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Copper Oaks Master Home Owners Association v. American Family Mutual Insurance Co.

United States District Court, D. Colorado

July 23, 2018

COPPER OAKS MASTER HOME OWNERS ASSOCIATION, a Colorado corporation, Plaintiff,


          Marcia S. Krieger, Chief United States District Judge

         THIS MATTER comes before the Court on Defendant American Family Mutual Insurance Company's (“American Family”) Renewed Motion to Vacate Appraisal Award. The Court has considered the parties' briefing on that issue (#119 and #120)[1] as well as the evidence and argument presented at an evidentiary hearing. The Court finds and concludes as set forth below.


         The Court generally exercises jurisdiction pursuant to 28 U.S.C. §1332. Although the Court has unresolved concerns about its subject matter jurisdiction for some claims in this case, it addresses the pending motion exercising its inherent powers to enforce orders of the court. See Auto-Owners Ins. Co. v. Summit Park Townhome Ass'n, 886 F.3d 863, 867-68 (10th Cir. 2018)


         Copper Oaks Master Home Owners Association (“Copper Oaks”) is the manager of sixteen residential buildings and a pool house located in Lakewood, Colorado. It was the insured on a casualty insurance policy issued by American Family (the “Policy”). As discussed in more detail herein, a salient feature of the Policy is the requirement that, when the value of a claim is disputed, the parties must engage in an “appraisal” process to quantify the value of the loss.

         Copper Oaks alleges that in September 2013, a hail storm caused significant damage to the property, and it made a claim upon American Family for coverage under the Policy. Ultimately unhappy with the amount that American Family initially paid on the claim, Copper Oaks filed suit in state court. American Family removed the case to this Court. The Amended Complaint in this action states four claims: 1) a request for declaratory judgment as to the appraisal process and award; 2) a request to compel an appraisal award in accordance with process specified in the Policy; 3) breach of contract in failing to pay the amounts owed under the Policy; and 4) unreasonable delay in payment in violation of C.R.S. 10-3-1115 and 1116 (#96).

         Early in the case Copper Oaks requested, and the Magistrate Judge ordered, that the parties participate in the appraisal process specified by the Policy. That process requires each party to appoint a “competent and impartial” appraiser. The two appraisers then jointly select a neutral umpire. Each appraiser submits an opinion as to the amount of the loss to the umpire. Upon the agreement of the umpire and at least one of the appraisers, the amount of the loss is conclusively determined.

         The appraisal process occurred in this case throughout most of 2016, but in January 2017, the parties announced that they had a dispute over the validity of the appraisal award (#43). Thereafter, Copper Oaks filed a motion for Partial Summary Judgment (#52), seeking to enforce the appraisal award. American Family responded with a Motion to Vacate Appraisal Award (#80).

         Upon review of the record, the Court became concerned about the sufficiency of Copper Oaks' standing to bring the first three claims. The Court issued an Order to Show Cause as to why those claims should not be dismissed (#82). At a hearing on the issues, and after consideration of the parties' arguments, both oral and written, the Court: 1) bifurcated claims in the Complaint into two groups - claims the concerned the appraisal process (Claims 1 and 2), and claims that concerned breach of contract and statutory bad faith breach of contract (Claims 3 and 4) (#94). After denying the parties' respective dispositive motions, the Court set the matter for a Pretrial Conference (#111, 118).

         At the conference, the parties agreed that there was a dispute as to whether the appraisal award was valid. American Family orally renewed its Motion to Vacate the Appraisal Award, which essentially sought judgment on Copper Oaks' first and second claims for relief. American Family contended that the appraisal award should be invalidated because the appraiser selected by Copper Oaks, Mr. George Keys, and the umpire, Mr. Robert Norton, were not impartial. Copper Oaks responded that American Family i) waived any objection to Mr. Keys and Mr. Norton, ii) is estopped from challenging them now, and iii) its request is barred by the doctrine of laches.

         Upon consent of the parties, the sufficiency of the appraisal was tried in a multi-day bench trial. At the close of the trial, the Court announced its intent to grant American Family's Motion to Vacate the Appraisal Award, stating that a written opinion would be issued. This opinion follows.


         Having considered the stipulations of fact, the evidence presented, both documentary and by testimony, and having observed the witnesses' manner in testifying, recollection, consistency and all other matters in assessing the credibility of such testimony, the Court finds as follows.


