July 27, 2009 – The Wisconsin Supreme Court held on July 10 that appraisals are presumptively valid, limiting judicial review of an appraisal award to the face of the award barring some defect in the appraisal process.

In Farmers Automobile Ins. v. Donaubauer, 2009 WI 73, the court also gave binding effect to the appraisal clause in an insurance policy over the objections of the insured that it did not explicitly state he would be bound by the appraisal.

Dissenting justices criticized the majority for acting to deprive the insured of the tools necessary to show deficiencies with an award and interpreting the ambiguity in a contract of adhesion against the insured.

House fire

In April 2003, a fire destroyed Joseph Donaubauer’s home insured by Farmers Automobile Insurance. Donaubauer obtained an estimate for the replacement value of his home of approximately $553,000. In June 2003, Farmers obtained its own estimate of $380,819.

Donaubauer rejected the Farmers’ figure, and Farmers increased its offer to $471,000. In April 2004, Donaubauer filed suit against Farmers.

In March 2005, Farmers sent Donaubauer a letter stating that the lawsuit violated the policy and that the policy’s appraisal clause governed resolution of the dispute over replacement value. Farmers said that the appraisal clause, once invoked, was binding on the parties. Donaubauer’s lawyer sent a letter stating that Donaubauer was “willing to fulfill his contractual obligations and participate in the appraisal.”

Under the appraisal policy, Donaubauer and Farmers each selected an appraiser. Those appraisers would then select a third appraiser to serve as an “umpire” who resolves differences if the two appraisers cannot agree.

Donaubauer indicated he would only continue with the appraisal process that was part of a mediation process and non-binding. Farmers replied it would not deviate from its appraisal policy.

Farmers asked the circuit court to enforce the appraisal agreement. Donaubauer acknowledged that he had agreed to the appraisal policy outlined in the policy, but he insisted it was not binding. He also argued that the court should relieve him from the agreement because Lynch v. Am. Family Mut. Ins. Co., 163 Wis. 2d 1003 (Ct. App. 1991) held that an insured is not required to participate in an appraisal process when the insurer failed to demand the appraisal prior to the insured’s lawsuit despite ample opportunity to do so.

For its part, Farmers argued that the appraisal clause, once invoked by either party, was binding on the parties. Farmers also argued that it would set bad precedent to allow Donaubauer to withdraw from an agreement because he subsequently found case law that might have, if known earlier, led the party to take a different course of action.

The circuit court agreed with Farmers and granted its motion to enforce the agreement. Subsequently, all three appraisers agreed on a replacement value of $396,260.75 and an actual cash value of $248,579.68. The appraisal award was a two-page document itemizing the components of the award, along with the replacement cost and actual cash value for each.

Donaubauer filed a motion with the circuit court to have the award vacated or modified. He asserted that communications among the appraisers demonstrated that they were confused as to their role in the process and that they had made inappropriate judgments regarding the aesthetic value of the original home’s features. He noted that the home proposal from the third-party contractor was more than 600 square feet smaller and came with completely different design features than his old home.

Farmers successfully moved to quash Donaubauer’s discovery motion and the circuit court denied Donaubauer’s motion to modify or vacate the award.

Binding appraisal process

In a majority opinion authored by Justice Michael Gableman, the supreme court upheld the circuit court’s discretionary decision to enforce the policy’s appraisal provision as a binding agreement between Donaubauer and Farmers.

The court declared the appraisal provision to be “plain and unambiguous” in its function. “The text of the provision clearly provides for an appraisal process that may be invoked by either party and ‘will set the amount of loss’ upon its completion,” the court explained.

But Justice Ann Walsh Bradley – joined in dissent by Chief Justice Shirley Abrahamson – argued that any waiver of the right to access courts must be clear and unambiguous. “It is particularly noteworthy that the words ‘binding,’ ‘bind,’ or ‘bound’ appear nowhere in this appraisal clause,” Bradley wrote.

“The majority and the circuit court commit the same error: they conflate the agreement to participate in an appraisal process (which appears in the text of the clause) with an agreement to be bound by the amount determined in the process (which does not appear in the text),” she continued.

Bradley argued that the provision is ambiguous and appropriately construed against its drafter under principles of insurance contract interpretation.

In a footnote, the majority responded that Bradley cited “no authority for the proposition that a clause needs to have the word ‘binding’ in order to be so.” The court added, “The clause itself, as the circuit court and court of appeals found abundantly obvious, is unambiguously binding when validly invoked.”

The majority also observed that Donaubauer did not dispute Farmers’ assertion in its first letter that the appraisal process was binding despite an express invitation to Donaubauer to contest that analysis. Donaubauer “instead simply affirmed that he would abide by the contractual obligations and proceed with the appraisal process,” the court said.

But Bradley said that Donaubauer’s agreement to “fulfill his contractual obligations” under a policy that does not expressly provide for a binding appraisal falls short of “clearly and unambiguously” forfeiting his right to have a jury decide the issue of damages.

