The Policyholder’s Perspective from Brandon McWherter
The Insurance Company’s Perspective from Parks T. Chastain

Last week, we looked at Magistrate Judge York’s October 2021 opinion in Smith v. State Farm, in which State Farm was ordered to proceed with an appraisal of the loss as properly invoked by Ms. Smith. As a refresher, Ms. Smith’s home was damaged by a March 3, 2020 storm, and State Farm agreed she suffered a covered loss and issued a payment to her. Ms. Smith disagreed with State Farm’s estimate of the loss and invoked the policy’s appraisal clause. State Farm refused to proceed with an appraisal of the loss, and Ms. Smith filed suit. In responding to Ms. Smith’s motion to compel appraisal, State Farm argued that there was only a dispute regarding the “scope” of covered loss, not the amount. Magistrate Judge York found no meaningful distinction between “scope” and “amount,” and thus ordered State Farm to proceed with an appraisal.  State Farm then sought review by the District Judge.

On review, Judge Breen affirmed Magistrate Judge York’s ruling in all respects and found State Farm’s objections to Judge York’s order to be “entirely unsupported.” Judge Breen’s opinion also highlighted the facts of the case, noting:

State Farm sought denial of the appraisal demand on the grounds that the parties’ disagreement went beyond the “amount of loss” to include a difference of opinion as to the scope of the work to be performed. Specifically, [State Farm] maintained that Smith was attempting to obtain payment for remediation of areas of her property not damaged by the storm, including the replacement of plumbing fixtures in the bathroom and kitchen and new water heater, furnace, and heat pump. Resolution of a dispute relating to the scope of work or covered provided by the insurance contract could not, State Farm insisted, form a proper basis for an appraisal under the policy provision. In the alternative, if the Court found appraisal appropriate, [State Farm] requested that the appraisal be limited to the scope of work prepared by the insurer which outlined the coverage available in the claim.

All of these arguments by State Farm were rejected by the Court, which also noted that State Farm offered no caselaw in support of its position that the application of the appraisal clause to a scope of loss controversy is somehow subject to a different standard if the “additional loss” is a large one. To sum it up, Judge York’s Order was affirmed, appraisal was ordered to proceed, and the appraisal is now underway.

A copy of Judge Breen’s opinion can be accessed here.

Over the past few posts, I’ve explored a couple of recent opinions from federal courts in the Eastern and Middle Districts of Tennessee that explored the appropriate use of appraisal in resolving disputes about the “scope” of a loss.  For this next installment, we move to West Tennessee for yet another recent case on the same topic.

In Smith v. State Farm Fire & Cas. Co., my client’s home was damaged by the March 3, 2020 tornado, made a claim with State Farm, disagreed with State Farm’s assessment of the amount of loss, and ultimately invoked the insurance policy’s appraisal clause.  Just like in Ingram and Harper, State Farm refused to allow an appraisal of the loss to occur. After filing suit, we quickly filed a Motion to Compel Appraisal.  State Farm, of course, opposed the motion, reasoning that the dispute was about “scope” and requesting that if an appraisal was allowed it should be limited to the scope of work approved by State Farm.  Long story short, State Farm lost.

On October 27, 2021, Magistrate Judge York issued an Order Granting Motion to Compel Appraisal (copy here), ruling that State Farm’s attempts to avoid and limit appraisal were improper. Refreshingly, Judge York’s analysis was simple — State Farm’s policy mandates appraisal when: (1) there is a dispute about the amount of loss; and (2) a written demand appraisal is made.  Thus, because there was no dispute that Ms. Smith properly invoked appraisal, “the only issue the Court must decide is whether the parties disagree on the amount of loss.” The answer was yes and appraisal was ordered to proceed.

