Winning Arbitration Battle in the Connecticut Supreme Court Regarding Historic Home Restoration Costs Still Leaves Insurer Defending Legal War in State Trial Court

Concluding that the trial court “improperly substituted its judgment” for that of an appraisal panel, the Connecticut Supreme Court invalidated the trial court’s decision to vacate an arbitration award for property loss caused by a tree falling on the insured’s home. See Kellogg v. Middlesex Mut. Assurance Co., 326 Conn. 638 (2017). Pending the outcome of this appeal, the insured filed a second suit against her insurer, Middlesex Mutual Assurance Company (“Middlesex”), alleging breach of contract under the homeowner’s “Restorationist” insurance policy, as well as various extra-contractual claims based on the allegedly improper and delayed adjustment of the claim. Notwithstanding the overlapping nature of these claims with those addressed by the arbitration panel, the court denied the insurer’s Motion to Dismiss. Thus, the second lawsuit remains pending despite the Supreme Court’s finding in favor of the insurer.

Both cases revolve around Sally Kellogg’s single-family property located in Norwalk, Connecticut, which is listed on the National Registry of Historic Places and sits in Norwalk’s Green Historic District. When Kellogg, an interior designer, purchased the property in 2002, she also purchased the Restorationist policy on the home and its contents. The policy provided for unlimited coverage for repairs, including the replacement or restoration cost of the property without deduction for depreciation.

Eight years later, a four-and-a-half ton tree fell on the house during a severe storm, breaking through the roof and causing extensive structural and other property damage. Following the insured’s submission of her claim, a dispute arose regarding the extent of the damage and the cost of repair. Kellogg invoked the appraisal provision of the policy, which provided for unrestricted arbitration in which a panel of three arbitrators—one appointed by each party, and a referee appointed by the two other arbitrators—had the power to decide issues of law and fact not subject to judicial review. The arbitration proceedings resulted in a combined award of $539,901.84 for both replacement/restoration cost and actual cash value loss to personal property contained within the house.

Kellogg, who had argued for restoration costs exceeding $1.5 million, filed an application in the Connecticut Superior Court to vacate the arbitration award, which Middlesex attempted to dismiss as untimely. Though the trial court stated it would only rule on the motion to dismiss, it went on to hold eight days of trial, which ultimately resulted in a finding that the award violated Connecticut General Statutes Section 52–418(a) because: (1) the trial court disagreed with the amount of the award, and (2) the decision of the appraisal panel “evidenced a manifest disregard of the nature and terms and conditions of the Restorationist insurance policy” in violation of the statute. The trial court vacated the arbitration award and denied Middlesex’s Motion to Dismiss.

In overturning this decision on Middlesex’s appeal, the Connecticut Supreme Court held that the trial court had improperly substituted its own judgment for that of the arbitration panel and failed to follow the proper standard for evaluating a claim of “manifest disregard of the law.” In doing so, the Court recognized the high level of deference paid to arbitrators in unrestricted arbitration proceedings, such that “a court may vacate an unrestricted arbitration award only under certain limited conditions: (1) the award rules on the constitutionality of a statute, (2) the award violates clear public policy, or (3) the award contravenes one or more of the statutory proscriptions of § 52–418.” (Internal citations removed). Further, the award resulting from unrestricted arbitration is not subject to de novo review even for errors of law.

Under this standard, the Supreme Court held, the trial court overstepped the scope of its judicial review, erroneously substituting its judgment for that of the arbitrators by essentially re-trying all of the facts found by the arbitrators regarding an appropriate award to the insured. To permit a party to object to an award simply because the party dislikes the outcome, the Court said, “would completely destroy the deference our law affords to the arbitration process by allowing the trial court to substitute its own judgment on the merits of the question submitted to arbitration.” In the absence of a claim that “the arbitrators refused to postpone a hearing, refused to hear any of the plaintiff’s evidence, or otherwise committed a procedural error,” the trial court should not have vacated the arbitration award, which was “final and binding.” The trial court further erred by construing policy language, when it should not have engaged in de novo review of the policy language at all. However, disagreeing with the trial court’s construction of policy language, the Supreme Court also declined to vacate the arbitration award on the premise that the panel had “manifestly disregard[ed]” the law in violation of Connecticut General Statutes Section 52-418(a)(4) “when it permitted the defendant to withhold depreciation costs until the plaintiff had incurred a debt for the repair or replacement of the property.”

Despite this good news for Middlesex, the company is still saddled with the defense of the second lawsuit. Stemming from the same property loss and claim, this subsequent lawsuit asserts both contractual and extra-contractual claims of bad faith, negligent adjustment of the claim, violations of Connecticut’s Unfair Trade Practices Act and Unfair Insurance Practices Act, negligent infliction of emotional distress, and estoppel. Middlesex moved to dismiss the complaint for lack of ripeness as well as under the “prior pending action” doctrine on the basis that all of the causes of action complained of arose from Middlesex’s allegedly improper conduct in the adjustment and appraisal of the claim.

