In a recent decision, the Illinois Appellate Court addressed a recurring point of contention in property insurance disputes. It tackled the issue of whether an insurer's policy defense, such as late notice, can block an insured's right to appraisal. The court's ruling provides important guidance for insurers and policyholders alike, reaffirming the appraisal process is independent from the resolution of certain coverage defenses. The opinion highlights the need for conscientious contract interpretation and strategic litigation planning when policy conditions and appraisal clauses intersect.
Background of the Case
Plaintiff Xiang Zhao owned a single-family home in Vernon Hills, Illinois, insured under a State Farm homeowner's policy that included coverage for accidental direct physical loss caused by hail. On April 20, 2023, a hailstorm struck the area. Zhao filed a claim in August 2023. Following its inspection, State Farm issued an estimate covering replacement of the gutters, downspouts, and aluminum trim on certain windows and paid $12,677.94.
Zhao disputed the assessment. A September 26, 2023, estimate from Encompass Builders valued the loss at $133,817.82, citing the need to replace all windows. On December 22, 2023, Zhao demanded an appraisal under the policy, identifying the disagreement as the extent of the hail damage to the windows. State Farm rejected the request on January 2, 2024. It asserted the difference in estimates reflected a coverage dispute, not a disagreement over the amount of loss, and maintained that appraisal could not resolve coverage issues.
Zhao sued on March 22, 2024, seeking an order compelling appraisal and damages for breach of contract. State Farm denied liability for full window replacement, arguing the damage resulted from excluded causes such as wear and tear, improper installation, or age-related deterioration.
In August 2024, Zhao moved for judgment on the pleadings, arguing the dispute concerned loss valuation and that State Farm had waived any late-notice defense. State Farm responded that appraisal was improper when the scope of loss was contested and challenged Zhao's compliance with the policy's notice requirements.
The trial court sided with Zhao. It found State Farm had acknowledged a covered loss by making partial payment, that the disagreement was over the amount of loss, and that the affirmative defense was irrelevant to the request for declaratory relief. The court ordered the case to appraisal and stayed further proceedings. State Farm appealed.
Coverage Dispute
At the heart of the dispute is the meaning of "coverage," In its strict legal sense, coverage refers to the insurer's assumption of a specific risk before the insured event occurs- essentially, who and what is insured, and against what perils. Couch on Insurance §212:12 (3d ed. Rev. 2022). By contrast, the lay definition from the Britannica Dictionary, often used in everyday conversation simply means. "Something an insurance company will pay for."
State Farm invoked both the legal meaning and the lay usage to frame its refusal to pay for full window replacement as a "coverage" dispute. However, the court reasoned under the legal definition, coverage was not in question. The homeowner's policy indisputably includes the windows as part of the insured dwelling, and both parties agree that accidental weather-related damage is covered. State Farm has already acknowledged storm damage to parts of the home- paying $12, 677.94 for repairs to gutters, downspouts, and some window trim.
The real disagreement is whether the hailstorm also damaged the windows themselves. This is not a coverage issue; it is a factual dispute about the extent of the loss. Under the policy, appraisal is the mechanism designed to resolve disputes over the amount of loss.
Appraisal and Arbitration
Illinois courts have long treated appraisal clauses in insurance policies as analogous to arbitration clauses, enforceable by the courts and subject to orders compelling compliance. Lundy v. Farmers Group, Inc., 322 Ill. App.3d 214, 218 (2001). While arbitration is broader and quasi-judicial in nature, appraisal serves a narrower purpose in determining the amount of loss. FTI International, 339 Ill.App.3d at 26062. Like arbitration, appraisal is favored as a faster, less expensive alternative to litigation, and when a valid arbitration agreement applies to a dispute, a court must compel it. Board of Managers of the Courtyards at the Woodlands Condominium Ass'n v. IKO Chicago, Inc., 183 Ill.2d 66,71 (1998),
State Farm argued that appraisal was inappropriate here because the dispute involved policy interpretation, a matter outside the scope of appraisal. Illinois law limits appraisal to loss-amount disputes, not pure coverage questions. In Lytle v. Country Mutual Insurance Co., 2015 IL App (1st) 142169¶ 27, for example, appraisal was denied where the dispute concerned whether certain ordinance-related costs were covered under the policy. The court stated, "A party is not entitled to an appraisal on the issue of insurance coverage or contract interpretation." In contrast, here the policy clearly covered the home's windows, and the disagreement was contained to whether hail caused the claimed damage, not whether the windows were covered at all.
