To expedite settlement during the adjustment process, homeowners’ insurance policies include an “appraisal clause.” This clause provides an avenue for insureds and insurers alike to resolve disagreements over the amount of damages suffered in any given loss. Pursuant to this clause parties each select an appraiser, these appraisers confer, and if they cannot agree, they select an umpire to determine the ultimate settlement amount. Of course, the presumption is that these appraisers are neutral. Otherwise, appraisers cannot be trusted, parties are not removed from their original deadlock and the fighting in the sandbox continues.
To expedite settlement during the adjustment process, homeowners’ insurance policies include an “appraisal clause.” This clause provides an avenue for insureds and insurers alike to resolve disagreements over the amount of damages suffered in any given loss. Pursuant to this clause parties each select an appraiser, these appraisers confer, and if they cannot agree, they select an umpire to determine the ultimate settlement amount. Of course, the presumption is that these appraisers are neutral. Otherwise, appraisers cannot be trusted, parties are not removed from their original deadlock and the fighting in the sandbox continues.
Most policies do not merely presume neutrality, but require it, specifically stating that an appraiser must be “impartial,” “disinterested,” “competent,” or “independent.” Recently, we have noticed an influx of appraisal contracts containing contingency fee agreements despite specific requirements of impartiality and disinterest in the outcome. Contrary to the concept of neutrality, knowledge that one is compensated by a percentage of the total settlement has a tendency to incentivize an appraiser to calculate a higher settlement total and, in turn, increase his or her own paycheck.
While the issue has not yet been litigated in Georgia, insurers in states such as Missouri, Colorado, Indiana, Iowa, Rhode Island, Texas, Michigan and Florida have attempted to disqualify appraisers operating under contingency fee agreements, with varying degrees of success. While a select few courts have held that contingency fee agreements do not pose a problem in the appraisal fee realm, most courts have found that such agreements are grounds for dismissing an arbitrator and, in some cases, vacating a previously agreed-upon appraisal award. Generally, courts give great weight to the specific terminology used within the appraisal provision. Terms mandating “impartial” or “disinterested” appraisers provide stronger footing for disqualification than provisions requiring a “competent” or “independent” selection.
To illustrate courts’ focus on the precise terminology contained in the insurance agreement, Pennsylvania courts have held that “impartial” is the highest level of neutrality:
. . . a holding that the mere existence of a contingency agreement warrants disqualification, in the absence of specific contractual language requiring impartiality, would be inappropriate. We find that the mere existence of a contingency fee agreement does not, in and of itself, render an otherwise “competent” appraiser unfit.
(emphasis supplied) Hozlock v. Donegal Companies/Donegal Mutual Insurance Co., 745 A.2d 1261, 1265 (2000). Texas courts have recognized the contractual nature of the appraisal right as well, sticking to the strict terms of the policy:
Just as we have concluded Texas case law does not require disinterested appraisers when the parties have not included that requirement in their contract, we also conclude that the policy here does not require appraisers to be disinterested merely by requiring that they be competent. To do so would be to read into the policy a provision the parties did not include.
Other courts, such as Missouri, hold appraisers to a high standard of neutrality, even absent specific policy provisions. Appraisers in that state must not be “interested, biased, or prejudiced. Harris v. American Modern Home Ins. Co., 571 F.Supp.2d 1066, 1077 (2008) citing Orr v. Farmers Mut. Hail Ins. Co. of Mo., 356 Mo., 372, 201 S.W.2d 952, 957 (1947). In evaluating the contingency fee agreement, the court held that “an appraiser becomes interested or biased by having a direct or indirect financial interest in the outcome of the appraisal.” Harris, supra, at 1078. Because the appraiser’s fee was $300, plus 15% of the final appraised value, the contingency fee “gave [the appraiser] a direct financial interest in the ultimate appraisal award, a fee that would increase as the appraisal amount increased.” Id. at 1079. Furthermore, the appraiser agreed to act as the insured’s attorney and agreed to perform another appraisal for the insured. The contingency fee, taken with these present and future business dealings, provided grounds for disqualification of the appraiser and grounds to vacate the appraisal award.
Like Missouri, courts in Colorado also hold that a contingency fee agreement between an appraiser and a party creates a financial interest in the outcome of the appraisal, rendering the appraiser “not impartial.” Gold v. State Farm Fire & Cas. Co., 2010 WL 3894141, *1 (U.S.D.C. Colo. 2010). The Gold decision was recently affirmed in April, 2016 in the Auto-Owners decision. See Auto-Owners Ins. Co. v. Summit Park Townhome Assn., No. 1:14-CV-03417-LTB (U.S.D.C. Colo. April 5, 2016)[Doc # 69]. There, the court stated that because a party-appointed appraiser had significant prior dealings, social and business relationships and political involvement with the party, as well as a contingent fee arrangement, the appraiser was not “impartial” as required by the insurance policy. Furthermore, the court noted the party’s nondisclosure of the fee agreement and prior business relationship “only raises suspicions about his impartiality and creates the appearance that he was trying to hide the damaging information.” Id. at pg. 13, citing Axis Surplus Ins. Co. v. CityCenter West LP, No. 2015 CV 30453 (Colo. Dist. Ct. Weld Cnty. Mar. 14, 2016)[Doc. # 63-1]. Looking to many different authorities for guidance on the appropriate level of neutrality, the court found the existence of a pecuniary interest as evidence of bias, ultimately quoting a known treatise, which provides, “[d]isinterest in the matter does not mean merely a lack of pecuniary interest, but is used in a broader sense, as impartial, fair, open-minded, and without partisanship, prejudice, or bias.” Id. at pg. 10, citing 15 Couch on Ins. § 211:33 (“Arbitrators, Appraisers and Proceedings Before Them”). The court disqualified the appraiser and vacated the appraisal award, noting that the contingent fee agreement created a “motive to ensure” that the appraisal panel awarded a “greater amount” than was owed. Id. at pg. 12.
