Appraising Facts Regarding Business Income Loss Much More Efficiently Than Litigating and Then Appraising Business Interruption Losses

Resolving disputes through appraisal or arbitration may be, but is certainly not always, less costly and efficient. This is especially true when the policy calls for arbitration of a commercial dispute, where the costs of the arbitration panel can run into hundreds of thousands of dollars and discovery is conducted, with parties in federal court paying for arbitrators, whereas judges are paid via public taxes. However, appraisal or arbitration is certainly much more efficient and less costly than having both litigation and an appraisal or arbitration.

These practical issues regarding the efficiency of dispute resolution were facing the federal court in an earlier order arising out of the same case 1 discussed in yesterday’s post, Can an Appraisal Panel Determine the Period of Restoration for a Business Interruption Dispute? Does the Panel Have to State the Period of Restoration in the Appraisal Award?

The case involved Proto Gage and Federal Insurance Company, which had insurance policies covering Proto Gage’s business income losses and extra expenses. In 2015 and 2016, Proto Gage experienced failures in two of its press machines (a 450-ton press and an 800-ton press). Proto Gage submitted claims to Federal for lost business income and extra expenses it incurred while its operations were impaired due to the press failures. Federal made payments to Proto Gage totaling around $1.3 million, of which $299,276 was for Proto Gage’s lost business income.

Proto Gage demanded appraisal under Michigan law to resolve the dispute over the amount of its loss. Federal rejected the appraisal demand, asserting the disagreement was about whether the lost business income was covered under the policy, which it claimed was a coverage issue for the court to decide.

The court noted the following regarding Michigan law about appraisal:

To distinguish whether a policy dispute should be resolved by appraisers or a court, the leading Michigan case on the subject has explained that ‘the issue of coverage is for the court, not the appraisers . . . . Where the parties cannot agree on coverage, a court is to determine coverage in a declaratory action before an appraisal of the damage to the property.’ Auto-Owners Ins. Co. v. Kwaiser, 476 N.W.2d 467, 469–470 (Mich. Ct. App. 1991).

Although Kwaiser does not specifically define what constitutes an ‘issue of coverage,’ federal courts addressing this issue offer guidance. Interpreting Michigan case law, the United States Court of Appeals for the Sixth Circuit explained that the district court ‘interpret[s] [a] policy’s terms’ and ‘appraisers resolve . . . any factual disputes about the amount of an insured’s loss.’ Scottsdale Ins. Co. v. Altman Mgmt. Co., 832 F. App’x 998, 999 (6th Cir. 2021). In other words, while ‘coverage issues’ for resolution by courts include ‘legal questions of what [a] policy does or does not cover,’ appraisers ‘resolve factual disputes . . . such as whether particular damage was caused by a covered event or some other cause . . . .’

… ‘Thus, courts make legal determinations as to the categories of coverage; appraisers make factual findings as to whether specific damage fits into those categories or not.’

Regarding the loss of income dispute and whether that issue is an appraisal issue or one of coverage for the courts and judges to decide, the Michigan court found the following:

The Court agrees with Proto Gage that the parties’ disagreement is a factual dispute for resolution by the appraisers. Federal does not dispute that the presses were damaged by perils covered under the policies—that is, Federal does not interpret the applicable policy language to mean that the press breakdowns are not a covered peril. ..Because the parties do not disagree as to ‘what the polic[ies] do[] or do[] not cover,’ the core of the dispute depends on ‘factual conclusions’ such as ‘whether particular damage [i.e., lost business income] was caused by a covered event or some other cause, the extent of damage, or the cost to [compensate the insured] that damage.’

The Michigan court held that the parties’ dispute did not present a coverage issue for the court and should be resolved through the appraisal process. The judge’s view was that the disagreement was over whether the lost business income was in fact caused by the covered peril (the press failures) or something else. The causation is a factual issue for appraisers to resolve under Michigan law and not a legal question of interpreting the policy for the court.

The court specifically noted in its analysis that allowing insurers to avoid appraisal by disputing causation would undermine the purpose of the appraisal process, which is to provide a prompt and economical means to resolve these types of disputes. Aren’t these the exact words I heard from Steve Badger yesterday while debating him on this issue in Dallas?

Insurance company attorneys have a strange way of saying they never need more cases or money because they are so busy, while at the same time they say that only courts and judges can resolve factual issues that they frame as “coverage disputes.”

The Michigan judge explained why accepting the insurance industry view would allow Steve Badger and his like-minded attorneys to have their cake and eat it too:

This view also could lead to courts and appraisal panels arriving at overlapping and duplicative factual determinations. If the court conducted a factual inquiry concluding with a determination that there was a covered cause for a loss, then the amount of loss would still have to be determined by appraisers. Such a process might well involve presenting much of the same evidence to appraisers, producing duplicative expense.

To illustrate: in the instant case, Federal claims that the press breakdowns did not produce the loss in business income. Under the D Boys approach—which Federal endorses here—a court would hear the evidence of both sides to determine what caused the loss of income. This would entail hearing potentially lengthy proofs on diverse issues like the impact of general economic downturn; the large-scale product recall and eventual bankruptcy of Takata, one of Proto Gage’s customers; why Proto Gage received fewer requests for quotes from its customers; and why bids submitted by Proto Gage to new customers were not accepted…. Assuming a court found some impact from the breakdown of the presses, it might find coverage and then order an appraisal. But then the appraisers would likely have to hear the same evidence to parse how much of the business loss should be attributed to the breakdown of the presses and how much to other causes. It is hard to imagine a more inefficient process for resolving this dispute.

This process would incentivize insurers to resist resolving claims, because by announcing a challenge to causation they would compel their insured to enter a lengthy and costly court litigation, with the possibility of more legal activity before an appraisal panel. This enhanced leverage would undoubtedly compel many insureds, who do not have the financial wherewithal to engage in such extended legal combat with their insurer, to agree to diminished settlements.

My bet is that my friendly foe, Steve Badger, would never admit that policyholders should have to give into the leverage of drawn-out appraisal battles and then be left to even more drawn-out legal battles. However, this federal judge understands the practical results of having appraisal panels make decisions that are then argued all over again in litigation.

For me and the vast majority of my clients, give us liberty or give us death in one battle. The party that has more money than Elon Musk is the insurance company. Insurance companies have a vast treasury and an army of attorneys who will outspend and wait out policyholders.

I will ask Badger and his cronies this: ‘Did policyholders buy the insurance, and the insurance companies promise them to get paid the full amount promised under the policy as fast as possible?’

The answer to this question sets up the entire debate Steve Badger and I have been having for almost a decade.

Thought For The Day

It makes my heart sick when I remember all the good words and the broken promises.

1 Proto Gage v. Federal Ins. Co., No. 21-12286 (E.D. Mich. Sept. 29, 2023).