My bet is that virtually all property insurance adjusters will say “yes.” Yet, in a recent order in a pending case in Wisconsin,1 State Farm has currently won an argument that the method of repair is a coverage issue and not an issue for an adjudication panel.
The order states the facts giving rise to a demand for assessment:
The plaintiffs and State Farm retained separate qualified contractors to estimate the cost of repairing the fire-damaged residence. On April 6, 2021, State Farm notified the plaintiffs that its contractor estimated the repair cost to be $54,692.48. Id. ¶ 12. On April 21, 2021, Plaintiff disputed the loss amount and submitted an estimate of $159,019.06. After another round of estimates, State Farm revised its estimate of the loss amount to $72,166.96 on June 22, 2021. On July 30, 2021, the plaintiff provided State Farm with an updated estimate of the loss of $156,993.49 plus $8,373.63 for removal of garbage. They also provided a signed proof of loss for the home policy limits including the increased five percent limit for trash removal and for 12 months of lost rent at a rate of $850 per month. The difference between State Farm’s estimate and the plaintiffs’ estimate is close to $85,000.
The fire is covered. The cost of repairing the fire-damaged property is disputed. The differences appear to be the typical type of case that is routinely referred to appraisal boards across the country to put the value difference to rest and avoid litigation. But State Farm has a different take.
For example, State Farm argued this in part of its information:
The parties have competing estimates that differ not only in their valuation of certain items but also in terms of the extent of damages. Specifically, the parties have forty-one disagreements about scope and four regarding valuation. State Farm contends that only the valuation disputes are appropriate for valuation. The plaintiff claims, on the other hand, that the entire dispute should be resolved by the assessment board.
However, recent Wisconsin case law, both state and federal, makes clear that appraisal should only cover appraisal disputes and that questions of scope are beyond the scope of this determination.
The term “extent of damage” is ambiguous. It can mean the right method of how to repair the damage. It can also mean the amount of damage caused by a hazard. To be clear, State Farm appears to argue that both the method of repair and the amount of damage are not appropriate for review panels to consider.
The judge agreed with State Farm, holding in part:
Under the plain language of the policy at issue in this case, the appraisal process is limited to circumstances where the insurer and the insured disagree as to the “magnitude of the loss” or valuation of the damage, not the extent or extent of the damage and method of repair.
If this holding stands, appraisal will not exist in Wisconsin. Insurers and policyholders always have different opinions about the way to fix damaged property. Ask seven different contractors on a $100,000 fire damaged building what method they would use to repair the fire damaged building and you will get seven different methods. The values can be around the $100,000 figure, but the methods invariably differ with different pricing.
The policyholders asked the court to reconsider the decision, noting:
State Farm has never contested coverage for this loss. Both parties agree that this was a fire loss. State Farm has never identified any other cause that contributed to the injury claimed by its insured. There is no motion recorded or anticipated that will address the coverage under the policy. The only dispute between these parties is the cost of repairing the fire damage. It is precisely this type of factual dispute that an assessment panel is supposed to resolve. Instead, under the current ruling, Higgins is now forced to incur the time and expense of having a jury determine the amount of the loss.
There is no basis for State Farm or this court to conclude that an adjudication panel would be asked to determine coverage for this claim. State Farm identified 41 “scope differences” between the parties’ estimates, arguing that “a scope dispute implicates coverage because resolution of a scope dispute necessarily involves an interpretation of whether an item suffered “accidental direct physical loss” sufficient to trigger coverage under the State Agricultural Policy.’ This is a gross mischaracterization of the facts and the policy relied upon by the court to reach its conclusion.
Of 41 scope differences, State Farm agreed that 32 involved some measure of accidental direct physical loss. The dispute about most of these items is whether the particular property – ie window, door, floor, trim, etc. – could be cleaned or repainted, or whether it must be removed and replaced; not if it suffered accidental direct physical loss. The remaining items largely comprise side work related to the items that have already been confirmed fire damaged. For example, if a window needs to be removed and replaced (as claimed by the insured) rather than cleaned (as claimed by State Farm), there may be additional work required such as installing window guards, trim and sill flashing. (Id. at 33.) Again, these were not differences in coverage—ie, whether a covered cause of loss caused accidental direct physical loss of the property—but rather a dispute over the cost of repairing the undisputed damage from a fire. Although the court was correct in holding that coverage disputes are beyond the scope of an adjudication panel, it was incorrect to accept without support State Farm’s contention that there was a coverage issue in that claim. This is a clear error of fact that supports reconsideration.
This case is another example of State Farm not paying awards, as noted in my post,
Why has State Farm stopped paying awards? Assuming the panel hypothetically reached an agreement on all the items, State Farm would take the disputed 41 items and remove them from payment, claiming they were “coverage” items. If this decision is upheld, such a move by State Farm would be ostensibly correct because the disputed items would have to be resolved through court proceedings.
There is another lesson from this case. State laws differ in the assessment process. Therefore, it is important to know the rules for each state. Because the rules are subject to change, as demonstrated by this case, appraisers and adjusters must stay educated on the current state appraisal law where the appraisal is being conducted.
Our legal system allows parties to challenge what they see as the correct interpretation of insurance policies. While many of us may not agree with State Farm’s opinion, it is certainly entitled to its day in court and a fair analysis of its position.
This is an important non-life insurance law and valuation matter. I will keep readers updated on future developments.
We meet aliens every day who have something to give us. They come in the form of people with different opinions.
1 Higgins v. State Farm Fire & Cas. Co.(E.D. Wis. July 5, 2022).