Fairly Debatable Appraisal Award Paid Promptly and in Full Defeats Bad Faith Claim


Insurance Claims Personnel Must Control The Issues To Be Determined By Appraisal And Should Never Leave The Appraisers To Work On A Guess As To What They Were Asked To Determine

Appraisal is a means of resolving an amount of loss and acts akin to an arbitration. What is to be appraised is a requirement of the parties to the appraisal. When an insurer’s appraiser – who valued the real estate only – was unaware that the insurer had paid the insured for its business personal property and fixtures loss, he signed an award that included a value for both the structure, the business personal property and the fixtures.


In Luigi’s, Inc. v. United Fire And Casualty Company, No. 19-1669, Supreme Court Of Iowa (May 14, 2021) Luigi’s restaurant in Oelwein, Iowa, was damaged when a fire broke out in the restaurant’s kitchen that resulted in a total loss of the building and its contents. Luigi’s insurance policy with United Fire and Casualty Company (United Fire) provided coverage for the building based on its “actual cash value” with a limit of insurance of $550,000. The policy provided two ways to determine the actual cash value:

  1. In the event that there is a regular market for the property where the property can be bought and sold in the ordinary course of dealing, and it is possible to determine the property’s market value, then the market value of the property is its Actual Cash Value.
  2. In the event that there is no regular market for the property where the property can be bought and sold in the ordinary course of dealing, or it is not possible to determine the property’s market value, then: Actual Case Value means the amount which it would cost to repair or replace covered property with material of like kind and quality, less allowance for physical deterioration and depreciation, including obsolescence.

United Fire’s adjuster, Dan Fasse, retained an independent real estate appraisal company, Rally Appraisal, to determine the building’s actual cash value. Rally employee Jim Herink, a certified general real property appraiser, believed a market approach to be the appropriate method to determine the property’s value. Citing to four restaurants in the area it believed were comparable to Luigi’s, Rally issued an appraisal report that concluded the actual cash value of the Luigi’s building immediately prior to the fire was $242,000.

Luigi’s invoked its right to the appraisal process. A decision agreed to by any two of the three would be binding on Luigi’s and United Fire. The policy holds the parties responsible for their own fees or costs associated with the appraisal process.

Globe Midwest assigned its employee Charles Sorrell, an insurance appraiser, to the matter. Sorrell in turn retained an independent real estate appraiser (since Sorrell was not a real estate appraiser) named Keith Westercamp to assist him on the matter.

Sorrell used a cost approach and concluded the actual cash value of the Luigi’s building immediately prior to the fire was $1,030,000. This figure included just over $900,000 for the structure and $122,767.62 for “furniture, fixtures and equipment.” Herink’s appraisal (which valued the building at $242,000) didn’t value and didn’t address any other property or fixtures within the building and was unaware that United Fire had paid Luigi’s for that part of the loss.

At the conclusion of the appraisa, all three signed an appraisal award letter establishing the loss amount at $502,000. This number consisted of a value for the building of $380,000 and a value for furniture, fixtures, and equipment of $122,000.

The umpire called Sorrell and asked if Luigi’s wished to consider reopening the appraisal hearing. The next day, Sorrell sent a short email declining any further action and stating that the appraisal award had been “agreed upon and signed” by all three participants at the hearing. Under the policy, having now received the sworn statement and proof of loss, United Fire had thirty days from the appraisal hearing—until July 22—to make its payment which it paid $502,000 fulfilling the award in full.

Luigi’s sued United Fire for breach of contract and bad faith, and included a request for punitive damages based on United Fire’s failure to pay the $550,000 building coverage limit and for its actions after the appraisal hearing. The jury returned a verdict in Luigi’s favor and awarded Luigi’s contract and tort damages plus $30,000 in punitive damages.

