Aetna Casualty & Surety Co. v. Insurance Commissioner

Davidson, J., delivered the opinion of the Court. This case concerns the effect of an appraisal clause in a standard fire insurance policy that establishes an appraisal procedure to be followed when the insurer and the insured fail to agree on the amount of loss. More particularly, this case presents the question whether, under such an appraisal clause, an insured can compel an insurer to submit to appraisal. The relevant provisions of the standard fire insurance policy here involved states: "Appraisal.

In case the insured and this Company shall fail to agree as to the actual cash value of the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within twenty days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for ⁴¹¹ fifteen days to agree upon such umpire, then, on request of the insured or this Company, such umpire shall be selected by a judge of a court of record in the state in which the property covered is located. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this Company shall determine the amount of actual cash value and loss.

Each appraiser shall be paid by the party selecting him and the expenses of appraisal and umpire shall be paid by the parties equally. "When loss payable. The amount of loss for which this Company may be liable shall be payable sixty days after proof of loss, as herein provided, is received by this Company and as settlement of the loss is made either by agreement between the insured and this Company expressed in writing or by the filing with this Company of an award as herein provided. "Suit.

No suit or action on this policy for the recovery of any claim can be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with and unless commenced within twelve months next after inception of the loss.” (Emphasis added.) In 1977, the appellant, The Aetna Casualty & Surety Company (insurer), issued an insurance policy to an appellee, the Archdiocese of Baltimore (insured), insuring the St. Stanislaus Kostka Hall (the Hall) against all risks of direct physical loss. On 5 July 1978, the Hall was severely damaged by fire. The insured promptly notified the insurer of the loss. ⁴¹² The insured’s Director of Insurance (Director) was authorized to negotiate a settlement of the fire loss claim. In accordance with his customary procedures, he sought bids for the restoration of the Hall to its pre-fire condition from two restoration contractors who would use the "walk-through” method of estimating which consists of basing a bid upon a detailed inspection of the building.

The insured’s Building and Properties Commission (Commission) was dissatisfed with the "walk-through” method relied on by the Director. The Commission suggested to the Director that instead, estimates be obtained based upon plans and specifications detailing the work necessary to restore the Hall to its pre-fire condition. The Director and the insurer were notified that the Commission retained the right to reject any offer of settlement made by the insurer based upon the "walk-through” method bids. Thereafter, the Director instructed the two "walk-through” method bidders to submit their estimates directly to the insurer.

On 9 November 1978, the insurer offered an adjustment of the loss based upon the amount of $366,010.00, the amount of the lower of the two "walk-through” method bids. The Commission rejected the adjustment. Subsequently, the Commission obtained plans and specifications for the restoration of the Hall. On 9 March 1979, the Commission received three bids based upon those plans and specifications, the lowest of which exceeded the lower of the previous "walk-through” method bids by approximately $159,516.00.

Thereafter, the insured attempted to negotiate a settlement on the basis of the new bids. The insurer refused to settle on any basis other than the adjustment previously offered. On 30 April 1979, the insured, invoking the appraisal clause in the insurance policy, demanded appointment of appraisers. The insurer asserted that the amounts of the Commission’s bids were higher than the amounts of the "walk-through” method bids because they were based on plans and specifications designed not merely to restore the ⁴¹³ Hall to its pre-fire condition, but rather to substantially improve it, and because of inflation that occurred during the Commission’s unreasonable delay in obtaining its bids.

The insurer insisted that its policy did not provide coverage for either of these increased costs. It concluded that the appraisal clause was inapplicable because the disagreement between the two parties involved a question of coverage and not amount of loss, and refused to submit to appraisal. Various proceedings were held before the Insurance Commissioner of the State of Maryland, see Maryland Code (1957, 1979 Repl. Vol.), Art. 48A, § 55 (2) (iv) and § 55A, 1 and in the Baltimore City Court, see Art. 48A, § 40 (1). 2 Ultimately, that trial court determined that the Insurance Commissioner did not have the authority to order the insurer to submit to appraisal.

On 14 June 1980, the insurer filed a Petition for Declaratory and Injunctive Relief. The petition requested a declaration that the insurer was not required to submit to appraisal and an injunction restraining the Insurance Commissioner from suspending or revoking its license or imposing a fine. The insured filed a cross-petition for declar ⁴¹⁴ atory relief seeking an affirmative declaration that the insurer must comply with the appraisal clause and pay the amount of money that the appraisal determined to be due. After a hearing, the trial court declared that the insurer was required to submit to appraisal and to pay the insured the cash value of the loss that the appraisal determined to be due.

The trial court entered a judgment in favor of the insured. The insurer appealed to the Court of Special Appeals. We issued a writ of certiorari before consideration by that Court. We shall affirm the judgment of the trial court.

This Court has recognized that under an insurance contract providing that an insured and an insurer shall submit to appraisal when they cannot agree as to the amount of loss, it is the duty of both parties to act in good faith and to make a fair effort to carry out such provision and accomplish its object. The Shawnee Fire Ins. Co. of Topeka, Kansas v. Pontfield, 110 Md. 353, 360 , 72 A. 835, 836 (1909); The Connecticut Fire Ins. Co. of Hartford v. Cohen, 97 Md. 294, 303 , 55 A. 675, 678 (1903); The Caledonian Ins.

Co. of Scotland v. Traub, 83 Md. 524, 533 , 35 A. 13, 15 (1896). We have additionally noted that under such an appraisal clause, a determination by the appraisers of the amount of the loss is a condition precedent to a suit on the policy by the insured. Traub, 83 Md. at 533 , 35 A. at 15 . Thus, we have stated: "[WJhere the failure to secure an award after submission to arbitration is due to the fault of the insured the absence of an award is a bar to an action on the policy, but where it is due to the fault of the insurance company or its appraiser the insured may bring suit on his policy without an award.” Pontfield, 110 Md. at 360 , 72 A. at 836 .

