e-Course Chapter 1 | Appraisal Clause

Chapter I

An Introduction To The Appraisal Process

A] Author’S Perspective

One of the most important and balanced provisions found in the Standard Fire Insurance Policy and most other property insurance policies today is the Appraisal Clause.

In fact, in most jurisdictions, it is one of the only provisions that afford protection to the interests of the insured in equal measure to those afforded the insurer. It has long been a valuable tool to all parties to the insurance contract in most states around the country.

One of the great challenges in the relationship between insured and insurer has long been finding an efficient and timely method of resolving the differences between the parties with respect to quantifying value and loss covered by the policy.

In the absence of a binding appraisal provision, the consumer must either accept the insurance company’s figures or retain counsel and proceed to litigation. Insureds would be forced to resort to the legal system to have these differences resolved. The litigation process is often expensive and time- consuming, with insureds paying in legal fees, the very benefit they were fighting to recover from the insurance company. An insurance carrier seeking to reduce claim payments could use this knowledge to leverage insureds to accept less in payment of claims than the insured might otherwise be entitled, due to the absence of quick, efficient and user-friendly alternatives.

In my legal practice representing victims of disasters, introducing my clients to this cold reality is something I’ve never gotten used to. These stark realities often prevents the insured from ever being made whole.

From the insurer’s perspective, an insurance carrier might benefit from the ability to bring a difficult, expensive and contentious adjustment to a satisfactory conclusion, without incurring extensive legal fees and accusations of bad faith.

Among the primary benefits favoring the appraisal process is the savings of time and money for the parties to the insurance contract

as well as the courts. States have long recognized that litigation avoidance results in many efficiencies and monetary savings for the parties involved as well as for an overburdened judicial system.1

The clear intent of the appraisal provision is to avoid undue formalities, delays, expense and the vexation of litigation.2

The usefulness of the appraisal provision depends upon whether the law of the state where the property is located permits either the insured or the insurer to compel the other to submit to appraisal and whether the award is binding. It will also depend on the scope of the issues subject to appraisal in the particular state where the property is located.

Its usefulness in the state of New York, for example, has been enhanced by the New York State Legislature on a number of occasions. In 1990 it amended the Insurance Law so as to permit an insured to require an insurer to proceed to appraisal on an expeditious basis in order to fairly and equitably determine the amount of loss and value.

Prior to 1990, appraisals were quite rare in the state of New York as consumers could not compel insurance companies to proceed to appraisal3 and insurers apparently determined it was not in their interest to utilize the process. For this reason, little historical guidance was available from New York State courts on the interpretation of the provision and the practical issues which arise from the time a formal demand for appraisal

1 Standard Form., Cal. Ins. Code §2071 (West 2003). 2 Ginsberg v. Coating Products, Inc., 152 Conn. 592, 210 A.2d 667 (1965).

In the decades since, the New York legislature has facilitated the enhanced use of appraisal by passing legislation which made it easier for insureds to compel the process by creating a quick and efficient “special proceeding” to enforce its usage when appraisal is wrongfully denied.4 This legislation was drafted by the author and signed by Gov. David Paterson on March 30, 2010. The legislature acted again (this time unanimously) in adopting legislation (drafted by the author and signed by Governor Andrew Cuomo in November, 2014) which clarified that issues of scope of loss are appraisable.5 These changes and the legislature intent they reflect have allowed use of appraisal to flourish as a method for claims resolution.

3 Happy Hank Auction Co. v. American Eagle Fire Ins. Co., 1 N.Y.2d 534, 136 N.E.2d 842, (1956). 4 Bill # 2088A. 5 Bill # 9346A.

Other states have a longer history of enforcing the appraisal process and a larger body of interpretive case law has resulted.6 Generally, appraisal is widely supported and encouraged by the judiciary as an informal, efficient, fair and equitable process to resolve the issue of “how much” in first-party insurance claims.As a consequence of the proliferation of insurance litigation, the appraisal clause has become as important as coverage and exclusionary provisions.7

This book represents an effort to accumulate the available precedent from around the country with an emphasis, wherever necessary, on distinctions between jurisdictions. It was organized in a manner that permits the members of the appraisal team as well as insurers, insureds, attorneys, adjusters and claims personnel who have a stake in the process, to understand it better, navigate it more efficiently and produce a valid award. The treatise was also designed to inform when an award may not be valid or some problem may have infected the process so as to undermine an award.

6 See, e.g., Taylor v. Farm Bureau Mut. Ins. Co., 2008 WL 4525496(Iowa App. 2008); Central Life Ins. Co. v. Aetna Cas. & Sur. Co., 466 N.W.2d 257, 260 (Iowa 1991). 7 The University of Toledo Law Review, 37 U. Tol. L. Rev. 931.

appraiser shall be paid by the party selecting him and the expenses of appraisal and umpire shall be paid by the parties equally.

In the many states that have adopted the Standard Fire Policy (also known as the New York Standard Fire Policy and less formally as the “165 Lines”), this language sets forth the minimum standards enjoyed by the policyholder.8 In these states, the carrier may amend the statutory language but may not diminish the rights of the insured as granted by the Standard Fire Policy.9

For example, the Standard Fire Policy has been mandated by statute in New York for many years. It was originally enacted in 1853, and its present form has been in use since 1943.

It has been held that the appraisal portion of the standard fire policy applies even if the peril causing the loss is something other than fire.10

8 e.g., Standard Form, Conn. Gen. Stat. §38a-307 (2003); Standard Policy Provisions, N.Y. Ins. Law §3404(e) (McKinney 2003); Standard Policy Provisions, 40 Pa. Cons. Stat. §636 (2003) (statute originally enacted on May 17, 1921); Insurance Act. R.S.O. 1990 Condition 11, §143 (Ontario, Can); Standard Provisions, Conditions, Stipulations and Agreements for such Policies, Va. Code Ann §38.2-2105 (Michie 2002); Michigan Statute M.C.L. 500.2833(1) requires all fire insurance policies issued in the state to include an appraisal provision requiring that the parties proceed to appraisal upon written demand of either. 9 Lane v. Security Mut Ins. Co., 96 N.Y.2d 1, 747 N.E.2d 1270 (2001). 10Zar Realty Management Corp. v. Allianz Ins. Co., 2003 WL 1744288 (SDNY).

Further, the appraisal provision has been held not to be ambiguous and many jurisdictions have used very similar provisions. “Appraisal” is a common term used in an insurance contract, with Black’s Law Dictionary defining “appraisal clause” as “[a]n insurance- policy provision allowing either the insurer or the insured to demand an independent estimation of a claimed loss.”11

The strength and effectiveness of the appraisal provision has been inconsistent from state to state and year to year.

In fact, it has been held that where a commercial policy covered locations in several states and the insurance policy failed to make clear how or where state-specific endorsements applied, where one endorsement required the insured to submit to binding appraisal without its consent while another, following the laws of the state of Kansas, allowed binding appraisal only if both parties agreed to it, the policy was deemed ambiguous in this regard and the court applied the interpretation favorable to the insured.12

11 Stuckman v. Westfield Ins. Co., 2011 WL 1944266 (Ohio Ct. App. 2011). 12 Security Storage Properties, Inc. v. Safeco Inc of America, 2010 W.L. 1936127 (D.Kan. 2010).

