Category Archives: Insurance

Appraisal Of Insurance Losses And The “Actual” Definition Of “Actual Cash Value”

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. 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.

Missouri Court Finds That “Ineffective” Reservation Of Rights Letters May Support Bad Faith Recovery Even In The Absence Of Coverage

All too often, instead of sending reservation of rights letters that unambiguously inform the insured of the insurer’s coverage position, insurers send longwinded, generic letters with a cursory discussion of the claim’s facts, minimal (if any) coverage analysis, extensive policy quotations, and boilerplate reservation language.  When presented with this type of ambiguous and vague insurer “reservation of rights,” many courts conclude that the insurer fails to properly preserve some or all of its coverage defenses.  See, e.g., Royal Ins. Co. v. Process Design Assocs., Inc., 582 N.E.2d 1234, 1240, 1242 (Ill. App. Ct. 1991) (“[b]ased on the equivocal nature of Royal’s [reservation of rights] letter, we find that Royal did not reserve all its rights and defenses, particularly its professional liability defense”).  See also Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012) (reservation of rights was invalid because it failed to “unambiguously inform [the insured] that [the insurer] intended to pursue a defense based on untimely notice of the claim”).  Recently, a Missouri Court of Appeals found that an insurer’s “ineffective” reservation of rights estopped the insurer from using a court’s finding of no coverage to avoid a bad faith judgment.

In Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas. Co., the Missouri Court of Appeals affirmed the lower court’s bad faith judgment against an insurer on the basis that, among other things, the insurer failed to provide a “proper and effective” reservation of rights letter.  Case No. WD76880, 2014 Mo. App. LEXIS 975, at *13-15 (Mo. Ct. App. Sept. 2, 2014).  In that case, the insured, Advantage, was sued in a construction defect case and tendered the claim to its insurer, Mid-Continent, which had sold it primary and umbrella CGL policies.  Mid-Continent sent letters to Advantage asserting that it was reserving its rights and that it would “promptly” inform Advantage of its coverage analysis.  Mid-Continent, however, failed to inform Advantage of its internal conclusion that there was no coverage and subsequently ignored Advantage’s demands for coverage.  Advantage was ultimately found liable in the underlying construction defect case.  In the coverage litigation, the trial court confirmed that Advantage’s claim was not covered but nonetheless returned a bad faith judgment against Mid-Continent.  Mid-Continent appealed.

On appeal, Mid-Continent claimed that there was no basis for the bad faith judgment because it defended Advantage under a reservation of rights while investigating a claim that the court ultimately determined was not covered.  The Missouri Court of Appeals disagreed.  Mid-Continent’s “reservation of rights” letters “did not constitute an effective reservation of rights.”  The letters “only vaguely informed the insured” of Mid-Continent’s investigation, coverage analysis and reservation of rights.  Also, while the letters “generally discussed the nature of the underlying lawsuit and set forth various provisions of Advantage’s general liability policy[,]” they did not “clearly and unambiguously explain[] how those provisions were relevant to Advantage’s position or how they potentially related to coverage issues.”  Mid-Continent also failed to promptly advise Advantage of its coverage analysis after concluding there was no coverage.  The court explained,

Defending an action with knowledge of non-coverage under a policy of liability insurance without a proper and effective reservation of rights in place will preclude the insurer from later denying liability due to non-coverage.  [cites]  Here, Mid-Continent’s purported “reservation of rights” notification was not timely or clear, nor did it fully and unambiguously inform the insured of the insurance company’s position as to coverage.  Thus, regardless of the court’s January 2012 declaratory judgment ruling that the policy language did not explicitly cover the claims …, because Mid-Continent failed to effect a proper reservation of rights, it was prohibited from asserting only limited coverage for the claim.  Therefore, Mid-Continent was estopped to deny coverage for the claim to the extent of its policy limits.  Consequently, the circuit court did not err in submitting the bad faith claim to the jury despite its declaratory judgment to the effect that the policy language did not expressly provide coverage.

Id. (emphasis in the original).  Therefore, the bad faith judgment against Mid-Continent was affirmed.

The Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas. Co. case is a significant win for policyholders in supporting the principal that a bad faith judgment can be rendered even if the claim itself is found to not be covered.