Cincinnati Insurance Company (Cincinnati) provided a homeowner’s policy to the insured. Pursuant to a Minnesota state statute, the policy included an appraisal clause mandating that if the parties could not agree on the valuation of a loss, that either party could demand an appraisal. A fire subsequently damaged the insured’s home. Cincinnati provided the homeowner with payment for the loss. The insured disagreed with the insurer’s valuation of the loss and demanded an appraisal. The appraisal process issued an award providing the insured additional payment for the loss.  Cincinnati promptly paid the appraisal award.

Four months after the appraisal process concluded, the insured filed suit against Cincinnati seeking pre-award interest under the Minnesota prejudgment interest statute. Cincinnati countered that the prejudgment interest statute does not apply to appraisal awards absent a lawsuit for either breach of contract or bad faith. That is, since the insured did not assert a cause of action for breach of contract or bad faith against Cincinnati, pre-award interest for the appraisal award was not justified.

On January 25, 2016, the Minnesota Court of Appeals ruled in favor of Cincinnati. The court noted that the “appraisal was a contractually required, procedural mechanism for evaluating and determining the amount of the loss.” Because Cincinnati adhered to the appraisal language and no breach of policy or bad faith could be shown, the court agreed with the insurer that the appraisal award represented only the amount of the insured loss, not compensation for a wrongdoing.

This decision is worth consideration to the extent it suggests an insurer cannot be liable for pre-award interest without a claim for breach of contract or bad faith as long as the insurer follows the appraisal provision in the policy. This is the case even if the appraisal process determines that the insurer’s initial valuation was less than the appraisers’ valuation.