1943 Ny Standard Fire Insurance Policy

1 Concealment, This entire policy shall be void if, whether 84 relating to the interests and obligations of such mortgagee may 2 fraud. before or after a loss, the insured has will - 85 be adding hereto by agreement in writing. 3 fully concealed or misrepresented any ma - 86 Pro rata liability. This company shall not be liable for a greater 4 terial fact or circumstance concerning this insurance or the 87 proportion of any loss than the amount 5 subject thereof, or the interest of the insured therein, or in case 88 hereby insured shall bear to the whole insurance covering the 6 of any fraud or false swearing by the insured relating thereto. 89 property against the peril involved, whether collectible or not. 7 Uninsurable This policy shall not cover accounts, bills, 90 Requirements in The insured shall give immediate written 8 and currency, deeds, evidences of debt, money or 91 case loss occurs. notice to this company of any loss, protect 9 excepted property. securities; nor, unless specifically named 92 the property from further damage, forthwith 10 hereon in writing, bullion or manuscripts. 93 separate the damaged and undamaged personal property, put 11 Perils not This company shall not be liable for loss by 94 it in the best possible order, furnish a complete inventory of 12 included. fire or other perils insured against in this 95 the destroyed, damaged and undamaged property, showing in 13 policy caused, directly or indirectly, by: (a) 96 detail quantities, costs, actual cash value and amount of loss 14 enemy attack by armed forces, including action taken by mili- 97 claimed; and within sixty days after the loss, unless such time 15 tary, naval or air forces in resisting an actual or an immediately 98 is extend in writing by this company, the insured shall render 16 impending enemy attack; (b) invasion: (c) insurrection; (d) 99 to this company a proof of loss, signed and sworn to by the 17 rebellion; (e) revolution; (f) civil war; (g) usurped power; (h) 100 insured, stating the knowledge and belief of the insured as to 18 order of any civil authority except acts of destruction at the time 101 the following: the time and origin of the loss, the interest of the 19 of and for the purpose of preventing the spread of fire, provided 102 insured and all others in the property, the actual cash value of 20 that such fire did not originate from any of the perils excluded 103 each item thereof and the amount of loss thereto, all encum- 21 by this policy; (i) neglect of the insured to use all reasonable 104 branches thereon, all other contracts of insurance, whether valid 22 means to save and preserve the property at and after a loss, or 405 or not, covering any of said property, any changes in the title, 23 when the property is endangered by fire in neighboring prem - 106 use, occupation, location, possession or exposures of said prop- 24 ises; (j) nor shall this company be liable for loss by theft. 107 erty since the issuing of this policy, by whom and for what 25 Other Insurance. Other insurance may be prohibited or the 108 purpose any building herein described and the several parts 26 amount of insurance may be limited by en - 109 thereof were occupied at the time of loss and whether or not it 27 dorsement attached hereto. 110 then stood on leased ground, and shall furnish a copy of all the 28 Conditions suspending or restricting insurance. Unless other - 111 descriptions and schedules in all policies, and if required, verified 29 wise provided in writing added hereto this company shall not 112 plans and specifications of any building, fixtures or machinery 30 be liable for loss occurring 113 destroyed or damaged. The insured, as often as may be reason- 31 (a) while the hazard is increased by the means within the con - 114 ably required, shall exhibit to any person designated by this 32 trol or knowledge of the insured; or 115 company all that remains of any property herein described, and 33 33 (b) (b) while while a a described described building building whether whether intended intended for for occupancy occupancy 116 116 submit submit to to examinations examinations under under oath oath by by any any person person named named by by this this 34 by owner or tenant, is vacant or unoccupied beyond a period of 117 company, and subscribe the same; and, as often as may be 35 sixty consecutive days; or 118 reasonably required, shall produce for examination all books of 36 (c) as a result of explosion or riot, unless fire ensue, and in 119 account, bills, invoices and other vouchers, or certified copies 37 that event for loss by fire only. 120 thereof if originals be lost, at such reasonable time and place as 38 Other Perils Any other peril to be insured against or sub - 121 may be designated by this company or its representative, and 39 or subjects. ject of insurance to be covered in this policy 122 shall permit extracts and copies thereof to be made. 40 shall be by endorsement in writing hereon or 123 Appraisal. In case the inured and this company shall 41 added hereto. 124 fail to agree as to the actual cash value or 42 Added provisions. The extent of the application of insurance 125 the amount of loss, then, on the written demand of either, each 43 under this policy and of the contribution to 126 shall select a competent and disinterested appraiser and notify 44 be made by this company in case of loss, and any other pro - 127 the other of the appraiser selected within twenty days of such 45 vision or agreement not inconsistent with the provisions of this 128 demand. The appraisers shall first select a competent and dis- 46 policy, may be provided for in writing added hereto, but no pro - 129 interested umpire; and failing for fifteen days to agree upon 47 vision may be waived except such as by the terms of this policy 130 such umpire, then on request of the insured or this company, 48 is subject to change. 131 such umpire shall be selected by a judge of a court of record in 49 Waiver No permission affecting this insurance shall 132 the state in which the property covered is located. The ap- 50 provisions. exist, or waiver of any provision be valid, 133 praisers shall then appraise the loss, stating separately actual 51 unless granted herein or expressed in writing 134 cash value and loss to each item; and, failing to agree, shall 52 added hereto. No provision, stipulation or forfeiture shall be 135 submit their differences, only, to the umpire. An award in writ- 53 held to be waived by any requirement or proceeding on the part 136 ing, so itemized, of any two when filed with this company shall 54 of this company relating to appraisal or to any examination 137 determine the amount of actual cash value and loss. Each 55 provided for herein. 138 appraiser shall be paid by the party selecting him and the ex- 56 Cancellation This policy shall be cancelled at any time 139 penses of appraisal and umpire shall be paid by the parties 57 of policy. at the request of the insured, in which case 140 equally. 58 this company shall, upon demand and sur - 141 Company's It shall be optional with this company to 59 render of this policy, refund the excess of paid premium above 142 Options. take all, or any part, of the property at the 60 the customary short rates for the expired time. This pol - 143 agreed or appraised value, and also to re- 61 icy may be cancelled at any time by this company by giving 144 pair, rebuild or replace the property destroyed or damaged with 62 to the insured a five days' written notice of cancellation with 145 other of like kind and quality within a reasonable time, on giv- 63 or without tender of the excess of paid premium above the pro 146 ing notice of its intention so to do within thirty days or after the 64 rata premium for the expired time, which excess, if not ten - 147 receipt of the proof of loss herein required. 65 dered, shall be refunded on demand. Notice of cancellation shall 148 Abandonment. There can be no abandonment to this com- 66 state that said excess premium (if not tendered) will be re - 149 pany of any property. 67 funded on demand. 150 When loss The amount of loss for which this company 68 Mortgagee If loss hereunder is made payable, in whole 151 payable. may be liable shall be payable sixty days 69 interests and or in part, to a designated mortgagee not 152 after proof of loss, as herein provided, is 70 obligations. named herein as the insured, such interest in 153 received by this company and ascertainment of the loss is made 71 this policy may be cancelled by giving to such 154 either by agreement between the insured and this company ex- 72 mortgagee a ten days' written notice of can - 155 pressed in writing or by the filing with this company of an 73 cellation. 156 award as herein provided 74 If the insured fails to render proof of loss such mortgagee, upon 157 Suit. No suit or action on this policy for the recov- 75 notice, shall render proof of loss in the form herein specified 158 ery of any claim shall be sustainable in any 76 within sixty (60) days thereafter and shall be subject to the pro - 159 court of law or equity unless all the requirements of this policy 77 visions hereof relating to appraisal and time of payment and of 160 shall have been complied with, and unless commenced within 78 bringing suit. If this company shall claim that no liability ex - 161 twelve months next after inception of the loss. 79 isted as to the mortgagor or owner, it shall, to the extent of pay - 162 Subrogation. This company may require from the insured 80 ment of loss to the mortgagee, be subrogated to all the mort - 163 an assignment of all right of recovery against 81 gagee's rights of recovery, but without impairing mortgagee's 164 any party for loss to the extent that payment therefore is made 82 right to sue; or it may pay off the mortgage debt and require 165 by this company. 83 an assignment thereof and of the mortgage. Other provisions

For a time in New York, an insured’s ability to compel the insurer to appraise a loss and to have judgment entered upon an award wavered.13 In 1949 the Appellate Division, Third Department held that an appraisal under a fire insurance policy was in the same nature of any arbitration agreement and could be enforced by the courts.14

New York State, as with all states, has a strong public policy in favor of arbitration. In fact, courts are statutorily pre-empted from deciding cases that fall within the scope of a valid arbitration clause.

However, in 1954, in a decidedly anti- consumer decision, the New York Court of Appeals in Happy Hank Auction Co. v. American Eagle Fire Ins. Co.,15 held that despite the mandatory language of the Standard Fire Policy, the New York courts had no power to require an insurer to take part in an appraisal demanded by an insured. This had the effect of making the appraisal clause almost irrelevant in the processing of insurance claims within the state. Few claims went to appraisal after this decision and New York became one

13 Max Gwertzman, A Legal Analysis of the Appraisal Agreement (4th Ed., Roberts Publ. Corp. 1972). 14 Fitzgerald Bottling Works of Amsterdam v. Continental Ins. Co., 275 A.D. 453, 90 N.Y.2d 430 (3d Dept. 1949), overruled in part by, In re Delmar Box Co., 285 A.D. 398, 137 N.Y.S.2d 491 (3d Dept. 1955), aff’d, 309 N.Y. 60, 127 N.E.2d 808 (1955) (appraisal clause in an insurance policy does not constitute enforceable agreement to arbitrate. 15 1 N.Y.2d 534, 136 N.E.2d 842 (1956).

