An appraisal clause is common within many
property insurance policies: in the case of a claim valuation dispute, the
insured and insurer each pick an appraiser, the appraisers choose an umpire,
and the parties agree to be bound by the process
Imagine a devastating fire renders your rental property
uninhabitable. You dig out your insurance policy and are relieved to find that
you are insured up to the “actual cash value” of the building. But what exactly
does this phrase mean? The Wisconsin Court of Appeals recently grappled with
this question in Coppins v. Allstate Indem. Co., No. 13AP2739
(Nov. 12, 2014). However, the decision casts some doubt on the level of
deference being paid to insurance appraisals under the Wisconsin Supreme
Court’s decision in Farmers Auto Ins. Ass’n v. Union Pac. Ry. Co.,
2009 WI 73.
An appraisal clause is common within many property insurance
policies: in the case of a claim valuation dispute, the insured and insurer
each pick an appraiser, the appraisers choose an umpire, and the parties agree
to be bound by the process.
A few jurisdictions
now allow either party to reject the demand for appraisal, as evidenced in state
amendatory endorsements for commercial property policies, homeowners policies,
or both. Allowing the insurer to reject an insured's demand for appraisal is
disadvantageous for insureds.
Over a strong dissent, Farmers approved of such appraisals as “a fair and
efficient tool” that “place[s] a difficult factual question . . . into the
hands of those best-equipped to answer that question.” 2009 WI 73, ¶43. Farmers also instructed judges to
defer to appraisal valuations, only vacating them in cases of “fraud, bad
faith, a material mistake, or a lack of understanding or completion of the
contractually assigned task.” Id.
at ¶44.
In the present case, after Coppins’ property was destroyed,
Allstate invoked the standard appraisal clause in the policy. The policy
promised to pay the building’s “actual cash value,” a term that it didn’t
define. Allstate’s appraiser ultimately set that value at $50,000, which he
considered the building’s market value. Coppins’ appraiser set it at
approximately $250,000, based on “a detailed item-by-item assessment of the
damaged items within the building, minus a sum to compensate for depreciation.”
Slip op. at 9. The umpire, though he calculated the “replacement cost” of the
building at nearly $290,000 and its “replacement cost less depreciation” at a
little under $145,000, set the “actual cash value” at slightly under $80,000.
As described by the Court of Appeals, the umpire’s explanation for why he
picked that number (and even for his understanding of what the term “actual
cash value” means) left a lot to be desired.
Coppins brought the usual claims against Allstate for breach of
contract, promissory estoppel, and bad faith. The trial court granted summary
judgment to Allstate, holding that it had discharged its obligations under the
policy by paying Coppins the amount divined by the umpire.
The Court of Appeals reversed and remanded for trial on all
three claims. Besides several facts suggesting that a reasonable insured would
have expected actual cash value to be determined according to the replacement
cost of the property (and not the market value), the court appeared especially
uncomfortable with an annual insurance premium of $2,112.08 where the ultimate
coverage would be capped at a $50,000 market value. Slip op. at 17. At the same
time, it is far from clear that the umpire failed to understand his
contractually assigned task, the only possible ground for reversal available on
these facts according to Farmers.
It appears more likely that the Court of Appeals simply “disagree[d] with the
award,” a forbidden ground for upending an appraisal. Farmers, 2009 WI at ¶45
The decision is also noteworthy for its apparent rejection of
the “broad evidence rule,” a doctrine accepted in many jurisdictions that
allows a fact finder to consider all evidence in determining the valuation of
an insurance loss. Previous Wisconsin decisions indicated that Wisconsin had
also adopted the broad evidence rule, so that evidence regarding both market
value and replacement cost could be considered. See, e.g., Doelger & Kirsten, Inc. v. Nat’l Union Fire Ins. Co.
of Pittsburgh, 42 Wis. 2d 518, 523 (1969). Those cases may explain
why the appraisal umpire felt justified in relying on market value data.
