Tenth Circuit Makes an Insurance Appraisal a full Arbitration

Historical Reason for Appraisal Eliminated by Tenth Circuit

Oct 11, 2021

Background

In June 2012, a hailstorm damaged three buildings owned by BonBeck. BonBeck submitted a claim for the damage under its commercial insurance policy with Travelers (the Policy), which covers hail damage. For each building, BonBeck alleged that the hailstorm damaged the exterior siding, overhang, HVAC, and roof. Travelers acknowledged that some hail damage occurred to all the building components except for the roofs, and it covered this damage with two payments totaling about $ 34,200. But Travelers denied coverage for the roof damage, asserting that it resulted not from the hailstorm but from uncovered events like wear and tear, deterioration, and improper installation.

Faced with this impasse over the roof damage, BonBeck invoked the appraisal provision. This provision allows either party to request an appraisal of certain issues on which they might disagree during the claims process, including “the amount of loss.” Invoking the appraisal provision sends the parties’ dispute to a panel comprised of three appraisers (the Panel, for short). But it did not immediately have that effect when invoked by BonBeck.

Travelers would only agree to BonBeck’s appraisal request under certain conditions that had been applied in similar situations for more than a century. In particular, Travelers insisted that the parties require the Panel to distinguish between disputed and undisputed damages. Travelers’ proposal would not allow the Panel to decide what caused the roof damage, whatever that amount of loss turned out to be. That is, the Panel could decide how much it would cost to repair the roofs but not what caused the roofs to require repair in the first place.

Travelers sued seeking declarations that (1) the Policy precludes the Panel from determining causation issues and (2) Travelers owed BonBeck nothing more because the remaining damage (meaning the disputed roof damage) was caused by excluded causes of loss.

The district court sided with BonBeck, concluding that the appraisal provision authorizes the Panel to make cause-of-loss determinations. The Panel issued its appraisal award, estimating the total repair cost for BonBeck’s loss from hail damage (excluding depreciation) to be about $216,000. Travelers paid BonBeck the appraisal-award amount, minus the approximately $34,200 it had already paid.

After another summary judgment the district court awarded BonBeck nominal damages ($1) and statutory interest ($36,142.63).

ANALYSIS

The disputed policy provision allows either party to request an appraisal on “the amount of loss,” a phrase with an ordinary meaning in the insurance context that unambiguously encompasses causation disputes. Contrary to Travelers’ view, giving effect to this meaning of the term “amount of loss” aligns both with other related policy language and with the appraisal provision’s purpose of avoiding costly litigation.

Mootness

Importantly, though, the Tenth Circuit concluded that Travelers’ response to BonBeck’s argument about the effect of its payment of the appraisal amount effectively moots its argument for reversal of summary judgment on its declaratory-judgment claim. That is, because Travelers admits it does not seek reimbursement of the appraisal-award payment, any relief the Tenth Circuit could grant on that claim would be illusory. Travelers’ appeal of its claim for declaratory judgment was dismissed as moot.

Merits

Because the Colorado Supreme Court has not addressed the issue Travelers raises, the federal court was required to predict how that court would decide the issue. Travelers contended that, contrary to the district court’s view, the Policy unambiguously precludes the Panel from deciding the cause of loss. The district court based its interpretation on the first sentence, which lists three items on which either party may request an appraisal: the value of the property, the amount of income and expense, or the amount of loss. It determined that the third item, “the amount of loss,” encompasses causation disputes. On appeal, Travelers barely mentions that phrase or the district court’s conclusion about its meaning. Significantly, the various dictionary definitions all include a causation component, each making clear that “loss” refers to damage resulting from a covered event.

Travelers briefs had little to say about the phrase “the amount of loss.” Travelers relied, rather, on common, ordinary parlance, “amount of loss” means the monetary value of property damage, irrespective of insurance coverage or source of damage. [Caribbean I Owners’ Ass’n v. Great Am. Ins. Co. of N.Y., 619 F.Supp.2d 1178, 1187 (S.D. Ala. 2008)].

Travelers focuses on the word “appraiser,” which appears several times throughout the appraisal provision. Travelers argues that the “plain meaning of [this term] and the Policy’s requirements for appraisers reflect an intent to limit the scope of appraisals to monetary determinations, thus precluding causation determinations.” To the Tenth Circuit:”Neither the word ‘appraiser’ nor the qualifications for appraisers render the unambiguous phrase ‘amount of loss’ ambiguous.”

Travelers also relies on the appraisal provision’s purpose. The Tenth Circuit refused to consider this argument, however, because the disputed language is unambiguous. And were that not the case, Colorado law would require it to construe any ambiguity against Travelers as the drafter of the Policy. Even so, if considered, the purpose of the appraisal provision only confirms what the text compels. As the district court persuasively reasoned, and as Travelers seems to agree, the appraisal provision’s aim “is to avoid litigation and encourage settlement of the parties’ dispute.” Removing causation from the appraisal process frustrates that purpose by “reserving a plethora of detailed damage assessments for judicial review.”

The Policy’s plain language identifies disputes like this one, over “the amount of loss,” as one of the issues on which the parties may request an appraisal. The disputed policy provision allows either party to request an appraisal on “the amount of loss,” a phrase with an ordinary meaning in the insurance context that unambiguously encompasses causation disputes like the one here. Contrary to Travelers’ view, giving effect to this meaning aligns both with other related policy language and with the appraisal provision’s purpose of avoiding costly litigation.

ZALMA OPINION

In my book, Zalma on Insurance Claims Part 104 Third Edition I note that appraisal, since the inception of the Standard Fire Insurance Policy, has been limited to a determination of the quantum of the loss. Determining causation required either an agreement of the insured and the insurer or a court judgment. By taking the quantum of loss away by appraisal all litigation disputing coverage would be limited to a trial or agreement on the cause of the loss. The Tenth Circuit has eliminated this process and allows appraisers to determine both causation and amount of loss and if the cause is one not excluded the entire dispute is resolved. Appraisal is a special form of limited arbitration, there are significant differences between the powers of an arbitrator and those of an appraiser. An arbitrator’s role is more like that of a judge in a judicial proceeding. In Florida, it is clear that “whether the claim is covered by the policy is a judicial question, not a question for the appraisers.” [Gonzalez v. State Farm, 805 So.2d 814, 2000.FL.0049845 (2000)] The Tenth Circuit should reconsider its conclusion and consider the meaning of the language rather than apply a dictionary definition to resolve an issue of law.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com, the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/ podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4