Property Valuations In Uncertain Times

Adam Levine | Ostrow Reisin Berk & Abrams

Valuation plays a critical role in real estate, from appraisals for residential mortgages to the sales of commercial real estate. But the COVID-19 crisis and resulting economic uncertainty pose some challenges for valuation experts across the country.

Limited physical access

Site visits have long been an integral part of the valuation process, but stay-at-home orders blocked access to many properties earlier this year throughout the country.

Fannie Mae and Freddie Mac have recognized this hurdle by temporarily permitting exterior-only and desktop appraisals for eligible mortgages. Banking regulators allowed certain commercial and residential loans to close without having an appraisal completed, though appraisals have been required within 120 days of closing.

Savvy valuators quickly turned to technologies, like Google Earth, Street View and drones, to help fill in the gaps created by the inability to physically access properties. They are also taking advantage of online databases of municipality property assessment records to obtain necessary information.

Lack of comparable sales

Under the comparable sales method, valuators look at the sales prices of similar properties in recent transactions, making adjustments for differences between those properties and the subject property. It is debatable whether pre-COVID-19 sales can be considered comparable with post-pandemic sales, though. Moreover, deal volume for certain types of properties has fallen in many areas.

Valuators are looking beyond comparable sales and considering individual circumstances on a more granular level. This approach acknowledges that generalities are of limited value when COVID-19 may have different effects on different properties in the same neighborhood.

Tumultuous conditions

Essential data inputs for valuations are shifting constantly, sometimes daily. Unemployment numbers have been at historical highs, while interest rates have been at notable lows.

Businesses that were healthy months earlier have boarded up threatening the continued vitality of neighborhoods and increasing expected vacancy rates. Struggling tenants may have fallen behind on monthly payments. Governments are not only mandating rent relief, but also providing financial support to prop up troubled companies. Plus, operating costs may be higher to comply with health and safety concerns, as well as to adapt property use and features for changes in demand.

Valuators must address all these factors in their reports. But users of those reports must understand the limitations and consider obtaining fresh appraisals when fewer uncertainties exist.

Heart of the matter

2020 has not been kind to the values of many types of properties. But it is always better to have an accurate, data-based assessment of value than rosy, speculative estimates that do not pan out.

Policy Language Expressly Prohibits Replacement of Undamaged Material to Match Damaged Material

Tred R. Eyerly | Insurance Law Hawaii

    Construing an all-risk Businessowners Policy, the court found that the policy language did not required replacement of undamaged material match materials that were damaged. Pleasure Creek Townhomes Homeowners’ Ass’n v. Am. Family Ins. Co., 2019 Minn. App. Unpub. LEXIS 1095 (Minn. Ct. App. Nov. 25, 2019).

    The policy covered the Association’s 14 townhome buildings. In June 2017, a hail storm damaged siding on all 14 buildings. An appraisal panel included the cost to replace the undamaged, faded siding in its appraisal award so that it would match the new siding. American Family refused to pay this component – which was appraised at about $211,382 – of the award. 

    An exclusion in the policy provided,

We will not pay to repair or replace undamaged material due to mismatch between undamaged material and new material used to repair or replace damaged material. 

We do not cover the loss in value to an property due to mismatch between undamaged material and new material used to repair or replace damaged material. 

After declining to pay for the undamaged mismatched siding, American Family moved for summary judgment, which the district court granted, finding that the policy excluded coverage.

    The appellate court affirmed. The Minnesota Supreme Court in Cedar Bluff Townhome Cond. Ass’n v. Am. Family Mut. Ins. Co., 857 N.W. 2d 290 (Minn. 2014), found that the mismatch between the old siding and new siding available constituted a covered loss, and obligated American Family to pay to replace all of the siding. But the policy in Cedar Bluff had no matching exclusion. Therefore, this case was distinguishable and the district court’s granting of summary judgment to American Family was affirmed. 

Insured’s Prejudgment Interest Award Runs From Date Appraisal Was Demanded

Christina Phillips | Property Insurance Coverage Law Blog | September 3, 2019

Dewey Hill owned eight townhome buildings in Minnesota insured by Auto-Owners.1 On August 16, 2013, a hail and windstorm damaged the buildings. Three days later, Dewey Hill notified Auto-Owners of the loss and submitted written property loss notices ten days later. Auto-Owners investigated the claim and approximately nine months later issued its first payment to Dewey Hill. A second payment was made by Auto-Owners approximately four months after that.

Dewey Hill disputed the sufficiency of the payments and ultimately the parties proceeded to appraisal. An award was entered, and Auto-Owners issued payment, representing the full and final amount of the appraisal award.

