Auto-Owners Insurance Company v. Summit Park Townhome Association
MEMORANDUM OPINION AND ORDER granting in part and denying in part 18 Plaintiff's Opposed Motion to Compel Appraisal Agreement, by Judge Lewis T. Babcock on 9/10/2015. (ebuch)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
LEWIS T. BABCOCK, JUDGE
Civil Case No. 14-cv-03417-LTB
AUTO-OWNERS INSURANCE COMPANY, a Michigan corporation,
SUMMIT PARK TOWNHOME ASSOCIATION, a Colorado corporation,
MEMORANDUM OPINION AND ORDER
This declaratory judgment action is before me on Plaintiff Auto-Owners Insurance
Company’s (“Auto-Owners”) Opposed Motion to Compel Appraisal Agreement [Doc. # 18], in
which Auto-Owners seeks to compel Defendant Summit Park Townhome Association (“Summit
Park”) to enter into an agreement governing the appraisal process in this case. I have reviewed
the motion, Summit Park’s response [Doc. # 22], and Auto-Owners’ reply [Doc. # 23]. Oral
argument would not materially assist me in deciding the motion. As I explain below, I GRANT
IN PART AND DENY IN PART the motion and order that the appraisal process be conducted
pursuant to the terms set forth herein.
The background to this dispute is more fully described in my order of April 14, 2015.
See Mem. Op. & Order [Doc. # 17]; --- F. Supp. 3d ---, 2015 WL 1740818. Briefly, AutoOwners issued an insurance policy to Summit Park, a townhome community, covering, inter
alia, “direct physical loss of or damage to” the Summit Park premises. 2d Am. Compl. ¶¶ 3-4
[Doc. # 6]. The policy has a term of March 1, 2013, to March 1, 2014. Id. ¶ 3. At issue is the
amount of money, if any, Summit Park is entitled to recover under the policy for damage it
alleges was caused by a September 2013 hailstorm. Auto-Owners contends that some or all of
the claimed damage was caused by a storm predating the policy’s inception or by a cause of loss
excluded under the policy, such as defective workmanship. Id. ¶¶ 61-71. On Summit Park’s
motion, I ordered the parties to engage in the policy’s appraisal process to determine the amount
of loss, if any, caused by the September 2013 storm. See Doc. # 17. The appraisal process is set
forth in the policy as follows:
Appraisal. If we and you disagree on the value of the property or
the amount of loss, either may make written demand for an
appraisal of the loss. In this event, each party will select a
competent and impartial appraiser. The two appraisers will select
an umpire. If they cannot agree, either may request that selection
be made by a judge of a court having jurisdiction. The appraisers
will state separately the value of the property and amount of loss.
If they fail to agree, they will submit their differences to the
umpire. A decision agreed to by any two will be binding. Each
party will: a. Pay its chosen appraiser; and b. Bear the other
expenses of the appraisal and umpire equally. If there is an
appraisal, we will still retain our right to deny the claim.
Ex. A to 2d Am. Compl. at 78 [Doc. # 6-1]. I did not provide guidelines for how the appraisal
process should proceed except to note that the appraisals should “provide sufficient detail”
regarding disputed costs. Doc. # 17 at 9. As an example, I noted that the parties dispute whether
the policy covers the cost of replacing undamaged property to achieve matching. Id. I explained
that “counsel should work collaboratively” to ensure that the appraisals address the cost of
undertaking such replacements, as well as any other disputed costs, so that discovery or
additional appraisals could be avoided once the Court decides whether the costs are covered
under the policy. Id. I stayed further court proceedings pending completion of the appraisal
process but “reserve[d] jurisdiction . . . to resolve any intractable disputes regarding the
appraisal process that may arise.” Id.
The parties are now at an impasse regarding how the appraisal process should proceed.
Auto-Owners has proposed a written agreement to govern the process. The proposed agreement
sets forth, for example, procedures to govern the parties’ communications with the appraisers
and umpire. Ex. A to Mot. at 6-7 [Doc. # 18-1]. It also lists specific items to be addressed by
the appraisals. Id. Auto-Owners argues that the appraisal procedure is a form of arbitration and,
therefore, is governed by the Colorado Uniform Arbitration Act, Colo. Rev. Stat. § 13-22-201, et
seq. (“CUAA”). It argues that the procedures in the proposed agreement are based on the CUAA
and that, even if the CUAA does not apply, the procedures would help to ensure “due process
and fair notice” and are further supported by the policy language requiring the appraisers to be
“competent and impartial.”
