Wisconsin Lawyer: Appraisal Provision Validated — Setting the amount of insured loss

Feb 19, 2010

Wisconsin Lawyer

Appraisal Provision Validated: Setting the amount of insured loss

Vol. 83, No. 2, February 2010

In Farmers Automobile Insurance Ass’n v. Union Pacific Railway Co., the Wisconsin Supreme Court set forth the standard for vacating or modifying insurance policy appraisal provisions used to set value for claimed losses. The court also tackled discovery and standard of review issues.

by Monte E. Weiss & Charles W. Kramer

Most personal and commercial insurance policies contain appraisal provisions that are used to set value for claimed losses. Despite the widespread use of such provisions, there has been little law on how courts should review the resulting appraisal awards. Recently, the Wisconsin Supreme Court considered the validity of appraisal awards and discussed how they can be challenged.1 In Farmers Automobile Insurance Ass’n v. Union Pacific Railway Co., the supreme court set forth the standard for vacating or modifying an appraisal award. It also described what must be shown to conduct discovery of those involved in the appraisal process if there is some question as to the award’s validity.

In a 5-2 decision, the supreme court concluded that appraisal awards are presumptively valid. Review of these awards should usually be limited to the face of the award, and to obtain discovery of persons associated with the appraisal process and awards, the party that wants to obtain such discovery must present prima facie evidence of fraud, bad faith, material mistake, or a failure to understand or complete the appraisal task. The opinion also is significant for leaving standing, without modification, the court of appeals’ holding regarding discovery for claims of insurance bad faith.

The Case Facts

The Farmers case arose from the ashes of Joseph Donaubauer’s home. Donaubauer alleged that on April 15, 2003, a Union Pacific Railway train car emitted sparks that caused a nearby grass field to ignite. The fire spread, eventually consuming Donaubauer’s home. At the time of the fire, Donaubauer had a homeowner’s insurance policy issued by Farmers Automobile Insurance Association (Farmers). He presented a claim to Farmers for his losses. Farmers paid him the limit of liability for the loss of his dwelling, the limit of liability for the loss of his personal property, and the limit of liability for the loss-of-use coverage.2 Donaubauer received, in total, more than $530,000 shortly after the loss.3

Donaubauer’s policy also contained a replacement-cost endorsement. This endorsement (entitled the “Home Guard Endorsement”) provided that Farmers would pay Donaubauer the actual cost that he incurred to replace his dwelling with a house of similar kind and quality. The endorsement also required Donaubauer to replace his home before Farmers would be obligated to make any payment under this endorsement. Despite this policy language, Donaubauer sought the replacement-cost benefits without first incurring the costs of replacement. Farmers refused to pay any replacement-cost benefits until Donaubauer actually incurred that loss. However, Farmers still negotiated with Donaubauer to reach an agreement as to the actual cost to replace his home. Farmers obtained a replacement-cost estimate of $380,819.38 and offered that amount. Donaubauer rejected this offer and presented an estimate of $553,000. Farmers increased its offer to $471,000. Donaubauer rejected this offer and filed suit against Farmers for failing to pay the replacement-cost benefits.4 Donaubauer soon obtained another estimate, which increased the replacement cost from $553,000 to $720,309. Because of the widening chasm between the parties, Farmers demanded an appraisal under the policy.

The appraisal provision at issue states that each party will name its own appraiser, and the two appraisers will then select an umpire. The appraisers are charged with the responsibility to separately set the amount of the loss (here, the replacement cost for Donaubauer’s dwelling). If the two appraisers cannot agree on the amount of the loss, the dispute is to be submitted to the umpire. An agreement by the umpire and one of the two appraisers “will set the amount of the loss.” Both in writing and on the record before the circuit court, Donaubauer agreed to use the policy’s appraisal provision. Donaubauer later reconsidered this decision. Farmers brought a motion to enforce the agreement to use the policy’s appraisal provision. The circuit court enforced the parties’ agreement.

The appraisal was conducted and resulted in a unanimous, detailed award. The award set forth both actual-cash and replacement-cost valuations of the dwelling, a second-floor kitchen, a septic system, exterior concrete, exterior blacktop, a shed, outbuildings, trees, sod, flowers, plants, and shrubs.5 The appraisers determined the actual cash value to be $248,579.68 and the replacement cost to be $396,260.75. Dissatisfied, Donaubauer moved to vacate or modify the appraisal award and requested, to support this motion, discovery of the appraisers, the umpire, and the builder hired by the appraisers to advise them regarding local building costs. The circuit court quashed the discovery requests and denied the motion to vacate or modify the award.