Applicability of Lynch

At the outset, the court said that Lynch may not have applied to the facts of this case. But, the court concluded, “[w]e need not reach Lynch’s application here because the parties agreed in writing to the appraisal process specified in the Policy.”

The court similarly dismissed Donaubauer’s argument that Lynch presented a mutual mistake of the parties. “A mistake of law by a party who fails to research and protect its legal rights, and who fails to fully consider the legal consequences of entering into an agreement, particularly when that party is represented by counsel, does not usually constitute grounds to rescind the agreement,” the court remarked.

“Allowing a party to withdraw from an agreement because it did not apprehend the applicable law beforehand sets a dangerous precedent,” the court added.

Review of appraisal award

  “The court’s role is not to determine whether the third party experts accurately valued the item (as if the court itself could do a better job), but whether the third party experts understood and carried out the contractually assigned task,” the majority said of its review of Donaubauer’s motion to vacate or modify the award.

“Appraisals are presumptively valid,” the court said, explaining that the appraisal process is fair to both parties because each is allowed to appoint an appraiser with a neutral umpire as the deciding vote. Further, the court noted, an appraisal promotes finality, saves time, and places a difficult factual question “into the hands of those best equipped to answer that question.”

“An appraisal may be set aside only upon the showing of fraud, bad faith, a material mistake, or a lack of understanding or completion of the contractually assigned task,” the court said. Thus, review of an appraisal award “should usually be limited to the face of the award,” the court added.

But Bradley said that the majority had curtailed meaningful review in most cases. She observed the strong extrinsic evidence Donaubauer complied to no avail. “Rare will be the case … where fraud, bad faith, material mistake, or lack of understanding of the process is apparent from the face of an appraisal award,” she wrote.

“The majority’s determination that review is usually limited to the face of the award is thus tantamount to a conclusion that as long as the appraisers provide dollar figures for several enumerated categories, the award will stand,” Bradley wrote. “This determination is not adequate to ensure that appraisals are fundamentally fair.”

Bradley and the majority argued over the meaning of Quinn v. New York Fire Ins. Co., 22 Wis. 2d 495 (1964).  The majority cited this case for the proposition that the review of an appraisal award is usually limited to its face. But Bradley said Quinn did not preclude more searching review.

“In fact, our case law supports the opposite conclusion,” Bradley wrote, citing Canfield v. Watertown Fire Ins. Co., 55 Wis. 419 (1882), which held an insured “may set up any matter which shows the award invalid, whether such matter appears upon its face or not.”

Responding to Bradley, the majority wrote, “[W]e have not stated that review is always limited to the face of the award. Rather, we have stated that review is usually limited to the face of the award. This gives the circuit judge discretion to exercise his or her judgment in the interests of fairness, while also ensuring that appraisals are not readily subject to challenge in courts, and are given the deference they deserve.”

The majority faulted Bradley’s approach for undermining the time-saving strengths of appraisals by “expanding and protracting expensive and stressful litigation.”

Arbitration versus appraisal

Bradley unfavorably compared appraisals to arbitration in that the appraisers give no explanation of how they arrived at their figures. “Unlike in arbitration where an arbitrator must explain his factual conclusions and legal reasoning in a written decision, there is no reasoning that can be tracked on the face of this appraisal award,” she wrote.

But the court noted that arbitration is governed by statute, unlike appraisals. Consequently, “[o]ur treatment of the appraisal process is informed by common law, contract interpretation, common sense, and the efficient administration of justice,” the court wrote.

Availability of discovery

If a challenger shows prima facie evidence of fraud or the other procedural defects itemized by the court as reasons to go beyond the face of the award, discovery is potentially available, the court said. However, permitting discovery remains within the circuit court’s discretion, the justices added.

In this case, “[t]he trial judge did not believe the appraisers’ communications displayed a misunderstanding of their task, and this was a reasonable conclusion,” the court said.

Bradley said the majority “deprives litigants of the tools necessary to substantiate a claim that the appraisal process was not fair.”

Donaubauer was seeking discovery during a civil action, not an appraisal process, Bradley noted. “A basic tenent of civil procedure is that relevant evidence which is not privileged is discoverable,” she said. “Evidence of the appraisers’ understanding of their role would be relevant to Donaubauer’s claim.”

Bradley faulted the circuit court for failing to sufficiently state its reasons to deny Donaubauer’s discovery motion. “[The circuit court] merely stated that finding no indication of fraud, it would not allow discovery,” Bradley wrote. “Yet, fraud is not the only circumstances under which an appraisal award should be vacated.

“Here, Donaubauer presented evidence that the appraisers misunderstood their role in the process,” Bradley continued. “Without discovery, however, he is deprived of an opportunity to substantiate his claim.

“Fundamental fairness requires more,” she concluded.