Summit Park refuses to enter into the agreement. It argues that the CUAA does not apply
to the appraisal process and that there is no other basis—in the policy or elsewhere—to order
that the appraisals be conducted in a certain manner. Summit Park also takes issue with specific
provisions of the proposed agreement: It argues, for example, that the agreement’s provisions
relating to disclosure of potential conflicts of interest by the appraisers and umpire are unduly
burdensome and that the provisions regarding discovery, subpoenas, and other formalities would
result in a quasi-judicial proceeding and undermine the appraisal provision’s purpose of
determining the amount of loss informally and expeditiously.
A. The Policy’s Appraisal Process Is Not an Arbitration Under the CUAA
The Court’s jurisdiction in this matter is founded on diversity of citizenship.
28 U.S.C. §1332(a). Therefore, while I apply federal procedural law, I apply the substantive law
of Colorado. Essex Ins. Co. v. Vincent, 52 F.3d 894, 896 (10th Cir. 1995); Trierweiler v.
Croxton & Trench Holding Corp., 90 F.3d 1523, 1539 (10th Cir. 1996). Under Colorado law,
interpretation of the terms of an insurance policy is a question of law reserved for the court. See
Am. Family Mut. Ins. Co. v. Allen, 102 P.3d 333, 340 (Colo. 2004).
The CUAA sets forth numerous procedures that govern “an agreement to arbitrate.”
Colo. Rev. Stat. § 13-22-203. By way of example, it specifies certain disclosures that arbitrators
must make in regard to potential conflicts of interest. Id. § 13-22-212. The statute, however,
does not define “agreement to arbitrate.” It appears that neither the Colorado appellate courts
nor the Tenth Circuit have decided whether an appraisal process can constitute arbitration under
the CUAA. While I previously noted that “the CUAA demonstrates a strong public policy in
favor of alternative dispute resolution processes,” I specifically “[did] not address . . . the
applicability of the CUAA to this case.” Doc. # 17 at 7. It is now necessary to do so to resolve
Auto-Owners’ contention that the CUAA should govern the appraisal process here.
The Tenth Circuit has held that an appraisal process did not constitute an arbitration
under the Federal Arbitration Act, 9 U.S.C. § 1, et seq., which, like the CUAA, does not define
the term. Salt Lake Tribune Publ’g Co., LLC v. Management Planning, Inc., 390 F.3d 684 (10th
Cir. 2004). Neither party contends that the Federal Arbitration Act applies here, but the opinion
is instructive. The case involved an option contract for the purchase of a newspaper. The
contract fixed the option’s exercise price at the fair market value of the newspaper’s assets. Id.
at 686-87. In the event the parties could not agree on the fair market value, the contract provided
that each side was to appoint an appraiser to assess it. Id. at 687. If the assessments of the
parties’ appraisers differed from each other by more than 10 percent, the parties “would jointly
select a third appraiser and the exercise price would equal the average of the two closest
appraisal values reported by the three appraisers.” Id.
In concluding that there was no arbitration agreement, the court noted that “[c]entral to
any conception of classic arbitration is that the disputants empowered a third party to render a
decision settling their dispute . . . ‘through to completion.’” Id. at 689-90 (quoting Harrison v.
Nissan Motor Corp., 111 F.3d 343, 350 (3d Cir. 1997)). The court noted that, even if “the
contract states that the third party’s decision is final and binding, courts must nonetheless
scrutinize the process created by the parties to ascertain whether the third party’s decision does
in fact resolve the dispute.” Salt Lake Tribune, 390 F.3d at 690. Because the third appraisal
would not be used at all if the first two appraisals were closest in value, the third appraisal
“would hardly settle the parties’ dispute” and, therefore, “standing alone, does not constitute an
arbitration.” Id. The court also rejected the argument that the “entire process” was an
arbitration, explaining that “the three-appraisal process does not resemble classic arbitration”
and that “to the extent there existed a dispute requiring arbitration, the [first two appraisers]
produced the dispute by affixing values more than ten percent apart.” Id.