Nonetheless, the Superior Court sided with Kellogg, categorically denying Middlesex’s motion to dismiss. In doing so, it held that the new action is separate and distinct from the insured’s application to vacate the award, and that her current claims are (or were) not contingent on the outcome of the arbitration appeal. The Court thus allowed the underlying action to proceed, notwithstanding that Kellogg’s claims directly related to the disputed adjustment and appraisal of the loss. For the same reasons, the Superior Court also denied Middlesex’s subsequent motion to stay the proceedings pending the outcome of the appeal.

Insurers should thus take note: a win in connection with issues of coverage and appraisal does not always avoid other potential liabilities arising from the adjustment of claims.

A link to the Connecticut Supreme Court’s decision is available on the judicial branch website: (p. 100).

The Oregon Supreme Court Again Offers Expansive View of the Fee-Shifting Statute But Provides Clarity to Insurers on Minimizing Fee Awards

In Oregon, ORS 742.061 authorizes an award of attorney fees to an insured that prevails in an action against an insurer. While there have been several Court of Appeals cases addressing this statute in the UIM context, the Oregon Supreme Court last ruled on ORS 742.061 in 2012, holding that the statute is not limited to actions on policies issued in Oregon, but that it applies broadly, to “any policy of insurance of any kind or nature.” Morgan v. Amex Assurance Co., 287 P.3d 1038 (Or. 2012).

Under a similar analysis, consisting of an examination of the statute’s text and context, along with any useful legislative history, the Oregon Supreme Court addressed another aspect of ORS 742.061 in Long v. Farmers Ins. Co. of Oregon, 360 Or. 791 (2017).  Specifically, the Oregon Supreme Court addressed whether an insurer’s voluntary mid-litigation payments can eliminate the right to attorneys’ fees under the fee-shifting statute.

In Long, Plaintiff discovered a leak under her kitchen sink that caused extensive damage to her home. She filed a claim with Farmers, and on January 17, 2012, and Farmers voluntarily paid $3,300.45 to Plaintiff for the actual cash value of the loss. Around that time, Farmers also paid $2,169.22 to Plaintiff for mitigation expenses. However, the Plaintiff submitted a proof of loss that exceeded the sum that Farmers had paid. The parties had not resolved Plaintiff’s claims a year later, so she commenced a lawsuit against Farmers. After appraisal, Farmers made two additional voluntary payments to Plaintiff – one payment in the amount of $2,467.09 on July 11, 2013 and another payment in the amount of $4,766.80 on August 14, 2013 – for the actual cash value that the appraisers had assigned to certain of Plaintiff’s claimed losses and mitigation costs.

Six months later, in February 2014, shortly before trial, Plaintiff submitted proof of loss for the replacement cost of her losses. Three days later, Farmers voluntarily paid $4,214.18 to Plaintiff for the replacement cost of Plaintiff’s undisputed losses. Farmers subsequently prevailed at trial. Nonetheless, Plaintiff filed a petition for attorney fees under ORS 742.061.

Under ORS 742.061, an insurer must pay the insured’s attorney fees if, in the insured’s action against the insurer, the insured obtains a recovery that exceeds the amount of any tender made by the insurer within six months from the date that the insured first filed proof of a loss. In Long, the issue before the Court was the meaning of the word “recovery.” The insured argued that the word “recovery” means any kind of restoration of a loss, i.e. judgment, settlement, voluntary payment or some other means, after an action on an insurance policy has been filed. Accordingly, any post-complaint payments made by an insurer would support an insured’s claim for fees under the statute. On the other hand, Farmers argued that the word “recovery” means a money judgment in the action in which attorney fees are sought. Farmers argued that attorney fees may be awarded only if the insured obtains a money judgment that exceeds any tender made by the insurer within the first six months after proof of loss.

Because this dispute is a matter of statutory interpretation, the Oregon Supreme Court examined ORS 742.061’s text and context, as well as any useful legislative history. The Court noted that it has repeatedly instructed that the terms of ORS 742.061 and its predecessors should be interpreted in light of their function within the statute’s overall purpose, and if it heeded that instruction in this case, “it becomes evident that the term ’recovery‘ must be read to include mid-litigation payments such as the ones that Farmers made.”

The Oregon Supreme ultimately concluded that the fact that Plaintiff did not obtain a “judgment” memorializing Farmers’ mid-litigation payments did not make ORS 742.061 inapplicable. The Court further clarified that a “declaration of coverage is not sufficient to make ORS 742.061 applicable; an insured must obtain a monetary recovery after filing an action, although that recovery need not be memorialized in a judgment.” Id. at 805.

Based upon that clarification, the Court held that Plaintiff was entitled to attorney fees for the work performed by her attorney up until the time that Farmers made voluntary payments to Plaintiff in July and August of 2013. This is because by then, Plaintiff had brought an action on her insurance policy and, by virtue of Farmers’ July and August payments, Plaintiff had “recovered” more in that action than Farmers had tendered in the first six months after proof of loss.

