Walnut Creek Townhome Association (Walnut Creek), a residential community in Urbandale, built a number of multifamily buildings between 2004 and 2006. The shingles used on the roofs were manufactured by CertainTeed and had a 25-year warranty. However, the shingles were considered defective by roofing professionals. In 2011, Walnut Creek hired Marcus Harbert, a professional roofer, to evaluate the life expectancy of the roofs. Harbert inspected the roofs of three buildings and found a number of defects throughout the shingles. Harbert recommended that Walnut Creek replace the shingles within five years. In August 2012, following a severe wind and hailstorm, Harbert reinspected the shingles for hail damage and concluded the impact was not enough to warrant filing an insurance claim. He recommended that Walnut Creek pursue the warranty claim against CertainTeed. In September 2012, Walnut Creek hired Nicholas Waterman, a roofing renovator, to inspect the roofs for hail damage. Following his inspection, Waterman concluded that the shingles “definitely had hail damage.”
Depositors Insurance Company (Depositors) was the insurer of Walnut Creek. In the policy, Depositors provided coverage for direct physical loss of or damage to the insured property but excluded from coverage loss or damage caused by negligent work including but not limited to faulty, inadequate, or defective design, construction, renovation or materials used in construction, renovation, or remodeling. The policy also included a right to appraisal provision, which provided that either party could demand an appraisal in writing if they disagreed on the amount of loss. The policy provided:
In this event, each party will select a competent and impartial appraiser after receiving a written request from the other, and will advise the other party of the name of such appraiser within 20 days. The two appraisers will select an umpire. If appraisers 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 property and the 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.
. . .
If there is an appraisal, we will still retain our right to deny the claim.
After Walnut Creek submitted an insurance claim to Depositors seeking recovery for the hail damage to the roof, Depositors retained Robert Danielson and Richard Herzog, two engineers who both inspected the roofs in December 2012. Danielson and Herzog both concluded that the hail caused no damage to the shingles. Walnut Creek retained Timothy Barthelemy, a public adjuster, who inspected the roofs and concluded that the shingles had hail damage. Depositors denied the majority of Walnut Creek’s claim. Walnut Creek then exercised its right to an appraisal pursuant to the appraisal clause in the policy.
Walnut Creek selected James Pierce as its appraiser and Depositors selected Eric Howell as its appraiser. Pierce and Howell selected Larry Roth as the umpire and they performed the appraisal on May 5, 2015. The appraisal award, signed by Pierce and Roth, awarded $1,467,830 to Walnut Creek for “loss and damage as a result of a hail and windstorm that occurred on or about August 8, 2012.” The written award specifically noted that it was not “an evaluation or determination of coverage, policy exclusions or the relative causation of the same.”
Depositors disputed whether its policy provided coverage for the loss from hail damage. Walnut Creek filed suit against Depositors for breach of contract and asked the trial court to enforce the appraisal award. Depositors argued that it did not breach the contract because “the roof damage was due to multiple concurrent causes, and such damage is excluded from coverage by the policy’s anticoncurrent-cause provision.” Additionally, Depositors argued that the appraisal award was “neither binding nor conclusive[.]” The trial court concluded (1) there was no breach of contract because the insurance policy did not cover the roof damage and (2) “that the appraisal award was ‘neither binding nor conclusive upon the parties.”’ Walnut Creek appealed the trial court’s ruling and the Iowa Court of Appeal reversed the lower court’s ruling on both the appraisal award and breach of contract claim. Depositors appealed to the Iowa Supreme Court, which held that “Depositors failed to overcome the appraisal award’s presumption of validity.” The Court concluded that “factual causation issues may be decided through the appraisal process” and that “[t]he appraisal award is presumptively binding on the parties and court.” The Court reasoned that it made sense that appraisers would address causation when making a determination regarding the amount of the loss. It said [“t]he district court was not free to make its own factual determination that there was no hail damage to the shingles.” The Court noted although the appraisers could determine the cause of the loss, coverage issues were to be determined by the court.
In its analysis of the appraisal clause in Depositor’s policy, the Court stated Iowa law requires property insurers to use language that is the “substantial equivalent” to the language set forth in Iowa Code § 515.109(6)(a). It noted that the language in Depositor’s appraisal clause was “the substantial equivalent of the prescribed statutory language for appraisals in the Iowa Code[,]” except for the final sentence: “If there is an appraisal, we will still retain our right to deny the claim.” The Court held that this provision was unenforceable to the extent it purported to change the meaning of Iowa Code § 515.109(6)(a). Therefore, that provision was unenforceable to the extent it sought to make the appraisers’ determination regarding the factual cause of the property loss and the amount of the loss nonbinding or inconclusive. The court held that “the appraisers’ determination of the factual cause and monetary amount of the insured loss is binding on the parties absent fraud or other grounds to overcome a presumption of validity.”
The Supreme Court vacated the court of appeals decision, reversed the district court’s decision with regard to the appraisal award, and remanded the case back to the district court for adjudication of the coverage exclusions under the anticoncurrent-cause provision.
Walnut Creek Townhome Ass’n v. Depositors Ins. Co., No. 16–0121 (Iowa June 1, 2018).