Hail Damage Sparks Fight Over Coverage, Appraisal Demand

By Don R. Sampen, published, Chicago Daily Law Bulletin, March 5, 2024

The U.S. District Court for the Northern District of Illinois recently held that a dispute between a property insurer and its insured over a demand for supplemental payments following a loss amounted to a coverage dispute not subject to appraisal.

The case is Philadelphia Indemnity Insurance Co. v. Hometown Cooperative Apartments, Inc., No. 23 C 4977, 2024 U.S. Dist. Lexis 16023 (Jan. 30). The insurer, Philadelphia, was represented by HeplerBroom LLC of Chicago. Wischhover & Associates of Palos Heights represented the insured, Hometown.

Philadelphia issued a commercial property insurance policy to Hometown covering 63 apartment buildings. Following extensive hail damage in 2019, Philadelphia’s engineering consultant prepared an estimate of the loss, to which Hometown’s representatives submitted 13 requests for increases. The consultant accepted most of the requests but excluded overhead and profit. The parties then agreed to the revised estimate of about $4.3 million.

About two years later, in 2023, Hometown’s representatives sought to increase the estimate again for “unforeseen” payments, to account for an updated price list using 2023 prices, for the cost of wood for window trim, and for overhead and profit. By that time Philadelphia had already paid some $3.2 million toward the loss and rejected the new requests.

Hometown then emailed Philadelphia an appraisal demand covering its revised estimate of $8.6 million. Philadelphia responded by taking the position the appraisal demand implicated questions of insurance coverage and legal questions, and advised Hometown it would file a declaratory action.

Philadelphia filed the instant declaratory action seeking a determination of its appraisal obligation for the requested increases. The appraisal clause of the policy allowed either party to demand an appraisal by two appraisers and an umpire when the parties disagreed on the value of the property or the amount of loss.

Hometown responded to the complaint with affirmative defenses and a counterclaim for breach of contract and a bad faith claim. Philadelphia moved to strike the defenses and dismiss the counterclaim.

Analysis

In an opinion by Judge Virginia M. Kendall, the court granted the motion. She characterized the dispute as whether the parties’ disagreement over the requested payment increases involved a coverage dispute — which, if so would give rise to a legal issue for the court to decide — or an amount-of-loss dispute to be adjudicated through the appraisal process.

Addressing Hometown’s contract claim, she then observed that Hometown had not provided any facts demonstrating that Philadelphia’s handling of the appraisal demand was a breach of contract. In fact she found that Philadelphia had performed under the contract by paying Hometown at least $3.2 million.

In addition, Kendall regarded Hometown’s contract claim as premature, for it was not entitled to litigate the amount of loss until its appraisal demand was rescinded or denied. While Philadelphia disputed the additional payments, it did not deny the appraisal demand but rather filed the declaratory action.

Ultimately, Kendall wrote, Philadelphia was asking the court to determine whether the additional payments being requested were improper appraisal demands that implicated questions of insurance coverage law. Hence, because Hometown had not pleaded that Philadelphia denied the appraisal or breached any other policy provision, no basis existed for the breach-of-contract claim.

The bad faith claim also fell because Kendall found a bona fide dispute over whether Hometown’s appraisal demand implicated issues of insurance coverage and Hometown had not pleaded any conduct amounting to bad faith. The affirmative defenses tracked the allegations of the counterclaim and suffered from similar deficiencies.

The court therefore granted Philadelphia’s motion, struck Hometown’s affirmative defenses and dismissed its counterclaim.

Key Point

Upon receiving an appraisal demand, a property insurer does not breach its contractual obligations when it does not deny the demand and seeks a declaration of its contract obligations when the demand arguably bears upon coverage under the policy.