Below is the substantive portion of the Court’s ruling:

[State Farm] contends the parties disagree only on the scope of covered loss, not the amount of loss. Specifically, Plaintiff claims there is residual damage to the buildings that has not, but should have been, covered, and [State Farm] asserts there is no additional covered loss as there is no residual damage. “By contesting whether there is additional loss, however, [a Defendant] necessarily disagree with [a Plaintiff] that the total amount of loss Plaintiff incurred includes any additional loss.” Kush Enters., LLC v. Mass. Bay Ins. Co., (3:18-cv-00492-CLC-DCP, J. Collier Opinion (D.E. 16-4). Additionally, “the plain language of the provision allows either party to demand appraisal when there is a disagreement on the amount of loss.” Id. Here, as [State Farm] is contesting Plaintiff’s assertion that additional loss should be covered, the total amount of loss is in dispute. Therefore, the Court finds that the criteria are satisfied and appraisal is appropriate.

Notably, State Farm filed a motion with the District Judge for review of Magistrate Judge York’s Order.  Spoiler alert – – Judge Breen affirmed Judge York’s decision. I’ll explore Judge Breen’s opinion in my next post.

Earlier this week I posted about the recent Ingram v. State Farm case in which a federal court in the Eastern District of Tennessee obliterated State Farm’s defense that appraisal was inappropriate for disputes about “scope.” The Ingram case was just one of several recent opinions from around the State of Tennessee concerning insurance appraisals in Tennessee.

For our next case, we travel to Nashville to the federal court in the Middle District of Tennessee to explore another case in which my firm represents the policyholders against State Farm – State Farm Fire & Has. Co. v. Harper (Case No. 3:20-00856).  In this case, the Harpers’ home in Mount Juliet was severely damaged by the March 3, 2020 tornado, and the Harpers promptly filed a claim with their insurer, State Farm. State Farm hired an engineer with NV4 to inspect the home, and subsequently estimated the cost of repairs at around $135,000. In contrast, the Harpers’ hired their own engineer and ultimately estimated the amount of loss at well over $300,000. To resolve this dispute, the Harpers invoked their insurance policy’s appraisal clause. As is too often the case, State Farm objected to the appraisal request, stating that “the appraisal provision of your policy is to resolve differences in the price of repairs which State Farm determined are covered. Appraisal cannot be used to resolve differences about the scope of work to be performed or coverage provided by contract.” After twice more rejecting the demand for appraisal, State Farm ultimately sued the Harpers and asked the court to enter a declaratory judgment that the appraisal provision does not apply in this instance. Although the case is still pending, the court ruled that State Farm’s objection and refusal to participate in the appraisal process was improper and ordered appraisal to proceed.

The issue was teed up for the court via the Harpers’ Motion to Compel Appraisal. State Farm opposed the appraisal on the basis that the dispute between the parties relates to the different engineering scope of work opinions and that this was not a dispute that could be resolved by appraisal. On the other hand, the Harpers pointed out that there was no dispute about coverage because everyone agrees that the tornado damage was covered by the policy, that State Farm had already made payments associated with the loss, and that the appraisal process is mandatory once properly invoked.

Ultimately, the Court determined that “the question before the court is whether a disagreement over the scope of work is something more than a disagreement over the amount of loss.” The answer to this question was a resounding “No”, and the Court determined that the appraisal provision must be enforced.  In issuing its ruling, the Court made some key observations that make clear that “scope of loss” and “amount of loss” are really the same thing:

“Appraisal is proper in this instance because defining the “scope of the work” is inherent in determining the “amount of loss.” Regardless of whether one estimate recommends tearing down the structure and one does not, they are still competing estimates that differ as to the amount of loss.

. . .

Once again, State Farm does not dispute that the entire damage done to the premises was caused by the tornado. State Farm only disputes the scope of the work required to repair the Harpers’ house to its pre-loss condition. Because liability is not at issue in this instance, a dispute over scope of the work in nothing more than a dispute over the monetary value of returning the insured premises to its pre-loss condition. Whether the property needs toby repaired or replaced is ultimately a disagreement over the amount of loss. Based on the plain language of the insurance policy, this is a matter that may be handled through appraisal.

. . .

Based on the plain language of the insurance policy, appraisal becomes mandatory once properly invoked by either party.

Much like the opinion in Ingram v. State Farm, the Harper opinion too ran roughshod over State Farm’s arguments against appraisal, even citing a Pennsylvania case that labeled an argument similar to State Farm’s as “frivolous.” Mark this one as a win for the good guys. The Harper opinion was issued on August 12, 2021 and can be found here. Congrats to my partner Jonathan Bobbitt and our associate Nan Steer, who worked with me on this case and contributed mightily to righting the ship.

