Court Opinion

ID: 8203242
Source: CourtListenerOpinion
Date Created: 2022-09-09 23:48:15.927359+00
Date Added: 2024-06-11T16:41:00.771348
License: Public Domain

ANN WALSH BRADLEY, J.
¶ 54. (dissenting). Although both arbitration and appraisal are contractual methods for alternative dispute resolution, there are significant differences. One difference lies in the statutory formality established to define the parties' *79responsibilities and protect their rights. "Arbitration in Wisconsin is a formal procedure, and the parties' rights and responsibilities are defined by statute.... Appraisal in Wisconsin, on the other hand, is a mechanism of dispute resolution that is not regulated by statute and, depending on the parties' agreement subjecting themselves to an appraisal process, may or may not be formal." Lynch v. Am. Fam. Mut. Ins. Co., 163 Wis. 2d 1003, 1010-11, 473 N.W.2d 515 (Ct. App. 1991).
¶ 55. The appraisal process may be less formal than arbitration, but that does not mean that it can be less fair.1
¶ 56. Even though the exact process necessary to create a fair method for resolving disputes through appraisal is not set forth in the statutes, there must be at least a minimum level of process to ensure that the parties are heard and that an appraisal decision is fairly reached and reviewed. This is especially important because the form appraisal clauses in standard insurance policies, which are contracts of adhesion, may result in a policyholder's forfeiture of the right to have a jury determine the amount of loss.
¶ 57. The majority, however, seems oblivious to the necessity of establishing minimum standards for fairness in the appraisal process because it: (1) allows for the forfeiture of an important right by erroneously reading into the appraisal clause the word "binding" where it does not exist; (2) appears to constrain meaningful review of an appraisal award under most circumstances by limiting review to the face of the award; and (3) affirms the circuit court's erroneous decision refus*80ing to permit Donaubauer to conduct necessary discovery in an action in the circuit court to invalidate the appraisal award. Because the majority fails to establish even minimum standards for fairness in the appraisal process, I respectfully dissent.
I
¶ 58. Before addressing the infirmities in the majority opinion, I briefly describe its response to the issues presented. The majority concludes that Donaubauer agreed to binding appraisal — not just once, but twice. It interprets a clause in the policy that the agreement of two appraisers "will set the amount of loss" as an explicit statement that the appraisal is binding. Majority op., ¶ 34. Hedging its bets, it also determines that Donaubauer's letter stating that he was "willing to fulfill his contractual obligations" amounts to a second agreement, and that "Donaubauer did not contest Farmers' assertion that he must submit to binding appraisal." Majority op., ¶ 39.
¶ 59. In addition, the majority concludes that appraisals are presumptively valid, and that they are fair because each party is allowed "to appoint an appraiser of their own liking, with a neutral umpire as the deciding vote." Id. op., ¶ 43. It determines that "[r]e-view of an appraisal award should usually be limited to the face of the award." Id., ¶ 45. Donaubauer argues that the arbitrators' e-mail communications are evidence that they misunderstood their role in the process. Nevertheless, the majority concludes, "Since we see nothing on the face of the award that supports a misunderstanding, the communications need not be examined." Id., ¶ 47. Further, it concludes that the circuit court correctly exercised its discretion when it *81did not permit Donaubauer to conduct discovery in the circuit court action. Majority op., ¶ 52.
II
¶ 60. I examine first whether Donaubauer is bound by the amount determined in the appraisal process and is thus foreclosed from pursuing an action in a court of law. The right to access courts in order to file a lawsuit for damages is an important right for all citizens. "[A]ny waiver of the right must be clear and unambiguous." DeGroot v. Farmers Mut. Hail Ins. Co. of Iowa, 643 N.E.2d 875, 876 (Ill. App. 1994) (determining that an appraisal clause similar to the clause before us today did "not operate as a final and binding resolution of the party's dispute" and did "not foreclose either party from maintaining an action in a court of law").
¶ 61. Appraisal clauses, like arbitration clauses, may be binding or nonbinding. In order to determine whether the appraisal clause here was binding or nonbinding, we must examine the words of the insurance contract.
¶ 62. This examination has double import here because of Donaubauer's subsequent agreement to "fulfill his contractual obligations." See majority op., ¶ 17. Donaubauer's subsequent agreement is nothing more or less than an agreement to fulfill the obligations set forth in his insurance contract.
