Federal Court Sides with Association in Appraisal Dispute

It seems that every few years the appraisal process becomes a hot topic across the country. While there are a number of disputes that can arise, the scope of what is determined in the appraisal process is often at the forefront of the argument.

As I noted in What Is The Role of An Appraiser, the standard appraisal provision states that appraisers will determine “the value of the property or the amount of loss.” Although this seems fairly straight forward, carriers and policyholders seem to regularly dispute what the “amount of loss” encompasses. Does it relate to the value of damages agreed to have been caused by a covered peril such as wind or hail? Or does it involve determining the amount or extent of damages caused by that covered peril? This may seem like a distinction without a difference to the uninitiated, such a determination is crucial to determining when, if ever, appraisal is appropriate to resolve a dispute.

The vast majority of jurisdictions have found that determining the “amount of loss” is not simply an exercise in valuation. As many courts have noted, this would limit the appraisal process solely to situations where the parties agree over the entire scope of damage (which is the very rare exception). Instead, most courts hold that the appraisal panel determines the “amount of loss” caused by a covered event. If the parties agree that hail is a covered cause of loss, but dispute whether the roofing system was damaged by the hail, then the appraisal process could resolve this dispute.

Colorado seems to be the hotbed of this dispute right now. Many carriers are reversing their longstanding positions and arguing that appraisal cannot determine causation, forcing policyholders to litigate to recover additional amounts. Some carriers are even changing their stance on a case by case basis to enforce appraisal when they believe it benefits them and prevent it when the situation does not.

While Colorado has several state trial court opinions finding that appraisal can (and should) determine the cause of disputed damages, there are no appellate decisions on point. There are also no published federal court opinions discussing the issue in any detail. This has, in part, led to the increase in disputes as of late.

An association that David Pettinato and I represent in the Denver area fought this battle in the Colorado Federal District Court. The carrier made multiple payments of over $200,000 but sued when the association would not accept that amount as a final sum. When the association invoked the appraisal process, the carrier balked claiming that appraisal was inappropriate to determine whether the damages were caused by the hail storm.

After weeks of briefing, the court issued a detailed 13-page opinion, finding that appraisal was required under the policy. The court noted that the appraisal panel could determine the amount of loss caused by the hail storm and found this determination was final and binding on the parties. While not an appellate court decision, the district court’s ruling is significant for Colorado policyholders and insurers. Given the detail and analysis in the Memorandum Order, other courts are likely to find it persuasive in future rulings.

Disputes over the scope of appraisal will likely continue, but this decision is a nice leap forward for policyholders attempting to utilize the contractual process to resolve disputes without litigation.

Claim Investigation, Negotiation, and Payment in Colorado

There are currently a large number of condominium and homeowners associations pursuing property damage claims in Colorado. With the number of wind and hail storms over the past couple of years, many of these claims are coming with higher dollar values than most policyholders have submitted in the past. One question I continually receive is what obligations an insurance company has in adjusting and paying a claim.

Like most states, Colorado law places an obligation of good faith and fair dealing on an insurance company and requires that the company, among other things, promptly and fairly investigate the claim, negotiate and settle the claim in with due regards for the best interest of the policyholder, and pay the claim as promptly as possible. Generally speaking the duty of good faith continues for the life of the parties’ relationship, including during an arbitration, appraisal, or lawsuit.

In regards to timing, property and casualty insurers in Colorado generally must pay claims within 60 days after receipt of a “valid and complete claim” unless there is a reasonable dispute between the parties.1 This means that after all relevant information has been provided proving the claim, and any litigation and/or appraisal is completed if applicable, an insurer must pay the full amounts owed under the policy.

Where Colorado differs from many states, however, is that an insurance company’s duty to negotiate, settle, or pay a claim can be suspended when there is a genuine dispute over the amounts owed under the policy and the parties have become adversarial. Colorado courts have generally found that the adversarial relationship exists when litigation is filed and when appraisal or arbitration is demanded. These requirements arguably would not be reinstated until appraisal, arbitration, or litigation is concluded.

Timeframes are important, especially in larger insurance claims where work needs to be completed as soon as possible. Aside from the legal deadlines, insurance policies also contain there own deadlines that must be complied with as well. Associations, as well as other policyholders, should document their claims thoroughly and as early as possible. Providing the supporting documentation immediately after a loss can get the claim paid quicker and allow the reconstruction process to begin in a timely fashion.


