Appraisal and the Impartiality of Appraisers

Timothy Burchard | Property Insurance Coverage Law Blog | July 6, 2019

Recently, the Colorado Supreme Court issued its opinion in Owners Ins. Co. v. Dakota Station II Condominium Association,1 on appraiser impartiality. Specifically, the court discussed the meaning and interpretation of impartiality under the insurance policy and whether a contingent-cap fee agreement between the appraiser and Dakota Station rendered the appraiser not impartial as a matter of law.

The story starts off in a very familiar way. Dakota Station made two insurance claims for weather damage to its property, a dispute arose, and Dakota Station invoked the appraisal clause in the insurance policy. The appraisal clause stated:

If [Owners] and [Dakota] disagree on the value of the property or the amount of loss, either may make a written demand for an appraisal of 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 a 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.

Both appraisers prepared estimates, but could not come to an agreement, so the appraisal decision went to an umpire. The appraisers’ estimates considered six total repair categories. The umpire agreed to four out of six repair categories in Owners appraiser estimate and agreed to two of six repair categories in the Dakota Station appraiser’s estimate, one of which was for the roofing system. The umpire drafted an appraisal award, which was signed by the umpire and Dakota Station’s appraiser. Owners paid the appraisal award.

Months later, “Owners called foul”2 and challenged the appraisal award in the lower courts. Owners challenged the appraisal award through a motion to vacate, claiming Dakota Station’s appraiser did not act impartially as required by the appraisal clause in the policy. The lower court disagreed, dismissed Owners motion to vacate, and a division of the court of appeals affirmed the dismissal. Owners then appealed to the Colorado Supreme Court.

The Colorado Supreme Court set out the issues it would review in the appeal:

[H]aving agreed to review the case, we must interpret the policy’s impartiality requirement and determine whether a contingent-cap fee agreement between Dakota and its appraiser rendered the appraiser partial as a matter of law.

Here are takeaways from the Colorado Supreme Court opinion:

  • The appraisal clause language noted above does not require appraisers to act with the same level of impartiality as arbitrators. Owners relied on Providence Washington Insurance Co. v. Gulinson3 to claim that it does, but the Colorado Supreme Court found that Providencedid not apply here. Further, the court stated Providence “didn’t establish a general duty of impartiality applicable to appraisers. We simply concluded that an [appraisal] award is invalid when one appraiser and the umpire agree to an award without notice to the second appraiser.”
  • The appraisal clause language noted above requires that appraisers do not advocate on behalf of either party and be unbiased, disinterested, and unswayed by personal interest. The Colorado Supreme Court said, “[t]he language of the appraisal provision doesn’t create an ambiguity as to whether the meaning of the word ‘impartial’ could encompass advocacy … [t]he provision certainly contemplates that the appraisers might submit conflicting values, but a difference in opinion could result for many reasons … [n]othing in the language suggests that values will be put forth on behalf of a party …” The Colorado Supreme Court remanded to the lower court to review whether Dakota Station’s appraiser acted impartially.
  • The contingent-cap fee agreement didn’t result in partiality on the facts presented in this case. While Dakota Station’s appraiser’s contract included a provision allowing a 5% contingent-cap fee, it required a Dakota Station representative to initial the contingent-cap fee clause. The clause was not initialed by Dakota Station and the court determined that no one believed the clause was applicable here. As such, the court provided an extremely narrow review of the contingent-cap fee agreement which unfortunately does not provide direction, generally. However, the court did offer that, “while we are wary of the possible incentives these [contingent-cap fee] agreements create, we decline to hold that they render appraisers partial as a matter of law.”

