Minnesota’s severe weather season is here. With that season comes the possibility of hail, heavy rain, lightning, and other weather-related threats that can quickly result in serious property damage to residential and commercial property. In the wake of last December’s Minnesota Supreme Court decision in Cedar Bluff, these events may now also result in coverage for unexpected expenses for insurers at the hands of appraisal panels which may be called on to make coverage determinations relating to the value of a covered loss.
Siding damage: The story behind Cedar Bluff
The insured condominium association in Cedar Bluff Townhome Condominium Association, Inc. v. American Family Mutual Insurance Co.,1
consisted of 20 multi-unit residential buildings. A series of siding panels wrapped the exterior of each building. Each panel was approximately 15 square feet in size.
During a hail storm in October 2011, all 20 buildings sustained some level of siding damage. The building with the most damage had ten damaged panels; the building with the least damage had only one damaged panel. A total of 11 buildings had three or fewer damaged siding panels.
At the time of the storm, the siding panels were 11 years old and had faded to some extent. While the original siding manufacturer could provide replacement panels, those panels were not available in the same color as the original panels.
After the storm, Cedar Bluff submitted a claim to its insurer, American Family, for the hail damage. The American Family policy provided that the insurer would pay for the cost to repair or replace the damaged property. The policy stated that replacement costs were determined based on the cost to replace the damaged property with other property “of comparable material and quality.”
A dispute arose between Cedar Bluff and American Family as to the full extent of the repairs or replacement. American Family proposed only replacing the damaged siding panels. It took the position that the policy required replacement of only the siding panels that received actual damaged. Remember, the manufacturer no longer carried the siding in the original color. The result was that color of the replacement siding would have been “slightly darker or slightly lighter” than the original siding.
Cedar Bluff, however, demanded that its insurer replace all siding panels on all 20 buildings. It contended that full replacement was necessary because there would otherwise be a “color mismatch” on and across all buildings. Cedar Bluff went on to assert that the phrase “of comparable material and quality” required a color match between the damaged and the undamaged siding panels.
The cost of replacing all of the siding panels was $361,108. This cost was substantially higher than $6,800 cost associated with replacing only the damaged siding panels. The parties were unable to agree on the amount of loss. As a result, Cedar Bluff demanded appraisal in accordance with the policy’s appraisal provision.
An appraisal hearing occurred, which involved a presentation of evidence and a site visit. The appraisal panel found that, while the original manufacturer could provide replacement siding panels, the panels “could not be matched in terms of color.” Based on the color difference, the appraisal panel concluded that “there was not a reasonable match available for the existing siding materials.” The panel then issued an appraisal award for “a total replacement of the siding.”
The appraisal panel acknowledged that American Family’s position “would be correct if the subject policy did not require such a color match.” But they also determined that a color mismatch was “not a repair or replacement with comparable materials of like kind and quality.”
American Family refused to pay the appraisal award because it believed the panel based its award on an unauthorized coverage determination.
Enter the courts
Cedar Bluff filed suit against American Family, seeking confirmation of the appraisal award. American Family counterclaimed with a motion for summary judgment. In it, American Family alleged that the appraisal panel exceeded its authority when it interpreted the insurance policy.
The trial court granted American Family’s motion. It ruled that American Family did not have to pay for the cost to replace siding panels that did not sustain damage. Additionally, the trial court found that American Family need not pay for siding that was an exact color match to the original siding. The court’s reasoning: the term “color match” was not in the policy.
On appeal, the Minnesota Court of Appeals reversed.2
That court found that under the Minnesota Supreme Court’s decision in Quade v. Secura Insurance Co.,3
the appraisal panel had the authority to consider the meaning of the phrase “of comparable material and quality” to determine the amount of loss. The Minnesota Supreme Court subsequently granted review.
The Court affirmed the Court of Appeals’ decision and the appraisal panel’s award. In doing so, the Court acknowledged that the interpretation of an insurance policy is a question of law. It also acknowledged that an appraisal panel may not construe an insurance policy.
But the Court then turned to its earlier decision in Quade in making its decision. It found that an appraisal panel can appropriately resolve questions of law when determining the amount of loss. This authority is, however, subject to judicial review.
The Court further held that the trial court erred when it refused to accept the factual determinations of the appraisal award.4
Comparable material and quality
The Court then interpreted the provisions of the insurance policy de novo. This review was necessary to determine if the appraisal panel properly concluded that the phrase “comparable material and quality” required a color match.
To that end, the Court observed that it must construe the insurance policy as a whole. The first step involved starting with the plain and ordinary meaning of the policy's terms. Then it required identifying “what a reasonable person in the position of the insured would have understood the words to mean.”5
The Court turned to the dictionary definition of “comparable.” From there, it concluded that “the plain meaning of the phrase ‘comparable material and quality’ is material that is suitable for matching.” It further concluded that:
"on the spectrum of resemblance, ‘comparable material and quality’ requires something less than an identical color match, but a reasonable color match nonetheless.”