Finding the policy language unambiguous, the circuit court concluded that pursuant to the policy, Farmers had no obligation to pay replacement-cost benefits under the endorsement until Donaubauer replaced his dwelling. Because he had not done so, there was no breach of the insurance policy’s promise to pay replacement-cost benefits. The circuit court also dismissed the misrepresentation claims, concluding that Farmers’ agreement to pay replacement-cost benefits was not false when the policy was issued as required for misrepresentation claims.6 Moreover, there was no bad faith by Farmers in refusing to pay replacement-cost benefits under the policy. Consequently, the circuit court dismissed the bad-faith claim without permitting any discovery concerning it. In a published opinion, the court of appeals affirmed.7 The supreme court accepted review and affirmed.8

The Supreme Court Decision

The Wisconsin Supreme Court addressed three of Donaubauer’s claimed errors and let stand the court of appeals’ holding affirming the dismissal of Donaubauer’s breach-of-contract and bad-faith claims. The three issues decided by the supreme court were whether 1) the circuit court properly exercised its discretion in enforcing the parties’ agreement to use the policy’s appraisal process, 2) the circuit court properly confirmed the appraisal award, and 3) the circuit court properly denied Donaubauer’s request to conduct discovery of those individuals associated with the appraisal award. The supreme court affirmed the court of appeals’ holdings on each of the issues it specifically addressed.

The Use of the Appraisal Provision.

After suit was commenced, Farmers demanded an appraisal to set the amount of the loss. The appraisal provision is a standard provision found in most property-insurance policies. Donaubauer’s agreement to use the policy’s appraisal provision was confirmed on the record and in various communications between counsel, as detailed by both the court of appeals and the supreme court.9 At some point, Donaubauer decided that he would be better served by having a jury, not the appraisers and umpire, determine the amount of the loss. In an attempt to obtain relief from his agreement, Donaubauer claimed that 1) he understood the appraisal provision to be a nonbinding advisory figure, 2) there was a mutual misunderstanding between the parties as to whether the appraisal provision was binding, and 3) he had since discovered a Wisconsin Court of Appeals case that he believed precluded Farmers from demanding an appraisal once suit had been commenced.10

In addressing the argument that the appraisal provision provided for a nonbinding figure, the supreme court’s response was two-fold. First, it concluded that the policy’s appraisal provision was plain and unambiguous and provided for a binding figure.11 That is, once an agreement as to the amount of loss was determined, that would be the amount of the loss. The court noted that the text of the provision “clearly provides for an appraisal process that… ‘will set the amount of loss.'” Because Donaubauer conceded that he agreed to use the appraisal process as set forth by the policy, he agreed that it was binding.

Next, the supreme court addressed Donaubauer’s mutual-mistake argument. Donaubauer argued that he thought that the provision was nonbinding and that Farmers thought it was binding and thus, there was mutual misunderstanding as to the impact of the policy provision. According to the supreme court, a mistake as to “scope, meaning or impact of a written agreement is a ground for attacking the agreement” only if relates to a fact. The legal effect of a contract clause is not a fact. Hence, there could not be a mutual mistake. At best, there was a mistake of law as to whether the provision would be binding, which is not usually a basis for relief.12

Finally, Donaubauer contended that case law prevented Farmers from even asking for an appraisal. According to Donaubauer, Lynch v. American Family Mutual Insurance Co. stands for the proposition that an insurer can never require an appraisal if the request for an appraisal is made after the insured files suit. Hence, Donaubauer argued that Farmers should not have been permitted to insist on an appraisal because it was requested after he had filed suit. The supreme court stated that it need not reach the issue because Donaubauer had agreed to an appraisal. However, while not explicitly addressing the Lynch argument, the supreme court suggested that Lynch did not necessarily provide the support that Donaubauer ascribed to it. The supreme court hinted that Lynch is better understood as holding that an insurer cannot invoke the appraisal clause if it had studiously avoided doing so before suit but did not do so.

