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.

Florida Appellate Court Finds Implications Of Bad Faith In Claims Handling Not Proper In First Party Insurance Coverage Dispute

Ashley Kellgren | Traub Lieberman Straus & Shrewsberry | August 17, 2018

In two separate opinions, Florida’s Fourth District Court of Appeals reiterated the longstanding principle that issues regarding the quality of an insurer’s adjustment of a claim and bad faith should not be interjected into a first party insurance coverage action. In Citizens Prop. Ins. Corp. v. Mendoza, 42 Fla. L. Weekly D. 1523 (Fla. 4th DCA 2018), an issue on appeal was whether the trial court properly instructed the jury on a duty to adjust the claim. In that case, the insureds incurred water damage to their home caused by a water heater leak. The insurer investigated the claim and denied coverage based on the policy’s constant or repeated seepage or leakage exclusion. At trial, the insureds took issue with the way the adjuster denied the claim, asserting that he violated ethical rules and the policy itself.   Over the insurer’s objection, the trial court instructed the jury regarding the adjuster’s “duty to adjust” the claim.

On appeal, the Fourth District reversed final judgment in favor of the insureds, explaining that the trial court’s instruction “transformed the case into a referendum on the quality of the adjuster’s performance instead of focusing the jury on the factual issue of whether the loss fell under the policy exclusion.” Continuing, the Court explained that, while issues regarding whether the adjuster “properly investigated” or “properly adjusted” the claim may be appropriate in a bad faith case, such considerations have no place in a simple breach of contract claim.

On that same day, the Fourth District issued a similar opinion in the case of Homeowners Choice Prop. & Cas. Ins. Co. v. Kuwas, 43 Fla. L. Weekly D 1513 (Fla. 4th DCA 2018). In Kuwas, the insured alleged two counts of breach of contract in connection with the insurer’s denial of coverage for two claims for property damage as a result of a water loss. At trial, the insured’s theory of his case focused on the insurer’s handling of his claim and other claims in general. For example, in opening statement and questioning of the insurer’s litigation manager, counsel for the insured commented that the insurer was “playing the odds” in hopes that the party seeking to be paid will not sue or it would deter others from making claims. Counsel for the insured suggested that this “playing the odds” was the wrong thing to do and would be a breach of the policy. The jury returned a verdict in favor of the insured and the trial court denied the insurer’s motion for a new trial.

On appeal, the insurer argued that “implications of bad faith should not form a basis to determine liability in a first party insurance coverage action.” The Fourth District agreed, finding that criticism of the insurer’s claim handling practices as a business practice was improper. The Court likewise agreed that the insured improperly used his questioning of the litigation manager as an opportunity to paint the insurer as a carrier that denies claims for any (or no) reason, which inappropriately shifted the focus to the insurer’s claim handling and bad faith. The issues of claim handling and bad faith were not before the jury and not proper considerations in a breach of contract action, where the insurer’s liability for coverage and damages has yet to be determined. The Court concluded that this, along with other errors at trial, warranted a new trial.