Case Name: GENERAL CASUALTY COMPANY, Plaintiff-Appellant, v. TRACER INDUSTRIES, INC., Defendant-Appellee
Court: Illinois Appellate Court
Jurisdiction: Illinois
Decision Date: 1996-12-18
Citations: 285 Ill. App. 3d 418
Docket Number: No. 4—96—0416
Parties: GENERAL CASUALTY COMPANY, Plaintiff-Appellant, v. TRACER INDUSTRIES, INC., Defendant-Appellee.
Judges: 
Reporter: Illinois Appellate Court Reports, Third Series
Volume: 285
Pages: 418–431

Head Matter:
GENERAL CASUALTY COMPANY, Plaintiff-Appellant, v. TRACER INDUSTRIES, INC., Defendant-Appellee.
Fourth District
No. 4—96—0416
Argued November 7, 1996.
Opinion filed December 18, 1996.
COOK, J., dissenting.
Larry D. Kuster (argued), of Rammelkamp, Bradney, Dahman, Kuster, Keaton & Fritsche, of Jacksonville, and Robert W. Cockerham, of Brown & James, P.C., of St. Louis, Missouri, for appellant.
James L. Perbix (argued), of Perbix & Morgan, of Havana, for appellee.

Opinion:
JUSTICE GREEN
delivered the opinion of the court:
Plaintiff General Casualty Company filed a petition against defendant Tracer Industries, Inc., to enforce an appraisal clause in a fire insurance policy issued to defendant. The policy provided for the parties to each appoint an appraiser, when necessary, to together appraise the loss suffered by an insured, and for the court to appoint an umpire if the appraisers could not agree. The petition alleged that an appraisal dispute arose here in regard to a fire resulting in total loss of a building in Havana. The court appointed Darrell Hilst umpire.
Hilst presented a report stating he was in agreement with the appraisal of James Johnston, appointed by defendant, which fixed the fire loss in the sum of $111,900, which was reduced by policy limits to $100,000. The sum of $33,527 had been paid, leaving $66,473 to be paid. Plaintiff filed a motion to set aside the determination resulting from the agreement of Hilst with Johnston's appraisal. The circuit court denied that motion. Judgment was entered against plaintiff for $66,473. By amendment that sum was later increased to $68,973.
Defendant appeals, maintaining the judgment was palpably erroneous because (1) Johnston's appraisal did not take into consideration the obsolescence of the insured building; (2) the award was so high that (a) it must have resulted from fraud, and (b) it was against public policy; and (3) a conflict of interest with Hilst rendered the judgment fraudulent. We affirm.
The evidence indicated that Robert Knake and William Knake, Jr., were the owners of the destroyed building. They were sons of William Knake, sole owner of the defendant corporation. The sons were named as additional insureds in the policy but, strangely, were never made parties to this suit. However, no issue has been raised in that regard.
The parties do not dispute that when a contract provides for a determination of amount by appraisers, substantial deference is given to that appraisal. Bailey v. Timpone, 75 Ill. 2d 539, 545, 389 N.E.2d 1193, 1196 (1979) (valuations under appraisal or arbitration would not be overturned "absent fraud or mistake"); Board of Education v. Gorenstein, 179 Ill. App. 3d 388, 394, 534 N.E.2d 579, 582-83 (1989) ("appraisers have wide discretion as to the methods and procedures they may follow in determining values"); Sebree v. Board of Educa tion, 254 Ill. 438, 446, 98 N.E. 931, 935 (1912) ("As long as appraisers act honestly and in good faith they have a wide discretion as to their methods of procedure and sources of information. Their conclusions, in the absence of fraud or mistake, will be binding upon the parties"); cf. Hetherington v. Continental Insurance Co., 311 Ill. App. 577, 583, 37 N.E.2d 366, 368 (1941) (courts may set an award aside if it is clear that there has been "fraud, misconduct or palpable or gross error or mistake").
