In 2016, State Farm came out with a new appraisal provision for its homeowner insurance policy.1 This new provision makes the appraisal process extremely burdensome for policyholders. While I have always felt the new provision violates the Standard Fire Policy, a Michigan federal district court recently reached the same conclusion.

In Hart v. State Farm Fire and Casualty Company,2 the policyholders’ residence was damaged by fire and smoke. State Farm accepted liability for the loss but disagreed with the amount and scope of the loss. The policyholders demanded appraisal, but State Farm declined to participate in an appraisal, taking the position that a difference in the scope of damage is a coverage issue, and not a dispute as to the amount of the loss. State Farm also declined to participate in an appraisal because the policyholders failed to provide written, itemized documentation of the specific items they were disputing in the State Farm estimate, which is a requirement under the “Appraisal” provision in Form HW-2122. The policyholders then filed suit, claiming not only that appraisal was warranted but also that several portions of Form HW-2122 should be voided as contrary to the Michigan Standard Fire Policy, which provides in part:

That if the insured and insurer fail to agree on the actual cash value or amount of the loss, either party may make a written demand that the amount of the loss or the actual cash value be set by appraisal. If either makes a written demand for appraisal, each party shall select a competent, independent appraiser and notify the other of the appraiser’s identity within 20 days after receipt of the written demand. The 2 appraisers shall then select a competent, impartial umpire. If the 2 appraisers are unable to agree upon an umpire within 15 days, the insured or insurer may ask a judge of the circuit court for the county in which the loss occurred or in which the property is located to select an umpire. The appraisers shall then set the amount of the loss and actual cash value as to each item. If the appraisers submit a written report of an agreement to the insurer, the amount agreed upon shall be the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any 2 of these 3 shall set the amount of the loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire shall be paid equally by the insured and the insurer.3

The policyholders moved for summary judgment, which the district court granted. The district court concluded that nine of the ten appraisal provisions in Form HW-2122 challenged by the policyholders violated the Michigan Standard Fire Policy. Those provisions are:

  1. “At least 10 days before demanding appraisal, the party seeking appraisal must provide the other party with written, itemized documentation of a specific dispute as to the amount of the loss, identifying separately each item being disputed.”
  2. “Each party will select a competent, independent appraiser…. The appraisers will then … jointly submit to each party a written report of agreement signed by them.”
  3. “The appraisers will then attempt to set the amount of loss of each item in dispute…. If the two appraisers fail to agree upon the amount of the loss within 30 days, unless the period of time is extended by mutual agreement, they will select a competent, impartial umpire and will submit their differences to the umpire.”
  4. “The party requesting the selection [of an umpire by a judge] … must provide the other party: (a) written notice of the intent to file, identifying the specific location and identity of the court at least 10 days prior to submission of the written application….”
  5. “In all instances the written report of agreement will be itemized and state separately the actual cash value, replacement cost, and if applicable, the market value of each item in dispute.”
  6. “To qualify as an appraiser or umpire …, a person must be one of the following and be licensed or certified as required by the applicable jurisdiction: (1) an engineer or architect with experience and training in building construction, repair, estimating, or investigation of the type of property damage in dispute; (2) an adjuster or public adjuster with experience and training in estimating the type of property damage in dispute; or (3) a contractor with experience and training in the construction, repair, and estimating.
  7. “A person may not serve as an appraiser or umpire if that person, any employee of that person, that person’s employer, or any employee of their employer: (1) has performed services for either party with respect to the claim at issue in the appraisal; or (2) has a financial interest in the outcome of the claim at issue in the appraisal.”
  8. “The appraisal award may not be entered as a judgment in a court.”
  9. “A party may not demand appraisal after that party brings suit or action against the other party relating to the amount of loss.”

As set forth in the opinion, the district court simply compared the appraisal provision in the Michigan Standard Fire Policy with the specific appraisal provision in State Farm Form HW-2122. That comparison revealed that the State Farm appraisal provisions at issue-imposed conditions, requirements, and demands not set forth in the Michigan Standard Fire Policy’s appraisal provision. The district court concluded that the State Farm appraisal provisions made the appraisal process far more burdensome than the Michigan Legislature intended. As such, they were contrary to MCL 500.2833(1)(m) and void as against public policy.

The district court also concluded that an appraisal was warranted, rejecting State Farm’s argument that a difference in the scope of damage is a coverage issue, not a dispute about the amount of loss issue. The district court reasoned that once an insurer admits that a loss is covered under its policy, a court is statutorily mandated to order the parties to participate in Michigan’s statutory appraisal process, as the parties do not dispute liability and only are at odds about the amount of the loss. Because the parties agreed that the policy covered damage caused by fire and smoke, and since the parties’ dispute related to the scope of damages and not to coverage, the district court ordered the parties to appraise the amount of the fire and smoke loss.

