Foran Glennon Palandech Ponzi & Rudloff

August 2015

Consequences of Bias or Conflict of Interest in Setting an Appraisal Award

Morgan Smith

Factual Background.  A very recent case out of Georgia,  Zurich Am. Ins. Co. v. Omni Health Solutions, LLC, No. A15A0170, 2015 WL 4034465 (Ga. Ct. App. July 2, 2015), contemplated the affect an impartial umpire may have on an appraisal award.  The instant case involved an insured property consisting of a 17,000 sq. ft. building containing several doctors’ offices.  In February of 2011, while the policy between the parties was in effect, the insured property sustained severe hail damage to its roof, resulting in damage to the building’s contents and equipment, plus water and mold damage to the building’s ceilings, walls and floors.  In addition to the property damage, the tenants of the building also incurred business interruption losses when they were unable to use their offices due to the state of the building.  The insurer and insured disputed the amount of the covered loss of the property and turned to appraisal, pursuant to the terms of the policy, to resolve the dispute.

The parties each chose an appraiser and the appraisers then selected an umpire to oversee the appraisal.  In October of 2012, each appraiser and the umpire agreed to an award of more than $800,000 for the structural damage (the “Structural Damage Award”) to the insured property, and in December of 2012, agreed to an award of $322, 443.61 for the insured’s business interruption claim (the “Business Interruption Award”).  At the time of appointment, the umpire was working as an independent adjuster. However, at some point during the appraisal, the umpire joined a firm that performed work for the insurer.  When this information became known to the parties, the umpire stepped down from the appraisal process at the insured’s request.

Discussion.  After the original umpire stepped down, the parties were unable to agree on the selection of a new umpire and moved for the appointment of a new umpire.  The Georgia Superior Court appointed a new umpire, but also ruled that because there was a question concerning the original umpire’s impartiality, the Structural Damage Award and the Business Interruption Award were not binding.  The insurer appealed, contending that the Superior Court erred in ruling that the awards were not binding.

The Court of Appeals of Georgia first decided on whether the Structural Damage Award was binding against the parties. The Court looked to the language of the policy which provided:

[t]he appraiser will state separately the value of the property and amount of loss. If they fail to agree, they will submit their difference to the umpire. A decision agreed to by any two will be binding.

With respect to the Structural Damage Award, the Court pointed to the record which clearly showed that, in addition to the original umpire, both parties’ appraisers agreed to the Structural Damage Award in writing.  Therefore, based on the plain language of the policy, the Structural Damage Award was binding on the parties, notwithstanding any potential bias of the original empire.

Next, the Court addressed whether the Business Interruption Award was binding.  The Court stated that unless it was set aside, the Business Interruption Award would also be binding because it was agreed to by both the original umpire and the insurer’s appraiser.  However, the original umpire’s impartiality could be grounds for setting aside the award.  The Court looked to the record to find that the Business Interruption Award was based on an estimate prepared by the insurer’s appraiser, and unlike the Structural Damage Award, only the insurer’s appraiser and the original empire were in agreement to the amount of the award.  Moreover, the Business Interruption Award was issued after the original umpire commenced work for the firm that performed work for the insurer.  Accordingly, the Court held that the Superior Court did not abuse its discretion in setting aside the Business Interruption Award, and consequently the Award was not binding.

Conclusion.  Here, the appellate court held that the umpire should have excused himself when he changed employment to a firm that conducted business with the insurer because this created impartiality/a conflict of interest.  The result in Zurich Am. Ins. Co. v. Omni Health Solutions, LLC provides further incentive for appraisers to select an umpire that is impartial and unbiased.  Any potential conflicts of interest an umpire may have should be made known upfront to avoid vacation of awards and potential litigation between parties.