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.