Does an assessment panel determine the size of the loss before coverage issues are raised? This question is a common question. The response results in incomplete and drawn-out procedures, leading to delayed payment to the policyholder. Each state seems to have its own answer to the question. Courts struggle with how to deal with these issues.
A federal court in Tennessee wrestled with this very question last month.1 The court noted the facts that led to a dispute as to what was owed:
On October 23, 2020, a storm caused severe hail and wind damage to the exterior and interior surfaces of the premises. The claimant filed a claim with BHHIC… in connection with the damage caused by the storm. Khushi hired a public adjuster to assess the damages and submitted a written “Proof of Loss”; to BHHIC. According to the plaintiff, wind and hail damage is covered by the insurance, and the defendant admitted that there was covered damage caused by wind, but the defendant “significantly undervalued the claim.” In its amended answer, BHHIC admits that wind and hail damage is covered by the policy, “subject to all conditions, limitations and exclusions” set forth in the policy…Khushi has demanded payment under the policy from BHHIC, but BHHIC has refused to pay.
The policyholder demanded a valuation and the insurance company refused to participate in a valuation claiming various coverage issues, including whether the hail caused the damage. The insurance company argued that the coverage issues must be settled first through litigation. The policyholder requested that the court order the parties to evaluate first and try any coverage issues later.
The court noted in particular:
The real question is not whether to allow an assessment, but whether the court, in the exercise of its discretion, should compel the assessment now or wait until some later time, when the alleged coverage issues have been resolved.
The court then noted that this controversy is routinely presented to judges across the country:
Courts around the country have regularly granted motions to compel appraisals, with the caveat that, absent an express clause to the contrary in the insurance contract, “appraisers have no power to decide coverage or liability issues.” Merrimack Mut. ins. Co. v. Batts, 59 SW3d 142, 152-53 (Tenn. Ct. App. 2001) …. If the parties have already decided on liability, the assessment process effectively resolves the dispute over the amount of the loss. But if liability is contested, an assessment of the “magnitude of the loss” would not “empower the appraisers to decide questions of coverage and liability.” In other words, issues of coverage and liability are always issues that must be resolved by the courts, even when the amount of damage is determined through the appraisal process. Looks, for example, Kush Enters., LLC v. Mass. Bay Ins. Co.2019 WL 13117568 (ED Tenn. Nov. 7, 2019) (noting that its decision granting a motion to compel an appraisal of defendant’s objection “does not expand the scope of the appraisal process” and affirming that appraisers cannot “make final determinations of causation , extent or liability under the policy, only the amount of loss, and that the defendant retained the right to “dispute these matters after the assessment is complete,” in which case the court would decide them …
Of course, questions of coverage, causation, and liability are often intertwined with the question of the magnitude of the loss. Accord, e.g. Hill v. Auto-Owners (Mut.) Ins. Co., no. 4:19-cv-78, 2020 US Dist. LEXIS 223142, 2020 WL 7034321, (ED Tenn. Nov. 30, 2020) (‘[P]as a practical matter, it would be difficult to completely separate causation and coverage results from an estimated loss.’); State Farm Lloyds v. Johnson290 SW3d 886, 890 (Tex. 2009) (recognizing that ‘[t]The boundary between liability and damage issues may not always be clear.’). And courts in different jurisdictions have developed different ways of dealing with these situations. In some states, the courts have concluded that, while “[t]here may be some times when the appraisal is so expensive and coverage so unlikely that it is worth considering in advance whether an appraisal is really necessary, ”unless the ‘loss amount’ will never be needed (a difficult prediction when litigation has yet To begin with), assessments should generally proceed without preventive intervention by the courts.
Other courts have held that, where coverage issues predominate over the question of amount of loss, the coverage issues should be resolved first, before an assessment is required. Looks, for example, SSDD, LLC v. Underwriters at Lloyd’s, London, No. 4:13-cv-258 CAS, 2013 US Dist. LEXIS 77467, 2013 WL 2420676, at (ED Mo. June 3, 2013) (applying Missouri law, finding that the dispute before it “primarily concerned coverage, as opposed to loss amount, and therefore enforcement of the judgment provision is not appropriate’); Hawkinson tread tire Serv. Co. v. Ind. Lumbermen’s Mut. ins. Co.362 Mo. 823, 245 SW2d 24, 28, (Mo. 1951) (holding that, where “the amount of loss was incidental to the actual underlying (legal) controversy between the parties as to the meaning of the insurance contract and its application to the facts” the legal issues should be resolved before an assessment was required).
