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).

Federal Court Ruling Vacates Hail Claim Appraisal Award, Highlights Appraiser Abuses

Denise Johnson | Claims Journal | July 26, 2018

A recent decision by a Colorado federal appeals court could have significant impact on hail claims and appraisals across the country.

Copper Oaks Master Home Owners Association v. American Family Mutual Insurance Co. involves a claim of hail damage that led to a dispute regarding damages.

According to the facts outlined within the opinion, Copper Oaks managed several residential buildings in Lakewood, Colo., at the time of the loss. On September 9, 2013, a hail storm allegedly caused property damage to the Copper Oaks complex. Due to debris scattered about the premises, the property manager, Mark Richardson, contacted Derek O’ Driscoll of Impact Claim Services, LLC, and requested he conduct a free inspection of the building roofs. At a November 2013 board meeting, O’Driscoll discussed his roofing evaluation and offered to represent Copper Oaks as public adjuster on its anticipated claim to American Family.

A month later, a separate report commissioned by Richardson found that Copper Oaks was “severely undercapitalized given the size, age and condition of the complex.” The report found that the HOA was severely underreserved – it had $70,112 in reserves, just 11 percent of the recommended amount of $625,597 to carry out extensive repairs needed. A special assessment of $1500 per unit was recommended but there was no evidence that was conveyed to the unit owners.

Copper Oaks hired Impact Claims in March 2014 as its public adjuster and agreed to pay a contingent fee of 15 percent of any insurance award.

American Family was first notified of the loss in April 2014. The insurer inspected the property damage and provided an estimate of $620,979 as the replacement cost value (RCV). The insurer issued payment of $497,765.43, the actual cash value of the loss, in July 2014.

Impact Claims determined Copper Oak’s loss to be much higher than the amount paid by American Family. Later in 2014, O’Driscoll estimated the total damage due to the hail storm at nearly $3.6 million. Upon learning of the increased damage estimate, American Family hired Madsen, Kneppers & Associates to appraise the loss. After an inspection, the firm issued a report estimating the total RCV loss at $608,398.49.

Disappointed with the amount American Family initially paid on the claim, Copper Oaks filed suit in state court. American Family had the case removed to federal court. The Amended Complaint stated four claims: 1) a request for declaratory judgment as to the appraisal process and award; 2) a request to compel an appraisal award in accordance with process specified in the Policy; 3) breach of contract in failing to pay the amounts owed under the Policy; and 4) unreasonable delay in payment in violation of C.R.S. 10-3-1115 and 1116.

Besides the dispute on damages, the parties disagreed as to whether the complex was actually damaged by hail during the storm. The court noted there wasn’t any contemporaneous evidence that hail had impacted any part of the property – “no statements of occupants, photos or the like.”

A requirement when the value of a claim is disputed is that the parties to the policy must engage in an appraisal process to determine the value of the loss.

The parties were ordered to participate in the appraisal process. The policy requires each party to appoint a “competent and impartial” appraiser. The two appraisers then jointly select a neutral umpire. Each appraiser submits an opinion as to the amount of the loss to the umpire. Upon the agreement of the umpire and at least one of the appraisers, the amount of the loss is conclusively determined.

The appraisal process, according to Steven Badger, a Dallas attorney with Zelle LLP, “was intended to be an amicable and expeditious approach to resolving disputed insurance claims. Appraisal clauses have been found in insurance policies for over 100 years, with the process serving as a valuable way to bring disputed claims to closure without the need for lawyers or lawsuits.”

Copper Oaks selected George Keys of Keys Claims Consultants, Inc. to act as its appraiser. American Family selected James Whipple. Keys and Whipple selected Robert Norton as the umpire.

Keys’ appraisal, submitted on February 29, 2016, found that “every roof, every elevation, every chimney, and virtually all of the siding on every building at the Copper Oaks’ property had either been damaged by hail or, if undamaged, would nevertheless have to be replaced in order to fully repair the hail damage.”

His initial loss estimate was $4,968,115.62 and was later revised to $5,066,238.99.

Whipple’s damage appraisal came in at $406,234.29.

Norton, as the umpire, concluded that there was some hail damage, but not nearly as much as Keys claimed. In July 2016, Norton proposed an appraisal award of $3,061,201.44. Neither appraiser agreed with the umpire’s proposed amount leading to Norton’s advisement that if they couldn’t agree, he would circulate a proposed final award of $2,943,919.72.

