In Hartford Lloyd’s Insurance Co. v. Teachworth, 898 F.2d 1058 (5th Cir. 1990), the insured made claims for hurricane and freeze damage under his Texas insurance policy issued by Hartford Lloyd’s. When the insured and Hartford were unable to agree on the damage, the insured invoked the appraisal provision of the policy. The appraiser for the insured estimated the damages at approximately $4,154,681, while Hartford’s appraiser arrived at a figure of about $1,419,951. Pursuant to the policy, the appraisers submitted their differences to an umpire appointed by a Galveston County judge, and the umpire agreed in large part with insured’s appraiser. The appraisal panel rendered a written appraisal award in the amount of $3,770,043.
Unsurprisingly, Hartford filed a declaratory judgment action after the appraisal award was rendered, alleging that the insured’s appraiser had not acted impartially and that the insured had acted fraudulently during the appraisal process. Although there was not support in the policy for its decision, the trial court determined that the appraisal award was an arbitration award governed by the Federal Arbitration Act (“FAA”). Accordingly, the trial court reviewed the award under sections 10 and 11 of the FAA, which gives the court authority to vacate or modify an arbitration award. The court determined that these sections did not give Hartford the right to a jury trial on the validity of the award, so the validity of the award was tried to the bench, which affirmed on appeal.
Because it did not receive the decision it wanted, Hartford – the insurance carrier – then argued that the FAA did not apply to appraisal awards, and appealed all the way to the Federal Court of Appeals for the Fifth Circuit. Comparing the two, the Fifth Circuit noted:
While both procedures aim to submit a dispute to a third party for speedy and efficient resolution without recourse to the courts, there are significant differences between them. For example, an arbitration agreement may encompass the entire controversy between parties or it may be tailored to particular legal or factual disputes. In contrast, an appraisal determines only the amount of loss, without resolving issues such as whether the insurer is liable under the policy. Additionally, an arbitration is a quasi-judicial proceeding, complete with formal hearings, notice to parties, and testimony of witnesses. Appraisals are informal. Appraisers typically conduct independent investigations and base their decisions on their own knowledge, without holding formal hearings. [emphasis added]
The court ruled that the insurance appraisal provision in the policy was not an arbitration agreement and therefore that the district court misapplied the FAA, harming Hartford by denying it a jury trial on the validity of the award, applying the wrong standards in assessing that validity, and making factual findings under FAA standards that defeated Hartford’s policy coverage defenses.
So according to the Fifth Circuit, appraisals are not arbitrations because they are not quasi-judicial proceedings. As the Fifth Circuit stated in Teachworth, appraisals are informal and they typically do not involve formal hearings.
