Add Colorado to the handful of states set to provide guidance on the level of impartiality required of appraisers.

The Colorado Supreme Court recently provided notice that it will rule on key issues relating to the interpretation of appraisal provisions in first party property policies.  In granting certiorari, the court noted that its upcoming ruling will analyze: (1) whether an appraiser can “favor one side more than the other” and act as “advocates” for the selecting party; and (2) whether “permitting insurance appraisers to utilize contingent-cap fee agreements that tie the appraiser’s own compensation to the ultimate appraisal award” renders the appraiser unable to serve.

In Owners Ins. Co. v. Dakota Station II Condo. Ass’n, No. 16CA0733 (Colo. App. Ct. July 27, 2017), there was a dispute between a first party property insurer and the insured condominium association regarding the extent of damages to a building because of wind and hail storms.  After continued disagreement about the value of damages, the parties invoked the policy’s appraisal provision.  When the party appointed appraisers submitted different proposed awards, a neutral umpire was appointed.  The umpire adopted four damage estimates from the insurer’s appraiser and two damage estimates from the insured’s appraiser.  After the umpire and the insured’s appraiser signed off on the award, the insurer filed a petition to vacate the award.

The policy at issue required the parties to select “a competent and impartial appraiser.”  The insurer argued that the insured’s appraiser was not “impartial” due to a number of reasons, including an alleged relationship between the insured’s appraiser and the insured’s public adjuster and the insured’s appraiser’s admission that she “advocated” for the insured during the appraisal.  Even though the term “impartial” was not defined in the policy, the appellate court opined that appraisers are different from umpires and that “the policy does not hold an appraiser to the standard of ‘not favoring one side more than another,’ in the sense that a judge or arbitrator (or the umpire under this policy) would be required to be impartial.  Rather, “[s]o long as the selected appraiser acts fairly, without bias, and in good faith,” he or she constitutes an “impartial” appraiser.  Given that the standard of impartiality for party appointed appraisers was found to be less than that for a judge or umpire, the appellate court ruled that the insured’s appraiser was “impartial”.

Additionally, the appellate court discussed whether the insured’s appraiser was impartial due the contractual terms under which she was retained.  The contract included a contingency fee award that stated “invoices for the work were not to exceed ‘5% of the total replacement cost value.’”  The insurer argued that the contract evinced a lack of impartiality because it gave the insured’s appraiser a financial incentive to submit a higher appraised value to increase her own fees.  However, there was no dispute that 5% of the insurer’s appraiser’s estimate of damages was far greater than the amount that the insured’s appraiser actually billed.  The appellate court agreed with the trial court in finding that “in the circumstances of this case, the 5% cap does not demonstrate a lack of impartiality on the part of the appraiser” because the 5% fee cap was far in excess of the amount of work billed by the insured’s appraiser.

How the Colorado Supreme Court rules on the contingency fee portion of the appellate court’s opinion will be significant.  The majority of courts addressing the appropriateness of an appraiser’s contingency fee arrangement have held that appraisers who are paid on a contingency fee basis are not “impartial”.  Central Life Ins. Co. v. Aethna Cas. & Sur. Co., 466 N.W.2d 257 (Iowa 1991); Aetna & Sur. Co. v. Grabbart, 50 A.2d 88 (R.I. 1991); Shree Hari Hotels, LLC v. Society Ins., 2013 WL 4777212 (S.D. Ind. Sep. 5, 2013); Harris v. Am. Modern Home Ins. Co., 571 F. Supp.2d 1066 (E.D. Mo. 2008); Gen. Star Indem. Co. v. Spring Creek Village Apts Phase V, Inc., 152 S.W.3d 733 (Tex. App. Ct. 2004).  All these courts have acknowledged that appraisers with a pecuniary interest in the outcome of the appraisal have a perverse financial incentive to inflate the value of the loss to maximize their own fees.

But a few courts have come to the opposite conclusion in holding that an appraiser being paid on a contingency fee basis does not render that appraiser “impartial”.  White v. State Farm Fire and Cas. Co., 809 N.W.2d 637 (Mich. App. Ct. 2011); Prien Properties, LLC. v. Allstate Ins. Co., 2008 WL 1733591 (W.D. La. April 14, 2008); Hozlock v. Donegal Cos./Donegal Mut. Ins. Co., 745 A.2d 1261 (Pa. Super. 2000); Rios v. Tri-State Ins. Co., 714 So.2d 547 (Fla. App. Ct. 1998).

How the Colorado Supreme Court rules in this case may provide instruction on how future courts could potentially address the impartiality of appraisers.   Of course, the Property Line will be closely watching this case and will keep you apprised of any significant developments.