Federal Arbitration Act Governs Property Insurance Appraisals

In a decision filed July 14, 2017, the US District Court for the Central District of California invoked the Federal Arbitration Act (FAA) in refusing to vacate an insurance appraisal award determining the value of insured tools stolen from their owner. The decision, James Dickey, Inc. v. Alterra Insurance Company, is reported at 2017 U. S. Dist. LEXIS 109811.

There was a twist: The court used state law to find that federal law applied.

The parties, insurer and insured, had been unable to agree on the value of the stolen tools, so defendant, the insurer, successfully moved the federal court to compel appraisal under the terms of the insurance policy. The policy appraisal provision required each party to select an appraiser and called for the appraisers to agree on and appoint an impartial “umpire.” If the appraisers cannot agree on the dollar amount of the loss, that determination is made when the umpire and one of the two appraisers agree on an award in writing.

Under this procedure, the policyholder nominated Eugene Twarowski as its appraiser, and the insurer nominated David Smith. The two appraisers selected Bo McCarthy to serve as the umpire. McCarthy disclosed that he had worked with Twarowski in a previous insurance appraisal proceeding approximately five years earlier, and that Twarowski had served in the role of public adjuster, an adjuster representing the interests of the policyholder. McCarthy disclosed that he had served as the insurance company’s appraiser in the earlier case.

The two appraisers could not reach an agreement on the value of the tools, so they and the umpire set up a meeting to discuss the contested issues. Appraiser Twarowski announced that he might bring a witness to the meeting, and McCarthy told the others he would question any witnesses, who should bring with them to the meeting any documents supporting their position. Twarowski then recanted, stating that he was not calling any witness to “testify” at the meeting.

The meeting occurred November 17, 2016. The appraisers and umpire disagreed on whether depreciation should be applied to the tools. Twarowski requested that the meeting be adjourned so he could gather additional evidence regarding price movements of the tools over time. McCarthy, who presided at the meeting, denied Twarowski’s request for what amounted to a continuance, and announced that the appraisal would be completed that day.

The next day umpire McCarthy and appraiser Smith (appointed by the insurer) signed an appraisal award, and 10 days later the policyholder provided a copy of it to the insurer by email. The insurer paid the award in full on December 7, 2016.

On June 2, 2017, the policyholder filed a motion to vacate the appraisal award, asserting that umpire McCarthy had failed to disclose to the policyholder that in the past McCarthy had performed work for the law firm representing the insurer in the pending matter. That work had consisted of McCarthy serving as the appraiser selected by a different insurer in that case, Allstate Insurance Company. In the earlier matter Twarowski had served as the insured’s public adjuster.

The court’s first step in deciding the policyholder’s motion to vacate the appraisal award was to determine whether California law or the FAA governed the outcome of the motion. Ironically, the court observed, both sets of laws apply, although at different stages of the analysis. Initially, the court held, the FAA applies whenever an arbitration clause is found in a contract involving interstate commerce. The court determined that insurance policies, such as the one in this case, generally involve interstate commerce.

The court then turned to the question of whether the appraisal clause of the policy of property insurance constitutes an agreement to arbitrate disputes under the FAA, and here’s where state law takes hold. Thirty years ago, the court noted, the Ninth Circuit federal Court of Appeals had addressed the issue of whether insurance policy appraisals are arbitrations and thus subject to the rules of the FAA. The correct inquiry, the court held, was “surprisingly simple” — to examine the relevant state law, in this case, California’s, to determine whether appraisals are the “functional equivalent” of arbitrations. Following the lead of that 30-year-old decision, which remains good law in the Ninth Circuit, the court observed that the definition of an arbitration agreement under California law expressly includes “appraisals and similar proceedings.” Since appraisals and arbitrations are functionally equivalent under California law, the court went on to apply the FAA to analyze the appraisal award at issue in the newly filed case.

Under the FAA notice of a motion to vacate an arbitration award must be served upon the adverse party within three months after the award is filed or delivered. Here the award was delivered to the insured by email attachment on November 28, 2016, so any motion to vacate, to be timely, must have been made before February 28, 2017. Since more than three months had elapsed since that statutory deadline, the policyholder’s motion was untimely and had to be denied unless one or more “tolling” legal principles applied here. The court found that no tolling was warranted because the policyholder’s tardiness was not due to it being somehow prevented from filing in time.

Also, since the failure of McCarthy to disclose his previous involvement with the policyholder’s lawyers was the basis on which the insured relied to vacate the award, it became relevant that appraiser Twarowski became aware of McCarthy’s nondisclosure at the parties’ meeting of November 17, 2016, months before the federal statutory deadline. Accordingly, the motion was time-barred.

Even though the motion was not timely filed, the court went further and found that the motion failed to allege any of the statutory grounds for vacating the arbitration award. Of the four grounds available for vacating awards under the FAA, the only ones conceivably applicable here were (1) where there was evident partiality or corruption in one or more of the arbitrators, or (2) where the arbitrators refused to postpone the hearing without sufficient cause, or refused to hear evidence pertinent and material to the controversy.

The first ground to vacate the award was not established, since the umpire did not fail to disclose information that created a reasonable impression of bias or that the umpire was actually biased against the insured. Although McCarthy failed adequately to disclose his previous work with counsel for the insurer before the meeting of November 17, 2016, courts have generally vacated awards based on “an impression of bias” only where the neutral’s previous involvement in previous cases was substantial, ongoing, and for one of the parties. This test was not satisfied here, held the court, since only one case was involved – and different parties.

The policyholder also alleged that McCarthy showed actual bias by deciding to disallow the testimony of witnesses, and by denying the request for a continuance. With regard to witness testimony, the evidence showed that the insured voluntarily withdrew its witness before the appraisal panel met. Denying a continuance does not show actual bias, since the parties had ample time before the meeting to gather any and all information relating to the value of the tools. Accordingly, the court found that the policyholder’s motion must be denied in the alternative because it failed to establish a ground for vacation of the award under the FAA.