While not controlling, I find Salt Lake Tribune highly persuasive and conclude that the
appraisal process set forth in the policy is not an arbitration under the CUAA. For one, the
process here, under which a decision must be “agreed to by any two [of the appraisers and the
umpire]” will not settle the parties’ disagreement over the amount of the loss if no two can agree.
See Enzor v. N. Carolina Farm Bureau Mut. Ins. Co., 473 S.E.2d 638, 640 (N.C. App. 1996)
(holding that appraisal award signed only by umpire was invalid because “umpire’s signature
alone fails to demonstrate that at least one other appraiser concurred in the award” and that, on
remand, the case would need to “be submitted to the court for resolution by trial or otherwise” if
an appraiser’s signature could not be obtained). Even assuming the more likely scenario that two
do agree, the parties’ dispute will not be settled through to completion because there will still be
legal issues for the Court to resolve. As one court has noted, “appraisal establishes only the
amount of a loss and not liability for the loss under the insurance contract,” whereas “arbitration
is a quasi-judicial proceeding that ordinarily will decide the entire controversy.” Minot Town &
Country v. Fireman’s Fund Ins. Co., 587 N.W.2d 189, 190 (N.D. 1998); see also Portland Gen.
Elec. Co. v. U.S. Bank Trust Nat. Ass’n as Tr. for Trust No. 1, 218 F.3d 1085, 1090 (9th Cir.
2000) (noting that, while “arbitration agreements permit arbitrators to resolve pending disputes
between the parties and to determine ultimate liability, generally through adversary hearings at
which evidence is admitted and the arbitrator plays a quasi-judicial role,” appraisal agreements
provide for the “submission of isolated issues to an appraiser” and do not “usurp the judiciary’s
power to resolve the case as a whole”); St. Charles Parish Hosp. Serv. Dist. No. 1 v. United Fire
& Cas. Co., 681 F. Supp. 2d 748, 758 (E.D. La. 2010).
Indeed, the appraisal provision reserves to Auto-Owners its “right to deny the claim,”
likely in recognition of the fact that, whatever the amount of the loss, other parts of the policy or
applicable law could limit coverage or preclude it altogether. As Judge Matsch of this Court
noted in regard to a similar provision, while “the appraisal clause in this case says it’s binding, it
also says if there is an appraisal . . . we’ll still retain our right to deny the claim[,] which is a
pretty important proviso.” See Hr’g Tr. at 6 [Doc. # 43], KCOM, Inc. v. Employers Mut. Cas.
Ins. Co., No. 14-cv-01854-RPM (D. Colo. June 16, 2015), appeal docketed, No. 15-1218 (10th
Cir. June 24, 2015). He added that, while appraisal could “give figures for the value of the
property,” it would resolve only “a part of the overall dispute” between the parties; it would not
resolve other issues, like whether the policy provided coverage for complete replacement of a
particular roof. Id. at 6-7. Accordingly, relying on Salt Lake Tribune, he concluded that
“[a]ppraisal is not arbitration under the Colorado [Uniform] Arbitration Act.” See id; Minute
Entry [Doc. # 36], No. 14-cv-01854-RPM; but see Lim v. Am. Econ. Ins. Co., No.
13-CV-02063-CMA-KLM, 2014 WL 1464400, at *3 (D. Colo. Apr. 14, 2014) (holding that
appraisal is arbitration under CUAA because, even though appraisal does not “decide every
dispute between” the parties, they are “bound . . . as to the amount of the loss”).
The parties here have already raised various legal issues that are likely to affect any
damages Summit Park is ultimately awarded. For example, if I determine that the policy does
not provide coverage for replacement of undamaged property to achieve matching—a disputed
issue—Summit Park’s damages will likely be lower than if I make the opposite determination.
Further, Summit Park has suggested that it may assert a claim for bad faith breach of an
insurance contract; it may seek to obtain additional damages and discovery in relation to such a
claim. So while appraisal is likely to produce certain binding factual determinations, it likely
will not resolve this case “through to completion.” Salt Lake Tribune, 390 F.3d at 689 (internal
quotations and citation omitted).