The Bailey court stated that review of the rental agreement there "should be limited in a manner analogous to the statutorily constrained role the courts may play in reviewing arbitration awards under the Uniform Arbitration Act (Ill. Rev. Stat. 1977, ch. 10, pars. 101 [through] 123)," even though the Act did not apply because the contract called for an "appraisement." Bailey, 75 Ill. 2d at 545, 389 N.E.2d at 1196. Since the parties had agreed the arbitrators had "binding authority to conclusively and finally establish the fair cash rental value of the premises," it was proper for the trial court to defer to the meaning the arbitrators ascribed to the terms they used. Bailey, 75 Ill. 2d at 546, 389 N.E.2d at 1196.
Recently, this court has noted:
"Arbitration awards should be construed, wherever possible, to uphold their validity. * The general view is that judicial review of an arbitrator's award is more limited than appellate review of a trial court's decision. [Citation.] An award will not be set aside due to gross errors in judgment in law or gross mistakes of fact by the arbitrator unless the errors or mistakes are apparent on the face of the award." Hayes v. Ennis, 278 Ill. App. 3d 121, 127, 662 N.E.2d 910, 913 (1996).
In Tim Huey Corp. v. Global Boiler & Mechanical, Inc., 272 Ill. App. 3d 100, 649 N.E.2d 1358 (1995), this court held that "[i]f the arbitrators have acted in good faith, however, the award is conclusive upon the parties. * Such deference is accorded because the parties have chosen in their contract how their dispute is to be decided, and judicial modification of an arbitrator's decision deprives the parties of that choice." Tim Huey, 272 Ill. App. 3d at 106, 649 N.E.2d at 1362. This court did note that "gross errors of judgment in law or gross mistakes of fact may be reviewable if they are apparent upon the face of the award" (Tim Huey, 272 Ill. App. 3d at 106, 649 N.E.2d at 1363).
We turn first to the question of whether the decision by Johnston, approved by Hilst, not to consider obsolescence was a gross error of law. The policy provided for limits of $100,000 each as to the building and its contents and further provided the insured would not be paid more than its "financial interest" in the property with any loss determined "[a]t actual cash value." The major problem in this case arises because the "actual cash value" of the building, as determined by the appraisers ($100,000), grossly exceeded any indication of market value.
The evidence was undisputed that one week before the fire, the Knake brothers purchased the property for $67,500. Shortly before that time, two appraisers appraised the premises at a market value of $69,900 and $71,000, and both valued the bare land at $52,500, in effect deeming the building to have a market value of only $17,400 or $18,500. Thus, the appraisers' award here would seem to place the "actual cash value" of the building at approximately five times its market value.
The parties agree that "actual cash value" and market price or value are different concepts, and the major distinguishing characteristic is that determination of "actual cash value" begins with a determination of the cost of replacement while market price is determined by what people would be willing to pay for a property. A very ornate and expensive house in an area where people would not want to live would have a high replacement cost but a low market value. The parties also agree that in arriving at "actual cash value" a deduction must be made from replacement cost to account for depreciation for age. See C.L. Maddox, Inc. v. Royal Insurance Co., 208 Ill. App. 3d 1042, 1055, 567 N.E.2d 749, 757 (1991); Chicago Title & Trust Co. v. United States Fidelity & Guaranty Co., 511 F.2d 241, 244-45 (7th Cir. 1975), both citing Smith v. Allemannia Fire Insurance Co., 219 Ill. App. 506, 513 (1920) ("Appellee under his policies is entitled to be indemnified hence actual cash value means reproduction value less depreciation for age and not market value").
Plaintiff asserts that in determining "actual cash value" a deduction from replacement cost must be made for obsolescence either as an aspect of depreciation or as an additional item. Hilst's report explained there is:
"an essential difference between a market value appraisal and an insurance appraisal. In estimating market value, the presence of obsolescence, both economic and functional, must always be reflected in the estimate of value. In insurance appraisal, the general rule is that where a property is being used for the purpose for which it was designed, or is usable for that or another purpose, obsolescence is not a factor in estimating depreciated insurable value." (Emphasis added.) J. Purdon, Appraisal for Insurance Purposes, Encyclopedia of Real Estate Appraising 1133, 1135 (3d ed. 1978) (hereinafter Encyclopedia).
(The encyclopedia uses the term "depreciated insurable value" instead of "actual cash value" to avoid the confusion the latter term can cause "because it implies a relationship to market value," but they denote the same concept. Encyclopedia at 1135.)
