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.

Can Insurance Appraisers Favor and Advocate For The Party That Selected Them?

Patrick Aul | Property Insurance Law Observer | March 22, 2018

This is a question the Colorado Supreme Court is set to resolve after recently granting Owners Insurance Company’s petition for writ of certiorari in Owners Insurance Company v. Dakota Station II Condominium Association, Inc., 2018 WL 948601 (Col. Feb. 20, 2018).

The Colorado Court of Appeals answered this question “yes” in the opinion being appealed from, at least as long as the appraiser does not also act in a demonstrably unfair manner or with a provable bias, such as with a direct financial interest in the outcome of the appraisal process. 2017 WL 3184568 (Col. App. Jul. 27, 2017).

The facts of the underlying loss are straightforward.

Owners issued a property damage insurance policy to Dakota. The appraisal provision of the policy states:

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 andimpartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that the 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.

(Emphasis added).

Wind and hail storms damaged the insured buildings. The parties combined the losses into a single insurance claim, but disagreed as to the value of the damages. The parties invoked the policy’s appraisal provision. When the parties’ appraisers submitted proposed awards of different amounts, they nominated an umpire. The umpire issued an award of $3 million, which appears to have been substantially identical to the damages estimate prepared by Dakota’s appraiser, at least with regard to amount. Owners’ appraiser, who had estimated the damages at about $2.3 million, disagreed with the umpire’s award and declined to sign it.

Litigation ensued, and Owners learned of facts it contends demonstrate Dakota’s appraiser was not sufficiently impartial. Specifically, Owners argues Dakota’s appraiser was not impartial because she: (1) met with Dakota and its public adjuster prior to being selected, (2) communicated with Dakota’s public adjuster while performing her appraisal, (3) failed to disclose certain policy terms and pre-loss roof repair estimates to Owners’ appraiser, (4) failed to disclose Dakota’s tactical decisions with regard to its claim, (5) included a claim for damage not caused by the hailstorm in her estimate, (6) was referred to by Owners’ public adjuster as his “partner,” (7) had a contract with Dakota that permitted her to be paid up to 5% of the total replacement cost value she estimated, and (8) testified that it is natural for an appraiser to act as an advocate for the party that retained her.

The Colorado Court of Appeals accepted that many (though not all) of Owners’ contentions had factual support, but nevertheless affirmed the trial court’s conclusion that Dakota’s appraiser was sufficiently impartial.

In so doing, the court addressed the impartiality standard under the policy.

The term “competent and impartial appraiser” is not defined in the policy. Owners argued that “impartial” means “not favoring one side more than another; unbiased and disinterested; unswayed by personal interest.” But the court partly disagreed. It stated:

While we agree that an impartial appraiser should be unbiased and unswayed by personal financial interest, like an expert witness at trial, we do not agree that the impartial appraiser called for in this policy may not favor one side more than the other.

2017 WL 3184568 ¶ 22. The court concluded that the context of the policy distinguishes appraisers from umpires, and “plainly contemplates that the appraisers will put forth a value on behalf of the party that selects them.” Id. ¶ 23. It also cited to an Iowa Supreme Court case that previously held “appraisers do not violate their commitment by acting as advocates for their respective selecting parties.” Id. ¶ 24 (citing Cent. Life Ins. Co. v. Aetna Cas. & Sur. Co., 466 N.W.2d 257, 261 (Iowa 1991)). Lastly, the court found that it would be understandable for an appraiser to view herself as an “advocate” for the party that selected her because appraisers often have, and in this particular case in fact had, pre-existing relationships with their retaining party, appraisers necessarily have contact with their retaining party in order to work out the details of the retention and gather information necessary for the appraisal, and appraisers know that an umpire will review their appraisals and select what the umpire finds to be accurate. Id. ¶ 67.

Accordingly, the court held that even if Dakota’s expert viewed herself as an advocate for Dakota, that does not mean in and of itself that her appraisal was biased, dishonest, or purposely inaccurate. Id. The court also held that the contingent-cap fee agreement in the appraiser’s contract with Dakota did not render her impartial on the facts before it, because 5% of the final appraisal was far in excess of the actual billed fees, the contract provision was not invoked, and there was no other evidence before it that the appraiser relied on improper assumptions, or took any other improper action, as a result of subjective bias. Id. ¶ 55.

The dissent, in an insightful opinion, noted that “the majority’s ruling permitting appraisers to be somewhat less than truly impartial may ultimately harm insureds by giving justification to insurers to hire appraisers who are not truly impartial,” particularly because insurers have the “ability to hire the same appraiser for numerous claims – an ability not shared by the insured.” Id. ¶ 72. Accordingly, the dissenting opinion would require that an appraiser not favor one side more than the other or advocate for the party that retains her in order to maintain their impartiality. Otherwise, the dissent states, the term “impartial” is completely read out of the policy, as “the word ‘impartial’ cannot be reconciled” with permitting appraisers to be advocates. Id. ¶¶ 76-80.

The certiorari order, issued on February 20, 2018, states that the Colorado Supreme Court is going to review whether the Court of Appeals’ rule permitting insurance appraisers to “favor one side more than the other” and act as “advocates” for the selecting party conflicts with its holding in a prior case that, although appraisers are not arbitration referees, their duty of impartiality is the same.  It is also going to review whether the Court of Appeals’ rule permitting insurance appraisers to utilize contingent-cap fee agreements that tie the appraiser’s own compensation to the ultimate appraisal award conflicts with its previous holding that such appraisers must be impartial in the same manner as arbitrators.

Accordingly, should the Colorado Supreme Court actually issue an opinion on these questions in the coming months, its ruling will provide guidance for future appraisal bias lawsuits not just in Colorado, but also in the many other jurisdictions for which controlling precedent on such issues remains lacking.