Appraisal awards, like arbitration awards, are difficult if not impossible to set aside. It is only when the parties fail to disclose conflicts or the insurance appraisers or umpires are found to be biased will the award be set aside by a reviewing court.
In Copper Oaks Master Home Owners Ass'n v. American Family Mut. Ins. Co., Civil Action No. 15-cv-01828-MSK-MJW, 2018 U.S. Dist. LEXIS 122493 (D. Colo. 2018), the difficulty was surmounted when the US District Court for the District of Colorado ordered the appraisal award vacated.
Facts of the Case
Copper Oaks Master Home Owners Association managed 16 residential buildings and a pool house located in Lakewood, Colorado. It was the insured on a casualty insurance policy issued by American Family (the "Policy"). The amended complaint in this action stated the following four claims.
A request for declaratory judgment as to the appraisal process and award
A request to compel an appraisal award in accordance with process specified in the policy
Breach of contract in failing to pay the amounts owed under the policy
Unreasonable delay in payment
The appraisal process occurred in this case throughout most of 2016, but in January 2017, the parties announced that they had a dispute over the validity of the appraisal award. Thereafter, Copper Oaks filed a motion for partial summary judgment seeking to enforce the appraisal award. American Family responded with a motion to vacate the appraisal award.
Upon consent of the parties, the sufficiency of the appraisal was tried in a multiday bench trial.
Findings of Fact
Copper Oaks had a homeowner's association administered by a board of directors ("the Board"). For most of the time pertinent to this case, the Board retained 4 Seasons Management & Realty Group to manage the property. This responsibility was assigned by 4 Seasons to Mark Richardson.
On September 9, 2013, Copper Oaks was subject to an afternoon thunderstorm. At the time of the storm, Copper Oaks was insured under the policy issued by American Family.
Immediately following the storm, Mr. Richardson saw leaves and debris scattered about the complex. He contacted Derek O' Driscoll of Impact Claim Services, LLC, requesting that Mr. O'Driscoll conduct a free inspection of the building roofs. At the Board meeting in November 2013, Mr. O'Driscoll discussed his roofing evaluations and offered to represent Copper Oaks as a public adjuster on its anticipated claim to American Family.
American Family promptly inspected the property and estimated the damage to be $620,979 at replacement cost value (RCV). In July 2014, American Family issued a check to Copper Oaks in the amount of $497,765.43, which reflected actual cash value (ACV) of the loss—the RCV less depreciation and deductible.
Later that year, Mr. O'Driscoll opined that Copper Oak's loss was substantially more than American Family had paid—$3,599,707.13. Mr. O'Driscoll urged the Board to supplement its claim. The Board agreed and retained 4 Seasons to provide management support services during the anticipated repairs for a contingent fee of 2.5 percent of any insurance award. Mr. O'Driscoll advised the Board that this fee could be built into the ultimate claim award.
When advised of Mr. O'Driscoll's estimate of Copper Oak's loss, American Family retained Madsen, Kneppers & Associates to appraise the loss. The firm inspected the property and issued a report estimating the total RCV loss at $608,398.49.
Requirements for the Appraisal Process
The policy set out the appraisal process to be used in the event that the parties could not agree on the amount of a loss. The policy contained no definition of "competent" or "impartial."
Copper Oaks selected George Keys and his company, Keys Claims Consultants, Inc. (KCC), to act as its appraiser. American Family selected James R. Whipple. Mr. Whipple and Mr. Keys then selected Mr. Norton as the umpire.
The parties agreed to proceed in accordance with a Department of Insurance Department of Regulatory Agencies (DORA) bulletin that requires that an umpire be "fair, competent, and impartial." To this end, the bulletin requires the umpire to "remain neutral" and prohibits the umpire from having "any communication with an appraiser" without participation by both parties and/or their representatives.
Mr. Keys's presentation to the Board before his appointment espoused views favorable to insurance policyholders and touted success based on Mr. Keys's prior experience as an insurance adjuster, which gave him "the edge" in getting the highest claim awards for his clients.
At the June 2015 Board meeting, Mr. O'Driscoll explained Mr. Keys's appraisal and consultant agreement, which required Copper Oaks to pay a fee calculated at "$350.00 per hour plus expenses, not to exceed 10 percent of the total of the insurance funds received." It contained no terms specifying what services would be provided, who would perform the services, or any hourly rate other than $350. There was no provision for periodic billing or review of charges incurred. Indeed, only paragraph five addressed payment, specifying that KCC would be "paid as a joint payee by the insurance company."
