What on Earth? Court Finds Ambiguous Property Appraisal Award for Earthquake Damage

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The U.S. District Court for the Southern District of Illinois recently held that outstanding coverage issues and an ambiguous notation in an appraisal award precluded a finding that an insurer satisfied its coverage obligations. Windsor Oaks, LLC v. Cincinnati Ins. Co., No. 17-CV-689-SMY-SCW, 2018 WL 4303141 (S.D. Ill. Sept. 10, 2018).

The insured, a hotel owner, submitted to its insurer a property claim for earthquake damage. The insurer retained an engineering expert, who determined the hotel did not sustain earthquake damage. Accordingly, the insurer denied the owner’s claim as not falling within the policy’s earthquake endorsement.

The owner invoked the appraisal clause of its policy, and the parties engaged in the appraisal process. The appraisal award for the earthquake claim contained, “N/A” next to the values for the amount of loss. The insurer interpreted the finding as a $0.00 award, requiring no payment to the owner. The owner disagreed and sued the insurer for coverage. The insurer counterclaimed.

In ruling on the insurer’s motion for summary judgment, the court first determined the appraisal award was not conclusive evidence of the lack of coverage. In Illinois, appraisers cannot ordinarily make coverage determinations, such as whether damage falls within the terms of the policy. Additionally, although appraisers in Illinois can generally determine both causation and the extent of damages, here the language of the appraisal referral limited the issues to valuation of the hotel. Because the appraisers’ roles were limited to valuation, they could not base any of their findings on the absence of earthquake damage.

Further, the court found an issue of fact remained as to the meaning of, “N/A.” The court reasoned that the common usage of, “N/A,” as an abbreviation for “not applicable,” did not shed any light upon the notation’s use in a document that required numerical values. The court also found significant affidavits from the umpire and the two appraisers. The umpire stated the notation was used because earthquake damage was not addressed. However, the owner’s appraiser declared they could not reach an agreement on earthquake damage, and in turn, the insurer’s appraiser attested that, “N/A” meant, “no award.”

The significance of the court’s decision lies in its recognition of the limitations on what appraisers may decide, or in other words, that appraisers may not decide coverage issues during the appraisal process. The decision likewise reflects courts’ willingness to invalidate appraisal awards where the appraisers fail to comply with the process laid out in the bargained-for insurance policy.