Zhao argued damage assessments fall squarely within the meaning of "amount of loss" relying on Shelter Mutual Insurance Co. v. Morrow, 2023 IL App (5th) 23049-U, in which the insurer admitted some covered damage but disputed the full extent. The Morrow court held that such disagreements belong in appraisal and to read the clause otherwise would undermine its plain meaning. This reasoning aligns Illinois precedent, which consistently holds that while courts decide pure coverage issues, they may compel appraisal when the disagreement concerns the value or scope of damage from a conceded covered event.[i]
Courts in other jurisdictions have gone further, holding that appraisers may address causation when determining the amount of loss, so long as coverage determinations remain with the court. [ii] Illinois follows a similar approach. Resolving amount of loss disputes can include some causation analysis, since separating damage caused by the covered peril from other causes is often necessary. Morrow, 2023 Il App (5th) 23049-U, ¶19.
Applying these principles, the trial court correctly found this was a loss-amount dispute and ordered appraisal. State Farm's refusal rested on a mischaracterization of the issue, and the court's order compelling appraisal was consistent with both Illinois precedent and persuasive authority from other jurisdictions.
Late Notice
The parties also disputed whether the homeowner provided timely notice of the alleged storm damage. State Farm argued that the trial court erred in finding it had waived its late-notice defense. Zhao countered that any delay was reasonable, and that State Farm forfeited the defense when it investigated the claim and issued payment. Both characterizations missed the trial court's actual holding.
Under Illinois law, a notice provision can be a valid condition precedent to coverage. Failure to give notice "within a reasonable time" may breach the policy. The purpose of such provisions is to allow the insurer to promptly investigate the claim. County Mutual Insurance Co. v. Livorsi Marine, Inc., 222 Ill.2d 303(2006).
Here, however, the lower court never decided whether Zhao's notice complied with the policy. Instead, it applied the appraisal clause, which expressly states that neither party waives contractual rights by demanding or participating in appraisal. The court held that policy defenses, including late notice, have no bearing on an insured's right to request appraisal.
The ruling preserved both parties' rights. Zhao was entitled to compel appraisal, but State Farm retained the ability to assert late notice as a defense later in the case. Therefore, the court concluded any weight given to the timing of notice is an issue for resolution after appraisal, not a bar to the process itself.
Looking Ahead
This decision confirms that appraisal is not a concession on coverage or a waiver of contractual defenses. While the timing of notice and other policy conditions remain viable issues for later litigation, they do not bar the parties from compelling appraisal where the policy expressly preserves the parties' rights. Insurers should look to have the damages appraised and categorized into the covered cause(s) versus the disputed cause(s). This then allows for later coverage defenses to be raised with particularity as to the damages disputed under the policy.
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[i] See Lytle, 2015 IL App (1st) 142169, ¶¶ 25-27 (holding that appraisal would have been appropriate for a dispute over the amount of a loss but that the specifics of the case involved policy interpretation); FTI International, 339 Ill.App.3d at 26-62(noting Illinois public policy in favor of appraisal, but finding the dispute over conflicting portions of the insurance policy to be beyond the scope of appraisal); Lundy, 322 Ill.App.3d at 218-19 (holding that a trial court may compel compliance with an appraisal clause but that resolution of the plaintiff's claim required interpretation of the policy language where the plaintiff accused insurer of misrepresentation).
[ii] Walnut Creek Townhome Ass'n v. Depositors Insurance Co., 913 N.W.2d 80, 91-92 (Iowa 2018) ("appraisers necessarily address causation when determining the amount of the loss from an insured event"); Quade v. Secura Insurance, 814 N.W.2d 703, 706-08 (Minn. 2021) (noting that prohibiting appraisers from considering causation would render appraisal clauses inoperative in most situations); Hahn v. Allstate Insurance Co., 165 A,3d 1026 (R.I. 2011) (rejecting a causation argument disguised as an issue of coverage).