Bign UHappy Hank Auction Co. v. American Eagle Fire

Court of Appeals of the State of New York Jul 11, 1956 1 N.Y.2d 534 (N.Y. 1956)

Argued April 25, 1956

535Decided July 11, 1956 *535

Appeal from the Appellate Division of the Supreme Court in the first judicial department, BENEDICT D. DINEEN, J.

536

Gilbert Goldstein and Lawrence Kovalsky for appellant. *536 Herbert P. 537Polk, Frederic C. Pitcher and Robert S. Newman for respondents. *537

Desmond, J.

A fire in plaintiff's furniture store on December 7, 1953 caused extensive damage to merchandise, fixtures and leasehold improvements which were insured against fire by the 15 defendants under policies with total coverage of $95,000. The proofs of loss submitted to defendants by plaintiff claimed a total value of about $139,000 for the property damaged or destroyed, and damage or loss thereto of about $129,000. Of the latter claimed total, about $71,000 was asserted to be damage to merchandise "in sight" after the fire, about $20,000 was claimed for merchandise missing or unidentifiable after the fire, and about $38,000 covered the alleged damage to improvements, betterments and fixtures.

The parties were unable to agree as to the amount of loss, since the insurers thought the above figures greatly exaggerated. Exercising their rights under their policies (lines 115-122), the insurers conducted in April, May, June and October, 1954 numerous and extensive oral examinations under oath of plaintiff's principal officer and its accountant. During the last of those hearings plaintiff through counsel announced that it was amending its proofs of loss by withdrawing so much of its claim as represented the value of missing merchandise, thus reducing its total demand to about $109,000. At the same time the insured, pursuant to policy provisions (lines 123-140), demanded an appraisal and named its appraiser but the insurers refused and have ever since refused to take part in any appraisal. Not only was agreement reached a t the amount of damage but the

insurers took the position that by reason of plaintiff's intentional and fraudulent concealment, and refusal to produce documents and information during the examinations, plaintiff has breached the policies and forfeited all rights to collect any amount thereon (see Insurance Law, § 168, and lines 1-6 of these policies). In the present suit brought by plaintiff in November, 1954, defendants have obtained on affidavits a summary judgment of dismissal. The import and effect of that judgment is to declare not only that plaintiff cannot force an appraisal but that the policies are void because "plaintiff has willfully and designedly refused to answer questions and produce documents that are indisputably material to its claim" and has been guilty of "a fully informed refusal to comply substantially with the terms of the policies" ( 286 App. Div. 510). We 538agree with the Appellate Division that plaintiff cannot have *538

specific performance of the appraisal covenant, but as to the other question (alleged willful and material concealments and refusals to produce, etc.) we hold that there are triable issues of fact.

The complaint herein as to each defendant contains a cause of action asserting that under the standard appraisal clause (see policies, lines 123-140, and Insurance Law, § 173) in each policy plaintiff has an absolute right to require that the loss and damage be determined by appraisal. The prayer for judgment as to each of those "first" causes of action is that the particular insurer defendant be required to proceed to appraisal and that the trial of the "second" causes of action (hereafter described) in the complaint be stayed until the appraisal shall have been had. We agree with the Appellate Division that plaintiff can have no such relief. Despite the mandatory language of the standard policy, the New York courts have no power to require an insurer to take part in an appraisal demanded by an insured but refused by his insurer. On the other hand, if the insurer demands appraisal and the insured fails or refuses to comply, the insured forfeits his right of action on the policy (policy, lines 157-161; Matter of Delmar Box Co. [ AEtna Ins. Co.], 309 N.Y. 60, 65). Such is the settled New York law. Nothing in article 84 of the Civil Practice Act or elsewhere gives the insured any right to relief either by special proceeding or by suit for specific performance ( Syracuse Sav. Bank v. Yorkshire Ins. Co., 301 N.Y. 403, 410-411; Matter of Delmar Box Co. [ AEtna Ins. Co.], supra). There is a contrary rule in Ohio ( Saba v. Homeland Ins. Co., 159 Ohio St. 237) but this court is so far committed on the question that remedial action must come from the Legislature, if at all.

On the other branch of the case we cannot agree with the Appellate Division. The affidavits on defendants' motion for summary judgment (including the minutes of the examination incorporated into an affidavit by reference) do no more, in our view, than set up questions of fact for trial. There were, of course, failures by plaintiff to produce parts of its books of account, also invoices, etc., but it was plaintiff's sworn testimony at the presuit hearings that all these had been lost in the fire. As to plaintiff's refusal to show or give defendants access to copies of plaintiff's tax returns, there not only is an arguable question as to whether such production was required by the *539 policies (see policies, lines 117-123) but a further question as to whether the inventory figures thereon would be material to the dispute as to the fire damage. Plaintiff did exhibit at the examinations what purported to be the original of an inventory taken a few weeks before the fire. As to plaintiff's withdrawal of part of its claim (on the advice of counsel, it would seem) such an amendment is within an insured's rights (see McMaster v. President Directors of Ins. Co. of North America, 55 N.Y. 222). Under some circumstances such a change of position might be evidence, at a trial, of fraud or concealment (see Corn Novelty Co. v. Norwich Union Fire Ins. Soc., 176 App. Div. 261, 263; Wicklow v. United States Fidelity Guar. Co., 220 App. Div. 199; Gipps Brewing Corp. v. Central Mfrs. Mut. Ins. Co., 147 F.2d 6). But the dispute as to whether there was here a willful and fraudulent withholding of information required by the policy is essentially the kind of question of fact that cannot, except in the most extreme of cases, be resolved through study of affidavits. A trial might or might not result in a finding that the papers and data demanded were material and that there had been a hiding thereof, willfully and with wrongful intent (see Porter v. Traders' Ins. Co., 164 N.Y. 504; Sebring v. Fidelity-Phenix Fire Ins. Co., 255 N.Y. 382, 385; Gibbs v. Continental Ins. Co., 13 Hun 611; 5 Joyce on Insurance, p. 5548). So, a trial there must be.

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Search all cases and statutes... JX Search Help Sign In Sign Up 539Although this suit is brought in equity, we consider that its allegations (with the first or appraisal counts stricken) sufficiently state causes of action at law against the several insurer defendants on the policies.

The judgment appealed from should be modified by eliminating therefrom the provisions for dismissal of the second cause of action against each defendant and, as so modified, affirmed, with costs in this court and in the Appellate Division.

CONWAY, Ch. J., DYE, FULD, FROESSEL and BURKE, JJ., concur with DESMOND, J.; VAN VOORHIS, J., dissents and votes to affirm.

of the few states in the nation to leave its consumers unprotected in this manner. Litigation became the only alternative to resolve disputes as to the amount of loss and damage. In countless cases, consumers accepted less than they merited under the policy due to the anticipated delay and expense involved in litigation. Others incurred extensive legal fees litigating the value of loss and damage, often negating any hard won monetary victory.

In 1990, the New York legislature appeared to have restored to the insured the power to compel compliance with the appraisal clause, originally taken away by the Court of Appeals in the Happy Hank16 decision. This was accomplished by the legislature's enactment of an amendment to §3404 of the New York State Insurance Law. The amendment provided that the appraisal provision shall be binding on all parties.