According to the opinion, Keys submitted his bill to Copper Oaks a week after the appraisal award of $2,873,085.35 was announced. The bill reflected 666.40 hours of work, all charged at a rate of $350 per hour, totaling $233,240. Of importance was that there wasn’t any differentiation in hourly rates based on the tasks performed or by the person performing the tasks.

In January 2017, the parties announced a dispute over the validity of the appraisal award. Copper Oaks sought to enforce the appraisal award, while American Family filed a motion to vacate the appraisal award.

During a hearing, the court bifurcated the allegations within the complaint into claims that concerned the appraisal process (Claims 1 and 2) and claims that concerned breach of contract and statutory bad faith breach of contract (Claims 3 and 4).

American Family contended that the appraisal award should be invalidated because the appraiser selected by Copper Oaks and the umpire were not impartial. Copper Oaks responded that American Family i) waived any objection to Keys and Norton, ii) was estopped from challenging them, and iii) its request is barred by the doctrine of laches.

Prior to and during this case, there were several judicial opinions in unrelated cases involving Keys that disqualified him as an appraiser and vacated associated appraisal awards.

Analysis of records and testimony by the appraisers led the court to determine that It was essential that the appraisal award be high enough to allow Copper Oaks to pay the bills of Keys, O’Driscoll, and related vendors as well as sufficient enough to allow Copper Oaks to make the repairs. The court noted that “Copper Oaks was required to obtain an appraisal award of nearly 128 percent of actual repair costs, simply to break even.”

After a bench trial to determine the sufficiency of the appraisal award, the court stated it intended to grant American Family’s motion to vacate the appraisal award. The Court reasoned that Keys was not “fair and competent”, because he had a “direct material interest in the amounts determined by the appraisal process” and because he did not disclose “facts that a reasonable person would consider likely to affect the appraisers interest in the amounts determined by the appraisal process.”

The court’s decision disqualified Keys and invalidated the appraisal award. The court stated, “Mr. Keys’ appraisal was so bereft of methodology and supporting evidence as to be completely implausible.”

The court deemed Norton as also not, “fair, competent and impartial.” This, too, invalidated the appraisal award.

According to the federal court, judgment was entered in favor of American Family on the first and second claims in Copper Oaks’ Amended Complaint. As a result, the court stated, “Because the vacatur of the appraisal award nullifies any determination as to amount that existed at the time of filing this action, Copper Oaks had no standing to bring its third claim, sounding in breach of contract for failure to pay.”

Thus, Copper Oaks third claim was dismissed.

Copper Oaks’ fourth claim for relief, based on the allegation of an unreasonable delay, was scheduled for determination by trial.

The decision highlights changes in the appraisal process over the past decade, said Badger.

“A cottage industry has emerged comprised of individuals who inject themselves into the appraisal process for their own financial gain. Since the appraisal process is not governed by any formal procedural rules or ethical guidelines, the process is now ripe for abuse, manipulation and outright fraud,” said Badger. “With this cottage industry, no longer is the objective to achieve a prompt and fair resolution of the claims, but to extort the highest possible payment from the insurance company to maximize profits to the contractors, public adjusters, appraisers and lawyers who are all part of these schemes.”

Badger is the author of several articles on fraud abuse in hail claims published by Claims Journal, including The Emerging Hail Risk: What the Hail Is Going On?

“The Copper Oaks matter is a prime example of the abuses that have sadly become commonplace in the insurance claim appraisal process, particularly in Texas and Colorado,” said Badger. “Sadly, it took federal court litigation to remedy the clear abuses that took place during this appraisal process. ”

Badger described the common abuses seen in the appraisal process.

“These abuses include significant and unsubstantiated increases in the alleged damages once the matter is in appraisal, appraisers motivated to jack-up claim values based on having a financial interest in the outcome, undisclosed friendly relationships between appraisers and umpires, and literal extortion by umpires when the insurance company appraiser refuses to sign their excessive proposed awards,” he said. “All of these schemes were present in the Copper Oaks matter.”

New schemes pop up every frequently, he added, describing a recent one where a policyholder appraiser charged $2,500 per hour, up to 20 percent of the appraisal award.

“It’s outrageous,” Badger said. “The clear intent with that fee is for the appraiser to receive a 20 percent contingency fee on the appraisal award, which is absolutely forbidden in both Texas and Colorado.”

Though the federal court decision in this case should aid in bringing awareness to the issue, Badger said fighting the schemes is an ongoing battle.