¶ 63. The contract provides:
If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent appraiser.... The appraisers will separately set the amount of loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will he the amount of loss. *82If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will set the amount of loss.
¶ 64. It is particularly noteworthy that the words "binding," "bind," or "bound" appear nowhere in this appraisal clause. Such words, or a variation thereon, are completely absent from the text. Yet both the majority and the circuit court read the word "binding" into the clause where it does not exist.
¶ 65. 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). See majority op., ¶ 3 ("We hold that the circuit court did not erroneously exercise its discretion in enforcing the agreement between the parties to participate in the binding appraisal process.").
¶ 66. I instead follow the basic principle of insurance contract interpretation that any ambiguity is construed against the drafter of the policy. If Farmers wanted the contract to provide for a binding appraisal process, it should have heeded the advice offered to those who draft contractual appraisal clauses: when drafting a binding appraisal clause you should expressly state that it is binding in order to avoid any ambiguity. See Thomas J. Stipanowich, Contract and Conflict Management, 2001 Wis. L. Rev. 831, 871 (discussing the nature and process of decision making, including whether appraisals are binding or nonbinding, and stating: "[I]t behooves drafters to make explicit the parties' expectations[.]"); see also Neil S. Hecht, Variable Rental Provisions in Long Term Ground Leases, 72 Colum. L. Rev. 625, 685 (1972) ("To anticipate [the] *83possibility [that one of the parties is unwilling to accept the appraisers' determination], it is wise to add a clause providing that the decision of the appraisers shall bind the parties[.]").
¶ 67. Insurance policies around the country follow that advice and expressly state in the appraisal clause whether it is binding. See, for example, the clause set forth in another Wisconsin case, Bowman v. Famers Insurance Group of Companies:
You or we may demand appraisal of the loss. Each will appoint and pay a competent and disinterested appraiser .... Each appraiser will state separately the actual cash value and the amount of loss. An award in writing by any two appraisers will determine the amount payable, which shall be binding on the parties.
No. 1994AP661, unpublished slip op. (Wis. Ct. App. Apr. 27, 1995) (emphasis added); see also Canfield v. Watertown Fire Ins. Co., 55 Wis. 419, 12 N.W. 252 (1882), infra, ¶ 79 n.2 ("[T]heir award in writing shall be binding on the parties hereto[.]") By contrast, the words in the insurance contract before us simply fail to make binding the acceptance of the appraisal amount.
¶ 68. The same wording — verbatim to Donaubauer's policy — was examined in Merrimack Mutual Fire Insurance Company v. Batts, 59 S.W.3d 142 (Tenn. Ct. App. 2001). In that case, an insured wanted to enforce the appraisal clause against the insurance company. She argued that the appraisal clause in her homeowners policy was in essence a binding arbitration agreement requiring the insurance company to pay the full amount of the appraisers' calculation of her loss.
¶ 69. The court set forth the rules of construction for insurance policies. It stated that "[t]he respective rights of an insured and an insurance company are *84governed by their contract of insurance." Id. at 148. "As with any other contract, the courts must give effect to the parties' intentions as reflected in their written contract of insurance." Id. Examining the exact words that are now before us, the court concluded that the appraisal clause did not bind the insurance company to pay the amount set by the appraisers. Id. at 150.
¶ 70. Consistent with Merrimack Mutual, Donaubauer was not required under the express language of the policy to be bound by the amount set by the appraisers. In fact, under Lynch v. American Family Mutual Insurance Company, 163 Wis. 2d 1003, he was not even bound to participate in any fashion whatsoever in the appraisal process.
¶ 71. In Lynch, the court held that "an insurance company may not demand an appraisal of a loss after the commencement of an action by the insured on that loss when the insurance company failed to demand the appraisal prior to the lawsuit even though it had an opportunity to do so." Id. at 1008. Here, the facts are clear. On April 15, 2003, Donaubauer's home was destroyed by fire. A year later, on April 12, 2004, he commenced a lawsuit in the circuit court. Almost another year passed after the commencement of the action before Farmers invoked the appraisal clause and designated its appraiser. Farmers certainly had plenty of opportunity to demand an appraisal prior to the commencement of the action and it simply failed to do so.
¶ 72. When agreeing to participate in appraisal after commencing litigation against Farmers, Donaubauer agreed only to "fulfill his contractual obligations" under the policy. Here, the parties' agreement, as reflected in the policy, did not expressly provide for binding appraisal. Accordingly, I conclude that *85Donaubauer is not bound to accept the amount determined by the appraisal. He has not clearly and unambiguously forfeited his right to have a jury decide the issue of his damages.
