Foran Glennon Palandech Ponzi & Rudloff

October 2017

Colorado Appraisal Dispute Seems To Discount True Impartiality

Is it possible to be an advocate, yet remain impartial? If that concept seems oxymoronic to you, then the recent decision of the Colorado Court of Appeals in Owners Insurance Co. v. Dakota Station II Condominium Assoc., 2017 WL 3184568 (Colo.App. 2017) is recommended reading. Owners concerned an insurer’s attempt to set aside a property damage appraisal award based on the partiality of the insured’s appraiser. Consistent with the standard appraisal provision contained in most property policies, the Owners policy provided that the insurer and the insured would each name a “competent and impartial appraiser.” The court denied the insurer’s petition, holding that the insured’s appraiser’s conduct, (including pre-appraisal meetings with the insured, communications with the insured’s public adjuster during the appraisal, an alleged partnership between the appraiser and the public adjuster, and aspects of the appraisal contract which capped the appraiser’s fees at 5 percent of the replacement cost value determined by the appraisal), did not indicate a lack of impartiality. That holding alone is unremarkable. However, the Owners court ventured further, interpreting and defining what it means to be an “impartial appraiser” as a matter of law, and the result may shock you.

For example, if you think “impartial” means “not favoring one side over the other,” the Owners court thinks you are wrong: “[w]e do not agree that the impartial appraiser called for in this policy may not favor one side more than the other.” Owners Insurance Co, 2017 WL 3184568 at *3. Tasked with interpreting an undefined but readily definable contractual term (“impartial”), Owners shunned any standard dictionary definition of the term, choosing instead an interpretation based on the structure of the policy’s appraisal provision and its perceived purpose. In doing so, Owners appears to discount the need for true impartiality based on the fact that disputes between partisan appraisers require the vote of an impartial umpire for their resolution:

The relevant paragraph of the policy goes on to provide that the two appraisers will select an “umpire,” and if the two appraisers fail to agree on the amount of loss, they will submit their differences to the umpire. Therefore, this language distinguishes the “impartial” appraisers from the umpire. Under this method, no one appraiser determines the final outcome; rather it is left to the umpire to resolve the differences from the appraiser. The policy plainly contemplates that the appraisers will put forth a value on behalf of the party that selects them …Thus, the policy does not hold an appraiser to the standard of “not favoring one side more than another,” in the sense that a judge or arbitrator (or the umpire under this policy) would be required to be impartial.

Owners Insurance Co, 2017 WL 3184568 at *4.

As a matter of contractual interpretation, perhaps the most shocking feature of this rationale is that the appraisal provision only uses the term “impartial” once, to specifically modify “appraiser,” not “umpire.” Apparently, by virtue of the umpire’s power to resolve appraiser disputes, the Owners court considered it self-evident that the umpire must be truly “impartial,” (e.g. not favoring one side over the other).

On the surface, the Owners court’s “no harm, no foul” approach to appraisal partisanship has some appeal. Particularly among the American legal community, the idea that competing zealous advocacy before a neutral decision-maker is the best way to approximate just outcomes is no foreign concept. Provided that the umpire and ultimate decision-maker does not favor one party over the other, what is the harm in a bit of partiality amongst appraisers? The answer depends on how one views the primary purpose of a contractual appraisal remedy, and whether or not the advocacy model of civil litigation is an appropriate model to advance that purpose.

The appraisal remedy provides a relatively inexpensive and expeditious (compared to full blown litigation) method to resolve amount of loss disputes. Sanctioning partisan appraisers comes at the cost of diminishing the difference between appraisal and litigation. Significantly, interpreting “impartial” to mean “not partial” increases the chances that appraisals can be decided without the costs associated with retaining an umpire. Interpreting the appraisal provision to provide that each party will obtain an impartial opinion
concerning the amount of loss, and that any further dispute will be resolved by an umpire, provides two mechanisms for final resolution based on two to three impartial opinions. The impartial appraisers may agree on the amount of loss, the least expensive and most expeditious road to resolution. Alternatively, if necessary, a third impartial view from the umpire will break the tie.

In contrast, if each side’s appraiser is an advocate, as Owners seems to suggest, the likelihood that appraisals will conclude by agreement of the appraisers without umpire involvement is likely to decrease drastically. Owners effectively reduces the appraisal provision to a means by which advocates of each party will act as a mouthpiece for that party’s position before a neutral decision-maker. In lieu of an interpretation that contemplates a second, third, and if necessary, fourth impartial opinion, the appraiser-as-advocate approach promotes the resolution of amount-of-loss disputes based on a single impartial opinion, that of the umpire. While this form of alternative dispute resolution is common in contractual agreements to arbitrate, it is not the process specified in the standard appraisal provision in property policies. Appraisal and arbitration may be relatives, but they are not identical twins. Indeed, a significant underpinning of the Owners decision is that appraisal is not arbitration, such that the standards of impartiality contained in the Colorado Uniform Arbitration Act did not apply. Owners Insurance Co, 2017 WL 3184568 at *1-2. Nonetheless, the Owens court’s explicit endorsement of partisan advocacy substantially closes the gap between a two-step appraisal process and a single-step arbitration.