However, this Court has not previously considered whether under such an appraisal clause an insured can compel an insurer to submit to appraisal. Courts in some jurisdictions in which the question has been considered have held that under such an appraisal ⁴¹⁵ clause an insured may compel an insurer to submit to an appraisal. E.g., Drescher v. Excelsior Ins. Co. of New York, 188 F.Supp. 158, 159 (D.N.J. 1960); Hala Cleaners, Inc. v. Sussex Mut.

Ins. Co., 115 N.J.Super. 11, 13 , 277 A.2d 897, 898 (1971); Saba v. Homeland Ins.Co. of America, 159 Ohio St. 237 , 239-40, 112 N.E.2d 1 , 2-3 (1953); Ice City, Inc. v. Insurance Co. of North America, 456 Pa. 210, 216-20 , 314 A.2d 236, 240-42 (1974); Standard Fire Ins.Co. v. Fraiman, 514 S.W.2d 343, 345-47 (Tex.Civ.App. 1974); see, e.g., Orient Ins. Co. v. Skellet Co., 28 F.2d 968, 969 (8th Cir. 1928); Itasca Paper Co. v. Niagara Fire Ins. Co., 175 Minn. 73, 79-80 , 220 N.W. 425, 427-28 (1928); Abramowitz v. Continental Ins.Co., 170 Minn. 215, 218 , 212 N.W. 449, 449-50 (1927), overruled in part on other grounds, 209 Minn. 182, 187 , 296 N.W. 475, 478 (1941).

These courts premise this conclusion on three grounds. Such a conclusion is consonant with the plain language of an appraisal clause establishing that submission to appraisal is mandatory when demanded by either the insured or the insurer. It is also consonant with the principle that an insured is entitled to receive the benefit of a bargain for which premiums were paid, including the right to settlement of his loss without the expense and delay of litigation. Finally, such a result is consonant with a legislative policy in favor of enforcement of executory agreements to arbitrate.

The underlying rationale for the principle that under an appraisal clause, an insured can compel an insurer to submit to appraisal was explained in detail in Saba v. Homeland Insurance Company of America, 159 Ohio St. 237 , 112 N.E.2d 1 (1953). There, an appraisal clause provided: "In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser...Saba, 159 Ohio St. at 238, 112 N.E.2d at 2 (emphasis added). In determining that the court had the authority to compel ⁴¹⁶ the insurer to submit to appraisal, the Supreme Court of Ohio said: "This provision is not an involved one, the words are simple, and the meaning is clear. Appraisers are to be selected on the demand of either party.

In none of the policies is there the slightest intimation that the selection is to be made on the demand of the insurer and not on the demand of the insured. If this were the import of the provision, there could be no excuse for the use of the word 'either.’ "This view is sustained by the succeeding word 'each.’ There is no suggestion that the insured alone shall select an appraiser on demand. As indicated by Ballentine’s Law Dictionary, the obvious meaning of the word 'each’ is 'every one of the two or more comprising the whole.’ "Nor is there doubt about the use of the next succeeding word 'shall.’ It clearly is employed in its ordinary mandatory sense. Furthermore, there is nothing in the context to warrant an inference that the word is used in a mandatory sense as to the insured alone and not as to the insurer.

The provisions are not revocable by either. "Hence, unless these words are held to signify the exact opposite of their obvious meaning, the appraisers must be selected when demanded by the insured or by the insurer. "The [insurers] insist further that if they refuse to select an appraiser, the [insured] has no recourse except to file suits on his policies. "This is equivalent to telling the [insured] that, although he paid a premium for the policies containing the advantage of the appraisal provisions, he in fact received nothing therefor, and that the sole result of the insertion of the appraisal provi ⁴¹⁷ sions in the policies was that the [insurers] gave themselves the advantageous right to compel the [insured] to select an appraiser before he could sue on the policies.

Hence, under this theory the appraisal provisions were a detriment instead of a benefit to the [insured], inasmuch as even without the appraisal provisions he, of course, had the right to sue. The [insured] was led to believe that he was purchasing policies giving him the right to an appraisal and a prompt settlement of his loss so he would have the insurance money with which to reconstruct his building without the expense and delay incident to litigation. Obviously this is a valuable right which he should not be denied. The failure and refusal of the [insurers] to select an appraiser as required by the provisions of the policies constituted a failure to agree on an umpire just as effectively as if they had selected an appraiser and instructed him not to agree on an umpire.

Under these circumstances the [insured] was authorized to request the court to select such umpire. "That this view of the policy provisions is consistent with the legislative policy of this state is demonstrated by the provisions of Section 12148-1 et seq., General Code, to the effect that such arbitration provisions in a written contract 'shall be valid, irrevocable and enforceable.’” Saba, 159 Ohio St. at 240-42, 112 N.E.2d at 2-3 (emphasis in original). Thus, the Supreme Court of Ohio held that when an insurer refuses to comply with an agreement to submit to appraisal, the insured can compel compliance. Courts in some jurisdictions have held that under an appraisal clause providing that an insured and an insurer shall submit to appraisal when they cannot agree as to the amount of loss, an insured may not compel an insurer to submit to appraisal.

E.g. Roumel v. Niagara Fire Ins. Co., 225 ⁴¹⁸ A.2d 658, 660 (D.C. 1967); National Fire Ins. Co. v. Shuman, 44 Ga.

App. 819, 819 , 163 S.E. 306 , 306 (1931); Happy Hank Auction Co. v. American Fire Ins.Co., 1 N.Y.2d 534, 538, 136 N.E.2d 842, 843-44 , 154 N.Y.S.2d 870, 872 (1956); In re Delmar Box