In the ensuing months, several judicial opinions in unrelated cases involving the same policy language (1) found that Mr. Keys was not sufficiently "impartial," (2) disqualified him as an appraiser, and (3) vacated appraisal awards where he had been an appraiser. It does not appear that Mr. O'Driscoll disclosed to the Board that he had a referral arrangement with Mr. Keys, nor that Mr. Mammel and Mr. Keys had a long-standing business and personal relationship.
Although the initial fee agreement called for Mr. Keys to bill its services by the hour, subject to a "cap" that ensured that Copper Oaks would never be obligated to Mr. Keys for more than 10 percent of the appraisal award, the court found that, in reality, the parties understood and acted as though the "cap" was simply a promise that Mr. Keys would be paid 10 percent of the appraisal award, similar to Mr. O'Driscoll's and 4 Seasons' contingent fees. The court also found that Copper Oaks never intended to pay Mr. Keys on an hourly basis.
In its literal sense, the phrase has a conditional meaning—that payment of the fee is "contingent" on some specific event (such as a verdict favorable to the person receiving the services) occurring. If that event does not occur, no fee is charged.
Mr. Whipple, Mr. Keys, and Mr. Norton agreed to comply with the impartiality and neutrality requirements and required disclosures set forth in the DORA bulletin. At no time did Mr. Keys disclose the following.
The existence or terms (including the 10 percent fee cap) of the initial appraisal and consulting agreement or that his agreement with Copper Oaks was an amendment agreement that eliminated the fee cap.
The existence or contents of court decisions issued during the appraisal process in which courts disqualified Mr. Keys and vacated the appraisal award on findings of his lack of impartiality and failure to disclose pertinent facts. AXIS Surplus Ins. Co. v. City Center West LP, 2015CV30453 (Weld County Dist. Ct. Mar. 14, 2016) (# 80-70); Auto-Owners Ins. Co. v. Summit Park Townhome Ass'n, No. 14-cv-03417-LTB, 2016 WL 1321507, at *3-4 (D. Colo. Apr. 5, 2016); Church Mut. Ins. Co. v. Broadmoor Cmty. Church, 2015CV32454 (Colo. Dist. Ct. El Paso County July 6, 2016) (# 80-71).
That Mr. Keys had a longstanding personal and professional relationship with Mr. Mammel, who was a principal in the law firm retained by the Board at the recommendation of Mr. Keys and Mr. O'Driscoll.
That Mr. Keys had a longstanding referral relationship with Mr. O'Driscoll.
Whether Mr. Keys and Mr. Norton Were "Impartial"
The Court found that Mr. 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 also found that Mr. Keys's agreement with Copper Oaks tied his fee directly to the appraisal award. The parties understood and agreed that Mr. Keys's fee would be fixed at 10 percent of the final appraisal award with "hourly" billing being irrelevant. The percentage cap gave Mr. Keys a material interest in the appraisal award, preventing him from being "fair and competent" in accordance with the DORA bulletin and, therefore, "impartial" under the policy.
In addition, "the court [found] that Mr. Keys' partiality resulted in him submitting an inflated appraisal based on assumptions about hail damage for which he had no support. Mr. Keys' appraised Copper Oaks' loss at $5,066,238.99, almost 50 percent greater than the estimate by Copper Oaks' own public adjuster, Mr. O'Driscoll ($3,599,707.13)." Notably, the conclusion that all building walls were damaged was based on the remarkable proposition that the hail storm in question was able to cause impact damage from at least two opposing directions during the same weather event, rather than along a single storm path.
In addition, Mr. Keys's testimony at the bench trial was often evasive, ambiguous, and largely incredible. In response to many questions by the court and counsel, Mr. Keys never described any methodology that he used to determine the scope of the hail damage. The outcome, which the court found to have been a fundamentally unfair appraisal, can most likely be explained by Mr. Keys's partiality and material interest in inflating the outcome of the appraisal process.
In conclusion, Mr. Keys engaged in actions that rendered him not "fair and competent," and Mr. Norton engaged in actions that rendered him not "fair, competent, and impartial." The court further found that both engaged in conduct that prejudiced the appraisal process and distorted the final award.
Insurance appraisers are—in many states—arbitrators who have the same ethical requirements as a judicial officer. For a judicial officer or an appraiser to have a financial interest in the outcome of a case is contumacious, wrong, and unethical. Because of his contingent fee situation, Mr. Keys has been disqualified in this and many other cases. Parties to insurance claims where appraisal is demanded should be concerned about allowing Mr. Keys or Mr. Norton to serve on an appraisal panel.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI.
Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion.
If such advice is needed, consult with your attorney, accountant, or other qualified adviser.