Auto–Owners Ins. Co. v. Second Chance Invs., LLC, A11–1145.

• Decision Date: 20 March 2013
• Docket Number: No. A11–1145.,A11–1145.
• Citation: 827 N.W.2d 766
• Parties: AUTO–OWNERS INSURANCE COMPANY, Appellant, v. SECOND CHANCE INVESTMENTS, LLC, Respondent.
• Court: Minnesota Supreme Court

827 N.W.2d 766

AUTO–OWNERS INSURANCE COMPANY, Appellant,

v.SECOND CHANCE INVESTMENTS, LLC, Respondent.

No. A11–1145.

Supreme Court of Minnesota.

March 20, 2013.

Syllabus by the Court

The appraisal provision in the Minnesota standard fire insurance policy, Minn.Stat. § 65A.01, subd. 3 (2012), does not provide parties the statutory right to have an appraisal panel decide whether a claim involves a total loss.

Joseph F. Lulic, Melinda J. Grundhauser, Hanson, Lulic & Krall, LLC, Minneapolis, MN, for appellant.

Michael R. Moline, Monroe Moxness Berg, P.A., Minneapolis, MN; and Jenneane L. Jansen, Kris E. Palmer, Jansen & Palmer, LLC, Minneapolis, MN, for respondent.

Brendan R. Tupa, Udoibok, Tupa & Hussey, P.L.L.P., Minneapolis, MN; and Scott A. Wilson, Minneapolis, MN, for amicus curiae Minnesota Association for Justice.

OPINION

PAGE, Justice.

This case presents the question of whether the Minnesota standard fire insurance policy, Minn.Stat. § 65A.01 (2012), gives a party to a fire insurance policy the right to have an appraisal panel decide whether a claim involves a total loss. We hold that a party has no such right because the plain language of the appraisal provision in Minn.Stat. § 65A.01, subd. 3, removes disputes “in case[s] of total loss on buildings” from the statutory appraisal process. Because the dispute here is over whether the insured building was a total loss, we affirm.

Respondent Second Chance Investments, LLC (SCI), purchased a fire insurance policy from appellant Auto–Owners Insurance Company that became effective on September 26, 2008, and covered a building with the limit of insurance set at $2,095,500. The valuation clause in the policy, consistent with the Minnesota standard fire insurance policy, provides that “[i]n the event of a total loss [ ] to the dwelling ... [Auto–Owners] will pay an amount equal to the limit of insurance.” According to SCI's initial proof of loss, on November 12, 2008, the building suffered extensive fire damage. Seeking payment of the limit of insurance, SCI filed a proof of loss claiming that the building was a “total loss.”

On January 12, 2009, EFI Global issued a written report on the loss on behalf of Auto–Owners. In the report, while noting that the building's shell, exterior walls, roof, and floor assembly were reusable, EFI nonetheless concluded that salvaging these parts would not be economical and that the best option would be to demolish the building frame “from the top down.” The EFI report did not include any cost estimates. On January 22, Lindstrom Restoration issued a report on behalf of SCI estimating the cost of restoring the building at $1,654,841, which is approximately $450,000 below the policy limit. However, the estimate did not include the cost of restoring the roof, nor did it include fees for a licensed structural engineer, which had been recommended in EFI's report. SCI contends that the Lindstrom report is incomplete and does not fully reflect the true cost of restoration.

On March 9, Auto–Owners rejected SCI's proof of loss, contending that it did not state the “Actual Cash Value” ¹ of the loss as required by the policy or provide a written estimate of repair to support the claim. Auto–Owners subsequently paid the outstanding mortgage balance of $1,038,677 on the building. On July 27, SCI filed a second proof of loss, which included an estimate from AAA Exteriors in the amount of $2,127,000—a cost that exceeded the policy limit. Auto–Owners again rejected the proof of loss, stating that it failed to set out the “Actual Cash Value” of the loss and that the written estimate of repairs needed to be supported by a trade breakdown of rebuilding costs.

On October 8, SCI sent a letter to Auto–Owners asserting that the terms of the policy did not require SCI to state an “actual cash value” other than the limit of insurance because SCI was claiming a total loss. In the letter, SCI demanded that Auto–Owners pay $616,697.74, which was not in dispute and was the difference between the mortgage balance already paid by Auto–Owners and the amount set out in the Lindstrom report. SCI further demanded that Auto–Owners pay the remainingdifference between the policy limit and the undisputed amount within 30 days. In response, Auto–Owners attempted to negotiate a release of all claims arising from the fire incident by paying the undisputed amount plus certain miscellaneous costs. SCI rejected the offer, and on October 28, Auto–Owners paid SCI the undisputed amount.

