Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Royal Marco is a corporation that operates condominiums and related properties on Marco Island, Florida. Royal Marco had insured its properties with QBE when Hurricane Wilma hit in October of 2005. Royal Marco immediately submitted a claim to QBE and QBE’s adjuster initially estimated over $1 million in damage from Wilma. In February 2006, QBE’s adjuster submitted a request for almost $500,000 in undisputed benefits to be paid, but QBE responded by paying only $250,000. By April of 2006, repair expenses exceeded $4 million and Royal Marco had expended its entire maintenance reserve account, levied its residents, and was forced to borrow on a line of credit to pay mounting repair expenses. In November of 2006, Royal Marco filed a Civil Remedy Notice (CRN) against QBE, and eventually filed suit against QBE in January of 2007 after rejecting QBE’s settlement offer that was roughly half of what was needed for repairs. QBE invoked appraisal and the parties finally agreed to enter appraisal in December of 2007. An appraisal award was issued in June of 2008, which was in turn paid by QBE in August of 2008. Royal Marco then filed suit for bad faith, and QBE filed its motion for summary judgment.

QBE argued that the appraisal award had a res judicata and collateral estoppel effect on Royal Marco’s bad faith lawsuit, essentially arguing that the appraisal award had already decided the issue of bad faith in favor of QBE. The Court did not agree, responding:

But the appraisal award was based on Royal Marco's breach of contract claim, not its bad faith claim, and it is well-settled that "[a] claim arising from bad faith is grounded upon a legal duty to act in good faith, and is thus separate and independent of the claim arising from the contractual obligation to perform." Blanchard v. State Farm Mutual Automobile Ins. Co., 575 So. 2d 1289, 1291 (Fla. 1991); see also Dadeland Depot, Inc., 483 F.3d at 1271-1272 (11th Cir. 2007) (holding that insured was not barred from asserting separate bad faith action against insurer despite the fact that insured could have brought bad faith claim in its earlier arbitration proceeding). Because Royal Marco seeks recovery at present for damages allegedly caused by QBE's bad faith, and not breach of contract, its claims are not barred by res judicata or collateral estoppel. [FN1]

FN1. For similar reasons, the Court declines to dismiss Royal Marco's claims for its appraisal costs, despite the contractual language indicating that such fees would be split. Because Royal Marco alleges that it would not have had to undergo appraisal but for QBE's bad-faith delay in settlement, such costs would appear to be consequential damages authorized by the statute.

QBE then argued that a bad faith lawsuit was precluded because QBE had timely paid the appraisal award. The Court was unpersuaded by QBE’s argument and provided a concise lesson in bad faith to the insurer:

Florida's bad faith statute obligates an insurer to act "fairly and honestly toward its insured," and "with due regard for her or his interests." Fla. Stat. § 624.155. This statutory duty "is grounded in the common law obligation of good faith that was traditionally imposed on insurers, which obligated insurers to `refrain from acting solely on the basis of their own interests' rather than those of the insured party." Dadeland Depot, Inc. v. St. Paul Fire and Marine Ins. Co., 483 F.3d 1265, 1276 (11th Cir. 2007) (quoting Farinas v. Fla. Farm Bureau Gen. Ins. Co., 850 So.2d 555, 558 (Fla. 4th DCA 2003)). Thus, a bad faith claim "is founded upon the obligation of the insurer to pay when all conditions under the policy would require an insurer exercising good faith and fair dealing towards its insured to pay", an obligation which "requires the insurer to timely evaluate and pay benefits owed on the insurance policy." Vest, 753 So. 2d at 1275 (Fla. 2000). The determination of whether the insurer has acted in good faith is fact-intensive and thus typically for the jury. See Dadeland Depot, 483 F.3d at 1278 n. 10 (collecting cases).

In the end, the Middle District Court held that neither QBE’s participation in the appraisal process, nor its timely payment of the appraisal award, was sufficient to preclude Royal Marco’s bad faith suit as a matter of law.

In Boone, the Boones alleged that because Safeco unconditionally denied some of their claims, the denial waived Safeco’s right to seek appraisal. In its analysis, the Court referenced a recent Texas Supreme Court decision, State Farm Lloyds v. Johnson, 290 S.W. 3d 886 (Tex. 2009), which held that an insurer may dispute the extent of coverage and deny certain claims without waiving the right to appraisal. The Court followed the Texas Supreme Court’s ruling in State Farm Lloyds, and ruled in favor of Safeco on this issue.

The Boones also argued that Safeco waived appraisal by anticipatorily breaching the contract by failing to comply with another policy provision, however, the Court also found that argument unpersuasive. The Court noted that at least one Texas court had explicitly rejected breach of contract as grounds for finding that an insurance company had waived its right to seek appraisal. The Court quoted the recent decision in Sanchez v. Prop. & Cas., Ins. Co. of Hartford, No. H-09-1736, 2010 WL 413687 (S.D. Tex. January 27, 2010):

If insureds could escape appraisal by merely alleging an anticipatory breach (or repudiation) whenever there is a dispute over coverage or claims handling, appraisal clauses would be virtually a nullity. Such a result is in direct contravention of the strong public policy in favor of enforcing such clauses.

The Court noted that for the Boones’ argument to be successful, they would have to show that the insurance company’s failures with respect to complying with other policy provisions constituted an “intentional relinquishment of the right to seek an appraisal by evidencing an intent to dispense with the policy’s requirements that enable the insurer to arrive at the amount of the loss.” The Court concluded that the alleged breaches by Safeco did not show waiver and, therefore, did not preclude its invocation of appraisal.

As you can tell from Boone v. Safeco Ins. Co. of Indiana, Texas maintains a strong public policy in favor of appraisal. In Boone, the Plaintiff’s lawyers presented these two interesting arguments in favor of waiver, but the Court shot both of them down. Policyholder lawyers will continue to pursue innovative arguments to persuade Texas courts to find waiver of appraisal by the insurer.

The Court noted the basic facts:

This is the third case to come before this court involving plaintiff Victoria Migaldi (Migaldi)'s homeowner insurance claim for windstorm damage caused by Hurricanes Frances, Jeanne and Wilma. Defendant Safeco Insurance Company of America ("Safeco") did not dispute coverage of the claim, but instead declined to pay the full amount claimed and invoked the policy's mandatory appraisal provision to determine the sum payable for losses that were disputed as to value.
...

On February 9, 2009, the court granted Safeco's renewed motion for summary judgment, concluding that Florida's VPL did not apply to Migaldi's claim because there was no "total constructive loss" of her residence, and that without a VPL override both parties remained bound by the appraisal award. Accordingly, the court entered final declaratory judgment in favor of Safeco in Migaldi I declaring that Safeco's full payment of the appraisers' award satisfied its indemnity obligations toward its insured under the policy...

On February 24, 2009, Migaldi filed a second action, Migaldi v Safeco Insurance Company of America,..."Migaldi II," seeking to hold Safeco liable for breach of contract for failing to pay further sums allegedly due under the policy for the same loss. In her second filed suit, Migaldi acknowledged that these claims were previously submitted to appraisal, but contended that "[t]he appraisal process failed to address all of the damages caused by the hurricane [sic] as they inappropriately applied a $ 10,000 mold cap to the building and personal damages."... On August 11, 2009, this court dismissed Migaldi II, with prejudice, finding the suit barred by the doctrine of res judicata because it involved a scope of coverage issue which was actually litigated and necessary to the judgment entered in Migaldi I....

On January 12, 2010, Migaldi filed the present suit, "Migaldi III," alleging a Florida Statute § 624.155 bad faith claim against Safeco relating to the same insurance claim. Here, Migaldi alleges that Safeco engaged in bad faith in the appraisal process by misrepresenting pertinent facts relating to coverages and facts of the loss at issue, including misrepresentations regarding the applicability of the policy's mold cap, and misrepresentations regarding damages from the first appraisal of the claims, leading to a "mishandling" of plaintiff's second appraisal. Migaldi also charges Safeco with improper delay in the adjustment of her losses through use of multiple independent adjusters, and improper delay in the appraisal process itself. Thus, in part, the current complaint attacks the validity of the appraisers' award on ground of "improper" procurement through bad faith claims handling techniques and tactics on the part of Safeco, and seeks to charge Safeco with liability for the alleged resulting diminution in the appraisers' valuation of her claim under the Florida first party bad faith statute.

This matter is currently before the court on Safeco's motion to dismiss on ground of res judicata. Safeco essentially contends that because Migaldi failed to challenge the appraisers' award or to appeal the judgment which confirmed the award in Migaldi I, her subsequent bad faith suit relating to Safeco's handling of her original windstorm claim is barred under principles of res judicata.

The Court granted Safeco's motion in part, but allowed much of the wrongful claims practice action to continue:

...the court concludes, in the context of the instant appraisal proceedings, that Migaldi may pursue a statutory bad faith claim against Safeco based on alleged unreasonable delay: (1) from the time Migaldi initially submitted her claim to the time Safeco initiated the appraisal proceedings; (2) for the time during the appraisal; and (3) for the time between confirmation of the appraisers' award (i.e. entry of final declaratory judgment in Migaldi I) and the time that Safeco tendered full payment the award to its insured...On the other hand, Migaldi may not challenge whether information submitted by Safeco to the appraisal panel regarding policy coverages and limitations, or facts relating to the losses at issue was relevant or accurate, or properly within the panel's scope or authority...

...the prior appraisal proceedings and declaratory judgment entered in Migaldi I do not preclude her current bad faith claims to the extent premised on allegations of unreasonable delay in the adjustment of the loss, appraisal of claim, or payment of claim, as more specifically articulated above. See Dadeland Depot, Inc., supra; Bullard Building Condominium Association, Inc. v Travelers Property Casualty Co. of America, 2009 U.S. Dist. LEXIS 70663, 2009 WL 2423436 (M.D. Fla. 2009).

The Court noted and followed authority from another jurisdiction:

As observed by the court in Wailua Associates v Aetna Casualty & Surety Company, 27 F. Supp. 2d 1211 (D. Hawaii):

[The insurer's] submission to the appraisal does not absolve it from liability for bad faith as 'the trier of fact could reasonably conclude that .. [the insurer] intentionally delayed the appraisal process.' Green v International Ins. Co., 238 Ill. App.3d 929, 179 Ill. Dec. 111, 605 N. E.2d 1125, 1129 (Ill. App. 1992). … '[I]f an insurer could utilize the apprisal process to shield itself from the consequences of failing to make a reasonable settlement offer … it would defeat the principles' underlying a separate cause of action for liability outside the insurance policy. Smithson v United States Fidelity & Guaranty Co., 186 W. Va. 195, 411 S.E2d 850 (W. Va. 1991) 27 F. Supp. 2d at 1220. Thus, an insurer who ultimately pays a claim may be held liable for bad faith in the event of unreasonable delay in the processing and adjustment of the claim. Id., citing Best Place Inc. v Penn America Ins. Co., 82 Hawaii 120, 920 P.2d 334, 347 (Haw. 1996). (emphasis added)

Delay is the number one complaint about claims adjustment from policyholders. It is caused by a number of actions and failures to act by insurance companies. Insurance companies have a legal duty to provide a sufficient number of motivated, trained and experienced adjusters with authority to promptly investigate facts of coverage, evaluate damages, explain the benefits and options available to the , and quickly pay those benefits to the policyholder. Lately, some insurers have been hiding unfair claims behavior of failing to conform to this duty by conducting a second adjustment through appraisal. This holding by Judge Hurley is important because it recognizes that payment of a disputed claim resolved by appraisal and paid within the time permitted by the policy following an appraisal does not provide an insurer immunity from wrongful claims conduct.

As one may discern, Safeco is battling a policyholder attorney that does not easily give up. Kelly Kubiak of Merlin Law Group represents the policyholders in this case. I am very proud of her zealous advocacy.

Kelly will be sharing our Safeco and Liberty Mutual claims practice materials with other policyholder attorneys at the Bad Faith Litigation Group meeting at the Annual Convention of the American Association for Justice next week. Please call her or David Pettinato for information about joining this organization if you represent policyholders who have been subject to delayed or improperly handled insurance claims.

Last week, the federal District Court ruled that discovery would continue in the litigation and while the appraisal was still pending:

The abatement sought here would be contrary to the cardinal principle of the Federal Rules of Civil Procedure that cases be administered "to secure the just, speedy, and inexpensive determination of every action." FED. R. CIV. P. 1; see 5C, WRIGHT & MILLER, FEDERAL PRACTICE AND PROCEDURE § 1360, at 78 (3d ed. 2004) ("[A]lthough a given motion might raise a valid point, unless its determination would have the effect of promoting 'the just, speedy, and inexpensive determination' of the action as mandated by Rule 1, the district court should probably deny the application and thereby avoid any delay."). Because the parties have until March 1, 2011 to complete discovery, this case need not be held hostage while the parties engage in the appraisal process.. (emphasis added)

You can bet that the policyholder attorneys in Tran will have the benefit of internal Safeco claims directives we obtained as a result of my large case against Safeco.
 

In Florida Guaranty Association, Inc. v. The Olympus Association, Inc., 34 So. 3d 791 (Fla. 4th DCA 2010), FIGA successfully argued to have a challenge to coverage following an appraisal award. Insurance coverage attorneys should read the case in its entirety because it is important. For everybody else, the holding is significant:

…we conclude that the trial court erred by entering final judgment in favor of Olympus and awarding it the amount set forth in the appraisal (less the deductibles), without first deciding the issue of coverage liability. When FIGA filed its affirmative defenses in response to Olympus's complaint, the trial court should have first decided FIGA's liability. As explained in Kennedy and supported by Fisher, FIGA could contest part of the liability without challenging coverage as a whole. The appraisal award itself indicated the amount could change as the award was made without consideration of the policy's provisions of coverage.

Accordingly, we reverse and remand for the trial court to determine FIGA's liability with regard to the contested claims, and then enter the appropriate amount based on the appraisal.

Appraisal used to be a quick and inexpensive method of resolving claims. FIGA now uses it as a first step before litigation begins in earnest to prevent, or slow, payment. Unlike other insurers that have to act in good faith, FIGA has no penalty for contesting claims. It can do so with impunity. And, based upon the number of inquiries from others, it is taking advantage of the law and doing so.

The Florida Legislature and the Office of Insurance Regulation need to address the issue of who is investigating the claims process at FIGA and how its claims operations are run. These are the same complaints that were being made about Citizens Property Insurance in the past which lead to claims reform at Citizens. It is bad enough that policyholders have their insurer go broke and have to wait for payment. They do not expect a claims catastrophe which they can do little about.

In Franco v. Slovanic Mut. Fire Ins. Assoc., 154 S.W.3d 777 (Tex. App.—Houston [14th Dist.] 2004, no pet.), the insured claimed that the insurer’s appraiser was biased. The insured based its claim on the fact that, prior to being selected as the insurer’s appraiser, the insurer’s appraiser worked as an investigative engineer for the insurer on the same matter; he had conducted an investigation on the insured’s home, examining the premises to determine the cause of the damage. He later issued an engineering report to the insurer regarding his findings. The court in Franco concluded that:

The showing of a pre-existing relationship, without more, does not support a finding of bias. . . . [Here, the insurer’s appraiser] was not an employee of [the insurer] and the [insurer’s appraiser’s] report and conclusions regarding the cause of the plumbing leak were his own.

In other words, the court concluded that a person is not disqualified from being an appraiser based solely on the fact that the appraiser had a pre-existing relationship with the insurer. This also applies even in those instances when the insurer’s appraiser had done prior work on the very matter he was selected to appraise.

In Gardner v. State Farm Lloyds, 76 S.W.3d 140 (Tex. App.—Houston [1st Dist.] 2002, no pet.), the insured claimed that the insurer’s appraiser was biased based on its long-standing relationship with the insurer. In Gardner, the insured submitted evidence that the insurer’s appraiser: (1) had written a training program used by the insurer; (2) had written numerous publications about hailstorm evaluations and served as a consultant for the insurer on those matters; and (3) was paid by the insurer for assignments across the United States over seven years. In the end, the court ruled that there was no evidence raising a fact issue about whether the insurer’s appraiser lacked independence because there was “no evidence that the [insurer] directed the [appraiser] to reach any conclusions . . . .”

In Gen. Star Indem. Co. v. Spring Creek Village Apts. Phase IV, Inc., 152 S.W.3d 733 (Tex. App.—Houston [14th Dist.] 2004), the insurer argued that the insured’s appraiser was biased. Evidence demonstrated that the insured’s appraiser would receive additional compensation if the settlement met a certain pre-set amount. The court concluded that:

[b]ecause [the appraiser] had a financial interest in insuring that the appraisal award exceeded $2 million, [the insurer] raised a fact issue with regard to whether [the appraiser] was impartial.” Citing Texas Supreme Court precedent, the court noted that “[a]n appraiser with a financial interest in the outcome of the appraisal is not impartial.

In short, an appraiser will not be found to be biased based solely on a pre-existing relationship with the insurer or even on a long-standing relationship if there is no evidence that the insurer exercises some control over the appraiser. But if the court finds that the appraiser has a financial interest in the final outcome, that appraiser might be disqualified due to bias. So the next time you are considering an appraiser, make sure to ask him/her about any relevant relationships with the parties involved and about their compensation structure. The last thing you want is to have a court disqualify your appraiser due to bias. If that happens, you will find yourself back at square one.

In Sanchez v. Prop. and Cas. Ins. Co. of Hartford, No. 09-1736, 2010 WL 413687 (S.D. Tex. Jan 27, 2010), the United States District Court for the Southern District of Texas recently found that Hartford Insurance Company waived its right to appraisal by taking too long to invoke the process. In Sanchez, Hartford’s appraisal clause did not specify a time frame for when a party could invoke the appraisal process. The Court noted that:

[w]hen a policy is silent as to time, the law will require that the demand for appraisal be made within a reasonable amount of time.

Some of you may now be wondering how a court calculates a “reasonable amount of time.” Fortunately, the Court shed some light on this question in Sanchez:

The proper point of reference for determining whether an insurer waived the right to invoke appraisal by delay is the point at which the insurer knew the appraisal clause could be invoked because of a disagreement over the amount of damages, that is, the point of impasse with the insured.

In Sanchez, the insured first informed Hartford of his claim for damages to his house from Hurricane Ike on October 26, 2008. Following inspection, Hartford sent a letter to the insured denying any payment on October 31, 2008. On November 1, 2008, the insured called Hartford to dispute the repair estimate. Hartford’s representative informed the insured that because Hartford’s final position was that the amount of covered damages did not exceed the deductible, no payment would be issued. The Court stated that:

[t]he parties’ diametrically opposed positions on the amount of damages suffered from the Hurricane, clearly articulated in the phone call, establish[ed] that an impasse had been reached.

Hartford was then on notice that it had the right to invoke the appraisal clause, and the Court used November 1, 2008, as the date from which to determine whether Hartford waived appraisal by failing to timely invoke its right. The Court found that because Hartford invoked the appraisal clause on October 15, 2009, and because Hartford produced no evidence that its delay in requesting an appraisal was due to a good faith attempt to ascertain the amount of damages, Hartford had waived its right to appraisal.

I hope none of you take this to mean that Texas courts will find waiver in all cases where the insurer takes a long time to invoke its right to appraisal. Every case is different – with each having its own unique set of facts – and a court will determine waiver if and when the issue arises. However, this is definitely something to keep in the back of your mind for those instances when a carrier is seemingly dragging its feet with respect to appraisal. If the facts are right in your particular case, a carrier could find itself out of luck and unable to invoke its appraisal clause.

Given the age of the case precedent in Texas regarding appraisal disputes, it seems appropriate to remember some other “oldies but goodies.”

Given the facts of the case, this ruling is not earth shattering. What will create a great deal of litigation and a lot of gamesmanship during the adjustment of claims is the following language of the decision:

Furthermore, granting appraisal of the items of loss in the insured's cross-appeal was premature as those items had yet to be adjusted. Without adjustment, it is impossible to know whether the parties disputed the amount of loss to warrant appraisal. See United States Fidelity & Guar. Co. v. Romay, 744 So. 2d 467, 469-70 (Fla. 3d DCA 1999).

What exactly does that mean? I anticipate that claims will drag on forever, as insurers will claim that the actions of the parties have not concluded in an "adjustment." Investigations already seem delayed and unnecessarily long from the policyholder's standpoint. Now, insurers can argue that various portions of a claim are not ripe for appraisal or litigation because they have not been "adjusted."

Nowhere in the policy does it require that the entirety of every item claimed must be "adjusted" before an appraisal is demanded or a lawsuit filed. All that has to happen to trigger appraisal is a disagreement on "the amount of loss." It would seem that here, where the insurer has had notice of the loss and after five months the parties could not agree upon "the amount of loss," even after a settlement meeting and a check was issued for the undisputed amounts, everything in dispute or which could be at issue should be determined through appraisal, if timely demanded and not waived. I disagree with the second quoted portion of this decision.

This decision will certainly lead to greater delays and nitpicking of issues by insurers wishing to drag out the time when resolution of amounts of loss will be determined.

There are some who claim that judges make bad umpires for appraisal. There is no empirical evidence to support that opinion and, frankly, I disagree. Umpires from the insurance industry carry their own bias and problems. I have no preference one way or another until I learn more about the case and the parties to the matter. It is always a debatable issue.

One of my Impressions Following the Alternative Dispute Resolution Roundtable was that the insurance industry does not think retired judges can be fair and are even lazy because they allegedly split the difference. I am curious if anybody actually has proof of this. In David's case, the Honorable Guy Spicola was the umpire.