Dewey Hill sued Auto-Owners claiming interest under Minn. Stat. § 549.09. After the trial court awarded Dewey Hill pre-judgment interest, Auto-Owners appealed.

In relevant part, Minn. Stat. § 549.09 provides:

Except as otherwise provided by contract or allowed by law, preverdict, preaward, or prereport interest on pecuniary damages shall be computed…from the time of the commencement of the action or demand for arbitration, or the time of a written notice of claim, whichever occurs first, expect as provided herein. The action must be commenced within two years of a written notice of claim for interest to being to accrue from the time of the notice of claim.

Ultimately, the appellate court concluded there was no err in determining that Dewey Hill was entitled to preaward interest. It further concluded that Dewey Hill was not entitled to interest from the date it filed its claim, but rather interest began to run from the date appraisal was demanded.

Section 549.09 unambiguously provides for preaward interest on an appraisal award. However, here, because the insured had not filed suit within two years of the date of loss, the appellate court affirmed the trial court’s determination that interest would not be awarded from the date of notice of the claim. Rather, interest would begin to accrue from the date of the demand for appraisal.

While unpublished, this case serves as a good reminder of that even if in the appraisal process, suit needs to be filed within two-years of the written notice of the claim. It is important to note, however, this two-year timeframe will extend no other limitation period within a policy. Therefore, it may become necessary to diary multiple deadlines including the deadline to commence suit under the policy and the two-year deadline from the date the claim was made to recover prejudgment interest.
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1 Dewey Hill III Townhomes Association, Inc. v. Auto-Owners Ins. Co., No. A18-1562, 2019 WL 3000691 (Ct. App. Mn. July 1, 2019).

Be Sure To Clearly Define The Grounds For Disqualifying An Independent Appraisal Because The Court May Not Do It For You

Gregory S. Paonessa |Burns & Levinson | May 29, 2019

It is not uncommon for parties entering into an agreement to transfer an asset to seek the input of an independent, third-party appraiser. Plainly, the parties to any such transaction desire an appraiser who will be unbiased and will not have any conflicts of interest. Further, one would assume that if such an appraiser’s company had a relationship with the opposing party, a court would step in to invalidate the appraisal. That assumption is not always correct, however–especially if the appraisal agreement does not specify what will disqualify the appraiser. Indeed, a Massachusetts Supreme Judicial Court judge recently confirmed this in Buffalo-Water 1, LLC v. Fidelity Real Estate Company, LLC.

In Buffalo-Water, an Appraisal Agreement only required the individual appraiser to disclose any prior appraisal services he rendered for either of the parties. The appraiser’s employer, Cushman & Wakefield, was not required to make any such disclosure, nor was it required to disclose conflicts of interest or relationships that could deem it to be biased. Further, and unbeknownst to Buffalo-Water, Cushman had previously been engaged by Fidelity to represent it in connection with a national contract.

Once Buffalo-Water became aware of the Fidelity-appraiser relationship, it filed suit, seeking to have the appraisal invalidated, and Fidelity moved to dismiss the complaint. Fidelity’s Motion was allowed, and Buffalo-Water appealed. In its opinion, the Supreme Judicial Court framed the issue as follows:

The issue on appeal is whether we should modify this common law rule and allow a judge to invalidate an appraisal intended by the parties to provide a final, binding valuation of a property, where there is the appearance of bias, not on the part of the individual who conducted the appraisal, but on the part of the entity that employed the individual appraiser.

In answering this question, the Court noted that Buffalo-Water’s complaint alleged no facts tending to suggest that the appraiser had any direct bias or conflicts of interest and also found that he had no indirect bias because he did not even know about Fidelity’s national representation by Cushman. Thus, the Court ruled that not only did the appraiser have no ability to disclose the Fidelity-Cushman relationship, but his appraisal could not have been tainted by that relationship. Ultimately, therefore, the Court refused to invalidate the appraisal or overturn dismissal of the action.

Buffalo-Water serves as a stark reminder to in-house counsel responsible for appraisal-agreements (and even other agreements, where appraisers are used) to think broadly as to what would disqualify an appraiser and specify any disqualifying circumstances in the agreement. As the Buffalo-Water Court noted:

When parties negotiate a contract that provides for a binding appraisal they are free to include provisions that establish more stringent impartiality requirements than those in our common law and specify the appraisal will be invalid where those requirements are not met.

Indeed, the last thing in-house counsel want to do is explain to their business counterparts that, despite the fact an appraiser’s company could be biased or lack impartiality, they can’t object to the use of a bad appraisal.

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.