Insurer overturns umpire's appraisal and diminishes fire liability
Evanston Insurance Company sued its insured, Cogswell Properties, LLC, after a mutually-selected umpire awarded Cogswell a fire insurance recovery. Cogswell had purchased a large complex of buildings--at a "fire-sale" price--and one of the buildings burned to the ground almost immediately. There was an enormous discrepancy between the market value of the buildings and the replacement cost, and the company had insured the buildings at a hybrid value that was more than market but less than replacement.
After the fire, the insurer refused to pay the claim and initially refused to select an arbitrator, appraiser or umpire. Instead it filed a lawsuit to reduce the potential payout. Eventually, the parties agreed on a long-time Grand Rapids insurance defense attorney to serve as the Umpire in assessing the parties' respective appraisals. The umpire had assigned a value to the burned building that was a combination of market and replacement values. The insurer asked the Federal District Court to set aside the umpire's decision and to enforce various terms of the policy.
This week the Sixth Circuit upheld the District Court's decisions limiting the insurance payout to less than $100,000.00. It concluded that the Federal Arbitration Act did not apply to Michigan law and render the umpire's decision binding; it ruled that the Umpire made a significant error of law in adopting a hybrid evaluation, and it applied the "fine print" of the policy to limit the insurance coverage to less than about 20% of the total value of the loss.