“At Citizens, lawyers win, public loses” was the Tampa Bay Times featured editorial headline on Friday, September 27, 2013. This followed an earlier article in the Times “Citizens racks up millions in attorney’s fees and it denies claims” exposing the astronomical legal fees that have been paid to both plaintiff lawyers (policyholders advocates) and defense lawyers who represent the insurance companies.

The legal fees that were exposed by the Times only cover Citizens Insurance, the state run insurance company, and reportedly only speak to the first party property side of Citizens business.  We can only speculate how much money has been spent in total following a disputed first party property claim and for appraisals in determining what is owed for property damage. When you include all the admitted and surplus lines carriers, my guess is that it will be many millions more!

So how did we get into this mess with lawyers adding to the expense when historically the amount of loss and damages was supposed to be determined by a fairly simple dispute resolution process adopted by most insurance companies many years ago? The process, called “Appraisal” was pretty much straight forward and seldom used until the aftermath of Hurricane Andrew and subsequent storms in 2004 and 2005.  In my view, the appraisal clause and process was simple to read and understand the way it was laid out in the various property insurance contracts. At one time there was a simple boilerplate form called Memorandum of Appraisal with a back sheet titled Declaration of Appraisers that was simple to fill out and sign.  And remember, the process and the forms purpose was to avoid lawyers, costly legal fees, as well as taking up the courts calendar and time that could be better served on complex legal issues.

Hurricane Andrew and other storms that followed in its wake changed the insurance adjusting process as well as how disputes were to be settled. When disputes started to arise from Andrew claims, the parties turned to the insurance contract to determine how they were to resolve the conflicts if the claim was a covered loss. Since Andrew was a covered loss, the appraisal process was invoked by the parties. In my view, this did not sit well with the legal profession since it cut them out of a big source of business that resulted from Hurricane Andrew. No law suits thus no  legal fees as appraisal was the stated insurance policy forum to be used.

Not to be outdone, the lawyers’ lobby jumped in and said appraisal was not the correct forum because it had language that made the appraisal process moot. What their fuss was about was a sentence in the appraisal clause that said, “…if there is an appraisal, we still retain our right to deny the claim.” Most professional insurance folks knew this was a reservation the carriers wanted to maintain allowing them to deny a claim in the event it was later discovered that the loss was not covered, or some fraud was committed, or other policy exclusions were discovered during or after the appraisal process.  If these types of issues were discovered, the carriers could reject the findings of the appraisal panel.

So off to court the lawyers went claiming the appraisal clause was non-binding .Thus, their clients did not have to submit to appraisal and could instead have the dispute resolved in a court, either by bench trial or a jury which would be binding subject to an appellant court agreeing with a lower courts findings if one side or the other appealed. Needless to say, this set off years of lawsuits, often with very different results in the various Florida state district and appellate courts as well as the U.S. Federal courts.  At one time, the ruling in one Florida District Court of Appeal was that appraisal was in fact arbitration, allowing the parties to choose if they wanted an informal or formal appraisal process. The rationale for the consumer was that if you just wanted more money quickly you could do an informal appraisal. If on the other hand you really needed more money to make repairs or replacement, perhaps a more formal forum with rules of conduct and evidence was needed including questioning witnesses under oath.

Suffice it to say, the court cases are too numerous and conflicted to list them all here, but ultimately the Florida Supreme Court ruled appraisal (as outlined in property insurance policies) was in fact not arbitration and isn’t subject to the Florida Arbitration Code.

The next big issue was what to allow the appraisal panel to consider in making their determination on the amount of loss and damages.  Soon a ruling came out that appraisers could in fact consider causation. To put it another way, they could cross a barrier that opened the door for coverage to be considered in a property insurance appraisal. 

As an aside, my firm was involved in a federal court case when the insurance company appealed an appraisal award claiming the appraisers had inserted amounts on an award form that were not covered, since the policy required these costs to first be incurred before they were payable, if in fact they were payable at all.  In a somewhat surprising decision, a federal appellate court ruled that the appraisal process was in fact binding and the insurance company had to pay the cost because the appraisers put them on a form and signed their names, which also included the umpire. It was later argued that this decision only applied to the federal courts and not to matters in Florida state courts.

As a result of this long and conflicted issue, the appraisal process in effect became the people’s court to determine what was owed for loss and damages in a property insurance policy. Anyone could demand appraisal, anyone could be an appraiser, or an umpire also called the neutral. Not surprisingly, this became the Wild West where appraisal was looked on as a no lose situation for the policyholder. After all, you typically got 50 % of the difference (split the baby) which was all new money beyond what the carrier wanted to pay you. And to boot this was accomplished at a fraction of the cost of litigation which often drags on for years.

What happened next was that some of the insurance companies took appraisal out of their policies and others that kept appraisal placed language that was so restrictive, that the issue was thrown back to the lawyers. The companies that took appraisal out substituted a mediation clause that was non-binding and in my opinion a poor forum to resolve property damage disputes. I have in the past been a proponent of mediation as it certainly does not hurt to talk with the other side, but in non catastrophic every day claim disputes mediation between the insurance company adjuster and the policyholder is not likely to work as both parties are entering into mediation with the same set of facts and positions as before.  While there is a state apportioned mediator this person has no authority and can only act as a referee of sorts.

And remember a policyholder is not likely to have the skill sets and experience the insurance adjuster brings to the table. Mediation has its own set of rules and practical procedures so if you do not have representation in mediation there is a good chance it will be a waste of time especially into day’s environment. In summary I believe the mediation clause was a give away for the insurance companies to appease the powers to be in Tallahassee to let them take appraisal out of their policies.     

This brings us to the current situation with Citizens. Citizen’s lawyers crafted policy forms that were so restrictive that by their very nature they invited litigation in order to start the process. Appraisal was out, the lawyers were in. In fact the amount of legal expense Citizens was incurring just because of their policy form change was a closely guarded secret, just recently exposed due to some hard work on the part of some consumer advocates and reporters.

So where do we go from here? Now, Florida has adopted a two-track appraisal system, where appraisers can appraise the amount of the loss (which includes causation consideration) and reach an award amount.

The insurance company (through their lawyers) can simultaneously continue their investigation to determine coverage issues such as fraud, policy exclusions etc. While this system is not perfect, it is for the most part better than the wild windy road we have come from.

Going forward, further consideration needs to be given to creating a professional appraisal designation with some real course work required, including licensing requirements, CE classes and for the folks who violate the rules and standards, sanctions or loss of licensing after a fair hearing.

Remember, all those millions going to lawyers are being paid for by the policyholders. There is no free ride. There certainly is an important role for our friends in the legal community, but not to the extent that has been exposed with this venting of legal cost by bad actors on both sides. Most importantly, this is about policyholders who have in many cases experienced a traumatic loss they expected was covered by a policy they paid for.