It should be noted that the supreme court reviewed the circuit court’s decision to enforce the agreement to set the amount of the loss via the appraisal provision based on an erroneous-exercise-of-discretion standard. Thus, provided that the circuit court found facts in the record, used the correct law, and had a reasonable basis for its decision, affirmance was required. Accordingly, the supreme court affirmed the decision.

Request to Modify or Vacate the Appraisal Award.

Donaubauer also had requested the circuit court to vacate or modify the award to reflect the $720,309 estimate he obtained. According to Donaubauer, there were two reasons for his request. First, some of the communications between the appraisers reflected what Donuabauer contended were inappropriate comments that, from his perspective, showed the appraisers’ misunderstanding of their job to assess the cost to replace his home. Second, the plans for the structure that the builder submitted based on the appraisal award provided for a house that was substantially different than the one that he lost. The circuit court denied his request.

In reviewing the circuit court’s decision, the supreme court discussed the context in which an appraisal award must be considered. The court noted that appraisals are creatures of contract and “therefore grounded in principles of contract interpretation.”13 As such, the supreme court noted, the parties contracted to have appraisers, not the court or a jury, determine the amount of the loss. Hence, appellate courts do not review whether the appraisers got it “right,” but rather whether the appraisers understood their role and carried out “their contractual assigned task.”14 Therefore, the awards must be deemed presumptively valid and the review is to be rather deferential.

The court concluded that setting aside an award is permitted only when there is a showing of fraud, bad faith, a material mistake, or a lack of understanding or failure to complete the task assigned. The decision to vacate the award is determined by reviewing the face of the award. If the face of the award fails to demonstrate these infirmities, then the award should not be disturbed. This standard is needed, according to the court, because any other standard would result in courts and juries substituting their judgment for the appraisers’ judgment, the latter of which is what the parties actually contracted for. Since the award seemed proper on its face, the communications between the appraisers were of no matter. Also, the court stated parenthetically that even if one reviews the communications they showed merely the expected discourse between the appraisers as they attempted to carry out their contractually assigned task.

It appeared to all three courts that Donaubauer’s real complaint was that the appraisal award was too low, and this simply was not enough to vacate or modify the award.15

Denial of Request for Discovery.

As a logical progression from its decision to limit review of the award to its face, the supreme court affirmed the circuit court’s discretionary decision to quash the requested discovery of the appraisers and the builder. The court said that since there was no showing of any problems with the award, there was no basis for any further inquiry and the discovery requests were properly quashed.

The Dissent.

Chief Justice Abrahamson and Justice Bradley dissented and stated they would have reversed the court of appeals. The dissent focused on two issues. The first issue was the language of the appraisal provision. The dissent stated that the appraisal provision did not clearly alert the insured that the result was to be binding, and that the policy should have contained the word “binding” or a derivative form. The dissent said that without this language, the insured would not be on notice of the binding nature of the appraisal provision.

The second issue was what the dissent perceived to be the absence of a mechanism to ensure that the appraisal process and the resulting award were fair. Asserting that insurance contracts are contracts of adhesion (a point seemingly rejected by prior Wisconsin case law),16 the dissent concluded that while the award provided an actual cash value and a replacement amount for 10 separate categories, there was no explanation as to how the appraisers determined “replacement value” so as to replace Donaubauer’s home with one of “like kind and quality.”17 The dissent believed that without any explanation for the basis of the amounts inserted into the award form, it would be difficult to show from the face of the award that the appraisers failed to understand their role, which would preclude any effective challenge to appraisal awards. Hence, the dissent would have allowed Donaubauer to conduct discovery so as to have a better opportunity to support his motion to vacate or modify the appraisal award.

Other Issues.

Significantly, the supreme court let stand the court of appeals’ upholding of the circuit court’s dismissal of Donaubauer’s bad-faith claim, stating that it “will allow the court of appeals’ opinion to be the final word on these issues.”18 Hence, this part of the court of appeals’ conclusion is binding Wisconsin law.

On this issue, the court of appeals concluded that since Donaubauer failed to present prima facie evidence of objective bad faith, he was not entitled to discovery on the subjective component, and thus dismissal of the bad-faith claim was appropriate.19

In Wisconsin, to prove that an insurance company acted in bad faith for refusing to honor an insured’s claim, the insured must show both an objective and a subjective basis for bad faith.20 The objective component requires the absence of a reasonable basis to deny the claim.21 The subjective component requires proof of the insurance company’s knowledge or reckless disregard that it has no reasonable basis on which to deny the claim.22 It is the subjective component that justifies the discovery of insurer’s claim files and claims professionals.