The bottom line is that the Court of Appeals may have achieved
a just result in this case, but it seems to have done so at the cost of
muddying the clear rule of Farmers
in favor of the appraisal mechanism and, perhaps, evading Doelger’s adoption of the broad
evidence rule. We’ll stay tuned to see if Allstate seeks review and, if so, if
the Supreme Court takes the case.
Property insurers and their insureds recognized that not every insurance dispute necessitated the expense and headache of a full-blown lawsuit. The result of this recognition was the birth of a new creature, the appraisal provision. This new creature, inserted into property insurance policies, gave insurers and insureds an efficient and effective means of resolving a dispute over the amount of a covered loss when both parties agreed on all issues other than the cost to repair or replace the damaged property. Each side would appoint a knowledgeable person from the industry and the two of them would come up with an agreed cost. If they couldn’t agree, an umpire was brought in to resolve the issue. It was efficient and fair.
Although the appraisal provision can take many forms, a typical one provides:
If we and you
disagree on 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 and notify the other of the appraiser selected
within 20 days of such demand. The two appraisers will select an umpire.
If they cannot agree within 15 days upon such umpire, either may
request that selection be made by a judge of a court having
jurisdiction. Each appraiser will state 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 as the amount of loss.
In the late 1800s, the appraisal
provision made its way into Texas insurance policies. For well over a
century, the appraisal provision performed as intended, and generally
succeeded in keeping those disputes involving only the amount of a
covered property loss off the dockets of Texas courts.
But in 2009, a decision from the Texas Supreme Court in State Farm Lloyds v. Johnson
blurred the previous clear boundaries of the appraisal provision’s
territory.[1] Confusion ensued. The dockets of Texas courts exploded
with disputes as to the proper boundaries of the appraisal provision’s
reach.
Compelled to follow Johnson’s
unclear directives, other Texas courts continued to distort the
boundaries of the appraisal provision. Eventually, it appeared that
perhaps every conceivable dispute would be within the reach of the
appraisal provision.
The facts the Texas Supreme Court examined in Johnson
are unexceptional. After a hailstorm in her town, Becky Ann Johnson
filed a claim under her homeowner’s insurance policy for damage to her
roof. State Farm’s inspector concluded that the hail had only damaged
the ridgeline of her roof and estimated repair costs at $499.50.
Johnson’s roofing contractor disagreed
and concluded the entire roof required replacement at a cost of more
than $13,000. As a result of the disagreement, Johnson demanded
appraisal under a provision similar to the one quoted above.
State Farm refused to participate in the
appraisal, asserting that the parties’ dispute involved the cause of
the damage — hail or not hail, and not simply the “amount of loss” as
stated in the appraisal provision. Johnson filed a declaratory judgment
action asking the court to compel appraisal. The trial court agreed with
State Farm that appraisal was not appropriate. The court of appeals
reversed, holding that appraisal was required.
In affirming the court of appeals’ order
compelling State Farm to participate in appraisal, the Texas Supreme
Court held that in determining the “amount of loss,” appraisers can
allocate damage between covered and excluded causes of loss.[2]
Other courts interpreting Texas law have since expanded Johnson to specifically hold that appraisers can resolve questions of causation.[3]
Accordingly, since Johnson,
appraisals in Texas have not been limited to simply ascertaining the
dollar amount of an agreed-upon covered claim. Instead, appraisals have
involved determinations by the appraisers and umpire of whether damage
was caused by a covered or a noncovered peril, as well as various other
disputes traditionally considered to be coverage and causation questions
outside the purview of the appraisal provision.
However, a recent decision by the
Northern District of Texas has recognized that not all disputes are
within the broad boundaries created by Johnson — a positive first step
in returning the appraisal provision to its intended purpose. In
December 2013, the Northern District of Texas issued an opinion in Devonshire Real Estate & Asset Management LP v. American Insurance Co.[4] Like Johnson and its progeny, the issue in Devonshire focused on the phrase “amount of loss” in a policy’s appraisal provision. And as in Johnson, Devonshire began with a hailstorm.
