When Is a Demand for Appraisal Too Late?

J. Ryan Fowler | Property Insurance Coverage Law Blog | May 8, 2018

I often hear from insureds that have been negotiating with their insurance company for a period of time when the insurer suddenly demands appraisal. The insureds do not want to go to appraisal and the first question is always, “Can the insurance company do that?” followed by “This claim has been going on for months, isn’t it too late?” My usual answer is that in Texas the insurance company can force appraisal before litigation if it is part of the insurance policy. However, when an insurance company demands appraisal while in litigation the answer often depends on the facts of the case.

Last week the Court of Appeals of Texas, Fort Worth, denied mandamus and found that a trial court that denied Allstate’s motion to compel appraisal did not abuse its discretion.1 The appellate court looking at the facts of the case had to decide if Allstate had waived the right to appraisal. The insured had to establish that Allstate had engaged in intentional conduct inconsistent with claiming the right to appraisal.

The court noted that simply a delay in invoking appraisal can be one aspect, or factor, of a wavier-by-conduct analysis. The court looked at the fact that Allstate had wrongfully removed the action to Federal Court; conducted six inspections of the property at issue—four by Allstate adjusters and two by Allstate’s experts; Allstate had agreed to a trial date; Allstate then moved to compel a seventh inspection by another expert for the express purpose of the new expert testifying at trial; Allstate’s attorneys then sought an extension for expert designations for the new expert witness.2

The appellate court then addressed Allstate’s conduct regarding the timing of an impasse regarding the party positions on the amount of loss in the claim. The insured argued the impasse was reached, at the latest, on May 9, 2017, when Allstate made a Texas Rule of Civil Procedure 167 offer of $4,000, and the insured rejected the offer and for the third time stated the loss to be over $19,0000. Allstate argued that no impasse was reached until August 14, 2017, because Allstate sent a settlement offer of $24,000 to the insured to settle all claims and give a full release. The court pointed out that Allstate was essentially arguing that despite its litigation conduct it may at any point trigger a new point of litigation by simply making a settlement offer that is requested. The court rejected this argument and agreed with the trial court that, rather than talking settlement, Allstate was “doing tactical maneuvering in the lawsuit.” The court pointed out the distinction between settlement negotiations as a lawsuit strategy and negotiations about the amount of loss.3

Ultimately the court held that Allstate cannot make a settlement offer to pay money in exchange for the dismissal with prejudice of the insured’s claims and then argue that its settlement offer constituted “good faith negotiations concerning the amount of loss suffered by the insured.”4

Waving the right to appraisal will continue to be a fact intensive analysis once litigation has commenced, but in this case Allstate’s eleventh-hour demand was deemed too late.
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1 In Re Allstate Vehicle and Property Ins. Co., No. 02-17-00319, 2018 WL 2069185 (Tex. App.—Fort Worth, May 3, 2018).
2 Id.
3 Id.
4 Id. citing Universal Underwriters of Tex. Ins. Co., 345 S.W.3d 404 (Tex. 2011).

The Proper Standard for Evaluating “Actual Cash Value” Under New Jersey Law

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | April 12, 2018

One of the most common questions we hear from our clients has to do with the differences between “actual cash value” and “replacement cost value.” Replacement cost value on its face seems relatively straight forward, but what is “Actual Cash Value” determined under New Jersey law?

This topic was visited by Shane Smith following Super Storm Sandy in Calculating Actual Cash Value, Part 5: New Jersey and New York, and I was curious if the criteria had changed following such an influx of first party property damage claims.

There are typically three general ways to determine Actual Cash Value:

  1. market value;
  2. replacement cost less depreciation; and
  3. the broad evidence rule.1

The Broad Evidence Rule, in layman’s terms, is a combination of Market Value (what it’s selling for now) and Replacement Cost less Depreciation (how much it costs to replace minus age/wear & tear/condition, etc.).2 In Messing v. Reliance Insurance Company, the court found “that the broad evidence rule was most consistent with the principle of indemnity.”3

The Supreme Court of New Jersey agreed. In Elberon Bathing Company v Ambassador Insurance Company,4 a fire case that went to appraisal, the Court held:

“[T]hat (1) appraisal based on replacement cost without consideration of depreciation does not measure actual cash value; (2) the proper standard for evaluating ‘actual cash value’ under New Jersey standard form policy is broad evidence rule. . . .”