Ill
¶ 73. Having concluded that parties can be bound to an appraisal process without an explicit agreement, the majority appears to constrain any meaningful review of an appraisal award under most circumstances. The majority opinion asserts that "[rjeview of an appraisal award should usually be limited to the face of the award," but that "[i]f fraud, bad faith, material mistake, or a lack of understanding of the process are reasonably implicated, it is within a judge's discretion to allow further inquiry or discovery." Majority op., ¶ 45.
¶ 74. Here, Donaubauer presented evidence that the appraisers misunderstood their role. The appraisers' e-mail communications indicated that they might not understand that they were required to provide an award that would permit Donaubauer to build a new home of "like kind and quality," as provided by the insurance policy. This inference is strengthened by the fact that the very same homebuilder who assisted the appraisers in calculating the amount of the award submitted a proposal for Donaubauer's new home — and it was 600 square feet smaller than the original home. See majority op., ¶ 25. Thus, the homebuilder appeared to believe that the award was insufficient to cover the cost of a home of like kind and quality to Donaubauer's original home.
¶ 75. Nevertheless, despite the extrinsic evidence that the appraisers failed to understand their role in the process, the majority limits its review to the face of the *86award. It states: "Since we see nothing on the face of the award that supports a misunderstanding, the communications need not be examined." Majority op., ¶ 47.
¶ 76. Rare will be the case, however, where fraud, bad faith, material mistake, or lack of understanding of the process is apparent from the face of an appraisal award. 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. This determination is not adequate to ensure that appraisals are fundamentally fair.
¶ 77. Further, this hollow standard of review is not mandated by our case law. The majority cites Quinn v. New York Fire Insurance Company, 22 Wis. 2d 495, 126 N.W.2d 211 (1964) for the proposition that review "should usually be limited to the face of the award," but this is a mischaracterization of Quinn. In that case and under the terms of the policy, the appraiser was required to appraise the actual cash value of property damaged by fire. Nevertheless, the award made "no reference to actual cash value; it sets forth only the loss." Id. at 500. The court determined that "The award, on its face, does not comply with the requirements of the policy." Therefore, the court concluded that the appraisal award was "of no effect." Id. at 502.
¶ 78. Quinn affirms the principle that when it is apparent from the face of the award the arbitrators did not understand the process, the award is invalid. However, it does not limit the court's review to the face of the award. Nowhere does it state that grounds for invalidating an appraisal award must usually be apparent on the award's face.
*87¶ 79. In fact, our case law supports the opposite conclusion. In Canfield, 55 Wis. 419, the insured filed a lawsuit in court to set aside an appraisal.2 The insured testified that he was not permitted to present evidence to the appraisers and that the appraisers incorrectly believed that certain items were not covered by the insurance policy. The court excluded the insured's testimony. On appeal, we determined that the testimony was wrongly excluded. We stated that the insured "may set up any matter which shows the award invalid, whether such matter appears upon its face or not." Id. at 424.
¶ 80. Here, the majority breaks new ground by limiting, under most circumstances, a court's review of an appraisal to the face of the award. The result will often prevent any meaningful review at all.
¶ 81. In this case, the appraisal award is a two-page document. The first page of the award contains: a signed declaration of the appraisers that they will act impartially and make a "true, just and conscientious award"; the selection of an umpire; a statement of the qualifications of the umpire; and a statement of the total replacement cost and actual cash value of loss. The second page provides an itemization of the total replacement cost and the total actual cash value of the following items: "dwelling"; "2nd floor kitchen"; "septic sys*88tem"; "exterior concrete"; "exterior blacktop"; "shed by garage"; "outbuildings"; "trees"; "sod"; and "flowers, plants, shrubs."
¶ 82. It is clear from the face of the award that the appraisers assigned a replacement cost and actual cash value for items in the ten separate categories listed above. What is invisible, however, is any explanation of how the appraisers arrived at the replacement cost and cash value of any of the above items. It is unclear whether the appraisers adhered to the policy's definition of "replacement value" as the cost of replacing Donaubauer's home with a home of "like kind and quality." 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. If Donaubauer is correct and the appraisers did not appreciate their role in the appraisal process to determine the cost of rebuilding a home of like kind and quality, it would likely not be apparent from the face of the appraisal award.
