A large condo development suffered substantial hail damage to many of its buildings’ roofs. After initial interaction with its insurer, the two parties went to arbitration in hopes of resolving their dispute over the extent of the loss. Dissatisfied with the non-binding decision made by an appraisal judge and the appraiser selected by the insurer, the condo association sued.
Here is how the courts viewed the loss in a manner that met the condo association’s coverage expectations.
Villas of Winding Ridge (Winding Ridge) is a 32-unit condominium complex with a clubhouse located in Indianapolis, IN. They hired a contractor to provide an estimate for the replacement of the complex’s aging roofs. The contractor reported that their property sustained hail damage. A hailstorm had occurred in the area in June 2013, nearly a year earlier.
On April 18, 2014, Winding Ridge submitted a claim to State Farm Fire and Casualty Company (State Farm), their insurance carrier at the time of loss. State Farm and Winding Ridge inspected the property damage. Winding Ridge and State Farm could not agree on a settlement. Winding Ridge requested an appraisal, which State Farm honored. One appraisal provided full shingle replacement to 13 of the 33 buildings and the other did not claim full replacement on any of the buildings. State Farm and Winding Ridge agreed to move forward with an umpire to reach a binding settlement.
An independent umpire was hired. The two appraisers and the umpire inspected the property. The umpire issued an award for repairs to the roofing shingles for the 13 buildings, soft metal damage on all 33 buildings, and replacement cost for shingles around roof vents. The umpire found that there was no indication of hail damage to the roof shingles. At this time, Winding Ridge advised the umpire of information from the roof shingle manufacturer. The manufacturer told Winding Ridge that they no longer produced the shingles needed to repair the roofs, and no comparable product existed. Winding Ridge failed to provide this information to State Farm. The umpire reviewed the manufacturer information but did not amend the award. The umpire stated there was very little, if any, hail damage to the shingles but spot repairs were included in the award. He also mentioned that many of the roofs had been patched but that issue was not considered in performing his job to determine damages. The umpire and one appraiser signed the award making it binding. State Farm issued payment to Winding Ridge.
Winding Ridge was dissatisfied with the umpire’s settlement and filed suit against State Farm for breach of contract, bad faith, and promissory estoppel. The district court granted part and denied part of Winding Ridges cross motion and granted State Farm’s Motion for summary judgment. Winding Ridge appealed the district court’s ruling.
The higher court found that State Farm did not breach the policy when it declined to pay for new roofs on all 33 buildings and that the appraisal award resolved the entire claim.
The court found that State Farm did not act in bad faith. In its opinion, there was no evidence of delayed payment or refusal to provide payment. As well, an agreement was reached with the umpire. One appraiser and the umpire signed the award, and payment was issued. Winding Ridge failed to show any evidence that State Farm acted in bad faith or acted with a culpable state of mind.
The US Court of Appeals for the Seventh Circuit affirmed the district court.
Editor’s Note: Hail Damage is displayed sporadically on a roof. It is not in formal unison and usually does not appear in a particular pattern. Wear and tear, defects, and other types of damage are commonly mistaken for hail damage on roofs.
Villas At Winding Ridge vs. State Farm Fire And Casualty Company – No. No. 19-1731 – Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:16-cv-3301
Is Appraisal Process Effective
When a large loss occurs it can be a stress test of the coverage promise that is the heart of every insurance policy. Filing a claim does not automatically result with a loss payment. An insurer and the policyholder may end up disputing what is owed. In the best case, the loss adjustment process may lead to an agreement over what’s due on a given loss. In the worst case, the dispute ends up being resolved in court. However, an appraisal may be a tool that could resolve matters before having to deal with the slow, expensive process of litigation.
Here is an excerpt of wording on appraisals found in the ISO CP 00 10-Building And Personal Property Coverage Form Analysis in PF&M.
