Foran Glennon Palandech Ponzi & Rudloff

December 2014

Appraisers: What does “disinterested” really mean?

Bridget Liccardi

The majority of property insurance policies contain a provision which allows for the insured or insurer to demand an appraisal if they disagree on the “amount of loss.”  The provision generally requires that each side select a “competent and impartial” or “competent and disinterested” appraiser.  The policies generally provide that the selected appraisers then choose a disinterested umpire to whom any differences are submitted.  Together, the panel consisting of two appraisers, and an umpire, determine the “amount of loss.”  Appraisers may only determine the “amount of loss.”  Appraisers may not make determinations of coverage or causation.

Discussion.  An appraiser is not the agent of the party who selected him.  It is, however proper for an appraiser to bring out facts that are favorable to the party which selected him. An appraisal award will not be set aside simply because the appraiser maintained a position favorable to the party that appointed him.  Heller v. Heller, 636 A.2d 599, 605 (N.J. Super.Ct. 1993); Hozlock v. Donegal Cos., 745 A.2d 1261, 1265 (Pa. Super. Ct. 2000) Nat’l Fire Ins. Co. v. O’Bryan, 87 S.W. 129 (Ark. 1905).   Further, the fact that an appraiser has served as an appraiser for an insurer or insured on previous occasions does not constitute conclusive evidence of bias or partiality.  American Cent. Ins. Co. v. Terry, 298 S.W. 658 (Tex. Civ. App. 1927); Messler v. Williamsburg City F. Ins. Co., 95 A. 601 (R.I. 1915).  However, there are limits to who parties can appoint as their disinterested or impartial appraiser.  In Sterling Spinning & Stamping Works v. Knickerbocker Ins. Co.,the Court found that a contractor who was employed by the insurer more than 1,800 times to prepare estimates and make appraisals, which represented 79% of the contractor’s total income, was not disinterested.  242 N.Y.S. 201, 203-04 (N.Y. App. Div. 1930).

In a recent case, the Court held that a party’s attorney could not serve as a disinterested appraiser.  Florida Insurance Guaranty Association v. Branco, 148 So.3d 488 (Fla. Dist. Ct. App. Sept. 19, 2014).  The court found that the attorney’s duty of loyalty to a client precluded their attorney from serving as a disinterested appraiser.

The vast majority of Courts have held that an appraiser with a financial interest in the outcome of the appraisal is not impartial or disinterested.  In a fairly recent decision, ShreeHari Hotels, LLC v. Society, Ins., the plaintiff (“Shree”) made a demand for appraisal pursuant to its insurance policy with defendant (“Society”) which provided that:

If we and you disagree on the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser.  The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction.  The appraisers will state separately the amount of loss. If they fail to agree, they will submit their differences to the umpire.  A decision agreed to by any two will be binding.

2013 WL 1500455 (S.D. Ind. April 11, 2013).

Shree and Society each appointed an appraiser.  The appraisers then chose an umpire. Following an appraisal award that was favorable to Shree, Society moved to set aside the award on the ground that Shree’s appraiser was not impartial because his compensation in the case was directly tied to the success of Shree’s claim by virtue of a contingency fee agreement with their appraiser.  The Court agreed and set aside the appraisal award stating:  “It is axiomatic that an appraiser with a financial interest in the outcome of an appraisal is not impartial.”  Id.  Likewise, in Central Life Ins. Co. v. Aetna Cas. & Sur Co., the Court found that an appraiser with a financial interest cannot, as a matter of law, be disinterested in the outcome. 466 N.W.2d 257, 261 (Iowa 1991).  Similarly, the court in Gold v. State Farm Fire & Casualty Co., the court concluded that an impartial appraiser cannot have a financial interest in the outcome.  2010 WL 3894141 (D. Colo. September30, 2010).

In Harris v. Am. Modern Home Ins. Co., the court held that while an appraiser “may receive a flat fee or an hourly fee, his fee may not be based on percentage of the settled loss…when an appraiser is paid through a contingent fee arrangement, the appraiser receives a direct financial interest in the dispute and becomes an interested party. 571 F.Supp.2d 1066 (E.D. Mo. 2008). However, the court in Rios v. Tri State Insurance Company, the insurance policy required a “competent, independent” appraiser. The Court relied on the dictionary definitions of “independent”, which means “not subject to control, restriction, modification or limitation from an outside source” and concluded that the policy language meant that the appointed appraiser could not be affiliated with either of the parties, but did not disqualify an appraiser who was being paid a contingency fee off the award, but was not affiliated with the party.  Further, in Linford Lounge Inc. v. Mich. Basic Prop. Ins. Ass’n, the Court held that an insurer’s public adjuster whose contract provided that he receive 7% of the amount the insured received from the insurance company, but whose contract was cancelled just before, or at the time he was appointed as the insured’s appraiser was disinterested, even though he had previously prepared an estimate of the loss in his capacity as the insurer’s public adjuster.  259 N.W.2d 201, 202-03 (Mich. Ct. App. 1977)

Conclusion.  If the appraisal process is invoked, attention should be given to the relationship between the insured and their appointed appraiser.  If the appraiser has a financial interest in the outcome, or a particular duty to the client, a court will likely disqualify the appraiser on this basis.  Furthermore, while Courts have stated that there is no real difference between the terms competent and impartial, the Rios decision shows that the term independent is interpreted quite differently.  UrbCamCom/WSU I LLC v. Lexington Ins. Co., No. 12-CV-15686, 2014 WL 1652201(E.D. Mich. April 23, 2014).  As such, if a disinterested appraiser is what the insurer seeks, the insurance policy should clearly and unambiguously require a disinterested appraiser.