CHAPTER 10

• Jurisdiction: United States

CHAPTER 10

Appraisal

A. Appraisal in First Party Insurance Policies

Almost all property insurance policies contain an “appraisal” clause similar to that in the Standard Fire Insurance Policy that provides:

In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon such umpire, then, on request of the insured or this company, such umpire shall be selected by a judge of a court of record in the state in which the property covered is located. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him and the expenses of and umpire shall be paid by the parties equally.¹

This provision is, in many states, considered an arbitration proceeding. In submitting a dispute over the amount of loss to appraisal, the submission to the appraisers by the insured or the insurer should be in writing, instructing that the parties do not want the appraisers to follow hard and fast, arbitrary, or fictitious rules in determining actual cash value, but to consider all evidence presented to them so that their award will serve to fully indemnify or compensate the insured for the actual loss he or she has sustained. At the same time, the appraisers must careful not to place the insured in a better position than he or she was in just before the fire.

By the appraisal provision, the insured and the company promise that if they cannot agree as to the amount of loss, they can submit their differences to a panel of three impartial arbitrators, called “appraisers.” The decision of the appraisers regarding the amount of loss is binding on both parties and should be used as a last resort when all efforts to reach an agreed amount of loss with the insured have failed. The provision is optional, and neither the insured nor the insurer is obligated to invoke it. It is a tool to aid the parties in quickly, fairly, and inexpensively resolve disputes about the amount of loss and claim.

California, by statute, has limited the process under certain situations by changing the statutory standard fire policy. The 2001 statute provides:

[P]roceedings are informal unless the insured and this company mutually agree otherwise. For purposes of this section, “informal” means that no formal discovery shall be conducted, including depositions, interrogatories, requests for admission, or other forms of formal civil discovery, no formal rules of evidence shall be applied, and no court reporter shall be used for the proceedings. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him or her and the expenses of and umpire shall be paid by the parties equally. In the event of a government-declared disaster, as defined in the Government Code, may be requested by either the insured or this company but shall not be compelled.²

The change was designed to cure a perceived use of appraisal as a device to beat into submission insureds making claims during disasters like earthquakes.

Jurisdictions differ on whether an appraisal is also an arbitration. The clause has been found to be an arbitration agreement (an agreement to arbitrate a dispute under the statutes governing arbitration) in California and many states.³ The Mississippi Supreme Court held that appraisers are not arbitrators in Munn v. Nat’l Fire Ins. Co. of Hartford, 115 So. 2d 54 (Miss. 1959) and in Hartford Fire Ins. Co. Jones, 108 So. 2d 571 (Miss. 1959).

In New York, the appraisal clause was found not to be an arbitration provision in Delmar Box Co. v. Aetna Ins. Co., 309 N.Y. 60, 127 N.E. 2d 808 (1955). The court stated that the New York statutes relating to arbitration do not act to convert the informal appraisal provided for in the standard fire policy to an arbitration proceeding.

1. Appraisal Is Arbitration

As you read the following decision of the California Court of Appeal, consider what convinced the court to conclude that an “appraisal” under an insurance policy is an arbitration. Also consider how treating appraisal as an arbitration effects the insurance claim dispute.

Klubnikin v. California Fair Plan Ass’n
84 Cal. App. 3d 393, 148 Cal. Rptr. 563 (Cal. Ct. App. 1978)

This is an appeal from a summary judgment which holds that an award of appraisers determined the amount payable by California Fair Plan upon a policy of fire insurance covering a building owned by William Klubnikin. We conclude that: (1) “appraisers” empowered by the terms of a policy of fire insurance to determine the “cash value” and “loss” utilized to ascertain the amount payable on the policy are arbitrators within the meaning of Code of Civil Procedure section 1280; (2) an award of the appraisers unchallenged within the time provided by Code of Civil Procedure sections 1288 and 1288.2 and confirmed by the superior court is final; and (3) because Klubnikin failed to file and serve a petition to vacate the award of the appraisers within that period, and because that award has been confirmed by the superior court, Klubnikin’s independent action upon the contract seeking damages in excess of the amount granted in the award of the appraisers is barred.

We therefore affirm the summary judgment.

California Fair Plan issued its policy of fire insurance in the amount of $12,000 covering a “Class D building occupied as [a] church” owned by Klubnikin. The policy insures the property “to the extent of [its] actual cash value . . . at the time of loss. . . .” The policy states: “In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser. . . . The appraisers shall first select a competent and disinterested umpire; . . . The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company shall determine the amount of actual cash value and loss. . . .” On May 30, 1974, while the policy was in force, the property was damaged by fire. A second fire occurred on the property on July 15, 1974. When Klubnikin and California Fair Plan were unable to agree on the actual cash value or amount of loss, Klubnikin invoked the procedure. Over the disagreement of the appraiser selected by Klubnikin, the appraiser designated by California Fair Plan and the umpire determined that as to the loss of May 30, the actual cash value was $5,000, the loss and damage was $18,000, and “[the] demolition and debris removal” was $1,600. The Fair Plan designee and the umpire also determined that as to the loss of July 15, the actual cash value and the loss and damage were both “zero.”

The appraiser selected by California Fair Plan and the umpire executed an award indicating their determination of the actual cash value and the amount of loss. This award of the appraisers was issued in writing on April 8, 1975, and was served on Klubnikin on April 15, 1975. Klubnikin did not file a petition to vacate the award. On May 29, 1975, he filed an action for breach of contract asserting that California Fair Plan had breached its obligation to pay the amount required under the policy. The complaint alleged that the was conducted in an improper and unfair manner because of a failure to give plaintiff adequate notice and opportunity to be heard. The complaint also alleged that the appraiser and umpire exceeded their power under the submission by attempting to resolve questions of coverage, the nature of the property involved, and the interpretation of the policy. The file copy of the complaint does not bear the stamp that summons was issued.

On October 8, 1975, well after the 100-day period following the award of the appraiser and umpire, Klubnikin filed an amended complaint asserting the same charging allegations, but adding a cause of action for declaratory relief. The file copy of the amended complaint bears the stamp “Summons Issued.”

California Fair Plan filed its answer to the amended complaint denying its charging allegations and asserting the affirmative defense that Klubnikin’s action on the insurance contract was barred because Klubnikin had not served and filed a petition to vacate the appraisers’ award within the 100-day period following service of a signed copy of the award as required by Code of Civil Procedure sections 1286.4 and 1288. On August 27, 1976, California Fair Plan filed its petition to confirm the “arbitration award” of the appraisers. On November 8, 1976, it moved for summary judgment in the case at bench. The motion was based upon an assertion that California Fair Plan’s petition to confirm the arbitration award had been granted. The trial court’s judgment sustaining the petition was in fact entered on November 9, after the notice of motion for summary judgment on Klubnikin’s amended complaint but before the motion was heard.

Notice of entry of the judgment confirming the arbitration award was given on November 10, 1976. The record does not indicate any appeal from that judgment. Klubnikin’s...