The insurance company and the insured may occasionally disagree on the value of property or on the actual amount of loss. The appraisal condition is designed to resolve these disagreements without a court intervention. In the first step, one party decides it has reached an impasse with the other party and makes a written request for an appraisal. Each party then hires an independent appraiser. Each appraiser must be both competent and impartial.
|Example: Jane is the insured and her insurance company is Bargun-Downe Property Company. They disagree on the value of the roof damaged by a lightning strike. They both agree to submit the dispute to appraisal. Jane selects an experienced appraiser who just happens to be her brother. Bargun-Downe selects a totally impartial party who does not have any appraisal credentials. Both appraisers are rejected. Jane’s selection is biased, and the company’s selection is not qualified.|
The appraisers then choose an umpire. If they cannot agree on one, they can request that a judge of a court that has jurisdiction select one. Once all parties are selected and are in place, each appraiser states the value of the property and the amount of loss. If both parties agree, the amount of loss is settled. Only disputed amounts are submitted to the umpire. Any decision made by any two of the three is binding on both the insurance company and the insured.
The expenses associated with this process fall outside the category of expenses the coverage form pays. The insured pays the following costs or expenses. The insurance company does not reimburse it for them:
- Its appraiser
- Its equal share of the cost of the umpire
- Its equal share of any other appraisal expenses
The insurance company pays the following costs and expenses. None of these expenses reduce the limit of insurance:
- Its appraiser
- Its equal share of the cost of the umpire
- Its equal share of any other appraisal expense
All Losses Aren’t Eligible Losses
Yes, we’re going back to the basics here. When disputes do go to the courts and involve very high financial stakes, we might assume that complicated issues are involved. Most root causes of litigation are usually quite simple. In the above case, a key issue was the lack of understanding about covered losses. An insurance policy protects against eligible losses, not all losses. The passage of time and regular use are the primary reasons for property losing its original value. Accidental loss is often a portal that reveals the existence and extent of different sources of reduced property value. It’s critical to keep in mind that, while insurance is a valuable source of protection, its role is narrowly defined.
Below is an excerpt about the role of the insurance contract found in “P&C Insurance by Gordis,” a component of Rough Notes Advantage-Plus
The Insurance Contract
The insurance contract is an agreement where one party obligates itself to make good the financial loss or damage sustained by a second party when a designated event occurs. The event must be fortuitous and happen by accident. The named insured must have insurable interest at the time of loss. One final point is that in order for any contract to be considered insurance, there must be a risk of loss.
An occurrence largely beyond the control of any involved party; happening by chance; accidental; for example: fire, lightning, windstorm, explosion or flood.
In order to recover from a loss to property, the holder must have an insurable interest in the property at the time of the event or occurrence. An insurable interest is any right, title or interest in property where the holder of that right, title or interest sustains financial loss if the property is damaged or destroyed. Any lawful and substantial economic interest in the safety or preservation of the property from loss, destruction or damage also constitutes an insurable interest.
An entity does not have to be the property owner to have an insurable interest in it. Examples include, but are not limited to, mortgagees, trustees, vendors, lessees and bailees. Insurable interest for any entity must exist at the time the loss occurs.
RISK OF LOSS
If property could never be destroyed, there is no risk of loss. If property must necessarily disintegrate or be destroyed, there is no risk of loss. Between these two extremes is the exposure of risk that can be insured.
BINDERS (not mentioned in the policy)
A binder provides immediate coverage on a risk. A binder may be written or oral and is temporary evidence of coverage. It is issued to show evidence of insurance coverage subject to the policy being issued, is usually effective for a 30-day period and remains in force for this period of time unless cancelled or replaced by the actual policy.
Special Legal Concepts
Affecting Insurance Contracts
A contract of adhesion is basically one prepared by one party to be accepted by the second party. As a result, any ambiguity in the contract is construed against the preparer; in this case, the insurance company.
Suggesting Taking A Look At What’s At Risk
Prevention or mitigation of exposures to loss is always a good idea. While, ideally, clients should have a firm grasp of the condition and value of their property and be willing to take steps to deal with issues, that’s not reality. An insurance professional can provide invaluable service by initiating action or, at least, raising their clients’ awareness. Take the situation where an agent may have made their observation of a condition that should be addressed and creating a way to open the insured’s eyes.
Here is how a letter may be used to prompt expert assistance in gauging property conditions. This comes from Business Building Letters.
No matter how thoroughly we have you insured, there is always an advantage to having a loss control specialist perform a double check. We have an opportunity to arrange for an [describe] from [name of insurance company] to visit your premises.
If it is convenient, will you please set aside an hour or so on [date] at about [time] for our visit?
You may also wish to have your [name or title] there. I’ll call to confirm.
P.S. If there is a more convenient time or date, please do not hesitate to call.