On appeal, United Fire argued that Luigi’s loss was completely resolved through the appraisal process and that the district court erred in denying the motion for directed verdict on the alleged delay in paying the claim. Stated differently, United Fire contends Luigi’s invocation of the appraisal process, and United Fire’s timely payment of the appraisal award, required the court’s dismissal of Luigi’s claims as a matter of law, and that Luigi’s failed to prove bad faith for any actions after the appraisal hearing.


United Fire argued repeatedly that “the construction of that policy is an issue for the Court as a matter of law” and that the district court could decide the issue based on the contract’s requirements. “The obligation to pay came upon the proof of loss and the appraisal award, and the award was paid within the time frame set in the policy.”

Luigi’s also contended United Fire’s reliance on Herink’s appraisal constituted bad-faith denial of its insurance claim. Bad-faith denial has two elements:

  • absence of a reasonable basis for denying the claim (an objective standard), and
  • the insurer knew or had reason to know its denial was without a reasonable basis (a subjective standard).

To establish bad faith Luigi’s must do more than show the investigation wasn’t as thorough or all-encompassing as Luigi’s would have liked. Again, United Fire had no obligation to disregard the opinion of its own expert in favor of the insured’s expert’s opinion.

Luigi’s possesses no bad-faith delay claim concerning the payment because the parties agreed in the insurance contract that United Fire would have thirty days after the appraisal hearing and submission of the sworn statement and proof of loss to make payment.

For Luigi’s to establish its claim of bad faith, it has to negate “any reasonable basis” for United Fire’s denial or delay. United Fire would have a reasonable basis if the claim is “fairly debatable” as to either an issue of fact or law. A claim is “fairly debatable” if it’s “open to dispute on any logical basis.”

The record makes clear there was a legitimate debate about the scope of the appraisal process. Not long after Luigi’s invoked its appraisal process right, Fasse emailed Sorrell asking, “Is an appraisal being sought for only the building coverage or are all coverages being disputed at this time?” Fasse then stated that he hadn’t received information to support any other coverages, naming particularly “the business personal property [(BPP)], the business income [(BI)] or extra expenses matters.”

Known to Fasse, but unbeknownst to Herink, United Fire had already paid Luigi’s business personal property claim by the time of the appraisal hearing. United Fire thus sent only Herink—a real estate appraiser but not a property appraiser—to the hearing. Herink had appraised the building, but he apparently came armed without information to discuss the valuation of any furniture, fixtures, or equipment. Herink’s written response to Sorrell’s appraisal report (provided to the umpire before the appraisal hearing) likewise included no mention of furniture, fixtures, or equipment. Even when viewed in a light most favorable to Luigi’s, the record establishes that the issue of whether the appraisal hearing would (or should) include consideration of furniture, fixtures, and equipment was “open to dispute” and thus fairly debatable.

United Fire thus had a reasonable basis for allowing Herink and Rally to send the posthearing letter and email. Luigi’s failed to meet its burden to negate any reasonable basis for Herink’s and Rally’s postaward correspondence. Under these circumstances, Luigi’s possesses no claim for bad faith as a matter of law, and the district court erred in denying United Fire’s motion for directed verdict.

Having reversed the district court’s denial of the motion for directed verdict on Luigi’s breach of contract and bad-faith causes of action, we likewise dismiss the related punitive damages claim necessarily associated with them. The judgment of the district court was reversed and remanded for dismissal.


Although United Fire was able to receive a reversal of the tort and bad faith claims it still paid $122,000 more than it owed since the $122,000 was found by the appraisers – and paid after the award – to be the business personal property and fixtures loss that had been paid before the appraisal was conducted. Luigi’s got a windfall and if it was being totally fair the award should have been amended to be limited to the loss to the structure. United Fire, by its lack of attention sent its appraiser into an appraisal without enough information to provide a proper award. Insurance claims personnel must control the issues to be determined by appraisal and should never leave the appraisers to work on a guess as to what they were asked to determine.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts; and the last two issues of ZIFL at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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