Was Middle School Grammar Study a Waste of Time? Court of Appeals Finds 12 Month Business Income Limitation for Period of Restoration to be Ambiguous - Despite Expert Proof as to Sentence Diagramming

Long title, I know, but hopefully it sparked your interest, or perhaps dredged up painful memories of drawing those sentence diagram structures on wide ruled paper, wondering if you would ever use that skill in “real life.”  Well, see how you think it worked in the case of Artist Building Partners v. Auto-Owners Mutual Insurance Company, No.M2012-00915-COA-RM-CV (Tenn. Ct. App. Nov. 21, 2013) (Download here). This was an insurance case where the issue under consideration was the construction of a Business Income and Extra Expense limitation, which provided in part as follows:

            [w]e will pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration and necessary Extra Expense you incur during the ‘period of restoration’ that occurs within 12 consecutive months after the date of the direct physical loss of or damage to property at the described premises, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss. 


The question presented was whether the 12 month limitation contained in the above policy provision applied both to the business income coverage and the extra expense coverage, or only to the extra expense coverage. Despite efforts by the insurer to argue that the 12 month limitation applied to both coverages (including the proffering of an expert witness from Vanderbilt University who had prepared a diagram of the sentence at issue and rendered an opinion as to its meaning), both the trial court and the Court of Appeals found that the language was, at the very least, ambiguous, since it was susceptible to more than one reasonable interpretation.


The Court of Appeals acknowledged the contrary opinion of the “learned professor” but opined that “an insured should not have to resort to retaining an ‘expert in sentence diagraming’ in order to properly interpret his or her insurance policy.” Because the policy language was susceptible of this reasonable interpretation from the standpoint of the insured, the 12 month limitation did not apply to the business income claim.  


I’ll bet most of us were thankful that we stopped diagraming sentences in high school – but maybe we need to get those grammar books back out! 

The Proper Scope of Appraisal - Thoughts from the Battlefield

In Parks' last post, "What is the Proper Scope of Appraisal in Tennessee?", he pointed out the Merrimack decision in which the Court of Appeals held that appraisal is not appropriate for decisions regarding coverage and liability.  In considering my response, I spoke with Chuck Howarth, who is part of The Howarth Group, a claims consulting and public adjusting business based out of Nashville.  Chuck's perspective on the appraisal process is unique for two reasons.  First, his group handles more insurance appraisals in Tennessee than anyone else of which I'm aware.  Second, he worked for eight or ten years with State Farm as an adjuster before moving to the other side of the fence as a public adjuster, which is where he's served for almost 25 years now.  In fact, he even trained staff adjusters for State Farm so his experience with the inner workings of insurance companies can come in handy.

So, when Chuck and his business partner, Denis Rowe (both Tennessee Public Adjusters), read Parks' recent post about appraisal, they had a few comments.  First, as to whether appraisal can be beneficial, they stated:

While we have used both public adjusting and the appraisal process to resolve claims, we have found that in Tennessee, Alabama, and Kentucky we get far better settlements using appraisal than serving as a property owner's public adjuster.  Of course its critical that a public adjuster have signficant experience with the appraisal process before heading this road.

Another issue they pointed out was that some insurance companies are taking the Merrimack case to the extreme and "are trying to prevent appraisals from happening by saying that the only thing an appraisal panel can do is to determine the pricing of their scope that they have decided is part of the loss."  Under this interpretation, the insurance company, not the appraisers, determine the scope of the damage.  This is definitely not good for insureds because the biggest problem with insurance adjusters' estimates is usually the scope of the necessary repairs, not the price.  For example if a tornado damages a home and everyone agrees the damage is covered, an appraiser's job would be to determine what needs to be repaired and the necessary cost of those repairs.  In that situation, some insurance companies would counter that an appraisal is inappropriate to determine what items need to be repaired (i.e., the scope), but rather appraisal is only appropriate for determining the necessary cost of repairs for the scope as determined by the insurance company.  Although I've not researched that particular issue yet, I feel certain that insurance companies taking this position are dead wrong.  More on that next time.

What is the Proper Scope of Appraisal in Tennessee?

In the past ten (10) years, we have seen much litigation arise concerning the proper scope of the appraisal clause. Although different policies have different provisions, the “gist” of an appraisal clause can be seen in the following policy provision:



If we and you disagree on the amount of loss, either may make written demand for an appraisal of the amount of loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. 


These “simple” provisions have created a myriad of issues. Chief among them is – just what exactly is this appraisal condition supposed to decide? It is important for all to understand what binding effect an appraisal award has, and what effect it does not have. The most common dispute centers over questions of coverage and causation. Does the appraisal clause resolve questions of coverage? What about questions of whether a particular element of damage was caused by a particular covered, or non-covered, event.


In Tennessee, the case of Merrimack Mutual Fire Insurance Company v. Batts, 59 S.W. 3d 142 (Tenn. Ct. App. 2001), perm app. denied, established that the appraisal process does not resolve questions of causation or coverage. The appellate court specifically noted:


·        “An appraiser’s authority is limited to the authority granted in the insurance policy or granted by some other express agreement of the parties.” Id. at 152.


·        “The appraisal clause in Mrs. Batts’s homeowners policy is limited to determining the ‘amount of the loss’-the monetary value of property damage.” Id.


·        [The appraisal clause] “does not vest the appraisers with the authority to decide questions of coverage and liability.” Id.


In the case, in which I represented the carrier, an appraisal award was entered. The company went through the award, and declined to pay for certain things because they (1) were not covered and/or (2) the damage was not caused by the particular tornado loss at issue.


The Court indicated that questions of coverage and causation were not within the authority of the appraisal panel. These issues could be resolved by the court, if necessary. The court also established that appraisal is NOT arbitration.


That is the right answer, I submit. The Court did note that it would also have been appropriate to go through the claim before entering appraisal, and simply decline to enter appraisal on issues of coverage and causation.