By: Sandy Eloranto, Senior Counsel, Sutton | Booker | P.C.

Chief Judge Marcia Krieger issued an important decision on July 23, 2018 regarding the competence and partiality of appraisers and umpires in the property damage appraisal process. In Copper Oaks Master Home Owners Association v. American Family Insurance Company, Case 1:15-CV-01828-MSK-MJW, Judge Krieger granted American Family’s Motion to Vacate the Appraisal Award after a five day evidentiary hearing.

Colorado homeowner insurance policies typically include an appraisal clause allowing either party to demand an appraisal if there is a dispute over the value of the loss. The appraisers often agree to make mutual disclosures under DORA Bulletin No. B-5.26 which provides guidance on selecting appraisers. The bulletin currently requires parties to comply with the policy language’s appraisal clause when selecting an appraiser and/or umpire. Appraisal clauses typically require appraisers and umpires be “fair and competent,” “able and impartial,” or “competent and disinterested.”

The bulletin goes on to state that “fair and competent” appraisers cannot: (1) be a party to the insurance contract; (2) have a financial interest in the outcome of the appraisal; (3) be a current employee of the insurer or policyholder; or (4) be a family member or an individual with whom the insured has a personal relationship that could reasonably suggest bias. Id. In addition, the appraiser cannot have a direct material interest in the amounts determined by the appraisal process and has an ongoing obligation to disclose to all parties “any known facts that a reasonable person would consider likely to affect an appraiser’s interest in the amounts determined by the appraisal process, including any contingency agreement related to the payment of the appraiser.” Prior versions of this bulletin restricted communication with any of the appraisers during the appraisal process, however the current version allows communication with a party’s own appraiser and limits only communication with the other party’s appraiser. Additionally, Colorado courts have ruled an appraiser cannot have a contingent fee agreement, or an agreement that sets the appraiser’s earnings based on the amount of the appraisal award. See, e.g., Colorado Hospitality Services, Inc. v. Owners Insurance Company, 1:14-cv-01859-RBJ, Order [Doc. 59], July 14, 2015. Challenges to an appraiser’s qualifications are on the rise in Colorado and most often relate to the appraiser’s bias and/or relationships with the parties and their other agents including public adjusters and attorneys.

In Copper Oaks, the policy’s appraisal clause required “competent and impartial” appraisers who would then jointly select an equally neutral umpire. Copper Oaks selected George Keys as its appraiser. Robert Norton was selected as the umpire. Copper Oaks also retained a public adjuster, Derek O’Driscoll of Impact Claims Services, and counsel.  American Family objected to the scope of the appraisal demand, noting the dispute was over the amount of covered damage as opposed to the costs to repair it. Magistrate Watanabe granted Copper Oaks request to enforce appraisal. American Family also objected to the competence and impartiality of George Keys and Robert Norton.

During the appraisal, Keys claimed 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 damage” for a cost of $5 Million, more than ten times the estimate by American Family’s appraiser and almost twice the amount estimated by Copper Oaks’ Public Adjuster. Norton proposed an award totaling just under $3 million and advised that if the panel could not agree, he would be “put in a position that I do not wish to be that may require a very significant shift upwards,” which American Family’s appraiser interpreted as a threat that if he did not agree to the current number, the award would be increased. Norton increased the award by $130,000 the next day and both he and Keys signed it. Judge Krieger determined this was an “unambiguous threat to American Family designed to compel [the appraiser’s] signature.” American Family paid the award under a reservation of rights.

American Family then asserted coverage defenses to amounts included in the award and challenged the appraisal process in general given the conduct by Keys and Norton. Copper Oaks filed a Motion for Summary Judgment to enforce the award and American Family responded with a Motion to Vacate the Appraisal Award. The Court held a week long bench trial regarding the sufficiency of the appraisal.

