On November 12, 2014, the Wisconsin Court of Appeals, District 1, rendered its decision in Coppins, et al. v. Allstate Indemnity Company, 13AP2739. Coppins involved an appeal from an order of the Milwaukee Circuit Court, Judge Paul R. Van Grunsven, awarding summary judgment to Allstate on Coppins' claims for breach of contract, promissory estoppel, and bad faith.

The claim in this case stemmed from a property fire that destroyed a duplex located at 3024-3026 North Second Street in Milwaukee, Wisconsin.  The property was insured by Allstate under a landlord policy that provided up to $298,538.00 of coverage on an “actual cash value” basis.  The policy did not, however, define how “actual cash value” was to be determined in the event of a loss.  The dispute in this case was the method Allstate used to value the destroyed property.

Allstate's claim adjuster, Jim Van Caster, found that the replacement cost of the duplex was $158,000.00, and then subtracted the depreciation value to come to a total “actual cash value” of $113,000.00.  Allstate refused to accept this figure, and retained a real estate market appraiser, Chris Krafcheck, who valued the property at $50,000.00.  Mr. Krafcheck's report specified that his valuation was based on “market value” alone, and did not take into consideration “actual cash value.”

Allstate offered Coppins $50,000.00 for the property loss based on Mr. Krafcheck's appraisal.  Coppins accepted the offer, but disputed the amount of the loss. Pursuant to an appraisal clause in the policy^[i], an appraisal was done by Gerald Smith (retained by Claim Professional Representatives for Coppins) that gave an “actual cash value” of $250,685.20.  Allstate retained another real estate appraiser, Michael Holzhuaer, who adopted the prior $50,000.00 market value as the “actual cash value.”

After several months, Coppins brought claims against Allstate for breach of contract, promissory estoppel, and bad faith for Allstate's refusal to appraise the property based on “actual cash value.”  The case was stayed, however, in order for the appraisal process to be completed.  Eventually, Steven Schwed was selected as an impartial umpire to determine the value of the property.

Mr. Schwed found the “actual cash value” of the property to be $74,198.42, plus he found an additional $5,000.00 was necessary for mold remediation, totaling $79,198.42.  Interestingly, Mr. Schwed had found that the replacement value of the property would be $287,798.76, but this figure was not used in his calculation of the “actual cash value.”  Rather, he used the average of the following five methods:

 1) Replacement cost less depreciation from Allstate's appraisal – $143,159.00, but he weighted this at 90% for a total of $128,843.10;

2) Building's assessment value – $69,400.00;

3) Income approach – $66,375.00;

4) Average of adjusted sales price – $57,265.00; and

5) Market value adopted from Allstate's appraisal – $50,000.00.

Mr. Schwed's report noted that the repairs vastly exceeded the value of the property, and indicated that, under Wisconsin's “broad evidence rule,” his figure was an appropriate determination of “actual cash value.”

Pursuant to Mr. Schwed's valuation, Allstate paid Coppins an additional $29,198.42.  Coppins was still unsatisfied with the valuation, and moved for summary judgment arguing that the appraisal was deficient and that Allstate breached its duties to Coppins under the policy by refusing to pay the claim according to the terms of the policy.  Allstate filed a cross-motion for summary judgment arguing that the appraisal award should be binding and that it had discharged its duties under the policy.  The trial court agreed with Allstate, dismissing Coppins' claims because the appraisal showed no indication of fraud, bad faith, or material mistake.  Coppins appealed.

The Court of Appeals reversed the circuit court's grant of summary judgment to Allstate, finding that,

“the policy and standard definitions of actual cash value – including definitions set forth by the Wisconsin Office of Commissioner of Insurance and Allstate's own website – contemplate that “actual cash value” would be calculated in the instant case primarily by subtracting depreciation from the cost to repair the damaged property.”

In other words, the Court held that, under the terms of the policy, the only proper determination of damages was “actual cash value.”  While the Court did acknowledge that the appraisal process is, generally, a fair and efficient tool for resolving disputes, it can set aside an appraisal where it shows, “fraud, bad faith, a material mistake, or a lack of understanding or completion of the contractually assigned task.”  The Court held that Allstate lacked an understanding of its contractually assigned task.

To determine what “actual cash value” meant, since it was not defined in the policy, the Court considered the following:

Language in the policy.  The Court turned to two separate provisions in the policy.  First, the policy contained an “important notice” that property was covered on an “actual cash value,” meaning that if a covered loss occurred, Allstate would “pay for a loss to your covered property on an actual cash value basis, meaning there may be a deduction for depreciation.”

Second, an endorsement of the policy title “Landlords Package Policy – Actual Cash Value Loss Settlement Endorsement”, the policy stated that payment could be reduced for depreciation, and that payment would not exceed the smallest of:

a)     The actual cash value of the damaged, destroyed, or stolen property at the time of loss;
b)     The amount necessary to repair or replace the damaged, destroyed or stolen property with other of like kind of quality; or
c)      The limit of liability applicable to the damaged, destroyed or stolen property.

Allstate's website.  The Court also took judicial notice of the definition of actual cash value on Allstate's website, which stated: “In many states, [actual cash value] means that, in the event of a covered loss, you'll be paid the current replacement cost of what you lost, minus depreciation.”

Definition by the Wisconsin Commissioner of Insurance.  The Court then turned to the definition of “actual cash value” by the Commissioner of Insurance, which defines it as, “[t]he value of the property when it is damaged or destroyed.  This is usually figured by taking the replacement cost and subtracting depreciation.”

Dictionary Definitions.  Finally, the Court turned to Black's Law Dictionary and Wikipedia, which define “actual cash value as “[r]eplacement cost minus normal depreciation.”

Based on the above definitions, and the fact that Coppins paid for over $300,000 in insurance coverage, the Court held that she would have reasonably interpreted the policy to repair the property to a reasonable standard of livability.  The Court did not grant summary judgment to Coppins, however, finding that a jury must determine whether Allstate acted in bad faith.

Conclusion

The take away is that just because a policy does not define “actual cash value” does not mean companies can appraise property based on any generally accepted method, such as assessment value, the income approach, average adjusted sales price, and/or market value.  Under this holding, companies must appraise property insured under an “actual cash value” policy by subtracting depreciation from the cost to repair the damaged property, or face a claim of bad faith.

[i] The appraisal clause allowed Coppins to make a written demand for an appraisal.  By doing so, each party was allowed to select an appraiser.  The appraisers selected by the parties then picked an impartial umpire.  According to the policy, the appraisers selected by the parties attempted to come up with an agreed upon value of the loss, with the umpire making the final decision in the event that the parties disputed the value by the appraisers.

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