         1. Copper Oaks is a 30 year-old condominium, townhome and apartment complex located in Lakewood, Colorado. It is comprised of 16 multi-family buildings and a pool house. Copper Oaks has a homeowner's association administered by a Board of Directors (“the Board”). For most of the time pertinent to this case, the Board retained 4 Seasons Management & Realty Group (“4 Seasons”) to manage the property. 4 Seasons assigned this responsibility to Mark Richardson.

         2. On September 9, 2013, Copper Oaks was subject to an afternoon thunderstorm. The parties disagree as to whether the complex was hit by hail during the storm, and if so, the size of the hail.

         3. At the time of the storm, Copper Oaks was insured under the Policy issued by American Family.

         4. Immediately following the storm, Mr.Richardson saw leaves and debris scattered about the complex. He contacted Derek O' Driscoll of Impact Claim Services, LLC, requesting that Mr. O'Driscoll conduct a free inspection of the building roofs. At the Board meeting in November 2013, Mr. O'Driscoll discussed his roofing evaluations and offered to represent Copper Oaks as public adjuster on its anticipated claim to American Family.

         5. In December 2013, a report commissioned by Mr. Richardson showed that Copper Oaks was severely undercapitalized given the size, age and condition of the complex. The homeowners association had reserves of only $70, 112, which was 11% of that recommended ($625, 597) in order to address extensive needs for building maintenance and repair. The report advised the association to impose a special assessment of $1, 500 per unit in order to maintain necessary reserves. There is no evidence that the association did so.

         6. In March 2014, the Board hired Mr. O'Driscoll and his company, Impact Claims, LLC, as its public adjuster for the purposes of investigating and processing a claim for hail damage. The Board agreed to pay Mr. O'Driscoll/Impact Claims, LLC a contingent fee of 15% of any insurance award.

         7. In late April 2014, Mr. Richardson notified American Family of Copper Oaks' loss. American Family promptly inspected the property and estimated the damage to be $620, 979 at replacement cost value (“RCV”). In July 2014, American Family issued a check to Copper Oaks in the amount of $497, 765.43, which reflected Actual Cash Value (“ACV”) of the loss - the RCV less depreciation and deductible.

         8. Later that year, Mr. O'Driscoll opined that the Copper Oak's loss was substantially more than American Family had paid - $3, 599, 707.13. Mr. O'Driscoll urged the Board to supplement its claim. The Board agreed, and retained 4 Seasons to provide management support services during the anticipated repairs for a contingent fee of 2.5% of any insurance award. Mr. O'Driscoll advised the Board that this fee could be built into the ultimate claim award.

         9. When advised of Mr. O'Driscoll's estimate of Copper Oak's loss, American Family retained Madsen, Kneppers & Associates (“MKA”) to appraise the loss. The firm inspected the property and issued a report estimating the total RCV loss at $608, 398.49.

         10. The parties were unable to resolve disagreements as to the amount of the loss, and this action was filed on July 25, 2014.

         Requirements for the Appraisal Process

         11. The Policy sets out the appraisal process to be used in the event that the parties cannot agree on the amount of a loss.

         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. (Emphasis added.) The Policy contains no definition of “competent” or “impartial.” 12. In January 2015, Magistrate Judge Watanabe granted (#40) Copper Oaks' Motion for Order Enforcing Appraisal Under the Insurance Policy. His order states in pertinent part:

[T]he court finds that Judge Babcock's reasoning in Auto-Owners Ins. Co. v. Summit Park Townhome Assn., 2015 WL 1740818 (D. Colo. April 14, 2015)[2], should be followed in the case. The record presented in the moving papers and the language used in the applicable policy provisions as cited by the parties support this court's analysis that this court should instruct the appraisers to determine the “amount of the loss” caused by hail or wind as required under the applicable policy provisions. By doing so, the appraisers will necessarily exclude loss or damage caused solely by a cause other than hail or wind.

         13. Copper Oaks selected George Keys and his company, Keys Claims Consultants, Inc. (“KCC”) to act as its appraiser. American Family selected James R. Whipple. Mr. Whipple and Mr. Keys then selected Mr. Norton as the umpire. Mr. Keys proposed that the parties abide by the terms of DORA Bulletin B-5.26, published by the Colorado Department of Regulatory Affairs, Division of Insurance (“the DORA Bulletin”). All parties agreed that the standards set forth in the DORA Bulletin would govern their conduct during the appraisal.