The parties agree that the purpose of a policy of fire and extended-coverage insurance is to insure, as much as reasonably possible, that the insured will be in nearly as good a position after the event insured against as before that event. Chicago Title, 511 F.2d at 245. When a chattel is lost, it can often be replaced by the purchase of a similar chattel. This is not as easy with real estate. For that reason, the theory of not considering obsolescence stated by Hilst makes sense.
Here, the burned building was across the street from a building already owned by defendant. Location may well have been a matter of value to defendant and it may want to rebuild. The location value of the building to the insured would not be an element in determining actual cash value but it is a logical reason why the appropriate measure of loss to the insured is replacement value less depreciation rather than market value, in which obsolescence would be a factor. On the other hand, the market value appraisal pointed out that Havana properties had economic obsolescence due to unemployment and lack of industry in the area. The same report indicated that although the building had deterioration because of age and wear, it did not indicate any other obsolescence. The deduction for depreciation taken properly accounts for that aging and wear.
The record does not disclose the exact purpose for which the building was designed, but all available information would indicate that it was designed for commercial or manufacturing purposes. At the time of the sale, it was being used as an "automotive building." The fact that plaintiff paid defendant $100,000 for the loss of contents in the building would indicate that commercial use of the building was continuing. As the plaintiff is contending that the appraisal was a "palpable and gross mistake," the burden would be upon it to show that the building was neither used nor usable as designed, if that would make a difference as to whether consideration of obsolescence was required. Moreover, the report by Hilst indicated that obsolescence should not be a factor, as long as the building would be usable as designed.
Citing Allied American Insurance Co. v. Washburn, 159 Ill. App. 3d 1035, 513 N.E.2d 50 (1987), plaintiff asserts that obsolescence is inherently an element of depreciation. However, the issue there was whether the Illinois Director of Insurance could enact a rule that "completely bann[ed] the issuance of all automobile insurance for physical damage coverage based on a stated value of the automobile less its depreciation." Washburn, 159 Ill. App. 3d at 1037, 513 N.E.2d at 52. The appellate court held the regulation was beyond the power of the Director. The court noted a definition of depreciation that described it "as '[a] decline in value of property caused by wear or obsolescence and is usually measured by a set formula which reflects these elements over a given period of useful life of property.' " (Emphasis added.) Washburn, 159 Ill. App. 3d at 1039, 513 N.E.2d at 53, quoting Black's Law Dictionary 397 (5th ed. 1979).
Washburn concerned a policy for damage to or loss of a chattel and an interpretation of payment for loss that approaches market value. The Washburn opinion pointed out that the owner of a special vehicle, such as an antique car, could obtain a "stated value" policy with a definite depreciation schedule. Washburn, 159 Ill. App. 3d at 1039, 515 N.E.2d at 53.
Plaintiff complains that Johnston's appraisal considered a procedure known as the Marshall-Swift method but did not make a deduction for obsolescence, which is an element of that procedure. This was entirely consistent with Johnston's theory that obsolescence was not a proper deduction from reproduction cost here.
In Bailey, the issue was the meaning of the phrase "Gross Income" in a lease, and the Supreme Court of Illinois stated that in passing upon the award of appraisers or arbitrators, they, rather than courts, should "clarify" the terms involved. Bailey, 75 Ill. 2d at 545, 389 N.E.2d at 1196. Here, somewhat similar deference should be given to the determination of "actual cash value." The theory that obsolescence was not a required deduction had logic behind it and we do not deem it to be a gross mistake of law or fact to use it.
We next consider whether the disparity between the market value of the building and the award indicates the award was fraudulent or against public policy. We note that even under plaintiff's appraisal, the reproduction cost of the building would be approximately $88,500. Under this figure, defendant would get a new building and $11,500 in addition. That amount of windfall would not indicate fraud, and use of those figures gives no deference to the determination of the majority appraisal that the cost of rebuilding would be much higher.