The Francisco Court noted the following in its legal analysis:

...under Florida law, “an insurer can only dispute coverage for the loss as a whole and not as individual parts.”...The leading case in the Eleventh Circuit on whether an insurer can challenge or require a delineation of an appraisal award is Three Palms Pointe, Inc. v. State Farm Fire and Casualty Co., 250 F. Supp. 2d 1357 (M.D. Fla. 2003), aff’d 362 F.3d 1316 (11th Cir. 2004).

In Three Palms Pointe, State Farm, as the insurer, had an appraisal award of $11,300,000, which included $560,000 for personal relocation expenses...After the appraisal award was issued, State Farm alleged that the “personal relocation expenses of residents were not recoverable.”... Three Palms filed suit to confirm the appraisal award, which essentially would require State Farm to pay the total appraisal award and not delineate between what it considered to be covered and non-covered losses...

The District Court held that the appraisal award should be confirmed... First, the Court confirmed the appraisal award because it was issued under valid procedures used in the Florida courts...The Court noted that once a petitioner moves to confirm an appraisal award, the insurer may assert an affirmative defense for “lack of coverage, policy limits, or a violation of policy conditions such as fraud, lack of notice, or failure to cooperate.”...Furthermore, “if the insurer fails to raise an affirmative defense or the insured defeats the defenses raised in a judicial proceeding, then a valid enforceable judgment is entered and the appraisal award is confirmed.”

The Court also specifically held that the relocation expenses that State Farm said were not covered under the policy were, in fact, recoverable in accordance with Florida law and the Court’s interpretation of the policy....Additionally, the Court found that “when an insurer admits that the loss is covered [under the policy], the appraisers can determine the cause of damage and the amount of that loss without judicial review of that decision (other than through Florida Statutes §§ 682.13, -.14). When the insurer claims that the loss is not covered, then the coverage question must be judicially determined.” ...

The Eleventh Circuit Court of Appeals affirmed the decision of the district court. See Three Palms Pointe, Inc. V. State Farm Fire & Casualty, Co., 362 F.3d 1316 (11th Cir. 2004). The Eleventh Circuit further interpreted the Florida Supreme Court case of State Farm Fire & Casualty Co. v. Licea, 685 So.2d 1285 (Fla. 1996). According to the Eleventh Circuit, “the Florida Supreme Court held that if an insurer and an insured party go to appraisal, the insurer can only dispute coverage for the ‘loss as a whole.’”...In sum, the Eleventh Circuit found that Licea held that “once an award has been made, the only defenses that remain for the insurer to assert are lack of coverage for the entire claim, or violation of one of the standard policy conditions (fraud, lack of notice, failure to cooperate, etc.) . . . .

The best part of Three Palms Pointe was that State Farm could have settled for a little more than $3 million at the time we were first retained. Once we hired engineers who more fully explored the damages hidden behind the walls, even State Farm acknowledged that the damages were significantly greater. Eventually, after a very formal appraisal where evidence was taken and witnesses were examined, the award was rendered and included a unique personal relocation expense. Relocation expenses were part of the "construction cost" because they lowered the amount of total construction. Had my client done the repair with the condominium residents in their homes, the overall cost would have been far greater. State Farm never seemed to grasp the concept that I would figure a method to save it money, but the judges understood.

In Francisco, the Court noted the following:

In the present case, Nationwide specifically requested that the appraisal award delineate damage due to water from damage due to mold and other perils. The Court presumes that the reason for the delineation is for Nationwide to distinguish between covered (water) and non-covered damage (other perils). Because the Eleventh Circuit has held that in Florida, once an appraisal award has been issued, an insurer may only challenge the lack of coverage of the entire claim, this Court is bound to hold that Nationwide may not challenge part of the appraisal award....

Footnotes are not normally that important. But in this case, the court made an important point in footnote 3:

To date, neither party has filed a copy of the actual insurance policy covering Francisco’s home. Based on statements during oral arguments, the Court understands that mold is a covered peril, but coverage is limited under the policy. However, without the actual insurance policy, the Court can make no determination as to what perils are and are not covered by the insurance policy.

I suggest defense counsel learn from this footnote and file certified copies of the policy next time.

It would seem that Motions to Confirm appraisal awards are the procedure to be followed by policyholder attorneys whenever insurers fail to fully pay the awarded amount to the policyholder:

Francisco’s Motion to Confirm the Appraisal Award must be granted because Nationwide does not assert a lack of coverage defense for the entire claim or a violation of one of the standard policy conditions, such as fraud, lack of notice, or failure to cooperate. See Three Palms Pointe, 362 F.3d at 1319 (“Given that an appraisal occurred, we hold [that the insurer] may not seek to challenge coverage with respect to part of the award on appeal.”). Furthermore, the fact that Nationwide paid the appraisal award in full into the court registry after Francisco filed the Motion to Confirm does not preclude confirmation of the appraisal award. In light of Nationwide’s Motion to Strike the appraisal award, the Motion to Confirm was necessary.

Three Palms Pointe continues to be a significant insurance coverage decision regarding Florida appraisals which needs to be studied, especially by those in federal court.

Appraisal is an often debated topic in Texas. The Symposium will host a special class devoted to Certification of Umpires in the Appraisal process. For those actively participating as or wishing to be appointed as Umpires in Texas appraisals, you simply cannot miss the opportunity to enroll in this class.

WIND Umpire Certification®

This workshop will provide the necessary certification to any¬one who wishes to be included in the Windstorm Insurance Network Umpire Directory. The first segment will focus on eth¬ics and professionalism as an umpire in the appraisal process. Case law will be the subject of the second segment. The final segment will address forms and awards.

Faculty: Janet L. Brown, Esquire, Boehm, Brown, Fischer, Harwood, Kelly & Scheihing, P.A.; John Voelpel, Voelpel Claim Service; Jon Doan, Claims Consulting Group; Dick Tutwiler, Charles R. Tutwiler and Associates; Javier Delgado, Esquire, Merlin Law Group.
REQUIREMENTS: Space is limited to the first 100 registrants.

This is a double-session, Part 1 and Part 2 MUST be taken together.

Javier Delgado and Tina Nicholson have been writing on Texas insurance issues every week in this Blog. Tina addressed Texas appraisals in Recent Court Decision in Texas Regarding Appraisal. Javier is on the Umpire panel for this symposium and will certainly address some of the new issues that are being raised since State Farm Lloyds v. Johnson was decided last year by the Texas Supreme Court.

A highlight of the Symposium and session that nobody will want to miss features two stellar panelists. Fortunately, there is no limit to the registrant size of that workshop:

Gulf Coast Insurance Case Law Update: Texas, Mississippi, and Louisiana

This workshop will discuss and review recent property insur¬ance case law from Texas, Mississippi, and Louisiana. It will include interpretations of how courts in the various states are ruling on insurance related issues. Developments in the three states that take up the western part of the Gulf will become more and more important as the impacts of storms such as Ike, Gustav, and even Rita and Katrina become important on the legal landscape. This panel, composed of a policyholder and a carrier’s attorney, will update you on the latest legal develop¬ments in Texas, Mississippi, and Louisiana and also provide a lively debate on whether the trends are pro-insured or pro-carrier.

Faculty: William “Chip” Merlin, Jr., Esquire, Merlin Law Group; Stephen Pate, Esquire, Fulbright & Jaworski LLP

Dr. Robert Hartwig of the Insurance Information Institute, recently provided a presentation to the National Association of Mutual Insurance Companies. He indicated that Hurricane Ike was the fourth most costly insured catastrophe in the United States and the third most costly hurricane. Hartwig’s statistics indicate that Hurricane Ike resulted in approximately 1,350,000 insurance claims. As this symposium is taking place in Texas, I am sure the material will be especially relevant to adjusters and attorneys dealing with current windstorm claims issues. Don't miss it.

The agenda is listed here.

The federal court cited an eighty-year-old Texas case, American Century Ins. Co. v. Terry, 26 S.W.2d 162 (Tex. 1930), regarding the factors to be considered. According to Sanchez and Terry, waiver of the right to appraise a loss can be established by the conduct of an insurer, including the following acts:

(a) parol waiver;
(b) refusal to appraise;
(c) denial of liability;
(d) failure to demand appraisal;
(e) actions inconsistent with intention to appraise;
(f) appointment of a prejudiced appraiser; and
(g) improper conduct during appraisement.  

In Sanchez, the court analyzed whether the insurer had denied liability or had failed to demand appraisal in a timely manner. The court determined that the insurer had not unconditionally denied liability because it had accepted coverage for a very small amount of damage. Although the amount of the accepted damage was less than the deductible and did not result in any payment, the court ruled that the acceptance of any amount of damage constituted acceptance of liability. Consequently, the court decided that the insurer had not denied liability of the claim so as to constitute waiver of appraisal.

The court then examined whether the insurer had failed to timely demand appraisal. The court noted the rule that where the policy does not set a deadline by which appraisal must be invoked, the demand for appraisal must be made within a reasonable amount of time. Of course, the amount of time that would be “reasonable” would vary with the facts of each claim.

The homeowner, Sanchez, reported his Hurricane Ike claim in October 2008. On October 31, 2008, the insurer sent Sanchez a letter stating that, in the insurer’s opinion, the damage did not exceed the deductible. On November 1, 2008, Sanchez telephoned the adjuster and informed him that he, Sanchez, disputed the insurer’s evaluation of the loss. Approximately one year later, after Sanchez had filed a lawsuit against it, the insurer demanded appraisal. The court determined that the insurer had waived its right to appraisal by failing to timely demand it.

The insurer had protested that the delay was caused by its attempts to adjust and settle Sanchez’s claim. An insurer does not waive its right to demand appraisal while it is actively attempting to adjust the claim. The court noted in this case, however, that the insurer presented no evidence that it was actively attempting to adjust Sanchez’s claim during the six-month period between the November 1, 2008 telephone conversation and the filing of Sanchez’s lawsuit. Moreover, the insurer did not request appraisal until more than four months after Sanchez filed his lawsuit. The court ruled that the insurer had waived its right to appraisal by its failure to demand it in a timely manner.

Due to the strong public policy favoring insurance appraisals in Texas, as established in State Farm Lloyds v. Johnson, we are sure to see a continuing evolution of the case law concerning insurance appraisal. The insurance professional should read Sanchez carefully for guidance on any possible waiver of the right to demand appraisal.

Barry Zalma wrote a comment worth sharing and pointing out my incorrect explanation of his law practice:

Thanks for the reference.

For your information, most of my work does not involve insurance fraud, it involves insurance coverage. I do write a twice monthly newsletter called "Zalma's Insurance Fraud Letter" because I saw a need. I am an insurance coverage lawyer and an insurance claims and coverage consultant and expert witness who testifies for any party who has a case against a party with whom I have no conflict. I also have written books that are available from my site or from the publishers that are useful to anyone interested in insurance.

In California "appraisal" is an arbitration whose result can be made into a judgment so impartiality -- or, at least, a lack of serious conflict must be shown.

Appraisal, in my opinion, should be used as a last resort. It is often less efficient than trial especially when the appraisers have little or no experience in valuing property or legal procedures.

Regards,

Barry Zalma

Harvey Goodman, a public adjuster from Goodman-Gable-Gould/Adjusters International, once told me that his firm rarely went to appraisal. He felt that they understood their client’s loss better than anybody else and should be able to explain and adjust it to resolution without having to risk third parties coming to a wrong conclusion. He wanted to keep control of the claim and suggested that many bitter disagreements regarding the value of a loss could be resolved through intensive good faith dialogue and negotiation with insurance company representatives. I know a number of prominent public adjusters who share that same philosophy, although most concede that appraisal is invoked much more often today than two decades ago--for a number of reasons.

Zalma’s opinion is not that different than Harvey Goodman’s. I agree that there are a number of case examples where appraisals take longer than litigation or can come out much worse for policyholders. On the whole though, I believe appraisals in most states usually reach resolution faster than litigation and at less cost.

One thing that is missing from the discussion is that the client policyholder should have a say and some legal advice whether the resolution should be through appraisal or litigation. A public adjuster should not unilaterally demand appraisal. The demand for appraisal and a suggestion that appraisal, rather than legal remedy, should be done is a legal decision with considerations of laws to the facts of a case. Adjusters who give advice as to one over the other in a given situation are giving advice that is commonly referred to as practicing law without a license. I am certain there will be a lot of public adjusters who claim that I am pointing this out because it is in my and other attorneys’ economic benefit to do so. On the other hand, it is illegal and a crime for public adjusters to practice law. Every public adjuster agrees to that, but I would suggest that a few do not want to adhere to that rule if it is not in their economic interest.

Indeed, I have met a few public adjusters in Texas who prepare their policyholder clients’ cases for settlements or litigation. They take the view that the Texas consumer protection statutes generally provide significant interest and other remedies that make most cases where an insurer offers an unfair settlement better resolved with attorney involvement. They always seek legal counsel for the client to help make the decision regarding appraisal or litigation.

The National Association of Public Insurance Adjusters, its general counsel, and officers have maintained my view and have warned against the unintentional practice of law by public adjusters for decades. There should be no question that only licensed lawyers should explain legal rights and actions to a client.. Many dedicated public adjusters are concerned that the legal bars of various states will question the licensing of public adjusting if public adjusters continually overstep their authority and provide legal, rather than adjustment, advice.

Appraisals generated as part of a loan application process are not appropriate for insurance purposes. The “cost approach” section of a market value appraisal is based on a “new construction” rather than a “reconstruction” basis. While not appropriate for insurance, the “cost approach” is what you’ll commonly get from a real estate appraiser if you simply ask for the “replacement cost;” it’s what they’re most familiar with, and they don’t need to spend money on an additional software packages to do the job. If you see the term “replacement cost new,” or “RCN,” it’s not the right kind of estimate. When ordering an appraisal, you probably need to take the extra step to tell the appraiser: “This is for insurance purposes; an estimate based on replacement cost new will not be acceptable.” If the appraiser seems baffled by such a request, you need to find a different appraiser.

Any estimating software can be manipulated to generate an artificially low number. Citizens’ has identified a few of the variables commonly manipulated: area, construction type, and subjective quality adjustments. There are many other variables that can be manipulated; it is important for the insured to carefully review the detailed report to make sure the entries are valid.

The agent/broker working with the insured also needs to check the appraisal to make sure that additions and deductions are aligned with the policy coverages. If foundations are covered (recommended) then they shouldn’t be deducted from the appraisal; if driveways and sidewalks are excluded, then they shouldn’t be included in the estimate. It would be difficult for the insured to recognize if an appraiser has manipulated the standard factors for quality, architects fees, overhead & profit, and others; but the agents/brokers see enough of these that they should be able to identify these adjustments.

The reason Citizens’ memo specifies that the detailed report be submitted, rather than a summary report, is so that the underwriters can spot the adjustments. Most of the “creative” adjustments would not appear on a summary report.

The Citizens’ memo mentions two vendors of software appropriate for generating insurable value estimates (Marshall & Swift/Boeckh [MSB], and e2Value). This list is not complete, there are a few others. MSB’s RCT, RCT HV, BVS are used by the insurance industry, but be careful, the books published by Marshal & Swift (same company) and commonly referenced by real estate and tax appraisers are not appropriate for insurance purposes. Before hiring an appraiser, you should check with the agent/broker to see what software the insurers use and request that the appraiser use the same software, this should help in reducing the potential for co-insurance.

In closing, please be wary of any appraisal firm that promotes its services on the basis that they can generate a lower estimate than the insurance company. Likewise, be wary of any agent/broker that has a “friendly” appraiser who is willing to provide a favorable estimate. Neither the “friendly” appraiser nor the agent/broker will likely suffer any consequences of under-reporting the exposure values.

-John Nixon
President, Asperta, Ltd.

For those of us in the trenches of working for fair and efficient resolutions of disputes, the following comment published early this morning to my post, Impressions Following the Alternative Dispute Resolution Roundtable, should provide serious consideration about how mediation can be easily abused:

Chip:

I am writing this to express my experiences with alternative claims resolution processes using both the Florida Mediation Program and the appraisal provisions of the insurance policy.

Let me start by saying that I have a somewhat unique perspective on claims handling. I have spent my entire 35 year professional career in the claims handling industry in one form or another. The first 24 years of my career I worked on the insurer side in various positions including a 5 year stint as a regional claims manager for a property casualty insurance carrier and 13 years as an equity partner in a regional independent adjusting company. For the past 11 years I have owned my own public adjusting company. So I have had extensive experience in both mediation and appraisal advocating for both the insurer and the insured.

First let me address the Florida Mediation program. To put it bluntly it is, in my opinion, an abject failure. Perhaps the first and foremost reason that it is a failure is that my experience has shown that the insurer’s representative almost always goes into the mediation without having full settlement authority. Without having that authority the insurer’s representative is unwilling or unable to offer a fair settlement to the insured simply because they either do not have the dollar authority to do so and/or are unwilling to go back to their supervisor for my authority. I have also experienced cases where the insurer agreed to go to mediation with an insured but at mediation they did not move one dollar from the original position that drove the claim to mediation in the first place. I have had an impasse declared within 10 minutes of the start of mediation with the insurer never making an offer above the original adjuster’s offer.

However, perhaps the most insidious aspect of mediation is the way the insurance industry advocates to the insured to use the mediation process without the insured having any professional assistance with their presentation. The insurer’s representative at the mediation is a professional claims person who has been trained in the mediation process and negotiation tactics. An unrepresented insured almost never understands the process and certainly does not have the training of the insurer’s representative. In the words of one insurer representative that I know when an insured goes into mediation without professional help, 'it is like leading the lambs to slaughter.' It has reached a point now that I see no redeeming reason to recommend to my clients, even with my help, that they avail themselves to the mediation program as it currently exists.

Next, let me relate my experiences with the appraisal process. In my career, I have appraised claims on behalf of both insurers and insureds. I have also served as an umpire on over 50 appraisals. I appreciate the appraisal process because it does give some finality to a claim. It is quicker and less costly than litigation and absent any coverage issues a properly crafted appraisal award is almost always binding on both the insurer and insured. The appraisal also gives the insured a professional advocate in the decision making process. That cannot be said for many mediation hearings. I also like appraisals because there is no such thing as an impasse in appraisal. I have yet to see an appraisal I was involved with that did not have an ending where at least two of the three appraisal panel members were able to reach an agreement.

Now, let me speak to the appraisal process. I believe the appraisal process would be very well served if it had some guidelines on how the process was to be conducted, such as having utilizing the Florida Arbitration Code as a guide. I have issues with the conduct of insurers and their appraisers. I believe insurers have far too much influence on their appraisers when it comes to the selection of an umpire.

As indicated by Umpires at the Roundtable, it is a very poorly kept secret that insurers have lists of umpires that they instruct their appraisers to never use, even if their own appraiser feels the person on that list is qualified and would make a good umpire on their appraisal. I have run across another problem in my capacity as umpire. I have had appraisals where the appraisers advise me they are at an impasse and need my umpire services to settle their differences. When I meet with the 2 appraisers they inform me that they really do agree on an amount of loss but the insurer’s appraiser informs me that he doesn’t want to sign the award. He won’t sign the award, even though he agrees with it, because he is afraid if he does sign it the insurer will stop using him on their appraisals. As an umpire I should be happy with this situation because it means more business for me. However that is not the case. I can’t help but think about the poor insured who has had his claim settlement delayed and now that an agreement has finally been reached he has to pay 50% of an umpire’s bill when in reality the umpire was not really needed. That is just wrong.

As a former claims manager and a person very familiar with the industry, it is naive to think that insurers, including Citizens, do not keep statistics and track which umpires and appraisers provide lower awards and then deselect those that give awards higher than what those insurers think is acceptable.

Does the appraisal process have warts? Certainly it does. However, I believe any problems with the appraisal process are repairable. I do not feel the same way about the Florida Mediation program.

Thanks for all your efforts on behalf of the policyholder.

Sincerely,
Don
Donald A. Phillips

Insurers, or any party to a dispute, can abuse the mediation process by having people that do not have the complete authority settle after considering everything presented at the mediation. I have heard of insurers that intentionally provide limited dollar authority to the adjuster at mediation, no matter how compelling the evidence presented, at a state sponsored mediation, knowing that many policyholders will simply give up. Many policyholders are afraid of litigation or appraisal. Nobody buys an insurance policy thinking they will have to become professional negotiators or litigators. Insurance companies have professional litigators and train their adjusters how to negotiate with unrepresented policyholders and how to hold their own in negotiations with attorneys. Honestly, what chance does a lone policyholder have against an insurer that has a claims attitude to pay as little as possible? Why do you think insurance company executives and their lobbyists are pushing for a mediation system in Florida where policyholders come all by themselves? "Lambs to slaughter" sounds about right to me.

Zalma noted that when considering the qualifications of an appraiser, California courts have adopted the arbitration code for guidance:

California courts have concluded this adjudication must be conducted pursuant to the provisions of the California Arbitration Act, Code of Civil Procedure section 1280 et seq. (Arbitration Act).

Section 1281.9 of the Arbitration Act requires proposed neutral arbitrators to disclose to opposing parties the existence of any potential grounds for disqualification. If a party objects to the proposed neutral arbitrator, section 1281.91 requires the objecting party to serve a notice of disqualification within 15 days of receipt of the disclosure statement.

...

The key to disqualifying a party appointed appraiser is whether there is a "substantial" business relationship between the party appointed appraiser and a party to the appraisal, their counsel, or the umpire. Impartial arbitrators/appraisers must disclose to the parties any dealings that might "create an impression of possible bias." The test is whether a reasonable member of the public at large, aware of all of the facts, would fairly entertain doubts concerning the arbitrators/appraisers impartiality, the arbitrator/appraiser is not subject to disqualification.

