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

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

If [Owners] and [Dakota] disagree on the value of the property or the amount of loss, either may make a written demand for an appraisal of loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding.

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

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

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

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

Here are takeaways from the Colorado Supreme Court opinion:

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

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