Therefore, the Court construed the phrase “comparable material and quality” to mean “a reasonable color match between new and existing siding when replacing damaged siding.”
The Court then turned to the question of whether the appraisal panel properly interpreted “comparable material and quality.” In particular, did that phrase require an exact color match or merely a reasonable color match? The Court concluded that it was the latter based on the panel’s use of the words “reasonable match” in its award. Accordingly, the Court concluded that the appraisal panel applied the correct legal standard.
Required property replacement
The Court then turned to the question of what property American Family must replace. First, the Court stated that “the question…is whether the color mismatch constitutes ‘direct physical loss of or damage to Covered Property.’” It went on to conclude that:
[b]ecause of the color mismatch resulting from the inability to replace the hail-damaged siding panels with siding of ‘comparable material and quality,’ the covered property—Cedar Bluff's ‘buildings’—has sustained a ‘distinct, demonstrable, and physical alteration.’”
The Court then addressed the amount of the covered loss. It established that the appraisal panel held an evidentiary hearing, heard from witnesses, and personally examined the damaged property. The Court also reiterated Minnesota’s strong public policy in favor of appraisals. Accordingly, the Court deferred to the appraisal panel’s factual determination as to the amount of loss.
The Court closed by stating that it was limiting its opinion to the case before it. It cautioned that all storm-related property damage claims involve their own unique facts. Consequently, the Court observed that:
“[i]n this particular case, the spot damage to multiple siding panels on multiple buildings, along with the appraisal panel’s assessment of the particular color mismatch, applied to the policy language at issue, lead to our conclusion that there is coverage.”
Appraisal panels: We’re not in Kansas anymore
In general, the goals of an appraisal panel are to determine only the monetary amount of the insured’s loss or damage. That is, the actual cash value or replacement cost of the claimed loss. Appraisal panels are not primed to resolve issues of coverage or policy interpretation.
But courts have found that the line between liability and measurement is not always clear. As a result, some courts have found that determining the amount of loss under an insurance policy necessitates a determination of causation.6 Other courts have found that an appraisal panel can even determine what repairs are necessary as a result of the loss.7
And now the Court’s Cedar Bluff decision has taken the appraisal panel’s role even further outside the known comfort zone. Specifically, the Court ruled that the appraisal panel could interpret a policy’s valuation provisions and determine coverage issues.
Insurers everywhere should take note of the decision in Cedar Bluff, even if the Court limited its holding that case. Appraisal panels are taking their roles further than they have before. Such actions could lead to unanticipated costs for insurers.
Appraisal panels are often not best suited to make policy interpretation and coverage determinations. Insurers should do all they can to avoid having an appraisal panel decide such issues (subject to later judicial review). This means resolving coverage disputes prior to requesting appraisal.
If a party believes that there are coverage issues at play, that party could file suit first. Then that party could subsequently move to stay appraisal pending resolution of coverage issues.8
When in doubt, it is best to speak with a lawyer who can help you identify potential issues and solutions.
1 857 N.W.2d 290 (Minn. 2014).
2 Cedar Bluff Townhouse Condo. Ass’n v. Am. Family Mut. Ins. Co., No. A13-0124, 2013 Minn. App. Unpub. LEXIS 1063 (Minn. Ct. App. Dec. 2, 2013).
3 814 N.W.2d 703 (Minn. 2012).
4 E.g., that matching replacement siding panels were not available.
5 Cedar Bluff Townhouse Condo. Ass’n v. Am. Family Mut. Ins. Co., 857 N.W.2d 290, 294 (Minn. 2014) (quoting Midwest Family Mut. Ins. Co. v. Wolters, 831 N.W.2d 628, 636 (Minn. 2013)).
6 See, e.g., Quade v. Secura Ins. Co., 814 N.W.2d 703, 706-07 (Minn. 2012); State Farm Lloyds v. Johnson, 290 S.W.3d 890, 891-93 (Tex. 2009). For example, the Quade case involved a dispute over whether damage to the insured’s roof was caused by wind (covered) or wear and tear (excluded). The court held that a determination of the “amount of loss” under the appraisal clause necessarily included a determination of causation. Quade, 814 N.W.2d at 706-07.
7 Currie v. State Farm Fire & Cas. Co., No. 13-6713, 2014 U.S. Dist. LEXIS 117970, at *12 (E.D. Pa. Aug. 19, 2014).
8 Courts in other jurisdictions have deferred appraisal until resolution of coverage issues. In Kirkwood v. Cal. State Auto. Ass’n Inter-Insurance Bureau, 122 Cal. Rptr. 3d 480, 490 (Cal. Ct. App. 2011), for example, the court said that “judicial economy favors resort to declaratory relief” as to questions of coverage prior to appraisal because it “head[s] off duplicative future actions” challenging policy interpretation.
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