Fiserv Solutions, Inc. v. XL Specialty Insurance

Citations: 94 A.D.3d 456; 943 N.Y.S.2d 1

Court: Appellate Division of the Supreme Court of the State of New York; April 5, 2012; New York; State Appellate Court

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The Supreme Court of New York County issued an order on March 23, 2011, addressing motions for summary judgment from plaintiffs Fiserv Solutions, Inc., and several banks, as well as from defendant XL Specialty Insurance Co. The court partially granted and denied both parties' motions, ultimately ruling that XL's insurance policy covers situations where Fiserv's rounding up of appraisal values results in figures exceeding the maximum value in the HomeValueBot (HVB) range. The court affirmed that XL's policy insures the ranges generated by Fiserv’s automated valuation model (AVM), not any arbitrary value selected by lenders if it exceeds the actual market value determined later by a certified appraiser.

The policy's purpose is to insure the accuracy of appraisals and cover losses from faulty appraisals provided by Fiserv, which eliminates the need for human appraisers. Fiserv’s AVM produces a single appraisal figure with a margin of error, while the HVB program offers a range of values from which lenders can choose. The policy defines 'Original Appraised Value' as the AVM value and 'Faulty Original Appraised Value' when this figure exceeds the actual market value assessed post-default.

While Fiserv argued that any chosen appraisal within the HVB range should be covered, the court disagreed, stating that such an interpretation would imply XL was insuring the lenders' decisions rather than Fiserv's appraisal accuracy. The ruling clarifies that insurance applies only when Fiserv’s provided appraisal range is significantly higher than the market value, emphasizing that Fiserv's control does not extend to the specific values selected by lenders within the HVB range.

The legal interpretation of the insurance policy issued by XL to Fiserv clarifies that it insures the accuracy of Fiserv's appraisal methods rather than the lenders' choices. The policy does not serve as default insurance. Both parties concur that the coverage applies only to appraisals based on the HVB range and not to the lenders' underwriting decisions. If a lender selects a value within the HVB range, there is no coverage if a subsequent appraisal falls within that range. While Fiserv acknowledges that under XL’s interpretation, lenders would be better protected by always choosing the lowest value within the HVB range, this does not render XL's interpretation incorrect. The lender's decision to select a higher value within the range involves calculated risk, and only the HVB range is insured, not the specific value chosen by the lender.

The dissent argues that the policy's language regarding the 'Original Appraised Value' suggests that it insures the accuracy of a single value within the HVB range, rather than the range itself. It contends that if a lender assigns a value exceeding the HVB range, that value is not insured, even if the range was inaccurately high. Conversely, if a lender chooses a value within the range that is ultimately too high, coverage remains for Fiserv's miscalculation. The dissent further claims that XL's interpretation conflicts with loss calculation provisions of the policy, but Fiserv has not disputed the feasibility of calculating a loss under XL's interpretation, indicating that the loss calculation method is not at issue in this appeal.

An example illustrates that a lender seeking coverage for a loss of $20,460.79 had their property appraised between $99,929.31 and $122,135.83, while the actual market value was determined to be $91,000. The calculated loss was $8,929.31, which was less than the loan amount, entitling the lender to recover that value. Despite the dissent's criticism, it is noted that XL continued to pay claims based on the previous approach, covering values used by lenders from the HVB range if they were below the retrospective appraisal.

A new internal claims manager identified errors in claim payments where insured values fell within the HVB range, asserting that XL’s previous erroneous payments do not negate its ability to enforce the policy's meaning. The court modified its order to grant summary judgment to the plaintiffs, establishing that coverage exists when Fiserv's rounding of guaranteed insured values in remittance reports exceeds the HVB range's maximum. Fiserv regularly submitted remittance reports detailing loan values to XL, which sometimes rounded these values to the nearest dollar. An example illustrated that an HVB range for a property was $132,026.06 to $145,923.53, but the remittance report recorded the appraised value as $145,924. XL had accepted premiums for the rounded values but now claims they exceed the HVB range, thus uninsured. The court emphasized that minor deviations from reporting should not invalidate XL’s obligations, referencing precedent that cautions against strict adherence to contract terms which could lead to unfair forfeiture of coverage. Furthermore, Fiserv maintains an insurable interest under the policy due to potential liability to the lenders.

Endorsement No. 1 clarifies that the insurance policy does not require sale or foreclosure as the only proof of loss; instead, a lender’s charge-off analysis can serve as a reasonable alternative. The deadline for submitting claims starts after the sale, appraisal, charge-off of the loss, or any event indicating potential loss recognition by the lender. A defendant can deny claims if it proves that an insured lender failed to follow its own procedures (citing Fiserv Solutions, Inc. v. XL Specialty Ins. Co. 84 AD3d 480 [2011]). 

The appeal focuses on the interpretation of the policy's definition of 'Original Appraised Value,' which refers to the value indicated by an automated property valuation (AVM) or reported by a HomeValueBot (HVB), contingent on the insured appraised value not exceeding the HVB's indicated range. The dissenting opinion argues that the policy insures the accuracy of the value chosen by lenders from the AVM-generated range. If the lender's selected value exceeds the upper limit of the generated range, the policy provides no coverage. 