This discussion is quite relevant to the ongoing debate about appraisal in Florida. One of the insurers’ contentions is that many policyholder appraisers are biased and interested. Insurers argue that appraisers who are compensated on a contingency fee system inherently try to raise the amount of awards because they have an incentive to do so.

A Florida case, Rios v. Tri-State Ins. Co., 714 So. 2d 547 (Fla. 3d DCA 1998), allows appraisers to work on a contingency basis, so long as it is disclosed to the panel. This is prohibited in Texas appraisals.

It will be interesting to see how all this resolves.

Sometimes, the best course of action is to take simple steps to solve a problem rather than a radical departure. Tweaking a process may be the best course of action rather than setting in motion an entire new process that creates additional and often unforeseen adverse consequences. If I had to suggest one thing to Sean Shaw regarding his recommendations, it would be: “keep it simple.” There were so many new ideas being espoused at the roundtable without thorough thought as to all the consequences, that I am afraid he and others at the Office of Insurance Regulation could promote a new policy which could end up being more harmful than good.

Assuming that appraisal is a mandatory requirement in all property insurance policies, I still like what I proposed in my post, A Method for Keeping the Appraisal Clause in Property Insurance Policies Which Will Satisfy All Concerns. I have no problem saying that I may be persuaded with a better idea, but I heard none yesterday that provided a simple solution. After listening to others, I have changed my opinion regarding the licensing of appraisers. I think that there should be licensing of appraisers to help protect consumers from unregulated individuals giving legal and claim advice.

Policy should be reflected in law and regulation that promotes quick and full payment of property insurance claims. The implied performance duties of an insurer to adjust the claim are found nowhere in the insurance contract. Regulators and judges must understand that law and regulation are the only methods of placing adjusting performance claims duties contractually upon insurers. I agree with the insurance executive that spoke during the public comment portion of the session who said there needs to be accountability when those duties applied to the contract are violated. The Prompt Payment requirements championed by Senator Jeff Atwater should have greater teeth and the obligations of good faith claim handling should always have an aspect of accountability when breached.

The California law which requires disclosure of the insurer’s claims file to the insured upon request should be adopted in Florida. I raised this point in the session and nobody seemed to disagree. The first party claims file is the most relevant evidence of how the insurer is evaluating the claim. It seems to work in California and there should be no reason why it would not work here. Why shouldn’t an insurer be honest with its customer and honestly share how the claim is being handled? Only cheating adjusters would be afraid of honesty and transparency.

The individual largely responsible for this California law is Amy Bach, the executive director of United Policyholders. The California law provides:

The insurer shall notify every claimant that they may obtain, upon request, copies of claim-related documents. For purposes of this section, "claim-related documents" means all documents that relate to the evaluation of damages, including, but not limited to, repair and replacement estimates and bids, appraisals, scopes of loss,
drawings, plans, reports, third-party findings on the amount of loss, covered damages, and cost of repairs, and all other valuation, measurement, and loss adjustment calculations of the amount of loss, covered damage, and cost of repairs. However, attorney work product and attorney-client privileged documents, and documents that indicate fraud by the insured or that contain medically privileged
information, are excluded from the documents an insurer is required to provide pursuant to this section to a claimant. Within 15 calendar days after receiving a request from an insured for claim-related documents, the insurer shall provide the insured with copies of all claim-related documents, except those excluded by this section. Nothing in this section shall be construed to affect existing litigation discovery rights.

When I was speaking with Amy Bach about the Roundtable, she reminded me that California has optional appraisal where there has been a disaster. Either party may opt out. There, the insurers were abusing the process by outspending the policyholders and making the process so expensive for the consumer that it significantly lengthened the time to recovery and reduced the net payout because of the expense. Insurers leverage this fact with policyholders by threatening appraisal when negotiating settlements. As I pointed out yesterday, absent the obligations of good faith claims handling, the insurer often has no time pressure to pay claims quickly. Raising time and expense as a negative aspect to a consumer can provide insurers with enough leverage to achieve an underpaid claim result to the customer. Here is that portion of the California law:

Appraisal

In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written request of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of the request. Where the request is accepted, the appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon the umpire, then, on request of the insured or this company, the umpire shall be selected by a judge of a court of record in the state in which the property covered is located. Appraisal proceedings are informal unless the insured and this company mutually agree otherwise. For purposes of this section, "informal" means that no formal discovery shall be conducted, including depositions, interrogatories, requests for admission, or other forms of formal civil discovery, no formal rules of evidence shall be applied, and no court reporter shall be used for the proceedings. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company
shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him or her and the expenses of appraisal and umpire shall be paid by the parties equally. In the event of a government-declared disaster, as defined in the Government Code, appraisal may be requested by either the
insured or this company but shall not be compelled.

Making the appraisal optional by law is an option which may be considered. Under this view, the inexpensive informal mechanism can stay in place by agreement. A negative aspect of my proposal is that policyholders may be better off simply litigating the matter rather than going through a full blown arbitration.

The insurance industry wants to push mediation. It wants to do this to avoid the perceived negative results of appraisal and still provide an alternative to litigation. My impression is that the insurer’s financial desire to achieve a reduction in the amount of claims severity (the average amount an insurer pays out for claims) can be achieved through a negotiation process where the insured can be leveraged by the prospect of delay and expense. Insurers train adjusters how to negotiate and even a voluntary mediation process can be abused. A Biloxi television station ran a feature of clients we represented that twice went through the Mississippi Department of Insurance mediation program following Katrina:
 

The real issue is how to get these disputes prevented in the first place. And, when they arise, how to get them resolved quickly and fairly. While it is easy for me to say that, coming up with an alternative dispute resolution process that is fair, quick and inexpensive, in a one size fits all format, is a puzzle that nobody has a perfect answer for. The prevention of the dispute and fair treatment can be accomplished as I have suggested with strong laws, transparency and good faith claims practice obligations.

But what about good faith disputes between parties? I still strongly feel that the insurer’s request for fair process of binding claim resolution with transparency is inherently sound. Indeed, that is what consumer’s want. And, what is often not said is that the result for the consumer once the dispute arises is often the skill of the appraiser or if litigated, the attorney selected by the policyholder. For example, our clients in the above video were advised by the first attorneys they hired to accept less in settlement than what the insurer twice offered in mediation. The skill of the right appraiser is something I noted in, Appraisers, Umpires and Appraisals as Valid Substitutions for the Right to a Jury Trial Depend on Viewpoint.

Insurance Veteran made a point that everybody in the insurance business knows. There are certain policyholders who want much more than what is fairly owed, and they unrealistically believe they are entitled to the money. Some of these people go over the top and commit fraud. Others just want magic to happen, and the claims money to be paid regardless of any justification.

While I can certainly appreciate his comment, he may have missed part of the point of my post. Many policyholder appraisers do not fully understand how to win the appraisal for the policyholder. They do not comprehend that the appraisal is truly an alternative dispute process that binds the policyholder.

Some may suggest that I am wrong, and that the goal of appraisal is a fair number for both sides. But, my policyholder clients may have a very different view of what fair is. So, if the insurer wants to dispute the amount in an appraisal, I want as much as I can get for my clients. After all, if there were no appraisal, my client would be asking a jury of peers for justice. But the insurance companies were historically so afraid of juries and costs, that a hybrid dispute process became standard in form insurance policies. Guess who benefitted most from that process?

Accordingly, my warning to all policyholders and those working with them in appraisals is that it is binding and should be taken as seriously as a public trial. I want the mindset of policyholders faced with an appraisal to be:

There is no second chance.

I started writing a reply that I feel better explains my impressions on this topic. Some suggest that I am opposed to appraisals for a number of reasons, including the possible loss of litigation revenue. These people do not fully understand the consequences of appraisal. I have a hard time explaining the historical importance of a jury as a core concept of American democracy, but I believe that giving up the right to a jury trial is the most important consequence of appraisal. Justice comes from the values of one’s peers in the community, not experts or government deciding what is fair and just. This is a fundamental concept of American democracy and protected by our Constitution.

My impression is that the skills of consumers’ appraisers have become much better. There are now numerous seminars that provide knowledge to public adjusters which result in an understanding of how to obtain a fair settlement for the policyholder through the appraisal process. Indeed, there now seems to be a certain segment of public adjuster that cannot reach voluntary resolution and thus use appraisal as the actual adjustment of the claim. The response is that some insurers are now removing the clause. From their view, there is not first a good faith adjustment which is then subject to a process that has no rules and enough transparency for them to think it is fair. And, the most important reason insurers are removing the clause is that they losing.

Finally, I applaud Sean Shaw. I would love to participate and listen to the views of the insurance industry. I have a warning about the comment from the lobbyist from the insurance trade association. But, that is for another day.

Again, keep it simple.

This is the legislation I will recommend to the Florida Insurance Consumer Advocate Sean Shaw and the Office of Insurance Regulation tomorrow:

(1)  In the event parties to an insurance contract enter into an appraisal, either party may demand that the procedures set forth in the Florida Arbitration Code (Section 682.02 et seq.) shall control in the appraisal process except as to the selection of the appraisers and appointment of the umpire.

(2)  If mutually agreed to in writing, the parties may modify the procedures set forth in the Florida Arbitration Code.

The practicality of this law is that it recognizes claims are not all the same. There is a huge difference between a $500 automobile claim dispute (automobile policies have appraisal clauses as well) and a $150 million commercial property damage claim with business interruption issues. When the stakes are high and the parties really want to make certain that the process is fair and each has its opportunity to be fully heard on the merits, the Florida Arbitration Code has long been recognized as providing such procedures.

But what about a far more common dispute involving $25,000? In that case, the parties may want to conduct the appraisal in much the same manner as is commonly done today--with little or no rules to save money and time for all. This suggested law allows the parties to modify the arbitration procedures regarding discovery, to afford savings in costs through mutual agreement.

My suggested method for resolving the current trend of insurers eliminating appraisal has come about through a number of observations.

1.  Florida law does not mandate the appraisal clause to be in property insurance policies because the Standard 165 line policy is no longer mandated in Florida. As a result of laws requiring policies to be easy to read, Florida, unlike many other states, dropped laws requiring property insurance policies to have minimum protections found in the 165 Line Standard Fire policy.

2.  Insurers are increasingly changing property insurance policies to vary from standard forms. Whether our Office of Insurance Regulation is doing a proper job is of concern to all because such changes can harm consumers through reductions of coverage and give competitive advantages to insurers that play "word games" with the products they sell. Deleting the appraisal clause is another example of this increasing trend by Florida insurers when they do not like the results the more standard forms in use throughout the country would otherwise require.

3.  Policyholders and insurers benefit by having alternative dispute methods which are quick and inexpensive. However, both desire fairness. The smaller the dispute, the greater the need for less costly methods. The greater the dispute, the greater the need for a method of fairness that ensures transparency and a result that is not based on gamesmanship.

4.  The Florida Supreme Court has mandated that appraisal is an informal process. In doing so, it overruled a lower appellate court ruling indicating that arbitration was the procedure that had to be followed in appraisals. In the past, many parties asked whether the appraisal would be conducted "formally," meaning following the arbitration code, or "informally" with the panel to make their own rules. Today, the panel makes their own rules based on the Florida Supreme Court decision.

5.  A cottage industry of appraisers and umpires has emerged over the past decade. The use of appraisal has become more common as an alternative to voluntary agreement through adjustment. Recognizing that informal appraisal may lead to gamesmanship and unfairness, at least one organization of considerable influence in Florida, the Windstorm Network, has educational classes on appraisal and the role of the Umpire. The Windstorm Network has a Certification course for Umpires and promulgated a set of ethical requirements for "Certified" umpires to follow. In doing so, the Windstorm Network recognized that umpires wield considerable influence in process and ultimate determination of the result.

6.  Appraisal, unlike mediation, is binding. Like arbitration, it is a true alternative to litigation. To suggest that mediation is an alternative to appraisal is incorrect and disingenuous. Without a binding method to litigation, insurers with the money can threaten a policyholder with expensive and time consuming litigation to gain negotiation leverage over the policyholder. Mediation is simply a more formal means to reach a voluntary adjustment of damage with a professional facilitating a compromise.

As an experienced attorney limiting my practice to policyholders with disputes, I cannot say that policyholders are better off resolving their disputes through appraisal, even with arbitration procedures available, versus litigating the matters. Litigation can raise a number of consumer protection statutes that benefit policyholders when insurers unreasonably underpay or delay payment. These rights cannot be raised by public adjusters or contractors because it involves the practice of law. Unless a policyholdere is very well educated in insurance law, an attorney is almost always necessary to successfully litigate these rights.

Indeed, the policyholder successful in appraisal has to pay for his costs of the appraisal and half the umpire's costs. In litigation, the successful policyholder can often recover all those costs along with interest for the unpaid sums.

While I have long been a critic of appraisal because it is a binding process with no rules, I can appreciate that the cost to reach a binding amount owed can be much less, and costs may be an overriding concern to all in claims where the amount in dispute is not great.

My suggested change to the law is merely a practical recognition that insurers do not, and should not, have to remove the appraisal clause from property insurance policies.

I appreciate all the comments and viewpoints which many of you have shared with me on this blog over the past month. I will provide my thoughts of the Roundtable discussion on Thursday.

I have studied the issue and have a recommendation that will keep appraisal in the insurance contract, keep the possibility of an informal appraisal proceeding and satisfy the insurance industry's concerns of due process. I will post those tomorrow afternoon.

Here are the panelists:

Here is the agenda:

Significant is the reasoning provided by United Property & Casualty for removal of appraisal:

The Appraisal clause is being eliminated. We are taking this action because the current appraisal language, as it exists, does not give insurers recourse to meaningful judicial review. Furthermore, the basis of awards under Appraisal is outside the scrutiny of both policyholders and insurers.

Eliminating the appraisal clause will mean that our policy contracts will follow Mediation, which is the Florida Legislature’s preferred method of dispute resolution.

Interestingly, the Courts have approved appraisal as a means to keep the matter away from litigation. United Property seems to want a mechanism to get disputes into litigation.

I am not certain that mediation is preferred by the legislature. The legislature has enacted laws that demand that insurers fully investigate a loss and promptly pay claims for the full amount.

Certainly, if the insurers can get unwary policyholders into mediation without professional representation and threaten the potential of a lawsuit without the possibility of appraisal, insurers will gain "leverage" in the negotiation of a dispute because delay works to an insurer's advantage. This is not what Florida legislators, except those politicians in the pockets of the insurers, want for Floridians.

Still, the trend is clear---appraisal is becoming less of an option. Many insurers are not happy with the results of appraisal and think our judicial system provides a better forum to fairly resolve disputes.

When I began to invoke the appraisal clause on Hurricane Andrew claims, only rarely would a carrier deny the Insured's right to invoke appraisal. In addition, most of the appraisals were settled directly with the carrier's appraiser and the umpire was only involved in approximately 10% of the appraisals. At that time, the carrier's appraiser was generally independent, and was free to act on his/her own without repercussions.

When I worked as an appraiser for the carrier back in the 80's and early 90's, I was provided a copy of the original adjuster's estimate and the name of the other appraiser, period. When my appraisal was over, I would provide a final report which would detail the issues and when necessary, I would point out the error of the carrier's position. I was not worried about losing an account as the result of a perceived bad appraisal award.

As time has passed, I have noticed a disturbing trend towards more and more interference in the appraisal process by the carriers. This progression has become so blatant, that only rarely do I not involve the umpire in appraisals. Many times the carrier's appraiser will agree that the carrier's original adjuster was completely in error, but the carrier's appraiser will request that we involve the umpire in the final award to provide the carrier's appraiser with "cover."

In this scenario, the carrier's appraiser clearly does not feel free to act independently. They are clearly worried that future business is in jeopardy if for instance he agrees a roof should have been replaced when the carrier denied the roof replacement. I seriously doubt the carrier's appraiser will provide the carrier with an honest assessment and in fact, the carrier is probably told the process "broke down again".

Is it any wonder then why these carriers want to get out of a "broken system?"

Chip, the system isn't broken. In the event that these carriers continue to drop the appraisal clause from their policy, consumers will be left with no option but to file suit.

I realize this helps your profession, but it isn't necessary. Your position that anything that short circuits the policy holders right to due process is bad is also completely derogatory towards my chosen profession and extremely arrogant to boot. Who better to render an opinion as to damage, than someone who has done this for a living and is a professional at assessing damage???

Florida needs advocates who fight for the consumers NOW and we need to stay on the "side of the angels."

Sounds like Mike is calling me out on this issue. From my impression, he frames it as, “if you do not agree with me, you are on the side of the insurance company.” Mike Rump is a great guy, but I simply believe he is upset that the insurance industry is removing the appraisal clause and he does not want that to happen. Here was my reply:

Mike,

I appreciate your comments and views. Sometimes, there will be disagreements among people that are normally aligned in interest.

I believe that one of the fundamental differences in our country versus many others is that we have a system of justice that provides for "due process." This is so important that it is in our constitution and most state constitutions.

Many "informal" appraisals can be "Kangaroo" courts because there are no rules. No right to confront witnesses or examine evidence. I have heard of some appraisals being conducted in bars with drinks.

The Windstorm Network recognized some of these problems and has promulgated a Code of Ethics for its certified Umpires.

Maybe your appraisals go very well. When I am involved, most of mine go very well for my clients too. However, as an attorney that represents policyholders, I get brought the appraisals where the policyholder's outcome was not very good. Most of the time in those situations, the policyholder did not have a public adjuster or professional helping in the process. Possibly, your view would change if you saw those cases.

I have been of the view that appraisal with the arbitration rules as a procedure would be fair and practical. Indeed, this was the law in Florida for a number of years until the Florida Supreme Court said the procedure was "informal." Many would suggest "informal" means without rules.

Under the arbitration rules, parties can make the appraisal as formal or informal as they want. Or, if they cannot agree, arbitration rules apply so that everybody gets a "fair" binding process. The procedure is determined in advance. There is no binding procedure on either party or how appraisals are to occur in Florida, today.

Could you imagine playing a game of cards with no rules? How about a playing a game involving ten million dollars at stake with no rules?

If you win at that system, I guess you would want to perpetuate it. But, some may suggest that an element of fairness is to have some set criteria for how the game is played before it starts. Losers may think it was rigged against them. Clever winners may not want the procedure to change fearing that their "edge" of winning will go away if they have to play by some set of rules which both sides have to abide.

It would seem to many Americans that any system of justice which is binding and with serious consequences would have some set rules. This notion of having set rules to play by for both sides has been my chief concern for a long time.” (emphsis added)

This was the similar view and concern I previously expressed in Appraisers, Umpires and Appraisals as Valid Substitutions for the Right to a Jury Trial Depend on Viewpoint, where I stated:

…Many policyholder appraisers do not fully understand how to win the appraisal for the policyholder. They do not comprehend that the appraisal is truly an alternative dispute process that binds the policyholder.

Some may suggest that I am wrong, and that the goal of appraisal is a fair number for both sides. But, my policyholder clients may have a very different view of what fair is. So, if the insurer wants to dispute the amount in an appraisal, I want as much as I can get for my clients. After all, if there were no appraisal, my client would be asking a jury of peers for justice. But the insurance companies were historically so afraid of juries and costs, that a hybrid dispute process became standard in form insurance policies. Guess who benefitted most from that process?

Accordingly, my warning to all policyholders and those working with them in appraisals is that it is binding and should be taken as seriously as a public trial. I want the mindset of policyholders faced with an appraisal to be:

There is no second chance.

I started writing a reply that I feel better explains my impressions on this topic. Some suggest that I am opposed to appraisals for a number of reasons, including the possible loss of litigation revenue. These people do not fully understand the consequences of appraisal. I have a hard time explaining the historical importance of a jury as a core concept of American democracy, but I believe that giving up the right to a jury trial is the most important consequence of appraisal. Justice comes from the values of one’s peers in the community, not experts or government deciding what is fair and just. This is a fundamental concept of American democracy and protected by our Constitution.

Yet, if some courts and states deem a procedure without a jury and without rules to determine what a policyholder will obtain as “fair,” I have some very strong opinions about what policyholders should do and how appraisers selected by policyholders should go about their work…” (emphasis added)

The January 6 Roundtable in Tallahassee is going to be an interesting discussion. To the extent anybody has an opinion or suggestion about improving the appraisal process, I suggest that you write your opinions to the Office of Insurance Regulation or to me. I intend to submit a written view which includes much of the debate with others in other posts we have had on this topic.

Do I expect that there is a chance that appraisal will remain in insurance policies and work exactly how it has in the past? The clip below reflects my opinion on that:

Here is his letter to me:

The Roundtable will be televised live on The Florida Channel, and there will be an opportunity for people to call-in with questions.

I have commented about appraisal in previous posts.

I plan to have a post before and after the roundtable as I work through my thoughts on how we can efficiently and fairly resolve cases short of litigation.

