Is Appraisal Governed Under the Federal Arbitration Act?

The Federal Arbitration Act is being raised in more court proceedings as pre-empting state common law regarding appraisal. I noted this last month in Is Appraisal an Arbitration Under the Federal Arbitration Act?

Another federal court in Maryland recently ruled that the Federal Arbitration Act (FAA) preempts state law and governs appraisal of property loss disputes:1

Appraisals And The Federal Arbitration Act

This Court has held that, when determining whether an appraisal provision constitutes an enforceable arbitration clause under the FAA, thereby triggering the FAA, ‘[i]t is . . . irrelevant that the contract language in question does not employ the word ‘arbitration’ as such. Rather, what is important is [whether] the parties clearly intended to submit some disputes to binding review by a third party.’ Liberty Mut. Grp., Inc. v. Wright, 2012 WL 718857 at *5 (D. Md. Mar. 5, 2012)….see also Omaha v. Omaha Water Co., 218 U.S. 180, 194 (1910) (noting that a particular dispute had involved arbitration ‘though the arbitrators were called appraisers’). Federal courts have also used ‘differing verbal formulations’ to determine whether a particular dispute resolution procedure constitutes ‘arbitration’ under the FAA….

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… the Court does not possess subject-matter jurisdiction to consider this dispute, because the parties’ appraisal dispute is subject to the FAA. In addition, Travelers’ challenge to Defendants’ appraiser is premature, because such a challenge cannot be raised until after the parties have completed the appraisal process.

… the Court reads the appraisal provision in the Policy to reflect the parties’ intent to conduct an appraisal of the Property and to submit their dispute about the amount of loss at the Property to binding review by a third-party appraiser. Because the Policy reflects that the parties agreed to submit their dispute to a third-party appraiser, the FAA governs this dispute.

Most appraisal cases in state courts have not raised or ruled on the issue of whether the FAA pre-empts state law. However, if these recent cases are to be followed, significant changes in the law of appraisal should be expected because most have followed state law and not the federal arbitration code for guidance.

In the post, Is Appraisal an Arbitration Under the Federal Arbitration Act?, I noted my concerns:

I have written about this issue in Is Appraisal Governed Under the Federal Arbitration Act? and If Appraisal Is Governed by the Federal Arbitration Act, What Is the Process? I would suggest that this issue is very much at play in many states and that the FAA is often overlooked. My guess is that most simply are ignorant about this legal issue.

The bottom line is that depending on state law, many courts may apply provisions of the FAA to appraisal. The problem is that many conducting appraisals are not conducting them pursuant to the provisions of the FAA. All is fine until somebody raises this difficult legal issue as a way to avoid a perceived injustice from an appraisal award.

I do not intend to throw a ‘monkey wrench’ into appraisals. However, this law is developing, and practitioners, public adjusters, restoration contractors, as well as parties to the insurance contract should be aware of this case and others similar to it. The arbitration process and who can be an arbitrator is very different from the typical appraisal and who qualifies as an appraiser.

The trend in federal court is clear—the FAA pre-empts state court law regarding appraisal. Keep up on this dynamic topic if you are a party to appraisal, an appraiser, or umpire.