September 24, 2021

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Is Appraisal Governed Under the Federal Arbitration Act?

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The modern appraisal process followed in most states is nothing like an arbitration. It has led me to warn that arbitration is not appraisal when the policy contains an arbitration clause.1

I recently wrote about a very serious trend regarding arbitration clauses found in an increasing number of insurance policies in Public Adjusters Beware of Arbitration Clauses Changing State Law. Our firm has over forty lawyers in the continental United States (not including Puerto Rico) devoted solely to the policyholder side of first-party insurance disputes. That blog generated an internal discussion with other Merlin Law Group attorneys about the Federal Arbitration Act. Those attorneys taught me that some, not all, federal courts are holding that the Federal Arbitration Act applies to appraisal regardless of what state law says.

For instance, in a 2019 decision, the Federal Second Circuit Court of Appeals found that the typical appraisal clause found in property insurance policies constitutes an arbitration under the Federal Arbitration Act (FAA):2

The appraisal process…constitutes arbitration for purposes of the FAA. The appraisal provision identifies a category of disputes (disagreements between the parties over ‘the amount of loss’), provides for submission of those disputes to specified third parties (namely, two appraisers and the jointly-selected umpire), and makes the resolution by those third parties of the dispute binding (by stating that ‘[a]n award in writing of any two will determine the amount of the loss’).

Thus, because we have appellate jurisdiction over an order denying a motion to compel arbitration, 9 U.S.C. § 16(a) (1)(B), and the appraisal process in the Policy falls within the meaning of arbitration, we have jurisdiction…

In a footnote, the court implicitly stated that federal law controls over differing state law regarding whether appraisal is to be treated as an arbitration:

Because federal common law provides the definition of ‘arbitration- under the FAA, [the policyholder’s] citations to cases defining arbitration under New York law are not instructive.

The Second Circuit court acknowledged in a footnote that this issue is legally in flux – meaning other federal courts have held differently.

See also Liberty Mutual Grp., Inc. v. Wright, No. DKC 12-0282, 2012 WL 718857, at *6 (D. Md. Mar. 5, 2012) (concluding that an entire appraisal process constitutes arbitration within the meaning of the FAA where the parties agreed to select a competent appraiser if they could not agree on the amount of the loss, and their agreement provided a fixed procedure for those appraisers to follow in setting the amount of the loss); cf. Evanston Ins. Co. v. Cogswell Properties, LLC, 683 F.3d 684, 693–94 (6th Cir. 2012) (holding appraisal process did not constitute arbitration under federal law where appraisal process did not provide for a final and binding remedy);”

If the appraisal clause triggers application of the Federal Arbitration Act, that is a huge change of the law and significantly changes what is currently taught by various organizations about appraisal. I have been to the AIUA classes and the Windstorm Insurance Network Appraisal Certifications classes. While arbitration might be mentioned at those classes as something other than appraisal, there is nothing discussed about the Federal Arbitration Act possibly controlling the appraisal process. I suggest that given the case law from the Second Circuit, those educating about appraisal at least warn what this case states and provide possible implications if it does.

Those within New York, Connecticut, and Vermont, where Second Circuit Court of Appeals law controls, should make certain to seek counsel about how this may impact their appraisals. I say “may” because somebody has to raise the issue. In the vast majority of all appraisals being conducted in those states, nobody is mentioning the case that generated the dialogue within our firm. How to properly deal with and best handle ongoing appraisals in Second Circuit states, and in states where the issue has yet to be raised, is something not currently being taught in the property insurance claim field publicly by anybody. I anticipate that will change as this case law is further developed.

Thought For The Day

All things must change to something new, to something strange.
—Henry Wadsworth Longfellow
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1 William “Chip” Merlin. What Are the Differences Between Mediation vs Arbitration vs Appraisal vs Litigation When It Comes To Resolving a Property Insurance Claim? Property Insurance Coverage Law. Aug. 2020. Available at https://www.propertyinsurancecoveragelaw.com/2020/08/articles/insurance/what-are-the-differences-between-mediation-vs-arbitration-vs-appraisal-vs-litigation-when-it-comes-to-resolving-a-property-insurance-claim/
2 Milligan v. CCC Information Services, Inc., 920 F.3d 146 (2d Cir. 2019).

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