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Hammond and DuChateau Help Create Favorable New Law in a Case of First Impression

Partners Rick Hammond and Jim DuChateau of the Chicago office recently obtained a dismissal with prejudice on behalf of Ohio Security Insurance Co. (a Liberty Mutual affiliate) in a federal suit pending in the U.S. District Court for the Northern District of Illinois.

The underlying loss concerned a claim for hail damage to an industrial property located in the southern suburbs of Chicago. Ohio Security investigated the insured’s claimed property damage, and after a dispute concerning the amount of loss arose, the matter proceeded to appraisal under the terms of the policy. The appraisal panel rendered an award, which was timely and fully paid by Ohio Security.

Nearly two years after the loss—and a year after the appraisal was completed—the insured retained a public adjuster who attempted to circumvent the final, binding appraisal award. The insured subsequently filed suit against Ohio Security, alleging breach of contract and statutory bad faith pursuant to Section 155 of the Illinois Insurance Code. In its complaint, however, the plaintiff failed to disclose the existence of the prior, fully-paid appraisal award on the underlying insurance claim.

In moving to dismiss the initial and amended complaints, Hammond and DuChateau argued on behalf of Ohio Security that the timely paid appraisal award in the underlying insurance claim was binding for purposes of an amount of loss, and the plaintiff therefore had neither contractual damages nor a cognizable claim of breach of contract. In granting the motion to dismiss, the Court departed from prior Illinois state and federal rulings and held, for the first time, that a fully-paid appraisal award is binding on the parties and forecloses a subsequent breach of contract action brought by the insured. In doing so, the Court found that the policy language pertaining to the binding nature of appraisal was clear and unambiguous and therefore would be enforced as written.

The decision reversed a 20-year precedent that allowed policyholders who were disappointed with their appraisal award to get a second bite at the apple by suing for breach of contract after an appraisal award was rendered and paid by the carrier. The Court further agreed with Ohio Security that the claim-preclusive effect of the prior appraisal award constituted a bona fide coverage dispute, which precluded liability under Illinois law for allegations of statutory bad faith. Accordingly, the Court also dismissed the statutory bad faith count with prejudice. The Court’s final dismissal order can be read in its entirety here.

(Rick Hammond and Jim DuChateau serve as national counsel to insurers on matters relating to property insurance coverage and on issues relating to fires and explosions, hail and wind losses, commercial property, business interruption, arson, fraud, and bad faith.)