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December 18, 2017

This article is originally a publication of Southern Loss Association, Newsletter December 2017. Legal opinions may vary when based on subtle factual differences. All rights reserved.

Since the start of my insurance coverage career, I have had a legal-philosophical interest in insurance appraisals. It has been a frustrating and fascinating roller coaster ride of appellate and Florida Supreme Court decisions. Back in 1997, I had a few cases involving appraisal demands, and my research soon revealed a puzzling anomaly. Florida law at the time treated appraisals like arbitrations subject to the Florida Arbitration Code (“FAC”). This was wrong. Wrong, wrong, wrong! Arbitrations and appraisals are different creatures. An arbitration resolves all issues, the entirety of a dispute. They are a substitute for court proceedings. Appraisals don’t resolve disputes like arbitrations do; they are not a form of “alternative dispute resolution” contrary to conventional description. Instead, appraisals are designed to set a previously unknown contractual term when the parties cannot agree to one – the amount or value of loss or damage. And, presumably, they set the value of direct, physical loss to property that the parties agree is covered by the policy. But I digress. More on that later.

Equating appraisals with arbitrations might seem harmless. Years ago (in Florida) as “arbitrations,” insurance appraisals had to follow the formalities of the FAC, allowing parties to be represented, have notice of hearings, etc. All good things. But, in Florida, having insurance appraisals subject to the FAC gave rise to several problems. First, appraisals became more expensive, with lawyers involved in appraisals as “arbitrators” on behalf of the parties, and retired judges often serving as the umpire. Neither a lawyer nor a judge is qualified to “appraise” value, really. Second, the FAC specifically allows, by motion, the compelling of arbitrations by trial courts. So, appraisals, as “arbitrations,” could be “compelled” by motion, often bypassing potential legal defenses to an appraisals before the insurance investigation is completed.

But, the real problem with having appraisals considered “arbitrations” subject to the FAC is the “confirmation” remedy available for arbitration awards. “Confirmation” is the way a trial court rubber stamps an arbitration award, transforming it into a judgment without anything more than a “motion to confirm” authorized by the FAC. A trial court ordinarily cannot change the award. Confirmation is fine for true arbitrations that adjudicate disputes normally resolved by a trial court. Those disputes might be contract breaches, statutory causes of action, and anything else that amounts to a recognized cause of action that could be the basis of a lawsuit.

An appraisal, however, does not resolve the entire dispute. It only sets the amount of loss – a previously unknown term of the policy that often, after a loss, is so inherently subjective that the parties cannot agree on it. Appraisal, unlike an arbitration, does not adjudicate a cause of action. It is essentially does what an insured and insurer cannot do—adjust a definitive amount of loss. Unlike a court judgment, the resulting appraisal award does not declare a winner or loser, that anyone breached or not, or that anyone owes anything. It only sets the amount of loss, the gross amount of loss.

But, none of these little technicalities mattered when Florida considered appraisals as arbitrations under the FAC. Upon the rendition of appraisal awards, attorneys for insureds often raced to the courthouse to “confirm” the award and turn them (wrongly) into judgments under the FAC, triggering a right to claim attorney fees under Florida’s fee shifting statute. Doing this was improper because, unlike arbitrations, an appraisal award does not adjudicate any causes of action that could be the proper subject of a judgment. (Technically, an appraisal award does not award anything. It just sets an amount or value of loss.) And even true arbitration awards that do not resolve all issues should not be confirmed under black letter arbitration law. These details, if they were argued, didn’t matter and courts often confirmed appraisal awards anyway, resulting in scores or hundreds of void judgments. But that’s now all water under the bridge.

I figured eventually this bad law would be corrected. And it was. In 2002, the Florida Supreme Court finally stated, unequivocally, that appraisals are not arbitrations subject to the FAC. Interestingly, the decision went against an insurer, who attempted to invalidate an appraisal award by claiming that the trial court was wrong to confirm or “rubber stamp” an appraisal award that did not follow the formalities of the FAC. The Florida Supreme Court refused to invalidate the award on that basis because, contrary to holdings of many of the appellate decisions at the time, appraisals are not arbitrations governed by the FAC and, therefore, do not have to follow the minimum due process formalities of the FAC. Candidly, in the same breath, the Florida Supreme Court should have said that because the FAC did not apply, the trial court was wrong to “confirm” the appraisal award because “confirmation” is a procedure that exists only in the FAC and is not a common law power of the trial court. Instead, an action for breach of contract is the remedy to “enforce” a valid but unpaid claim after an appraisal award is issued.

