Generally, an insurance policy’s appraisal provision specifies that either party to the contract may seek court intervention to appoint an umpire (by a judge of a court with jurisdiction), but the policy does not include a provision explicitly requiring that the other party be notified if and when the first party goes to court.
In one typical scenario, the insured and the insurer appoint appraisers, but the appraisers have not agreed on an umpire within 15 days. Therefore, the insured hires an attorney and goes to court to have an umpire appointed without notice to the insurer. The insured's appraiser and umpire then quickly agree on an appraisal award, and the insurer learns about it after the award has been signed.
The issue could also arise when an insurer has declined to participate in an appraisal because the claim was fully denied based on a causation or coverage determination. In this instance, the insured could go to court without notice to the insurer to have a friendly umpire appointed, which more likely than not results in a generous appraisal award.
In recent months, some plaintiff firms in Texas have interpreted the absence of any such language as an invitation to proceed ex parte – without any notice to the carrier and with no opportunity for the carrier to have input with the court before an umpire is appointed.
These law firms are citing a seven-year-old order issued by Judge Sam R. Cummings in Schwartz v. Century Surety Company; Civil Action No. 1:11-CV-217-C. In that case, both parties appointed appraisers, and the appraisers could not agree on an umpire. The Schwartzes then sought and obtained the appointment of an umpire by filing an action in the state court. Once Century realized an umpire had been appointed, it removed the case to federal court, seeking the court’s assistance to have the state court order vacated.
Century argued that the process was not fair and violated its due process rights, because no notice was given to Century prior to the filing of the state court action seeking the appointment. Judge Cummings noted that the insurance contract, presumably drafted by the insurer, did not include a requirement that notice be given to the other party before seeking appointment of an umpire by a court of jurisdiction. As such, Judge Cummings held that any ambiguity about whether notice is first required before seeking judicial intervention is interpreted against the drafter. Because the contract did not explicitly require prior notice, and was presumably at a point at which the parties could not agree anyway on the appointment of the umpire (or else they would have previously done so), Judge Cummings denied the motion to vacate.
Some courts have held that a carrier is entitled to notice and a right to object to the appointment of an umpire. In Calendonian Ins. Co. v. Superior Court In and For Alameda County, 140 Cal.App.2d 458, 295 P. 2d 49 (Cal.App. 1 Dist. 1956), it was held that the lower court did not have jurisdiction to appoint an umpire at the insured’s request without notice to the carrier.
In Camden Fire Ins. Ass’n v. Cahill, 266 Ky. 362, 98 S.W.2d 462 (Ky. Ap. 1936), it was held that an appraisal award made by an insured’s appraiser and umpire appointed by a court without notice to the insurer was invalid, despite the absence of policy language requiring notice. The Kentucky Court held, “[t]his award was not validly made. A proper tribunal was never set up. The court . . . should not then have acted except after reasonable notice to appellant so that it could be properly represented. True, the contract does not require notice, but the law does.”
Although the typical appraisal provision allows either party to seek appointment of an umpire by a court, it does not authorize that appointment to be made without notice to the other party. Due process requires that parties be given “adequate notice and an opportunity to be heard or to defend” before adverse action is taken.
Principles of fairness and due process dictate that prior notice is required, and to find otherwise encourages abuse of the appraisal process. By imposing a prior notice requirement and allowing an opportunity to have input with the court on the umpire appointment, courts would help to preserve the integrity of the appraisal process.
From our Houston office, Lugenbuhl shareholders Rebecca Moore and Martin Sadler are members of the firm's Insurance practice. Visit the Insurance practice section to learn more about our expertise and services.
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