*Note that the Harper Order discussed above was issued by United States Magistrate Judge Jeffery S. Frensley.  State Farm has challenged the Order via a motion for review, which has been briefed for final decision by the United States District Court Judge. An update will be posted once the review process has been finalized.

In 2021, courts across Tennessee issued a handful of decisions that continue to define the nuances of the Tennessee Court of Appeals’ opinion in Merrimack v. Batts that is now twenty years old. Suffice it to say the landscape is quickly changing and I’m excited to share the new developments. The next few posts will explore these decisions and their importance on insurance appraisals in Tennessee. First up is Ingram v. State Farm Fire & Cas. Co., a case pending in the Eastern District of Tennessee at Chattanooga.

In Ingram, my firm represents Mr. Ingram, whose home was damage in the April 2020 storms that impacted Hamilton County. After he made a claim with State Farm, a disagreement arose between he and State Farm concerning the amount of loss so he invoked his insurance policy’s appraisal clause. As has become rather commonplace over the last few years, State Farm refused to allow the appraisal process to proceed. Instead, State Farm sent a letter to Mr. Ingram declining to move forward with appraisal, stating as follows:

“After reviewing the estimate provided to us on December 1, 2020, and comparing it to the State Farm estimate, we determined there are both price and scope differences present between the two estimates. The appraisal provision in the policy is to resolve differences in the price of the repairs which State Farm determined were covered. Appraisal cannot be used to resolve disputes regarding covered damages. Therefore, appraisal would not be appropriate [as the appraisal panel has] no authority to decide questions of coverage.”

In response to State Farm’s refusal to appraise the amount of loss, Mr. Ingram filed suit asserting breach of contract and quickly filed a Motion to Compel Appraisal. State Farm of course opposed the motion and on December 14, 2021, the Court issued its ruling and ordered the appraisal process to proceed. In issuing his opinion, Judge McDonough made several key common-sense points that run contrary to many insurance companies’ routine handling of appraisal demands.

First, the Court rejected State Farm’s contention that the dispute was about “coverage” rather than amount of loss. Instead, the Court noted that because the parties agreed that there was coverage for Mr. Ingram’s loss as a general matter (State Farm had previously estimated and issued a partial payment for the storm damage), the real question was the extent and amount of the loss. Judge McDonough ruled:

“Ingram contends that that there is additional loss that is eligible for coverage, while State Farm contends that this is an issue of scope of coverage. However, this dispute must necessarily be treated as one regarding the total amount of loss, rather than coverage, as State Farm has already conceded that at least some storm damage is covered. . . . To decide otherwise in this instance would allow insurance [companies] to avoid appraisal by claiming there is a coverage issue, even when the dispute concerns additional amounts of loss. Consequently, the Court determines that this dispute falls within the appraisal provision’s ambit.”

Second, the Court was not unmindful that State Farm itself wrote the insurance policy’s appraisal clause, which is mandatory if there is a dispute about the amount of loss and appraisal is properly invoked.

Lastly, the Court cautioned the appraisal panel to be sure its appraisal of the loss is detailed and itemized so that State Farm can challenge any portions of the award that it may later determine are not covered by the terms of its insurance policies.

This case was a big win not only for Mr. Ingram but also for policyholders across Tennessee.  For years, State Farm and other insurers have tried to make a distinction between “scope of loss” and “amount of loss,” a distinction that doesn’t exist in reality. The Ingram opinion, and a few others I’ll discuss in future posts, make clear that no such distinction exists.

A copy of the case can be found here.  Congrats to Jonathan Bobbitt at McWherter Scott & Bobbitt, PLC, who is leading the litigation on this case.