However, the court of appeals noted that a “prerequisite to discovery in a bad-faith case is, …, some evidence that what the insurance company did was objectively unreasonable because there is no claim for bad faith if it was not.”23 While “Donaubauer would love to scour through Farmers’ files in an attempt to find some dirt … absent an objectively unreasonable response to an insured’s offer of settlement, we are left with a mere legitimate disagreement, which, as we have seen, is not enough to state a cause of action on the objective aspect of a bad-faith claim.”24 Because Donaubauer failed to show some evidence of objectively unreasonable responses by Farmers, no discovery was permitted and the bad-faith claim was properly dismissed.

Lessons from the Case

This decision should preclude most challenges to appraisal awards. These awards are presumptively valid and generally should be upheld. This result makes sense given the appraisal provision’s purpose and the procedure employed. The appraisal provision’s purpose is to set the amount of the loss (that is, the actual cash or replacement value of certain property) and nothing more.25 Once the amount of the loss is set, the parties are free to litigate all other issues between them, including coverage.26 Hence, the reach of the appraisal and, thus, the limited rights affected by the appraisal’s application, make a highly deferential review logical.

The very process used in appraisals helps to ensure fairness of both the procedure and the result. Each party names a qualified, competent expert appraiser. The two appraisers then select an umpire. Moreover, the mandate of the appraisers is to agree. That is, under the policy provision, they are supposed to attempt to agree as to the amount of the loss. This requirement makes it less likely that one expert will simply be a shill for the party that retains that expert.

Given the foregoing, the dissent’s concerns seem overly cautious. The policy language specifically provides that an agreement by two appraisal participants “will set the amount of the loss,” and the essence of the provision’s purpose is to resolve a dispute – the amount of the loss. If the provision’s purpose is to be fostered, it makes little sense to burden the process with an exacting review, such as the one suggested by the dissent, that exceeds the standard accorded to review of jury verdicts. Any standard other than the deferential one adopted by the majority would result in the “award, instead of being the end of litigation, … simply be[ing] a useless step in its process.”27

In addition, while not deciding the issue, the Wisconsin Supreme Court indicated that merely because one party won the race to the courthouse, the policy’s appraisal provision is not per se unavailable. Donaubauer contended that the Lynch holding prevented Farmers from even requesting the appraisal, because it did so only after he filed suit. The supreme court stated that it need not decide this issue, but noted that its review of Lynch indicates that the appraisal provision is unavailable when the insurer had an ample amount of time to seek resolution of the loss amount by the appraisal provision and specifically avoided doing so until after litigation had been commenced. Thus, it appears that either party may still have the option to seek the policy’s built-in dispute resolution method even after suit has been commenced.28

Finally, by letting the court of appeals’ holding on the dismissal of the bad-faith claim stand as the final word, the supreme court altered the procedure for pursing bad-faith claims.29 If the insured is unable to demonstrate some evidence of objective bad faith, not only will the insured be prevented from conducting discovery into the insurer’s files and deposing its claims professionals, but the bad-faith claim itself will be dismissed.

This limitation makes sense given that Wisconsin’s bad-faith law requires an insured to prove bad faith on both an objective and a subjective basis. The absence of either prong precludes a bad-faith claim.30 This decision makes clear that an insured will not be able to use perhaps some inartfully drafted claims notes to buttress what is a weak objective bad-faith claim.

In many respects, the Farmers decision is not a surprise. The insurance industry intended appraisal to be a quick, effective, and cost-efficient process to resolve a single issue – the valuation of damaged or destroyed property when the carrier and the insured cannot otherwise agree. Many courts nationwide have routinely accorded such provisions wide latitude and enforced their result. Wisconsin now joins those other jurisdictions that pay heed to the parties’ intentions to resolve these limited disputes expeditiously.


1Farmers Auto. Ins. Ass’n v. Union Pac. Ry. Co., 2009 WI 73, 319 Wis. 2d 52, 768 N.W.2d 596.

