Insurance appraisal awards are frequently the subject of court decisions because of difficulties appraisal panels face when tasked with determining the amount of a loss, especially when the loss implicates potential coverage issues.  In the most recent decision coming out of the United States District Court for the Western District of North Carolina, an appraisal award was held to be invalid because the appraisal panel contemplated causation issues in reaching its decision.

In Glendale, L.L.C. d/b/a Western Sizzlin v. Amco Insurance Company d/b/a Nationwide Mutual Ins. Co., Docket No. 3:11-cv-3-RJC-DCK, 2012 U.S. Dist. LEXIS 56335 (Apr. 23, 2012)1, the Plaintiff’s restaurant sustained fire damage to the building and its contents.  Plaintiff reported the loss to its commercial property insurer, Nationwide Mutual Ins. Co. (“Nationwide”).  After a dispute arose as to the valuation of the loss, the parties agreed to submit the claim to appraisal.  Nationwide’s chosen appraiser determined that the reasonable cost of the building repair was $187,281 and contents replacement was valued at $19,512.  These numbers were significantly less than the $520,911 for building repair costs and $304,607 for contents replacement amounts arrived at by Plaintiff’s chosen appraiser.  In support of his valuation, Nationwide’s appraiser argued to the umpire that items which would be excluded as part of the insurance contract should not be included within the appraisal process/award or, at the very least, should be identified separately. 

Nationwide’s appraiser went on to explain that, in his opinion, they “should consider what caused certain conditions” and “if the damages [were] preexisting… or if they [were] caused by poor maintenance…then they should not be included in [the] appraisal award”. 

Furthermore, Nationwide’s appraiser also argued that, since the Plaintiff failed to repair the roof, resulting in additional building damage, those costs should not be considered in any award because they resulted from Plaintiff’s post-fire neglect of the building, and were not directly caused by the fire.  The umpire issued an appraisal award, which Nationwide’s appraiser signed.  The award provided for building repair replacement cost at $286,745 and contents replacement cost at $49,350.  The award excluded repair costs for any conditions that they determined existed before the fire, as well as costs for the damage caused by post-fire neglect of the building, believing these items would not be covered by the policy.

Plaintiff initiated suit against Nationwide, claiming that Nationwide breached the policy by failing to pay the appraisal award.  Nationwide acknowledged that it did not pay the award, however, it claimed it did not do so because it did not know to whom to send the proceeds.  In its motion for summary judgment, Plaintiff asked the court to declare the appraisal award invalid, for, among other reasons, that the award improperly includes issues of coverage and causation.   Nationwide argued that the award should be upheld because all contractual appraisal provisions were followed and there was no evidence of fraud, duress, or other impeaching circumstances which would justify invalidating the award.

In its opinion, the court found that the appraisers properly excluded from their award any costs associated with repair of any pre-existing conditions in the building.  Instead of classifying this as a coverage decision, the court noted that appraisers are tasked with evaluating the amount of loss, and in order to measure the loss, there has to be a starting point.  To the extent that there were conditions that existed prior to the loss, the cost of repairing those conditions should be excluded when measuring the amount attributed to the loss.  On the other hand, the court held that the appraisers went a little too far when they excluded costs associated with damage caused by Plaintiff’s post-fire neglect of the building, as opposed to damage directly caused by the fire.  The court found that the appraisers were not the proper parties to determine which damage was caused directly by the fire and which damage resulted instead from Plaintiff’s alleged post-fire negligent.  The court likened this type of determination to a wind vs. mold determination, which should be decided by a jury as an issue of fact.  Therefore, the court found that portion of the award non-binding as a matter of law.

As is evident from this decision, courts are often tasked with walking a very thin line when deciding whether appraisal awards implicate coverage or causation issues.  This North Carolina court found that the appraisers could properly use what is essentially a causation-type analysis to separate out and exclude pre-existing damage and/or damage caused by poor building maintenance in order to measure the loss.  Yet, those same appraisers were not permitted to use a causation type analysis to determine which damage was caused by the fire and which was caused by post-fire neglect.   While this decision involves a very particular set of facts, the court’s decision does serve to highlight some of the apparent gray areas that frequently surface when courts are tasked with reviewing the propriety of appraisal awards that implicate coverage issues.  However, since courts in other jurisdictions may have different approaches when considering coverage issues in the context of appraisals, it is important to consult with counsel and research the law of the applicable jurisdiction when proceeding with an appraisal.

1 Reproduced by Robinson & Cole LLP with the permission of LexisNexis. Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.  All rights reserved.  No copyright is claimed as to any portion of the original work prepared by a government officer or employee as part of that person’s official duties.