The Elberon the New Jersey Supreme Court found broad evidence to be the standard because it requires the fact-finder to consider the same evidence an expert would consider relevant to an evaluation; fair market value and replacement cost minus depreciation. The Court does allow the fact-finder to use the criteria as guidelines if the facts of the case are appropriate.
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1 See Note, “Valuation and Measure of Recovery Under Fire Insurance Policies,” 49 Colum. L. Rev. 818, 820-823 (1949); Cozen, Op. cit., supra, 12 Forum at 648-658; Hinkle, “The Meaning of ‘Actual Cash Value,’” 1967 Ins.L.J. 711. See generally Annot., 61 A.L.R.2d 711 (1958).
2 Messing v. Reliance Ins. Co., 77 N.J.Super. 531, 187 A.2d 49 (1962).
3 Id. at 534.
4 Elberon Bathing Co. Inc. v Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978).

“Like Kind and Quality” Is an Appraisable Issue

Christina Phillips | Property Insurance Coverage Law Blog | December 3, 2017

Following a loss, the issue of replacement with “like kind and quality” often arises whether it be with the replacement of personal property or building materials. The phrase “like kind and quality” is typically not defined in an insurance policy, so whether construction is of “like kind and quality” can easily become a dispute. But is this dispute subject to appraisal?

In Taven Apartments Limited Partnership v. State Farm Fire & Casualty Company,1 the trial court was recently faced with this issue. Following a loss which destroyed an apartment building, Taven submitted a claim to State Farm for which it made partial payment. Taven went forward and reconstructed the destroyed building and demanded that State Farm proceed with appraisal. State Farm denied the request asserting that the structure built to replace Taven Apartments was not “like kind and quality.”

State Farm disputed the claim on the basis that the replacement structure had different dimensions and amenities. Taven disputed the contentions and submitted construction drawings prepared to conform to the design of the destroyed building, re-using the existing foundations and concrete slab for the original building. Taven also moved to compel State Farm to appraisal, asserting that determining whether the replacement structure is of “like kind and quality” is within the appraisers’ purview and expertise which would include a determination of what the proper replacement cost or value is, and whether the rebuilt building was of the same size as the destroyed building, and used materials of like kind and quality. State Farm alleged that the dispute centered on the “extent of coverage” for the replacement building.

The United States District Court of the Eastern District of Missouri ultimately concluded that “like kind and quality” was not a coverage issue, but was a valuation matter. Specifically, the court concluded that the dispute related to valuation and cost of damages, repairs, and construction constituted a “disagree[ment] on the value or the amount of the loss” which was subject to appraisal. In this jurisdiction, it is likely that future disputes involving issues of what constitutes “like kind and quality” will be subject to the appraisal process.

1 Taven Apartments Limited Partnership v. State Farm Fire & Cas. Co., No. 1:17-cv-00083, 2017 WL 4778580 (E.D. Mo. Oct. 23, 2017).

If You Believe Your Appraisal Award Is Wrong – You Might Be Right

Jeff Zane | Property Insurance Coverage Law Blog | November 13, 2017

In theory, the appraisal process is intended to provide an efficient means of determining the cost to repair or replace damaged property. It is also intended to have a degree of finality – once the appraisal panel determines the amount of damages, the damages are typically fixed at that amount.

However, that does not mean you shouldn’t examine an appraisal award, or that you necessarily must accept it if it is substantially defective. In Texas, as in many states, an appraisal award may be set aside: (1) when the award was made without authority; (2) when the award was made as a result of fraud, accident, or mistake; or (3) when the award was not in compliance with requirements of the policy.1

If your appraisal award seems incorrect to you, try to obtain as much information as you can about the basis for the award. This is not always easy, because appraisal panels can be less than transparent about their reasoning and methods. For this reason, it is sometimes important that your appraiser attempt to memorialize as much as is possible about the panel’s deliberations through emails, notes or other contemporaneous records.