IV
¶ 83. Finally, the majority deprives litigants of the tools necessary to substantiate a claim that the appraisal process was not fair. Here, Donaubauer filed an action in circuit court seeking to invalidate the appraisal on the grounds that the appraisers misunderstood their task.3 He contends that he should have *89been permitted to conduct discovery in the circuit court action to bolster his claims. Specifically, he sought to depose the appraisers to ascertain their understanding of the task.
¶ 84. Importantly, Donaubauer does not request discovery during an appraisal process. Rather, he requests discovery in a civil action filed in circuit court to vacate the appraisal award. A basic tenet of civil procedure is that relevant evidence which is not privileged is discoverable. Wis. Stat. § 804.01(2)(a). Evidence of the appraisers' understanding of their role would be relevant to Donaubauer's claim.
¶ 85. The majority agrees that the appraisal should be vacated if the appraisers failed to understand their task, and that discovery into this matter is potentially available if Donaubauer made a prima facie showing that they misunderstood their task. Yet, without explaining the circuit court's reasoning, the majority simply concludes that "the trial judge examined the relevant facts, applied a proper standard of law, and reached a conclusion that a reasonable judge could reach[.]" Majority op, ¶ 52.
¶ 86. The circuit court did not provide any indication that it considered the evidence set forth by Donaubauer or his claim that the appraisers misunderstood their task. It merely stated that finding no indication of fraud, it would not allow discovery:
*90If there was a whiff of fraud or some indication that this process lacked integrity, I would think under those circumstances, when you are talking about a fraud here, it would be a fraud on the Court and that I consider very serious. I think the Court under those circumstances would have inherent power to do whatever is necessary to right that kind of a situation. ... As I said earlier, I don't see that type of a situation present here. I don't see Mr. Donaubauer or any party to this appraisal process as being entitled to use all of the discovery mechanisms of Chapter 804[.]
¶ 87. Yet, fraud is not the only circumstance under which an appraisal award should be vacated. This court has stated, and the majority agrees, that an appraisal can be vacated when the appraisers did not understand their role in the process. Majority op., ¶ 44. Dechant v. Globe & Rutgers Fire Ins. Co., 194 Wis. 579, 217 N.W. 322 (1928). Here, Donaubauer presented evidence that the appraisers misunderstood their role in the process. Without discovery, however, he is deprived of an opportunity to substantiate his claim.
¶ 88. Fundamental fairness requires more. I conclude that the circuit court erroneously exercised its discretion by quashing Donaubauer's discovery request and thus denying Donaubauer a meaningful opportunity to substantiate and be heard on his claim.
¶ 89. For the reasons set forth above and because the majority fails to establish even minimum standards for fairness in the appraisal process, I respectfully dissent.
¶ 90. I am authorized to state that Chief Justice SHIRLEY S. ABRAHAMSON joins this dissent.

 See generally Timothy E Law & Jillian L. Starinovich, What Is It Worth? A Critical Analysis of Insurance Appraisal, 13 Conn. Ins. L.J. 291 (2006-2007).

 Although the court in Canfield appears to use the terms "appraisal" and "arbitration" interchangeably, the clause in the insurance policy was for appraisal of the amount of loss: "If differences of opinion should arise between the parties hereto as to the amount of loss or damage, the subject shall be referred to two disinterested and competent men ... who shall ascertain, estimate, and appraise the loss or damage, and their award in writing shall be binding on the parties hereto[.]" Canfield v. Watertown Fire Ins. Co., 55 Wis. 419, 420, 12 N.W. 252 (1882).

 We can be guided by the statutory standards for vacating or modifying an arbitration award. Wisconsin Stat. § 788.10 requires an award to be vacated "[wjhere the award was procured by corruption, fraud or undue means"; "[w]here there was evident partiality or corruption on the part of the arbitra*89tors"; "[w]here the arbitrators were guilty of misconduct... or any other misbehavior by which the rights of any party have been prejudiced"; or "[wjhere the arbitrators exceeded then powers, or so imperfectly executed them that a mutual, final and definite award ... was not made." Section 788.11 requires an arbitration award to be modified if "there was an evident material miscalculation of figures or an evident material mistake"; "[w]here the arbitrators have awarded upon a matter not submitted to them"; or "[w]here the award is imperfect in matter of form[.]"