In Olga Despotis Trust v. The Cincinnati Insurance Company, a tornado destroyed a building leased as a medical imaging facility in Missouri, owned by the Trust and insured by The Cincinnati Insurance Company (CIC). Approximately one and one-half months after the loss, the Trustee forwarded a completed Proof of Loss form to CIC claiming a loss in excess of policy limits, and alleging the actual cash value (ACV) of the building was $1.4 million. CIC determined that the ACV of the building was $800,000 and, within fifteen days of the submission of the Proof of Loss form, CIC presented the Trust with a check for $813,931, including the undisputed ACV amount. The Trust insisted that more funds were due and disputed CIC’s determination of value.

Approximately three and one-half months after the loss occurred, CIC sent a letter invoking the appraisal provisions under the CIC policy. The Trust replied to the appraisal request stating that an appraisal will be unproductive, and proposed a settlement. CIC declined the settlement offer and again requested the Trust’s cooperation with the appraisal provision of the policy, stating that the appraisal would be binding on both the insured and insurer under the terms of the appraisal provision.

One week later, the Trust filed a lawsuit in Missouri state court seeking damages for breach of contract and a declaratory judgment that the appraisal provision was unenforceable. CIC removed the case but later, the case was voluntarily dismissed without prejudice. The Trust then filed a lawsuit in federal district court in St. Louis alleging the same breach of contract in Count I, a claim for vexatious refusal to pay in Count II, and finally, a declaratory judgment count. CIC filed a motion for summary judgment asking the Court to order an appraisal which motion was granted. An appraisal panel issued its decision declaring the ACV loss of $1,056,000, also determining the total replacement cost to be $1,500,000 and lost rent to be $94,000. As the result of the appraisal, CIC promptly paid the Trust the remaining ACV figure of $256,000 and an additional $22,658 for lost rental income. Nevertheless, the Trust insisted it was entitled to the building’s replacement cost rather than simply the ACV of the loss, and moved to amend its complaint to add further allegations.

The parties filed cross-motions for summary judgment on the remaining counts I and II and the district court granted summary judgment in favor of CIC. An appeal was taken to the 8th Circuit. The Trust argued that the district court erred by concluding CIC had not waived its right to appraisal and then, by enforcing the provisions of the appraisal clause. The Trust also argued that by recognizing the existence of an arbitrable dispute, CIC impliedly waived its right to arbitrate the dispute. Finally, the Trust alleged that CIC only invoked the appraisal provision for the disputed ACV whereas the district court erred in sending the entire case including replacement cost, for appraisal.

The 8th Circuit found that the rule requiring that an insurance policy be construed favorably to an insured in cases of ambiguity does not allow a forced interpretation of the language in order to create ambiguity where none otherwise exists. In Missouri, appraisal clauses to determine the amount of the loss are considered binding and enforceable and must be complied with before a right of action accrues to the insured. Appraisal is appropriate where the parties’ disagreement is over the amount of the loss and not coverage issues.

The 8th Circuit found that the Trust filed the lawsuit after first declining to participate in the appraisal process. After the district court determined the ACV of the property to be $256,000 more than CIC’s initial estimate and payment, CIC promptly paid the additional ACV value determined by the Court and moved for summary judgment on the remaining breach of contract and vexatious refusal claims. The district court found that there was no breach of contract since there was no wrongful refusal to pay and that a cause of action for breach could not accrue in any event until the completion of the appraisal process. As to an allegation that the policy’s replacement cost provision was clear and unambiguous and that the replacement cost value should be paid, Missouri courts have found that when a policy requires repair or replacement of the damaged property as a condition precedent to receiving RCV, the insurer has no obligation to pay that amount until or unless the replacement actually occurs.

CIC paid the undisputed ACV within fifteen days of the Trust submitting its Proof of Loss, which the Trust accepted and later promptly paid the additional ACV value as determined by the Court. The Court was not persuaded by the Trust’s claim for vexatious delay, determining that the Trust failed to state a claim for breach of contract. CIC was justified in its action, and there could be no vexatious refusal since the ACV amount was determined through the appraisal process. The Court noted that CIC’s initial ACV calculation was closer to the appraisal’s determination than was the Trust’s claim for ACV.

The 8th Circuit affirmed the grant of summary judgment in favor of CIC.

By Kent M. Bevan of Dysart Taylor