I’m sure it’s just me, but…it often seems like the courts spend disproportional amounts of time litigating the obvious.
Case in point. The appraisal clause in most homeowner’s policies is constructed to resolve disputes regarding the amount of a claim. This article examines the absurdity of allowing Public Adjusters (PA’s) to act as both a “disinterested” appraiser while also being paid a contingency fee by the policyholder. (See NOTE #1 below)
Typically, an appraisal clause requires each side to select a “disinterested” party to conduct an appraisal and to agree with the other side on a third person to act as an umpire. Agreement by any two is binding on both parties. (See NOTE #2 below)
It’s an accepted, well established, and dare I say simple, method of alternative dispute resolution dating to the early foundations of modern property insurance, specifically the 1943 165-line Standard Fire Insurance Policy –every word of which was painfully scrutinized in my early insurance classes including, and most especially, the word “disinterested”. It was never discussed, nor even contemplated, that this word, “disinterested,” would not only include someone who is “interested” but one who also stands to make more money the higher they appraise the damage.
It is, by all convention, oxymoronic to even use the word “disinterested” and the words “contingency fee” when referring to the same person. But, that’s essentially what’s been happening for way too long in the state of Florida and elsewhere–my opinion, of course.
It may be on its way out now that the specific question has been referred to Florida’s supreme court. Dive into State Farm vs. Sanders on your own (See NOTE #3 below), but…in summary there are two basic issues:
- Can a public adjuster, paid via a contingency fee, be considered a “disinterested” appraiser on the same loss?
- Without regard to any contingency fee, can a public adjuster act as an appraiser for a policyholder they are also acting as an “agent” for?
Let’s consider both questions concurrently. A PA that acts as the appraiser for his client is being hired to judge whether or not he’s done a good job—essentially ruling on the accuracy of his own work product. Ridiculous, but permissible unless the supreme court puts a stop to it. Now, if that PA is also paid on a contingency fee basis (which, in my experience, they always are) then, he/she is also further incentivized to approve of their own work product, (instead of a truly“ disinterested” person) and even their original estimate is likely to be higher as a result.
Again, my opinion: an appraisal rendered under these circumstances isn’t worth the paper it’s written on. And, while I don’t have any statistical validation supporting this next statement, I’d be willing to bet that such appraisals are never (that’s never) materially less than the original damage estimate the so called “disinterested” PA submitted to the carrier.
Of course, there are two sides to this issue. And, they diverge not only on the legal interpretations but also on whether consumers would be harmed if the Supreme Court rules in State Farm’s favor. (See NOTE #4 Below)
My guess, and the guess of many others, is Florida’s court will prohibit appraisals by PA’s working on a contingency fee. And, perhaps go further by prohibiting PA’s from appraising for those they represent, regardless of the remuneration methodology. (See NOTE #5 below)
For me this just confirms that Florida’s rates aren’t the highest in America (and twice that of the national average) because of hurricanes and reinsurance. PA’s on contingency fees appraising their own work is another below-the-surface contributor to loss inflation along with: PA fee caps that are the highest in America, one-way attorney fee’s, fee multipliers (see Florida’s Rate Problem—the Fee Multiplier) and the most liberal bad faith environment in America.
I should say, I’m not a lawyer and I’m not an expert in the appraisal process, but I did talk to a lawyer, a public adjuster and a representative of the Florida Association of Public Insurance Adjusters before publishing. (See NOTE #4 below). And, based on those inquiries, here are some questions I still have…
- How much income do PA’s average annually from appraisals? Is this enough to cause them to move from contingency fee contracts to hourly contracts in order to keep the appraisal income flowing? How much, if anything, would premium payers save if that happened?
- Will PA’s raise their contingency fee percentage to make up for any potential loss in appraisal income? I noticed that the PA in the case at hand was charging 10%. Will that rise as and if appraisal income diminishes? (See NOTE #4 below)
- Will PA’s have relationships with other PA’s to appraise losses whenever they have a contingency contract–“I’ll appraise your losses if you’ll appraise mine?” Conceptually, this could be a break-even arrangement to policyholders, absent other factors.
- Speaking of other factors. How much has the current approach contributed to loss inflation and thus to Florida’s highest-in-America homeowners’ rates? How much money could premium payers save if the current system was reformed and all appraisals had to be an established flat fee, one fee for residential and another for commercial?
- How expensive is the appraisal process and how many fewer times would it be requested by the policyholder if their PA wasn’t going to be paid to do the appraisal? How much money would this save Florida’s premium payers, if any?
- Florida has more PA’s than any other state, around 1400. Would we have fewer PA’s if we lowered the percentage fee cap in tandem with prohibiting PA’s from appraising their own losses? How much money would Florida’s premium payers save, if any?
All good questions the answers to which I do not have but, which we may have “IF” the Supreme Court rules as I and many others believe it will.
IMPORTANT: I would appreciate some diversity of opinion on this issue, especially whether you believe consumers will be helped or hurt by the Supreme Court decision. Please let me know your thoughts one way or the other as well as any anecdotal information I may be missing by responding below via “Speak Your Mind” which requires you to log in. If you are not a subscriber please become one by entering your email above.
NOTE # 1: To begin, Webster’s New World Dictionary says “appraise,” a transitive verb, means “to set a price for; decide the value of, esp. officially; to estimate the quality of; to judge the quality or worth of.” Webster’s Collegiate Thesaurus lists the following synonyms for “appraise”: “assay, assess, evaluate, rate, set at, survey, valuate, value.” See also; What is the Insurance Appraisal process? by Insurance Appraisal and Umpire Association, Inc.
NOTE #2: Sometimes the appraisal clause uses the word “independent” instead of “disinterested” and the meaning can be interpreted differently than State Farm’s policy which uses “disinterested.” Either way, the trend in Florida cases is clearly moving towards no appraisers being previously retained as public adjusters whether or not hired on a contingency fee basis. See “Can PA’s on Contingency Fee Act as the Appraiser?” by Chip Merlin, April 16, 2020
NOTE #3: The case certified to the Supreme Court is State Farm v. Sanders in which State Farm petitioned the Third DCA to quash an order permitting Mr. & Mrs. Sanders’ public adjuster to act as their “disinterested” appraiser. Another case that also turns on the meaning of “disinterested” as contemplated by the parties’ contractual agreement is State Farm vs Beth Crispin.
NOTE #4: Review State Farm vs. Sanders for the position of State Farm and some other carriers. I’ve also spoken to my PA friends who agree with State Farm’s interpretations and who charge a contingency of 10% and a flat fee for appraisals of $750 for residential and $1250 for commercial. One said his appraisal fee would be much less if he had already done the foundational work as part of his contingency contract. Another said he would not do the appraisal on a job where he had a contingency contract. So, it seems there’s broad diversity of opinion in the PA community. I emailed questions to Paul Handerhan the President of FAIR and often a spokesman for The Florida Association of Public Insurance Adjusters. He is always courteous and helpful and you can read the full Q&A text here.
NOTE #5: My opinion on how the court may rule is based on two general sets of information: one, the outrageous nature of the status quo much of which is reported in this article, and; two, the opinions expressed by Chip Merlin, head of a plaintiff’s firm with connections to PA’s and experience dealing with PA’s as appraisers. Here are the relevant Merlin blogs:
- “Disinterested” Appraiser Means One With No Pecuniary Interest in the Outcome of the Appraisal Award by Chip Merlin, February 14, 2020
- “PA’s as Appraisers May Be History” – By Chip Merlin, December 12, 2019
- “Can PA’s on Contingency Fee Act as the Appraiser?” By Chip Merlin, April 16, 2020
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