It may be possible to set aside an appraisal award, for example, if the panel improperly bases its award on repairs or replacement with materials that are not like kind and quality with the existing property.

To explain, most insurance companies promise in their policies they will repair or replace damaged property with materials of “like kind and quality.”2 Notwithstanding this clear language, a carrier’s appraiser may coax an umpire to reduce the amount of an award by basing it upon the cost to use a materially different roofing system. Perhaps the carrier feels that a 90-millimeter roof can be replaced by a 45-millimeter roof, or that premium tiles may be replaced by lower-grade tiles with a more limited life-span. Arguably, neither example represent materials of “like kind and quality.”3

If this happens, you might consider challenging the appraisal award because the appraisal panel has exceeded its powers by failing to comply with the terms of the underlying contract. Appraisal panels enjoy a good deal of discretion, but they do not enjoy the unfettered ability to stray from the governing insurance policy. If an appraisal award is “not in compliance with the requirements of the policy” because it does not comply with the “like kind and quality” provision, then a court should reject the award.

Challenging an appraisal award is always an arduous task, however, and you will want to consider your options carefully. If you have any doubts about your award, be sure to speak with an experienced attorney.
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1 Garcia v. State Farm Lloyds, 514 S.W.3d 257, 265 (Tex. App. 2016), review denied (June 2, 2017). See also Hanson v. Commercial Union Ins. Co., 150 Ariz. 283, 285, 723 P.2d 101, 103 (Ariz. App. 1986) (“An award must comply, in substance and form, with the submission agreement. Thus, the act of an umpire in excess of his authority renders the award void, to the extent that the authority is exceeded. And the same result is reached, whether the authority is exceeded consciously or by mistake. Appraisers’ acts in excess of authority are not binding on the parties, without ratification.”).
2 The standard Texas homeowner’s policy, for example, provides that the insurance company will “repair or replace any part of the damaged property with material or property of like kind and quality.”
3 I also urge you to read – or re-read – my colleague Jonathan Bukowski’s excellent post regarding “matching” issues in an appraisal award in a recent Colorado case.

Federal Arbitration Act Governs Property Insurance Appraisals

Richard Wolf | Claims Journal | July 27, 2017

In a decision filed July 14, 2017, the US District Court for the Central District of California invoked the Federal Arbitration Act (FAA) in refusing to vacate an insurance appraisal award determining the value of insured tools stolen from their owner. The decision, James Dickey, Inc. v. Alterra Insurance Company, is reported at 2017 U. S. Dist. LEXIS 109811.

There was a twist: The court used state law to find that federal law applied.

 

The parties, insurer and insured, had been unable to agree on the value of the stolen tools, so defendant, the insurer, successfully moved the federal court to compel appraisal under the terms of the insurance policy. The policy appraisal provision required each party to select an appraiser and called for the appraisers to agree on and appoint an impartial “umpire.” If the appraisers cannot agree on the dollar amount of the loss, that determination is made when the umpire and one of the two appraisers agree on an award in writing.

Under this procedure, the policyholder nominated Eugene Twarowski as its appraiser, and the insurer nominated David Smith. The two appraisers selected Bo McCarthy to serve as the umpire. McCarthy disclosed that he had worked with Twarowski in a previous insurance appraisal proceeding approximately five years earlier, and that Twarowski had served in the role of public adjuster, an adjuster representing the interests of the policyholder. McCarthy disclosed that he had served as the insurance company’s appraiser in the earlier case.

The two appraisers could not reach an agreement on the value of the tools, so they and the umpire set up a meeting to discuss the contested issues. Appraiser Twarowski announced that he might bring a witness to the meeting, and McCarthy told the others he would question any witnesses, who should bring with them to the meeting any documents supporting their position. Twarowski then recanted, stating that he was not calling any witness to “testify” at the meeting.

The meeting occurred November 17, 2016. The appraisers and umpire disagreed on whether depreciation should be applied to the tools. Twarowski requested that the meeting be adjourned so he could gather additional evidence regarding price movements of the tools over time. McCarthy, who presided at the meeting, denied Twarowski’s request for what amounted to a continuance, and announced that the appraisal would be completed that day.