Only months before this primarily “good” appraisal opinion, the Florida Supreme Court issued what I believe was a bad appraisal opinion from a purely legal perspective. The Florida Supreme Court held, effectively, that “causation” could be decided as part of an “amount of loss” determination of an appraisal panel, where some of the loss was admittedly covered. Only a complete lack of coverage could prevent appraisal. Never before were appraisals meant to decide any causation, which always had been an issue reserved for the court. Appraisals traditionally determined the value of an agreed scope of damage. It only makes sense that the policy, which addresses payment and adjustment of covered losses, allows for the appraisal of only covered losses. If the appraisers determine what the scope of covered loss is, including the fundamental question about whether any damage they see occurred within the policy period, then the appraisers necessarily and improperly determine coverage questions that should be for court resolution. The policy appraisal provision, in my view, is meant to appraise the amount of covered loss, the scope of which necessarily is, or rather, was a question for the court. But just like that, in 2002, trial by jury on the important question of coverage disappeared.

No one realized it in 2002, but these two cases created a perform storm for the 2004 & 2005 hurricane claims. The Florida Supreme Court had expanded the role of appraisers to include causation, but at the same time reduced the accountability of the appraisal panel by holding that appraisals were not arbitrations governed by the formalities of the FAC. Supplemental claims and demands for appraisal were made, and insurers, already burdened by unprecedented claims, were only too happy to have them resolved though appraisal. But that proved to be a big mistake on large claims that had not justified, so was thought, the hiring of experts to provide the crucial information and support necessary to defend what appeared to an under-deductible loss. Many insurers were blindsided by expert reports submitted by insureds’ representatives for the final appraisal meeting and multimillion dollar appraisals awards resulted from under deductible adjustments.

Eventually, insurers caught on to the problem of blindly entering appraisal, and realized that to participate in appraisals, they needed to know what was being claimed by the insured as damaged. They needed historical documents from the insured, expert reports, and other information to avoid any surprises during appraisals. But many representatives of insureds were unwilling to oblige with examinations under oaths or document requests. They wanted appraisal, and hired lawyers for insureds to force the issue.

Many resorted to filing Petitions (or Motions) to Compel Appraisal, and the like, to force appraisals before the investigation of supplemental claims were completed. These Petitions to Compel Appraisals often succeeded summarily despite having no legal basis whatsoever since the FAC no longer applied. Seeking the compelling of appraisal through court action was an improper holdover of a body of case law overruled by the Florida Supreme Court’s pronouncement that appraisals were not arbitrations subject to the FAC. Yet, trial courts compelled appraisals anyway, improperly in my view. I say “improperly” because the only way a court can force any party to take action (like compelling appraisal) is through injunctive relief, an equitable remedy which has a very high bar that arguably should never be the subject of any motion to compel appraisal.

It was around this time when I entered the fray and realized that these motions to compel appraisals effectively sought summary judgment without the submission of summary judgment evidence. I was able to point out the flouting of basic rules of procedure and have these motions to compel appraisal denied just on procedural grounds. One needs competent evidence before obtaining a sought after legal remedy.

After losing these motions, plaintiff attorneys soon learned to move for summary judgment to compel appraisal. In response, the defense raised the failure to comply with policy conditions. And then, another appellate case was published that initially seemed helpful but in the end, proved problematic. The case said that an evidentiary hearing was necessary to adjudicate whether the insured complied with post-loss conditions before appraisal could be compelled by a trial court. Evidentiary hearing? The dispute over compliance with post-loss conditions always historically had been a jury trial issue. Now, the issue could be resolved by a bench trial? Again, trial by jury on an important legal issue simply disappeared, although the Florida Supreme Court has not yet addressed this issue. And important issues of contract compliance often became the subject of summary hearings, with appraisals, in the end, compelled before any real investigation had been completed.

So with the coming onslaught of Irma appraisal demands, insurers must understand that the chances are low of avoiding appraisal on scope and price claims, often where causation is a major issue. But as I have written earlier on LinkedIn, the key to the defense of these cases is litigating what is precisely owed under the policy when repairs have not been made. That would be, for the vast majority of cases, the ACV of the damage. That means, in my view, the ACV of only the covered damaged property, not a 10 percent depreciation applied to a global repair estimate containing a scope of repair that includes much more than the scope and value of the damaged property–matching costs, tear out, and allowances for future collateral damage repair. None of those things should be a part of an ACV calculation. But in the 2004 & 2005 storm claims, they were, transforming under deductible claims into multimillion dollar appraisal claims, the splitting of which resulted in appraisal awards that insureds’ representatives were only too happy to sign.

Appraisal in Florida, historically, was a good thing to avoid litigation. But long ago, it was rare and its costs likely made insurers and insureds compromise any dispute before engaging appraisers and umpires. Now, however, given that appraisers can determine causation, there is no reason for an insured not to send a claim into appraisal with the hope that the lack of accountability, the lack of any standards for evidence and expert testimony, and the desire of umpires to “split the baby” will lead to a much bigger payment than otherwise possible. Insurers must do the usual thorough claims investigation and pay what is owed (and maybe more), but they must be vigilant to enforce policy coverage provisions and conditions to avoid surprises during appraisal and preserve defenses in any later litigation.