         14. Pertinent to this case, the DORA Bulletin requires that the appraisers to be “fair and competent.” The DORA Bulletin prohibits an appraiser from having a financial interest in the outcome of the appraisal, and imposes on the appraiser a continuing duty to disclose any facts, known or learned after accepting appointment, that a reasonable person would consider likely to affect the appraiser's interest in the amounts determined by the appraisal process. The DORA Bulletin also requires that an umpire be “fair, competent and impartial.” To this end, the Bulletin requires the umpire to “remain neutral” and prohibits the umpire from having “any communication with an appraiser” without participation by both parties and/or their representatives.

         Keys' Fee Arrangement with Copper Oaks

         15. At the April 2015 Board meeting, Mr. O'Driscoll introduced and endorsed Mr. Keys and KCC (collectively, “Keys”[3]). Keys' presentation and literature espoused views favorable to insurance policyholders and touted success based upon Mr. Keys' prior experience as an insurance adjuster, which gave him “the edge” in getting the highest claim awards for his clients. He advertised that he treated his clients “like he was dealing with his momma.” Mr. Keys and Mr. O'Driscoll also recommended that the Board retain the law firm of Becker & Poliakoff, P.A, in which Christopher Mammel, Copper Oaks' current counsel, was a principal.[4] Ultimately, the Board adopted both recommendations.

         16. At the June 2015 Board meeting, Mr. O'Driscoll explained Keys' Appraisal and Consultant Agreement (Ex. 13). The agreement required Copper Oaks to pay a fee calculated at “$350.00 per hour plus expenses, not to exceed 10% of the total of the insurance funds received.” It contained no terms specifying what services would be provided, who would perform the services, or any hourly rate other than $350. There was no provision for periodic billing or review of charges incurred. Indeed, only paragraph 5 addressed payment, specifying that KCC would be “paid as a joint payee by the insurance company.”

         17. There is no signed copy of the Appraisal and Consultant Agreement in the trial record, but Board minutes from June 8, 2015 reflect its approval and the retention of both Keys and Becker & Poliakoff (Ex. 8).

         18. In the ensuing months, several judicial opinions in unrelated cases involving the same Policy language i) found that Mr. Keys was not sufficiently “impartial, ” ii) disqualified him as an appraiser, and iii) vacated appraisal awards where he had been an appraiser. One specifically cited to the percentage fee cap in Keys' fee agreements as evidence of bias. In light of this particular decision, Keys sought to renegotiate his Appraisal and Consultant Agreement with Copper Oaks. The Board's September 2015 meeting minutes describe a seventy minute executive session in which the Board discussed “amendment” of the Appraisal and Consultant Agreement with an attorney from Becker & Poliakoff. The minutes reflect that ‘upon returning” from the executive session, the Board approved an “amended engagement contract.” The “amended agreement” (Ex. 15) made two important substantive changes to the original Appraisal and Consultant Agreement:

• The preamble contains an acknowledgement by Copper Oaks that it had “no preexisting financial relationship with KCC, and to its knowledge, KCC is not affiliated with any party to the appraisal.” The representation that the parties had had no preexisting relationship was patently false in light of the Appraisal and Consultant Agreement that was ostensibly being amended. As to the representation that Copper Oaks knew nothing about any of KCC's affiliations, it is clear that Copper Oaks knew that Mr. Keys and KCC were affiliated, but the Court understands that this disclaimed any knowledge by Copper Oaks about the personal and business connections between Keys, Mr. O'Driscoll, Mr. Mammel and Becker & Poliakoff.
• The fee cap of 10% of the insurance funds received is eliminated. In all other respects, the “amended agreement” is functionally the same as the earlier Appraisal and Consultant Agreement. For example, the amended agreement is devoid of terms common to hourly fee arrangements: specification of who would perform what services at what hourly rate, a provision for submission of periodic statements, provisions for interim payment by Copper Oaks, etc.

