Viewpoint: Is Appraisal an Arbitration? Yes and No. Maybe. Sort of.

Appraisal and arbitration are similar – and different. Are they so similar that appraisal can be called a form of arbitration, or are they so different that appraisal is a thing unto itself? And most important, the next time you contemplate demanding appraisal – will it really make any difference?

Although courts disagree on whether to refer to appraisal as “arbitration”, they are virtually unanimous regarding the practical differences between the two.

For example, in Liberty Mutual Group, Inc. v. Wright,[1] a Maryland court considered whether appraisal constituted an enforceable arbitration triggering the Federal Arbitration Act. In answering the question, the Court observed it was “…irrelevant that the contract language…does not employ the word ‘arbitration’ as such. Rather, what is important is [whether] the parties clearly intended to submit some disputes to binding review by a third party.” After balancing the similarities and differences, the Court concluded that “when viewed as a whole, the appraisal process constitutes ‘arbitration'”:

Because the umpire might not render the decision that settles the dispute, the “one feature that must necessarily appertain to a[n arbitration] process” could be lacking…When viewed on the whole, however, the entire appraisal process does constitute “arbitration.” The parties agreed to select “competent appraisers” if they could not agree on the amount of loss, and their agreement provides a fixed procedure for those appraisers to follow in setting the amount of loss. Submission of the dispute to the appraisers will ultimately settle that issue, as the appraisers—perhaps through involvement of the umpire—will reach a binding decision through that process. The fact that the appraisal process does not settle the parties’ entire controversy or require an official adversary proceeding, complete with witnesses and cross-examination, is of no moment…[2]

In Merrimack Mutual Fire Insurance Co. v. Batts,[3] the Tennessee Court of Appeals saw it differently, concluding that arbitration and appraisal proceedings are not the same thing:

Arbitration is a consensual proceeding in which the parties select decision-makers of their own choice and then voluntarily submit their disagreement to those decision-makers for resolution in lieu of adjudicating the dispute in court. Appraisal is something narrower. Appraisal is the act of estimating or evaluating something; it usually means the placing of a value on property by some authorized person. Specifically, the object of appraisal in cases of casualty insurance is to quantify the monetary value of a property loss, not to decide questions of liability.

The Court found it “unnecessary and even inappropriate to abandon the workable distinction” between arbitration and appraisal.[4] The Supreme Court of Florida reached the same conclusion, finding it “difficult to imagine” that parties agreeing to the appraisal clause in the insurance policy, which called for an “informal appraisal proceeding,” actually contemplated a “formal arbitration hearing.”[5]

This is not a new conundrum. Over fifty years ago, the Supreme Court of Mississippi expressed disappointment that “all of the lawyers and the court completely overlooked the fact that the report of the appraisers is not an arbitration award.”[6] The court concluded that, unlike arbitration, appraisal is simply an “incident feature of a contract” in which the parties pre-agreed to a method of ascertaining “value, price, or amount of loss or damage” – but not liability.[7]

For those accustomed to the relative simplicity of a typical appraisal, the idea of recasting it as a form of arbitration raises understandable concerns that could tip the scales against demanding appraisal at all. The typical differences between appraisal and arbitration are illustrated by the chart below:

Superimposing the more formal procedural requirements of an arbitration could change who is best qualified to serve as an appraiser or umpire, expand the scope of the issues addressed and resolved, and substantially increase the time and expense of the process. This is not what the language of traditional appraisal clause envisions – and that is the key to answering our question.