The Occupational Safety and Health Act was signed into law in 1970 by President Nixon, and the Occupational Safety and Health Administration (OSHA) was simultaneously created to implement, administer, and enforce its requirements. OSHA’s mission is to “assure safe and healthy working conditions for working men and women by setting and enforcing standards and by providing training, outreach, education and assistance.” Every single contractor in the United States is required to provide a safe work environment for its construction workers. Compliance with OSHA standards is mandated by federal law and is not optional.  Over the years, it has become obvious that many insurance companies are not including the necessary cost of OHSA compliance within their Xactimate estimates. Contractors, public adjusters, and insurance appraisers have shown me countless estimates from insurance companies that omit any costs for OSHA compliance.

The cost of compliance varies depending on the type of job to be performed, but OSHA standards are applicable and enforceable on both residential and commercial projects. There are OSHA standards that must be followed for fire and water remediation, as well as roof replacements and siding repairs. Many insurance company adjusters do not believe that OSHA standards apply to residential roof replacements. This is a very common misconception, but here is a link from OSHA that explains the guidelines for residential roofing and fall protection – – OSHA Fact Sheet – Fall Protection in Residential Construction.

In my experience. I would estimate that 95% of the Xactimate estimates that I have seen written by insurance company adjusters do not include any of the necessary costs for OSHA compliance. Of the 5% that I do see that have these costs added, most of those incorrectly apply the costs of OSHA compliance under the “Ordinance or Law” section of the policy. I commend the adjusters and appraisers who strive to do the right thing and my hat is off to them for including these costs into their estimate; however, OSHA costs must be included within the ACV settlement and it is inappropriate to withhold these costs as “Paid When Incurred” items.   Costs of compliance with an “ordinance or law,” also commonly referred to as “code upgrades,” are excluded by almost every standard form insurance policy  unless the policyholder has paid an additional premium to purchase “ordinance and law” coverage.  Ordinance and Law coverage is available to provide additional coverage when a law or ordinance regulates the materials, demolition, or construction to a property after a covered loss. For example, drip edge is required to be installed on the eaves of roofs in every jurisdiction within the state of Tennessee. If a roof requires replacement and it does not currently have drip edge installed, the building code will require drip edge be installed during the new roof replacement. The cost associated with the drip edge will fall under the ordinance or law coverage provided by the policy and some of these policies only pay this cost on an incurred basis, meaning it is not paid with the initial ACV payment. For reference, a standard residential ordinance or law provision is below:

Ordinance or Law

      1. You may use up to 10% of the limit of liability that applies to COVERAGE A, you may use up to 10% of the limit of liability that applies to Building Additions and Alterations for the increased costs you incur due to the enforcement of any ordinance or law which requires or regulates:

(1) The construction, demolition, remodeling, renovation or repair of that part of a covered building or other structure damaged by a PERIL INSURED AGAINST;

(2) The demolition and reconstruction of the undamaged part of a covered building or other structure, when that building or other structure must be totally demolished because of damage by a PERIL INSURED AGAINST to another part of that covered building or other structure; or

(3) The remodeling, removal or replacement of the portion of the undamaged part of a covered building or other structure necessary to complete the remodeling, repair or replacement of that part of the covered building or other structure damaged by a PERIL INSURED AGAINST.

      1. You may use all or part of this ordinance or law coverage to pay for the increased costs you incur to remove debris resulting from the construction, demolition, remodeling, renovation, repair or replacement of property as stated in a. above.

This coverage is additional insurance.

With this provision, the homeowner can use up to 10% of his or her dwelling limit to cover any increased costs or demolition that is required to comply with an ordinance or law that regulate the construction or demolition of the building. This is not the same thing as compliance with OSHA standards. When a property was built, it must be assumed that the building was built in a safe manner, and estimating and paying OSHA costs on an ACV basis is merely returning the property back to the condition it was in at the time of the loss. OSHA compliance does not increase the value of the property or provide any betterment.  As a result, depreciation should not be applied to costs of OSHA compliance.  In the same way, holding back these costs as “Paid When Incurred” would be a misapplication of the policy provisions.

Commercial policies are much more complex when it comes to Ordinance or Law coverage and typically have three distinct coverages within the Ordinance or Law section. Like residential policies, these coverages are not usually automatic, and an additional premium must be made to have this type of “Code Upgrade” coverage.  An example of a commercial Ordinance or Law provision is shown below:

Coverage A – Undamaged Portion of the Building. When an Ordinance or Law requires an Insured to tear down the undamaged portion of a building, this coverage provides protection for the value of the undamaged portion of the building.

