Minnesota High Court Blurs Line Between Coverage Determination and Amount of Loss in Appraisal

In many property loss cases, distinguishing between “coverage” and the “amount of loss” will be straightforward for purposes of invoking appraisal. See, e.g., Kawa v. Nationwide Mut. Fire Ins. Co., 174 Misc.2d 407, 664 N.Y.S.2d 430 (N.Y. Sup. Ct. 1997), where a windstorm damaged the insureds’ house.

After the inspection, the insurance company in Kawa tendered its settlement offer. The insureds rejected the offer and sued, demanding appraisal. The dispute between the parties concerned whether the policy required the insurer to repair the house only to its pre-damage condition, or, as the insureds contended, to replace the home’s damaged aluminum siding with vinyl siding. The Court denied the insureds’ motion to compel appraisal, deeming the dispute one of coverage, rather than damages.

The Kawa case illustrates the principal that the court was required to interpret the policy to resolve the dispute because the appraiser’s assessment of value of the claim depended upon a resolution of a legal question. A different result was recently seen in the Minnesota Supreme Court’s decision in Quade v. Secura Ins., 2012 WL 2121235 (Minn. 2012).

In Quade, a strong windstorm caused extensive damage to the insureds’ farm buildings. The windstorm damaged several buildings and the insurer paid for some of the damages, but determined that the damage to the roofs of three buildings were the result of wear and tear and not the windstorm. Consequently, Secura, the insurer, denied the claim based upon the wear and tear exclusion and advised the insureds that they should initiate an appraisal pursuant to the policy if they disagreed with the denial.

The policy contained a typical appraisal clause which provided that either party could demand an appraisal if the parties failed to agree on “the amount of loss.” However, instead of pursuing an appraisal, the insureds brought a breach of contract lawsuit against Secura.

The insureds argued that the appraisal clause was not applicable because the dispute between the parties was whether the damage to the roofs was covered by the policy and did not involve the cost of repairing the roofs. The Minnesota trial court agreed with Secura and dismissed the complaint. On appeal, the Court of Appeals concluded that the resolution of the insureds’ claim “required the determination of legal questions concerning the meaning and application of contract clauses, causation, and liability” and therefore the trial court erred by ordering the parties to engage in the appraisal process. The Minnesota Supreme Court reversed the lower appellate court.

The Minnesota Supreme Court acknowledged the well-established rule under state law that liability determinations are made by courts, not appraisers, and that the scope of appraisal was limited to damage questions, while liability questions are reserved for the courts. Generally, the Court agreed that appraisers have authority to decide the “amount of the loss” but may not construe the policy or decide whether the insurer should pay.

Turning to the facts of the case, the high court found that the record in the case demonstrated the dispute between the parties involved both a question of damages and a question of liability under the policy. The insureds asserted that the damage to the roofs was a covered loss due to wind damage. Secura asserted that the damage to the roofs was due to wear and tear and was excluded.

Under the circumstances, the Court found that determining the dispute between the parties regarding the amount of loss under the appraisal clause necessarily included a determination of causation. The causation question involved separating loss due to a covered event from a property’s pre-existing condition. The lower court observed that if the insureds’ interpretation were adopted, appraisal clauses would be rendered inoperative in most situations which would directly conflict with the public policy of the state of Minnesota which encouraged the appraisal process.

The Court’s holding in Quade recognized that questions of law or fact, which are involved as mere incidents to a determination of the amount of loss or damage are appropriate to resolve in an appraisal in order to ascertain the amount of the loss.

The distinction between coverage and damages can become more difficult when the insured seeks coverage for lost business income. In many cases the calculation can be speculative and involve complex apportionments of competing causal factors. Additionally, the calculation of the restoration period, the period during which business income losses can be attributed to the covered event, can broach both legal and factual elements, creating a boundary that will require careful analysis to delineate. See, e.g., Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 261 F.Supp.2d 293 (S.D.N.Y. 2003) (hereinafter “Duane Reade I”) and Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F.Supp.2d 235 (S.D.N.Y. 2003) (hereinafter “Duane Reade II”).

In Duane Reade I, the district court appropriately reserved the determination of the legal dispute for itself rather than delegating it to the appraisal panel. Once the legal question was resolved, the factual question of determining the actual date of the restoration period fell within the appraisal panel’s scope. In Duane Reade II, the district court resolved the legal question by dismissing both sides’ interpretations of the policy as extreme, concluding that, on the facts of that case, the appropriate scope of the restoration period was the time it would take to rebuild, repair or replace the damaged the property. Once the district court clarified the scope of restoration within the meaning of the policy, defining that specific period was a sufficiently legal question to allow resolution by the appraisal panel.

What the Duane Reade cases illustrate is that the presence of a coverage dispute does not preclude an appraisal demand. Only a coverage dispute that precedes the valuation of damages which prevents such a demand precludes appraisal. Coverage disputes that are independent of the valuation of damages can stand in abeyance pending the appraisal.

The Minnesota Supreme Court’s decision in Quade, as pointed by the dissent of Justice Page, sidestepped the central dispute in the case which was whether the roof damage was a covered loss.

Although Minnesota law empowered appraisers to consider causation in determining the “amount of loss,” Justice Page found that Minnesota law did not authorize appraisers to make a legal determination that the claim loss was not covered by the policy. (Citing Mork v. Eureka-Sec. Fire & Marine Ins. Co., 230 Minn. 382, 384, 42 N.W.2d 33, 35 (1950) (“The finding of appraisers on the question of coverage … [is not] final.”); Harrington v. Agric. Ins. Co. of Watertown, N.Y., 179 Minn. 510, 512, 229 N.W. 792, 793 (1930) (“[A]lthough the appraisers of a fire loss must determine what property was covered in order to arrive at the amount of damage, the right of the insurer to have a judicial determination of liability includes the right to a judicial determination of the coverage of the policy.”)

Justice Page also pointed out that judicial economy favored a judicial determination prior to appraisal where a coverage issue is involved. According to Justice Page, it was logical to answer the coverage question first because, if the Court determined that there was no coverage, then there was no need for the appraisal. However, if there is a coverage dispute, assuming the appraisal goes forward, the appraisal will not resolve the issues between the parties, necessitating a judicial determination in any event.