The good news is that calling an appraisal an “arbitration” should not change the process. Even if an appraisal is governed by a federal or state arbitration act, the fundamental character of an appraisal should not change; the language of the appraisal provision determines the nature of the process regardless. For example, while the United States Supreme Court has acknowledged that the Federal Arbitration Act (FAA) generally preempts state laws that would otherwise determine the appropriate forum,

…it does not follow that the FAA prevents the enforcement of agreements to arbitrate under different rules than those set forth in the Act itself. Indeed, such a result would be quite inimical to the FAA’s primary purpose of ensuring that private agreements to arbitrate are enforced according to their terms. Arbitration under the Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate…so too may they specify by contract the rules under which that arbitration will be conducted.[9]

Thus, whatever scope, procedure, or finality an arbitration might otherwise have under a given statute, the language of the appraisal provision takes precedence. The goal is to effectuate the intent of the parties – not override it. This is why the court in Liberty Mutual Group could fairly conclude that appraisal is a form of arbitration, but still say “…the fact that the appraisal process does not settle the parties’ entire controversy or require an official adversary proceeding, complete with witnesses and cross-examination, is of no moment.”[10]

Take, for example, the scope of an appraisal. In Wailua Associates v. Aetna Casualty & Surety Co., the court characterized appraisal as a form of arbitration, but rejected an attempt to use the appraisal process to resolve a coverage dispute.^[11] Although the appraisal was allowed to proceed before a liability determination was made, the court explicitly instructed the appraisal panel not to consider issues “pertaining to coverage and liability under the insurance policy as these issues are beyond the scope of the parties agreement to arbitrate.”[12] When the insured subsequently sought to preclude any challenge to the resulting award, the court had not forgotten its earlier admonition:

Wailua further contends that Aetna, in disputing the extent of its liability…is improperly seeking to collaterally attack the merits of the Award. This contention is belied by the facts of the case. At no point through this litigation has the court expressed any opinion whatsoever regarding the issues of coverage, mitigation, causation or liability. In fact, the Court expressly forbid the panel from considering issues of coverage and/or liability as those issues were “beyond the scope of the parties agreement to arbitrate.” The Court finds the issues of mitigation, coverage and causation to be unresolved, thus Aetna cannot be precluded from arguing the extent of liability (if any)…^[13]

One caveat is in order with respect to enforcement. Specifically, in jurisdictions where appraisal is deemed a form of arbitration, any legal action to compel appraisal, appoint an umpire, or enforce an award may be governed by the procedural requirements in the relevant arbitration act. But even here, any differences in the mechanisms of enforcement will likely be more form than substance.

Appraisal has always been, in varying degrees, a roll of the dice. Then again, so is litigation. That said, regardless of whether appraisal is characterized as an arbitration, the calculus involved in deciding whether to appraise or litigate remains the same.

Appraisal may be called arbitration – but the procedural baggage should not come with the name. The language of the appraisal provision alone controls the process. Roll the dice accordingly.

[1] 2012 WL 718857 (D. Md. 2012)(emphasis added).

[2] Id., *6. See also, Milligan v. CCC Info. Servs. Inc., 920 F.3d 146, 152 (2d Cir. 2019) (although “the appraisal process … constitutes arbitration,” the appraisal provision controls the scope of the appraisal).

[3] 59 S.W.3d 142, 152 (Tenn. Ct. App. 2001) (internal citations and quotations omitted).

[4] Id.

[5] State Ins. Co. v. Suarez, 833 So. 2d 762 (Fla. 2002).

[6] Hartford Fire Ins. Co. v. Jones, 108 So. 2d 571, 572 (Miss. 1959).

[7] Id.

[8] More formal procedures may be warranted for more complex claims, and parties often agree to a protocol governing the appraisal process. The point here is to highlight the typical differences between appraisal and arbitration.

[9] Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479, 109 S. Ct. 1248, 1255–56 (1989)(emphasis added).

[10] 2012 WL 718857, at *6.

[11] 904 F. Supp. 1142, 1149 (D. Haw. 1995).

[12] Id.

[13] Wailua Assocs. v. Aetna Cas. & Sur. Co., 27 F. Supp. 2d 1211, 1218 (D. Haw. 1998). See also, MMI Realty Servs., Inc. v. Westchester Surplus Lines Ins. Co., No. CV 07-00466 HG-KSC, 2008 WL 11344896, at *3 (D. Haw. Jan. 2, 2008)(refusing to permit appraisal of an issue that “unquestionably implicates causation, coverage and liability, not merely amount of loss”).