The insured and insurer in Devonshire
disputed the amount the insurer owed for hail damage to the insured’s
apartment complex. The insured sued and the insurer demanded appraisal.
Appraisal progressed with each side selecting an appraiser. The two
appraisers agreed to an appraisal award with specific lines for
replacement cost value (RCV) and actual cash value (ACV).
The appraisal award also included an
amount for tax, overhead and profit, but clarified that the award was
“less prior payments.” Following the signing of the appraisal award, the
insured’s appraiser submitted a letter to the court that was filed as a
notice of appraisal, which calculated prior amounts paid for gutters
and carports on a replacement cost value and an actual cash value basis.
The insurer’s appraiser submitted a
subsequent letter, disputing the insured’s appraiser’s calculations,
stating that the calculation did not deduct taxes, overhead and profit.
Additional documents were filed by the appraisers to clarify their
differences with regard to the ultimate amount the insurer owed.
The issue before the court was whether
the appraisers, in submitting their multiple documents, had fulfilled
their duties under the appraisal clause. The insurer argued that in
order to state the “amount of loss” as required under the policy, the
appraisers must calculate the appropriate amount of deductions to apply
to the total loss award and provide the “amount of loss payable.”
If the appraisers cannot agree on the
“amount of loss payable,” the dispute should be submitted to the umpire.
The insured, on the other hand, argued that the appraisers fulfilled
their duties when they calculated the total amount of loss (upon which
they agreed) and that they were not required to determine the net loss
or “amount of loss payable.” The insured further argued that because the
appraisers fulfilled their duties, the appraisal award was complete and
binding and should not be disturbed by the court.
In examining this issue, the court began
as follows: “In order to determine the proper scope of the appraisers’
duties, the court looks to the language of the insurance contract.” (Johnson, on the other hand, began its discussion with “A Brief History of Appraisal Clauses,” beginning with a decision from 1888.)
The Devonshire court explained
that the appraisal provision at issue stated that each appraiser would
determine the “amount of loss,” not the “amount of net loss.” Based on
the plain meaning of the language alone, the court held that the
appraisers were required to ascertain the “total sum of financial
detriment caused to the property and nothing more.” The policy did not
provide them with the obligation or authority to determine the net loss
owed by the insurer.
The court even specifically recognized that its ruling was likely not the most efficient, stating:
It would likely be
more efficient for the appraisers here to agree to the amount of prior
payments, given that the parties agree that certain prior payments
should be deducted. ... yet the contract’s language only vests the
appraisers with the responsibility of stating the “amount of loss,” and
the appraisers accomplished this once they determined the total
financial detriment that Devonshire suffered ...
Although Devonshire did not
involve the question of whether causation could be decided by appraisal
and the court never openly questioned the holding of Johnson in
its opinion, the court’s focus on examining solely the rights bestowed
to appraisers by the policy language, and the court’s statement that the
job was complete when the appraisers “determined the total financial
detriment” sound similar to the arguments that have been used against
the expansion of the scope of appraisal.
Only time will tell whether the Devonshire
opinion is an outlier in the tale of the Texas appraisal provision or
whether it is the beginning of the end of the appraisal provision’s
conquest beyond the scope provided to it by the policy language.
Regardless, Devonshire suggests there may be a few more pages of the tale left to tell.
[1] 290 S.W.3d 886, 889-90 (Tex. 2009).
[2] Id. at 893.
[3] TTM Investments, Ltd. v. Ohio Cas. Ins Co., 730 F.3d 466, 475 (5th Cir. 2013); MLCSV10 v. Stateside Enters., Inc., 866 F. Supp.2d 691 (S.D. Tex. 2012).
[4] CA No. 3:12-CV-2199, 2013 WL 6814731 (N.D. Tex. Dec. 26, 2013).