The disparity in value also does not violate public policy. Courts may refuse to enforce arbitration awards that contravene "a well-defined and dominant public policy, as ascertained ' " 'by reference to the laws and legal precedents and not from general considerations of supposed public interests.' " ' " Tim Huey, 272 Ill. App. 3d at 110, 649 N.E.2d at 1365, quoting Department of Central Management Services v. American Federation of State, County & Municipal Employees, 245 Ill. App. 3d 87, 93-94, 614 N.E.2d 513, 517 (1993), quoting W.R. Grace & Co. v. Local Union 759, 461 U.S. 757, 766, 76 L. Ed. 2d 298, 307, 103 S. Ct. 2177, 2183 (1983), quoting Muschany v. United States, 324 U.S. 49, 66, 89 L. Ed. 744, 756, 65 S. Ct. 442, 451 (1945).
In Whitten v. Cincinnati Insurance Co., 189 Ill. App. 3d 90, 544 N.E.2d 1169 (1989), a defendant sold homeowners insurance that went into effect before plaintiffs closed on the home. After the insurance went into effect, but before closing, the house was destroyed by lightning. Whitten, 189 Ill. App. 3d at 93, 544 N.E.2d at 1171. The sale was called off and the seller returned plaintiffs' earnest money. Whitten, 189 Ill. App. 3d at 94, 544 N.E.2d at 1171. Plaintiffs subsequently bought the property under a new agreement with the price reduced by the amount the seller received for the destruction of the house from its insurer. Whitten, 189 Ill. App. 3d at 94, 544 N.E.2d at 1171. Plaintiffs nevertheless maintained they were entitled to the full amount of the insurance policy they had purchased from defendant. Whitten, 189 Ill. App. 3d at 92, 544 N.E.2d at 1170.
This court upheld the circuit court's rejection of the request on public policy grounds for two reasons. First, allowing full recovery might "encourage future fraud on insurance companies" by "providing] an incentive for an unscrupulous home buyer to insure the property to be purchased, burn it, pay a reduced price for it, and then recover fully under the insurance policy." Whitten, 189 Ill. App. 3d at 100, 544 N.E.2d at 1175. Second, a full recovery would unjustly enrich plaintiffs. Whitten, 189 Ill. App. 3d at 100, 544 N.E.2d at 1175.
The situation here differs materially from Whitten. There, the fire occurred before the sale. The insureds purchased at a price that reflected only the value of the bare land. The sellers had collected from their insurance the full amount for the destruction of the building. Here, the fire occurred after the sale and no one else was paid for the loss. "While the situation here does present some windfall to defendant if it does not choose to rebuild, we do not have a situation in which two recoveries are had for the same insured loss with the accompanying incentive for arson.
This case also differs from Lieberman v. Hartford Fire Insurance Co., 6 Ill. App. 3d 948, 287 N.E.2d 38 (1972), and Aetna State Bank v. Maryland Casualty Co., 345 F. Supp. 903 (N.D. Ill. 1972), where recovery under insurance policies was denied for fire losses to buildings when they were deemed worthless and about to be demolished. We also note that here an agent of plaintiff inspected the building, agreed to write a $100,000 limit on recovery for the building, and charged a premium based on that exposure. The building here was a total loss. The determination of policy limits and assessment of premium did not make the policy a valued policy that would automatically make the $100,000 loss figure applicable for a total loss. Rather, the determination of $100,000 policy limits and assessment of premium thereon tends to negate any contention by plaintiff that the request here for $100,000 damages for a total loss is fraudulent or inherently unfair.
We also hold that Hilst was not shown to have had a disqualifying conflict of interest. Plaintiff made no objection to the appointment until Hilst filed his report. Plaintiffs verified motion alleged that Hilst was a member of the Havana Chamber of Community Development and a close friend of "the insured's owner" and contended that the refusal of Hilst to consider obsolescence and the gross disparity between the appraisal, which Hilst approved, and the other appraisals indicated bias. Hilst filed a counteraffidavit stating he had "never been a close friend of, neighbor of, had a personal relationship with, or intimately known" any of the Knakes and had never lived within seven blocks of them nor been with them except at a "large social gathering" some 20 years earlier. No other evidence was presented. The only contention of plaintiff that was not disputed was the allegation that Hilst was a member of the Chamber of Community Development. That was not of itself a disqualifying bias.
We would also note that Hilst, who broke the tie between the parties' appraisers, was appointed by the court. Thus, neither side had an advantage in the selection of appraisers.
We affirm the judgment of the circuit court upholding the award arising from the appraisement.
Affirmed.
McCullough, J., concurs.