The approach of the hurricane season emphasizes the importance of understanding how courts apply appraisal clauses in property insurance disputes. The application of the appraisal clause when an insurer denies coverage is discussed as well as the application of the arbitration code.
Virtually all first-party property insurance policies contain an "appraisal" clause whereby each party, insured, and insurer appoint a "disinterested" or "impartial" appraiser who, in turn, selects an umpire to resolve issues of the amount of loss.
Florida Appraisal Clause Example
"If you and we disagree on the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of loss. If they fail to agree, they will submit their differences to an umpire. A decision agreed to by any two will be binding. Each party will: (a.) Pay its chosen appraiser; and (b.) Bear the other expenses of the appraisal and umpire equally. If there is an appraisal, we will still retain our right to deny the claim." Appraisal clause, Johnson v. Nationwide Mutual Ins. Co., 828 S2d 1021 (Fla 2002).
Since shortly after Hurricane Andrew in 1992, Florida's intermediate appellate courts have wrestled repeatedly with the scope of, and procedure to be applied in, an appraisal. Not surprisingly, they have reached contrary results. Recently, the Supreme Court of Florida clarified at least two of these issues. The approach of hurricane season, and the vigilance afforded these decisions in other jurisdictions, provide reason to review them.
Application of Appraisal Clause When Insurer Denies Coverage
While other issues remained, there was never doubt that the appraisal clause would apply when the insurer acknowledged coverage for the claim and the only issue was the amount of loss. However, the issue remained, "What if the insurer denied the damage was caused by a covered cause of loss?" This question stemmed from State Farm Fire & Cas. Co. v. Licea, 685 S.2d 1285 (Fla 1996), the last time the Supreme Court had examined the appraisal clause, when it stated:
We interpret the appraisal clause to require an assessment of the amount of loss. This necessarily includes determinations as to the cost of repair or replacement and whether or not the requirement for a repair or replacement was caused by a covered peril or a cause not covered, such as normal wear and tear, dry rot, or various other designated, excluded causes. [685 S.2d at 1288.]
In Johnson v. Nationwide Mutual Ins. Co., 828 S2d 1021 (Fla. 2002), the insureds made a claim for damage due to sinkhole (an exception to the earth movement exclusion, coverage for which is mandated by Florida Statute). Following investigation, Nationwide could find no evidence of sinkhole and denied the claim.
Relying on the dicta found in Licea and subsequent, intermediate appellate decisions, such as Florida Select Ins. Co. v Keelean, 727 S2d 758 (Fla 2nd DCA 1999), and Opar v. Allstate Ins. Co., 751 S.2d 758 (Fla. 1st DCA 2000), upon receipt of the lawsuit, Nationwide sought to invoke the appraisal clause and moved to dismiss the complaint. Nationwide's theory was that, under the facts of the claim, there was no coverage and, therefore, it viewed the amount of loss as "zero" for purposes of the appraisal clause. The facts of the loss, i.e., was it a covered cause of loss, were to be resolved in appraisal, which Nationwide believed would be conducted as an arbitration under the Florida Arbitration Code. (See discussion of Allstate Ins. Co. v. Suarez, 833 S.2d 762 (Fla. 2002), supra.)
The trial judge denied the motion to dismiss in favor of appraisal; upon interlocutory appeal, the Second District Court of Appeal reversed and ordered appraisal and the Supreme Court accepted jurisdiction based on conflicting decisions among the intermediate appellate courts.
Johnson was consolidated before the Supreme Court with State Farm Fire & Casualty Co. v. Gonzalez. In the latter case, the insureds made a claim to State Farm asserting that blasting in the vicinity of their home caused cracks in the walls and tiles. State Farm denied coverage following an investigation which attributed the cracking to minor settlement of the foundation, not blasting. As in Johnson, the homeowners filed suit, and State Farm moved to dismiss in favor of appraisal.
The appraisal panel determined the entire damage was caused by settlement of the foundation and entered an award of zero. State Farm's motion to confirm the appraisal award (pursuant to the Florida Arbitration Code) was opposed by the policyholders on the basis that an appraisal cannot determine coverage. The trial court confirmed the award but the intermediate appellate court reversed and remanded, concluding "that the appraisers impermissibly decided whether the entire claim was within the coverage of the insurance policy." [828 S.2d at 1024.]
After explaining the Licea decision, which the parties to Johnson and Gonzalez, as well as several other courts, had sought to apply, the Supreme Court restated the issue and provided the answer:
In both Johnson and Gonzalez, the insurers denied that there was a covered loss under the respective policies.... Therefore, the issue in Johnson and Gonzalez was not appraising the amount of loss which the insurer admitted was covered. Rather, the issue was one of whether the policies covered the losses for the claims that were made.
In accord with our decision in Licea, these coverage issues were to be judicially determined by the court and were not subject to a determination by appraisers. Therefore, in Johnson, the determination as to whether the loss was covered by a sinkhole or earth movement is an issue of coverage for the whole loss and is an issue for judicial determination by a court. [828 S.2d at 1025.]
Thus in instances where, under the facts of the loss, the insurer disputes any coverage, the claim is inappropriate for appraisal. Issues of forfeiture of coverage, such as fraud, lack of compliance with post-loss conditions, etc., were never subject to determination in appraisal and remain unaffected. See Paradise Plaza Condo. Assoc. v. Reinsurance Corp. of New York, 685 S.2d 937 (Fla. 3rd DCA 1996).
Application of the Arbitration Code
Shortly after its decision in Johnson, the Supreme Court announced its opinion in Allstate Ins. Co. v. Suarez, 833 S.2d 762 (Fla 2002). Following the decision of the First District Court of Appeal in Florida Farm Bureau Casualty Ins. Co. v. Sheaffer, 687 S.2d 1331 (Fla. 1st DCA 1997), which held an appraisal clause was an agreement to arbitrate and the proceedings were subject to the Florida Arbitration Code, Chap. 682, Fla. Stats., insurers ran the risk an insured dissatisfied with the result of an appraisal could have it overturned if the insured was not afforded the rights and procedures established by the arbitration code. Thus, proceeding under the arbitration code became the norm unless the insured made an informed waiver of those rights before the proceedings commenced.
In Suarez, however, the Supreme Court stated the appraisal clause was not ambiguous and "[i]t is clear from a plain reading of the clause that an informal appraisal proceeding, not a formal arbitration hearing pursuant to section 682.06, Florida Statutes (1999), was intended and agreed upon by the parties in agreeing to the appraisal provisions of the policy". Accordingly, the Sheaffer decision and that of a second intermediate court of appeal which followed Sheaffer (a third had reversed itself after adhering to Sheaffer for several years) were disapproved.
Much of the confusion in the appraisal cases stemmed from the courts' use of the word "coverage" to describe both the facts giving rise to the cause of loss and whether or not there had been compliance with post-loss conditions on the part of the policyholder. While the latter situation was never part of the appraisal process, loose judicial language allowed both insurers and insureds to be confused for several years as to the scope of an appraisal proceeding. When either party believed it had the due process protections of the arbitration code, an alternative to judicial resolution of the facts in the forum of appraisal was more palatable. Since appraisal is no longer "arbitration" in Florida, it only makes sense that fundamental decisions such as whether or not the facts of the loss give rise to coverage under the policy be made in the judicial process.
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