Certain provisions of the CUAA are simply inapposite in the appraisal context. For
example, the CUAA provides that an “arbitrator may issue a subpoena for the attendance of a
witness and for the production of records and other evidence at any hearing and may administer
oaths.” Colo. Rev. Stat. § 13-22-217(1). Further, an arbitrator “may permit such discovery as
the arbitrator decides is appropriate in the circumstances.” Id. § 13-22-217(3). If applied to
appraisals, such provisions would transform a process that has traditionally been informal into a
quasi-judicial proceeding. See Hartford Lloyd’s Ins. Co. v. Teachworth, 898 F.2d 1058, 1062
(5th Cir. 1990) (“Appraisals are informal. Appraisers typically conduct independent
investigations and base their decisions on their own knowledge, without holding formal
hearings.”); McDonnell v. State Farm Mut. Auto. Ins. Co., 299 P.3d 715, 722 (Alaska 2013)
(“Appraisal follows an expedited timeline and is resolved by a panel of independent appraisers,
while arbitration is a quasi-judicial proceeding that is governed by a much more detailed
statutory scheme and includes formal evidentiary hearings with depositions and witness
testimony.”). It seems unlikely that either the Colorado legislature or the parties to the instant
insurance contract could have intended such a transformation without expressly saying so.
B. The Court Will Impose Guidelines to Govern the Appraisal Process
The parties’ briefs make clear that the parties cannot or will not agree on even basic
ground rules to govern the appraisal process. And the rhetoric that counsel have employed in the
briefs suggests that counsel are not helping the parties in this regard. See, e.g., Resp. Br. at 10
[Doc. # 22] (noting that Auto-Owners “wants to turn this appraisal into a circus”); Reply Br. at 3
[Doc. # 23] (criticizing Summit Park’s conduct as “somewhat disturbing”). I expect the parties
and counsel to make better efforts to cooperate going forward. For the following reasons, I also
believe it necessary to impose the guidelines set forth at the end of this order to govern the
First, the appraisal process in the policy is mandatory when properly invoked, as here.
The policy states that, upon a party’s “written demand,” each party “will” choose an appraiser,
the appraisers “will” choose an umpire to whom they “will” submit any differences they have,
and the umpire’s decision “will” be binding. As the parties are deadlocked, a clear framework is
necessary to effectuate these mandates. Second, the policy requires the appraisers to be
“competent and impartial.” The guidelines below regarding disclosures and ex parte
communications will minimize the risk that the appraisal award will need to be vacated pursuant
to this language. See Colorado Hosp. Servs. Inc. v. Owners Ins. Co., No. 14-CV-001859-RBJ,
2015 WL 4245821, at *2-3 & n.3 (D. Colo. July 14, 2015) (vacating appraisal award “as a matter
of contract interpretation” where policy required that appraisers be “competent and impartial”
yet a “motive to develop a high appraisal [was] built into the fee schedule” of one of the
appraisers). The guidelines are similar to those governing arbitrations under the CUAA and to
those the Colorado Division of Insurance has adopted for certain appraisal proceedings. See
Colo. Rev. Stat. § 13-22-212; Colo. Div. of Ins. Bulletin B-5.26 (#2), 2014 WL 6792685 (Dec. 3,
Third, the Colorado Supreme Court has recognized that certain protections, including the
right to notice and a hearing, apply to appraisal proceedings. See Providence Wash. Ins. Co. v.
Gulinson, 215 P. 154, 155 (Colo. 1923) (vacating appraisal award made by appraiser and umpire
where other appraiser was not given notice of meeting at which award was made); St. Paul Fire
& Marine Ins. Co. v. Walsenburg Land & Dev. Co., 278 P. 602, 602-03 (Colo. 1929) (voiding
appraisal where insured was denied right to “appear before the appraisers” and “be heard”). The
guidelines I impose will protect the integrity of the process and increase the likelihood of a valid
appraisal award. Finally, the Court has the responsibility and the inherent power “to control and
supervise its own proceedings.” See United States v. Carrigan, 804 F.2d 599, 603 (10th Cir.
