Denise Johnson | Claims Journal | July 26, 2018
A recent decision by a Colorado federal appeals court could have significant impact on hail claims and appraisals across the country.
Copper Oaks Master Home Owners Association v. American Family Mutual Insurance Co. involves a claim of hail damage that led to a dispute regarding damages.
According to the facts outlined within the opinion, Copper Oaks managed several residential buildings in Lakewood, Colo., at the time of the loss. On September 9, 2013, a hail storm allegedly caused property damage to the Copper Oaks complex. Due to debris scattered about the premises, the property manager, Mark Richardson, contacted Derek O’ Driscoll of Impact Claim Services, LLC, and requested he conduct a free inspection of the building roofs. At a November 2013 board meeting, O’Driscoll discussed his roofing evaluation and offered to represent Copper Oaks as public adjuster on its anticipated claim to American Family.
A month later, a separate report commissioned by Richardson found that Copper Oaks was “severely undercapitalized given the size, age and condition of the complex.” The report found that the HOA was severely underreserved – it had $70,112 in reserves, just 11 percent of the recommended amount of $625,597 to carry out extensive repairs needed. A special assessment of $1500 per unit was recommended but there was no evidence that was conveyed to the unit owners.
Copper Oaks hired Impact Claims in March 2014 as its public adjuster and agreed to pay a contingent fee of 15 percent of any insurance award.
American Family was first notified of the loss in April 2014. The insurer inspected the property damage and provided an estimate of $620,979 as the replacement cost value (RCV). The insurer issued payment of $497,765.43, the actual cash value of the loss, in July 2014.
Impact Claims determined Copper Oak’s loss to be much higher than the amount paid by American Family. Later in 2014, O’Driscoll estimated the total damage due to the hail storm at nearly $3.6 million. Upon learning of the increased damage estimate, American Family hired Madsen, Kneppers & Associates to appraise the loss. After an inspection, the firm issued a report estimating the total RCV loss at $608,398.49.
Disappointed with the amount American Family initially paid on the claim, Copper Oaks filed suit in state court. American Family had the case removed to federal court. The Amended Complaint stated four claims: 1) a request for declaratory judgment as to the appraisal process and award; 2) a request to compel an appraisal award in accordance with process specified in the Policy; 3) breach of contract in failing to pay the amounts owed under the Policy; and 4) unreasonable delay in payment in violation of C.R.S. 10-3-1115 and 1116.
Besides the dispute on damages, the parties disagreed as to whether the complex was actually damaged by hail during the storm. The court noted there wasn’t any contemporaneous evidence that hail had impacted any part of the property – “no statements of occupants, photos or the like.”
A requirement when the value of a claim is disputed is that the parties to the policy must engage in an appraisal process to determine the value of the loss.
The parties were ordered to participate in the appraisal process. The policy requires each party to appoint a “competent and impartial” appraiser. The two appraisers then jointly select a neutral umpire. Each appraiser submits an opinion as to the amount of the loss to the umpire. Upon the agreement of the umpire and at least one of the appraisers, the amount of the loss is conclusively determined.
The appraisal process, according to Steven Badger, a Dallas attorney with Zelle LLP, “was intended to be an amicable and expeditious approach to resolving disputed insurance claims. Appraisal clauses have been found in insurance policies for over 100 years, with the process serving as a valuable way to bring disputed claims to closure without the need for lawyers or lawsuits.”
Copper Oaks selected George Keys of Keys Claims Consultants, Inc. to act as its appraiser. American Family selected James Whipple. Keys and Whipple selected Robert Norton as the umpire.
Keys’ appraisal, submitted on February 29, 2016, found that “every roof, every elevation, every chimney, and virtually all of the siding on every building at the Copper Oaks’ property had either been damaged by hail or, if undamaged, would nevertheless have to be replaced in order to fully repair the hail damage.”
His initial loss estimate was $4,968,115.62 and was later revised to $5,066,238.99.
Whipple’s damage appraisal came in at $406,234.29.
Norton, as the umpire, concluded that there was some hail damage, but not nearly as much as Keys claimed. In July 2016, Norton proposed an appraisal award of $3,061,201.44. Neither appraiser agreed with the umpire’s proposed amount leading to Norton’s advisement that if they couldn’t agree, he would circulate a proposed final award of $2,943,919.72.
According to the opinion, Keys submitted his bill to Copper Oaks a week after the appraisal award of $2,873,085.35 was announced. The bill reflected 666.40 hours of work, all charged at a rate of $350 per hour, totaling $233,240. Of importance was that there wasn’t any differentiation in hourly rates based on the tasks performed or by the person performing the tasks.