Plaintiff Fiserv offers financial services, including automated home value appraisal services via AVMs, which allow lenders to avoid the costs of human appraisals. The policy, issued by defendant XL Specialty Insurance Company in June 2004, covers lenders against losses due to faulty appraisals. A 'Faulty Original Appraised Value' occurs when Fiserv’s appraisal exceeds the property's actual market value, determined by a certified appraiser after a loan defaults. The policy also defines 'Original Appraised Value' to include various types of valuations, with AVMs presenting a single appraisal figure and a margin of error.

In December 2004, XL agreed to insure appraisals from Fiserv's HomeValueBot (HVB), which presented appraisals as a range rather than a single value, allowing lenders greater flexibility in loan underwriting. The definition of 'Original Appraised Value' in XL's policy was expanded to include values reported from HVB, provided they did not exceed the indicated range. Fiserv continued to report a specific dollar value within the HVB range to XL for insured appraisals, even if this value occasionally fell outside the HVB range due to rounding by its internal systems.

From mid-2005, XL paid claims based on the specific dollar values chosen by lenders, even when subsequent appraisals indicated lower market values, resulting in payments on 165 out of 166 claims during this period. Claims were initially managed by an XL employee with expertise in fine arts, who relied on summary sheets prepared by others. As claims increased, XL notified Fiserv of policy cancellation effective April 2008 and reassigned claims management to Keri Ryan, who identified issues with prior claim payments. She noted that many claims involved retrospective appraisals lower than the chosen values within the HVB range, leading her to conclude that only the range was insured and that no loss occurred in these cases. Additionally, she found instances where lenders used values exceeding the HVB range, which she deemed not covered by the policy's definition of original appraised value.

XL Insurance paid over 99% of claims prior to identifying certain issues, but after personnel changes, it denied 1,114 claims and approved only 21 from June 18, 2008, to October 1, 2010, resulting in a payment rate below 2%. Fiserv and the Lenders initiated legal action in April 2009 for declaratory relief, alleging XL must adjust claims according to the Policy, and claimed breach of contract, violations of the Connecticut Unfair Insurance Practices Act and Unfair Trade Practices Act, and breach of implied covenants of good faith and fair dealing. They sought an injunction to prevent XL from inconsistent claims adjudication. In October 2010, both parties filed for partial summary judgment, each asserting that the Policy’s language supported their interpretations and discussing extrinsic evidence for their arguments. On March 23, 2011, the court partially granted and denied these motions. The plaintiffs appealed three court rulings related to the definitions of "Original Appraised Value" and coverage limits concerning loans exceeding HVB value ranges. XL appealed two rulings regarding the timeliness of claim notifications and Fiserv's insurable interest in the policy. The plaintiffs argued the Policy covers instances where actual appraised values fell below the HVB range, invoking the doctrine of substantial performance, which the court rejected, affirming XL’s interpretation that the Policy requires precise compliance. Consequently, any loans exceeding the highest HVB value, even slightly, are not covered. Both parties maintain that the definition of original appraised value is unambiguous.

Plaintiffs and XL have conflicting interpretations of the insurance policy clause regarding "original appraised value." Plaintiffs contend that the clause implies lenders rely on a single appraisal value from the HVB range for underwriting, asserting that 'value' denotes a specific dollar amount and that terms like 'insured appraised value' also refer to a single figure. Conversely, XL argues that the definition indicates coverage for the range of values produced by the HVB program, not just one value. XL's interpretation divides the definition into two elements: one that outlines the original appraised value as the HVB range and another that limits this to instances where the insured value does not exceed that range. The document cites legal precedents emphasizing that insurance policy language should be interpreted in its ordinary meaning unless ambiguous. The disagreement over the definition alone does not constitute ambiguity. The court finds that the original appraised value definition is not reasonably susceptible to multiple interpretations, agreeing with Fiserv’s position that the clause indicates coverage for a single value, which must not exceed the HVB range. The court concludes that any value selected must fall within the HVB range to be insured, and acknowledges that XL recognizes the accuracy of the selected single value as the insured aspect. Thus, the policy effectively ensures coverage only if the lender's chosen value does not surpass the highest value reported by HVB.

The policy defines "loss" as the unpaid principal of a covered loan after the sale of secured property post-default, subject to specific limitations. Section III specifies that the maximum loss payable under the policy cannot exceed the lesser of the difference between the original appraised value and the as-of appraised value, or the unpaid loan principal. Accurate calculations of loss depend on having a specific original appraised value rather than a range. The plaintiff's interpretation of the original appraised value is necessary for applying the loss calculation provisions, as XL's conflicting view would render loss determinations impossible. XL's argument that "insured appraised value" limits the use of HVB does not address whether "insured" refers to a single value or a range. The policy's language indicates that lenders are covered if the appraisal value is found to be inaccurate, regardless of whether it falls within or below the reported HVB range. The motion court should have granted the plaintiffs’ request for a declaration that XL must adjust claims according to the policy. Additionally, testimony indicates that the insurance was intended to guarantee valuation accuracy, while acknowledging that it does not cover losses from poor underwriting practices. Both Fiserv and XL operate in Connecticut, and the parties agree that Connecticut law governs the dispute.