Appraisal Is Not Arbitration in Alabama
Whether an appraisal is to be treated or considered an arbitration has been a topic of contention this year. The Alabama Supreme Court has recently determined that appraisal is not arbitration under federal or state law.1 It made this finding:
[T]he appraisal clause does not require the appraisers or the umpire to consider evidence and arguments from the parties, the appraisal clause does not require the appraisers or the umpire to base their valuation on a substantive legal standard, and submission of the valuation issue to the appraisal process would not settle the entire dispute between Crystal Shores and Great American. Thus, the appraisal clause fails to meet most of the elements of ‘classic arbitration’ described in cases that have chosen to define the term ‘arbitration’ in the FAA using federal law. We must conclude, therefore, that the appraisal clause is not an arbitration clause under the FAA according to that standard – the only standard argued by Great American.
It found the same when construing the terms under Alabama law:
In this case, the clause at issue seeks to settle disputes between Great American and Crystal Shores involving the amount of a loss by using appointed appraisers and an umpire. In other words, the clause seeks to appraise the amount of the loss sustained to the property covered by the insurance policy. The language of the clause reflects that the parties intended the clause to be what it states it is: an appraisal clause. There is no ambiguity in the clause’s language that would lead to a conclusion that the parties intended the clause to be anything other than what it states. As Crystal Shores observes, ‘[h]ad Great American desired to insert an arbitration clause in the insurance contract [it] could have done so ….’…Instead, the insurance policy contains an appraisal clause.
It seems that Great American’s only response to such reasoning is the Milligan court’s statement that ‘the term ‘arbitrate’ need not appear in the contract in order to invoke the benefits of the FAA.’…But the Milligan court’s statement was made in the context of concluding that federal common law defines the term ‘arbitration’ in the FAA, a subject we dealt with in Part II.A. of this analysis. Here we address the definition of the term ‘arbitration’ under Alabama law. As we have noted, Alabama cases have consistently drawn distinctions between appraisal and arbitration, Alabama law focuses on whether the parties to the contract intended to arbitrate the dispute at issue based on the language of the contract, and, despite the prolific presence of appraisal clauses such as the one at issue in insurance contracts, our courts have never held that ‘appraisal’ is the same procedure as ‘arbitration.’ Therefore, we conclude that under Alabama law an appraisal clause in an insurance contract does not qualify as a clause calling for ‘arbitration’ under the FAA.
Appraisal, as property insurance practitioners understand the term, is not arbitration. Alabama sees it the same way despite a property insurance carrier trying to argue otherwise.
Thought For The Day
What’s in a name? That which we call a rose by any other name would smell as sweet.
—“Romeo and Juliet” by William Shakespeare
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1 Great Am. Ins. Co. v. Crystal Shores Owners Ass’n, No. SC-2023-0092, 2023 WL 8858165 (Ala. Dec. 22, 2023).
