Tenth Circuit Rules Against Insurer and Decides That Appraisers Can Decide Causation

In the continuing saga of what can and cannot be appraised in a property insurance appraisal, the Tenth Circuit, in contrast to many other courts, has ruled appraisers can determine coverage issues.

In Bonbeck Parker, LLC v. Travelers Indem. Co. of Am., 2021 U.S. App. LEXIS 29607 (10th Cir. October 1, 2021), a hailstorm damaged three buildings covered under a commercial property insurance policy.  A dispute between the insured and insurer arose over whether the hailstorm caused all of the damage claimed.  The insurer paid some of the claimed damage, but denied coverage for other claimed damage, asserting that it was caused by non-covered causes such as wear and tear.  The insured invoked appraisal. 

The insurer asserted that it would only participate in appraisal under certain conditions.  The insurer wanted to limit the appraisal only to undisputed hail damages.  Thus, the appraisal panel would be limited to deciding how much repairs would cost but not what caused the roofs to require repairs in the first place.  The insured objected. 

The insurer filed a declaratory judgment action.  On summary judgment, the district court sided with the insured and agreed that the appraisal clause allows appraiser to determine causation.  The parties had other disputes, but this blog entry focuses on the causation issue within appraisal.

The Tenth Circuit made an “Erie Guess” as to how the Colorado Supreme Court would rule on the issue.  The district court and Tenth Circuit focused on the appraisal clause’s statement that, if there is a disagreement as to the “amount of loss,” either party can demand appraisal of the loss.  The Tenth Circuit observed that “amount of loss” was not defined in the policy and consulted dictionary definitions.  The Tenth Circuit cited various definitions of “loss,” such as “the amount of an insured’s financial detriment by… damage that the insurer is liable for.”  The Tenth Circuit concluded that all of the definitions included a causation component.  Further, the Tenth Circuit surveyed case law from Minnesota, Iowa, and Delaware.  Perhaps the most emphatic citation was from an Iowa intermediate appellate court that held: “causation is an integral part of the definition of loss, without consideration of which appraisers cannot perform their assigned function.”

The Tenth Circuit rejected various arguments by the insurer.  For example, the insurer noted that the appraisal clause gives the insurer the right to deny coverage even after the appraisal is complete.  The insurer argued that denial could be based on any ground available in the policy, including that the damage resulted from an excluded cause of loss.  The insurer argued that the court could not give effect to the plain meaning of the sentence if the appraisal panel determines causation. 

The Tenth Circuit reasoned that the insurer’s argument could not be reconciled with the plain meaning of “amount of loss.”  The Tenth Circuit opined that “amount of loss” explained subjects on which the parties may request appraisal, while the “right to deny” concerns the insurer’s options after an appraisal on one of those subjects. 

Also for example, the Tenth Circuit rejected an argument by the insurer that the term “appraiser” reflected an intent to limit that person to making monetary determinations, thus precluding causation determinations.  The Tenth Circuit opined that determining the value of something includes a causation element because that “something” is the “amount of loss.”     

In conclusion, the Tenth Circuit cited the leading case from the Texas Supreme Court, State Farm Lloyds v. Johnson, 290 S.W.3d 886, 892 (Tex. 2009):

As the Texas Supreme Court observed, that kind of causation issue arises “in every case,” and if “appraisers can never allocate damages between covered and excluded perils, then [they] can never assess hail damage unless a roof is brand new.” Id. at 892-93. Such a result “would render appraisal clauses largely inoperative, a construction we must avoid.” Id. at 893. Other district-court decisions have recognized as much, and we find their reasoning persuasive. See, e.g., Auto-Owners Ins. Co. v. Summit Park Townhome Ass’n, 100 F. Supp. 3d 1099, 1103 (D. Colo. 2015).

Notably, the Texas Supreme Court in Johnson also opined as follows in what has become an oft-cited headnote:

Indeed, appraisers must always consider causation, at least as an initial matter. An appraisal is for damages caused by a specific occurrence, not every repair a home might need. When asked to assess hail damage, appraisers look only at damage caused by hail; they do not consider leaky faucets or remodeling the kitchen. When asked to assess damage from a fender-bender, they include dents caused by the collision but not by something else. Any appraisal necessarily includes some causation element, because setting the “amount of loss” requires appraisers to decide between damages for which coverage is claimed from damages caused by everything else.

This of course does not mean appraisers can rewrite the policy. No matter what the appraisers say, State Farm does not have to pay for repairs due to wear and tear or any other excluded peril because those perils are excluded.

Johnson, 290 S.W.3d at 893. 

In a footnote, the Tenth Circuit cited authorities from the Supreme Courts of Alabama and Mississippi holding that appraisers cannot resolve causation issues.  The Tenth Circuit did not get into the rationales of those other courts, but stated that its decision was based on a conclusion of how the Colorado Supreme Court would resolve the issues.

The Tenth Circuit held that the district court properly granted summary judgment for the insured on its claim that the insurer breached the policy when it refused to allow the appraisal to proceed. 

Under Bonbeck, although appraisers may consider causation, the insurer was not wrong to be concerned that the appraisal process would be abused to sweep everything that was wrong with the insured’s buildings into the appraisal, resulting in an award that the insurer would be pressured to pay in full regardless of coverage.  It will be interesting to see how Bonbeck is applied and if a Colorado state court adopts the reasoning and its holding. 

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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