The next day umpire McCarthy and appraiser Smith (appointed by the insurer) signed an appraisal award, and 10 days later the policyholder provided a copy of it to the insurer by email. The insurer paid the award in full on December 7, 2016.

On June 2, 2017, the policyholder filed a motion to vacate the appraisal award, asserting that umpire McCarthy had failed to disclose to the policyholder that in the past McCarthy had performed work for the law firm representing the insurer in the pending matter. That work had consisted of McCarthy serving as the appraiser selected by a different insurer in that case, Allstate Insurance Company. In the earlier matter Twarowski had served as the insured’s public adjuster.

The court’s first step in deciding the policyholder’s motion to vacate the appraisal award was to determine whether California law or the FAA governed the outcome of the motion. Ironically, the court observed, both sets of laws apply, although at different stages of the analysis. Initially, the court held, the FAA applies whenever an arbitration clause is found in a contract involving interstate commerce. The court determined that insurance policies, such as the one in this case, generally involve interstate commerce.

The court then turned to the question of whether the appraisal clause of the policy of property insurance constitutes an agreement to arbitrate disputes under the FAA, and here’s where state law takes hold. Thirty years ago, the court noted, the Ninth Circuit federal Court of Appeals had addressed the issue of whether insurance policy appraisals are arbitrations and thus subject to the rules of the FAA. The correct inquiry, the court held, was “surprisingly simple” — to examine the relevant state law, in this case, California’s, to determine whether appraisals are the “functional equivalent” of arbitrations. Following the lead of that 30-year-old decision, which remains good law in the Ninth Circuit, the court observed that the definition of an arbitration agreement under California law expressly includes “appraisals and similar proceedings.” Since appraisals and arbitrations are functionally equivalent under California law, the court went on to apply the FAA to analyze the appraisal award at issue in the newly filed case.

Under the FAA notice of a motion to vacate an arbitration award must be served upon the adverse party within three months after the award is filed or delivered. Here the award was delivered to the insured by email attachment on November 28, 2016, so any motion to vacate, to be timely, must have been made before February 28, 2017. Since more than three months had elapsed since that statutory deadline, the policyholder’s motion was untimely and had to be denied unless one or more “tolling” legal principles applied here. The court found that no tolling was warranted because the policyholder’s tardiness was not due to it being somehow prevented from filing in time.

Also, since the failure of McCarthy to disclose his previous involvement with the policyholder’s lawyers was the basis on which the insured relied to vacate the award, it became relevant that appraiser Twarowski became aware of McCarthy’s nondisclosure at the parties’ meeting of November 17, 2016, months before the federal statutory deadline. Accordingly, the motion was time-barred.

Even though the motion was not timely filed, the court went further and found that the motion failed to allege any of the statutory grounds for vacating the arbitration award. Of the four grounds available for vacating awards under the FAA, the only ones conceivably applicable here were (1) where there was evident partiality or corruption in one or more of the arbitrators, or (2) where the arbitrators refused to postpone the hearing without sufficient cause, or refused to hear evidence pertinent and material to the controversy.

The first ground to vacate the award was not established, since the umpire did not fail to disclose information that created a reasonable impression of bias or that the umpire was actually biased against the insured. Although McCarthy failed adequately to disclose his previous work with counsel for the insurer before the meeting of November 17, 2016, courts have generally vacated awards based on “an impression of bias” only where the neutral’s previous involvement in previous cases was substantial, ongoing, and for one of the parties. This test was not satisfied here, held the court, since only one case was involved – and different parties.

The policyholder also alleged that McCarthy showed actual bias by deciding to disallow the testimony of witnesses, and by denying the request for a continuance. With regard to witness testimony, the evidence showed that the insured voluntarily withdrew its witness before the appraisal panel met. Denying a continuance does not show actual bias, since the parties had ample time before the meeting to gather any and all information relating to the value of the tools. Accordingly, the court found that the policyholder’s motion must be denied in the alternative because it failed to establish a ground for vacation of the award under the FAA.