On Tuesday, January 11, 2022, Justice McDonald of the Connecticut Supreme Court authored a unanimous decision establishing new precedent benefitting policyholders. In Karl Klass v. Liberty Mutual Insurance Company, (SC 20451), the Connecticut Supreme Court upheld the trial court’s decision requiring Liberty Mutual to participate in an appraisal proceeding where Liberty Mutual refused to participate claiming that it had issued denials with respect to certain areas of the insured’s damages and that those denials required the matter to be decided in court as opposed to the appraisal process.
The Connecticut Supreme Court unanimously disagreed with each of the points raised by Liberty Mutual. The Supreme Court held questions such as whether an entire roof needs to be replaced and what portions of the undamaged building need to be replaced to provide the insured with a reasonable uniform appearance are issues for adjusters and appraisers, not questions of coverage for the court. The Connecticut Supreme Court rejected Liberty Mutual’s effort to convert questions concerning the scope of damages into coverage denials of building components thereby forcing insureds to litigate coverage denials. As a result of this decision, insureds can now have questions of matching and the extent of damages resolved through the appraisal process, which can often lead to a resolution within months as opposed to years being spent in court litigating what Liberty Mutual attempted to characterize as coverage issues
Often an insurance company and the insured cannot agree upon the amount necessary to compensate the insured fairly and justly for their loss and damages. Almost every insurance policy provides that in the event of a dispute as to the amount of loss either party can demand appraisal and the “amount of loss is to be resolved by a panel comprised of a disinterested appraiser selected by each party and an umpire selected by those appraisers, effectively an arbitration panel”. See Covenant Insurance Company v. Banks, 177 Conn 273, 279-80, (1979). Appraisal can result in an expedited resolution of the amount of loss. An appraisal can be completed within weeks or months. Where insurance companies are looking to delay payment of claims they often try to avoid appraisal by issuing a “denial” for a portion of the claim. The insurance company argues whatever portion of the claim it has denied, such as an undamaged area of the property which the insured claims needs to be replaced to allow for matching, must be resolved through a coverage litigation trial, which often take years. Some insurance companies go further and argue that the appraisal therefore should not take place until the partial denial is fully adjudicated, which will take years. Karl Klass v. Liberty Mutual Insurance Company is an example of such overreaching on the part of an insurance company and how our office challenges such tactics for the benefit of policyholders.
In 2018, Mr. Klass contacted his insurer to report damage to the roof of his home. The insurance company, Liberty Mutual, accepted the claim as it agreed that there were shingles missing from the dwelling portion of the rear slope of the roof likely caused by a windstorm. The insurance company issued an estimate to replace the rear slope of the dwelling roof and the attached garage roof. Mr. Klass hired a contractor who inspected the roof and determined that the entire roof should be replaced at nearly double the cost of the insurance company’s estimate.
Given the dispute over the amount of loss, Mr. Klass notified Liberty Mutual that he was demanding appraisal under the policy to determine the amount of loss. Liberty Mutual took the position that “the plaintiff was not entitled to invoke the appraisal process in the absence of a ‘competing’ estimate (i.e., one that addressed the claim for which the defendant had accepted coverage).” Karl Klass v. Liberty Mutual Insurance Company, 2022 WL 126637, at *2 (Conn. Jan. 11, 2022). Liberty Mutual argued that “any dispute regarding the matching of the front and rear roof slopes was a question of coverage rather than an issue for appraisal.” Id.
In a subsequent report, the insurer’s representative opined that the shingles along the rear slope and ridge caps of the residence and garage could be replaced such that a reasonably uniform appearance of the roof is maintained. Liberty Mutual then sent out another letter “denying ‘coverage’ for the front slopes of the plaintiff’s roof”. Id. Liberty Mutual said, “in light of its denial of ‘coverage’ for the front roof slopes, it contented there was no valuation issue remaining for the appraisal process”. Id.
In short, Liberty Mutual, after accepting coverage for a windstorm loss, determined that it only wanted to pay for damages that it saw to the rear slopes of the home and the garage. The insured, through his contractor, argued that replacing only the rear slopes would leave him with a home that would be mismatched and without a reasonable uniform appearance as required by Connecticut General Statute §38a-316e(a), the matching statute. Mr. Klass, therefore, claimed the insurance company had to replace both the rear and the front slopes otherwise he would be left a roof that did not match. He wanted the appraisal panel to determine what would be a reasonable repair and was willing to accept whatever the majority of the appraisers determined should constitute a reasonable repair to his roof.
On the other hand, Liberty Mutual was not willing to allow the appraisal panel to determine the extent of the damages caused by the windstorm loss and the repairs necessary to provide Mr. Klass with a reasonable uniform appearance. Instead, Liberty Mutual issued a denial to a portion of the roof, which Mr. Klass believed needed to be replaced. Liberty claimed undamaged portions of the roof could not be replaced because they did not suffer direct physical loss and that Liberty’s denial of coverage had to be adjudicated in court as opposed to being decided by an appraisal panel.
Mr. Klass retained our office, and we filed an Application to Compel Appraisal pursuant to Connecticut General Statute §38a-307 and Connecticut General Statute §52-410, which is the appropriate mechanism to pursue when an insurance company refuses to proceed with an appraisal. Upon reconsideration of its initial decision, the trial court directed the parties to proceed to appraisal. The trial court confirmed that appraisers could not make coverage determinations but found that the extent of damages attributable to the windstorm loss, including the issue of matching and the amount of damages necessary to assure a reasonable uniform appearance, should be resolved through the appraisal panel, not through a court. Liberty Mutual refused to accept the trial court decision and filed an appeal.