The first case, Patrick v. State Farm, 647 So.2d 983 (Fla. 3d DCA 1994), involved a situation where the unit owner repaired and replaced his property through his own efforts. He did not pay somebody else to do much of the work. The Court denied replacement cost coverage stating the following:

Replacement cost insurance is designed to cover the difference between what property is actually worth and what it would cost to rebuild or repair that property. It is insurance on a property's depreciation. Leo L. Jordan, What Price Rebuilding?, 19 ABA Fall Brief 17 (1990). Courts have almost uniformly held that an insurance company's liability for replacement cost does not arise until the repair or replacement has been completed. Id.; see, e.g., Tamco Corp. v. Federal Ins. Co. of New York, 216 F.Supp. 767 (N.D.Ill.1963). Patrick's contract provides that State Farm “will not pay for any loss on a replacement cost basis until the lost or damaged property is actually repaired or replaced....”
…
Patrick also argues that State Farm should pay the total amount the insurance company estimated it would cost to repair or replace his property, despite the completion of the work for a lesser amount. However, the contract plainly provides that State Farm “will not pay more for loss in any one occurrence on a replacement cost basis than ... the amount you actually spend that is necessary to repair or replace the lost or damaged property.” The issue also was squarely addressed in Kolls v. Aetna Casualty and Surety Co., 378 F.Supp. 392 (S.D.Iowa), aff'd, 503 F.2d 569 (8th Cir.1974). There, the insureds were paid $631,955 for the actual value of a destroyed shopping center. Depreciation was figured at $54,920. The insureds then scaled back the rebuilding and only spent $510,759.88. The court refused to order the payment of the withheld amount because the insureds had not spent more on the rebuilding effort than they received in payment for the actual value of the shopping center. “[T]he Replacement Cost Endorsement is not of value to the plaintiffs until they have expended an amount greater than what they could recover under the basic policy coverage....” Kolls, 378 F.Supp. at 400.

The practical pointer here is that had the policyholder’s counsel been aware of State Farm operational guidelines, the case could have been won. State Farm has an internal guideline for just about every claims situation. There was one in existence that provided that State Farm would pay for its policyholder’s time and effort in repairing or replacing the damaged structure. My practice tip is to hire claims experts who have these claims guidelines or simply ask for them. Many companies have these claims guides for use by adjusters. This case is an example of State Farm allowing its attorneys to argue something it did not even believe-- as proven by its operational guides.

Vantage View vs. QBE Insurance, No. 07-60138, 2009 WL 536546 (S.D. Fla., March 3, 2009) is significant because it is a recurrent situation where a denial is made and then the insurer does not want to pay full replacement cost benefits. In some situations, it could provide an unscrupulous insurer a motive to avoid paying the full benefits owed under a policy, knowing a poor insured could never raise monies to rebuild. The Court stated:

Here, the jury found that Defendant breached the insurance contract by failing to pay Plaintiff for the damages it sustained. The jury also found that Plaintiff sustained $910,500.00 of replacement cost damage. Despite that damage, Defendant failed to provide Plaintiff any funds to allow it to make repairs. By so doing, Defendant frustrated Plaintiff's efforts to make any repairs and prevented Plaintiff's compliance with the replacement cost provision in the policy. See e.g., State Farm Fire & Casualty Ins. Co. v. Miceli, 164 Ill.App.3d 874, 115 Ill.Dec. 832, 518 N.E.2d 357, 362 (Ill.App.Ct.1987) (when insurer made compliance with a condition precedent impossible by failing to provide any funds, the insureds were not prevented from recovery of replacement cost); Bailey v. Farmers Union Cooperative Ins. Co. of Nebraska, 1 Neb.App. 408, 498 N.W.2d 591, 598-99 (Neb.Ct.App.1992) (awarding replacement cost coverage despite the plaintiff's failure to comply with the policy condition to rebuild when the plaintiff did not have funds to rebuild); McCahill v. Commercial Union Insurance Co., 179 Mich.App. 761, 446 N.W.2d 579, 585 (Mich.Ct.App.1989)) (awarding recovery for replacement costs because the failure of the insurer to advance funds meant there was “little likelihood of being able to secure financing to repair or replace” property). Florida law is clear that “a party, who, by his own acts, prevents performance of a contract provision cannot take advantage of his own wrong.” North Am. Van Lines v. Collyer, 616 So.2d 177, 179 (Fla.Dist.Ct.1993); see Paparone v. Lake Placid Holding Co., 438 So.2d 155, 157 (Fla.Dist.Ct.App.1983); Ward v. Branch, 429 So.2d 71, 74 (Fla.Dist.Ct.App.1983); see also Restatement (Second) of Contracts § 245 (“Where a party's breach by non-performance contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused”). Indeed, any other outcome would result in an insurer “profit[ing] from its own breach of the agreement.” Zaitchick v. American Motorists Ins. Co., 554 F.Supp. 209, 216 (S.D.N.Y.1982) (quoting and incorporating the insured's argument that the insurer's conduct made it impossible for the insured to fulfill the condition precedent).

This conclusion is buttressed by the language of the policy. Specifically, the policy provides that replacement cost value will not be paid unless the repairs are made “as soon as reasonably possible.” Clearly, it is not “reasonably possible” for the insured to make repairs without receipt of the funds from the insurer. Indeed, Ceballo and Patrick support this interpretation, given that the insurer in those cases advanced funds making it possible for the repairs to occur. Lastly, the Court finds that any other result would provide insurers with an incentive not to pay legitimate claims in cases where payment on a replacement cost basis is likely to be more than payment based on an actual cash value. Thus, the Court denies Defendant's motion for judgment as a matter of law. (emphasis added)

A footnote written by the Court is also significant:

The Court disagrees with Defendant's contention that this finding creates or extends insurance coverage not in the policy.... To the contrary, the Court finds that coverage exists in the policy. It is Defendant's actions in breaching the contract that give rise to Plaintiff's ability to avail itself of the replacement cost provision of the policy. The fact that the policy also provides for actual cash value has no bearing on the Court's interpretation of the policy as to replacement cost in view of Defendant's breach. (emphasis added)

I wish Judge Senter would have followed these lines of cases and reasoning in the Mississippi Katrina litigation. The replacement cost policy contemplates that the insured will have some partial payments immediately on an actual cash value basis to start the repair and replacement. When there is a wrongful denial, the policy stops working in the manner contemplated. The insurer should not benefit from its own wrong action.

Finally, after my post regarding the disappearing appraisal clause in While State Farm May Stay in Florida, Appraisals May Go, the decision in State Farm Florida Ins. Co. v. Nichols,--- So.3d ----, 2009 WL 3674569 (Fla. 5th DCA, November 6, 2009), was released. I believe this opinion will probably accelerate that exodus. By chance, I ran into the very capable policyholder’s attorney, Craig LaValley, in Fort Myers several weeks ago. He won this case and one similar on appeal. He told me that his reasoning was quite simple—if the policy values are determined by appraisal, the insurer decided to go down “the will” street and no longer was on the “may street.”

This is exactly the reasoning followed by the appellate Court:

The homeowners' policies clearly require State Farm to pay the full amount of an appraisal award within sixty days of the award.

…

This statute provides in pertinent part:

The insurer may limit its payment to the actual cash value of the sinkhole loss, not including underpinning or grouting or any other repair technique performed below the existing foundation of the building, until the policyholder enters into a contract for the performance of building stabilization or foundation repairs.

…

We construe this language as permissive, not mandatory. Because it is permissive, the policy language that requires payment of subsurface repairs within sixty days after the appraisal award is not in conflict with the statute and is binding on the parties to the insurance contract.

I suggest that the practical impact of this case is to force many insurers to pay for replacement cost if the value is determined by appraisal. The long term impact may be that the appraisal clause will be written out of many property insurance policies if insurers want to avoid this result.

Increasing property insurance capacity in Florida is a significant public objective. Our governmental leaders should encourage this. Given the lack of a true open or free market as a result of limited capacity, many insurers attempt to charge rates which are unfair because there are no, or limited, alternatives to buyers. I disagree that complete rate deregulation of Florida's non-free insurance market, which some legislators and State Farm lobbyists were calling for last year, will cure the problem.

Dan Luby reported in Florida Insurance News that the Florida Office of Insurance Regulation has approved another form policy without the appraisal process.

On 11/16/2009 the Florida Office of Insurance Regulation (OIR) approved the elimination of the Appraisal Clause from the homeowners multi-peril policy for Liberty Mutual Fire Insurance Company (NAIC Company Code 23035) and The First Liberty Insurance Corporation (NAIC Company Code 33588). This change is effective 12/14/2009 for new business and 02/04/2010 for renewals.

This is a definite trend. Some claims executives have confided with me that they feel the process is unfair to them for several reasons.

First, they complain that many public adjusters use appraisal as a means to obtain a split between an outrageously high estimate and a "fair" estimate. They complain the appraisal panel, more often than not, simply splits the differences of the estimates.

Second, they feel that many coverage issues get intertwined with appraisal. Thus, they complain that uncovered causes of loss often wrongly get included into appraisal awards.

Third, the process becomes ripe with gamesmanship involving millions of dollars with larger claims. They complain that the informal nature of the appraisal process does not protect then from improper conduct and activities.

I am not going to comment on these complaints because I am not going to change any insurance company executive's perspective on this issue. From my perspective, policyholder's with professional representation at appraisals are doing much better than a decade ago, when they often went without professionals experienced in the appraisal process. My impression is that these higher awards are why some insurers no longer want to allow appraisal to continue.

The important aspect for the policyholder is that increasingly, there will no longer be a binding alternative dispute resolution process. Public adjusters may have to start preparing their work for litigation rather than appraisal. The exactness required in litigation is much higher than most appraisals because there will usually be greater critical analysis of the damage and coverage issues.

The bottom line is that I expect this trend to continue. Appraisals could become rare as more companies change their forms, removing the clause. Some policyholders may simply "give up" on a claim because litigation is a much more risky and demanding process than an informal appraisal of damages.

The portion of the statute upon which State Farm relied stated:

The insurer may limit its payment to the actual cash value of the sinkhole loss, not including underpinning or grouting or any other repair technique performed below the existing foundation of the building, until the policyholder enters into a contract for the performance of building stabilization or foundation repairs. After the policyholder enters into the contract, the insurer shall pay the amounts necessary to begin and perform such repairs as the work is performed and the expenses are incurred. The insurer may not require the policyholder to advance payment for such repairs.

The insureds argued that that the language in their homeowners’ policies, which required payment within sixty days after the amount of the loss is settled by appraisal, controlled.

Finding that the language of Florida Statute 627.707(5)(b) was permissive and not mandatory, Florida’s Fifth District Court of Appeal agreed with the insureds and held State Farm to the terms of the policy it wrote.

We construe this language as permissive, not mandatory. Because it is permissive, the policy language that requires payment of subsurface repairs within sixty days after the appraisal award is not in conflict with the statute and is binding on the parties to the insurance contract.

You can read the slip opinion here.

The issue on certiorari was whether a bad faith claim was ripe, not whether bad faith existed, therefore, the facts giving rise to the bad faith claim were not necessary to the opinion. In this case though, the majority opinion detailed the facts, noting “extraordinary length of time it has taken to resolve the Association's claim,” and describing State Farm's actions as “aggressive legal tactics” and “unfounded imposition of conditions.” As the facts giving rise to the potential bad faith claim may well have been crucial to the two justice majority’s decision, they are detailed below.

The Facts

On October 24, 2005, Hurricane Wilma caused substantial damage to the forty five roofs covering the Seville Place residential condominiums. Seville Place filed a claim with State Farm under its condominium association insurance policy, which specifically covered direct physical loss or damage to property caused by a hurricane. The policy specified that any dispute between the insurer and insured regarding the loss amount would be resolved by appraisal:

If we [State Farm] and you [the Association] 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 and impartial appraiser. Each party will notify the other of the selected appraiser's identity within 20 days after receipt of the written demand for an appraisal. The two appraisers will select an umpire. If the appraisers cannot agree upon an umpire within 15 days, 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. . . . If we submit to an appraisal, we will still retain our right to deny the claim.

In January 2006, State Farm made two payments on the claim which totaled $90,564.62. Seville Place’s estimate of the damage exceeded $4.6 million. By October 2006 (a year after the loss), Seville Place concluded that further negotiation would be fruitless and made a written demand for appraisal.

State Farm claimed there was “no clear disagreement” between the parties because it had not yet been allowed access to all the damaged condominium units and declared it would agree to appraisal only if Seville Place agreed to two conditions: 1) any appraisal award “must be a line item document, broken down by building and unit number, including the pricing that establishes the award of that item;” and 2) State Farm required a sworn “proof of loss” form.

In February 2007, Seville Place filed suit against State Farm for breach of the insurance contract and sought declaratory relief regarding coverage and State Farm's waiver of policy defenses. Seville Place also asked the court to enforce the appraisal provision without State Farm's required conditions. State Farm claimed that it agreed to appraisal, but renewed its request for the special conditions.

The trial court granted Seville Place’s motion for partial summary judgment on the policy condition defenses, based on the facts that State Farm acknowledged the loss was covered by making the January 2006 payments and then denied the balance of Seville Place’s claim. The circuit court also ordered appraisal, without the conditions sought by State Farm, and allowed sixty days for the completion of the process. State Farm moved for an additional sixty days in order to inspect the interior of several of the condominium units. The trial court granted the extension, directed Seville Place to assist State Farm in accessing the units, and set a final appraisal hearing for June 28, 2008.

Seville Place’s appraiser and the umpire signed a final appraisal award, fixing the insured loss at $2,960,405. The award excluded any interest, costs, and attorney's fees that might be determined by the court, and noted it should be reduced by amounts State Farm previously paid and any applicable deductible.

The day before that hearing, State Farm filed an emergency motion and affidavit seeking removal of the neutral umpire appointed by the court. State Farm later supplemented this motion with a request for an “entirely new panel to conduct a new appraisal,” asserting that otherwise it would “require many weeks, months, and possibly even years to sort through the multiple issues related only to this highly problematic and invalid appraisal gone wrong.”

The trial court confirmed the award, denied State Farm's emergency motion for removal of the neutral umpire, and granted the Seville Place's motions to amend the complaint to add a statutory bad faith claim and a demand for punitive damages. The court also reaffirmed that State Farm's affirmative defenses had been subsumed in the confirmation order “and/or such defenses were waived by State Farm.” State Farm then filed the petition for certiorari at issue, arguing that the trial court erred in allowing the complaint to be amended with the bad faith claim.

Whether the bad faith claim was ripe

The Third District explained that two conditions must be met before a statutory first-party bad faith action is ripe. First, the insurer raises no defense which would defeat coverage, or any such defense has been adjudicated adversely to the insurer. Second, the actual extent of the insured's loss must have been determined.

The Court rejected State Farm’s argument that a trial was required on certain affirmative defenses it believed were still pending and all appellate remedies regarding that judgment must be exhausted before a bad faith claim may proceed. No affirmative defenses remained pending; State Farm waived most or all defenses to coverage by acknowledging and paying Seville Place for the loss after the claim was made. In dismissing State Farm’s argument, the Court explained:

 [T]he procedural trenches and hurdles proposed by State Farm would contravene the express objectives of the bad faith statute and the Florida Insurance Code: the fair and prompt investigation and adjustment of claims by insurers.

The Court found no authority to support State Farm’s contention that Seville Place must obtain a final judgment from a jury before it may proceed with its bad faith and punitive damages claim. To the contrary, the Florida Supreme Court has held that an arbitration award determining liability and extent of loss is sufficient for a bad faith claim. The Court further noted that State Farm bargained for the binding nature of the appraisal award in the policy it drafted. The Third District held the remaining calculations to the award, including subtraction of the three percent hurricane deductible and prior payments and the computation of prejudgment interest, were ministerial acts which did not affect the final nature of the award. The Court further held that Seville Place’s reserved motion for attorney's fees and costs allowed that issue to be determined at the conclusion of the entire case.

The Court also rejected State Farm’s argument that a bad faith claim is premature until the insurer exhausts all appellate remedies regarding liability and loss amount, noting no “decision by this Court or the Florida Supreme Court has held that liability and the extent of damages must also be “finally final,” surviving any appellate remedies sought by an insurer, before the insured's bad faith claim is ripe.”

The Court concluded with the following observation regarding State Farm’s conduct:

State Farm originally estimated the Association's covered loss at $324,017. This is less than eleven percent of the amount determined by the appraisal process. State Farm will have an opportunity to explain this fact, to explain the extraordinary length of time it has taken to resolve the Association's claim, and to defend State Farm's aggressive legal tactics (including the unfounded imposition of conditions on the contractually-stipulated appraisal provision and the last-minute attempt to remove the neutral umpire). For now, however, we find no basis in this record to quash the orders below as requested by State Farm.

Justice Shepherd dissented, writing that the majority’s decision to deny State Farm’s petition for certiorari conflicted with North Pointe Ins. Co. v. Tomas, 999 So. 2d 728 (Fla. 3d DCA 2008), and XL Specialty Ins. Co. v. Skystream, Inc., 988 So. 2d 96 (Fla. 3d DCA 2008). Shepherd took issue with the fact that no judgment had been entered in the case. According to Shepherd, it is prejudicial to allow issues of bad faith into a coverage case, with expanded bad faith discovery, before the underlying claim for damages has been determined.

As noted above, State Farm’s seemingly bad faith conduct in handling the claim was not relevant to the sole issue before the court-whether, by law, the bad faith action was ripe. Yet Justice Salter took care to detail the abusive tactics and even commented upon them in concluding his opinion. In this case, bad facts made good law.

I have been diligently studying law about the Texas appraisal process and procedure after being recently retained by a commercial client that was sued by the insurer for not cooperating in a number of ways, including the appraisal. Among other issues, the insurer claims that the process is taking too long, which is rather novel from the standpoint of what most insurers think about playing the float.

While thinking about the issues in that case, I came across a blog post Appraisal Process As A Substitute For Trial by Oklahoma attorney Steven Buchman. Appraisal is nothing like a trial if conducted informally. There is a significant chance of unfairness to both parties because there is no procedural due process. Indeed, in most states that allow the appraisal to be “informal,” there are no rules about the procedure of appraisal at all. I found Buchman’s following remarks interesting because they reflect the higher aspirations of fairness and accuracy in the result:

Does the appraisal process always work? No. Just like the jury system and any other dispute resolution device created by man, it is imperfect. On the other hand, when a dispute needs to be resolved without years of litigation, expert witnesses, depositions, appeals, and legal maneuvering, the appraisal process offers an alternative to people.

While care should be given to the choice of both the appraisers and the umpire, I have witnessed situations in which there was so much maneuvering by the participants the parties ended up in litigation. Both sides clearly want their own appraiser to be competent and knowledgeable, but it is also important to have one that is reasonable and fair-minded. If both sides merely hire their own advocate to serve solely as their "fighter in the ring" it creates more disputes for resolution by the umpire. Locating an umpire who has some experience can be extremely beneficial. Since the umpire's job is strictly intended to resolve disagreements between the appraisers, prior experience in how appraisals function is helpful. More important is a willingness to listen, fairly look at the circumstances, and make a rational decision.

Having personally served as an umpire at the request of attorneys representing insureds as well as insurance companies, there is a keen responsibility that you feel as an umpire to try to do the right thing. In particular, I recall one situation in which the appraisers with me acting as the umpire essentially reached a conclusion unanimously as to the amount. The determination was exactly the midpoint between the polarized positions of the parties. I recall thinking before the award was entered that we would probably hear grumbling that we simply "split the baby" and divided everything down the middle. I personally disdain the practice of some umpires submitting a decision in the middle to avoid the appearance of showing favoritism. The practice of "splitting the baby" is not the purpose of appraisal. The job of the umpire is to make the right decision. He should not be concerned with future work from the parties or making either side unhappy.

At the end of the day, lawyers, adjusters, and insureds owe a duty to try to reach results that are fair and appropriate for the situation.

The problem is that the view of “fair” is dependent on what you have analyzed to be an accurate estimate of the damage and claim. I have yet to see an insurance company appraiser come to one of my clients seeking information regarding the damage, history of the property, and observations of why my client believes the damage is more than the insurance company estimate. The reason is obvious-- the insurance company does not want its appraiser to learn information that may increase the value of the estimates of damage being prepared by its appraiser. The insurance company appraisers usually have some prior relationship with the insurance company adjuster or independent adjuster and are looking for future business. I truly believe that most want to keep the dollar value as low as fairly possible—a number have admitted as much over drinks at the various conferences I attend.

And, in many jurisdictions, the policyholder’s appraiser is acting as an advocate as well. Indeed, I request that clients I represent in appraisal have an appraiser that works as hard as possible to find out all information about the loss from both my client and from the insurer’s viewpoint. It is my impression that the harder and longer one works on analyzing damage following a loss, the more damage is found that would simply go unclaimed as a result of ignorance. Getting an accurate and fair independent estimate of damage by either appraiser requires diligence, information, expertise and then an understanding of why other views are not accurate or subject to criticism.

This type of critical analysis is normal for those of us in insurance coverage litigation. However, it is often the exception rather than the rule in appraisals where, as noted by Buchman, the panel often simply splits amounts.

Texas insurance law follows a view that the appraisers and umpire are an independent and unbiased group similar to a jury. I know this is not going on in many Texas cases. So it may come as a surprise for insurers and policyholders to read the following from Delaware Underwriters v. Brock, 109 Tex. 425, 430 (Tex. 1919):

The Alabama Supreme Court clearly gave the right construction to the appraisal clause in these policies, when it said: "The purpose of the clause is to secure a fair and impartial tribunal to settle the difference submitted to them. In their selection it is not contemplated that they shall represent either party to the controversy or be a partisan in the cause of either, nor is an appraiser expected to sustain the views or to further the interest of the party who may have named him. And this is true, not only with respect to estimating the amount of the loss, but also with reference to the selection of an umpire. They are to act in a quasi judicial capacity and as a court selected by the parties free from all partiality and bias in favor of either party; so as to do equal justice between them. This tribunal having been selected to act instead of the court and in place of the court, must, like a court, be impartial and non-partisan. For the term 'disinterested' 'does not mean simply lack of pecuniary interest, but requires the appraiser to be not biased or prejudiced.' And, if this provision of the policy was not carried out in this spirit and for this purpose, neither party is precluded from going to the courts, notwithstanding the agreement to submit their difference to the board of appraisers.