It states:

§ 3404(g). Notwithstanding any other provision of law to the contrary, the provisions of the appraisal clause set out on the second page of the standard fire

16 Id.

policy and the provisions of section three thousand four hundred eight of this chapter, including determination as to the amount of loss or damage rendered thereunder, shall be binding on all parties to the contract of fire insurance evidenced by the policy.17

The great majority of states reject the Happy Hank line of cases.18 In fact, in Standard Fire Insurance Company v. Fraiman,19 the Texas Court of Appeals, while discussing other similarly minded decisions stated:

To the extent that Happy Hank Auction Co. v. American Eagle Fire Ins. Co.20 holds that the insurer may raise as a defense the failure of the insured to submit to an appraisal, but the insured may not coerce the insurer to appraisal but he may file suit on the policy, we reject that line of reasoning. The insured has the right to rely on the plain language of this policy providing for appraisal upon the written

17 N. Y. Ins. §3404(g). 18 15 Couch on Insurance §209:3 (3d ed. 2003). 19 514 S.W. 2d 343 (Tex. App.-Houston [14th Dist.] 1974). 20 Happy Hank, supra.

demand of either party, which language may have formed in his own mind a part of the consideration for the premiums he paid for.21

In New York, the legislature's amendment of the insurance law was prompted by the fact that the Standard Fire Policy in New York, which has long required the inclusion of the appraisal clause, had been interpreted in a manner that rendered it all but obsolete. As a practical matter, insurers had been given the option of declining appraisal while the insured was required to go to appraisal if such action was requested by the insurer or would risk claim denial based upon his or her failure to cooperate. This interpretation effectively negated the practical significance of the appraisal clause while placing the insurance consumer at a distinct disadvantage in coming to an agreed settlement with their insurer.22

Such a demand does not negate jurisdiction of the courts and leaves the general question of liability to be judicially determined. It simply provides a reasonable method of estimating and ascertaining the amount of the loss and value of the property damaged and

21 15 Couch on Insurance §209:3 (2d. ed. 2003). 22 Memorandum to Bill No. 2585 N.Y.S. Legislature, 1989, Sponsors Senator Joseph Bruno and Assemblyman Howard Lasher.

insured.

This provision of the policy clearly and unequivocally manifests the intent and agreement of the parties to the contract of insurance that any difference arising between them as to the amount of loss or value of the property insured shall, at the request of either party, be submitted to the appraisal process. The appraisal is to be by an umpire and two appraisers to be chosen as therein provided, whose award shall be conclusive as to the amount of such a loss and value only but shall not determine the question of liability of the company.23

In Connecticut it has been held that where an appraisal provision exists within a policy of insurance, the Connecticut courts are empowered to direct compliance with its provisions.24

The same rule exists in the state of Texas.25

In the state of Pennsylvania, the law

23 Max Gwertzman, A Legal Analysis of the Appraisal Agreement, pp. 5-6 (4th ed., Roberts Publ. Corp., 1972); N.Y. Ins. Law §3404. 24 Steiner v. Middlesex Mut. Assur. Co., 44 Conn. App. 415, 689 A.2d 1154 (1997); Ginsberg v. Coating Products, Inc., 152 Conn. 592, 596, 210 A.2d 667, 669 (1965). 25 See James v. Prop. & Cas. Ins. Co. of Hartford, 2011 WL 4067880 (S.D. Tex. 2011) (An appraisal clause which granted insured and insurer the right to “demand an appraisal of the loss” was enforceable...“Appraisal clauses such as this one...have been upheld in Texas for more than one hundred years.”).

requires that the appraisal provision be included in all fire insurance policies.26

Some states currently have reduced the importance and effectiveness of the appraisal provision by making it voluntary, thus precluding any successful attempt at enforcement by litigation. These states, such as Arkansas, California, Nebraska, Oklahoma, Oregon, Puerto Rico, South Dakota and West Virginia have left their insureds substantially unprotected by requiring the insured to retain counsel and litigate the issues of actual cash value and the amount of loss. This will have the ultimate effect of making it more likely that insureds would be forced to accept less in payment than they might otherwise have been entitled with a more efficient and less expensive enforcement mechanism.

However, where a policy in Florida provided that either party “may” demand appraisal in the event of a disagreement as to amount of loss, a court reversed a lower court judgment and clarified that this term did not connote that the appraisal was permissive. It remanded for an order finding arbitration mandatory once invoked by either party, asserting “a full reading of the clause makes

26 40 P.S. § 636; See also, Monarch Inc. v. St. Paul Property & Liability Ins. Co., 2004 WL 1717618 (E.D. Pa. 2004).

clear that neither party has the right to deny that demand once it is made.” This was particularly applicable under these circumstances, where the insurer’s demand for the process was timely and it had not acted inconsistently with the right to pursue appraisal throughout the proceedings.27

Puerto Rico has taken the appraisal provision out of its Standard Fire Policy completely, thus depriving its insurance consumers of any appraisal rights whatsoever.

Without a binding appraisal provision, an aggrieved insured can either accept the carrier’s best offer or litigate. By undermining this important process, as for example by permitting the insured to challenge the carrier’s position on the issue of the amount of loss, only if the insurer agrees to be challenged, these states will ultimately experience increased litigation as well as customer dissatisfaction.

Formerly, the state of California required that every policy issued in the state mandate that the parties submit to appraisal when demanded by either party. However, California Senate Bill 658 (introduced in 2001) which was passed by the legislature, now limits

27 United Community Ins. Co. v. Lewis, 642 So.2d 59 (Fla.3d DCA 1994).

the insured’s right to compel appraisal to only cases involving catastrophic loss, such as earthquakes.

In most situations in California, appraisal has been made voluntary by inclusion of the language, “where the request is accepted...” in the statutorily mandated appraisal clause.

Virginia mandates participation in the appraisal process upon demand,28 however a separate section of the insurance code prohibits the carrier from including a policy provision which deprives the insured access to the courts in seeking redress for breaches of the insurance contract. Therefore, in the state of Virginia, at least, it would appear that either the insured or insurer may compel appraisal, but the insured alone maintains the right to litigate should that be appropriate under the circumstances.29

In Louisiana it has been held that the policy language which states in pertinent part that “either party may make written demand for an appraisal of the loss” utilizes permissive

28 Standard Provisions, Conditions, Stipulations and Agreements for such Policies, Va. Code Ann. §38.2-2105 (Michie 2002). 29 Provisions Limiting Jurisdiction, or requiring construction of contracts by Law of Other States, Prohibited, Va. Code Ann. §38.2-312 (Michie 2002). “No insurance contract delivered or issued for delivery in this commonwealth...or which are performed in this commonwealth shall contain any condition, stipulation or agreement depriving the courts of this commonwealth of jurisdiction in actions against the insurer.”

language that permits but does not require that the parties engage in the appraisal process. Thus, the claimant was not bound to participate in the process.30

In the state of Massachusetts, a statutory reference procedure is utilized whereby both the insurer and insured submit three names to the other side, whereupon the other party selects one of those three to serve as an appraiser. The process is compulsory upon demand.31

In fact, in Massachusetts, where the insurer had specifically rejected the public adjuster’s calculation of the loss, and the parties failed to agree on the amount of loss, appraisal was a condition precedent to bringing an action against the insurer even where the insurer denied liability for the fire on the ground that the insured or someone at her direction had intentionally set the fire.32

In Oklahoma, the party who demands the benefit is bound by the appraisal while the non-requesting party is not bound.33 The premise for this approach is that the statute which mandates the inclusion of the appraisal

30 Smith v. Employers Mut. Cas. Co., 2006 WL 3533126 (W.D. La. 2006). 31 Referees; Selections, Mass. Gen. Laws Ch. 175, §100 (2003). 32 McCord v. Horris Mann Ins. Co., 390 F.3d 138 (1st Cir. Mass. 2004). 33 Massey v. Farmers Ins. Group, 837 P.2d 880, 1992 Okla. 80 (Okla. 1997).

provision in the policy34 violates the Oklahoma constitution which requires the right to a jury trial to be inviolate.35 In Oklahoma, it is only the unwary and unsophisticated insured who will make use of the appraisal provision where he can only lose.