The Colorado Supreme Court opinion provides a distinction between appraisers and arbitrators and the definition of impartiality but falls short of a final decision on whether Dakota Station’s appraiser acted impartially or if the appraiser’s contingent-cap fee agreement impacted the appraiser’s ability to act impartially as a matter of law in this case. What this opinion does provide is that the actions of appraisers during an appraisal should be appropriately scrutinized and that taking a position with an estimate cannot be based on the interests of an appraiser’s client, whether the insured or insurer.
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1 Owners Ins. Co. v. Dakota Station II Condo. Ass’n, No. 17SC583, 2019 CO 65 (Colo. June 24, 2019).
2 Id.
3 Providence Washington Ins. Co. v. Gulinson, 215 P. 154, 155 (Colo. 1923).

Does Payment of an Appraisal Award Wipe Out Claims Handling Insurance Code Violations?

J. Ryan Fowler | Property Insurance Coverage Law Blog | July 5, 2019

The Texas Supreme Court recently answered the question above in two cases with different results depending on what type of insurance code violations the insured is alleging. The court addressed Texas Insurance Code chapter 542 violations (often called prompt payment of claims) in Barbara Technologies Corporation v. State Farm Lloyds.1

In Barbara Technologies, the court held that an insured may proceed on a claim under Chapter 542 even after the insurance company invokes the policy appraisal provision and ultimately pays the appraisal award.

However, on the same day, the Texas Supreme Court addressed violations of Chapter 541 of the Texas Insurance Code (often called bad faith claims practices) in Ortiz v. State Farm Lloyds.2 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.

Both cases involved the insurance company invoking appraisal during litigation and ultimately paying the appraisal award after it was issued. Reading the two cases together highlights the differences in Insurance Code violations and what claims are still viable after appraisal. To simplify, the court held that:

  1. An insured’s breach of the insurance contract claim is barred;
  2. An insured’s common law bad faith claims are barred when the insured is only seeking policy benefits;
  3. An insured’s Chapter 541 claims are barred when the insured is only seeking policy benefits; and
  4. An insured’s Chapter 542 claims remain viable.

The court made it clear however to prosecute Chapter 542 violations and ultimately recover damages under the statute the insured must still carry the burden of proof and establish that it is entitled to the prompt payment of damages. The court rejected the insured’s argument that when an insurer pays an appraisal award, it accepts liability on a claim and pays policy benefits as actual damages that it is strictly liable for statutory penalties under the prompt payment of claims act.3

Ultimately the court has attempted to clarify the law as it relates to the payment of appraisal awards and Texas Insurance Code violations. If you have a question relating to an insurance claim that has been through the appraisal process contact an experienced insurance attorney.
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1 Barbara Technologies Corporation v. State Farm Lloyds, No. 17-0604 (Tex. June 28, 2019).
2 Ortiz v. State Farm Lloyds, No. 17-1048 (Tex. June 28, 2019).
3 Barbara Technologies.

When Does Pre-Award Interest Begin to Run on an Appraisal Award?

Christina Phillips | Property Insurance Coverage Law Blog | June 25, 2019

I recently had a public adjuster reach out to me asking me how pre-award interest on an appraisal award was calculated. Coincidently, in Creekview of Hugo Association v. Owners Insurance Company,1 the United States District Court for the District of Minnesota recently addressed the application of pre-award or pre-judgment interest under Minnesota Law.

Under Minnesota Statute §549.09, subd. 1(b), except as otherwise provided by contract or allowed by law, prejudgment interest on an appraisal award begins accruing “from the time of the commencement of the action or the demand for arbitration, or the time of a written notice of the claim, whichever occurs first.” The Minnesota Supreme Court, in Poehler v. Cincinnati Insurance Company,2 held that §549.09 provided for pre-judgment interest on appraisal awards.

In Creekview, the claim dispute proceeded to appraisal which ultimately resulted in an award being entered for the insured for approximately $450,000 more than the replacement cost value determined by the insurer’s independent adjuster. Creekview filed suit seeking confirmation of the appraisal award, as well as pre and post-award interest. The parties disputed the date on which pre-award interest began to accrue.

The insured submitted written notice of its claim via email to Owners approximately one week after the hailstorm event, requesting that Owners open a claim stemming from the hail damage that had occurred. Owners disputed that this constituted “written notice of claim,” arguing that such notice was not provided until the insured submitted its proof of loss.

