Appellate Court Affirms Denial of Prejudgment Interest on Insurance Payment Made Pursuant to Declaratory Relief Action
Last month, we examined insurance companies’ routine practice of filing declaratory judgment actions after declining coverage and denying an appraisal request and the Third District’s rejection of such an action as not having an actual controversy subject to determination of declaratory relief. This month, we look at a Second District case in which such an action led a resolution between the insurer and condominium association, resulting in what appears to be a favorable award for the association — even if it lost its claim for prejudgment interest on appeal.
Greater New York Mutual Insurance Company (the insurer) insured property coverage to Galena at Wildspring Condominium Association, covering a complex of 33 two-story condominium buildings. Greater New York Mutual Insurance Co. v. Galena at Wildspring Condominium Ass’n, 2022 IL App (2d) 210394, ¶4. The insurer determined that there was storm damage to the property from hail, but not wind, with an estimated repair or cost of $730,396.30. In October 2017, the insurer issued an actual cash value check for nearly $527,879.68 after deducting prior payments and depreciation. In January 2018, the association submitted a proof of loss for $5,020,438.90 and, in March, demanded an appraisal under the policy terms. 2022 IL App (2d) 210394 at ¶4.
In April 2018, the insurer filed a declaratory relief action seeking the following declarations: (1) the appraisal provision of the policy was inapplicable to the dispute; (2) the insurer was not obligated to pay (a) the proof of loss, (b) replacement costs until damaged property was replaced or repaired, or (c) the increased costs of construction; and (3) the insurer had no further liabilities under the policy. 2022 IL App (2d) 210394 at ¶¶1, 5. The association promptly answered and counterclaimed for declaratory relief that (1) coverage existed under the policy, (2) the association was entitled to an appraisal by an appraisal panel, (3) the insurer was liable for the amount determined by the appraisal panel, and (4) judgment be entered for the appraisal amount. 2022 IL App (2d) 210394 at ¶6.
During the litigation, the parties agreed to submit the dispute to an appraisal panel. Their agreement for appraisal provided for a payment formula if there was an appraisal award, including a deferred payment of replacement cost value conditional on completing repairs within one year. 2022 IL App (2d) 210394 at ¶7. Under the policy, payment was to be made within 30 days of agreement as to amount to be paid or an appraisal award. 2022 IL App (2d) 210394 at ¶8. The appraisal panel determined that the actual cash value of the loss was $1,676,304.46, and the replacement cost value was $2,634,946.98. 2022 IL App (2d) 210394 at ¶9. The association filed a motion for summary judgment based on the appraisal award. The motion included a prayer for an award of five-percent interest accruing from 30 days after the association filed its proof of loss in 2018. 2022 IL App (2d) 210394 at ¶10. The insurer responded that interest would begin to accrue 30 days after the appraisal award. It also argued that that the award should be limited to actual cash value because the replacement cash value claim was not due unless repairs were completed in a year. 2022 IL App (2d) 210394 at ¶11. The parties eventually agreed that the actual cash value was as determined, and that the replacement cost value would be due within a year if repairs were completed within such time. 2022 IL App (2d) 210394 at ¶13. The trial court held that interest would begin to accrue after the appraisal award was decided in 2021, rather than when the proof of loss was filed years earlier because the amount of the loss suffered by the association was not “readily ascertainable” until the appraisal panel completed its evaluation. Id. The association appealed solely the question of prejudgment interest.
The standard of review applied by the appellate court in this case is essential to the outcome. Typically, the grant of summary judgment is a question of law, and the standard of review is de novo. 2022 IL App (2d) 210394 at ¶17. However, the appellate court here held that “whether to award prejudgment interest is a matter within the sound discretion of the trial court, and its decision will not be reversed absent an abuse of discretion.” Id. “An abuse of discretion occurs where the trial court’s ruling is arbitrary, fanciful, or unreasonable, or where no reasonable person would adopt the court’s view.” Id., citing Certain Underwrites at Lloyd’s London v. Abbott Laboratories, 2014 IL App (1st) 132020, ¶71, 16 N.E.3d 747, 384 Ill.Dec. 354.
The dispute focused on when interest would begin to accrue under the Illinois Interest Act, 815 ILCS 205/2, with the association arguing that interest began to run after it filed its proof of loss and the insurer arguing that interest began to run after the appraisal panel determined the amount owed. 2022 IL App (2d) 210394 at ¶¶18, 20. Section 2 of the Interest Act provides for five percent per annum interest on all moneys due “on any bond, bill, promissory note, or other instrument of writing.” An insurance policy has been held to be an instrument of writing under the Interest Act. 2022 IL App (2d) 210394 at ¶18. “[P]rejudgment interest may be recovered from the time that money becomes due under the insurance policy. . . . ‘The existence of a good faith defense does not preclude recovery of interest.’ ” [Emphasis in original.] [Citation omitted.] Id., citing Couch v. State Farm Insurance Co., 279 Ill.App.3d 1050, 666 N.E.2d 24, 27, 216 Ill.Dec. 856 (3d Dist. 1996). However, Couch also held that recovery of prejudgment interest required that “the sum due must be liquidated or subject to an easy determination by calculation or computation.” 2022 IL App (2d) 210394 at ¶19, citing Couch, supra, 666 N.E.2d at 27.
The appellate court agreed with the insurer because, although the filing of the proof of loss was a condition precedent to the determination of the amount due, the amount due was not “easily determinable,” or as the trial court held “readily ascertainable.” 2022 IL App (2d) 210394 at ¶21. The court was particularly persuaded by the broad disparity of the insurer’s determination of loss, the association’s proof of loss claim, and the amount ultimately determined by the appraisal panel.
Given the great disparity between the amounts claimed due by the parties, as well as the disparity between those amounts and the final amounts determined to be due by the appraisal panel, we cannot say that the court’s conclusion that the amount due was not “readily ascertainable” was an abuse of discretion. 2022 IL App (2d) 210394 at ¶21.
As noted in last month’s column, the Third District’s resolution of the case pitted a common industry practice against the prima facie case for declaratory relief actions. Although there may have been intellectual satisfaction in the results of the Third District’s analysis, the case left the parties unresolved with the likelihood of more litigation. In this month’s case, the insurer responded immediately to the insured’s demand for an appraisal under the policy by filing the declaratory relief action instead of declining the request. The trial court in the Second District may have had more reasonable parties or may have pressured the parties more to work through their dispute. The opinion does not reflect either was the situation, but the result was a final resolution, which is after all the purpose of the court.
For more information about condominium law, see CONDOMINIUM LAW: GOVERNANCE, AUTHORITY, AND CONTROLLING DOCUMENTS (IICLE®, 2021). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.