No Good Deed Goes Unpunished: Appraiser Working on a Contingency Fee not Impartial

CONTINGENCY FEE DESTROYS IMPARTIALITY

Travelers was presented with a claim that it evaluated and paid promptly. Faced with evidence of additional damage it paid more. Regardless the insured assigned its additional claim to its roofer who retained an appraiser who agreed to work on a contingency fee plus provide a 15% fee to the roofer. In Travelers Casualty Insurance Company Of America v. Mudd’s Furniture Showrooms, Inc., CMS Roofing, Inc., and Jaron Jaggers, Civil Action No. 4:19-CV-186-JHM, United States District Court, W.D. Kentucky, Owensboro Division (March 28, 2022) the USDC in Kentucky found it necessary to vacate the award for breach of the requirement for an impartial appraisal.

FACTS

In a protracted insurance dispute resulting from roof damage to a Mudd’s Furniture Showrooms (“Mudd’s”) building caused by a severe wind and rainstorm (the “Loss”) the parties were unable to resolve the claim, and Mudd’s invoked the appraisal process under the policy. The resulting appraisal award, which Travelers deems invalid, prompted Travelers to file a declaratory judgment action.

The Initial Loss and Investigation

Travelers adjusted the loss claim making a payment reflecting only the replacement of the metal roof covering, some exterior roof patching, and limited interior water damage in the rooms located beneath the single section of roof.

Mudd’s entered into an agreement with CMS Roofing, Inc., a roofing contractor, which authorized CMS to assist Mudd’s in the insurance claim.  Responding to CMS’s discovery, Travelers deployed engineers and inspectors to the property to check it out themselves. A subsequent engineering report confirmed CMS’s findings and acknowledged further areas of damage beyond Travelers’ initial assessment. Travelers re-evaluated the claim in December 2017 and permitted more money to be paid to cover the exterior roofing damage. Travelers’ re-adjustment increased the claim allowance to $154,887.84, with a $114,910.64 ACV. Travelers accordingly paid Mudd’s $64,154.85 (the difference between the initial ACV paid in June and the newly calculated ACV in December). [

Mudd’s authorized CMS to proceed with the roof replacement. CMS completed the roof replacement for the areas covered by the re-adjustment in June 2018.

THE APPRAISAL

Despite Travelers’ adjustments, Mudd’s and CMS’s Jaron Jaggers [“Jaggers”] retained doubts about whether the claim assessments were accurate and sufficient to cover the full extent of the damage. Mudd’s assigned its rights in the insurance claim to Jaggers. Thereafter, Jaggers had discussions with Mr. Denis Rowe, Vice President and Partner in The Howarth Group, which is a firm that provides insurance claim consulting services to policyholders. Jaggers, Rowe, and Chuck Howarth, President and Founder of the Howarth Group, had a dinner meeting where they discussed the claim. Mudd’s and Jaggers subsequently signed an Appraisal Employment Agreement naming the Howarth Group as their appraiser. The fee arrangement in the original Appraisal Employment Agreement between Howarth and Mudd’s was for an hourly rate of $375, with the total fee to be capped at no more than 30% of any additional amounts recovered by Mudd’s through the appraisal process (a “contingency fee cap” arrangement). Furthermore, the agreement stated: “should the process produce no additional settlement then no fee will be due.” Howarth agreed to pay Jaggers a 15% referral fee for the appraisal work, to be paid from Howarth’s fee as the appraiser.

Umpire Ward considered submissions from both parties reflecting its perceived amounts of loss, respectively.  The Award comprised two separate estimates created by Ward, one for exterior roofing damage and one for interior damage. The Award determined the cause of the Loss to be wind and water damage and set the Loss amount as $784,754.64 ACV and $844,290.37 RCV. The exterior damage estimate consisted of $283,827.42 RCV, and the interior estimate amounted to $500,927.22 for ACV and $560,462.95 for RCV.

DISPUTE OF THE AWARD AND TRAVELERS’ COMPLAINT

Travelers alleged that the Award should be vacated because Howarth was not impartial as Mudd’s appraiser, as required by the Policy, owing to his contingency fee-based arrangement with Jaggers. Travelers claims that Mr. Howarth colluded with Jaggers to submit inflated roofing estimates for the appraisal, rather than disclose the amounts actually incurred by Jaggers and CMS to replace the roofs, because he had a direct financial interest in the outcome of the appraisal.

