Patrick McGinnis | Property Insurance Coverage Law Blog | March 23, 2016
In Texas the general rule seems to be that either the insurance company or the policyholder may invoke the appraisal clause (before or after suit is filed). After the award both parties are generally bound by the award, unless they can prove the award was arrived at as a result of fraud or some other recognized basis for challenging the award. It is very difficult to set aside an award.1 I was recently asked by a policyholder about setting aside an unfavorable award in Oklahoma. The rules are different in Oklahoma because the appraisal award is only binding on the party who invoked appraisal. This rule was discussed in an interesting case out of the Oklahoma Supreme Court, Massey v. Farmers Insurance Group,2 where the Court answered a certified question from the U.S. Court of Appeals for the Tenth Circuit.
Massey was insured by Farmers. Massey suffered a fire at their home. Massey and Farmers could not agree on the amount of damages. Massey filed suit and then Farmers invoked appraisal under the appraisal clause in the policy.3 The Massey’s did not agree with the award, went to trial and got a verdict very much in excess of the appraisal award. Farmers appealed arguing that the award was preclusive as to damages. In other words, Farmers argued that the damages were capped at the appraisal award. The Tenth Circuit certified the issue to the Oklahoma Supreme Court.
First the court looked at prior cases, which indicated that appraisal awards are binding on both parties. However, the court pointed out those cases were decided before Oklahoma law mandated the inclusion of the appraisal clause. The court saw a difference between non-mandated and mandated appraisal clauses because the mandated appraisal clause is “imposed on both parties by statute and neither party can negotiate its inclusion or exclusion.”4 Relying on an Oregon case, the court pointed out that appraisal is “permissive” to the party invoking it because they have chosen to invoke it. However, for the other party appraisal is “mandatory” because they are compelled to submit whether they want to or not. The court further reasoned and held that the appraisal award is binding on the party who invoked it because appraisal is permissive to him and he chose the appraisal tribunal as his forum. However, appraisal is not binding upon the party who did not invoke it because the binding nature of the appraisal award would violate that party’s constitutional right to trial by jury. Amazing!
Why shouldn’t this analysis be used in all appraisal contexts, regardless of whether appraisal clauses are imposed by the legislature of various states? As I said before, even in states where appraisal clauses are not mandated by the legislature, they are no less mandatory for the policyholder. They are contracts of adhesion. The policyholder has no right to negotiate any provision of the policy. It is a myth that the policyholder “negotiated” the appraisal clause into his insurance policy. When the carrier invokes appraisal, especially after the policyholder has filed suit and invoked his right to trial by jury, the policyholder is forced to go to an appraisal he doesn’t want. Isn’t it a violation of his constitutional right to trial by jury if a bad award comes back and he is stuck with it? In states where appraisal clauses are not mandated, but the insurance company inserts an appraisal clause into the contract, then the insurance company has permissively inserted that clause. As such, the insurance company should never be able to walk away from an award in favor of the policyholder, even if the policyholder invoked appraisal.