“All the insurance company wants is a level playing field – where both sides pick impartial appraisers and work fairly to achieve a prompt and fair resolution of the claim,” Badger explained. “Regardless of who prevails, if the process is fair then it achieves its intended purpose. But there was absolutely nothing fair about the process in the Copper Oaks case. And the federal judge exposed it. Hopefully this well-written decision will serve as a much-needed warning to the entire cottage industry engaged in these appraisal schemes.”

Connecticut Court Holds Unresolved Coverage Issues Makes Appraisal Premature

Michael S. Levine, Lorelie S. Masters & Geoffrey B. Fehling | Hunton Andrews Kurth | July 2, 2018

A Connecticut court recently denied a motion to compel appraisal of a claim for coverage of a commercial property damage claim, holding that, where the insurance policy at issue provides for appraisal of disputes related to the value or quantum or a loss suffered—not the rights and liabilities of the parties under the policy—appraisal is premature. The decision relied on law that equates insurance appraisal to arbitration and follows a number of decisions holding that parties cannot expand the scope of appraisal clauses to resolve questions of coverage or liability where, as in this case, those issues are not supported by the applicable policy language.

Background

Ice Cube Building (ICB) owned commercial property in Groton, Connecticut, that was covered by a property insurance policy issued by Scottsdale. Following a winter storm, the weight of the accumulated snow and ice caused the roof to leak and water to enter the building. ICB provided notice of the claim to Scottsdale, which acknowledged partial coverage for the loss. Scottsdale paid the undisputed amount of the claim, but ICB asserted that it had incurred additional, unreimbursed loss in excess of $1 million that was covered by the policy.

When Scottsdale refused to pay, ICB sued in state court for breach of contract and a declaratory judgment that the policy covered all of its unreimbursed losses. After Scottsdale removed the case to federal court and filed an answer and counterclaim, ICB moved to compel arbitration under the policy’s appraisal provision and to stay the litigation.

June 18 Decision

The parties did not dispute that the policy required appraisal of certain disputes, including appraisal as to the amount of loss, arising from the policy. They disagreed, however, on whether the policy’s appraisal clause requires arbitration of a dispute over coverage of ICB’s claim and not simply the amount of damage ICB asserts remains unpaid.

In its motion, ICB pointed to the disagreement on the “amount of loss it suffered” and its written demand for appraisal, arguing that Connecticut’s arbitration statute and the terms of the policy require the court to appoint an appraiser to assess its unreimbursed losses. Scottsdale countered by arguing that “an appraisal is premature because there are outstanding coverage issues that the Court must address as a condition predicate to the appraisal process.” The Court agreed with Scottsdale and denied the motion.

In reaching its decision, the Court noted that “the Policy unambiguously provides for arbitration of disagreements relating to the ‘value of the property’ or the ‘amount of loss’ suffered by the policyholder.” However, “[b]ecause the Policy expressly provides for the arbitration of disputes related to the value or quantum of a loss suffered—not the rights and liabilities of the parties under the Policy—and the Court may only compel the parties to arbitrate matters which they have agreed to arbitrate under the provisions of the insurance policy, the Court cannot compel the parties to arbitrate the question of coverage . . . .” The Court agreed with Scottsdale’s position that, where coverage is in dispute, those unresolved coverage issues posed antecedent questions for the court and are not appropriate for appraisal. As a result, the court denied ICB’s motion to compel appraisal as premature.

Takeaways

As this decision makes clear, appraisal should not be used to determine coverage issues impacting the scope of an insurer’s liability for the claim. The court in Ice Cube Building specifically relied on the language of the appraisal provision, pointing out that appraisal, as a type of arbitration, is a creature of contract and its scope cannot exceed what the parties agreed to. This distinction is often made clear in the policy’s appraisal provision, which commonly limit appraisal to the “amount of loss.”

As was the case in Ice Cube Building, courts have followed such unambiguous restrictions on the scope of issues addressed in appraisals and have refused to compel appraisal where disputed issues include questions of coverage and liability. In many cases, insurers attempt to invoke appraisal clauses prematurely, seeking to resolve issues of both the extent of damage and coverage. Interestingly in Ice Cube Building the policyholder attempted to force appraisal, and the insurer correctly noted that, under the terms of the policy, unresolved coverage and liability issues posed antecedent questions for the court to decide that were inappropriate for appraisal. Policyholders should carefully review the proper scope of appraisal provisions in first-party property policies to determine the most efficient and effective way to resolve disputed claims and to ensure that coverage issues are resolved in the appropriate forum or process. The case is Ice Cube Building, LLC v. Scottsdale Insurance Co., No. 3:17-CV-00973 (VAB), 2018 WL 3025037 (D. Conn. June 18, 2018).