1 3 Colo. Code Regs. 702-5-1-14 Sec. 4(A)(1).

Colorado Court Employs Grammatical Approach to Determine Man-Made Earth Movement Not Excluded Under Earth Movement Policy Provision

If asked what an ordinary person might select for casual reading, one might think of books, magazines, or newspapers, but probably not insurance policies. If an ordinary person were to read an insurance policy, what would he or she think it meant? In states that employ the “reasonable expectations doctrine” for insurance policies, courts are often faced with this question. Colorado is one of the states that considers the reasonable expectation of the insured when interpreting insurance policies, and a recent condominium case there took a grammatical approach to determine what an ordinary reader would have understood the condominium policy to have covered.

In High St. Lofts Condo. Ass'n, Inc. v. Am. Family Mut. Ins. Co., 10-CV-02484-MSK-BNB, 2011 WL 4479120 (D. Colo. Sept. 26, 2011), a Boulder condominium started cracking and sloping when the city began road construction nearby. The condominium alleged that vibrations from the local construction caused the damage to its property. The condominium filed a lawsuit against the contractor responsible for the road construction and also filed a claim with its insurance company. The insurance company claimed that “earth movement” caused the damage, and that it was excluded under the following provision in the policy:

We will not pay for loss or damage caused directly or indirectly by any of the following. [ ... ]
(4) Earth sinking (other than sinkhole collapse), rising, or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water underlying the ground surface.

To determine what an ordinary reader would understand this policy language to mean, the court took a fine-toothed comb to the grammatical structure of this exclusion.

[S]ubparagraph (4) … is somewhat of an ungrammatical maze. It begins by straighforwardly listing three verbs (technically verb-like gerunds)—“sinking,” “rising,” and “shifting”—each of which describes ways in which earth can move. Somewhat jarringly, the sentence then interposes a definitional term—“including”—without clearly indicating what term or terms are being defined. It proceeds to define one or more of the previous verbs with a noun phrase —“soil conditions.” Because the paragraph later defines the noun phrase “soil conditions” to itself comprise “contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water underlying the ground surface,” an ordinary insured attempting to understand the paragraph would simply substitute the definitional portion of the paragraph's second sentence for the term “soil conditions” in the first sentence, yielding a provision that purports to exclude coverage for “[e]arth sinking ..., rising, or shifting including contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water underlying the ground surface....”

This is somewhat of an improvement, although the object being modified by “including” is still unclear. An ordinary insured might then conclude that a given unit of earth can only move in a few different dimensions: it can “sink” or “rise” relative to its neighboring units, it can “shift” either laterally or forward and backward compared to its neighbors, or it can “expand” or “contract” itself. The remaining terms —“freezing, thawing, improperly compacted soils and the action of [subsurface] water”—describe mechanisms that would cause the earth to move, not movements themselves. Finally, the terms “settling, cracking or other disarrangement of foundations” describe damage that might result when the earth moves as described.

The court concluded that an ordinary person would reasonably understand this policy provision to exclude coverage for damage, when that damage results from movement of the earth caused by “freezing, thawing, erosion, improperly compacted soil, or sub-surface water.” In essence, except for improperly compacted soil, the court removed all man-made causes of earth movement from this exclusion. The court looked to the facts of the case and determined that man-made vibrations from nearby construction may have caused the condominium’s damage and denied the insurance company’s motion for summary judgment.

While some states like Colorado use the reasonable expectations doctrine, many other states take a plain meaning approach that lets the terms of the insurance policy control, regardless of the understanding or expectation of the parties. When analyzing the plain meaning of the terms of a policy, courts can also look to the grammatical construction to determine what policy provisions mean. See Farmers Ins. Exch. v. Versaw, 99 P.3d 796, 797 (Utah 2004); Rich v. Principal Life Ins. Co., 875 N.E.2d 1082, 1091 (Ill. 2007).

The grammatical analysis of the policy in the High St. Lofts case could also be used in jurisdictions that employ the plain meaning approach. The rules of grammar apply to what the terms actually mean as well as to what a reasonable person would expect them to mean. As illustrated by the analysis of this case, the interpretation of insurance policies is not always easy. If you have questions regarding your policy or interpretation, please contact competent legal counsel.