The Hart decision is relevant to Illinois policyholders for two reasons.

First, like Michigan, Illinois is a Standard Fire Policy state.4 Under the powers vested by sections 397 and 401 of the Insurance Code, the Director of Insurance has promulgated certain regulations that provide a Standard Fire Policy.5 Under the regulations, all fire insurance policies must “conform to such form of the Standard [Fire] Policy or, if another form is used, shall for the purpose of concurrence of contract be deemed to be the Standard [Fire] Policy.”6 In essence, the standard form of fire insurance guarantees a minimum level of coverage that supersedes any attempt to limit or to restrict coverage to less than the statutory minimum. Stated differently, fire insurance policies may not provide coverage less than that set forth in the standard form. Hence, to the extent an insurance policy provision omits or detracts from the minimum protections afforded by the standard form, the provisions of the standard form control and the non-compliant policy is enforceable as if it conformed to the requirements or the prohibitions of the standard form.7 As the Hart decision establishes, as related to an appraisal of a fire loss, an appraisal provision that imposes conditions, requirements, and demands not set forth in the Illinois Standard Fire Policy’s appraisal provision are unenforceable.8

Second, like Michigan courts, federal district courts in Illinois have unanimously concluded that disputes as to (a) causation (whether a covered peril caused the damage); (b) the scope of damage (the extent or scope of the physical damage from the covered peril); (c) the scope of repairing or replacing the damage; (d) the cost of repairing or replacing the damage; (e) matching; and (f) whether the damage is extensive enough to require employing a general contractor are disputes as to the amount of loss, not coverage, and thus appropriate for appraisal.9
1 See pages 21 and 22 of Form HW-2122.
2 Hart v. State Farm Fire and Cas. Co., 2012 WL 3709534 (E.D. Mich. Aug. 21, 2021).
3 MCL 500.2833(1)(m).
4 The 1943 New York Standard Fire Policy (“the Standard Fire Policy”), or a statutory version differing from it only slightly, is used in many states, including Arizona, California, Georgia, Idaho, Iowa, Louisiana, Massachusetts, Michigan, Minnesota, Nebraska, New York, and West Virginia. The Standard Fire Policy, a form consisting of 165 lines, has served as the foundation for most property insurance policies covering the peril of fire since its inception in 1943. The Illinois Standard Fire Policy is available on the Illinois Department of Insurance’s website.
5 50 Ill. Adm. Code § 2301 and 5/401(a); 50 Ill. Adm. Code § 2301 et. seq.
6 50 Ill. Adm. Code § 2301.30.
7 215 ILCS 5/401(a), 5/397, 5/143(2), and 5/442; 50 Ill. Adm. Code §2301 et. seq.
8 As no Illinois state or federal court has addressed whether an insurer’s appraisal provision violates the Standard Fire Policy as related to a fire loss, it would be appropriate for a court to look to decisions from sister-states interpreting their version of the Standard Fire Policy, as the Seventh Circuit Court of Appeals did in Streit v. Metropolitan Cas. Ins. Co. 863 F.3d 770 (7th Cir. 2017), determining whether an insurance policy exclusion that precluded innocent co-insureds from recovering violated the minimum level of protection afforded by the Standard Fire Policy.
9 See, e.g., Prescott Mill Condo. Ass’n v. Mid-Century Ins. Co., 2012 WL 3700742 (N.D. Ill. Aug. 4, 2021); Adam Auto Group, Inc. v. Owners Ins. Co., 2019 WL 4934597 (N.D. Ill. Oct. 7, 2019); Windridge of Naperville Condo. Ass’n v. Philadelphia Indem. Ins. Co., 2018 WL 1784140 (N.D. Ill. April 13, 2018); Spring Point Condo. Ass’n v. QBE Ins. Corp., 2017 WL 8209085 (N.D. Ill. Dec. 13, 2017); Runaway Bay Condo. Ass’n v. Philadelphia Indem. Ins. Co., 262 F.Supp.3d 599 (N.D. Ill. April 25, 2017); Windridge of Naperville Condo. Ass’n v. Philadelphia Indem. Ins. Co., 2017 WL 372308 (N.D. Ill. Jan. 26, 2017); Philadelphia Indem. Ins. Co. v. Northstar Condo. Ass’n, 15 cv 10798 (N.D. Ill. Oct. 18, 2016 (D.E. 34)).