DISCUSSION

Travelers argued strenuously that Howarth was paid on a contingency fee basis and thus cannot be an impartial appraiser. A contingency fee arrangement renders an appraiser not impartial because it would generate a “personal stake in the appraisal results.” [Veranda Gardens, LLC v. Secura Ins., No. 3:18-cv-611-DJH-RSE, 2019 WL 2438788, at *4 (W.D. Ky. June 11, 2019).] When appraisers have a contingency fee arrangement in place but later retract it, like what Howarth did in this case, courts have still found the agreement to improperly affect the appraiser’s ability to be impartial. [See Auto-Owners Ins. Co. v. Summit Park Townhome Association, No. 14-cv-03417-LTB, 2016 WL 1321507, at *5 (D. Colo. Apr. 7, 2016).]

A provision that states “should the process produce no additional settlement then no fee will be due” clearly is wrongful. Here, Howarth’s initial fee arrangement clearly incentivizes him to expand the scope of loss in this case. Whether the fee arrangement was modified to remove such provisions is disputed, but the fact that it was there at the beginning is indicative of Howarth’s mindset with respect to the appraisal. Howarth initially proposed the contingent cap because he wanted Mudd’s to “benefit” from his appraisal.

An appraiser must not show bias or favoritism to any party or do the partisan bidding of one side.

Howarth is not one who occasionally acts as an appraiser in an insurance dispute. Acting as an appraiser is now his principal business.  His business is to help policyholders when his focus as an appraiser should be to fairly and impartially value a loss.

In this case, Howarth initially got involved when he learned from Denis Rowe of an opportunity where his firm could add “scope” to an insurance claim. Jaggers, Rowe, and Howarth had meetings where they discussed the claim and the idea that Howarth’s fee would come from adding “scope” to the interior damage to the building. Even before the appraisal process was invoked, Rowe advised Howarth that “we could add another 100 to 150 [thousand dollars] on the claim.”

Howarth initially tied his fee to whatever amount was added over what Travelers had already offered in settlement. Moreover, he tried to hide this from Travelers, redacting the portions of both his compensation package and Jaggers’ referral fee in correspondence with Travelers. The relationship that Howarth had with Jaggers, the roofer-who became the insured via an assignment- was more than troubling. Cultivating a relationship with a roofing contractor like Jaggers is apparently important to Howarth’s business, so much so that Howarth was willing to pay Jaggers 15% of any compensation he received from serving as the appraiser on this claim.

The Court concluded that the Howarth Group crossed the line. The word “impartial” the requirement the policy placed on people who could serve as an appraiser,
means unbiased and disinterested-not favoring either side over the other.” Rather than being disinterested and agreeing to undertake the task of rendering a fair and impartial appraisal, no matter the outcome, Howarth concluded from the outset that it could add “scope” to the project, going so far as to promise the insured that if it could not add value, it would charge nothing for the effort.

While adding value is the understandable desire of the insureds, an impartial appraiser should not begin his work with this as the goal. Howarth might ask here, “why should we get involved if we don’t think we can help the policyholder add value to the claim?” The answer is: get involved as an adjuster, not as an appraiser, if it is your desire to help the policyholder.

The Howarth Group uses the appraisal process as a tool to help policyholders, which in the Court’s opinion is not how the process should work. Lastly, paying a roofer, who has been assigned the insurance claim, a referral fee for the opportunity to act as the appraiser just plain looks bad, smells bad, and is bad.

Based on the foregoing, the Court concluded that no reasonable jury could determine that Howarth acted as an impartial appraiser . Accordingly, the Court granted summary judgment to Travelers on Count I and vacated the Award.

Appraisal is a tool to fairly, and in good faith, resolve disputes between an insurer and its insured to determine the amount of loss. To reach a fair result the appraisers and the umpire must be impartial and disinterested. When a person is retained as an appraiser he or she promises to increase the scope of the loss and serve on a contingency fee basis it is impossible for that person to be an impartial and disinterested trier of the facts of the loss.  The court should have forwarded the evidence presented in the motion for summary judgment to the US Attorney since the award was obtained wrongfully and was an attempt to defraud Travelers who was sued only because it did what the policy required and, when shown more damages, paid for those promptly.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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