131_C083

Insurer Must Accept Decision Of Its Approved Umpire

Commercial Property	Appraisals
Obsolescence	Binding Arbitration

General Casualty issued a fire policy to Tracer Industries, Inc. (Tracer), with a limit of $100,000 for a commercial building. The record showed that William Knake (Knake) was the corporation's sole owner and that his sons, Robert and William, had purchased the property for $67,500 about one week before the fire loss.

Before buying the building, two appraisers estimated the property's market value, including the land it sat upon, at $69,900 and $71,000, respectively. Both appraisers valued the land at $52,500, which in effect resulted in a market value for the building at only $17,400 and $18,500, respectively.

The insured showed that an agent of General Casualty had inspected the property. Based on the inspection, the agent agreed to write a $100,000 limit on the building and $100,000 on the contents, charging a premium based on those values.

The fire occurred about a week after the sale, and the building and contents were destroyed. General Casualty paid the full limit on the contents. However, after they failed to agree on the building loss amount, General Casualty asked for arbitration, which was granted. Both parties selected an appraiser, and the court appointed an independent umpire. The arbiters reached an agreement on the loss amount, and General Casualty sought to have the appraisal award set aside on the grounds that it was excessive. The insurer complained the appraisers and court-appointed umpire had not taken into consideration the obsolescence of the building. On appeal, General Casualty also contended the following:

· the disparity between the market value and the award was fraudulent,

· allowing a fraudulent award would be against public policy, and

· the umpire appointed by the court had a disqualifying bias or conflict of interest.

Darrell Hilst (Hilst), the umpire appointed by the court, reported that he agreed with the insured's appraiser, who had fixed the fire loss at $111,900. This total was reduced to the policy limit of $100,000.

On appeal, the court pointed out that where the policy provides for arbitration, substantial deference was given to the appraisers. Their conclusion, and that of the umpire, in the absence of fraud and mistake, was binding. Being bound by the decision was in accordance with the parties' mutual choice to resolve their dispute through the policy's arbitration provision.

The insured's appraiser and the court-appointed umpire chose not to consider obsolescence. General Casualty asserted that obsolescence had to be deducted in determining "actual cash value," but Hilst based his appraisal on the general rule where, if a property is usable for its intended purpose or another purpose, obsolescence is not a factor. The parties agreed the purpose of fire insurance was to insure, as much as possible, that the insured would be in nearly as good a position after the fire loss as before the occurrence. The record also showed that General Casualty's appraiser calculated the replacement cost of the building was about $88,500.

In conclusion, the higher court ruled that Hilst did not have a disqualifying conflict of interest and noted also that General Casualty did not object to his appointment until after his report was filed. Neither the insured nor General Casualty had an advantage in the appointment of Hilst by the court. The judgment of the lower court was affirmed.

General Casualty Company, Appellant v. Tracer Industries, Inc.--No. 4-96-0416-Appellate Court of Illinois, Fourth District--December 18, 1996--674 North Eastern Reporter 2d 473.