Coverage B – Demolition. When an Ordinance or Law requires an Insured to tear down the undamaged portion of a building, this coverage pays for the cost to demolish and haul away debris from the undamaged portion of the building.

Coverage C – Increased Costs of Construction. When an Ordinance or Law requires modifications in how a building must be repaired or reconstructed, this coverage provides protection for the increased costs of construction associated with repairing or rebuilding the structure to the code existing at the time of the loss. Coverage usually applies to both the damaged and undamaged portions of the building.

Again, just like residential policies, these additional commercial property coverages have nothing to do with the minimum standards set forth by the federal government to keep workers safe. Each of the above coverages are intended to remove, build, or upgrade covered property after a loss due to the enforcement of local code requirements. I do not believe that any insurance company or their adjusters intentionally want to put workers or the general public in any type of danger; however, by not applying the minimum safety standards to their repair estimates, they essentially are doing just that. The key points to know are these:

  1. OSHA standards must be followed on every single reconstruction project, large or small, residential or commercial.
  2. OSHA standards are not suggestions, they are federally mandated.
  3. The usual and customary costs for OSHA compliance must be paid on an ACV basis for claim settlement purposes.
  4. OSHA Standards are not code upgrades and they do not fall within the Ordinance or Law coverage provisions.

OSHA Standards should never be coded as “Paid When Incurred.”  By withholding the necessary costs of OSHA compliance, this is no different than depreciating or withholding the cost of labor to install or replace a damaged item, which the Tennessee Supreme Court ruled last year to be unlawful. A link to my blog about the depreciation of labor can be found here.

Do not let insurance adjusters tell you otherwise, the cost for OSHA compliance is not already built into Xactimate line item estimate pricing.  There are specific line item entries available to estimators within Xactimate that must be added to the estimate.  Also, remember that the premiums that most policyholders pay are based on a replacement cost valuation basis, meaning the cost of replacing the damaged property for today’s reconstruction costs.  Because policyholders are already paying a premium for OSHA compliance, they should be compensated for these costs on any loss where OSHA standards apply to the repair or replacement of damaged property.

The storm has passed and a new wave of obstacles and hurdles are sure to follow in its wake.  Out-of-state adjusters have already flooded the area, and not all of them know and understand policyholders’ rights in the State of Tennessee.  Here’s a few tips on a few areas that we at McWherter Scott & Bobbitt often run into when handling storm-damage claims:

  1. Matching – In the fall of 2017, the Tennessee Commissioner of Insurance adopted a rule requiring that in claims involving replacement cost policies, the insurance company must replace items “so as to conform to a reasonably uniform appearance,” at least in policies that don’t specifically contain language that makes clear that matching is not insured.  This means that insureds are entitled to a matching, uniform appearance, not patch-work repairs that leave a bad appearance.  Here is the link.
  2. Consequential Damage – In that same rule, the Commissioner of Insurance also made clear that “when a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making such repair or replacement not otherwise excluded by the policy, shall be included in the loss,” and “the insured shall not have to pay for any cost except for betterment and any applicable deductible.”
  3. Overhead and Profit – In Tennessee, general contractor’s overhead and profit must be included in the actual cash value payment as long as the work is of the type for which a person would reasonably be expected to utilize the services of a general contractor.  This is true even if the owner does the work himself or doesn’t perform any repairs at all.  In one of our recent cases, a federal court in the middle district of Tennessee held that our client stated a claim for bad faith and punitive damages when an insurer failed to include overhead and profit on a large, commercial roof-only project.
  4. Causation – Tennessee follows the “substantial factor” test when two losses operate together to cause a loss.  This means that if there are two perils that jointly contribute to a loss (one of which is covered and one of which is not), then the entirety of the loss is covered as long as the covered peril was a “substantial factor” of the loss or damage.  This means that losses are often covered even when wear and tear, deterioration, improper workmanship and materials, and other excluded causes contribute.
  5. Labor Depreciation – In one of my recent cases, the Tennessee Supreme Court ruled in Lammert v. Auto-Owners that labor may not be depreciated when calculating the insurer’s actual cash value payment obligations unless the policy clearly allows it.  Use of improper settings within estimating software can have a dramatic impact on claim payments.

