Accepting coverage for part of a claim may subject an insurer to a policy’s appraisal process when the extent of covered damage is in dispute, according to a recent ruling issued by the Eastern District of Tennessee. In Morrow v. State Farm Fire & Cas. Co., Case No. 1:21-CV-00133-DCLC-CHS, 2022 WL 885863 (E.D. Tenn. Mar. 22, 2022), a severe storm with strong winds and tornadic activity damaged the insured’s home in Manchester, Tennessee. After the storm, the insured promptly reported the damage to her home to her insurer. The insured’s policy covered direct physical loss to her home, other structures on her property, and her personal property. The insurer acknowledged that the damage to the insured’s home was covered under the policy and made a payment, following its own estimate of the damage, for her loss. The insured, however, alleged that the insurer failed to determine the actual cost of the damage to her home. She informed the insurer that its payment was insufficient to cover all of the damage and restore her home to its condition before the storm.
As a result of this dispute, the insured invoked the policy’s appraisal clause, which provided for mandatory appraisal if the insured and the insurer failed to agree “on the amount of loss” and one of the parties demanded that “the amount of the loss be set by appraisal.” The insured selected an appraiser, but the insurer denied her demand for appraisal. The insurer told the insured that her estimate of the damage to her home represented a dispute in coverage rather than a dispute in the amount of loss, which could not be settled under the appraisal clause in the policy. The insured then filed suit against the insurer, asserting claims for breach of contract and bad faith.
After filing her lawsuit, the insured moved to compel the insurer to engage in the appraisal process contemplated by the policy. In response, the insurer contended that there was a coverage dispute between it and the insured, not a disagreement about the amount of loss. The insurer admitted that it acknowledged coverage over the insured’s claim and paid her for its estimate of the damage to her home. However, the insurer explained that its own contractor concluded that there was no other storm damage to her home beyond what it initially acknowledged. Moreover, the insurer maintained that the policy did not provide coverage for the damages identified by the insured’s contractor. The insurer contended that its initial estimate and payment were the only amounts due to the insured under the policy.
The court held that the appraisal provision was valid in Tennessee and applied to the claim at issue. The court noted that the parties did not dispute that the insured’s damage was covered as a general matter; they instead argued over the extent and the amount of the loss: the insured contended that there was additional loss unaccounted for in the insurer’s estimate, while the insurer contended that its initial payment represented the full value of the damage caused by the storm. Because the insurer had conceded that at least some storm damage was covered, the court held that the dispute was about the total amount of loss, rather than coverage. To decide otherwise, the court reasoned, would allow insurers to avoid appraisal by claiming there is a coverage issue, even when the dispute concerned additional amounts of loss. Consequently, the court determined that the dispute fell within the policy’s appraisal clause. Accordingly, the court granted the insured’s motion to compel appraisal and ordered the parties to engage in the appraisal process.
Therefore, under Tennessee law, when an insurer acknowledges coverage and makes a payment on a portion of the claim, it may be compelled to participate in the appraisal process if it takes the position that no further damages are covered. An insurer who has accepted a portion of a claim will only be able to avoid the appraisal process if it is clear that its dispute with the insured revolves around a coverage issue, and not merely the extent of covered damages.