I know there are many adjusters and public adjusters in Texas that are reading this and agreeing with me that this Pollyanna process is not going on in their appraisals. And they are thinking, “OK Chip, but if I appoint such an expert angel of an appraiser and the other side appoints the same outcome oriented person, I am going to lose and get an unfair award. So, what do I do to follow the law and still make certain I get a fair award?”

Honestly, as an attorney that is required to follow the law, I have to tell people to follow it. But, could you imagine a system of justice where the parties picked the “independent and fair” jury members fifty-fifty and then those independent jurors voluntarily agreed to pick an independent and unbiased judge? Of course not. No legal jurisdiction selects jurors or judges in that manner because nobody would believe the other party would select an unbiased and independent juror. Yet our Texas appellate judges somehow have this notion that it can happen when it comes to insurance companies and policyholders picking appraisal panels.

My prediction is that sometime in the future, our Texas jurists will start to understand the reality of the situation and the standard of the panels will change to reflect reality. Until then, parties to Texas appraisals are advised to consider whether the appraisal panel is acceptable under Texas legal standards.

If you are a licensed public adjuster, I encourage you to attend. I think it will provide you a unique opportunity to explain improper conduct to a regulator actively investigating important claims matters.

Many claims issues will be explored during the seminar, and I will also explain why I think some appraisals are being lost in Texas and what can be done about it.

From: Public Adjuster <stephen@docudamage.com>
To: Chip Merlin
Sent: Thu Sep 10 10:22:30 2009
Subject: UmpireBook.com - The latest free tool for Public Adjusters

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UmpireBook.com
The latest free tool for Public Adjusters

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Dear WILLIAM,

If you engage in the Appraisal Process then you need to know about www.UmpireBook.com

UmpireBook was NOT developed to just give our opinions on Umpires! It was developed solely to disclose potentially biased relationships between Umpires, Insurance Carriers and insurance carrier Appraisers.

Through giving a very simple rating to the Umpire along with listing the identity of the Insurance Carrier and their Appraiser then potential biased relationships begin to become very, very clear!

Before you proceed, please watch the following short video tutorial. Please make sure you turn up the sound on your computer.

Here is the video: http://www.screencast.com/t/pNzHkVl4DY

We have constructed this site in such a way as to allow the following:

1. Policyholders Appraisers will be able to register for an account at www.UmpireBook.com. Currently we are only accepting applications from Licensed Public Insurance Adjusters. Professional Appraisers as well as Attorneys will also be permitted if they can display substantial proof that they work only on the side of consumers.

2. Once registered, the user will be able to post profiles of Umpires and Insurance Carriers Appraisers that they have done business with.

3. Once a Profile of an Umpire or Insurance Carrier Appraiser has been posted then Registered Users will be able to rate their experience with the Umpire or Appraiser. The rating will consist of:
a. The date the Appraisal was concluded (The approximate date is acceptable)

b. The identity of the Umpire

c. The identity of the insurance carriers Appraiser

d. The name of the Insurance Carrier

e. A rating of either Excellent, Average or Poor for the Umpire

Once the above information has been entered, the Umpire or Appraisers profile will display the rating for others to see. After numerous ratings of the same Umpire or Appraisers performance by many different Registered Users we will begin to see the following:
a. A quick "at a glance" idea of any biased relationships between Umpires and specific insurance carrier Appraisers.

b. If the Umpire has been reported to have acted as an Insurance Carriers Appraiser and if so by which company and how the Registered Users Rated him while doing so.

c. A list of the Umpires that the Appraisers have worked with in the past and the Registered Users opinions of the outcome as well as a list of Appraisers that the Umpires have worked with in the past and the Registered Users Opinions on those as well.

4. The Registered User will also be allowed to make specific notes on his opinion of the performance of the Umpire or Appraiser. The notes can be quick singles sentences or whole paragraphs. The Registered User will be able to choose to make the specific notes either anonymous or allow his name to be shown as the author of the notes.

Remember, that the Umpire Book depends on you, it's users , to make it the fantastically useful tool that it can be for all of us. So, you must take the time to enter in the data. If necessary, give your secretary a list of your past Appraisals with notes on your opinions and have her enter the list. We encourage you to share your thoughts on how we might make the site better and even more functional. Please send me an email with your thoughts or comments to:
 

Stephen Hadhazi
Florida Public Insurance Adjuster
10311 Emnora
Houston, TX 77043
Office: (713) 689-9177
Fax: (281) 596-7508
Website: www.DocuDamage.com
Email: stephen@docudamage.com

In a property appraisal, the umpire is supposed to be fair. I am not certain if this website will help support "fairness" or not. "Excellent" ratings may suggest the umpire's rulings unfairly benefit policyholders. That is just as unfair as umpires who always rule in favor of insurance companies.

On the other hand, knowing that an umpire is "outcome oriented" rather than ruling on the evidence is important. To that extent, I think this new website will be helpful and prevent harm to policyholders.

What are your thoughts?

Comments are encouraged.

A recent Florida case that was resolved through appraisal still resulted in an award of prejudgment interest in North Pointe Ins. Co. vs. Tomas, No. 3D08-2245.(Fla. App. 3rd DCA, August 26, 2009). The facts set indicated the following:

The Tomases made a claim with their homeowners' insurance carrier, North Pointe, for a complete replacement of a marble kitchen floor damaged as a result of dropping a pot on October 23, 2005. After investigating the claim, North Pointe determined that the loss was excluded under the policy and denied coverage. The Tomases filed a petition to compel appraisal under the terms of the homeowners' policy. In a letter dated September 5, 2007, North Pointe withdrew its previous denial of the claim, admitting coverage and stipulating to attorney's fees up to the date of receipt of the letter. The claim went to appraisal and North Pointe paid the claim on May 14, 2008. On June 10, 2008, an appraisal award was entered in the amount of $115,899.52, including prejudgment interest from the date of the loss. The Tomases moved to confirm the appraisal award and for entry of final judgment. The trial court granted the motion to confirm the appraisal award, including attorney's fees and prejudgment interest from the date of the loss.

The Court upheld the award of prejudgment interest reasoning the following:

In Lugassy, the question was from what date prejudgment interest starts to run where the insurer denies coverage and is later held liable for the claim…The general rule is that interest on a loss payable under an insurance policy is recoverable from the date payment is due pursuant to the provisions of that policy. Lugassy carved out an exception to that rule where the insured denies coverage and later admits coverage or coverage is later determined through litigation. Once the insurer denies coverage, it is deemed to have waived the policy provision for deferred payment and, should it pay, becomes responsible for prejudgment interest from the date of loss. "[I]f the insurer denies liability, interest begins to run from the date of the loss, even where the policy provides for payment at a later date." Lugassy, 593 So. 2d at 572.

North Point denied coverage for the claim. Even though it later agreed to appraisal and paid the appraisal award, it is deemed to have waived the policy provision allowing deferred payment and is responsible for prejudgment interest from the date of the loss. See Lugassy; accord State Farm Fire & Cas. Co. v. Albert, 618 So. 2d 278 (Fla. 3d DCA 1993) (holding that prejudgment interest is payable from the date of the loss); see also Liberty Mut. Ins. Co. v. Alvarez, 785 So. 2d 700 (Fla. 3d DCA 2001) (making distinction that, where there is no denial of coverage, prejudgment interest is payable from date of appraisal as opposed to date of the loss). We affirm the trial court's order confirming the appraisal award and awarding prejudgment interest from the date of loss.

The appellate briefs of the parties are available here.

We are currently surveying past public adjuster attendees for specific questions before this seminar so that the question and answers will be thoroughly analyzed. The primary purpose is to provide my experience and that of my firm, which has primarily done this line of legal work for 25 years, to those who are similarly licensed and dedicated to helping policyholders.

The tactics and strategies of each case and each type of loss change as the circumstances dictate. There have been some legal changes to appraisal in Texas as well as other developments which impact the "best practice" a public adjuster uses in the field when dealing with insurance companies. We will share with you what is working and what is not working.

So, if you are licensed Texas public insurance adjuster, please plan on attending, learn how you can make more money by doing your policyholder a better job, and you will also get some free continuing education credits from the Texas Department of Insurance. Please go to www.adjusterlife.com to register.

I am looking forward to seeing you at our seminar on September 11, 2009.

Following my post, Umpires Following Unfavorable Appraisal Awards May be Subject to Suit, I wrote one of the most active umpires in property insurance appraisals and a teacher in the Umpire Program, John Voelpel. Voelpel is one of the busiest property insurance umpires in Florida. He was part of a roundtable discussion on “Umpires and Umpiring” at the Florida Association of Public Insurance Adjusters 2009 Annual Convention. I asked John if there were any written procedures regarding the appraisal process. He indicated no, but directed me to the Wind Umpire Directory.

The Wind Umpire Directory has been widely distributed to judges in the coastal areas of the United States and to the members of the Windstorm Network. It lists certified umpires and is a far better source for a policyholder find an umpire than a list provided by an insurance company. The appraisal procedures explained in the Wind Umpire Directory are rather basic and barely more than what is written in standard insurance policies:

What is the appraisal process?

The appraisal process is a contractual process for resolving valuation issues. Appraisal provisions have been included in insurance contracts for over 100 years. Most appraisal clauses in insurance contracts provide that if the insurer and the insured cannot agree on the value of the property or the amount of the loss, either party may make a written demand for an appraisal. Each party then selects their own appraiser and the appraisers perform their own independent evaluation. Prior to the evaluation, the umpire is selected by the appraisers or the Court is petitioned to appoint an umpire. If the two appraisers can agree on the value of the property or the amount of the loss, that amount is established and the process is concluded. If they cannot agree on the value of the property or the amount of the loss, then the matter is submitted to the Umpire for resolution. The Umpire’s decision becomes binding only by a majority agreement (2 of 3).

The most admirable work other than the teaching Voepel and others have done with the Windstorm Network has been to develop an Umpire Code of Ethics. More than anything else, this Code of Ethics provides some semblance of fairness to the individual required to be the “judge” of this very informal and important process. While not truly a judge, an umpire’s powers in the appraisal process cannot be overstated. The individuals that painstakingly worked on the Code should be proud--as should the Windstorm Network. I should point out that this Code is copyrighted.

The Code of Ethics for Umpires in Insurance Appraisals^© was prepared in 2004 by the Umpire Directory Committee of Windstorm Insurance Network, Inc. The Officers and Board of Directors approved the Code on August 3, 2004. Pursuant to the Bylaws of the organization, the Code was adopted by the members at the Annual Business Meeting in February 2005, at the annual Windstorm Insurance Conference. The Code was revised in September 2007.

I encourage all to read the Code in its entirety. I think the most important provisions of the Code are:

PREAMBLE:

The use of appraisal to resolve insurance disputes has grown extensively. Persons who act as Umpires therefore undertake serious responsibilities to the public, as well as to the parties. Those responsibilities include important ethical obligations.

…

Although most proceedings are Appraised pursuant to an insurance contract and voluntary agreement of the parties, certain disputes are submitted to Appraisal by the Court. In all such cases, the persons who have the power to decide should observe fundamental standards of ethical conduct… Umpires, like judges, have the power to decide cases. However, unlike full-time judges, Umpires are usually engaged in other occupations before, during, and after the time that they serve as Umpires. Often, Umpires are purposely chosen from the same trade or industry as the parties in order to bring special knowledge to the task of deciding the pending issues. This Code recognizes these fundamental differences between Umpires and judges.

…

CANON I. AN UMPIRE SHOULD UPHOLD THE INTEGRITY AND FAIRNESS OF THE APPRAISAL PROCESS.

A. An Umpire has a responsibility not only to the parties but also to the process of appraisal itself, and must observe high standards of conduct so that the integrity and fairness of the process will be preserved. Accordingly, an Umpire should recognize a responsibility to the public, to the parties whose rights will be
decided, and to all other participants in the proceeding.

B. One should accept appointment as an umpire only if fully satisfied:

(1) that he or she can serve impartially;

(2) that he or she can serve independently from the parties, potential witnesses, and the appraisers;

(3) that he or she is competent to serve; and

(4) that he or she can be available to commence the appraisal in accordance with the requirements of the proceeding and thereafter to devote the time and attention to its completion that the parties are reasonably entitled to expect.

C. After accepting an appointment and while serving as an Umpire, a person should avoid entering into any business, professional, or personal relationship, or acquiring any financial or personal interest, which is likely to affect impartiality or which might reasonably create the appearance of partiality. For a reasonable
period of time after the decision of a case, persons who have served as Umpires should avoid entering into any such relationship, or acquiring any such interest, in circumstances which might reasonably create the appearance that they had been influenced in the appraisal by the anticipation or expectation of
the relationship or interest. Existence of any of the matters or circumstances described in this paragraph C does not render it unethical for one to serve as an Umpire where the parties have consented to the Umpire's appointment or continued services following full disclosure of the relevant facts in accordance
with Canon II.

D. Umpires should conduct themselves in a way that is fair to all parties and should not be swayed by outside pressure, public clamor, and fear of criticism or self-interest. They should avoid conduct and statements that give the appearance of partiality toward or against any party.

…

F. An Umpire should conduct the appraisal process so as to advance the fair and efficient resolution of the matters submitted for decision. An Umpire should make all reasonable efforts to prevent delaying tactics, harassment of parties or other participants, or other abuse or disruption of the appraisal process.

…

H. Once an Umpire has accepted an appointment, the umpire should not withdraw or abandon the appointment unless compelled to do so by unanticipated circumstances that would render it impossible or
impracticable to continue. When an Umpire is to be compensated for his or her services, the Umpire may withdraw if the parties fail or refuse to provide for payment of the compensation as agreed.

...

Umpires do not contravene this Canon if, by virtue of such experience or expertise, they have views on certain general issues likely to arise in the Appraisal, but an Umpire may not have prejudged any of the specific factual determinations to be addressed during the Appraisal.

During an appraisal, the Umpire may engage in discourse with the parties or their counsel, draw out arguments or contentions, comment on the law or evidence, make interim rulings, and otherwise control or direct the appraisal. These activities are integral parts of an Appraisal…

CANON II. AN UMPIRE SHOULD DISCLOSE ANY INTEREST OR RELATIONSHIP LIKELY TO AFFECT IMPARTIALITY
OR WHICH MIGHT CREATE AN APPEARANCE OF PARTIALITY.

A. Persons who are requested to serve as Umpires should, before accepting, disclose:

(1) any known direct or indirect financial or personal interest in the outcome of the appraisal;

…

(4) any other matters, relationships, or interests which they are obligated to disclose by the agreement of the parties, the rules or practices of an institution, or applicable law regulating umpire disclosures.

B. Persons who are requested to accept appointment as Umpire should make a reasonable effort to inform themselves of any interests or relationships described in paragraph A.

C. The obligation to disclose interests or relationships described in paragraph A is a continuing duty which requires a person who accepts appointment as an arbitrator to disclose, as soon as practicable, at any stage of the appraisal, any such interests or relationships which may arise, or which are recalled or discovered.

...

E. Disclosure should be made to all parties unless other procedures for disclosure are provided in the agreement of the parties, applicable rules or practices of an institution or by law.
…

CANON III. AN UMPIRE SHOULD AVOID IMPROPRIETY OR THE APPEARANCE OF IMPROPRIETY IN COMMUNICATING WITH PARTIES.

…

B. An Umpire or prospective Umpire should not discuss a proceeding with any party in the absence of any other party, except in any of the following circumstances:

(1) When the appointment of a prospective Umpire is being considered, the prospective Umpire:

(a) may ask about the identities of the parties, counsel, or witnesses and the general nature of the case;

and

(b) may respond to inquiries from a party or its counsel designed to determine his or her suitability and availability for the appointment. In any such dialogue, the prospective Umpire may receive information from a party or its counsel disclosing the general nature of the dispute, but should not permit them to discuss the merits of the case.

C. Unless otherwise provided in this Canon, in applicable arbitration rules or in an agreement of the parties, whenever an Umpire communicates in writing with one Appraiser, the Umpire should at the same time send a copy of the communication to other Appraisers.

CANON IV. AN UMPIRE SHOULD CONDUCT THE PROCEEDINGS FAIRLY AND DILIGENTLY.

A. An Umpire should conduct the proceedings in an even-handed manner. The Umpire should be patient and courteous to the parties, their representatives, and the witnesses; and, he or she should always encourage similar conduct by all participants.

B. The Umpire should allow each Appraiser a fair opportunity to present its evidence and arguments.

C. When the Umpire determines that more information than has been presented by the parties is required to decide the case, it is not improper for the Umpire to ask questions, call witnesses, and request documents or other evidence, including expert testimony.

D. Upon the request of either or both Appraisers the Umpire should personally inspect any available damaged property.

…

CANON V. AN UMPIRE SHOULD MAKE DECISIONS IN A JUST, INDEPENDENT AND DELIBERATE MANNER.

A. The Umpire should, after careful deliberation, decide all issues submitted…

B. An Umpire should decide all matters justly, exercising independent judgment, and should not permit outside pressure to affect the decision.

C. An Umpire should not delegate the duty to decide to any other person.

D. In the event that both appraisers agree upon a settlement of issues in dispute and request the umpire to embody that agreement in an award, the umpire may do so.

CANON VI. AN UMPIRE SHOULD BE FAITHFUL TO THE RELATIONSHIP OF TRUST AND CONFIDENTIALITY INHERENT IN THAT OFFICE.

A. An Umpire is in a relationship of trust to the parties and should not, at any time, use confidential information acquired during the Appraisal process to gain personal advantage or advantage for others, or to affect adversely the interest of another.

B. The Umpire should keep confidential all matters relating to the Appraisal process and decision. An Umpire may obtain help from an associate, a research assistant or other persons in connection with reaching his or her decision.

C. It is not proper at any time for an Umpire to inform anyone of any decision in advance of the time it is given to all parties. It is not proper for the Umpire to inform anyone about the substance of the deliberations of the Appraisers. After an appraisal award has been made, it is not proper for an umpire to assist
in proceedings to enforce or challenge the award.

CANON VII. AN UMPIRE SHOULD ADHERE TO STANDARDS OF INTEGRITY AND FAIRNESS WHEN MAKING ARRANGEMENTS FOR COMPENSATION AND REIMBURSEMENT OF EXPENSES.

…

B. Certain practices relating to payments are generally recognized as tending to preserve the integrity and fairness of the arbitration process. These practices include:

(1) Before the Umpire finally accepts appointment, the basis of payment, including any cancellation fee, compensation in the event of withdrawal and compensation for study and preparation time, and all other
charges, should be established.

(2) Umpires should not, absent extraordinary circumstances, request increases in the basis of their compensation during the course of a proceeding.

(3) Umpires should not withhold any decision or award pending payment by any or either party for the services of the umpire.
....

I urge any person interested in becoming an Umpire to take the certification course and then get listed in the Wind Umpire Directory. The classes will be offered at the Windstorm Insurance Conference January 25-28, 2010, in Jacksonville, Florida.

It states in part:

11. Pursuant to the terms of the Policy, the Insured invoked the appraisal process and demanded the Insurance Company to comply with the Policy's appraisal clause via' US Mall and facsimile.

12. The Insurance Company complied wlth the Insured's appraisal demand and selected Shawn Hall of Burton Claims Service, Inc. as their appraiser, Shortly thereafter, the Insured selected Tony Quintana of Claimserve Co. as his appraiser.

13. On or about March 24, 2008, the appraisers, in order to provide an accurate appraisal estimate, conducted an inspection of the insured's property which is the subject ofthis action.

14. Each appraiser separately detailed the actual cash value, the replacement cost, and the amount of loss of each Item. Unfortunately, they failed to come to an agreement.

15. As afforded in the Policy, in the event that the competent and impartial
appraisers are unable to reach an agreement, the decision to set the amount of loss must be assigned to a neutral umpire, selected by both the Insured and the Insurance Company.

16. Mr. Art Newman (the "Umpire"), was mutually selected by Mr. Quintana and Mr. Hall, before the start of the appraisal process.

17. On or about June 13, 2008, both appraisers provided the Umpire copies of their loss estimates. In order to provide a competent and accurate estimate of the loss, The Umpire scheduled an inspection of the property. This property inspection was to be attended by himself, Mr. Quintana and Mr. Hall and was scheduled to take place on July 23, 2008. 

18. On July 23, ;l008,the date mutually agreed to by all parties, the Umpire failed to appear at the Inspection and did not notify any party of same.

19. Notwithstanding, his failure to appear at the inspection and failure to examine the physical damages that were the subject of disagreement between the appraisers, on July 30, 2008, the Umpire submItted an executed Appraisal Award in the amount of $17,613.61.

20. The Umpire never visited nor inspected the property, never attempted to
reschedule said inspection, never examined the physical damages that were the
subject of disagreement between the appraisers and never properly appraised the
amount of the losses.

21. The Umpire did not have prior knowledge of the claim, and therefore was
unqualified to make an assessment of the damages without personally inspecting the property first.

22. The Insured has suffered and continues to suffer damages resulting from the Umpire's egregious behavior In issuing an Appraisal Award after failing to inspect
the property.

23. Pursuant to Frorida Statute Section 682.13(b), the court snarl vacate an award when: "... there Is evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or umpire or misconduct prejudicing the rights of
any party."

