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.
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.