In a long-awaited decision, Colorado’s highest court ruled a designated appraiser in a property insurance dispute must remain impartial and free from favoring one party over the other. Specifically, the Supreme Court held that the policy language required appraisers to be “unbiased, disinterested, and unswayed by personal interest.” This decision is a win for the insurance industry, although the Supreme Court created a framework that is certain to lead to disputes about an appraiser’s partiality in the future.
The decision in Owners Insurance Co. v. Dakota Station II Condominium Association Inc arises out of a dispute over proceeds owed to Dakota Station II Condominium Association Inc., under a commercial property policy issued to Dakota by Owners Insurance Co. for damage to Dakota’s premises caused by weather. Dakota invoked the policy’s appraisal provision, which required both the insured and the insurer to “select a competent and impartial appraiser.” The appraisers submitted their findings to a court-appointed umpire, who awarded Dakota nearly $3 million for the replacement cost of repairing the premises. Owners paid the award, but later contested it, alleging Dakota’s appraiser acted impermissibly partial and further alleging Dakota’s appraiser improperly entered into a “contingent-cap fee agreement” that would have entitled her to as much as five percent of the insurance award.
The Supreme Court focused its interpretation on the term “impartial” in the appraisal provision and found that, based on the term’s plain meaning, an appraiser must “be unbiased, disinterested, and unswayed by personal interest.” The appraiser cannot favor one side over the other or advocate on behalf of either party. Significantly, the Supreme Court determined Dakota’s fee arrangement with its appraiser did not necessarily render the appraiser partial because the cap was not invoked and the appraiser’s actual fee did not approach five percent of the actual $3 million award.
This decision will open the door to challenges by both insurers and their insureds to appraisal awards, as it leaves determinations about partiality open-ended. For instance, the Supreme Court could have adopted a bright-line approach to whether contingency fee arrangements with appraisers are permissible. Nevertheless, the Supreme Court left the parties to litigate that question on a case-by-case basis, contrary to other courts that have found, as a matter of law, a contingency fee arrangement necessarily renders an appraiser partial. As quoted in a Law360 article on this case, Goldberg Segalla partner Jonathan Schwartz finds the Supreme Court’s tightrope walk unduly perilous.
Additionally, this decision unfortunately puts the onus on insurers to speak up when they learn an insured’s appraiser is poisoning the appraisal process. Insurers need to encourage their designated appraisers to inform them as soon as the insured’s appraiser starts acting unduly partial during the process. It is to be expected that an insured’s appraiser will advocate for his/her own findings, but there is a line that should not be crossed. When an appraiser does cross that line, the insurer must be made aware so it can choose whether to freeze the process and move to disqualify the partial appraiser.
To avoid much of this sparring altogether and return the appraisal process to its original purpose of resolving property damage valuations outside of the courts, insurers can protect themselves and appraisal awards by creating more precise policy language prohibiting the designation of appraisers who may lack an appearance of impartiality.
Under the existing appraisal provisions, and to avoid challenges by insureds to insurer-designated appraisers, insurers should ensure those appraisers:
1. Have no employment ties to the insurer
2. Are not designated too often
3. Have no financial interest in the outcome of the appraisal
4. Continually disclose any material fact that could arguably affect their interest in the amounts determined during the appraisal process.
Of note, while this list serves as a guideline for insurance companies, it is not absolute.