Tamara Chen-See | Property Insurance Coverage Law Blog | October 23, 2018
The appraisal alternative dispute resolution procedure in most first-party property insurance policies in Florida is a valuable process for insureds. In our experience at Merlin Law Group, few states in the country have a greater need for an understandable, enforceable appraisal process than Florida. Since at least Hurricane Andrew in 1992, policyholders and insurers have resorted to appraisal as a quicker, more cost-effective, binding means to determine a critical issue under the policy – the amount of a loss.
Other states with fewer court rulings evaluating the standards of the appraisal remedy are now dedicating tremendous party and judicial resources to interpretation of the sparsely-worded appraisal provision in most policies. Practitioners in Florida share a concern that the confusion about the appraisal remedy evident in other states may be exported into the courts of Florida. Florida’s Third District Court of Appeal recently stilled some of those concerns in Brickell Harbour Condominium Association v. Hamilton Specialty Insurance Company,1 affirming long-standing precedent governing appraiser qualifications.
The Brickell Harbour Condominium Association suffered a large water loss after a water valve leak caused major damage to its building. The carrier made a substantial advance payment of $150,000 and another payment of $300,000. When the insured did not accept that its loss had been fully paid, the insurer demanded appraisal.
The appraisal provision in the policy required appointment by the parties of “competent and impartial” appraisers, who would then select an umpire. The insured contested that the insurance company’s appraiser, an employee of J.S. Held, was “impartial” because he was hired by J.S. Held, which was to be directly compensated by the insurer. The insured providing no evidence of the nature of the appraiser’s, or J.S. Held’s compensation.2
The District Court of Appeal recognized there is little authority evaluating the impact of appraiser compensation on meeting the “impartiality” standard of qualification under the policy – other than the Third DCA’s own 1998 opinion in Rios v. Tri-State Insurance Company3 determining that “an appraiser’s direct or indirect financial interest in the outcome of the arbitration,” including an arrangement for a contingent fee was not itself disqualifying, and merely required disclosure to the other members of the panel and the parties.4 The court decided disclosure remained a “workable approach.”5
The court also held that impartiality means “something other than the ‘dictionary definition’ as it relates to appraisers appointed and paid by the parties.”6 In recognizing this reality that the party-selected appraisers will have some bias favoring the party that appointed them, the court held that the jointly selected umpire provides the real impartiality in the appraisal process:
If an appraiser acts unprofessionally, skews what should be objective calculations regarding materials and labor costs, and puts the proverbial thumb on the scale, the umpire is the safeguard empowered to reject such efforts by siding with the other party-appointed appraiser. Alternatively, a professionally-qualified umpire may negotiate one or both of the party-appointed appraisers into a reasonable compromise.7
The decision in Brickell Harbour clarifies confusion in other state and federal opinions attempting to interpret Florida’s state law on this topic. In 2014, the Fifth District Court of Appeal had speculated that changes in the AAA and ABA Code of Ethics cited as a basis for merely requiring disclosure of a contingent fee compensation arrangement in Rios had been undercut when that Code of Ethics was later changed.8 And, the federal Southern District of Florida recently issued an opinion echoing this doubt whether Rios was still good law.9 The appellate court in Brickell Harbour acknowledged both cases in footnote discussions in its opinion, and then overrode the suggestion that its disclosure approach in Rios had been undermined:
Following a survey of decisions in other jurisdictions and a review of the Code of Ethics for Arbitrators in Commercial Disputes, this Court concluded that an appraiser’s ‘direct or indirect financial interest in the outcome of the arbitration,’ including an arrangement for a contingent fee, requires disclosure rather than disqualification in the case of an appraiser. This Court then ordered the appraisers to make the disclosures to each other and the parties as provided by the Code.
We conclude that this remains a ‘workable approach to this issue,’ and encourage such disclosures in the present case before the confirmation of the appraisal. On the record before us, we agree with the trial court that the Insurer’s appointment of Mr. Ison did not warrant disqualification.10
For whatever reason, appraisal challenges have become a cottage industry in property insurance disputes, much like litigation regarding examinations under oath was used by insurance carriers seeking a means to forfeit coverage following the 2004 and 2005 hurricanes in Florida.11 Given the value to both parties of the appraisal remedy, decisions like Brickell Harbour are important to the clarity of Florida’s state law governing appraisal, and enabling prompt, cost-effective, binding decisions on the critical issue of the benefit owed the insured under the policy.
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1 Brickell Harbour Condo. Assoc. v. Hamilton Specialty Ins. Co., – So.3d – , 2018 WL 4904927 (Fla. 3d DCA Oct. 10, 2018).
2 The insured also argued that the appraiser should be disqualified because his employer, J.S. Held, was being investigated by the Florida Department of Financial Services for alleged fraud. Since this investigation had apparently been initiated based on allegations of the Association’s own public adjuster for the claim, the Third DCA found the argument “circular.” It refused to rely on the allegations of an interested party to the appraisal, in effect, as a self-fulfilling prophecy leading to disqualification.
3 Rios v. Tri-State Ins. Co., 714 So.2d 547 (Fla. 3d DCA 1998).
4 Brickell Harbour, 2018 WL 4904927 *3.
5 Id.
6 Id.
7 Id.
8 See Florida Ins. Guar. Ass’n v. Branco, 148 So.3d 488, 495 (Fla. 5th DCA 2014)(dicta).
9 Verneus v. Axis Surplus Ins. Co., 2018 WL 3417905 *5-6 (S.D. Fla. July 13, 2018).
10 Brickell Harbour at *3 (citations omitted).
11 See Whistler’s Park, Inc. v. The Florida Ins. Guaranty Ass’n, 90 So.3d 841, 845 (Fla. 5th DCA 2012): “As discussed in Curran [83 So.3d 793 (Fla. 5th DCA 2011) aff’d 153 So.3d 1071 (Fla. 2014)], several of Florida’s district courts of appeal have concluded that the failure of an insured to appear for an EUO prior to filing suit to recover an unpaid claim is a material breach of contract, requiring forfeiture of coverage. These decisions have led to a cottage industry of EUO litigation. If an insurer can procure a failure to comply—or, even better, a refusal to comply—with the EUO requirement, they have a perfect defense to payment. Similarly, if counsel for insureds can bait the insurer into refusing payment without adequate justification, this may trigger a bad faith claim. The actual, if unglamorous, true purpose of the EUO—verification of the insured’s loss—has been lost in this larger battle. No doubt there can be genuine instances of insurance fraud, but the recent and ever—escalating number of EUO cases that have arisen all over the state appear to be more about strategy than truth.”