Condoning partisan favoritism by appraisers also increases the transactional costs of umpire appointment. As noted in Owners, the standard appraisal provision provides that the appraisers will select the umpire and provides for court appointment of the umpire in the event that the appraisers cannot agree. Truly impartial appraisers are more likely to reach an agreement on the appointment of an umpire in the first place. Partisan appraisers, on the other hand, are more likely to reach an impasse, often reflexively adhering to the zero-sum mindset that what is good for thee must be bad for me. The cost is not trivial, requiring the retention of counsel by both parties to engage in a mini-litigation over the choice of an umpire, at a cost which often significantly exceeds the umpire’s actual fee.

Financial costs are not the only consideration. As previously discussed, the Owners decision relies heavily upon the fact that a truly impartial umpire will cast the decisive vote, and appears to seek refuge in the fact that the umpire is not appointed by the parties to the insurance contract: “The umpire who is not selected by either party, makes the final determination.” Owners Insurance Co, 2017 WL 3184568 at *4. It would be difficult to argue with this statement if the umpire appointment was made by impartial appraisers, but Owners permits the decision to be made by advocates who are free to favor the interests of their patrons over the opposing party. Owners permits the impartial appraiser to confer with the retaining party on matters of strategy, to collaborate with other agents of the retaining party, and to openly favor the retaining party’s position in the appraisal process. These allowances are inconsistent with the notion that the umpire is not selected by either party. If an impartial appraiser is free to advocate on behalf of his/her patron, there is no meaningful distinction between the appointment of an umpire by a party’s appraiser and the appointment of an umpire by the party. In this regard, the pernicious influence of appraiser partiality is not mitigated by the appointment of an umpire, but extends to that process with increased possibilities of corruption.

While Owners does not purport to provide carte blanche to appraisers to indulge their biases, the lines that it seeks to draw are difficult to identify. Once the absence of partiality is removed from the definition of impartial, what remains? According to Owners, an “impartial” appraiser must be impartial in the same sense as a retained expert at trial. Owners Insurance Co, 2017 WL 3184568 at *4. This seems to suggest that the employment of appropriate methodology in reaching an opinion is a suitable proxy for true impartiality. Id. (“We understand this to mean that an impartial appraiser … applies appraisal principles with fairness, good faith and lack of bias.”). Unfortunately, Owners does not explain just how an appraiser can favor one party over the other with a “lack of bias.” Beyond that linguistic paradox, the expert witness comparison is inapt for several reasons.

Foremost, an expert witness at trial plays a fundamentally different role than an appraiser during an appraisal. An expert witness in a litigation offers his or her opinion on an issue, but does not decide issues of fact, a role which is reserved exclusively for a judge or a jury. Thus, an expert’s opinions are offered to a neutral third-party, who then makes the factual determinations. By contrast, an appraiser both provides his or her opinions on the disputed issues, and votes on the final appraisal award. Thus, an appraiser’s role in an appraisal is significantly more impactful than that of an expert witness at trial. In a trial with expert witnesses, a ruling results from a majority vote by neutral fact-finders (e.g., a jury); in an appraisal, the award requires a vote of an appraiser, who is acting on behalf of a party, and has offered an opinion on the disputed issue. When viewed through this lens, it is clear that the expert witness and the appraiser perform vastly different functions.

The expert witness comparison also fails to account for the difference in procedural safeguards between appraisal and litigation. A litigant has several avenues to challenge the testimony of a partisan expert, including the threshold admissibility requirements of Federal Rule of Evidence 702, and the exposure of bias through vigorous cross-examination. By contrast, appraisal is an informal proceeding devoid of many procedural or evidentiary safeguards. Indeed, the principal contractual protection for the integrity of the appraisal process is the requirement that both appraisers must be “impartial.” Defining that term to permit partisan favoritism, as did the Owners court, substantially undercuts this modest protection.

Charitably read, Owners can be viewed as an attempt to reduce litigation over appraisal awards. Whether it will actually result in those ends is questionable, and the costs of its means high. A preferable means of reducing litigation, and one faithful to the contractual language, may be to require the parties to retain impartial appraisers in lieu of partisan advocates. The parties to an appraisal would be required to conform their conduct to the law. Instead, Owners adjusts the law to accommodate the conduct of the parties, leaving all sides with the unenviable task of determining what it means to favor one side over the other without bias. Impartial advocates on both sides will undoubtedly grapple with that question in the days to come.

Thomas H. Blomstrom, Paul C. Ferland, Charles J. Rocco