A trio of recent Maryland cases decided this summer involving demands for appraisal show that many courts are questioning whether property insurance appraisals are more akin to arbitrations and whether appraisal demands are proper when coverage issues arise. The trend is that federal courts are increasingly indicating that appraisal is to be treated as a demand for arbitration and governed under the Federal Arbitration Act. Maryland insurance appraisals as an alternative resolution dispute process are being upheld, but the courts are carefully guarding the insurer’s right to challenge coverage issues.

New Hope Church of God Waldorf v. Brotherhood Mutual Insurance, 1 involved a belated motion to send a matter in litigation to appraisal. The court noted the following:

In Maryland, ‘appraisal is analogous with arbitration. Consequently, this Court has applied arbitration law to appraisal clauses in insurance policies. Under the MUAA, ‘any provision in an insurance contract with a consumer that requires arbitration is void and unenforceable.’ However, that rule ‘does not apply to a [contract] provision that establishes an appraisal process to determine the value of property.’… Therefore, ‘ordinarily[,] an insured may compel an insurer to submit to appraisal. The plain language of the appraisal clause, the need to preserve the insured’s bargained for benefit, and the legislative policy in favor of enforcement of executory agreements to arbitrate dictate this result.’

However, a court order compelling an appraisal may not be appropriate when the parties’ dispute centers on whether the insured is entitled to coverage at all, rather than the exact value of loss that the parties agree is covered.

….It is apparent, however, that the parties’ dispute runs deeper than the value of covered loss and concerns whether the loss is covered at all…. An appraisal would serve no purpose if, as Defendant contends, the loss is not covered.

While the court denied the request for appraisal, indicating that coverage issues exist, it specifically noted in a footnote that neither party raised that the Federal Arbitration Act may preempt Maryland law:

The Court notes that the Federal Arbitration Act (‘FAA’) ‘preempts conflicting state law.’ Thomas Assocs., Inc. v. Oak Mgmt., Inc.,… (D. Md. Nov. 6, 2008) (citing Preston v. Ferrer, 552 U.S. 346, 352 (2008)… Neither party contends that provisions of the MUAA that are relevant here are preempted by the FAA.

In Thompson v. Allstate Property and Casualty Insurance Company, 2 the court noted that Maryland recognizes property insurance appraisal in the following context:

In Maryland, this Court has long recognized that, notwithstanding the distinctions between an appraisal under an insurance policy appraisal clause and arbitration, appraisal is analogous to arbitration. Consequently, this Court has applied arbitration law to appraisal clauses in insurance polices.

The federal court cited Maryland law on the issue:

Here, the appraisal clause expressly provides that in the event of a failure to agree on the amount of loss, on the written demand of either the insured or the insurer, each shall select an appraiser. This language is plain and unambiguous. It mandates that both the insured and the insurer submit to appraisal upon the demand of either, thereby assuring that the insured as well as the insurer has a contractual right to a prompt and inexpensive determination of the amount of loss. That contractual right, for which the insured bargained and paid premiums, can be preserved only if the insured is enabled to compel the insurer to submit to appraisal. 3

The federal court further noted that the new Maryland Uniform Arbitration Act (MUAA) still allows appraisal because it has a specific provision allowing for determinations of property value:

The MUAA has since been amended. It now states that ‘Except as provided in paragraph (2) of this subsection, any provision in an insurance contract with a consumer that requires arbitration is void and unenforceable.’ Md. Code Ann., Cts. & Jud. Proc. § 3-206.1(b)(1). However, paragraph (2) of that subsection then clarifies that ‘This subsection does not apply to a provision that establishes an appraisal process to determine the value of property.’… So although Defendant argues that ‘an insurance contract with a consumer cannot force the insured to give up his/her right to a jury or bench trial to resolve an alleged breach of the insurance contract,’ the MUAA unambiguously provides that a provision requiring appraisal such as that contained in the Policy is permissible.

The court compelled appraisal but required the appraisers to itemize the damages to preserve the coverage issues for future litigation:

The Court will reconcile the above by compelling appraisal while preserving Defendant’s right to contest whether certain damages set forth by that appraisal fall within the Policy’s gambit. The question of whether any particular damage(s) to Plaintiff’s residence is covered under the Policy exceeds the scope of the appraisal clause given the clause’s plain language and the above case law. But Plaintiff has presented sufficient information supporting that the parties contest the value of certain damage(s) that Defendant has identified coverage for under the Policy resulting from a covered peril. Thus, the Court will grant Plaintiff’s motion and compel the parties to engage in the appraisal process to better determine the precise value of loss to Plaintiff’s residence resulting from a covered peril. However, the Court will also require the appraisers to itemize their damage reports such that Defendant will be able to contest whether any particular damages are excluded from the Policy’s coverage. This solution recognizes Plaintiff’s contractual right to invoke appraisal under the Policy, preserves Defendant’s ability to contest the scope of covered losses under the Policy following that appraisal, and accords with the Court’s general sentiment of encouraging alternate dispute resolution methods for the sake of efficiency and judicial economy.

The court’s analysis about sending the matter to appraisal first before the coverage is determined was previously discussed in depth by me in “What Comes First—The Appraisal or The Coverage Determination?” where I noted:

Does an appraisal panel determine the amount of the loss before the coverage issues are litigated? This question is a common issue. The answer results in imperfect and prolonged proceedings, which result in delayed payment to the policyholder. Every state seems to have its own answer to the question. Courts struggle with how to handle these issues.

Finally, a Maryland federal judge preliminarily denied the request for appraisal because the policyholder’s complaint was so ambiguous it could not determine which claim the policyholder was trying to resolve through appraisal: 4

The Dudleys’ Motion asks the Court to compel an appraisal of their home to determine the amount of loss allegedly caused by either fire or storm damage (their Complaint is not clear as to which)….

Given the obvious lack of clarity in the Dudleys’ Complaint regarding which insurance claim (one filed for fire damage, the other filed for storm damage) forms the basis of their suit, the Court concludes that it would be premature, at this stage, to compel an appraisal, even if one were otherwise warranted.

Accordingly, the Court DENIES WITHOUT PREJUDICE the Dudleys’ Motion to Compel Appraisal and Stay Litigation Pending Appraisal The Dudleys are GRANTED LEAVE to file a Motion for Leave to Amend their Complaint within the next thirty (30) days to clarify which claim or claims they are pursuing here. Allstate may, of course, oppose the Motion for Leave to Amend in due course.

The bottom line is that appraisal is a valid method of claims resolution in Maryland. Courts will carefully look at the coverage issues raised, but may still require the appraisal to take place before litigating the coverage issues depending on case facts.

Thought For The Day

I deem it important to the security of every citizen that the obligation of contracts should be maintained.
—Francis Scott Key

1 New Hope Church of God Waldorf v. Brotherhood Mut. Ins., No. 23-2341, 2024 WL 3638031 (D. Md. Aug. 2, 2024).
2 Thompson v. Allstate Prop. & Cas. Ins. Co., No. 1:22-cv-02379, 2024 WL (D. Md. June 25, 2024).
3 Citing Aetna Cas. & Sur. Co. v. Ins. Comm’r, 293 Md. 409, 422 (1982).
4 Dudley v. Allstate Vehicle & Prop. Ins. Co., No. 8:24-cv-612, 2024 WL 374909 (D. Md. Aug. 9, 2024).