In Indiana, federal courts have recently held that a policy provision requiring “competent and impartial” appraisers was violated by a contingent fee agreement between the appraiser and the insured. Shree Hari Hotels, LLC v. Society Ins., 2013 WL 4777212 (S.D. Ind. 2013). Setting aside the appraisal results, the court held “[i]t is axiomatic that an appraiser with a financial interest in the outcome of the appraisal is not impartial.” Id. at *2, citing Gold, supra, Harris, supra, and others. While the contingency agreement was capped at a maximum of 10% of the total aware, and thus not a traditional contingency fee, the appraiser “indeed had a ‘vested interest’ [in the value of the claim], and that determination is not even a close call.” Id. at *2.
In one of the most well-known and often-cited cases in this area of law, the Supreme Court of Iowa vacated an appraisal award, finding a policy requiring a “competent and disinterested” appraiser was violated by the appraiser’s use of a contingency fee agreement. Central Life Ins. Co. v. Aetna Cas. & Sur. Co., 466 N.W.2d 257 (Iowa 1991). The appraisal agreement provided no specific qualifications for appraisers, and it was argued that the appraisal agreement modified and the policy, thus abandoning the requirement that appraisers be disinterested. Id. at 260. Holding that the appraisal agreement did not affect the policy’s appraiser qualifications, the court cited a treatise’s explanation of the “goal of impartiality,” quoting:
Arbitrators or appraisers who may be selected to adjust a loss should be disinterested, and not represent the parties selecting them. The term ‘disinterested’ has been used in the sense of meaning competent, impartial, and substantially indifferent between the parties. It is intended that such persons shall be fair and unbiased, since they are acting in a quasi-judicial capacity. It means more than merely a lack of pecuniary interest in the outcome.
J. Appleman & J. Appleman § 3927. The court stated that “[d]ue to the contingent fee arrangement, Central’s appraiser was interested because he had a direct financial interest in the dispute.” Id. at 261. Finding that no showing of prejudice was required, the court held that “[b]ecause Central’s appraiser’s fee was based on a percentage of the settled loss, we hold that Aetna’s motion for partial summary judgment to vacate the appraisal award should be sustained.” Id. at 262.
Michigan courts, on the other hand, have held that a contingency fee agreement did not affect the “independence” of an appraiser, as required by the terms of a Michigan statute requiring the selection of “competent, independent” appraisers. White v. State Farm Fire and Casualty Co., 293 Mich.App. 419, 809 N.W.2d 637 (2011). Notably, the White court made a distinction between the terms “independent” and “impartial,” explaining
the definition of ‘independent’ is ‘not dependent, not subject to control, restriction, modification, or limitation from a given outside source.’ On the contrary, the definition of ‘impartial’ is ‘favoring neither, disinterested, treating all alike; unbiased, fair, and just.’
(internal quotations omitted, emphasis supplied), Id., at 425, quoting Black’s Law Dictionary. Citing prior Michigan precedent, the White court explained, “an independent appraiser may be biased toward the party who hires and pay him as long as he retains the ability to base his recommendation on his own judgment.” Id. Leaving open the question of whether a contingency fee agreement violates a policy that requires “impartial” appraisers, the court chose to follow Florida’s jurisprudence, which found that contingency fee agreements did not violate such a term where “independence” alone was required. Id. at 428. The requirement of independence could be satisfied merely by the appraiser’s testimony that the exercised his own judgment regarding the value of the loss. Id.
Florida courts tolerate the greatest amount of entwinement between appraisers and the party who appoints them. In Rios, the court stated that a financial interest in the outcome of the appraisal award did not violate a policy’s requirement of a “competent and independent appraiser,” upholding a contingency fee agreement. Rios v. Tri-State Insurance Company, 714 So.2d 547, 549 (Fla. Dist. Ct. App. 1998). While the court required that the existence of a contingency fee agreement be disclosed to the other party, the appraiser would not be disqualified for operating under such an agreement. Id. at 550. Decided in the same year as Rios, the Galvis court expanded its forerunner’s holding, providing that an appraiser hired under a contingency fee agreement did not violate a policy requiring each party to select a “competent and disinterested appraiser.” Galvis v. Allstate Ins. Co., 721 So.2d 421 (Fla. Dist. Ct. App. 1998). With little explanation, the court rejected the challenger’s claim that the difference in “disinterested” and “independent” should provide a legal distinction. Id. at 421.
This issue is ripe for litigation in Georgia. Based on the previously-discussed rulings in other states, policy provisions containing the requirement of an “impartial” appraiser tend to offer the most sound basis for disqualifying an appraiser. Therefore, underwriters should consistently include this terminology in appraisal provisions. Furthermore, to maintain the integrity of the appraisal process, it is in the best interest of insurers to challenge the appointment of appraisers who are paid pursuant to contingency fee agreements before an award has been entered.