24. Clearly, the issuance of an Appraisal Award by the Umpire, wrthout the inspection of the property, evidences partiality on his part and clearly constitutes misconduct prejudicing the rights of the Insured. These egregious acts of misconduct have undoubtedly damaged the Insured.

25. The Insured has been obligated to retaIn the undersigned attorneys for the prosecution of this action and is entitled to a reasonable attorneys' fee pursuant to
Florida Statute Section 627.428.

26. This Court should vacate the Appraisal Award executed by the Umpire who has engaged in blatant misconduct as a result of his actions, prejudiced the rights of the Insured and has otherwise greatly damage the Insured,

WHEREFORE, the Insured respectfully requests that this Court enter judgment
against the Insurance Company and Art Newman, vacate the Umpire's Appraisal
Award or in the alternative modify or correct the award and entille the undersigned to court costs and reasonable attorneys' fees pursuant to Sections 627.428, Florida
Statutes.

I do not know what will come of this lawsuit. Generally, it is difficult to overturn an appraisal award. And, just because Newman did not go to the loss site does not prove he is prejudiced against the policyholder. Further, there is no requirement that he go to the loss site. As I previously indicated in Appraisals Better Be Won Because They are Difficult to Overturn--Even if Unfair in Result or Procedure, there are no rules at all.

Still, the cost of hiring counsel to represent himself could subject Newman to a change of heart. Possibly, this will be the new techniques for those that lose appraisals-- sue the umpire. The impact of such action would certainly make umpires a little more concerned with their activities during the appraisal process. Fortunately, I have never filed suit against an umpire.

My concern is that if my colleagues start filing such suits on a regular basis, the availability of umpires is going to diminish and the cost is going to rise. I used to question why umpires posed the hypothetical of being the target of lawsuits, and now I can appreciate their concern and the reality of the costs and implications by such actions. It will be interesting to see if this becomes a trend or isolated occurrence.

This is the comment from Insurance Veteran that sparked this post:

“After thirty six years as an adjuster, insurance company claims manager, and head of a major restoration firm, I've looked at this issue from a multitude of vantage points.

Sometimes, the insured is seeking an outcome incompatible with the policy conditions. Hoping for renovations to unaffected areas, repairing damages caused by non-insured perils, and other similar unrealistic expectations, very frequently contribute to the "unhappy" syndrome.

I've also worked as a Public Adjuster and do not view this issue from one side of the fence. If an insured retains a knowledgeable, honest appraiser, the system does normally work.

Unfortunately, Christmas does only come once a year.”

Whether or not I agree with the comment, I have to respect anybody who has given thirty-six years of their adult life to the insurance business. Some of my policyholder colleagues have found it curious that I would allow a post, Sandy Burnette Defends Insurance Fraud Fighters, where the people that deny my clients’ claims are praised. But I feel that insurance fraud is wrong and, as unfortunate as it is, there is a true need for good, hardworking people devoted to catching fraudulent insureds.

Insurance is a fantastic product. Unfortunately, those who work for insurers are sometimes unfairly demonized simply because their work is not always consistent with policyholder interests. I am to blame for this at times.

I learn a lot from people like Insurance Veteran. Much of their knowledge is based on experience and learning at a level in the industry with which I have little contact. When people like Insurance Veteran explain how different carriers, contractors, and adjusters think and work through issues, it adds a bit of knowledge. If correct, I can use that knowledge to better understand issues and do my job for policyholders.

For example, I spent the last two Fridays working with a former State Farm adjuster who worked as a claim reinspector. His stories regarding the inner workings of how that job functioned, how his performance was criticized, who did the criticizing, and his job frustrations and joys lead me to a better understanding of an entity with which my law firm is in frequent litigation. His knowledge of State Farm’s current claims management, claims personnel, and claims processes provided me with a more accurate understanding of the industry.

So, to all insurance industry readers who want to make a comment, do not be afraid to make a point. Simply make up an alias if you want to remain anonymous. Many in the insurance industry who meet me actually find that, despite my pointed lawsuits and rhetoric, we can agree on many issues-- even if they cannot be seen talking with me (fear of reprisal). I have quite a bit more freedom because my clients do not care who I talk with, so long as I show them the money at the end of the dispute.

Insurance Veteran made a point that everybody in the insurance business knows. There are certain policyholders who want much more than what is fairly owed, and they unrealistically believe they are entitled to the money. Some of these people go over the top and commit fraud. Others just want magic to happen, and the claims money to be paid regardless of any justification.

While I can certainly appreciate his comment, he may have missed part of the point of my post. Many policyholder appraisers do not fully understand how to win the apprasial for the policyholder. They do not comprehend that the appraisal is truly an alternative dispute process that binds the policyholder.

Some may suggest that I am wrong, and that the goal of appraisal is a fair number for both sides. But, my policyholder clients may have a very different view of what fair is. So, if the insurer wants to dispute the amount in an appraisal, I want as much as I can get for my clients. After all, if there were no appraisal, my client would be asking a jury of peers for justice. But the insurance companies were historically so afraid of juries and costs, that a hybrid dispute process became standard in form insurance policies. Guess who benefitted most from that process?

Accordingly, my warning to all policyholders and those working with them in appraisals is that it is binding and should be taken as seriously as a public trial. I want the mindset of policyholders faced with an appraisal to be:

There is no second chance.

I started writing a reply that I feel better explains my impressions on this topic. Some suggest that I am opposed to appraisals for a number of reasons, including the possible loss of litigation revenue. These people do not fully understanding the consequences of appraisal. I have a hard time explaining the historical importance of a jury as a core concept of American democracy, but I believe that giving up the right to a jury trial is the most important consequence of appraisal. Justice comes from the values of one’s peers in the community, not experts or government deciding what is fair and just. This is a fundamental concept of American democracy and protected by our Constitution.

Yet, if some courts and states deem a procedure without a jury and without rules to determine what a policyholder will obtain as “fair,” I have some very strong opinions about what policyholders should do and how appraisers selected by policyholders should go about their work:

“Veteran,

I appreciate the view and you taking the time to share it.

Yes, sometimes policyholders have an unrealistic viewpoint. Sometimes, the appraisal process, whether informal or formal, results in awards where the policyholder has a poor result. Indeed, it happens in Courtrooms as well where the insurer simply prevails and the policyholder loses. No process guarantees a perfect and accurate judgment from differing evidence. That is reserved for the Almighty.

The policyholder has no protection in an informal appraisal process if the policyholder is ignorant. If a policyholder fails to obtain a very good appraiser as well as professional preparation of the evidence supporting damage, my impression is that insurers typically get a result with a far smaller award than when policyholders get the "right" appraiser and use professionals to provide, and work with, the appraiser towards a strategically prepared presentation to an Umpire.

My impression is that many policyholders in Florida come away with a good result because there is a very active public adjuster industry and knowledgeable policyholder bar that have experience with how to go about presenting evidence in an informal appraisal procedure so that policyholder recovery is fully realized.

This was not the case fifteen years ago in Florida nor in many other states today. In some situations, I have been approached for representation by policyholders, following a poor award, where they selected appraisers that are realtors, from restoration contractors that are on the insurers preferred vendor list, independent adjusters, and contractors with little insurance understanding that a simple estimate is generally going to result in an award far lower than what should have been obtained. If you select the wrong appraiser as a policyholder, you will lose.

The harder you work preparing an appraisal as if it were a full blown trial with a twist that it is not a trial, the better the results are generally obtained. Time, money and thoughtful preparation supporting the claimed amount as well as thoughtful preparation of rebuttal evidence is crucial to enhancing recovery for policyholders.

Selection of the Umpire is also important. Some umpires are slow and lazy. They take a lot of time to split differences. Some umpires are concerned about pleasing one side or the other--unfair awards may result. Ignorant appraisers sometimes agree to insurance industry Umpires. Getting the "right" umpire can make the difference between winning, having a so-so result, and getting killed because the "fix" is in. This is the real world of "Umpire shopping" that goes on everyday in the banter of the appraisal process. If a policyholder selects or has appointed the "wrong" umpire, the policyholder loses.

I applaud all Umpires that take their job seriously enough to become Certifide through the Windstorm Network and educate themselves enough to truly be worthy of what the position should be and requires.

The one aspect of all this is the right to have a jury of one's peers determine the outcome of a dispute is completely abrogated through this process. Not only are there no procedural due process safeguards for policyholders which allow them to have a right to confront those with opposing views, there are no rules at all. These basic civil protections were first provided to subjects of Kings in the Magna Carta and they exist in our Constitution.

Maybe personal Constitutional rights and the liberties all of us enjoy do not matter much in this day and age. After all, Judges trained in the law and are sworn to uphold the Constitution and the important personal right to a jury trial, make simple rules that suggest expediency and cost is more important than the Constitutional right. So, why should others care?

Many of my colleagues and myself have taken an oath to support and truly (possibly naively) believe in our jury system with set rules and procedures of fairness. My personal and professional opinion is that Kangaroo courts subject to personal arbitrary rules should not be forced upon those that do not voluntarily agree. Policyholders with adhesionary policy terms not bargained for should question the wisdom of judges to say that somebody has relinquished such important rights merely by purchasing a standard form policy.

Yet, I live with what many Courts have found. If the rule is that there are no rules, I can get into the mud with the best of anybody. All I care about for my client is winning anyway I legally can if we go to an appraisal. Absent fraud, the Courts in informal situations have just about blessed that "anything goes."

This is what I teach and preach to public adjusters that attend our workshops. Unlike an insurer to its customer, I have no obligation to be fair and act in good faith to the insurance company during the appraisal process. Instead, my legal obligation is to zealously represent my client to the best of my ability and for the interest of my client. Insurers always have an obligation to be "fair" and thus cannot legally act only in their short term economic interest if they are acting in good faith and following the regulations that bind them.

From my view, insurers wrote this clause into the policy long ago when there were few public adjusters and experienced attorneys for the policyholder. It served them well to reduce claims payments at little cost when there was futile opposition.

"The worm turns."

A recent case supporting my position is Farmers Auto. Ins. Ass'n v. Union Pacific Ry. Co.,
--- N.W.2d ----, 2009 WI 73, 2009 WL 1976043 (Wis., July 10, 2009). There, a policyholder argued that the appraisal panel came to a wrong conclusion and wanted to prove the mistake by taking the depositions of the appraisal panel. I have no idea how else you would prove they made a mistake without first obtaining the evidence. While I know many property insurance appraisers claim their depositions cannot be taken because they are like jurors, that argument is inherently flawed because the evidence and procedures of the admitted evidence are public in a jury trial and only the deliberations are private. Indeed, the jury in their deliberations are instructed as to the law they must follow when cosidering the evidence. In property insurance appraisals, there is no formal process (in many states), they are not public, and there are no instructions as to what is to be done to accurately determine the value as well as define what "value" even means.

Yet, the Wisconsin court found the policyholder had no right to discovery to prove a basis for overturning the appraisal award. It also remarked in a manner that I often do when talking to policyholders and public adjusters about why winning the award is paramount—no matter how you do it:

“Appraisals also deserve a more deferential review because the appraisal process is a fair and efficient tool for resolving disputes. First and foremost, the process is fair to both parties. It allows each to appoint an appraiser of their own liking, with a neutral umpire as the deciding vote. Appraisals also promote finality, are time and cost-efficient, and place a difficult factual question-the replacement value of an item-into the hands of those best-equipped to answer that question. As a form of alternative dispute resolution, the appraisal process is favored and encouraged.

…

The real issue, of course, is that Donaubauer feels the award was too low. It may be that the award was low, and it may be that Donaubauer cannot obtain a 4,000 square foot home with the same specifications based on the award. Conversely, the award may be too high. That is of no event. The salient fact is that Donaubauer agreed to participate in the binding appraisal process he contracted for in his Policy. There is no credible evidence on the face of the award of fraud, bad faith, material mistake, or a failure to understand the contractually assigned task. Therefore, the award should not be set aside.”

Some, but not all Courts, have demanded that appraisals have a procedure which ensures fairness. The dissenting judge noted what many, including myself, find to be a major problem with appraisals:

“Even though the exact process necessary to create a fair method for resolving disputes through appraisal is not set forth in the statutes, there must be at least a minimum level of process to ensure that the parties are heard and that an appraisal decision is fairly reached and reviewed. This is especially important because the form appraisal clauses in standard insurance policies, which are contracts of adhesion, may result in a policyholder's forfeiture of the right to have a jury determine the amount of loss.

The majority, however, seems oblivious to the necessity of establishing minimum standards for fairness in the appraisal process because it: (1) allows for the forfeiture of an important right by erroneously reading into the appraisal clause the word “binding” where it does not exist; (2) appears to constrain meaningful review of an appraisal award under most circumstances by limiting review to the face of the award; and (3) affirms the circuit court's erroneous decision refusing to permit Donaubauer to conduct necessary discovery in an action in the circuit court to invalidate the appraisal award. Because the majority fails to establish even minimum standards for fairness in the appraisal process, I respectfully dissent.”

I have a number of clients with matters in appraisal. Pick very qualified appraisers who will work hard on your case and with sufficient time to prepare. There is no second chance. “Just win, baby” is the mantra every policyholder better have in an appraisal.

"The following must be followed when completing the proofs for flood claims:

1. Use the exact Federal Form for the Proof of Loss and not a generic form. Failure to do so may jeopardize payment. It would be similar to filing a Federal Income Tax return with a state form.
2. Figure exact amounts owed. Do not put, "policy limits" or "to be determined."
3. Document the amounts owed and attach the documentation. Do not just "ballpark" or "estimate" an amount. File the proof with actual estimates, proposals, lists, or some type of documentation which "proves" and substantiates the loss amount.
4. Get it received and in the hands of the company listed on the policy by the deadline. Do not just send it to the adjuster on the deadline day.
5. Do not rely upon other oral or written extensions from the field adjuster or his supervisor. Only written extensions coming from the Director or Deputy Director can legally extend the time.

National Flood may, on appeal, rescind these requirements. If you get in this predicament, we strongly suggest you obtain legal counsel. The best course of action is to never place yourself in that position in the first place."

We have been receiving some wrongful responses to properly complete Flood Proofs of Loss and imagine many others have as well. If you submit a properly filled out Proof of Loss, the insurer either pays the claim, pays part of the claim, and if the policy allows, may even replace or repair the property. The one thing some insurance adjusters wrongfully do is reject a properly completed proof of loss. This is technically a breach of the insurance contract by the insurance company because no property insurance contract, even a Flood contract, allows that to be the response.

When I did property insurance defense early in my career over twenty-six years ago, my mentor, Paul Butler, Jr., made this point in a number of insurance seminars, but the wrongful practice of "rejecting" properly completed Proofs of Loss still exists for some reason. We have received a number of these from National Flood and the adjusters with Fidelity. We have talked with them and they are clueless about what to do when a Flood policyholder sends a properly completed and documented Proof of Loss for a claim amount which is higher than what they agree is the amount of damage. I hope Russ Tinsley and others with National Flood are reading this because it is a problem that is harming policyholders.

Most insurance companies will pay the undisputed portion of the claimed amounts and try to adjust the disputed amounts through good faith discussion. This activity goes on all the time. Most property insurance claims being handled with disagreements can end with each side giving some after consideration for the other's point of view. But, the Proof of Loss is not rejected. Instead, the good faith insurer merely indicates that it disagrees, puts in writing why it disagrees, pays the undisputed amounts, and usually asks to meet right away for a settlement or other adjustment conference trying to resolve differences in good faith.

The alternatives left to resolve the dispute are usually litigation or appraisal. The problem with litigating against National Flood is the unavailability of attorney’s fees and the usual high expense of federal litigation. The policyholder can win the lawsuit, but have no money after attorney’s fees and costs because the disputes are not usually that large.

A good example of this is in Dwyer v. Fidelity National Property and Casualty Insurance Company, 565 F.3d 284 (5th Cir., April 09, 2009). A summary of the facts were:

"...Fidelity paid the policy limit for contents and $86,629 for flooding-related building damages. After the first set of checks did not arrive, Fidelity mailed a second set, which the Dwyers received in December.

On February 21, 2006, Dwyer sent a certified letter to both Fidelity and Traveler's Insurance Company (“Traveler's”), whose homeowner's insurance policy on the Dwyer dwelling covers wind damage. The letter stated that a contractor's estimate to repair the house was roughly $100,000 more than the combined amounts paid by Fidelity and Traveler's. Dwyer wrote that neither he nor the contractor could accurately distinguish between wind and flood damage, so Dwyer recommended each company pay the additional expenses in proportion to the amount it had already paid. Based on this calculation, he requested an additional $85,471.89 from Fidelity.

Fidelity instructed the Dwyers to contact the adjuster and faxed a copy of the letter to him. Apparently no further action occurred, and the Dwyers sued Fidelity on August 25, 2006, seeking additional money under the policy and damages under federal common law for bad faith claim adjustment. The complaint does not limit its allegations to undervaluation of the Dwyers' loss nor does it disavow a claim to increase Fidelity's share of the wind/water allocation, and it includes claims such as “failing to properly train its adjusters and agents,” which could be related to valuation, coverage, or both.

In its answer, Fidelity denied liability and stated:

If these Plaintiffs' SFIP claims dispute reaches a point where it is established that there is (1) full and complete compliance with all conditions precedent to the making of a claim, and (2) resolution and agreement upon all issues of both coverage and the scope of the loss, then in that event (but not until that event) Defendant affirmatively asserts and invokes the appraisal clause of the SFIP. 44 C.F.R. Pt. 61, App. A(1), Art. VII(P).

...

...Fidelity filed a motion to compel appraisal...

Because the trial date was close at hand, the district court denied the motion as untimely. After a four-day bench trial, the court awarded the Dwyers the difference between Velez's estimate and the money already paid by Fidelity. In addition, the court awarded the Dwyers their attorneys' fees, finding that Fidelity qualified as a “federal agency” under the Equal Access to Justice Act. Fidelity appeals both rulings."

I assume there was no bad faith award because there is no federal common law bad faith. But the case is not finished and insurance monies paid because of what the Fifth Circuit did on appeal. It held that the matter had to go to appraisal despite the long time of litigating the matter and also held that no attorney’s fees and costs could be awarded against National Flood or the WYO (Write Your Own) carriers.

The appraisal analysis first noted:

"The Dwyers...argue that appraisal cannot be requested after suit has been filed. They offer no authority support their position. Nothing in the clause or the contract as a whole establishes a time limit for invoking the appraisal clause. Contractual clauses cannot be evaded by racing to the courthouse, and appraisal and arbitration clauses are routinely invoked during litigation. E.g., Hill v. G E Power Sys., Inc., 282 F.3d 343 (5th Cir.2002) (arbitration); Terra Indus., Inc. v. Commonwealth Ins. Co., 981 F.Supp. 581, 600 (N.D.Iowa 1997) (appraisal). Consequently, the appraisal clause may be invoked after suit, provided that the failure to do so has not amounted to waiver.

…The district court incorrectly homed in on the interval between the appraisal request and the trial date. The appropriate waiver inquiry examines Fidelity's knowledge and action-when Fidelity knew that the appraisal clause could be invoked, whether it reacted timely to the knowledge. Fidelity first learned that the Dwyers disputed only the amount of loss, not coverage or other issues, on January 5, when it received the Velez estimate. Five weeks later, after informal requests failed, Fidelity formally moved the court to compel appraisal. Fidelity did not sit on its rights. In the context of the ongoing litigation, Fidelity raised the issue of appraisal in a timely fashion….”

Regarding the attorneys fees, the Court found: 

“Fidelity, a private insurer, cannot be characterized as a department, commission, administration, authority, board, or bureau of the United States. For the Dwyers to recover EAJA fees, Fidelity must qualify as an “independent establishment” or a “corporation in which the United States has a proprietary interest.” An “independent establishment,” however, is “an independent entity within the executive branch.” Scott v. Fed. Reserve Bank of Kansas City, 406 F.3d 532, 535 (8th Cir.2005) (emphasis added). Fidelity is not so situated, nor is Fidelity “a corporation in which the United States has a proprietary interest.” See id.

Finally, although Fidelity acts as a fiscal agent of the United States, “it is possible to be a fiscal agent ... of the government without being a federal agency.” Id. (citing In Re Hoag Ranches, 846 F.2d 1225, 1227 (9th Cir.1988)). The SFIP regulations expressly state:

A WYO Company shall act as a fiscal agent of the Federal Government, but not as its general agent. WYO Companies are solely responsible for their obligations to their insured under any flood insurance policies issued under agreements entered into with the Administrator, such that the Federal Government is not a proper party defendant in any lawsuit arising out of such policies.

… In analyzing the definition of “federal agency” under the Federal Tort Claims Act, the Supreme Court admonished that although “[b]illions of dollars of federal money are spent each year on projects performed by people and institutions which contract with the Government” and “the Government may fix specific and precise conditions to implement federal objectives,” such contracts and regulations do not transform private actors into federal agencies. United States v. Orleans, 425 U.S. 807, 815-16, 96 S.Ct. 1971, 1976-77, 48 L.Ed.2d 390 (1976). Likewise, serving as a fiscal agent and a participant in a heavily regulated federal program did not transform Fidelity into a federal agency under the EAJA.
…

This conclusion is consistent with that reached by several district courts. See Dickerson v. State Farm Fire and Cas. Co., 2007 WL 1537631, at *4, No. 06-5181 (E.D.La. May 23, 2007) (“[W]hile State Farm is a WYO carrier participating in the NFIP as fiscal agent for the United States, it is not an agency of the United States as required by the EAJA.”); Schopen v. State Farm Ins. Co., 1996 WL 696444, at *2, No. 96-1892 (E.D.La. Dec. 2, 1996) (“Section 2412(b) only applies to civil actions which are ‘brought ... against the United States.’ State Farm is neither the United States nor an agency of the United States.”). The district court erred in awarding EAJA fees to the Dwyers.”