The next day, Auto–Owners wrote to SCI demanding an appraisal pursuant to the policy and Minnesota law. SCI responded that appraisal was not appropriate under the policy language as it was claiming a total loss, but agreed to proceed with an appraisal to preserve its rights. On February 24, 2010, Auto–Owners gave notice that it would not participate in the appraisal process because SCI did not agree that the appraisal panel could render a binding decision as to whether the loss was total. Consistent with that notice, Auto–Owners did not participate in the appraisal that followed.

Ultimately, Auto–Owners filed a complaint in district court seeking an order declaring the rights of the parties under Minnesota law and compelling SCI to submit the issue of whether the building was a total loss to a binding determination by an appraisal panel. In its answer, SCI took the position that an appraisal was not appropriate when the loss at issue is total. SCI also filed a counterclaim alleging that Auto–Owners breached its obligations under the policy when it refused to pay the limit of insurance as required when there is a total loss. Auto–Owners moved to compel SCI to submit to a binding appraisal. SCI moved for partial summary judgment on the issue of whether the loss was total and for an order granting leave to amend its counterclaim to include claims for prejudgment interest and taxable costs.

The district court denied Auto–Owners' motion to compel appraisal and dismissed its complaint, concluding that “[t]he parties did not present and this Court did not locate any case in which a Minnesota court held that a total loss was an issue for appraisers.” The district court also denied SCI's motion for partial summary judgment, essentially concluding that there were genuine issues of material fact as to whether the building was a total loss. Finally, the district court granted in part SCI's motion to amend the counterclaim to include taxable costs. The court of appeals affirmed, concluding that a court, rather than an appraisal panel, is the appropriate forum to determine whether the property suffered a total loss. Auto–Owners Ins. Co. v. Second Chance Invs., LLC, 812 N.W.2d 194, 201 (Minn.App.2012).

We granted Auto–Owners' petition for review on the sole issue of whether a party to a fire insurance policy has the statutory right to have an appraisal panel decide whether a claim involves a total loss. By way of background, Minn.Stat. § 65A.01, which is commonly referred to as the Minnesota standard fire insurance policy, was enacted in 1895. Act of Apr. 25, 1895, ch. 175, § 53, 1895 Minn. Laws 392, 417–22. The statute mandates that all fire insurance policies issued within Minnesota “conform as to all provisions, stipulations, and conditions” within the statute. Minn.Stat. § 65A.01, subd. 1. The statute is considered a “valued policy” law. See Nathan v. St. Paul Mut. Ins. Co., 243 Minn. 430, 433, 68 N.W.2d 385, 388 (1955) (citation omitted) (internal quotation marks omitted). Such laws were enacted in response to the practice of fire insurance companies writing excessive amounts of coverage, collecting high premiums, and then reducing the amounts of recovery when losses occurred. See Winfield V. Alexander, Insurance: The Wisconsin “Valued Policy” Law, 10 Wis. L.Rev. 248, 248 (1934–35). Under a valued policy law, the insurer is less apt to set an excessively high insurable value because when a total loss occurs, the insurer must pay that insurable value and cannot reduce the amount of recovery. Id. at 264. Indeed, we have recognized that the purposes of the Minnesota standard fire insurance policy are “[t]o prevent overinsurance by requiring prior valuation” and “avoid litigation by prescribing definite standards of recovery in case of total loss.” Nathan, 243 Minn. at 433–34, 68 N.W.2d at 388. Thus, in determining whether the insurer is required to pay the limit of insurance, the key inquiry is whether a total loss has occurred as opposed to whether the amount of loss or damage meets a certain threshold.

Consistent with these purposes, the standard fire insurance policy requires the insurer to pay the policyholder an amount equal to the limit of insurance in case of a total loss. Minn.Stat. § 65A.01, subd. 5 (“No provision shall be attached to or included in such policy limiting the amount to be paid in case of total loss on buildings by fire, lightning or other hazard to less than the amount of insurance on the same.”). In other words, the statute requires the parties to a fire insurance contract to “agree in advance on a valuation of the property to be insured, and, in the absence of fraud, this valuation is binding” as the amount to be paid when the loss is total. Nathan, 243 Minn. at 433, 68 N.W.2d at 388. In contrast, if the property is partially destroyed, the insured recovers the actual amount of loss, whatever that is. Brooks Realty, Inc. v. Aetna Ins. Co., 276 Minn. 245, 252, 149 N.W.2d 494, 499 (1967). In Minnesota, the standard for determining total loss under the standard fire insurance policy is as follows:

A building is not a total loss ... unless it has been so far destroyed by the fire that no substantial part or portion of it above ground remains in place capable of being safely utilized in restoring the building to the condition in which it was before the fire.... There can be no total loss of a building so long as the remnant of the structure left standing above ground...