With respect to claims arising out of the September 11, 2001 terrorist attack on the World Trade Center, it had been held that acts of Congress limiting liability of various entities and industries and which conferred exclusive jurisdiction on the United States District Court, Southern District of New York, with respect to resolution of related disputes, were not intended to deprive the parties to an insurance contract of their contractual right to appraisal. Thus, those claims are appraisable pursuant to the laws of the state of New York.36

Even in states that recognize the appraisal provision as a condition precedent to suit, this will only be so where there has been an actual demand for appraisal. In the case of Duane Reade, Inc. v. St. Paul Fire and Marine Ins,37 the court disagreed with the carrier’s argument that an appraisal was required

34 Standard Policy Provisions, Okla. Stat. tit. 36 §4803(g) (2003). 35 Oklahoma Const. Art. 2 §819. 36 S.R. Intern. Bus. Ins. Co., Ltd. v. World Trade Center Properties, LLC , 2002 WL 1905968 (S.D.N.Y. 2002). 37 411 F.2d 384 (2nd Circ. 2005).

before suit could be brought based on the plain language of the policy’s appraisal clause which stated that neither party was required to submit to an appraisal until a written demand for appraisal had been issued. In this matter, the Second Circuit Court of Appeals sitting in New York and ruling on a matter arising out of the destruction of the World Trade Towers found the “no-suit” provision of the policy to be ambiguous with respect to the appraisal provision. The court concluded that while the clause may plausibly be read as precluding suit until an insured satisfies every contractual obligation as the carrier asserted, it is equally amenable to being read as precluding suit only if the insured failed to satisfy those obligations which have accrued before suit is filed. Thus, the court concluded that appraisal is not a condition precedent to suit if it had not been demanded.

In Iowa, a district court’s decision to order appraisal was upheld when appraisal was found to be a condition precedent to any further action to resolve the matter. The court held that where appraisal has been demanded, the court may consider coverage issues before appraisal is complete and that other judicial determinations are properly postponed until such time. Where appraisal is demanded, under a policy with terms governed by Iowa Code §515.138(6),

“completion of the appraisal process is a precondition to a suit by either party.” However, if an appraisal demand is not made before litigation is commenced, a lawsuit “cannot be barred as premature, because appraisal is not then a precondition to suit.” 38

38 North Glenn Homeowners Ass’n v.State Farm Fire and Cas .Co., No. 13-0859 (Court of Appeals, July 16, 2014).

C] Appraisal As Distinct From

Arbitration

Although numerous courts around the country have taken guidance from cases and statutes relating to arbitration, insurance appraisal is actually distinct from an arbitration.39 A number of basic distinctions have long prevailed between an appraisement under the Standard Fire Policy and an arbitration. An agreement for arbitration ordinarily encompasses the disposition of the entire controversy between the parties upon which judgment may be entered after judicial confirmation of the arbitration award. In contrast, an agreement for appraisal extends merely to the resolution of the specific issues of value and the amount of loss, with all other issues being reserved for a determination in a plenary action.40

39 United States Fire Ins. Co. v. Franko, 443 So.2d 170 (Fla. 1st DCA1983); New Amsterdam Cas. Co. v. J.H. Blackshear, Inc., 116 Fla. 289, 156 So. 695 (1934); Preferred Mut. Ins. Co. v. Martinez, 643 So.2d 1100 (Fla. Dist. Ct. App. 3d Dist. 1994); Intracoastal Ventures Corp. v. Safeco Ins. Co., 540 So.2d 162 (Fla. Dist. Ct. App. 4th Dist. 1989); Childs v. State Farm Fire & Cas. Co., 899 F. Supp. 613 (S.D. Fla. 1995), aff’d, 158 F.3d 588 (11th Cir. 1998) (Appraisal provision in insurance policy construed to be an arbitration provision.); Allstate Ins. Co. v. Suarez, 786 So.2d 645 (Fla. Dist. Ct. App.3d Dist. 2001), aff’d, 833 So.2d 762 (Fla. 2002) (over ruling Hoenstine v. State Farm Fire & Cas. Co., 736 So.2d 761 (Fla. 5th DCA. 1999) and Florida Farm Bureau Cas. Ins. Co. v. Sheaffer, 687 So.2d 1331 (Fla. 1st DCA 1997)); See also, Allstate Ins. Co. v. Martinez, 833 So.2d 761, 27 Fla. L. Weekly S1043 (Fla. 2002); Quade v. Secura Ins., 792 N.W.2d 478 ( Minn Ct. App. 2011), .Alexander v. Farmers Ins. Co., Inc., 219 Cal.App.4th 1183, 162 Cal Rptr.3d 455 (Cal. App. 2 Dist. 2013), citing Doan v. State Farm. General Ins. Co., 195 Cal.App.4th at 1092-99, 125 Cal.Rptr.3d 793 (2011); Certain Underwriters at Lloyd’s of London v. Bart Enterprises, Int’l Ltd., 2013 WL 2252914 (Cal. App. 2013). 40 In re Delmar Box Co., 309 N.Y. 60, 127 N.E. 2d 808 (1955).

Arizona, California, Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Michigan, Minnesota, Mississippi, Texas and Wisconsin among others, have also used the rules and procedures relating to arbitration in the context of insurance appraisals.41

Michigan however, has recognized an insurer’s right to appraisal despite an insured’s common law right to unilaterally revoke an arbitration clause. It has been stated that the principle of unilateral revocation of arbitration had to succumb to the statute requiring fire insurance policies to contain a provision entitling either party to make a demand for

41 Steiner v. Middlesex Mut. Assur. Co., 44 Conn.App. 415, 689 A.2d 1154 (1997); Middlesex Mut. Assur. Co. v. Clinton, 38 Conn. App. 555, 662 A.2d 1319 (1985); Covenant Ins. Co. v. Banks, 177 Conn. 273, 413 A.2d 862 (1979); Closser v. Penn Mut. Fire Ins. Co., 457 A.2d 1081 (Del. 1983); Elberon Bathing Co. v. Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978); Atlas Const. Co. v. Indiana Ins. Co., 160 Ind. App. 33, 309 N.E.2d 810 (2d Dist. 1974); Auto-Owners Ins. Co. v. Kwaiser, 190 Mich. App. 482, 476 N.W.2d 467 (1991); Acme Roll Forming Co. v. Home Ins. Co., 100 F.Supp.2d 567, 569 (E.D. Mich. 2000), aff’d in part, reversed in part on other grounds, 31 Fed. App. 866 (6th Cir. 2002) (full-text opinion unpublished) (Where the court states “The law in Michigan is clear that appraisal constitutes a common-law arbitration agreement.”); Davis v. National Am. Ins. Co., 78 Mich. App. 225, 259 N.W.2d 433 (1977); Meineke v. Twin City Fire Ins. Co., 181 Az. 576, 892 P.2d 1365 (Ariz. App. Div. 1 1995); Harvey Prop. Mgmt. Co. v. Travelers Ind. Co., 2012 WL 5488898 (D Ariz.) 6700 Arrowhead Owners Ass’n v. State Farm Fire and Cas Co., 2012 WL 5868969 (D. Ariz. 2012); Munn v. Nat’l Fire Ins. Co. of Hartford, 237 Miss. 641, 115 So.2d 54 (1959); Wells v. American States Preferred Ins. Co., 919 S.W.2d 679 (Tex. App. Dallas 1996); Beard v. Mount Carroll Mut. Fire Ins. Co., 203 Ill. App. 3d 724, 561 N.E.2d 116 (5th Dist. 1990); Friday v. Trinity Universal, 262 Kan. 347, 939 P.2d 869 (1997); Garden-Aire Village South Condo Ass’n, Inc., 2013 WL864570 (S.D. Fla); U.S. Fid. & Guar. Co. v. Romay, 744 So.2d 467, 469 (Fla.3d DCA 1999); Galindo v. ARI Mut. Ins. Co., 203 F.3d 771,776 (11th Dir. 2000); QBE Ins. Corp. v. Twin Homes of French Ridge Homeowners Ass’n., 778 N.W.2d 393, 398 (Minn.Ct. App. 2010). (In Minnesota, appraisal decisions are subject to Minn. Stat. §572.08-.30 (2008) {renumbered to 572B.01 et. Seq}, The Arbitration Statute.).

appraisal. Allowing one party to unilaterally revoke the appraisal clause and terminate the appraisal process would directly conflict with the statute.42

However, the United States Court of Appeals for the Sixth Circuit has stated in a case arising in Michigan that a commercial property policy’s appraisal provision in which the insurer retained its right to deny a claim in event of an appraisal, did not provide for binding “arbitration” within the meaning of the Federal Arbitration Act as defined by federal or Michigan law and did not mandate that a “hearing type” appraisal process was required.43

As seen in some of the cases cited above, at times it seems courts have confused arbitration with appraisal with somewhat unpredictable consequences.44

Those jurisdictions that tend to treat insurance appraisal as arbitration often permit a broader array of issues that may be resolved

42 Frans v. Harleysville Lake States Ins. Co., 270 Mich. App. 201, 714 N.W.2d 671 (Mich. App. 2006). 43 Evanston Ins. Co. v. Cogswell Properties, LLC, 683 F.3d 684 (6th Cir, 2012); 9 U.S.C.A. §1 et seq. 44 Richard C. Bennett, Appraisal, Insuring Real Property §3001 (3)(a) (Matthew Bender); See also, Suarez, 786 So.2d 645 (Fla. Dist. Ct. App. 3d Dist. 2001), aff’d, 833 So.2d 762 (Fla. 2002) ; See also, Allstate Ins. Co. v. Martinez, 833 So.2d 761, 27 Fla. L. Weekly S1043 (Fla. 2002).

through the appraisal process. For example, in Florida Farm Bureau Cas. Ins. Co. v. Scheaffer45 the principle issue involved whether the insured was entitled to replacement of their entire roof when concededly, only a few roof tiles were damaged and required replacement but matching tiles could not be located. The insured claimed this to be a coverage issue and thus not subject to the appraisal provision. After carefully reviewing the distinctions between appraisal and arbitration, the First District Court of Appeals nevertheless found the appraisal clause constituted an agreement to arbitrate and held it was subject to the Florida Arbitration Code.