I feel for the Dwyers. It appeared they were awarded only another $56,963.19 which easily gets eaten up by deposition and expert costs even before the cost of their attorneys. Now, they will have to pay for an appraiser and half an umpire’s cost as well. Some may correctly figure that it may not pay to fight the National Flood bureaucracy. Something needs to be done in Congress about this because policyholders are economically forced to take less. There is no meaningful way for them to “win” and be made whole, unless they file a lawsuit to only prove a point.

First, the Court discussed the history of appraisal and its legal ramifications of it. It found that appraisal clauses existed since the late 1800s, and courts have uniformly enforced them. Appraisal does not divest the court of jurisdiction, it merely binds the parties to have the extent or amount of the loss determined in a particular way. Liability for such loss is determined, if necessary, by the courts. While appraisal clauses are rarely drafted with specificity, it is generally understood that the scope of appraisal is damages or valuation of a loss, not liability.

Curiously, the Court interchanged two very different proceedings as if they were one: appraisal and arbitration. The two are very different, yet it seemed to suggest that appraisal is legally sound (although calling it arbitration) because it only involves matters of value, with the courts reserving review of the liability:

“In 1897, we repeated this distinction between damage questions for appraisers and liability questions for the courts: It seems to be generally held that a stipulation that the question of liability shall be determined by arbitration is contrary to public policy and void, but it is otherwise, as we have seen, as to the ascertainment of the amount of the loss. There is neither repugnancy nor inconsistency in leaving the former question to the courts when the liability is disputed, and at the same time in providing that the amount of the recovery shall be settled by arbitration. …

…

While policies hostile to arbitration have largely been preempted,… limiting appraisal to damages and not liability is surely still correct. … Most appraisal clauses do not define the scope of appraisal in detail (as is the case here), but the ordinary meaning of the words serves that purpose…. The word "appraisal" itself generally means "[t]he determination of what constitutes a fair price; valuation; estimation of worth." … The policy directs the appraisers to decide the "amount of loss," not to construe the policy or decide whether the insurer should pay. … And the policy requires each party to select a "competent, disinterested appraiser," not a lawyer or insurance expert. …”

State Farm Lloyds v. Johnson, 2009 Tex. LEXIS 470, 7-8 (Tex. July 3, 2009).

Given this language, one can expect insurers in future cases to argue that appraisal cannot determine whether a peril caused damage, but only the value of damage. Don’t shoot me if you are a public adjuster or policyholder, I am telling you what you can probably expect in the event an insurer thinks it can prove that an appraisal panel included otherwise uncovered damage because the policy excluded damages caused by a certain peril.

Returning to the facts, State Farm argued that no appraisal was needed because appraisers cannot decide causation issues and State Farm disputed Johnson’s assertion that her shingles were damaged by hail. However, the Court noted that nothing in the record indicated the roof was damaged by anything other than hail. So, based on the record, the Supreme Court found that the trial court could not conclude as a matter of law that the parties' dispute was about causation rather than something else.

Nevertheless, in discussing the issue the court noted that State Farm’s argument, if accepted, would eliminate the benefits of appraisal process in nearly every case:

"[A] dispute about how many shingles were damaged and needed replacing is surely a question for the appraisers. If the parties must agree on precisely which shingles have been damaged before there can be an appraisal, appraisals would hardly be necessary. What's more, either party could avoid appraisal by simply picking a few extras. The cost of replacing shingles (or anything else) is a function of both price and number; appraisers must factor in both shingle prices and shingle numbers to decide the "amount of loss." To the extent the parties disagree which shingles needed replacing, that dispute would fall within the scope of appraisal."

Johnson, 2009 Tex. LEXIS 470 at * 12.

So here is the big question:

Did the Court mean the appraisal panel could determine which panels were damaged from hail and needed replacing, or whether they could determine which hail damaged panels needed replacing?

Your answer, very likely, depends on whether you are an insurer or insured. Yet, the Court rejected State Farm’s assertion that causation can never be an issue addressed by appraisal. It cited several circumstances when different types of damage occur to different items of property, and appraisers may have to decide the damage caused by each before the courts can decide liability.

For example, in Lundstrom v. United Servs. Auto. Ass'n-CIC, 192 S.W.3d 78, 89 (Tex. App.--Houston [14th Dist.] 2006, pet. denied), appraisers assessed $ 4,226.19 for damages due to water (a covered peril) but made no finding for damages due to mold (coverage was disputed). The Texas Court of Appeals rejected the argument that appraisal is barred "whenever causation factors into the award." The court affirmed the water damage award and rendered mold damage moot by finding no coverage. In this context, if courts could decide the amount of damage caused by each peril, there would be no damage questions left for the appraisers. The same would be true in Johnson’s case, where when the causation question involved separating loss due to a covered event from a property's pre-existing condition.

Indeed, the Court noted that appraisers consider causation in every case, at least as an initial matter. An appraisal is for damages caused by a specific occurrence, not every repair a home might need.

The Court concluded for several reasons that judicial review of appraisals should not occur until after the appraisal has occurred. It noted that appraisal is intended to take place before suit is filed and noted that several courts have held it is a condition precedent to suit. Appraisals require no attorneys, no lawsuits, no pleadings, no subpoenas, and no hearings. The Court assumed that appraisals are likely completed in less time and expense than it would take to file motions contesting it.

The Court reasoned that if it were to permit litigation about the scope of appraisal, it would dramatically impact and delay Texas insurance practice. Yet, it assumed that appraisal can most often be structured in a way that decides the amount of loss without deciding any liability questions. How that is going to be accomplished was not fully explained, but here is the quote regarding that procedure:

“When divisible losses are involved, appraisers can decide the cost to repair each without deciding who must pay for it. When an insurer denies coverage, appraisers can still set the amount of loss in case the insurer turns out to be wrong.”

I can imagine the disagreements and questions coming into our office about what this means. But as I read it, the Court has suggested that appraisers can segregate covered and disputably covered items with awards of values for each. This sounds great, but is largely unworkable. It may harm policyholders as appraisers for insurers argue causation and ask for segregation, to which an umpire may agree.

I had this situation once in Mississippi. It did not work. The panel argued about each little item on numerous structures as to value and causation. All the insurer’s appraiser did was say that virtually all the items were not damaged by a covered peril of wind, but made the panel value all items claiming they were not covered. Then, we were left with amounts that could not be explained as to what exactly was agreed to as part of a covered amount and what was disagreed to because awards do not get that precise unless you draw it as a picture with dollars for each.

On large losses, the cost and time of doing this procedure is not fast or inexpensive. It is a colossal waste of time and money that will result in a very ambiguous result for a judge and jury to decipher. You can get down to the smallest of details of covered and uncovered parts of a large structure and then force the policyholder to sort them all out later through litigation. This is difficult. Since Texas law places coverage as a burden of the policyholder, it makes the job twice as difficult because the awards will be ambiguous in large cases.

The Court has created something of a procedure nobody has ever done. Except for my one attempt between my client and one poor insurer, the Court made up something entirely new and unique despite other states having appraisal work fairly well. While we did resolve the case, it was obvious such a procedure simply cannot work in large cases with multiple disagreements of various causes. Here, the decision does not help the policyholders. The Court, albeit well meaning, is making up something found nowhere in appraisal law, arbitration law, or the policy.

The Court then assumed that the scant precedent involving disputes about the scope of appraisal suggested that appraisals generally resolve such disputes. If that is true, such reasoning suggests that litigating the scope of appraisal is wasteful and unnecessary. I am not so certain that insurers who feel they are paying damages caused by excluded perils are going to agree.

The logic is also subject to criticism because those cases simply did not go to appraisal—the insurer refused. Coverage cases exist because of a denial. Now, there will be the possibility that coverage cases will exist in the form of appraisal objections and reviews where evidence of what the panel considered plus the evidence of the causation of loss are in dispute. Trials of these coverage issues will be more time consuming, complex, and costly.

Finally, and in opposite to the prior suggestions of finality through resolution, the Court concluded that if an appraisal award is flawed, it can be remedied through legal process. The Court concluded:

“unless the "amount of loss" will never be needed (a difficult prediction when litigation has yet to begin), appraisals should generally go forward without preemptive intervention by the courts.”

Johnson, at *24.

The practical implications of this decision are subject to debate. For instance, is it good for policyholders to provide an insurer two chances to avoid or delay payment? The insurer could refuse to pay following an appraisal, claiming the scope of the appraisal exceeded the panel's authority. I suspect that umpires and appraisers are then going to be subject to depositions and discovery to discover what motivated the award and determine exactly what was considered as caused by a covered peril leading to a wrong award.

I suggest that umpires and appraisers in Texas take care to keep everything involving an award. I suspect there could be a brand new era of "appraisal litigation" in Texas, as insurers or insureds fight about whether the panel delved into improper areas of coverage or refused to consider values because of coverage issues. One attorney in our firm was appalled at the idea, exclaiming, "I never let insurers depose appraisers and umpires!" To say the least, there are some strong feelings about what this decision means.

From the policyholder's perspective, I am still not certain what to do in Texas regarding appraisal. Some public adjusters will provide legal advice to simply go into appraisal. In some instances, I would agree. In other situations, it may just drag out a long appraisal process that may be subject to a long court battle. Texas has a prompt payment statute that provides significant interest and penalties. Some underwriters, knowing that their case is weak, may try to avoid those penalties by suggesting that the policyholder go to appraisal, then go to appraisal--while still objecting because of alleged coverage issues.

So if appraisers and umpires want to be on a panel and decide matters, they better get ready to explain to my insurance defense buddies, like Steve Pate and his very capable crew from Fulbright and Jaworski, what and why they did things in an appraisal. One thing is certain, State Farm’s very bright and creative attorneys will have a long and detailed record next time this issue goes to an appellate court in Texas. This case may have read very differently if there had been a full record indicating that causation was considered:

“A. Is this a causation dispute?

First, the record does not prove that the dispute here is about causation.

…

On appeal, State Farm emphasizes it is disputing not just which shingles were damaged, but which were damaged by hail. But nothing in the summary judgment record establishes Johnson's roof was damaged by anything else. In State Farm's denial letter, its summary judgment motion, and even its briefs in this Court, there is neither evidence nor even a hint about what else caused the damage. The trial court could not conclude this was a causation dispute just because State Farm claimed it was.

Nor does the record conclusively establish that the parties' dispute is solely about how much of the roof was damaged rather than how much needs to be replaced. Sometimes it may be unreasonable or even impossible to repair one part of a roof without replacing the whole…. The policy provides that State Farm will pay reasonable and necessary costs to "repair or replace" damaged property, and repair or replacement is an "amount of loss" question for the appraisers…. On this record, the trial court … could not conclude as a matter of law that the parties' dispute was about causation rather than something else.”

State Farm Lloyds v. Johnson, 2009 Tex. LEXIS 470, 12-14 (Tex. July 3, 2009)

State Farm and other insurers will not make this mistake next time. They will certainly try to depose the appraisers to prove that coverage issues were determined. You can anticipate that the insurer’s appraiser will provide an affidavit to that effect detailing exactly how many non-covered cause dollars were included in an appraisal award.

So, every non-lawyer telling a policyholder that going to appraisal is going to be easy, quick, inexpensive, a way around causation and without attorneys better be getting ready for a dose of questioning about providing legal advice if the insurer disagrees with the appraisal outcome and files an action for review. It could end up as a legal slugfest over what and why decisions were made in and by a panel that considered evidentiary and discretionary matters coming to what they thought was a just award.

The most troubling language seeming to allow this discovery, usually unheard of in other jurisdictions, is this:

“This of course does not mean appraisers can rewrite the policy. No matter what the appraisers say, State Farm does not have to pay for repairs due to wear and tear or any other excluded peril because those perils are excluded. But whether the appraisers have gone beyond the damage questions entrusted to them will depend on the nature of the damage, the possible causes, the parties' dispute, and the structure of the appraisal award (as discussed more fully below).”

As I have said before, I love Texas because Texans have a different perspective on things. Maybe this case is going to be the perfect fix for resolving insurance disputes, but it is hard to figure out how right now. I am going to go back and analyze each situation, and determine the best course for each client given their fact pattern and remedy available. If any other professional is doing something else, I would like to know the logic behind it.

Good luck and remember my rule about appraisal—win! Because, when the smoke clears in the Wild West, the dead don’t get a second chance.

The seminar topics and speakers are:

Topic: “Appraisal - Appraising Large Losses”
Presenters: W. Wesley Baldwin of The Baldwin Company and Jonathan Wilkofsky, Esq. of Wilkofsky, Friedman, Karel & Cummins

Topic: “Builder's Risk Program and Coverages” (part 1)
Presenters: Samuel Bergman of Rolyn Companies, Inc.; Stephen R. Figlin, SPPA of Stephen R. Figlin & Associates, Inc., and Peter Kahn of Matson, Driscoll & Damico

Topic: “Builder's Risk Program, Coverages and Adjustments” (part 2)
Presenters: Samuel Bergman of Rolyn Companies, Inc.; Stephen R. Figlin, SPPA of Stephen R. Figlin & Associates, Inc., and Peter Kahn of Matson, Driscoll & Damico

Topic: “Introduction to Building Code Coverage” (part 1)
Presenters: Mark Friedman, Esq. of Wilkofsky, Friedman, Karel & Cummins, and Fred Yutkowitz, Esq. of Fairview-Licht Company, LLC

Topic: “Building Code Coverage Requirements for Repairs” (part 2)
Presenters: Mark Friedman, Esq. of Wilkofsky, Friedman, Karel & Cummins, and Fred Yutkowitz of Fairview-Licht Company, LLC

Topic: “Business Income - Primary Analysis and Authentication”
Presenters: Brad White & Max Flynn of Meaden & Moore, and Hayes Walker, III of Rollins Accounting & Inventory Services

Topic: “Business Income & Extra Expense - Measuring Small Losses” (BI part 1)
Presenters: Don Dragony, CPA of Alex N. Sill Company; Paul McGowan, Jr., CPA, CVA of Matson, Driscoll & Damico, and Ronald Papa, SPPA, of National Fire Adjustment Company, Inc.

Topic: “Business Income & Extra Expense - Extended BI Coverages, Application and Calculation” (BI part 2)
Presenters: Don Dragony, CPA of Alex N. Sill Company; Paul McGowan, Jr., CPA, CVA of Matson, Driscoll & Damico, and Ronald Papa, SPPA, of National Fire Adjustment Company, Inc.

Topic: “Business Income & Extra Expense - Manufacturing Losses” (BI part 3)
Presenters: Don Dragony, CPA of Alex N. Sill Company; Paul McGowan, Jr., CPA, CVA of Matson, Driscoll & Damico, and Ronald Papa, SPPA, of National Fire Adjustment Company, Inc.

Topic: “Commercial Property Forms and Endorsements”
Presenters: Dennis Perlberg, Esq. of Perlberg & Speyer, LLP, and David Karel, Esq. of Wilkofsky, Friedman, Karel & Cummins

Topic: “Deposition ABC's - Preparation is Key to Survival”
Presenters: Mary Kestenbaum Fortson, Esq. of Merlin Law Group and William F. Burke, Esq. of Adler, Pollock & Sheehan

Topic: “Ethics”
Presenters: Nicole S. Figlin, SPPA of Stephen R. Figlin & Associates and W. Richard Burr SPPA of Young Adjustment, Inc.

Topic: “Homeowners Coverages”
Presenters: Randy Goodman, SPPA of Goodman-Gable-Gould/AI and Joel Gumbiner, Esq. of Gumbiner & Eskridge, LLP

Topic: “Insured's Cooperation and Duties - How to Prevent a Problem”
Presenter: Robert P. Rutter, Esq. of Rutter & Russin, LLP

Topic: “Science of Roof Damage Claims”
Presenters: William F. Merlin, Esq. of Merlin Law Group and Timothy Marshall of AT Designs, Inc.

Topic: “Subrogation Opportunities Do's and Don'ts”
Presenter: Jean Niven, Esq. of Merlin Law Group

Topic: “The Adjuster as an Expert Witness”
 Presenters: Dave Pettinato, Esq. of Merlin Law Group and Jonathan Wilkofsky, Esq. of Wilkofsky, Friedman, Karel & Cummins

Topic: “Vacancy and Occupancy Defenses - Its Many Faces”
Presenters: Tina Nicholson, Esq. of Merlin Law Group and Ronald Reitz, CPPA of Quality Claims Management, Inc. 

Dr. Therese M. Vaughan, CEO of the National Association of Insurance Commissioners, will give the keynote address. Dr. Vaughan was Iowa State Insurance Commissioner from 1994 through 2004 and also the Robb B. Kelley Distinguished Professor of Insurance and Actuarial Science at Drake University.

This conference is open to the entire insurance community. Insurance company adjusters, brokers, agents, attorneys, accountants, and public adjusters are invited. I expect the First Party Claims Conference will be an excellent resource and provide practical tools and answers to a variety of insurance related matters. If you adjust roof claims, you simply cannot afford to miss that presentation with its all-star speakers.

Information on the education program (topics & speakers), exhibitor/sponsor opportunities, conference registration, and hotel accommodations is available at www.firstpartyclaims.com

I received an email from an insurance agent and appraiser, John Nixon, that warns of many condominiums "shopping" for cheap appraisals and low estimates for the full replacement value be insured. He wrote:

"Lately, I’ve seen some "professional appraisers" advertising that independent appraisals can help reduce homeowners or commercial property insurance premiums. These ads are suggesting that the insurance carriers are cheating the consumer by inflating estimated replacement costs.

Indeed, some ignorant legislator is accusing Citizens of wrongdoing because he can get an independent appraisal 30-50% lower. These appraisers are using tools and methods inappropriate for insurance purposes: new construction vs. reconstruction, inappropriate deductions for covered property, shorting measurements, and/or failure to include building features.

Sadly, many good independent appraisers were driven out of the insurance to value business by a generation of appraisers willing to work for low fees. Many of these new appraisers unethically do their job and "hit" the number their client wants. This same type of unethical behavior by real estate appraisers generated over-valuation and fueled mortgage fraud. In part, these activities helped lead to the collapse of the lending market.

Now, these same appraisers are trying to appease client demands and "hit" a low number for insurance premium purposes. The insurance consumer doesn’t know any better. However, they will get a hard lesson when the carrier uses different tools and methods when it comes time to calculate coinsurance requirements after a loss. Neither the clever agent nor unethical appraiser will help their client recover from inadequate limits and resulting coinsurance penalties.

I have tried to get Citizens Property Insurance Corporation to clarify their advice for consumers on getting replacement cost estimates for insurance to value purposes, but they declined. They have left the responsibility with the uneducated policyholder to determine appropriate valuation methods. They also declined to disclose what standards they would use post-loss.

Does an underwriter’s acceptance of an independent appraisal on the front-end for underwriting purposes obligate them to use the method/calculations on the back-end for coinsurance calculations? If the coinsurance penalty holds up, have you ever tried to go after appraisers E&O coverage?

In most cases they will have used M&S cost guides and software which have a license restriction prohibiting their use for insurance purposes. I think the agents are more careful to cover their malpractice exposure with signed waivers.

John Nixon
President
Asperta, Ltd."

There is no definitive answer, as each case depends on the facts. I deal with the ramifications of coinsurance penalties all the time. The worst offenders are usually commercial businesses and condominiums. There are various methods we use to avoid coinsurance penalties when the issue arises.

However, I urge all policyholders to get a professional replacement value estimate if feasible. To be safe, over-insure rather than underinsure. Most of the time, many who believe they over-insured are still underinsured.

Agents have to be careful as well. We currently have an eight-figure errors and omission case against an agent. The case involves a co-insurance penalty, and the agent helped make the determination as to the amount of required insurance.

After yesterday's post, I received a number of private questions as well as a public comment from Eric Hyman, an experienced public adjuster. I replied to his comment:

Eric,

I really have no idea how they go about classifying what you have stated. I have no idea how much Citizens pays in attorney’s fees to defend its cases nor how much it pays policyholders for attorney’s fees when it loses. Do you have any evidence to support your allegations? Send it to me, and I would be more than happy to share it.

I appreciate that you are upset that the manner in which you resolve cases with Citizens may no longer be available. You have told me that most of your cases go to appraisal because Citizens never comes close to agreeing with amounts you provide. And, you get significantly more money back for the policyholder.

Indeed, I predict there will be considerable "push back" because a cottage industry of appraisers for each side and umpires may no longer be making fees from the number one source of appraisal--Citizens.

Still, the process is inherently flawed. There is no due process. I have said that since there are no rules, the only rule is to be honest, but do everything you can to win.

In Florida, when the appraisal result is unfair, there is little either party can do about it. Unfairness may occur in arbitration or litigation, but I can assure everyone that they will be able to present their case, subject the opposing view to critical review, and submit the matter to a somewhat independent panel or jury. All of this guaranteed by the due process clauses of the United States and Florida Constitutions.

The other truth is that Citizens management may feel that the appraisal process results in unjust awards favoring policyholders. If so, they should explain why and how the appraisal process favors policyholders over insurers.

My impression is that the cases going to appraisal now have a policyholder who knows to get evidence and make a presentation to show the validity of the claim amount. In the past, insurers would run over policyholders, thinking their appraiser would do all this work. The appraisal process is no longer a "winning" proposition for insurers as it was in the past, and now some insurers are seeking other ways to game the system to lower claims payments to customers.