And still other courts appear to have held that it is appropriate to order an appraisal before coverage disputes are resolved only if the insurer has conceded that there is a covered loss and the only issue to be resolved is the amount of the loss. Looks, for example, Williamson v. Chubb Indem. ins. Co., no. 11-CV-6476, 2012 US Dist. LEXIS 31648, 2012 WL 760838, at (ED Pa. Mar. 8, 2012) (‘A condition of adjudication is that there be an admission of liability and a dispute only as to the dollar value of the loss.’ Ice City, Inc. v. Ins. Co. of N. Am.456 Pa. 210, 314 A.2d 236, 240 (Pa. 1974)).
Courts around the country seem to be coming to different conclusions about how to handle the situation. This can be good for insurance defense attorneys because they bill on briefs and legal arguments. The insurers must hold on to the flow of potential liabilities. But the policyholder has the claim payment delayed and effectively denied pending the determination of the legal issue. A purpose of the assessment as a speedy resolution process is lost when a case reaches this stage of legal entanglement without a clear path.
The federal court judge had to decide how Tennessee law would resolve the issue. That answer is anything but certain:
The Tennessee courts have not actually confronted the issue, although the Tennessee Court of Appeals has noted, with apparent approval, a decision by a Michigan court suggesting[ing] that disputed questions of coverage and liability are best submitted to the courts before any dispute as to the amount of loss is submitted to the appraisers.’ Merrimack Mut. Fire Ins. Co. v. Batts59 SW3d at 153 (citing Auto-Owners Ins. Co. v. Kwaiser, 190 Mich. App. 482, 476 NW2d 467, 469 (Mich. Ct. App. 1991)). The federal district courts in Tennessee considering motions to compel assessments have generally approached the issue with an eye toward whether the amount of loss in dispute predominates over coverage and liability issues, or vice versa, and thus whether to order an assessment early in the litigation process or resolve disputes. legal issues first would be more likely to advance the interests of the legal economy and party resources. Looks, for example, Sphere. Aerospace, Inc. v. Phillips & Jordan, Inc.2015 WL 5514627, (ED Tenn. Sept. 17, 2015) (granting motion to compel adjudication, holding that the adjudication provision of the policy is valid and that compelling adjudication, in addition to being consistent with the policy, “would potentially save both the parties’ resources and legal resources”, increase “the likelihood of the parties reaching a settlement will increase, as each party will know where it stands when they return to litigation”, “give both parties a target to direct their arguments towards either in support of [of]or resistance” to the judge’s decision, “potentially eliminate the need for future litigation in this court, and at a minimum, . . . streamline any future litigation’).
In the end, the court followed the Texas approach and sent the case for adjudication:
It seems clear that proceeding with an adjudication will expedite the resolution of this case, save the parties and judicial resources, and increase the likelihood of settlement.
The suit was removed to federal court on April 13, 2022. The decision to send the case for assessment first was made on January 13, 2023. Nine months were lost just to send the case back for assessment.
How long will the assessment take? Who knows. After the assessment process, the case may go back to square one for more litigation on the coverage issues.
The question for the policyholder is why go to valuation rather than just prove everything in court and get the matter settled? This delay defeats the purpose of insurance – prompt and complete financial relief. The insurer also has two pieces to gain – one at assessment and another in reserve through subsequent legal proceedings.
I will report more on the case if further legal proceedings take place.
There is also an additional caveat to those who invoke assessment in Tennessee – it may not demonstrate the need to file a lawsuit. Check the expiration dates. Some carriers will go through the appraisal process and not pay the appraisal price, citing the statute of limitations.
You can delay, but time does not.
1 Khushi P’ship v Berkshire Hathaway Homestate Ins. Co., No. 3:22cv-00265, 2023 US Dist. LEXIS 6602, 2033 WL 186863 (MD Tenn. Jan. 13, 2023).