unlikely that each party would select and compensate its own appraiser and expect that appraiser to not advocate for or favor its side. After all, the umpire is supposed to fulfill the unbiased third-party role in the appraisal process.

Colorado’s holding should put both insurers and policyholders on notice to review the language of appraisal provisions commonly found in first party policies, including homeowners, commercial property, and builders risk insurance. Parties should consider whether this is the arrangement they want and whether to negotiate for a process that expressly allows for appraisers to advocate on their behalf to the umpire. Otherwise, they run the risk that a favorable award can be vacated based on an after-the-fact showing of partiality or bias.

In addition to reviewing appraisal provisions, parties should carefully consider the appraiser selection process and vet potential appraisers before the appraisal process begins.