Indeed, in December, 2002 the Supreme Court of Florida specifically disapproved of the holding in Sheaffer in bringing Florida into line with the majority of states. The Supreme Court stated the following:

“We disapprove of the decisions in Sheaffer46 and Hoenstine,47 because the appraisal clauses in those cases were substantially similar to the one in the present

45 Florida Farm Bureau Cas. Ins. Co. v. Sheaffer, 687 So.2d 1331 (Fla. 1st DCA 1997) (amended by Allstate v. Suarez, 786 So.2d 645 (Fla. Dist. Ct. App. 3d Dist. 2001), aff’d, 833 So.2d 762 (Fla. 2002) (appraisal clause is not an agreement to arbitrate)). 46 Florida Farm Bureau Cas. Ins. Co. v. Sheaffer, 687 So.2d 1331 (Fla. 1st DCA 1997). 47 Hoenstine v. State Farm Fire & Cas. Co., 736 So.2d 761 (Fla. 5th DCA 1999)

case, and a plain reading of those clauses reveals that formal arbitration was not contemplated or agreed upon by the parties. In Sheaffer, the First District went beyond the plain meaning of the appraisal clause when it considered that the appraisers would have to ‘exercise...quasi- judicial authority’ to resolve the dispute.48

“The issue to be resolved is whether an unambiguous provision for appraisal may be construed as an agreement to arbitrate the underlying dispute. As we stated in Siegle v. Progressive Consumers Ins. Co., 819 So.2d 732 (Fla. 2002) ‘when an insurance contract is not ambiguous, it must be given affect as written.’ See, State Farm Fire & Cas Co. v. Oliverias, 441 S.2d 175, 178 (Fla. 4th DCA 1983).”

Neither the trial court nor the Third District in Suarez found the appraisal clause in the homeowner’s policy to be ambiguous, nor do we find any

48 Allstate Ins. Co. v. Suarez, 786 So.2d 645 (Fla.3d DCA 2001), aff’d, 833 So.2d 762 (2002).

ambiguity in the clause. It is clear from a plain reading of the clause that an informal appraisal proceeding, not a formal arbitration hearing pursuant to §682.06 Florida Statutes (1999) was intended and agreed upon by the parties in agreeing to the appraisal provisions of the policy. See, Liberty Mut.l Fire Ins. Co. v. Hernandez, 735 S.2d 587, 589 (Fla. Dist. Ct. App. 3rd Dist. 1999) (“[T]heclause contemplates inspection and valuation by each appraiser individually, not a trial- type hearing.”)”49

More recently, Florida’s Third District Court of Appeals found the state’s Arbitration Code not to be a source of guidance when it considered an insured’s petition to confirm an appraisal award where there was no statute authorizing such a petition.50

49 Suarez, 786 So.2d 645 (Fla. Dist. Ct. App.3d Dist. 2001), aff’d, 833 So.2d 762 (2002);; See also, Allstate Ins. Co. v. Martinez, 833 So.2d 761, 27 Fla. L. Weekly S1043 (Fla. 2002); see also 200 Leslie Condominium Ass’n, Inc. v. QBE Ins. Corp., 2011 WL 2470344 (S.D.Fla.); see also United States Fidelity & Guaranty Co. v. Romay, 744 So.2d 467 (Fla.3d DCA 1999); see also Gray Mart, Inc. v. Fireman’s Fund Ins. Co.,, 703 So.2d 1170 (Fla.3d DCA 1997); Fla. Farm Bureau Cas. Ins. Co. v. Sheaffer, 687 So.2d 1331 (Fla. 1st DCA 1997); State Farm Fire & Cas. Co. v. Middleton, 648 So.2d 1200 (Fla.3d DCA 1995); Intracoastal Ventures Corp. v. Safeco Ins. Co. of Am., 540 So.2d 162 (Fla. 4th DCA 1989); Phillips v. General Acc. Ins. Co. of Am., 685 So.2d 27 (Fla.3d DCA 1996); Preferred Ins. Co. v. Richard Parks Trucking Co., 158 So.2d 817 (Fla.2d DCA 1963). 50 State Farm Florida Ins. Co. v. Gonzalez, 76 So.3d 34 (Fla.3d DCA 2011).

Numerous jurisdictions have recognized the traditional distinctions between arbitration and appraisal. These states have generally included Alabama, Arizona, California, Georgia, Indiana, Iowa, Maryland, Michigan, Missouri, New Jersey, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Tennessee, Utah, West Virginia, Wisconsin and others.51

51 See, Rastelli Bros. v. Netherlands Ins. Co., 68 F. Supp.2d 440 (D.N.J. 1999); Elberon Bathing Co. v. Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978); Casper v. Allstate Ins. Co., Unrecorded decision, Md .Ct. of Special Appeals # 1583, June 28, 2000 (recognizing the party’s right to proceed by informal appraisal without the procedural requisites mandated by the Maryland Uniform Arbitration Act, 3-213, et seq; In re Delmar Box Co., 309 N.Y. 60, 127 N.E.2d 808 (1955); Rademaker v. Atlas Assur. Co., 98 Ohio App. 15, 120 N.E.2d 592 (8th Dist. 1954); Minot Town & Country v. Fireman’s Fund Ins. Co., 1998 N.D. 215, 587 N.W.2d 189 (1998); Hartford Fire Ins. Co. v. Jones, 235 Miss. 37, 108 So.2d 571 (1959); PHC, Inc. v. North Carolina Farm Bureau Mut. Ins. Co., 129 N.C. App. 801, 501 S.E.2d 701 (1998) (holding that the Uniform Arbitration Act did not apply to appraisal under insurance policy, explaining that “the appraisal provisions of the insurance policy merely provide a mechanism whereby the parties can rapidly and inexpensively determine the amount of property loss without resorting to court process”); Eberhardt, et al v. Georgia Farm Bureau Mut. Ins. Co., 223 Ga. App. 478, 477 S.E.2d 907 (1996) (holding that appraisal clauses are valid, binding and enforceable, but stating that the Georgia Arbitration Code does not apply to insurance contracts); Smithson v. United States Fid.& Guar. Co., 186 W. Va. 195, 411 S.E. 2d 850 (1991); Merrimack Mut. Fire Ins. Co. v. Batts, 59 S.W.3d 142 (Tenn. Ct. App. 2001) (The court recognized that appraisal is a narrower form of relief than arbitration and is limited to the effort to quantify the monetary value of a property loss, not to decide questions of liability); and Standard Fire Ins. Co. v. Fraiman, 514 S.W. 2d 343 (Tex. App.-Houston [14th Dist] 1974); Appalachian Ins. Co. v. Rivcom Corp., 130 Cal. App.3d 818, 182 Cal. Rptr. 11 (2d Dist. 1982); Jefferson Ins. Co. of New York v. Superior Court of Alameda County, 3 Cal.3d 398, 475 P.2d 880, 90 Cal.Rptr. 608 (1970); Miller v. U.S.A.A. Cas. Ins. Co., 44 P.3d 663 (2002); Lyon v. Hartford Ace & Indem. Co., 25 Utah 2d 311, 480 P.2d 739 (1971), overruled on other grounds by, Beek v. Farmer’s Ins. Exch., 701 P.2d 795 (Utah 1985), overruled as stated in, Gagon v. State Farm Mut. Auto Ins. Co., 746 P.2d 1194 (Utah Ct. App. 1987), overruled as stated in, Camphill v. State Farm Mut. Auto Ins. Co., 840 P.2d 130 (Utah Ct. App. 1992); Hanson v. Commercial Union Ins. Co., 150 Ariz. 283, 723 P.2d 101 (Ct. App. Div. 1 1986); Lynch v. American Family Mut. Ins. Co., 163 Wis.2d 1003, 473 N.W.2d 515 (Ct. App. 1991); Casualty Indem. Exchange v. Yother, 439 So. 2d 77, 79-80 (Ala. 1983); Hartford Lloyds Ins. Co. v. Teachworth, 898 F.2d 1058, 1061-62 (5th Cir.1990); Unetco Ind. Exchange v. Homestead Ins. Co., 57 Cal App. 4th 1459, 67 Cal Rptr.2d 784 (Ct. App. 1997); Robinson v. Lumberman’s Mut. Cas. Co., 110 Pa. Super. 396, 168 A. 321 (Pa. 1933) (the appraisal provision provided for in the Standard Fire Policy was not an “arbitration” and the appraisal merely operated as conclusive