This past Sunday morning I boarded  a plane for Naples, FL for a mediation in one of the labor depreciation class actions my firm is handling.  When I left, I had no idea that when I returned a few days later Nashville would be a very different place.  The storms that pummeled Tennessee on March 2 and 3 will impact our state for decades.  Lives were lost, buildings destroyed, businesses ruined, and churches toppled.  The recovery and reconstruction process will take years.  Our thoughts and prayers go out to those that were impacted, and our firm (McWherter Scott & Bobbitt, PLC) will proudly stand with those who have lost so much.

(photo by FOX 17 Nashville)

For the past few years, I’ve been involved in several labor depreciation cases around the Southeast, including one right here in Tennessee against Auto-Owners.  The threshold legal question in that case, Lammert et al. v. Auto-Owners Mutual Ins. Co., was whether an insurance company can depreciate the cost of labor when determining its actual cash value payment obligations.  The Supreme Court’s answer was a resounding “No”.

The Lammert case was filed as a class action in federal court in Nashville, but Judge Crenshaw certified this critical legal question to the TN Supreme Court.  Here is the exact question that Judge Crenshaw asked the Supreme Court to answer:

Under Tennessee law, may an insurer in making an actual cash value payment withhold a portion of repair labor as depreciation when the policy (1) defines actual cash value as “the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss,” or (2) states that “actual cash value includes a deduction for depreciation”?

In answering the question, the Supreme Court first explained the problem with an example, borrowing from a hypothetical we provided in our brief:

The following hypothetical illustrates the dilemma. Suppose that laminate flooring with half of its useful life remaining is damaged by a sewer backup and that the homeowner has an insurance policy providing that the insurance company will cover the actual cash value of damaged property, calculated by deducting depreciation from the replacement cost. Further suppose that it would cost $10,000 to replace the floor, with $5,000 in labor costs and $5,000 in material costs. If depreciation is deducted from material costs alone, then the actual cash value for the floor is $7,500. If depreciation is deducted from the total replacement cost, then the actual cash value of the floor is $5,000.

In the end, the Supreme Court’s based its decision on the general rule that any ambiguity must be construed in favor of the policyholder, and in light of the fact that the policy could be construed in two ways, the Court held as follows:

We conclude that the language regarding depreciation in the policies in question is ambiguous. Under Tennessee law, ambiguities in insurance contracts are strictly construed against the insurance companies and in favor of the insured. Therefore, with the insured’s interpretation controlling, labor may not be depreciated when the insurance company calculates the actual cash value of a property using the replacement cost less depreciation method.

This was a huge win for Tennessee policyholders.  Millions of dollars have been shortchanged over the past several years, and this decision is the first step putting that money into the pockets of who it belonged to in the first place – – the policyholders.

A copy of the opinion can be downloaded here.

In the case of Conley v Tennessee Farmers, the Court of Appeals held that a misrepresentation as to prior foreclosure on an application is sufficient to void coverage as such misrepresentations increased the risk of loss as a matter of law. The Court of Appeals held:

Continue Reading Misrepresentation as to prior foreclosure voids policy, even if innocently made

I draw your attention to the June 25 Tennessee Court of Appeals decision in the case of Dutton v. Tennessee Farmers Mutual Insurance Company which addressed the question of whether misrepresentations made on an initial policy application which unquestionably increased the risk of loss would still operate to void that coverage when multiple renewals of coverage had taken place. Dutton v TN Farmers. The applicants unquestionably made misrepresentations on the policy application which were material, specifically dealing with drug use and convictions for drug related crimes. After the policy was issued (based upon that application), time passed, and multiple renewals occurred. In pertinent part, the changes made to the policy included the deletion of the individual who had the drug related problems. The insured argued the changes to the policy meant the misrepresentations no longer had any bearing on the risk that Tennessee Farmers was insuring.

Continue Reading Misrepresentation at Inception of Policy is Effective to Void Coverage Even After Renewals