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.

Florida Federal Court Allows Insurer To Invoke Appraisal Provision Despite Pending Lawsuit Against Insurer

Jeremy S. Macklin | Traub Lieberman Straus & Shrewsberry | September 11, 2018

In Reynolds Ventures, Inc. v. Scottsdale Ins. Co., 2018 U.S. Dist. LEXIS 150508 (M.D. Fla., Sept. 5, 2018), the U.S. District Court for the Middle District of Florida held that a surplus lines insurer who acts consistently with its rights may invoke its appraisal rights after suit has been filed.

Marram Corp. (“Marram”) secured a first party property insurance policy from Scottsdale Insurance Company (“Scottsdale”). Marram’s property suffered water damage, and Marram filed a claim with Scottsdale. Marram allowed Reynolds Ventures, Inc. (“Reynolds”), a contractor, to directly bill Scottsdale for its repair services. Reynolds and Scottsdale disputed the amount of damage sustained by Marram. Reynolds (through rights acquired by Marram) sued Scottsdale for breach of contract for underpaid services. Scottsdale brought a motion to compel appraisal and to stay legal proceedings.

Reynolds objected to the appraisal for three reasons: (1) disputes over coverage exist, (2) Scottsdale failed to invoke an appraisal, and (3) Scottsdale failed to notify Reynolds of its rights under the policy. Scottsdale argued that it sent Reynolds a demand for appraisal before Reynolds filed suit, and that Scottsdale had not acted against its appraisal rights. The demand for appraisal on which Scottsdale relied was a letter with generally accurate policy information that references “Nationwide” not “Scottsdale” as the insurer.

The court found the controversy of the letter referencing “Nationwide” instead of “Scottsdale” irrelevant. The court held that the policy’s appraisal clause was not limited by notice prior to suit. Rather, the right to an appraisal can be invoked after suit has been filed. Scottsdale could invoke its appraisal right after the suit was filed so long as it acted consistently with those rights. Because Scottsdale acted consistently with its appraisal rights, Scottsdale sufficiently invoked its appraisal right within the policy.

Reynolds next argued that Scottsdale failed to notify it of its right to participate in mediation pursuant to Florida statute Section 627.7015 (2) & (7). However, the court pointed out that Section 626.913 clearly excludes surplus lines insurers from 627.4015 (2) & (7) unless the policy specifically states otherwise. Scottsdale is a surplus line insurer and the policy did not state that Florida Statute Chapter 627 applies. Therefore, the court granted Scottsdale’s motion, mandating appraisal and staying the legal proceedings.

Partial Denial of Coverage: If They Raise It, Then You Can Appraise It

Francisco Garcia | Property Insurance Coverage Law Blog | August 8, 2018

Nearly every homeowner’s insurance policy issued in Florida provides a mechanism for resolving disputes between the insured and their carrier as to the amount of a loss: Appraisal.

The language of the appraisal clause can vary from carrier to carrier – some policies, for example, can require appraisal to be invoked within a certain period of time – so it is important to carefully review the specific policy provision any time a party demands a loss be submitted to appraisal. The process is commonly described as follows:

Appraisal. If you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. Each shall notify the other of the appraiser’s identity within 20 days of receipt of the written demand. The two appraisers shall then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the residence premises is located to select an umpire. The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall be the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any two of these three shall set the amount of the loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire shall be paid equally by you and us.

When properly invoked, participation in the appraisal process is mandatory and the amount of loss determined by the panel is binding.

Florida’s Fourth District Court of Appeals recently addressed whether appraisal can be compelled by a carrier after partially denying coverage for the loss. The case, People’s Trust Insurance Company v. Tracey,1 involved a claim for damage to an insureds’ roof and their home’s interior. The homeowners reported that the loss had been caused by wind from a tornado. Although the carrier generally acknowledged coverage for the loss, it limited its payment to only the interior damages and denied coverage for roofing system portion of the claim. Specifically, People’s Trust sent the insured a letter stating:

THERE IS COVERAGE UNDER THE POLICY FOR THIS LOSS AS A WHOLE; HOWEVER, THE SCOPE OF DAMAGES COVERED BY YOUR POLICY INCLUDES ONLY THE INTERIOR DAMAGES BUT DOES NOT INCLUDE YOUR ROOF.

We have completed our investigation of your claim, and based upon what we were provided and what you reported, and additionally, based upon our claim investigation, there is generally coverage for your loss as a whole. However, and more specifically, our investigation revealed that the roof leak you reported stemmed from age-related wear and tear and deterioration; general mechanical breakdown or latent defect; and/or faulty, inadequate or defective maintenance of the roofing system – none of which are covered causes of loss. Therefore, in our opinion, the scope of covered damages would not include your roofing system because those damages were caused by uncovered or excluded causes, but would provide coverage for resulting ensuing damages to the interior of your home. Therefore, we believe our obligation is to repair only those damages to the interior of the home. If you are not in agreement with that assessment, the question of whether the scope of repairs should include the roof, can be resolved in appraisal.

In response to two proofs of loss submitted by the insureds, both of which exceeded the insurer’s payment and included repairs to the roof, People’s Trust demanded. The homeowners then filed suit against their insurance carrier for breach of contract and the insurer responded by moving to compel appraisal. People’s Trust maintained that the cause of the roof damage could be resolved in appraisal because it went to the amount of the loss. The insured successfully argued that the cause of the damage to the roof was a question of coverage and, therefore, solely within the purview of the court.

The trial court agreed with the insureds and denied People’s Trust motion to compel appraisal, without prejudice. The appellate court, however, reversed and remanded the case back to the trial court to compel the appraisal. In its reasoning, the appellate court explained that “when an insurer admits coverage and disputes the amount of loss, causation is to be determined by an appraisal panel.” Regarding the insured’s argument, the court emphasized that “[c]ausation is a coverage question for the court when an insurer wholly denies that there is a covered loss and an amount-of-loss question for the appraisal panel when an insurer admits there is a covered loss, the amount of which is disputed.”

This case further demonstrates the nuances of first-party property actions and how particular facts surrounding a claim can change the outcome of litigation. Based on Tracey, if an insurer denies coverage for a loss in its entirety it may not be able to avoid litigation by invoking appraisal – but if it only denies coverage for a portion of the claim, then you may have no other option than to participate in the appraisal process. If you believe that an appraisal provision has been improperly demanded or have questions about whether an insurance carrier may invoke appraisal under a policy, contact an experienced insurance professional for help.
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1 People’s Trust Ins. Co. v. Tracey, No. 4D17-3945, 2018 WL 3559914 (Fla. 4th DCA July 25, 2018).