Don’t let insurers dismiss your case because you’re in appraisal limbo.
There appears to be a new issue brewing in the insurance world: Can you maintain a breach of contract action while appraisal has been invoked, but no award has been issued?
Appraisal is a mechanism designed to resolve disputes as to the amount of loss. For example, if an insurer thinks a claim is worth $2,000 but you think it’s worth $100,000, demanding appraisal is a helpful tool one may use as a policyholder to resolve this dispute. However, appraisal can also take a long time and there is no guarantee that the insurance company will pay the appraisal award amount. Appraisal provisions contain a reservation of rights, such that the insurer can be bound to a certain amount of loss, but is still allowed to deny the claim. So, what happens when you demand appraisal, but before the process completes and an amount of loss is determined, the statute of limitations is about to expire?
Insurance policies universally contain some provision that limits the time frame an insured is allowed to bring suit. In many of the commercial policies I’ve seen, it’s two years from the date of loss. Meaning when a loss event occurs, the insured has two years to file a lawsuit if it believes the insurance company has breached the contract or otherwise not paid an owed amount. In that scenario, the insured has to file suit because otherwise, the appraisal award won’t mean anything. The insurer can deny coverage and the insured will be left without a remedy because the two-year contractual limitation has passed.
But when the insured files suit without knowing the amount of loss (because the appraisal has not completed), the door is wide open for the insurance company to challenge the ripeness of the lawsuit. The simple argument insurance companies make is: how can there be a breach of contract, when the amount of loss has not yet been determined? At first glance, this is a compelling argument. Why would someone sue over an amount that they admittedly do not know with certainty? How is such a case ripe for adjudication? Insurance companies can use this argument, while also wielding their contractual limitation to bring suit. For example, if an insurer does not enter into a tolling agreement to extend the amount of time the insured can file suit, the insurer can simply argue that the action is not ripe for adjudication, knowing full-well that the action may not become ripe until after the contractual limitation has expired, thus barring any action for breach of contract if the insurer does not pay.
In Colorado, this area of law is significantly lacking in appellate rulings. But on this issue of whether an appraisal award is a condition precedent to a breach of contract action, there appears to be some substantive law—dating back to the 1890s.
Two United States Supreme Court cases, that I dub Hamilton I (Hamilton v. Liverpool & London & Globe Ins. Co., 136 U.S. 242 (1890)) and Hamilton II (Hamilton v. Home Ins. Co., 137 U.S. 370 (1890)) , appear to be on point. Hamilton I stands for the proposition that insurance companies are surely allowed to make an appraisal, and subsequent appraisal award, conditions precedent to filing an action. But in Hamilton II, the Supreme Court held that the insurance policy must make the condition precedent explicit or the condition precedent must be necessarily implied from the policy’s terms—which will not be easy for an insurer to show since apparently, appraisal provisions haven’t really changed from the 1890s. The First Circuit later adopted these rulings in Mutual Fire Ins. Co. v. Alvord, 61 F. 752 (1st Cir. 1894), and then, in 1960, the Colorado Supreme Court adopted the reasoning in Alvord, bringing these decisions into the 20th century. Wagner v. Phoenix Ins. Co., 348 P.2d 150 (Colo. 1960).
We’ve seen the argument from two different insurance companies now that an appraisal award is a condition precedent to filing suit on a breach of contract action. No judge has ruled on the issue yet, but I’ll be sure to give you an update when the time comes…