While “written notice of claim” is not defined, the court in Creekview held that such a notice need not identify a specific amount of damages to trigger pre-award interest. Rather, the only reason an insured would open a claim with its insurance carrier was because it believed its loss was covered under the policy and that it claimed some amount of payment from the insurer for that damage.3 In that regard, the association’s email which had referenced the “community” suggested that the extent of the damages was not confined to a single building, but rather provided information from which Owners could have determined its potential liability.

More specifically, the court noted that Owners’ interpretation of Minn. Stat. §549.09, requiring that an insured submit a proof of loss before pre-award interest is triggered, would allow insurers to largely control whether and when pre-award interest is triggered. In other words, the insured could delay or not ask for a proof of loss, whereby avoiding altogether its pre-award interest obligations. Such conduct would be inconsistent with and defeat the dual purposes of the pre-award interest: (1) compensating the plaintiff for the loss of use of the money; and (2) promoting settlement.4

The court concluded that the better approach, consistent with the intent of Minn. Stat. §549.09, is that pre-award interest began accruing when Creekview opened its claim, triggering Owners’ “affirmative duty to inquire into the particular benefits that [Creekview was] claiming and to provide [it] with a position on [its] claim.”5

The court went on to explain that while the depreciation holdback should be included in the interest computation, the amount of Owners’ initial payment (before appraisal occurred) should be excluded from the computation. The court’s reasoning went back to the dual purposes of the pre-award interest statute. First, once Owners made its initial payment, the insured had the money in hand and needed no compensation for the loss of its use of these funds. Second, inclusion of such funds in the calculation of the pre-award interest would also disincentivize insurers from making such payments, curbing settlement.
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1 Creekview of Hugo Association, Inc. v. Owners Ins. Co., No. 19-487, 2019 WL 2283693 (D. Minn. May 29, 2019).
2 Poehler v. Cincinnati Ins. Co., 899 N.W.2d 135 (Minn. 2017).
3 Creekview, 2019 WL 2283693 *7.
4 Id. at *8.
5 Id.

Delayed Insurance Payment? Texas Does Not Allow Insurers To Profit From Nonpayment During Appraisal

Chip Merlin | Property Insurance Coverage Law Blog | June 29, 2019

Rene Sigman of Merlin Law Group’s Houston office was getting some pretty good results for clients this week when she sent me a Texas Supreme Court appraisal case which makes delaying insurers more accountable for inaccurate or plain wrongful estimates of the benefits owed to policyholders. All this Texas good news had me thinking “Yippee-Yi-Yo-Ki-Yay!”

The ruling is simple, but the reasoning is complex and at time restrained. Indeed, and respectfully, it is my opinion that aspects of the decision are simply wrong if one had studied and cited insurance adjustment treatises rather than relied upon insurance law cases about how property insurance adjustments are to be made. Here is the ruling:

[A]n insurer must pay damages in the form of 18% interest on the amount of the claim and reasonable and necessary attorney’s fees if it delays payment of a claim for more than the applicable statutory period or sixty days…..We hold that neither State Farm’s invocation of the policy’s appraisal process for resolution of a dispute as to the amount of loss, nor State Farm’s payment based on the appraisal amount, exempts State Farm from TPPCA damages as a matter of law. And without State Farm having accepted liability under the policy or having been adjudicated liable, we hold that Barbara Tech is not entitled to TPPCA damages as a matter of law.

The bottom line is that policyholders may be entitled to interest but must prove entitlement. To prove all this, policyholders should not hire second rate Texas insurance attorneys because proving the entitlement is a lot easier said than done.

What Baseball Has Taught Me About The Insurance Appraisal Process

Ryan Hutson | Butler Weihmuller Katz Craig LLP | May 10, 2019

Anyone who has ever watched baseball knows that umpires sometimes make an incorrect call. In appraisal of a property insurance claim, sometimes the umpire can make a mistake as well. 

