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December 18, 1996


Appeal from Circuit Court of Mason County. No. 94MR39. Honorable Fred W. Reither, Judge Presiding.

Released for Publication January 1, 1997. As Corrected February 24, 1997.

Honorable Frederick S. Green, J., Honorable John T. McCullough, J. - Concur, Honorable Robert W. Cook, J. - Dissent. Justice Green delivered the opinion of the court.

The opinion of the court was delivered by: Green

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, 27 Ill. Dec. 785 (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, 128 Ill. Dec. 397 (1989) ("appraisers have wide discretion as to the methods and procedures they may follow in determining values"); Sebree v. Board of Education, 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, 215 Ill. Dec. 9 (1996).

In Tim Huey Corp. v. Global Boiler & Mechanical, Inc., 272 Ill. App. 3d 100, 649 N.E.2d 1358, 208 Ill. Dec. 697 (1995), this court held that "if 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 on 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 "at 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, 153 Ill. Dec. 791 (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, ...

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