The Court continued, however, that Plaintiff was not entitled to her attorney fees that accrued after the July and August 2013 payments. First, the voluntary payments made by Farmers in February 2014 were payments for the replacement value of Plaintiff’s loss, for which Plaintiff filed her proof of loss. That proof of loss for replacement value triggered the six-month period for settlement of Plaintiff’s claim for the replacement value of her losses under ORS 742.061, and Farmers made payments for the replacement cost within the six-month period, as mandated by the statute.

Second, except for the two replacement cost payments that Farmers made in February 2014, Plaintiff did not recover, after August 2013, any amount over and above what Farmers had already paid. At trial, Plaintiff sought but was unsuccessful in obtaining any greater sum. Thus, because Plaintiff’s recovery after Farmers’ August 2013 payment did not exceed Farmers’ timely tender, Plaintiff was not entitled to attorney fees under ORS 742.061 for work performed by her attorney after that date.

This case demonstrates how important it is for insurance companies to keep track of when voluntary payments are made and the potential impact of those payments on their ability to minimize an insured’s entitlement to attorney’s fees under ORS 742.061.

Florida District Court Finds That Settlement Can Trigger Bad-Faith Claim

Florida’s Fourth District Court of Appeal recently ruled that an insured need only establish an insurer’s coverage obligation and the extent of damages, and not the insurer’s liability for breach of contract, to be permitted to proceed with a bad-faith claim under Section 624.155(1)(b)1 of the Florida Statutes.

INS BLOG_hurricaneIn Cammarata v. State Farm Florida Insurance Co., 2014 Fla. App. Lexis 13672 (September 3, 2014), the insureds (homeowners) were two of many South Florida residents who sustained damages as a result of Hurricane Wilma, which hit the coast on October 24, 2005.  Nearly two years later, the insureds filed a claim with their homeowners’ insurer.  The insurer inspected the home and, having estimated the amount of damages to be lower than the policy deductible, advised that the policy had not been triggered.  The parties then participated in an appraisal process, with the insureds’ appraiser submitting an estimate higher than the policy deductible and the insurer’s appraiser submitting an estimate lower than the policy deductible. Pursuant to the policy, the insureds filed a petition requesting that the circuit court appoint a neutral umpire.  The umpire issued an estimate higher than the policy deductible (although lower than the insureds’ appraiser’s estimate), and the insurer paid the amount, minus the deductible.  The insureds then filed a bad-faith action against the insurer under Section 624.155(1)(b)1 of the Florida Statutes.

The parties filed cross-motions for summary judgment.  In its motion, the insurer argued that because its liability for breach of contract had not been determined the insureds’ bad-faith action was not ripe.  In response, the insureds argued that only an insurer’s liability for coverage and the extent of the damages covered must be determined for a bad-faith claim to mature.  The trial court granted the insurer’s motion.

The Fourth District Court of Appeal reversed, holding that the determination of the existence of liability and the extent of an insured’s damages are the conditions precedent to a bad-faith action, and that those conditions may be established by a settlement paid by the insurer.  In so holding, the Fourth District receded from its prior decision in Lime Bay Condominium, Inc. v. State Farm Florida Insurance Co., 94 So.3d 698 (Fla. 4th DCA 2012), relied upon by the insurer, in which the Fourth District held that an insurer’s liability for breach of contract must be determined before a bad-faith action becomes ripe, harmonizing that decision with its decision in Trafalgar at Greenacres, Ltd. v. Zurich American Insurance Co., 100 So.3d 1155 (Fla. 4th DCA 2012), in which the Fourth District ruled that an appraisal award issued after an insured filed a breach of contact claim satisfied the necessary prerequisite of obtaining a “favorable resolution” prior to filing a bad-faith claim.

In Cammarata, the Fourth District relied upon the Florida Supreme Court’s decisions in: 1) Blanchard v. State Farm Mutual Automobile Insurance Co., 575 So.2d 1289 (Fla. 1991), addressing an insurer’s claim that an insured must bring a bad-faith claim together with an underlying breach of contract claim, in which the court held that “[a]bsent a determination of the existence of liability . . . and the extent of the [insured’s] damages, a cause of action cannot exist for bad faith”; and 2) Vest v. Travelers Insurance Co., 753 So.2d 1270 (Fla. 2000), addressing a claim for bad faith based upon an insurer’s payment of policy limits after the filing of a bad-faith action, in which the court held that the existence of liability and the extent of an insured’s damages can be established based “upon a settlement,” thereby ripening a bad-faith claim.

The Fourth District Court of Appeal reversed and remanded for reinstatement of the insureds’ bad-faith action, noting that it was not taking any position on whether that action has any merit.

Image courtesy of Flickr by NASA Goddard Space Flight Center.