When There Is an Insurance Claim for Property Damage, How Much Will the Payout Be Set Off by Depreciation?

In Hometown Community Association, Inc. v. Philadelphia Indemnity Insurance Company, No. 17-cv-00777-RBJ, Dist. Ct. (D. Colorado 2018), the United States District Court of Colorado sorted out the conflict between the parties.

This suit comes from Philadelphia Indemnity Insurance’s (“Philadelphia”) treatment of insurance claims for property damage that Hometown Community Association, Inc. (“Hometown”) sustained in a July 7, 2014 hailstorm. Philadelphia acknowledged coverage for Hometown’s insurance claim and issued an initial payment of the claim. However, the parties disagreed about the amount of damage and the scope and cost of repairs, so Hometown invoked an appraisal process provided in the insurance policy. That process involved each party choosing an impartial appraiser. Because the parties’ appraisers could not agree, an umpire was selected to resolve the differences. An appraisal award was set. The only thing the sides disagree on is the depreciation.

Despite Philadelphia’s payment of the appraisal award, Hometown sued Philadelphia for breach of contract and two types of “bad faith” claims: unreasonable delay or denial of an insurance benefit and common law bad faith. Philadelphia moved to dismiss. On December 12, 2017 the Court granted Philadelphia’s motion to dismiss in part, dismissing the contract claim but not the bad faith claims. In a counterclaim Philadelphia alleged that Hometown breached its contractual obligation to select a competent and impartial appraiser and that the award was invalid, and damages should be awarded against Hometown in the amount of the appraisal award. The counterclaim also seeks a declaration that Philadelphia owes nothing beyond the “actual cash value” of the repairs. Hometown has now moved for dismissal.

The appraisal clause provides that if the parties disagree on the value of the property or the amount of the loss, either party may demand an appraisal of the loss. The Court must decide whether to vacate the loss. The Court says if an appraiser is biased, the opposing party could request to vacate an award.

Hometown is a homeowner’s association. Its interest is in getting the damage it attributes to the hailstorm repaired at little if any cost to itself and its member homeowners. The Court says there is nothing inherently wrong with hiring a contractor on the basis that the contractor will be paid by the proceeds of the insurance claim. From Hometown’s point of view it probably makes good business sense.

However, the nature of the contractor’s fee inherently created a motive to inflate the costs. But Philadelphia alleges that the appraiser presented an estimate he obtained to the appraisal panel. That is the exact number that was awarded for repairs to roofs and exteriors, constituting nearly the entire appraisal award. Construing Philadelphia’s allegations in its favor for purposes of the motion to dismiss, the Court finds that it is reasonable to infer that Hometown must have known that the appraiser was presenting numbers obtained from the contractor the appraisal panel.

The Court said hold that if Hometown knew the estimate of the value of the damage caused by the hailstorm was being presented to the appraisal panel, then it had a duty to disclose its contractual arrangement with contractor to Philadelphia, and the umpire. There was a duty to disclose.  If Philadelphia had been made aware that the contractor had a material interest in the outcome of the appraisal process that potentially could impact its estimate, it presumably could and would have brought that to the attention of its appraiser and, ultimately, the umpire.

For the reasons stated herein, Philadelphia’s motion for reconsideration is granted in part and denied in part, and Hometown’s motion to dismiss defendant’s/counter-plaintiff’s counterclaims is denied. The motion for reconsideration is granted to the extent that the Court holds that Philadelphia’s appraiser’s alleged misconduct during the appraisal cannot be imputed to Philadelphia, and that plaintiff has not alleged facts that plausibly would permit Philadelphia’s removal of the “appointment action” to serve as a basis for a bad faith claim.