Citizens makes several valid points in its report, although I disagree with its publicly stated motive for requesting eliminating the appraisal clause.

Given that public adjusters are obtaining more money for policyholders through appraisal and that so many others, such as appraisers and umpires, have made careers in the appraisal process, you can bet those individuals with such significant financial interests oppose Citizens’ move. This is a normal reaction to the possibility significant change.

My opinion of appraisal has not changed much over the past fifteen years since I chaired a sub-committee of the American Bar Association's Property Loss Insurance Committee involving a study of the fairness and procedures of the appraisal clause. The procedures vary by state. Many states have noted the due process concerns and have required the process to be more of an arbitration. Florida's procedure for appraisal is what I call the wild west method. There are no rules. Shoot 'em out, and you better be standing when the smoke clears because there are no second chances for the dead.

I essentially said this when I was asked to be on a Keynote Panel regarding the appraisal process at the Windstorm Conference. While various attorneys, umpires, appraisers, and insurers have tried to set rules through a "Memorandum of Appraisal," that is not required under the terms in insurance policies, statute, or common law.

As an attorney, I always point out that the United States has long held many informal methods unconstitutional. One of the great protections to individuals is a right to have a jury decide controversies. This is a fundamental right with a longstanding history. Alternative methods to resolve controversies must satisfy due process safeguards. I have questioned how a system with no rules does this. Some States, like Florida, allow the informality without addressing constitutional concerns.

Dan Luby, of Precision Adivisors, sent me a private follow-up. It is pertinent to this issue:

"I read your blog today concerning the changes to the Citizens Appraisal clause. I appreciate the attribution.

As a follow up, attached is an excerpt from a recent Citizens filing with the OIR that details the proposed changes to the Appraisal clause in the ‘Homeowners 4 Contents Wind Only Form.’

Appraisal will now be an option available to either party provided that both parties agree to the “terms of a written agreement” to be determined at a later date.

I read this to mean a negotiated ‘Memorandum of Appraisal’ detailing what would be submitted to appraisal, how the appraisal would be conducted and the form of the award. Either party is not obligated to accept a “request” for appraisal.

Scroll down to page 10 of 12 in the policy form. While this filing deals with only one policy form, I would speculate that all of the Citizens policies will be similarly amended.

The complete filing (No. 09-11984) is available at http://www.floir.com/edms/temp1/SessionsPDFs/OnlyOrig09-11984.PDF

Additionally, this new form would require that “any one you hire in connection with your claim” must submit to an EUO if requested. I assume this is targeted towards public adjusters."

This is an important issue and will likely significantly change the way many claims are handled and resolved. I will try to keep everyone informed of these changes.

Of course, that is not how Citizens’ in-house attorneys and management try to spin what they are doing by removing the appraisal clause from their property insurance policies. After all, if the Board of Governors really wanted to know why Citizens loses at appraisal, it would not make an in-house inquiry. The claims managers would just make excuses for losing. If the Board of Governors wanted to know the embarrassing truth, they would ask their opponents, “why are our claims handlers losing these appraisals?”

Citizens is a part of Florida’s government. So how embarrassing would it be for our elected representatives and our appointed Board of Governors if the media reported that Citizens lost so many appraisals because it severely underpays claims and battles its policyholders regarding how much is owed? What if the media reported that this is the true reason that Citizens wants to end appraisal?

Citizens usually loses badly in appraisal because its adjustments are not correct and reflect a bias to underpay policyholders. It delays claims and battles policyholders rather than engaging in a dialogue about resolution and why a dispute occurs.

For example, I have invited Citizens senior management to speak on a multi-million dollar claim that has been pending for several years with another attorney in our firm. They refused to even speak with us, cancelled settlement meetings, refused the less expensive alternative of appraisal, and forced us to file a lawsuit to force a resolution. All this, despite our client’s hope that the matter could be resolved amicably, without a lawsuit. When claims managers refuse to talk and discuss differences, lawsuits are the only option. Citizens customers must wait and then fight for money that is rightfully theirs.

Many of Citizens’ claims are handled so poorly that almost anybody reviewing a closed claim can find significant amounts that were not paid. I hear this all the time. It is the major reason Citizens has re-opened claims--it underpays the initial adjustment.

Still, appraisal is not a “right” for policyholders. Citizens management and in-house attorneys made an excellent point that appraisal has no written rules and is subject to abuse. I am surprised that the Florida Supreme Court has allowed appraisal, an informal process, to bind parties. I have long felt that an informal process of binding resolution violates due process. At one time, Florida Courts ruled that the appraisal process was subject to the Arbitration Code. This is no longer the case, and Citizens correctly pointed to the deficiencies of appraisal in its report to the Board of Governors.

Citizens did not report to its Board of Governors the true reason management wants to change the rules and take appraisal out of the policy. Somebody on the Board of Governors should question whether Citizens management is being truthful and the media should start an inquiry. Everybody in the business knows that the true reason for removing appraisal from the policy is because Citizens underpays many claims, and appraisals embarrassingly prove it.

Dan Luby of Precision Advisors forwarded me the following story of Citizens’ change to eliminate the appraisal clause:

It would appear that Citizens Property Insurance Corporation is changing their previous position on amending the Appraisal process and is now recommending the elimination of the Appraisal process.

 The following are the minutes from the Citizens ‘Actuarial and Underwriting Committee Meeting’ held on May 11, 2009:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

 DISPUTED CLAIMS/APPRAISAL – POLICY FORM CHANGES

MAY 11, 2009

 EXECUTIVE SUMMARY

 Staff seeks approval to amend Citizens’ policy forms (1) to eliminate appraisal as a mechanism to resolve disputed property claims, and (2) to improve certain claims adjusting processes. The elimination of appraisal is a change from the recommendation made last year to reform appraisal policy language. See minutes of Actuarial & Underwriting Committee, May 29, 2008; Board of Governors, June 19, 2008.

Background

Citizens’ property policies generally provide that, in the event of a dispute related to the “amount” of a loss, either Citizens or the policyholder may demand an appraisal of the loss. Citizens’ policies currently use industry standard language. The principal advantages of a disputed claims appraisal are that it generally resolves claims disputes more quickly and with less expense and fees than litigation. But its advantages are overshadowed by its disadvantages.

Notwithstanding significant and meaningful operational reforms that Citizens and its Litigation & Disputed Claims Unit (“LDCU”) have instituted, appraisal remains very flawed and subject to abuse by third-party stakeholders. The standard language used by Citizens and the industry is problematic because it provides virtually no rules for the process. As a result, insurers (including Citizens) are legally required to pay damages that may not be covered by the policy form, nor caused by a covered peril, nor supported by substantial evidence, and without recourse to meaningful judicial review. The process is so problematic that some carriers have eliminated appraisal from their policy forms (and some others are in the process of doing so).

In its January 2009 report on Citizens, the Auditor General recognized the flaws of the appraisal process and the challenges of third-party stakeholders, and further encouraged Citizens to complete its work on this issue, by stating: “Citizens’ staff is reconsidering whether to move forward with these amendments or, instead, whether it should eliminate appraisal from its policy forms (in which case these disputes would be resolved through litigation). . . We recommend that Citizens continue to evaluate its options . . . and select an option which ensures the fair treatment of policyholders and full disclosure of all decisions made relative to the claim amounts ultimately paid.”

Recommendations

Staff recommends the following changes to its various property policy forms, as applicable: 

• Eliminate the provision for appraisal of disputed property claims. 

• Provide Citizens with the option to require examination under oath and recorded statements for all property claims. When the insured is an association or corporation, require that certain representatives must submit to examination under oath and recorded statements.

• In multi-peril policies, conform the “duties after a loss” provisions to those in wind-only policies; and modify the “duties after a loss” provisions of all policies to improve the claims adjusting process.

 Staff recommends elimination of the appraisal provision principally for the following reasons: 

• Citizens has more confidence in the judicial system than in the appraisal process. Litigation has known rules and procedures. Whereas appraisers and umpires are essentially unregulated, opposing attorneys and judges are subject to the Florida Code of Professional Responsibility (essentially, an enforceable code of ethics and rules of compliance), as well as supervision by The Florida Bar Association and the Florida courts (including discipline by the Florida Supreme Court).

• Alternative dispute resolution (ADR) is important from consumer perspective, but stakeholders are skipping statutory mediation and filing appraisals as the ADR of choice. By eliminating appraisal, statutory mediation favored by the Florida Legislature will again be the ADR of choice. Should Appraisal be eliminated, there will remain multiple opportunities for mediation and early settlement. Citizens may institute other ADR if the insured agrees.

• For policyholders, appraisal is a secretive process, with the basis of the award outside the scrutiny of the policyholder and the insurer. Like Citizens, policyholders have virtually no way to seek judicial review of an appraisal award. In litigation, a policyholder is able to recover its attorney fees, while its appraisal expenses generally come out of the award. 

• Elimination of appraisal meets the objectives suggested by the Auditor General’s office (fair treatment of policyholders and full disclosure of all decisions) because the courts are very attentive to policyholder rights, and because judicial decisions and jury verdicts are fully disclosed.

RECOMMENDATION

Citizens’ staff requests that this Committee recommend to the Board of Governors that Citizens amend its policy forms and submit appropriate filings to the Office of Insurance Regulation to: (1) eliminate disputed claims appraisal, and (2) improve claims adjusting as described in this Executive Summary.

Bill Gross is the most famous philatelist of United States stamps. He was supposed to be there as well, but he was pulled away to a last minute meeting with Alan Greenspan and Treasury Secretary Geithner on an allegedly more important endeavor--how to save the economy.

I know that collecting stamps seems a bit nerdy. But, when you consider that I also study insurance policies and read how obscure insurance clauses are legally interpreted, it makes a little more sense. As an adult, it is now a hobby usually done in solitude with a lot of study. Similarly, I find that most good lawyers spend a lot of time studying their area of practice in quiet reflection.

At this weekend's gathering, I met Dan Walker, treasurer of the American Philatelic Association. When he learned what I do for a living, he shared an experience he had when he owned an insurance company that specialized in insuring collectibles.

A collector insured Civil War items for approximately $2.5 million. He reported a burglary of his entire collection, and Dan felt something was wrong. He hired an attorney and a SIU (fraud) adjuster just to check out the circumstances. Apparently, the collector had recently suffered a severe medical setback with diabetes. They learned that he had approached several dealers trying to sell his collection. When those dealers heard the collection was stolen, they suggested that it might be a fraud because they found most of the items to be forgeries. The SIU investigator tracked down a storage facility that rented space to the collector just before the alleged burglary.

Eventually, the insurance case became a criminal matter, and the collector was convicted of insurance fraud.

Dan said it was a very desperate and sad story of a person being "duped" into purchasing allegedly valuable collectibles without doing enough investigation to determine the authenticity of the items. Collectibles insurance does not cover the loss of market value if one purchases a forgery.

Collectors should always get an independent appraisal and expertization before purchasing from a dealer or at auction. Some dealers and auctioneers advertise and promote items which are not authentic, damaged or altered. Dealers often make expert repairs which are difficult to detect and make the item appear pristine. Such alterations subtract significantly from value. Items sold on eBay are notorious for this.

So always follow this rule:

When buying something of value, get the expertization from a true expert not affiliated with the dealer or seller.

Sandy Burnette and Barry Zelma would be happy to hear that Dan’s SIU team did such a great job. There is a need for such trained attorneys and adjusters. My sense from Dan Walker was that this was a very unique situation. He indicated that it was the only time he ever had to go into a courtroom in his twenty-two year insurance career.

I wonder why an insurer like State Farm would spend so much money on advertising fraud detection. It cannot be to get people to buy State Farm policies. When you consider how few of their customers ever commit fraud, why would State Farm spend money on an advertising campaign about fraud?

For example, State Farm advertised that it provided arson dogs to investigators. I cannot imagine somebody reading that advertisement and saying, "Edna, let's go buy some State Farm insurance because they are out to get their customers that are arsonists." What is the real purpose of that advertising campaign?

Some may suggest that State Farm and others in the insurance fraud industry make up such advertisements and statistics to raise suspicion of everybody that makes a claim. Of course, those who determine the purpose of the advertising and make up the statistics are not about to reveal their motives. Consumers should question such insurance advertisements and the potential impact upon those receiving the message.

Still, none of those concerns and thoughts mean that there is not a significant need for the hard and important work of those that investigate and detect fraudulent insurance claims. It also does not mean that we need to consider every claimant a potential crook.

Yesterday, Slabbed reported on a blockbuster Hurricane Katrina case where State Farm's conduct is at issue. Allegedly, State Farm attorneys threatened their own appraiser:

 "Tucker and Spragins, both through their representations and their omissions to Minor, attempted to “set up” the Kuehns (as well as Minor; see Exhibit “B,” Second Deposition of John Minor, p. 108) in such a way as to further interfere with the appraisal process as outlined by the policy language, delay the payment of the Kuehns’ claim, and pursue their own anti appraisal agenda on behalf of State Farm. According to Minor’s testimony, the attorneys communicated with him during the appraisal process in such as way as to make him feel they were trying to “blackball” him, or “play dirty pool,” and he felt threatened. See Exhibit “B,”Second Deposition of Minor, pp.159-161. This is the man that State Farm, through Lucky Tucker and Scot Spragins, hired. The only specific instructions regarding the appraisal which Minor could actually remember were squarely in contradiction to what is actually provided for by the subject policy."

State Farm's counsel, Scot Spragins has opposed us in a number of cases. While tough as nails, sometimes confrontational, and very competitive, I have never found him to be unethical. To me, Scot is very typical of the strong stable of attorneys State Farm retains in its defense. While I wholeheartedly applaud Slabbed for bringing this important case into the public awareness, I think their post was a bit strong and premature regarding the alleged findings. Proof is another matter which everyone deserves before making such serious final judgment of someone's character.

I have a client who is a judge. He, his wife and two little girls literally lost everything in Hurricane Ivan in September, 2004. Their windstorm insurance carrier, Vanguard Fire & Casualty Insurance Company, denied coverage entirely, contending that not a single shingle was blown from the roof, not a window broken by wind in this Category 5 storm, dubbed “Ivan the Terrible.” The coverage denial was apparently based on “word of mouth” that a 15-foot wave had allegedly swept the home away prior to any wind damage occurring. The insurance company failed to hire an engineer or meteorologist to confirm this rumor. While my clients were lucky enough to have their flood insurer tender policy limits, like many, they were woefully underinsured and needed help from their wind carrier.

When FIGA took over the claim in 2007, it was the perfect opportunity to make things right. Instead, FIGA has compounded the misery. Initially, FIGA continued the denial of coverage. Then, last year, FIGA revealed for the first time a January 2007 engineering report acknowledging the home had in fact sustained wind damage before the storm surge came. After that, FIGA changed its tune, admitted coverage, and tendered a small sum based on its expert’s opinion. In keeping with the quality of “service” on this claim, FIGA’s expert has never been to the site and based his opinions on photos of nearby homes. On the other hand, the insureds received an opinion from an engineer who walked the site, inspected an adjacent building, and concluded that the home was severely damaged before the storm surge hit.

Nevertheless, I figured—this is our opportunity to work toward a fair resolution of this claim. The insurance policy provides for an alternative dispute resolution process to quickly and economically dispense with disagreements over the amount of loss—appraisal. I thought, surely an entity funded by assessments on the insurance consumers of this State will want to wrap this up as soon as possible. How wrong I was. Indeed, FIGA’s lawyer has advised me that we can expect this case to be going on for a very long time. FIGA contested appraisal and lost. Then sought to stay appraisal while it appealed—and lost. Now FIGA is seeking a second bite at the apple asking the appellate court to instruct the trial judge to stay the appraisal. Even if the appraisal is allowed to proceed, FIGA tells me the award will not be paid and I can expect more litigation.

What is going on here? I spoke with a lawyer in the Panhandle last week about possibly serving on our appraisal panel. He had a conflict because he has two claims pending with FIGA and can’t even get them to call him back. In another case of mine, FIGA has agreed to go to appraisal, but only if the insured signs a release of all claims upon payment of the appraisal award!

With more and more small companies taking over Citizens policies, there is a real danger these insureds could end up with FIGA in the event of another busy hurricane season. Anyone have ideas on how to fix this? After all, you and I are footing the bill . . .

- Kristi Demers-Crowell

(Kristi Demers-Crowell is an attorney in the Tampa office of Merlin Law Group and is licensed to practice in Florida and Texas)

There are some important issues that may get public adjusters into trouble with their policyholder clients concerning legal issues of appraisal under Texas law. We are posting a memo outlining cases involving appraisal in Texas. I want to warn anybody not licensed to practice law against giving legal advise based on these cases. I strongly urge those with questions about their rights in appraisal and what they may give up by invoking appraisal to contact an attorney.

Each case going into appraisal is unique. The manner of presentation and whether a dispute is better resolved for a policyholder by appraisal is sometimes complex. The bottom line is that there needs to be analysis of what is in the policyholder’s best interest. Other methods of resolving a claim, including litigation, offer valuable legal rights which may be foreclosed by electing appraisal.

For example, we are cautioning that public adjusters may be jeopardizing their clients’ rights to interest under the Texas Prompt Payment statute, which provides 18% simple interest. One appellate case suggests that by invoking appraisal, the policyholder waives the interest penalty. It is our opinion that public adjusters should obtain permission from their clients before invoking appraisal. Additionally, they should be careful not to provide legal advice to their clients.

Texas has a number of policyholder protection statutes involving claims conduct. Four very relevant statutes provide:

§ 542.055. Receipt of Notice of Claim

(a) Not later than the 15th day or, if the insurer is an eligible surplus lines insurer, the 30th business day after the date an insurer receives notice of a claim, the insurer shall:

(1) acknowledge receipt of the claim;

(2) commence any investigation of the claim; and

(3) request from the claimant all items, statements, and forms that the insurer reasonably believes, at that time, will be required from the claimant.

(b) An insurer may make additional requests for information if during the investigation of the claim the additional requests are necessary.

(c) If the acknowledgment of receipt of a claim is not made in writing, the insurer shall make a record of the date, manner, and content of the acknowledgment.

§ 542.056. Notice of Acceptance or Rejection of Claim

(a) Except as provided by Subsection (b) or (d), an insurer shall notify a claimant in writing of the acceptance or rejection of a claim not later than the 15th business day after the date the insurer receives all items, statements, and forms required by the insurer to secure final proof of loss.

(b) If an insurer has a reasonable basis to believe that a loss resulted from arson, the insurer shall notify the claimant in writing of the acceptance or rejection of the claim not later than the 30th day after the date the insurer receives all items, statements, and forms required by the insurer.

(c) If the insurer rejects the claim, the notice required by Subsection (a) or (b) must state the reasons for the rejection.

(d) If the insurer is unable to accept or reject the claim within the period specified by Subsection (a) or (b), the insurer, within that same period, shall notify the claimant of the reasons that the insurer needs additional time. The insurer shall accept or reject the claim not later than the 45th day after the date the insurer notifies a claimant under this subsection.

§ 542.058. Delay in Payment of Claim

(a) Except as otherwise provided, if an insurer, after receiving all items, statements, and forms reasonably requested and required under Section 542.055, delays payment of the claim for a period exceeding the period specified by other applicable statutes or, if other statutes do not specify a period, for more than 60 days, the insurer shall pay damages and other items as provided by Section 542.060.

§ 542.060. Liability for Violation of Subchapter

(a) If an insurer that is liable for a claim under an insurance policy is not in compliance with this subchapter, the insurer is liable to pay the holder of the policy or the beneficiary making the claim under the policy, in addition to the amount of the claim, interest on the amount of the claim at the rate of 18 percent a year as damages, together with reasonable attorney's fees.

(b) If a suit is filed, the attorney's fees shall be taxed as part of the costs in the case.

An insurance company that delays payment can face significant penalties under Texas law. We strongly encourage every policyholder considering appraisal to determine what rights they will give up by invoking the appraisal process. Each case is different, and some claims may be best resolved through appraisal.

State Farm delayed naming its appraiser. After months, the condominium came to us for help. After we filed suit, State Farm finally started moving the appraisal along. State Farm still maintained its right to deny the claim following appraisal. Not surprisingly, the award from the appraisal panel was approximately $2.1 million, about three times State Farm's estimate.

Kristin then filed a Motion for Entry of Final Judgment and To Determine Entitlement to Attorneys Fee and Costs. State Farm fought the entitlement to fees and lost. The amount of the fees and costs will be determined later.

On a side note, State Farm hired two engineers that routinely work for insurance companies and whose opinions always seem to favor less damage and less coverage for the policyholder. While the bad faith and claim practice lawsuit has not been filed yet, one of the recurrent themes with State Farm is that it claims not to act in an outcome oriented manner, but routinely supports its positions with experts that are outcome oriented to find less damage and coverage.

Also, we sometimes do work with Stephen Sarasohn, a public adjuster in the Boca Raton area. Stephen tells me that when he gets retained on a State Farm loss, he always carries several old State Farm files with him to show the State Farm adjuster. He tells and then shows the State Farm adjuster that State Farm's reserve and estimate should be tripled because State Farm usually determines a loss at one third of the actual value. This is exactly what happened in our case.

You would think the field adjusters would report what Stephen Sarasohn told them to their State Farm managers. State Farm, if it truly wanted to make certain its policyholders were getting every penny they deserved, would contact Stephen and find out why their estimates are routinely low. Possibly, State Farm claims management already knows and simply does not want to change.