In January 2017, the parties announced a dispute over the validity of the appraisal award. Copper Oaks sought to enforce the appraisal award, while American Family filed a motion to vacate the appraisal award.
During a hearing, the court bifurcated the allegations within the complaint into claims that concerned the appraisal process (Claims 1 and 2) and claims that concerned breach of contract and statutory bad faith breach of contract (Claims 3 and 4).
American Family contended that the appraisal award should be invalidated because the appraiser selected by Copper Oaks and the umpire were not impartial. Copper Oaks responded that American Family i) waived any objection to Keys and Norton, ii) was estopped from challenging them, and iii) its request is barred by the doctrine of laches.
Prior to and during this case, there were several judicial opinions in unrelated cases involving Keys that disqualified him as an appraiser and vacated associated appraisal awards.
Analysis of records and testimony by the appraisers led the court to determine that It was essential that the appraisal award be high enough to allow Copper Oaks to pay the bills of Keys, O’Driscoll, and related vendors as well as sufficient enough to allow Copper Oaks to make the repairs. The court noted that “Copper Oaks was required to obtain an appraisal award of nearly 128 percent of actual repair costs, simply to break even.”
After a bench trial to determine the sufficiency of the appraisal award, the court stated it intended to grant American Family’s motion to vacate the appraisal award. The Court reasoned that Keys was not “fair and competent”, because he had a “direct material interest in the amounts determined by the appraisal process” and because he did not disclose “facts that a reasonable person would consider likely to affect the appraisers interest in the amounts determined by the appraisal process.”
The court’s decision disqualified Keys and invalidated the appraisal award. The court stated, “Mr. Keys’ appraisal was so bereft of methodology and supporting evidence as to be completely implausible.”
The court deemed Norton as also not, “fair, competent and impartial.” This, too, invalidated the appraisal award.
According to the federal court, judgment was entered in favor of American Family on the first and second claims in Copper Oaks’ Amended Complaint. As a result, the court stated, “Because the vacatur of the appraisal award nullifies any determination as to amount that existed at the time of filing this action, Copper Oaks had no standing to bring its third claim, sounding in breach of contract for failure to pay.”
Thus, Copper Oaks third claim was dismissed.
Copper Oaks’ fourth claim for relief, based on the allegation of an unreasonable delay, was scheduled for determination by trial.
The decision highlights changes in the appraisal process over the past decade, said Badger.
“A cottage industry has emerged comprised of individuals who inject themselves into the appraisal process for their own financial gain. Since the appraisal process is not governed by any formal procedural rules or ethical guidelines, the process is now ripe for abuse, manipulation and outright fraud,” said Badger. “With this cottage industry, no longer is the objective to achieve a prompt and fair resolution of the claims, but to extort the highest possible payment from the insurance company to maximize profits to the contractors, public adjusters, appraisers and lawyers who are all part of these schemes.”
Badger is the author of several articles on fraud abuse in hail claims published by Claims Journal, including The Emerging Hail Risk: What the Hail Is Going On?
“The Copper Oaks matter is a prime example of the abuses that have sadly become commonplace in the insurance claim appraisal process, particularly in Texas and Colorado,” said Badger. “Sadly, it took federal court litigation to remedy the clear abuses that took place during this appraisal process. ”
Badger described the common abuses seen in the appraisal process.
“These abuses include significant and unsubstantiated increases in the alleged damages once the matter is in appraisal, appraisers motivated to jack-up claim values based on having a financial interest in the outcome, undisclosed friendly relationships between appraisers and umpires, and literal extortion by umpires when the insurance company appraiser refuses to sign their excessive proposed awards,” he said. “All of these schemes were present in the Copper Oaks matter.”
New schemes pop up every frequently, he added, describing a recent one where a policyholder appraiser charged $2,500 per hour, up to 20 percent of the appraisal award.
“It’s outrageous,” Badger said. “The clear intent with that fee is for the appraiser to receive a 20 percent contingency fee on the appraisal award, which is absolutely forbidden in both Texas and Colorado.”
Though the federal court decision in this case should aid in bringing awareness to the issue, Badger said fighting the schemes is an ongoing battle.
“All the insurance company wants is a level playing field – where both sides pick impartial appraisers and work fairly to achieve a prompt and fair resolution of the claim,” Badger explained. “Regardless of who prevails, if the process is fair then it achieves its intended purpose. But there was absolutely nothing fair about the process in the Copper Oaks case. And the federal judge exposed it. Hopefully this well-written decision will serve as a much-needed warning to the entire cottage industry engaged in these appraisal schemes.”