In the last five years several Minnesota appellate cases have shaped the law on whether interest is owed on an appraisal award and how that interest is calculated. This post provides a summary of where Minnesota law stands on calculation of interest.
The first case to allow interest on an appraisal award held that residential insurance policies can set the way interest is calculated. See Poehler v. Cincinnati Ins. Co., 899 N.W.2d 135, 139 (Minn. 2017). The state law method is the default method when the insurance policy does not state the method. The insurance policy itself can govern calculation of interest, to the point that interest can be written out of an insurance policy. The law regards insurance policies as contracts, so insurance companies and property owners can agree on a rate of 1%, 5%, or even no interest.
Default Method
For residential insurance policies silent on calculation of interest, the method of calculation has been established. A rate of 10% applies to the principal amount of over $50,000, and 4% for appraisal awards that are under $50,000. Minn. Stat. § 549.09. The principal amount is calculated by taking the appraisal award and subtracting prior insurance company payments and deductibles. Here is an example of a calculation:
Appraisal Award: $75,000
Prior Payments $26,000
Deductible: $5,000
Principal: $44,000
Interest Rate: 4%
Annual Interest: $1,760
To illustrate the importance of a 10% rate, the following is an alternative calculation:
Appraisal Award: $75,000
Prior payments $10,000
Deductible: $5,000
Principal: $60,000
Interest Rate: 10%
Annual Interest: $6,000
The length of the interest period is important. Interest that accrues over six months will result in a payment far less than interest accruing over three years. The Minnesota appellate courts have held that interest begins to accrue upon the property owner’s first written notice of claim. That written notice of claim can be anything, including an email or a direct message within an insurance company’s website. It ought to identify the type of claim (i.e., hail, fire, etc.), location, date, and a strong statement about the amount sought. The purpose is to give the insurance company notice of the claim and an opportunity to sell it, not every detail that could impact the claim.
Many of my clients want to tell me when the insurer acknowledged the claim in writing. That is not the date when interest accrues. Under Minnesota law for the default method, interest only accrues on the property owner’s written notice of claim.
Other Methods
The default method is not the only method to calculate interest. Recently the Minnesota Supreme Court held that insurance policies can set the date when interest begins to run. Insurance companies can, and often do, write a policy so that interest only begins after the claim is payable. See Wesser v. State Farm, 989 N.W.2d 294 (Minn. 2023). A claim may only be payable when there is a settlement or appraisal award. As such, the default method of the first written notice of claim described above is overcome. As insurance policies vary by insurer, a residential property owner needs to read his or her policy to see how interest is calculated.
Commercial Property
The preceding applies to residential property. Another statute exists specific to commercial property insurance. That statute also allows 10% interest after the insurer’s breach of the policy. Minn. Stat. § 60A.0811. The date that triggers interest is the date of the request for payment. The statute does not require the request to be in writing.
Whether this statute applies to appraisal awards is debated. Insurers will argue that disagreeing with an insured’s position on interest is not a breach of the insurance policy, and only a breach results in interest. I would argue that the statute allows for interest not only in the instance of a breach, but “failure to fulfill, a duty to provide…. payments”. We will see how the law develops for all scenarios that trigger this interest.
Conclusion
Do not hesitate to e-mail me if you have questions on whether interest is owed under your policy. My e-mail address is ed@beckmannlawfirm.com