Just as in baseball, yelling and kicking dirt on the umpire’s proverbial home plate will never resolve or change the incorrect call during an appraisal process.  Only by following the proper procedure can a baseball team’s manager get a call reviewed by video replay and, potentially, have the bad call overturned. The same holds true in insurance appraisals.

A federal judge recently ruled that an incorrect appraisal award by a court-appointed umpire was binding on the parties, even where the umpire later attempted to issue a “corrected” award.  Guzman v. American Security Insurance Company, No. 18-cv-61195, 2019 WL 1383230 (S.D. Fla. March 27, 2019).  While the umpire later claimed his first award was not final, the court found that the umpire lacked the authority to unilaterally modify the award where: 1) the insurance policy expressly stated that a decision by any two of the three appraisers was binding, and; 2) the “wronged” party did not follow the statutory procedures to obtain a modification to the award.

In Guzman, the insured brought a claim against the insurance company for disputed damage claims arising from Hurricane Irma.  After the initial filing of the suit, the parties agreed to stay litigation and complete the appraisal process available under the policy.  Each party hired their own appraiser, but they were unable to reach agreement on the scope of loss. As they also could not agree on an umpire, one was appointed by the court, and together the three inspected the property.

Five days after the joint inspection, the umpire emailed his signed appraisal award in the amount of $121,800.30.  Importantly, the email stated, “See attached for review and comment.  If one or both of you find this agreeable, please sign, scan, and return to me.  I will then get out the originals.”   

Within 40 minutes of the appraisal award, the insurer’s appraiser sent an email objecting to the Appraisal Award and asking for an itemization of the award.  The insured’s appraiser, however, quickly signed the copy of the award previously signed by the umpire and submitted it. 

Seeing his mistake, the umpire emailed both appraisers the same day, requesting missing documents from the insured’s appraiser and indicating that he would “hold off” on the final appraisal award until after those documents were produced.  About 12 days later, the umpire issued a revised appraisal award for $90,704.27.  This lower award prompted the insured to file a Motion to Confirm the initial appraisal award.

In ruling that the initial appraisal award was binding on the parties, the court focused on the language of the appraisal provision of the policy at issue. Specifically, the provision allowed that if the appraisers disagree, they shall submit their difference to an umpire, and a “decision agreed to by any two will be binding”. While the umpire later indicated by email that the initial award was not final, there was nothing in the initial signed award that indicated it was not final.  Thus, the court found that once a second appraiser, in this case the insured’s, signed the award, the award became binding by the express and unambiguous terms of the insurance policy. 

For future attorneys about to step up to the proverbial plate, the court in Guzman hinted at a possible way the Defendant insurer could have handled the umpire’s incorrect award, even once it was signed by both the umpire and the opposing appraiser. 

While the appraisal process is not governed by the Florida Arbitration Code, Florida courts apply the procedures provided by the Arbitration Code to the confirmation process of an appraisal award.  Specifically, the court noted that Florida Statute §682.12 controls the confirmation of arbitration awards.  Under §682.12, a court shall confirm an arbitration award unless an insurer moves to vacate, modify or clarify an award pursuant to Florida Statutes 682.10, 682.14 or the award is vacated pursuant to 682.13. 

Florida Statute 682.10 states in part that an arbitrator may modify, clarify or correct an award where a party makes a motion to the arbitrator/umpire within 20 days of the award, allowing the opposing party 10 days to object to the motion.  The court may then submit the claim to the arbitrator to consider whether to modify or correct the award.

In this case, the insurer never filed a motion to modify, clarify or correct the award.  While the insurer’s attorney expressed his objections to the award via email, the court highlighted that the insurer never made a formal motion or request for modification or correction. 

All the emails in the world and all the back-tracking of the umpire couldn’t overturn the wrong call, but one proper motion by the insurance company “team manager” could have potentially reset the whole scenario.  It is a valuable lesson to future attorneys going to bat through the appraisal process.  If the umpire gets it wrong, file a timely motion with the court to start the review process; don’t just kick dirt at the umpire.