For example, the Utah Supreme Court in Miller v. U.S.A.A. Cas. Ins. Co.,52 distinguished insurance appraisals from arbitration, stating:

“Although appraisal may be used as another form of alternative dispute resolution, it is not arbitration. Appraisal, in a general sense is defined as the “determination of what constitutes a fair price; valuation; estimate of worth.”53

An appraisal is an informal, independent investigation conducted by individuals who “base their decisions on their own knowledge.”54 An appraisal is generally

evidence of damages); Frans v. Harleysville Lake States Ins. Co., 270 Mich.App. 201, 714 N.W.2d 671 (Mich.App. 2006) (parties had the right to the benefit of appraisal despite their common law right to unilaterally revoke an arbitration clause at any time before the announcement of the award as allowing one party to unilaterally revoke the appraisal clause would directly conflict with the statute. M.C.L.A. §500.2833(1)(m); Terra Industries, Inc. v. Commonwealth Ins. Co. of Am., 981 F. Supp. 581, 607 (N.D. Iowa 1997) (determining appraisal provision required on ascertainment of the amount of loss, not legal question of coverage); Taylor v. Farm Bureau Mut. Ins. Co., 2008 WL 4525496 (Iowa App.) (finding Iowa Code Chapter 579A.1(2)(a) which invalidates an agreement to arbitrate in a contract of adhesion is inapplicable to appraisal.); Stuckman v. Westfield Ins. Co., 2011 WL 1944266 (Ohio Ct. App.) (holding that there was nothing in the record to indicate that the provision at issue was anything other than an appraisal as Ohio law is clear than an appraisal condition in an insurance policy is not subject to the arbitration statutes.); Kirkwood v. California State Auto. Assn Inter-Ins. Bureau, 193 Cal .App. 49, 122 Cal. Rptr.3d 480 (Ct. App. 2011; CNS Corp. v. Global Aerospace, 2010 WL2978063 (E.D.Mo.) (As the dispute in an appraisal centers on the cost to repair, it does not resolve all issues and thus does not violate the Missouri prohibition against arbitration provisions in insurance contracts). 52 Miller, 44 P.3d 663 (2002). 53 Black’s Law Dictionary 97 (7th Ed. 1999). 54 Teachworth, 898 F.2d 1058.

conducted “without hearing or judicial inquiry.”55

In addition, unlike arbitration, “appraisal ordinarily settles only a subsidiary or incidental matter rather than the main controversy as does an arbitration award.”56

In Miller57 it was stated that an appraiser’s power generally does not encompass the disposition of the entire controversy between the parties...[but] extends merely to the resolution of the specific issues of actual cash value and the amount of loss.58

The Miller court went on to distinguish arbitration by describing it as:

“[A] method of dispute resolution involving one or more neutral parties...whose decision is binding.”59

Specifically, an arbitration is a “broad, quasi-judicial proceeding, complete with

55 6 C.J.S. Arbitration §3 (1975). 56 Id.; St. Paul Fire & Marine Ins. Co. v. Wright, 97 Nev. 308, 310, 629 P.2d 1202, 1203 (1981). 57 Miller, 44 P.3d 663. 58 In re Delmar Box Co., 309 N.Y. 60; See also, Miller v. U.S.A.A. Cas. Ins. Co., 44 P.3d 663 (quoting, In re Delmar Box Co., 309 N.Y. 60, 127 N.E.2d 808 (1955)). 59 Black’s Law Dictionary 100 (7th Ed. 1999); See also; Reed v. Davis County School District, 892 P.2d 1063, 1065 (Ut. Ct. App. 1995); 6 C.J.S. Arbitration §1 (1975).

formal hearings, notice to parties and testimony of witnesses.”60

Louisiana has explained the distinction by stating that appraisers’ responsibilities “are merely to ascertain the cash value and the extent of the insured’s loss and are proper and legal and do not fall into that class of arbitrations which undertake to oust the courts of their jurisdiction”. It has been recognized that “[i]n theory, arbitration is a substitute for a proceeding in court, and should not be confused with what takes place where parties refer to selected persons some ministerial duty or some matter involving only the ascertainment of facts, requiring no hearing nor the exercise of judicial discretion upon the question in dispute.”61

Some states like Maryland, while not imposing their formal arbitration rules and procedures on the appraisal process, often use the terms appraisal and arbitration interchangeably. While the terms are used interchangeably and the two processes share a body of procedural law, these states nevertheless recognize the distinction between the two while making available the statutory enforcement mechanisms necessary to give

60 Teachworth, 898 F.2d 1058. 61Girard v. Atlantic Mut. Ins. Co., 198 So.2d 444 (4th Cir. 1967), citing Housing Authority of New Orleans v. Henry Ericsson Co., 197 La. 732 (La. 1941).

life to the appraisal provision.62

The Maryland Court of Appeals properly articulated the distinctions between the two methods of issue resolution.

The Court stated:

A number of basic distinctions have long prevailed between an appraisement under the standard fire policy and a statutory arbitration. An agreement for arbitration ordinarily encompasses the disposition of the entire controversy between the parties, upon which judgment may be entered after judicial confirmation of the arbitration award, while the agreement for appraisal extends merely to the resolution of the specific issues of actual cash value and the amount of loss, all other issues being reserved for determination in a plenary action. Appraisal proceedings are, moreover, attended by a larger measure of informality, and appraisers are ‘not bound to the

62 Aetna Cas. & Sur. Co. v. Insurance Com’r, 293 Md. 409, 422, 445 A.2d 14 (1982); Meyer v. State Farm Fire & Cas. Co., 85 Md. App. 83, 85, 582 A.2d 275, 275-276 (1990); Brethren Mut. Ins. Co. v. Filsinger, 54 Md. App. 357, 362-63, 458 A.2d 880, 883-84 (1983).

strict judicial investigation of an arbitration.’ Arbitrators are required to take a formal oath and may act only upon proof adduced at a hearing of which due notice has been given to each of the parties. They may not predicate their award upon evidence garnered through an ex parte investigation of their own, at least unless so authorized by the parties. Appraisers, on the other hand, are not required to take an oath. They are likewise ‘not obliged to give the claimant any formal notice or to hear evidence;’ and they may apparently proceed by ex parte investigation, so long as the parties are given the opportunity to make statements and explanations to the appraisers with regard to the matters in issue.