1986). Imposing guidelines will allow the appraisal process to proceed in an orderly and
efficient manner that conserves the Court’s resources and minimizes the need for further
involvement of the Court.
Courts regularly impose guidelines similar to those below to govern appraisal processes
in insurance contracts. See, e.g., Am. Storage Centers v. Safeco Ins. Co. of Am., 651 F. Supp. 2d
718, 720 (N.D. Ohio 2009) (noting the court’s “lengthy Order which contained instructions for
the conduct of the appraisal process”); CIGNA Ins. Co. v. Didimoi Prop. Holdings, N.V., 110 F.
Supp. 2d 259, 275 (D. Del. 2000) (ordering that “[t]he appraisers shall make determinations as to
the following” and including a list of issues to be addressed, such as “the amount of loss to clean
up and remove asbestos containing materials and/or asbestos fibers as a result of the fire”); see
also Terra Indus., Inc. v. Commonwealth Ins. Co. of Am., 981 F. Supp. 581, 607 (N.D. Iowa
1997) (permitting parties to “move the court for a determination” in the event “intractable
disputes arise over what issues are properly within the scope of appraisal”).
In determining the guidelines to be imposed, I relied upon the foregoing authorities as
well as Auto-Owners’ proposed appraisal agreement and Summit Park’s objections thereto. I
briefly address those objections. First, I have not adopted Auto-Owners’ requested provisions
regarding witness lists, subpoenas, hearing testimony, and the like, as I agree with Summit Park
that they would turn the appraisal process into a quasi-judicial proceeding, contrary to the
purpose of the appraisal provision. Second, Summit Park has expressed concern about the
burden imposed by the disclosure requirements, given that its proposed appraiser has acted as an
appraiser for other clients of Summit Park’s counsel—a law firm that Summit Park states has
represented thousands of policyholders over the course of some 30 years. In this regard, I
emphasize that the below guidelines—like the CUAA—require only a “reasonable inquiry” with
respect to conflicts of interest. I also note that “[t]he suggestion that retention of an expert on
multiple engagements renders the expert other than impartial is a slippery slope.” Colorado
Hosp. Servs. Inc., 2015 WL 4245821, at *2 n. 2. Finally, Summit Park objects to Auto-Owners’
“extensive delineation” of items the appraisals should address, but I find most of them
reasonable. See Doc. # 17 at 9 (noting that appraisals should “provide sufficient detail” and
“make appropriate factual conclusions to enable the Court” to resolve the parties’ disputed legal
issues). I have not, however, required the appraisers to subtract “any applicable deductibles or
payments previously made”—as Auto-Owners would—because doing so could require them to
interpret the policy.
Accordingly, the following guidelines shall govern the appraisal process in this case:
1. The loss that is to be appraised is the physical damage to Summit Park’s property allegedly
caused by the hailstorm of September 14, 2013.
2. With respect to each separate building allegedly damaged by the September 14, 2013
hailstorm, the appraisal award shall set forth detailed factual findings regarding the amount
of the loss. For each building, this shall include, but not necessarily be limited to, the
a. The percentage of the loss caused by the September 14, 2013 hailstorm, specified using
the range of 0% to 100%.
b. The actual cash value (ACV) and replacement cost value (RCV) amount of the loss with
respect to the separate elements or components of construction of each building, such as
roofs, siding, windows, trim, paint, HVAC equipment, etc., and how the depreciation was
calculated for each component. As necessary and appropriate, the amount of overhead
and profit, if any, and the amount for any general conditions shall be separately specified.
c. To the extent there was damage to the vinyl siding caused by the September 14, 2013
hailstorm, the appraisal award shall separately set forth: (i) the cost to repair or replace
the damaged siding; and (ii) the cost of replacing undamaged property to achieve
complete matching of the repair materials with the existing siding. It shall also set forth
the cost of repairing or replacing the damaged siding in a reasonable manner that does
not achieve matching of the repair materials with the existing siding.
3. In view of the different elements of construction allegedly damaged by the September 14,
2013 hailstorm (e.g., roofs, vinyl siding, etc.), the parties may, but are not required to, select
different appraisers with respect to different aspects of the loss. If a party selects only a
single appraiser, such appraiser must be competent to address all aspects of the loss.
