The Case
Zhao[i] involved a coverage dispute over a homeowner’s hail damage claim and the cost of repair/replacement under the homeowner’s policy.
During the initial claims process, both sides obtained damage estimates. Those estimates reflected a sizeable gulf in covered damage. That dispute led to the policyholder invoking the policy’s appraisal provision, which the insurance carrier resisted. The policyholder then filed a coverage action in court.
The trial court found for the policyholder and ordered the matter to appraisal, reasoning that the dispute concerned the extent of damages, not coverage. On appeal, the appellate court affirmed the decision to compel appraisal to resolve the dispute. Significantly, it ruled that appraisal experts may consider causation issues when determining the extent of loss. Prior to Zhao, courts traditionally treated causation in coverage litigation as a coverage issue and decided it as a matter of law. Under Zhao, appraisal panels may consider causation in a limited fashion when determining the amount of loss.
Zhao’s Ruling & Reasoning
In Zhao, the policyholder filed a homeowners insurance claim with State Farm for hail damage to the policyholder’s home. After investigating, State Farm produced an estimate covering the replacement of the home’s gutters and downspouts, as well as window frames and trim. The policyholder disputed the estimate and hired a contracting service, which produced a more expansive estimate for her claim covering the windows themselves. The disagreement on the value of the claim prompted the policyholder to invoke her policy’s appraisal process, describing the dispute as “the scope of the damages and the damage repairs” to restore her home. State Farm argued that the estimate differences underlying the dispute concerned the issue of policy coverage, which courts had typically treated as a legal question reserved exclusively for courts, rather than the facts-based issue of the amount of loss within the scope of appraisal.
The essence of the Zhao opinion turned on whether the court applied a lay or legal definition of “coverage.” State Farm argued that any consideration of whether additional damages were covered under the policy was a coverage consideration, whereas the policyholder argued that the issue was one of loss valuation. Ultimately, the appellate court distinguished between a lay understanding of “coverage” (as applied to loss valuation) and the narrower legal definition reserved for courts to decide.
The court further clarified the scope of these definitions and held that the legal definition of coverage “has a narrow and precise meaning, which is the assumption of the risk of the occurrence of the event insured against before its occurrence.” Examples of legalistic coverage issues reserved for a court’s consideration include who qualifies as an insured and the type of risk the policy insures against. The court then reasoned that the lay definition of “coverage” (essentially “something that an insurance company will pay for”) does not rise to the level of a legal coverage question that only a court can decide and may instead fall within the scope of the appraisal process.
Accordingly, the Zhao appellate court ruled against State Farm, concluding that the dispute pertained to the lay definition of “coverage”—the amount of loss—and fell within the scope of appraisal. The court emphasized that the dispute concerned the factual extent of loss rather than the narrow, strictly legal questions of coverage reserved for courts. It further noted that State Farm had already acknowledged partial coverage, leaving no genuine legal coverage dispute for the court to decide.
Impact of Zhao and Thoughtful Strategic Planning
Appraisal provisions in insurance policies serve to determine the amount of loss in a claim made under a property insurance policy. These kinds of appraisals are performed by industry damage experts knowledgeable about the type of underlying claim and loss at issue. The Zhao court noted that although the appraisal process is not a legal one, it performs an important role in litigated matters by helping to expeditiously resolve disputes, much like arbitration. Policy appraisal provisions typically require two appraisers, one appointed by the policyholder and one by the insurer, with a third party serving as a neutral umpire. That structure often produces compromise and, in turn, higher damages awards for policyholders than insurers might reach on their own during claim adjustment. Courts generally give strong deference to awards issued through this process.
The opinion in Zhao more closely aligns Illinois state-court law with decisions from other states and federal circuits, including Illinois federal district courts. Consistent with Zhao’s findings, Illinois federal courts have also held that when an insurer acknowledges some part of a claim as covered, disputes over causation as it relates to the extent of loss are appropriate for appraisal. In that setting, appraisers may resolve factual questions about the cause of physical damage. Accordingly, the Zhao decision makes clear that under Illinois law and the general trend of many jurisdictions, some causation questions are necessarily included in the appraisal process when determining the amount of loss.
The Zhao court’s findings expand and reinforce the role of the contractual appraisal process. Carriers are well-served to recognize this shift in judicial attitude toward the appraisal process and consider its impact early on, particularly where a matter seems likely to proceed to litigation. Courts routinely uphold appraisal awards. Under Zhao, those awards may now resolve a broader range of issues (unless significant misconduct occurs during the appraisal process). Understanding Zhao and its implications can assist carriers with early, thoughtful strategic planning, especially given the evolving role of appraisals in property-insurance disputes and coverage litigation.
[i] Xiang Zhao v. State Farm Fire & Cas. Co., 2025 IL App (2d) 240723