         19. Keys submitted no bill to Copper Oaks until August 15, 2016, one week after the Appraisal Award of $2, 873, 085.35 was announced (Ex. 57). The single bill reflects 666.40 hours of work, all charged at a rate of $350 per hour, for a total fee of $233, 240. There is no differentiation in hourly rates based on tasks or by the person performing the task - for example, clerical time spent making travel arrangements and Mr. Keys' presentation of his appraisal to the umpire are both billed at $350 per hour. According to Mr. Keys' testimony, his staff was supposed to record all time spent on the project, but he acknowledged that neither he nor his staff focused on hourly charges in formulating the single invoice submitted to Copper Oaks. For example, Mr. Keys testified at the hearing that he personally was on site “many, many occasions”[5] in early 2016, yet the invoice Keys submitted to Cooper Oaks bills only three hours of Mr. Keys' time all in a single site visit. The invoice further reflects that Mr. Keys spent only 7.25 hours in total in preparation of the appraisal, four of which were devoted to emails, communications with the appraisal panel, and a “pro-rated” conversation with counsel. Mr. Keys testified that he did not keep track of his time at all. When asked about billing discrepancies that indicated that Keys may have significantly under-billed Copper Oaks based on hours spent, Mr. Keys was blasé. Neither he nor his staff attempted to reconcile time records with their recollections or testimony.

         20. Curiously, even though the “amended agreement” eliminated any reference to the original fee cap of 10% of the insurance award, Keys' fee of $233, 240 fee ultimately charged was almost precisely that amount - 9.8% of the final valuation of the claim by the appraisal panel (that is, the appraisal award less the sum previously already paid by American Family).

         21. The Court pauses at this stage to make certain findings about Copper Oaks' financial relationship with Keys. Although the initial fee agreement called for Keys to bill its services by the hour, subject to a “cap” that ensured that Copper Oaks would never be obligated to keys for more than 10% of the appraisal award, the Court finds that, in reality, the parties understood and acted as though the “cap” was simply a promise that Keys would be paid 10% of the appraisal award, similar to O'Driscoll and 4 Seasons' contingent fees. In other words, the Court finds that Copper Oaks never intended to pay Keys on an hourly basis.

         Several facts support this conclusion. Copper Oaks' severely underfinanced reserve account made it impossible for it to pay more than $200, 000 to Keys for services rendered unless and until a large appraisal award occurred. The absence of traditional indicia of an hourly rate agreement, Keys' billing of clerical time at inflated rates, and Keys' own lackadaisical reaction to questions at trial about his lax timekeeping also suggest to the Court that Keys' “hourly” billings were simply a facade intended to conceal what was, in reality, a standard contingent[6] fee.

         Similarly, the parties' purported agreement to modify the fee arrangement to remove the “10% cap” was a transparent attempt to create the illusion that the parties were attempting to reform their fee agreement in light of a recent judicial opinion that declared contingent fees paid to appraisers to, per se, require vacatur of appraisal awards. The Court finds that, in reality, the parties intended to adhere to the existing agreement: i.e., that Keys would receive 10% of the appraisal award as payment. The fact that Keys eventually submitted an error-riddled, sometimes inflated invoice that just happened to amount to 9.8% of the value of the appraisal award was no coincidence. Thus, the Court finds that both Copper Oaks and Keys always understood and intended that Keys' payment for serving as appraiser would be a flat 10% of the final appraisal award.

         It was therefore essential that the appraisal award be high enough to allow Copper Oaks to pay the bills of Keys, O'Driscoll, and 4 Seasons, plus be sufficient to allow Copper Oaks to repair the buildings. Indeed, under Keys, O'Driscoll, and 4 Seasons' contingent fee arrangements, Copper Oaks was required to obtain an appraisal award of nearly 128% of actual repair costs, simply to break even.

         DORA Compliance by Mr. Keys

         22. As noted earlier, Mr. Whipple, Mr. Keys and Mr. Norton[7] agreed to comply with the impartiality and neutrality requirements and required disclosures set forth in the DORA Bulletin.

         23. In conformance with the DORA Bulletin, Mr. Keys made his initial disclosures to via email on March 18, 2016. He stated in conclusory fashion that: (1) he was not a party to the Policy; (2) he did not have a financial interest in the outcome of the appraisal; (3) he was billing for his time on an hourly basis; (4) he was not a family member of the insured and had no relationship with any member of Copper Oaks; and (5) he had a continuing obligation to supplement ...

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