Furthermore, in an arbitration, all of the arbitrators, if there be more than one, ‘must meet together and hear all the allegations and proofs of the parties.’ The standard appraisal clause, in contrast, specifically recites that the umpire is not to participate in the appraisal in all cases, but is only to pass on

such differences as there may be between the appraisers designated by the respective parties. In addition, the vacator of an arbitration award invariably results in a new arbitration whereas after an appraisal award has been set aside without fault on the part of the insured, he is not required to submit to any further appraisement but is free to litigate the issues in an action at law on the policy.63

In California, while the terms arbitrator and appraiser are at times used interchangeably, the courts have historically recognized the distinctions between arbitration and appraisal. It is said that in California, though the appraisal is governed by the general rules of arbitration, an appraiser has far greater flexibility then an arbitrator in evaluating a matter in appraisal.64

The wide applicability in California of arbitration’s guidelines to appraisal is not

63 Aetna Cas. & Sur. Co. v. Ins. Com’r, 293 Md. at 422, Quoting, In Re Delmar Box Co., 309 N.Y. 60, 127 N.E.2d 808, 811 (1955). 64 Unetco Ind. Exchange v. Homestead Ins. Co., 57 Cal. App. 4th 1459, 67 Cal. Rptr.2d 784 (2d Dist. 1997); Devonwood Condominium Owners Ass’n v. Farmers Ins. Exchange, 162 Cal. App.4th 1498, 77 Cal. Rptr.3d 88 (2008) (recognizing a confirmed award of appraisers and umpire under an insurance policy is treated as a confirmed arbitration award which has the same effect as a judgment in a civil action but recognizing appraisers generally have more limited powers that arbitrators).

without exception. In one appraisal-related matter, the court considered the provisions in Section 1281.9 of California’s Arbitration Act requiring proposed arbitrators to disclose any potential grounds for disqualification to opposing parties. It examined them against the state’s Insurance Code § 2071 requiring parties to engage in an informal appraisal proceeding, where each chooses a competent and disinterested appraiser (or alternatively, the court) who may then choose a competent and disinterested umpire. Though disclosure and disqualification requirements are “standard components” of arbitration, § 2071’s specifications warrant different treatment of party-selected appraisers; the requirement to select a competent and disinterested appraiser “in effect constitutes a contractual agreement between the parties to select neutral appraisers.” In light of this and in the absence of other statutory authority, the court did not observe “an automatic and unlimited right of disqualification” for appraisers’ disclosures.65

The United States Court of Appeals for the 5th Circuit has articulated the differences between appraisals and arbitrations as follows:

65 Mahnke v. Superior Court, 180 Cal. App.4th 565, 103 Cal. Rptr.3d 197 (Ct. App. 2009).

Insurance appraisals are generally distinguished from arbitrations. While both procedures aim to submit a dispute to a third party for speedy and efficient resolution without recourse to the courts, there are significant differences between them. For example, an arbitration agreement may encompass the entire controversy between the parties or may be tailored to particular legal or factual disputes. In contrast, an appraisal determines only the amount of loss without resolving issues such as whether the insurer is liable under the policy. Additionally, an arbitration is a quasi-judicial proceeding, complete with formal hearings, notice to parties, and testimony of witnesses. Appraisals are informal. Appraisers typically conduct independent investigations and base their decisions on their own knowledge, without holding formal hearings.66

A Florida court similarly clarified the difference in the realms of appraisal and

66 Teachworth, 898 F.2d at 1061-62.

arbitration in finding that the trial court erred in applying the Florida Arbitration Code to confirm an appraisal award, ultimately reversing on the basis that the trial court improperly overruled an insurer’s objections and defenses to a judgment. It declared that arbitration “ordinarily encompasses the disposition of the entire controversy between the parties...[but] appraisal extends merely to the resolution of the specific issues of actual cash value and ‘amount of loss’”; that appraisal is an informal process which does not require that appraisers be sworn; that appraisers “act on their own skill and knowledge” related to the appraisal; that appraisers are not required to provide formal notice of their actions to parties or counsel or hear evidence; appraisers may conduct ex parte investigation if done in good faith; and other issues not assigned to appraisal are determined in a “plenary action.” The court contrasted appraisal with arbitrations, which it characterized as “quasi-judicial proceedings...impressed with the same procedural safeguards” of judicial proceedings.67

As will be seen throughout this text, many courts have utilized the arbitration process and

67 Citizens Prop. Ins. Corp. v. Mango Hill #6 Condominium Ass’n. Inc., 117 So.3d 1226, 1227 and 1230 (2013).

the law which has been constructed around that process to draw analogies in resolving disputes that have arisen during appraisal.

For example, it has been held in the state of Ohio that the appraisal clause in a homeowner’s insurance policy constituted an “arbitration” for the purposes of judicial review and the enforcement of the award.68

Serious consequences have occurred where courts have equated arbitration and appraisal, however. For example, in Philip Vandrilla v. Middlesex Mut. Assur. Co.,69 the Superior Court of Connecticut concluded that since appraisal is the equivalent of arbitration under Connecticut law, the failure of the umpire, if not the appraisers as well, to be sworn as required by §52-414(d) of the Connecticut General Statutes, requires the appraisal award to be invalidated. This interpretation would not appear to do justice to the intent of the appraisal clause.

Connecticut courts have acknowledged that “a person can be compelled to arbitrate a dispute only if, to the extent that, and in the manner which he has agreed to do so.”

68 Cousino v. Stewart, 2005 WL 3120245 (Ohio App. 6th Dist. 2005). 69 1994 WL 668756 (Conn. Super. Ct. 1994); See also, Reinke v. Greenwich Hospital Assoc., 175 Conn. 24, 29, 392 A.2d 966, 968 (1978).

The issue of whether the parties to a contract have agreed to appraisal is controlled by their intention. In the Jacob v. Seaboard70 case, the Superior Court of Connecticut found that the intent of the parties as expressed in their contract was for an appraisal without the attendant formalities called for by the arbitration statute. Nevertheless, the court concluded that the informal valuation proceeding held was a statutory arbitration proceeding for the purposes of enforcement under the laws of Connecticut.

Some states, like California, have specifically made certain aspects of its statutory law as to arbitration applicable to insurance appraisals. For example, California Code of Civil Procedure § 1281.9 requires the umpire to disclose prior relationships with the parties within 10 days of their proposed nomination. In Jefferson Ins. Co. of New York v. Superior Court of Alameda County,71 the California Supreme Court determined that enforcement procedures respecting arbitration

70 Jacob v. Seaboard, Inc., et al, 1991 WL 2238765 (Conn. Super. Ct. 1991); and Jacob v. Seaboard, Inc., etal.,1991 WL 162314 (Conn. Super Ct. 1991); See also, A. Dubreiul & Sons, Inc. v. Libson, 215 Conn 604, 608-09, 577 A.2d 709, 712 (1990). 71 3 Cal.3d 398, 402, 475 P.2d 880, 90 Cal. Rptr. 608 (1970); See also, e.g., Order to Arbitrate Controversy; Petition; Determination of Court, Cal. Civ. Proc. §1282.2(g) (2003)(which provides that “if a neutral arbitrator intends to base an award upon information not obtained at the hearing, he shall disclose the information to all parties to the arbitration”).

were specifically made applicable to insurance appraisals.

There, the trial court was found to have the discretion as to whether to stay appraisal. In an action involving a disagreement over the nature of a dispute and the applicability of Appraisal, it was held that “just as it has ‘the power to sever arbitrable claims from inarbitrable ones and to stay either the arbitration or the judicial proceedings pending the outcome of the other.’”72

In Arizona, it has been determined that “appraisal clauses should be interpreted using arbitration principles, based on the determination that appraisal is analogous to arbitration. Since public policy favors arbitration, it also favors liberally construing a policy’s appraisal clause and resolving any doubts in favor of the appraisal process.”73

In Pennsylvania, for purposes of enforceability, there is no distinction between arbitration and appraisal.74

72Alexander v. Farmers Ins. Co., Inc., 219 Cal.App.4th 1183, 162 Cal Rptr.3d 455, citing Doan v. State Farm General Ins. Co., 195 Cal.App.4th at 1092-99, 125 Cal.Rptr.3d 793 (2011). 73 Harvey Prop. Mgmt. Co. v. Travelers Ind. Co., 2012 WL 5488898 (D Ariz.2012); U.S. Insulation Inc. v. Hilro Const. Co., Inc., 146 Ariz. 250, 705, P.2d. 490, 498 (Ariz. App. Ct. 1985). 74 Ice City, Inc. v. Ins. Co. of North America, 456 Pa. 210, 314 A.2d 236 (1974).

The policy form commonly known as the London Arbitration Clause or the Bermuda Arbitration Clause, for example, is more encompassing then the standard appraisal provision and replaces both appraisal and litigation against the carrier. The policy language in these situations contemplate a true arbitration in that the clause commonly covers all disputes or controversies arising out of or relating to the policy, its breach, termination or invalidity and mandates a resolution of all such disputes by a panel of arbitrators.