Supreme Court Has Ruled That the Appraisal Clause in the Standard Fire Policy Is Constitutional

The United States Supreme Court held in the 1931 case of Hardware Dealers Mutual Fire Insurance Company v. Glidden Company,1 that the appraisal clause found in the Minnesota standard fire insurance policy is constitutional. This post follows the recent post, Does the Appraisal Process Violate the Constitution?, where I analyzed a pending case where the insurance company is arguing that the appraisal “process” is unconstitutional.

The Supreme Court decision is a little confusing because it discusses “appraisal” as an “arbitration.” Nevertheless, the Court noted the issue as follows:

In the present suit, brought to recover the amount of the award, the appellant set up by way of defense, the single point relied on here, that so much of the statutes of Minnesota as requires the use by appellant of the arbitration provisions of the standard policy infringes the due process and equal protection clauses of the Fourteenth Amendment. In rejecting this contention and in sustaining a recovery of the amount of the award, the Supreme Court of Minnesota, consistently with its earlier decisions, ruled that the authority of the arbitrators did not extend to a determination of the liability under the policy, which was a judicial question, reserved to the courts, but that their decision as to the amount of the loss is conclusive upon the parties unless grossly excessive or inadequate, or procured by fraud.

The Supreme Court noted that the appraisal clause had long been commonly used in fire insurance policies. I found one in an American maritime contract that predated the United States, which was noted in Appraisal Clause in 1761 Maritime Policy and Reflections on Fast Resolution of Controversies.

In Does the Appraisal Process Violate the Constitution?, I made the following observation:

The crazy thing about the position is that Empire Indemnity wrote the appraisal clause into the policy. Empire Indemnity has been going to appraisal without arbitration or a formal process in many appraisals long before this policy was written. So I do not know how much of a good faith argument this really can be by Empire Indemnity.

The policyholder made the same contention before the Supreme Court, but the language had to be in the policy because it was required so by law:

Appellees insist that the use of the clause here was voluntary, since the appellant was not compelled to write the policy, and that in any case appellant, by long acquiescence in the statute, is estopped to challenge, after the loss, the right of the insured to rely upon it. Without stopping to examine these contentions, we assume that appellant’s freedom of contract was restricted by operation of the statute, and pass directly to the question decided by the state court, whether the Fourteenth Amendment precludes the exercise of such compulsion by the legislative power.

Further analyzing the constitutional due process concerns, the Supreme Court remarked:

The present statute substitutes a determination by arbitration for trial in court of the single issue of the amount of loss suffered under a fire insurance policy. As appellant’s objection to it is directed specifically to the power of the state to substitute the one remedy for the other, rather than to the constitutionality of the particular procedure prescribed or followed before the arbitrators, it suffices to say that the procedure by which rights may be enforced and wrongs remedied is peculiarly a subject of state regulation and control. The Fourteenth Amendment neither implies that all trials must be by jury, nor guarantees any particular form or method of state procedure…. In the exercise of that power and to satisfy a public need, a state may choose the remedy best adapted, in the legislative judgment, to protect the interests concerned, provided its choice is not unreasonable or arbitrary, and the procedure it adopts satisfies the constitutional requirements of reasonable notice and opportunity to be heard.

…

Without the aid of the presumption, we know that the arbitration clause has long been voluntarily inserted by insurers in fire policies, and we share in the common knowledge that the amount of loss is a fruitful and often the only subject of controversy between insured and insurer; that speedy determination of the policy liability such as may be secured by arbitration of this issue is a matter of wide concern… that in the appraisal of the loss by arbitration, expert knowledge and prompt inspection of the damaged property may be availed of to an extent not ordinarily possible in the course of the more deliberate processes of a judicial proceeding. These considerations are sufficient to support the exercise of the legislative judgment in requiring a more summary method of determining the amount of the loss than that afforded by traditional forms. Hence the requirement that disputes of this type arising under this special class of insurance contracts be submitted to arbitrators, cannot be deemed to be a denial of either due process or equal protection of the laws.

The Court then ruled the appraisal clause constitutional:

[W]e now hold, that the state, in the present circumstances, has power to prescribe a summary method of ascertaining the amount of loss, the requirements of the Fourteenth Amendment, so far as now invoked, are satisfied if the substitute remedy is substantial and efficient.

Everybody in the property insurance appraisal business should read the opinion carefully because it seems to assume that the parties will pick experts and that it will move along promptly. This is often not the case. Members may have little expertise. Promptness is often missing, but normally not at the rate of either formal arbitration or judicial proceedings.

I wanted to answer the question in the prior post. But there is a lot more to this important topic which I will write about in the future.

Thought For The Day

At all events, arbitration is more rational, just, and humane than the resort to the sword.
—Richard Cobden
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1 Hardware Dealers Mutual Fire Ins. Co. v. Glidden Co., 284 U.S. 151, 52 S. Ct. 69, 76 L. Ed. 214 (1931).