On appeal, Liberty Mutual argued the trial court improperly granted the plaintiff’s Application to Compel Appraisal. Liberty Mutual argued that the dispute between the parties was one pertaining to the legal question of coverage. The Connecticut Supreme Court noted that the only dispute on which the plaintiff “sought appraisal was the extent of defendant’s replacement obligation pursuant to the matching statute”. Id. at 4. The Supreme Court said, “the threshold, and ultimately dispositive, issue before us is whether a dispute as to the scope of an insurers replacement obligation under the matching statute is a question of coverage to be resolved by the courts or questioned the amount of loss to be resolved by the appraisal panel”. Id. The Connecticut Supreme Court’s unanimously held that the scope of an insurer’s replacement obligation under the matching statute is to be resolved through the appraisal panel, not through court.
In agreeing with the positions put forth by Biller, Sachs & Robert, and the decision of the trial court, the Connecticut Supreme Court adopted all the arguments put forward by our office. In addition to our firm trying the underlying case, we authored the appellate brief, and argued the appeal before the Supreme Court. The issue is of such great significance to the insurance industry and to the rights of policyholders that amicus briefs were filed by attorneys Karen Dowd and Brian Goodman, pro hac vice on behalf of the National Association of Public Insurance Adjusters (NAPIA), and by attorney Jason Cieri on behalf of United Policy Holders.
The Connecticut Supreme Court discussed decisions in other states and the legislative history of Connecticut’s matching statute. The Court noted that the “history reveals that the legislature contemplated that matching would be a ‘subjective’ determination made on a case-by-case basis.” Id. at 5. The Court also said that legislative history is “devoid of any contrary indication that the Legislator viewed the extent of an insurers replacement obligation as a coverage issue or disputes as to matching as a matter to be resolved by Courts in the first instance”. Id.
The Connecticut Supreme Court cited In re Pottenburgh v. Dryden Mutual Ins. Co., 55 Misc. 3d 775, (2017), where the insured’s estimate was based on the lack of availability of matching siding for undamaged areas relating to a vandalism loss.
The insurance company refused to participate in the appraisal on the grounds the dispute was regarded as a scope of coverage. In that case, the New York court noted “appraisal is limited to the extent of work required to repair the damage caused by the vandalism incident. Such disputes are factual questions that fall squarely within the scope of the policy’s appraisal clause”. Id. at 6. The Connecticut Supreme Court also cited from other Courts in Minnesota and Texas which included statements that “sometimes it may be unreasonable or even impossible to repair one part of the roof without replacing the whole. The policy provides that the insurer will pay reasonable and necessary costs to repair or replace the damaged property, and repair or replacement is an amount of loss question for the appraisers”. Id. Also cited is a recent decision from our sister state in Massachusetts, which held that “to the extent the [insurer] disputes the amount of matching loss … a reference proceeding [namely, appraisal] may be appropriate”. Id.
In noting that the insurance company cited no contrary case law, the Court went on to note that Liberty Mutual’s “own conduct in the case was consistent with the insurance industry and practice of having appraisers decide the extent of the insurer’s replacement obligation to ensure a matching of adjacent items”. Id. The Supreme Court noted that the defendant’s own appraiser reached a conclusion on the very same issue and that “the defendant’s posture in this case also undermines its position that the present dispute raises a question of law”. Id.
Significantly, prior to this decision, insurance companies in Connecticut were relying upon a lower court decision issued in April 2019, entitled Kamansky v. Liberty Mutual Insurance Company Docket No. CV-18-6094809-S (April 30, 2019) (68 Conn. L. Rptr. 449). Insurance companies were using that case to argue that Connecticut’s matching statute limited repair or replacement only to items that were adjacent to the items damaged. In other words, if a wall is damaged, only the wall adjacent to the one damaged could be replaced regardless of whether or not there would be a reasonable uniform appearance when the repairs were completed. The Kamansky decision has been cited by many insurance companies over the last two years arguing that while Connecticut has a matching statute, the parameters of the matching statute are limited by the Kamansky ruling, and by the argument that the insurance company need only replace items that are adjacent.
The Connecticut Supreme Court squarely rejected any argument that Kamansky has any significance to this issue in the State of Connecticut. The Supreme Court said that the Superior Court in Kamansky was faced with a question of “pure statutory construction”. Id. In a footnote, the Supreme Court said that Liberty Mutual “misconstrues the trial court’s decision in Kamansky as concluding that the undamaged sides of the insured’s house were not ‘adjacent’ to the damaged side.” Id. at 7. The Connecticut Supreme Court went on to say in Kamansky, “the insured conceded that the undamaged garage sides were not ‘adjacent’ to the damaged side. Therefore, the issue of whether non-damaged sides were ‘adjacent’ to the damaged garage siding was not before the court.” Id.
Rather, the Connecticut Supreme Court held “when an insurer concedes the existence of a covered peril to an insured’s premises, issues concerning the extent of the insurer’s obligation to replace adjacent, undamaged items to achieve a reasonably uniform appearance are a component of the ‘amount of loss’ and are, therefore, part of the appraisal process.” Id.
The Supreme Court went on to state that Liberty Mutual conceded the damage “to the plaintiff’s roof resulting from wind damage was a covered loss under the homeowners policy of the plaintiff” and “the parties’ disagreement regarding how many shingles need to be replaced—whether it be only the missing shingles, the rear slopes of the garage and dwelling roofs, or the entire roof—in order to make the plaintiff whole is a factual dispute that falls within the scope of the insurance policy’s appraisal clause.” Id.
Klass v. Liberty Mutual represents a significant decision in favor of policyholders within the State of Connecticut, will likely be cited throughout the country.