4. An individual who has a known, direct, and material interest in the outcome of the appraisal
proceeding or a known, existing, and substantial relationship with a party may not serve as
an appraiser. Each appraiser must, after making a reasonable inquiry, disclose to all parties
and any other appraiser any known facts that a reasonable person would consider likely to
affect his or her impartiality, including (a) a financial or personal interest in the outcome of
the appraisal; and (b) a current or previous relationship with any of the parties (including
their counsel or representatives) or with any of the participants in the appraisal proceeding,
including licensed public adjusters, witnesses, another appraiser, or the umpire. Each
appraiser shall have a continuing obligation to disclose to the parties and to any other
appraiser any facts that he or she learns after accepting appointment that a reasonable person
would consider likely to affect his or her impartiality. If an appraiser discloses a fact
required to be disclosed pursuant to this paragraph and a party files an objection in this Court
to the appointment or continued services of the appraiser no later than 15 days after
becoming aware of such fact (or from the date of this order, whichever comes later), the
objection may be a ground for vacating an award made by the appraiser. The same objection
procedure shall apply in the event a party becomes aware of information bearing on an
5. The standard for impartiality and disclosure obligations described in the preceding paragraph
also apply to the umpire, except that the parties shall raise any objections regarding a
proposed umpire’s impartiality or competency through the procedure set forth in the policy.
See Doc. # 6-1 at 78 (“The two appraisers will select an umpire. If they cannot agree, either
may request that selection be made by a judge of a court having jurisdiction.”). Objections
regarding the impartiality or competency of an umpire who has already been selected shall be
raised in the manner specified in the preceding paragraph.
6. Neither Auto-Owners nor Summit Park, nor any of their representatives, including public
adjusters, shall have any ex parte communications with any appraiser or umpire regarding
any substantive or material matter related to the loss to be appraised. The parties may
communicate with their respective appraisers only regarding non-substantive matters, such as
scheduling matters. If the appraisers and/or umpire meet at the property to inspect the
alleged damage, they shall not meet with or have any communications with any party or its
representatives concerning any substantive or material matter unless the other party’s
representative or representatives are also present at such meeting. If any party intends to
send a representative or representatives to such inspection or meeting, it shall provide the
other party with at least 10 days advance notice, so that the other party can also send a
representative or representatives.
7. If a party desires to present to the appraisers and/or umpire any written evidence or
information related to the amount of loss allegedly caused by the September 14, 2013
hailstorm, a copy of any communication transmitting such written evidence or information
must be contemporaneously sent to the other party. Written evidence or information
includes, but is not limited to, estimates, photographs, bids, reports, product specifications,
and weather data, whether stored or maintained in written or electronic form.
8. Unless the appraisers selected by the parties agree regarding the amount of loss caused by the
September 14, 2013 hailstorm, so that an appraisal award can be made by the two appraisers
without requiring the services of the umpire, before any appraisal award is made with respect
to any aspect of the claim, the appraisers and umpire shall conduct an informal hearing. The
hearing shall be conducted at a time and place mutually agreed to by the parties, the
appraisers, and the umpire. The appraisers and umpire shall determine the format of the
hearing and the rules, if any, governing the hearing.
9. The appraisers and umpire shall have no authority to decide legal issues, which are reserved
for the Court.
10. The parties and their counsel shall ensure that the appraisers and umpire receive notice of
this order. The parties and their counsel shall make every reasonable effort to ensure that the
appraisal process proceeds in accordance with this order.
NOTICE IS GIVEN THAT, IF THE COURT FINDS THAT THE PARTIES AND/OR
THEIR COUNSEL HAVE NOT COMPLIED WITH THIS ORDER, THE COURT WILL
IMPOSE SANCTIONS AGAINST THE PARTIES AND/OR THEIR COUNSEL PURSUANT
TO THE COURT’S INHERENT AUTHORITY.
Accordingly, Auto-Owners’ motion [Doc. # 18] is GRANTED IN PART AND
DENIED IN PART. The appraisal process shall proceed as set forth above.
DATED: September 10 , 2015, at Denver, Colorado.
BY THE COURT:
s/Lewis T. Babcock
LEWIS T. BABCOCK, JUDGE
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