Property Insurance Appraisal Law Is Dynamic

Happy Post Super Bowl Day!

Property insurance appraisal has become the “go-to” method of property adjustment resolution. The number of cases involving insurance appraisals has exploded. My computer search found over 20 property insurance cases decided since this New Year. Since appraisal is being invoked on more claims than ever, legal issues have arisen. One carrier, State Farm, has an entire claims department overseeing its claims placed into appraisal.

This week, I am going to write at least one blog a day from cases decided all over the country focusing on appraisal. If anybody has any specific questions or comments, I will do my best to answer those.   

Policyholders simply want to be paid fully for their losses. They would rather have absolute trust in the property insurance adjusters being motivated to find all the damage and paid promptly. Most insurance company adjusters are not being trained nor have the time to investigate to find all the damage.

With policyholders feeling that they are not being fully paid, restoration contractors and public adjusters are often advising their policyholder customers and clients that appraisal is the best method to resolve the differences. Many insurance companies are also invoking the appraisal provisions of the insurance policy, claiming that the amounts requested are too high and seeking to avoid lawsuits and claims of bad faith claims practices.   

The trend has been that the larger the award or the amount in controversy, the more the insurance company analyzes the appraisal process, the award, or the people participating in the appraisal panels. This has also contributed to the additional litigation related to appraisals.

A recent example is an Indiana case where the insurance company adjusted a hail damage claim for approximately $8,000.1 The award was approximately $1,020,000. The insurance company refused to pay the full award and litigation ensued.

The significant facts indicated that after the appraisal was invoked, the following:

Before the appraisal process was complete, Motorists hired Edwin Barron, an engineer and accident reconstructionist, to ‘determine whether any of the roofs of the subject property were damaged by hail.’ In July 2019, Mr. Barron inspected Mesco’s property and concluded: (1) the metal roofing and gutter downspouts were cosmetically damaged by hail; (2) ‘[t]he modified bitumen roof coverings exhibited some inadvertent man-made damage but were not damaged by hail’; and (3) ‘[t]he EPDM roof covering was not damaged by hail.’ Motorists told Mesco that, because of Mr. Barron’s conclusions, ‘the EPDM and modified bitumen roof coverings cannot be included in the appraisal process as the disagreement is not the value of the roof coverings; rather if the roof coverings are damaged.’

This is becoming more common. I find that insurers obtain a preliminary report from their appointed appraiser. If the preliminary report is not favorable, the insurer then does additional investigation to fight off a higher than expected award or to create an issue for litigation.      

The court noted the award by the appraisal panel:

Umpire Myers issued his appraisal award about a month later, concluding: (1) the modified bitumen roofs were damaged by hail and needed to be replaced; (2) the metal roofs needed to be replaced; and (3) the EPDM roofs and roof-mounted HVAC units were not damaged and did not need to be replaced. Umpire Myers calculated estimates for each damaged section of roofing for a total replacement cost value of $1,020,490.32 and an actual cash value of $894,733.82. The award was signed by Umpire Myers and Mesco’s appraiser, Nick Banks. On October 23, 2019, Motorists issued $265,296.21 to Mesco for its ‘covered damages that were awarded by appraisal,’ noting that this did not include payment for interior water damage or damage to the modified bitumen and EPDM roofing.

The insurer refused to pay the entire award, arguing that the panel exceeded its authority in determining the amount of damage caused by hail. The causation issue was used as an avoidance of payment. The federal district court disagreed and cited a federal Colorado appellate case our firm won two years ago:

For example, in BonBeck Parker, LLC v. Travelers Indem. Co. of America, 14 F.4th 1169 (10th Cir. 2021), Travelers argued that damage was not from a ‘hailstorm but from uncovered events like wear and tear,’ so the last sentence of the appraisal provision allowed it to deny coverage ‘on any ground available under the Policy’ including ‘its view that something other than the hailstorm caused the damage.’ The Tenth Circuit disagreed, finding that read in context of the appraisal provision and the entire policy, the ‘right to deny’ clause reiterates Travelers’ right to deny the claim for reasons that have ‘nothing to do with the cause of the damage’ like failure to ‘provide ‘prompt notice of the loss or damage.’ ’ The Tenth Circuit concluded that this interpretation of the appraisal provision gave ‘effect both to the plain meaning of the phrase ‘amount of loss’ in the first sentence and Travelers’ retained defenses in the last sentence.

Finding that the panel did exactly what it was supposed to do, determine the amount of damage caused by the hailstorm, the court found that the insurer breached the contract:

Therefore, the ‘right to deny’ clause may be triggered for reasons that come from elsewhere in the policy, as in Employers Mutual Casualty Co. v. Skoutaris, where the insurer refused to pay a binding appraisal award because the insured breached his duty to submit to an examination. Or it may be triggered by an allegation of some other ‘exceptional circumstance.’… But the provision cannot reasonably be read to give Motorists the unfettered right to disregard an appraisal award because it disagrees with the outcome of the appraisal process.

Since the insurer lost the breach of contract action, the court is still entertaining the bad faith cause of action.

Stay tuned for more about appraisals. It is now a very dynamic subset of property insurance law.

Thought For The Day

Quality is never an accident. It is always the result of intelligent effort.

—John Ruskin  

1 Mesco Mfg. v. Motorists Mut. Ins. Co., No. 1:19-cv04875, 2023 U.S. Dist. LEXIS 12490, 2023 WL 403974 (S.D. Ind. (Jan. 25, 2023).