“Disinterested” Appraiser Question Certified to Florida Supreme Court

On April 15, 2020, Florida’s Third District Court of Appeal certified to Florida’s Supreme Court the following question deemed to be of great public importance[1]:

CAN A FIDUCIARY, SUCH AS A PUBLIC ADJUSTER OR APPRAISER WHO IS IN A CONTRACTUAL AGENT-PRINCIPAL RELATIONSHIP WITH THE INSUREDS AND WHO RECEIVES A CONTINGENCY FEE FROM THE APPRAISAL AWARD, BE A DISINTERESTED APPRAISER AS A MATTER OF LAW?[2]

Insurers in Florida have grappled with the question in recent years, with public adjusters increasingly naming themselves as appraisers, leading to litigation over an alternative dispute resolution process designed to avoid litigation. The answer to the question will significantly impact the future of appraisal in Florida.

In Florida and in other states, an appraisal clause in most property insurance policies provides an alternative to litigation for insurers and policyholders who disagree about the value of a property insurance claim. The premise is straightforward: rather than litigate a breach of contract dispute in court, either party can invoke appraisal. Generally, each party then names its own appraiser. The policy requires that each appraiser must be competent and either “disinterested” or “impartial.” The disinterested or impartial appraisers work together to reach agreement about the value of the claim. Absent agreement between the two appraisers, they select a neutral umpire who reviews the appraisal information. An appraisal award signed by the umpire and at least one of the two appraisers is binding on the insurer and policyholder.

            Sounds fair, but property insurance appraisals too often have become a cottage industry with public adjusters advising their policyholder clients at the outset of a claim that they will pursue appraisal. Why? With limited procedures for courts to review and oversee appraisals, appraisals are prone to untested damage theories and egregiously excessive repair estimates, combined with obscure and inconsistent appraisal processes, resulting in plethoric appraisal awards. This is particularly true in Florida, where appraisals are not limited to determining damage scope and amount, but also determine questions of coverage:

[Appraisal] necessarily includes determinations as to the cost of repair or replacement and whether or not the requirement for a repair or replacement was caused by a covered peril or a cause not covered, such as normal wear and tear, dry rot, or various other designated, excluded causes.[3] (emphasis added).

            Insurers in Florida have cried foul when policyholders name their public adjusters as their appraisers. Pursuant to Florida Statute § 626.854, public adjusters receive a commission fee of 20 percent of the insurance claim payment – so the higher the insurance claim payment, the higher the public adjuster fee. This, insurers argue, renders a public adjuster not disinterested or impartial in the outcome of the appraisal.

The concurring opinion in Sanders, supra, discusses the evolution of this issue in Florida courts, leading to a split among appellate districts as well as Florida federal courts.[4] Recently, the Fourth and Fifth District Courts of Appeal of Florida have held that a public adjuster is not a “disinterested” party and may not serve as a disinterested appraiser for the policyholder.  State Farm Florida Insurance Company v. Valenti, 285 So.3d 958 (Fla. 4th DCA 2019); State Farm Florida Insurance Company v. Crispin, 290 So.3d 150 (Fla. 4th DCA 2020) (when a policyholder’s public adjuster is entitled to collect a contingency fee or percentage based on recovered insurance proceeds, the public adjuster may not serve as a “disinterested appraiser.”).  See also Florida Ins. Guar. Ass’n v. Branco, 148 So.3d 488 (Fla. 5th DCA 2014) (A “disinterested” person is one who is free from prejudice, bias, or partiality and does not have a pecuniary interest). 

            However, the Third District Court of Appeal of Florida is bound by decades-old precedent in Rios v. Tri-State Insurance Company, 714 So. 2d 547 (Fla. 3d DCA 1998) and Galvis v. Allstate Insurance Company, 721 So. 2d 421 (Fla. 3d DCA 1998).  At the time Rios and Galvis were decided, the Code of Ethics for Arbitrators in Commercial Disputes stated “persons who are requested to serve as arbitrators should before accepting, disclose (1) any direct or indirect financial or personal interest in the outcome of the arbitration…”  As such, the Third District concluded that a policyholder’s public adjuster can serve as the policyholder’s appraiser as long as the financial interest of the appraiser is fully and voluntarily disclosed.  But the Florida Supreme Court has since stated that there is a clear difference between appraisal and arbitration and consequently the procedures followed in the arbitration code do not govern the procedures of an appraisal.[5] 

            Even when a policy of insurance does not define “disinterested” or “impartial,” an appraiser should not have a vested financial interest in the policyholder’s possible recovery from the insurer.  In Verneus v. Axis Surplus Insurance Co., 2018 U.S. Dist. LEXIS 147100 (S.D.Fla. 2018), the court declined the policyholder’s first selection of its public adjuster as its appraiser. The court held that it would be highly unlikely that the appraiser would now reach a different conclusion from the work product he previously produced in his role as the public adjuster.  And, when the policyholder next selected its expert witness as its appraiser, the court turned to the Black’s Law Dictionary definition of “impartial”:

[n]ot favoring one side more than another; unbiased and disinterested; unswayed by personal interest.

Impartial, Black’s Law Dictionary (10th ed. 2014). The court held that the expert witness, who had already given a plaintiff-paid expert report, was neither unbiased nor disinterested and would likely not be unswayed by personal interest, and as such, was not impartial.

            However, in Brickell Harbour Condo. Ass’n v. Hamilton Specialty Ins. Col, 256 So. 3d 245 (Fla. 3d DCA 2018), the court mysteriously concluded that “impartiality means something other than the “dictionary definition’ as it relates to appraisers appointed and paid by the parties.”[6]

            Until Florida courts provide clarity regarding who can serve as an impartial or disinterested appraiser, the appraisal process will remain riddled with disputes that must be litigated, adding time and expense to what should be a fair and reasonable dispute resolution mechanism.

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[1] Florida’s Supreme Court has discretion over whether it will rule on this question, but as a practical matter, the state’s high court usually accepts jurisdiction over questions identified by state appellate courts as being of great public importance.

[2] State Farm Fla. Ins. v. Sanders, 2020 Fla. App. LEXIS 5033 (Fla. 3d DCA 2020)

[3] State Farm Fire & Cas. Co. v Licea, 685 S2d 1285 (Fla 1996).

[4] Citing Rios v. Tri-State Insurance Company, 714 So. 2d 547 (Fla. 3d DCA 1998) and Galvis v. Allstate Insurance Company, 721 So. 2d 421 (Fla. 3d DCA 1998); State Farm Florida Insurance Company v. Cadet, 2020 Fla. App. LEXIS 2153 (Fla. 5th DCA 2020), and State Farm Florida Insurance Company v. Crispin, 2020 Fla. App. LEXIS (Fla. 5th DCA 2020), as well as the decision in State Farm Florida Insurance Company v. Valenti, 285 So. 3d 958 (Fla. 4th DCA 2019), regarding the disqualification of a party’s appointed appraiser with a financial interest in the outcome.

[5] Allstate Ins. Co. v. Suarez, 833 So. 2d 762 (Fla. 2002)

[6] The certified question in Sanders, supra, seeks the Florida Supreme Court’s determination of the meaning of “disinterested” appraiser, and not the meaning of “impartial” appraiser.