2Ultimately, the appraisers determined that the actual cash value of Donaubauer’s home was less than the limit of liability for coverage of the dwelling. However, under Wisconsin’s valued-policy statute, Wis. Stat. section 632.05(2), payment of the full policy limit was required.

3Actual cash value is the value of property after a deduction for depreciation. Replacement-cost coverage is designed to insure the depreciation. See generally Johnny Parker, Replacement Cost Coverage: A Legal Primer, 34 Wake Forest L. Rev., 295, 296 (Summer 1999); Leo John Jordan, What Price Rebuilding? Brief, Spring 1990, 17, 17.

4Donaubauer’s suit alleged each of the three types of misrepresentation: a violation of Wis. Stat. section 100.18, breach of contract, and bad faith. The bad-faith claim was stayed pending resolution of the underlying claim.5Farmers, 2009 WI 73, ¶¶ 24-25, 319 Wis. 2d 52.

6See Wis. JI-Civil 2401, 2402, 2403.

7Farmers Auto. Ins. Ass’n v. Union Pac. Ry. Co., 2008 WI App 116, 313 Wis. 2d 93, 756 N.W.2d 461.

8Farmers, 2009 WI 73, 319 Wis. 2d 52.

9Id. ¶¶ 14-18, 33 n.13; Farmers Auto. Ins. Ass’n, 2008 WI App 116, ¶ 6 n.1, 313 Wis. 2d 93.

10Lynch v. American Family Mut. Ins. Co., 163 Wis. 2d 1003, 473 N.W.2d 515 (Ct. App. 1991).

11Farmers, 2009 WI 73, ¶ 34, 319 Wis. 2d 52.

12Milwaukee Women’s Med. Servs. Inc. v. Scheidler, 228 Wis. 2d 514, 598 N.W.2d 588 (Ct. App. 1999).

13Farmers, 2009 WI 73, ¶ 42, 319 Wis. 2d 52.


15Id. ¶ 50.

16Katze v. Randolph & Scott Mut. Fire Ins. Co., 116 Wis. 2d 206, 212-213, 341 N.W.2d 689 (1983).

17Farmers, 2009 WI 73, ¶ 82, 319 Wis. 2d 52.

18Id. ¶ 2 n.2.

19Farmers, 2008 WI App 116, ¶¶ 27-28, 313 Wis. 2d 93.

20Anderson v. Continental Cas. Co., 85 Wis. 2d 675, 691, 271 N.W.2d 368 (1978).



23Farmers, 2008 WI App 116, ¶ 26, 313 Wis. 2d 93.

24Id. ¶ 28.

25Diane Richardson, Homeowners Personal Lines Coverage Guide 18 (2d ed. 2002) (“This provision … is to determine the amount of a loss, not whether a loss is covered or not.”).

26Breshears v. State Farm Lloyds, 155 S.W.3d 340 (Tex. App. 2004) (appraisal intended only to estop contest over value of damages).

27Remington Paper Co. v. London Assurance Corp., 12 A.D. 218, 225, 43 N.Y.S. 431 (App. Div. 4th Dept. 1896).

28See generally Jonathan Wilkofsky, The Law and Practice of Insurance Appraisal, Chapter IV – Waiver and Estoppel 91-92; see also Vanguard Underwriters Ins. Co. v. Smith, 999 S.W.2d 448 (Tex. App. 1999) (public policy favors use of this alternative dispute method even after litigation has been commenced).

29Blum v. Studinski, 2009 WI App 19, ¶ 15, 315 Wis. 2d 822, 762 N.W.2d 819.

30Samuels Recycling Co. v. CNA Ins. Co., 223 Wis. 2d 233, 250, 588 N.W.2d 385 (Ct. App. 1998).

Monte E. Weiss, Case Western Reserve 1991, is one of the founders of Deutch & Weiss LLC, Fox Point. He primarily practices the defense of bodily injury and property damage claims for insurance companies and self-insured companies and insurance contract interpretation, including the drafting of insurance policies and the defense of bad-faith claims. He is a frequent lecturer on insurance topics. He was counsel for Farmers Automobile Insurance Association in Farmers v. Union Pacific.

Charles W. Kramer, U.W. 1993, also primarily represents insurance companies and their insureds with Deutch & Weiss and served as co-counsel for Farmers Automobile Insurance Association in Farmers v. Union Pacific.