Testimony at the hearing revealed that Keys had undisclosed relationships with the property manager, the public adjuster, and the lawyers retained by Copper Oaks. In determining Keys was not “competent and impartial” under the policy, Krieger noted that Keys failed to disclose:

(1)    The existence or terms of his initial financial arrangement with Copper Oaks;

(2)    The existence or contents of court decisions disqualifying Keys;

(3)    His long-standing personal and professional relationship with Copper Oaks’ attorney;

(4)    His long-standing referral relationship with Copper Oaks’ public adjuster, Derek O’Driscoll.

Krieger questioned Keys directly about his ongoing duty to disclose facts a reasonable person would consider likely to affect his interest, asking how a judge’s ruling disqualifying him could fall outside of this catchall category.

Keys’ financial agreement, which had been revised to replace contingent language with a capped hourly rate, also turned out to be problematic. Krieger determined that despite the revision to the financial agreement, Cooper Oaks never intended to pay Keys on an hourly basis and “Keys’ ‘hourly’ billings were simply a façade intended to conceal what was, in reality, a standard contingent agreement.” In addition to noting that Copper Oaks’ “severely underfinanced reserve account” made it impossible to pay Keys until a large appraisal award occurred, Judge Krieger noted that Keys did not bill Copper Oaks for his time until after the award was issued, did not reasonably track his time or calculate staff time in a way a person working on a true hourly agreement would, ultimately submitted a bill that “curiously” charged almost exactly 10% of the appraisal award. Judge Krieger stated, “under Keys, O’Driscoll, and 4 Season’s contingent fee arrangements, Copper Oaks was required to obtain an appraisal award of nearly 128% of actual repair costs, simply to break even.”

Krieger was equally troubled by Umpire Robert Norton’s conduct, including failing to disclose a recent opinion invalidating an award Norton signed because of Keys’ partiality and having ex parte communications with Keys about that opinion during the appraisal process.

Judge Krieger determined jurisdiction was proper under 28 USC § 1332 and the Court’s inherent power to enforce orders of the court (noting the appraisal had been ordered by the Magistrate Judge), but acknowledged she had “unresolved concerns about subject matter jurisdiction over some of the claims.” Judge Krieger also laid out the standards governing the conduct of appraisers, noting the recent Court of Appeals decision in Owners Ins. Co. v. Dakota Station II Condominium Ass’n Inc., 2017 WL 3184568 (Colo. App. July 27, 2017) determining an impartial appraiser must apply appraisal principles with “fairness, good faith, and lack of bias.”

Finally, Judge Krieger laid out the standards for challenging an appraisal award noting that the federal courts apply a categorical rule which assumes an impartial appraiser’s conduct impacts the appraisal award (and thus does not require a showing of how the bias effected the award). Colorado state courts, however, at least according to the recently published Dakota Station case (currently up on cert), require a showing that the appraiser did not meet the policy language regarding partiality and that this resulted in a distortion of the process or a flawed award. Judge Krieger determined that under both standards the appraisal award was invalid. “In total, the Court finds that Mr. Keys’ appraisal was so bereft of methodology and supporting evidence as to be completely implausible. This outcome, which the Court finds to have been a fundamentally unfair appraisal, can most likely be explained by Mr. Keys’ partiality and material interest in inflating the outcome of the appraisal process … [which] had an articulable and demonstrable effect on the appraisal process.”

Judge Krieger dismissed Copper Oaks breach of contract claim and set the unreasonable delay/denial claim for trial, noting that judgment would enter in American Family’s favor at the conclusion of proceedings in the case on Copper Oaks declaratory action on the appraisal process and request to compel the award. Copper Oaks filed a Notice of Appeal which is being considered for summary disposition under 10th Cir. R. 27.3(B) because Judge Krieger’s ruling was not a final order (10th Cir. No. 18-1331). Copper Oaks then filed a separate action in Jefferson County state court seeking to compel the appraisal provision and start, apparently, an entirely new appraisal. The new suit asserts a declaratory action, two breach of contract claims, and a claim for unreasonable delay and denial. American Family removed the case to federal court and notified Judge Krieger via a notice of related cases. Copper Oaks voluntarily dismissed the only remaining claim (unreasonable delay/denial) presumably so that the order vacating the award will be a final order and can be appealed.