The Rocky Mountain Association of Public Insurance Adjusters (RMAPIA) had a great meeting with a candid and positive discussion of current insurance issues being faced by the Colorado Division of Insurance. The photo above is Merlin Law Group attorney Larry Bache asking Insurance Commissioner Michael Conway.1

During his presentation about appraisal, attorney Matthew Pearson discussed an Arizona case2 about appraisal that supports causation being determined in appraisal but suggests the principals to be used in appraisal are in Arizona arbitration law.

Regarding causation, the court stated that in Arizona appraisals, causation was appropriate for determination by the appraisal panel:

The Court is persuaded by the reasoning in a number of cases that the “amount of loss” under the appraisal provision would necessarily include a determination of causation as to whether some of the damage to Plaintiffs’ roof is due to another cause, such as wear and tear, and not by the November 2019 storm. See Ori v. Am. Family Mut. Ins. Co…..(“The term ‘amount of loss’ ‘necessarily … includes the amount it would cost to repair that which was lost.’ ”)….Quade, 814 N.W.2d at 706-07 (“The Quades assert that the damage to the roofs is a covered loss for wind damage. Secura asserts that the damage to the roofs is due to wear and tear and is excluded under the policy. We believe that under the circumstances of this case a determination of the ‘amount of loss’ under the appraisal clause necessarily includes a determination of causation.”); Johnson v. State Farm, 204 S.W.3d 897, 903 (Tex. App. 2006) (“If the parties had to first agree on which specific shingles were damaged and approach every disagreement on extent of damage as a causation, coverage or liability issue, either party could defeat the other party’s request for an appraisal by labeling a disagreement as a coverage dispute. Instead, as the process is designed, once it is determined that there is a covered loss and a dispute about the amount of that loss, the appraisal process determines the amount that should be paid because of loss from a covered peril.”); Phila. Indem. Ins. v. WE Pebble Point, 44 F.Supp.3d 813, 818 (S.D. Ind. 2014) (“[I]t would be extraordinarily difficult, if not impossible, for an appraiser to determine the amount of storm damage without addressing the demarcation between ‘storm damage’ and ‘non-storm damage.’ To hold otherwise would be to say that an appraisal is never in order unless there is only one conceivable cause of damage….”); State Farm Lloyds v. Johnson, 290 S.W.3d 886, 892-93 (Tex. 2009) (“If State Farm is correct that appraisers can never allocate damages between covered and excluded perils, then appraisals can never assess hail damage unless a roof is brand new. That would render appraisal clauses largely inoperative, a construction we must avoid.”); Walnut Creek Townhome Ass’n v. Depositors Ins. Co., 913 N.W.2d 80, 91 (Iowa 2018) (concluding that although coverage questions are for the court, factual causation issues may be decided through the appraisal process).

The court also commented upon the legal standards applicable to Arizona appraisals:

The Arizona Court of Appeals has explained that ‘appraisal is analogous to arbitration’ and the ‘principles of arbitration law’ should be applied to proceedings involving appraisals. Meineke v. Twin City Fire Insurance Co., 892 P.2d 1365, 1369 (Ariz. Ct. App. 1994). ‘Public policy favors arbitration,’ which is ‘an expeditious and inexpensive method of dispute resolution.’. . . Due to this public policy, any doubts as to whether or not a matter is subject to arbitration should be resolved in favor of arbitration. New Pueblo Constructors, Inc. v. Lake Patagonia Recreation Ass’n, 467 P.2d 88, 91 (1970). Likewise, doubts as to whether an issue is subject to appraisal should be resolved in favor of appraisal.

Does this mean that the standards of selecting appraisers and umpires as well as the process of appraisal is found in Arizona arbitration law? One law review commentator reflecting on Arizona appraisals and this issue stated:

In this regard, there is a clear need to formally distinguish appraisal from arbitration, because arbitration employs a much more extensive fact finding exercise than is used in appraisal and, unlike appraisal, employs a quasi-judicial decision making process. Arbitration involves far more than does appraisal; arbitrators hold formal hearings, take evidence, call witnesses, and resolve disputed issues of liability, whereas appraisal is designed to avoid the necessity for this type of adversary proceeding in the first instance. Appraisal’s sole purpose is to fix the amount of damages where liability is undisputed.

That same commentator noted how courts have made the distinctions between arbitration and appraisal ambiguous in Arizona:

Ambiguity in Arizona’s Common Law

Notwithstanding the distinctions noted above, at least some Arizona courts have compared appraisal clauses to arbitration clauses in insurance contracts. This comparison likely arises from the fact that traditionally little attention has been given to appraisal as a distinct process, despite the clear differences. In Home Indemnity Co. v. Bush, for example, Division One of the Arizona Court of Appeals construed an appraisal clause in an automobile policy as an ‘appraisal and arbitration provision,’ despite the lack of any language in the provision characterizing it as one involving arbitration. But nothing in the Bush court’s opinion suggests it (or the parties) even considered whether a distinction between the two processes might exist.

Some twenty years later, in Meineke v. Twin City Fire Insurance Co., the same appellate court concluded on the basis of a single Maryland case that despite differences between appraisal and arbitration, the processes are analogous. The court further referred to a 1978 Arizona decision, Hirt v. Hervey, for the proposition that appraisers’ decisions are entitled to the equivalent measure of finality given those of arbitrators, and to a 1986 opinion in Hanson v. Commercial Union Insurance Co. to suggest that in view of similarities between appraisal and arbitration proceedings, courts should apply the standard of review applicable in arbitration cases to those concerning appraisal. The courts’ conclusory statements failed, however, to establish precisely how arbitration and appraisal are ‘analogous,’ nor did the Meineke court identify or discuss the differences it acknowledged to exist between the processes.3

Accordingly, there was a suggestion that a legislative remedy might resolve these issues:

Arizona, like many states, has enacted a general statutory scheme governing property insurance, which has no provisions pertaining to appraisal. This oversight is particularly problematic for Arizona policyholders given the lack of common law concerning these issues in the jurisdiction. As a result, the terms of their policies determine how appraisal should be conducted and umpires selected. Critics suggest that leaving the contours of the appraisal process to boilerplate contract provisions drafted by insurance companies and inserted into adhesion contracts permits insurers to obtain the greater benefit of the appraisal bargain. On the other hand, were the state legislature, rather than the insurer, to give clearer shape to the appraisal and umpire selection process, that effort would almost certainly help to minimize any bias currently present in the appraisal process and better effect the public policy goals of appraisal. A clear statutory scheme would benefit lawyers as well, as not only courts misperceive the relationship between appraisal and arbitration. In fact, many cases in which courts intuitively apply arbitration principles to appraisal problems are caused by a party’s invocation of the protections of arbitration in the first instance.

The bottom line is that courts in Arizona are allowing causation to be determined by appraisal panels. What is meant by Arizona appraisal law being guided by Arizona arbitration principals has not been fully decided.

Thought For The Day

Life is full of confusion. Confusion of love, passion, and romance. Confusion of family and friends. Confusion with life itself. What path we take, what turns we make. How we roll our dice.
—Matthew Underwood
1 Commissioner Conway was under quarantine after a possible exposure to Covid.
2 Klein v. Safeco Ins. Co. of America, No. 20-2432 2021 WL 3518639 (D. Ariz. Mar. 31, 2021).
3 Amy M. Coughenour. Appraisal and the Property Insurance Appraisal Clause—A Critical Analysis: Guidance and Recommendations for Arizona. 41 Ariz. St. L.J. 403 (Summer 2009).