M. Kim Anderson
Robertson Stromberg Pedersen LLP is a member of the ARC Group Canada
Appraisal is intended to quickly resolve valuation disputes between insured and insurer. It does not displace the court in determining other issues. Often it is easy to separate valuation issues from other matters in dispute. Sometimes, however, the issues are intimately entwined. If they are intertwined, how do the appraisers and the umpire conduct themselves without exceeding their jurisdiction?
In Ontario, the Insurance Act provides that every fire policy in force shall contain Statutory Condition 11, which states:
“In the event of disagreement as to the value of the property insured, the property saved or the amount of the loss, those questions shall be determined by appraisal as provided under the Insurance Act before there can be any recovery under this contract, whether the right to recover on the contract is disputed or not, and independently of all other questions. There shall be no right to an appraisal until a specific demand therefore is made in writing, and until after proof of loss has been delivered.”
Nearly identical wording has been adopted almost universally across Canada.
In some statutes, this statutory condition has broader application than fire insurance. In some cases, the condition is expressed more broadly, or is otherwise made applicable to other forms of insurance. The condition may also apply where expressly incorporated into the policy, and where such incorporation is not statute-barred.
While the condition is part of the policy, the process is set out in the act, which governs timing, notice requirements, the appointment of appraisers and the umpire (including court appointment if necessary).
Upon appointment, the appraisal begins. Where the appraisers agree on a value, there is no need to have recourse to the umpire, and the matter is at an end. Otherwise, the umpire participates and a finding by any two of the three binds the parties.
Often, given the nature of the loss and of any underlying disagreement, the process is perfunctory. Although calling evidence and holding a hearing are not precluded, the fact that the appraisers each represent a party means that appraisers and umpires frequently act upon their own assessment of the situation.
CASE LAW ON APPRAISAL PROCESS
In Krofchick, a dispute arose over residual value of the property. The insured, advised of the “preliminary view” formed during appraisal, told his appraiser that an engineer’s report, setting forth a contrary view, would be provided. The insured asked that no decision be made until it was considered. The appraiser ignored the request, met with the other appraiser and umpire, and agreed on a final award. The insured challenged the award, but the court held: “The function of the appraisers and umpire was not to hear evidence, but rather to arrive at a decision on the basis of their own knowledge and expertise. If they were not required to hold a hearing, as we have found, then they could not have been under any obligation or duty to postpone the decision in order to consider a piece of evidence that one party wanted to put before them.”.
This decision is consistent with most cases on such matters. The courts are generally deferential on matters of procedure and expertise. As a general rule, an umpire’s award cannot be set aside except for fraud, collusion, or lack of impartiality.
Statutory Condition 11 restricts itself to matters of valuation, and provides that appraisal shall take place independently of all other questions. Because of this, and because of the historic deference shown by the courts, litigants have frequently resisted appraisal, preferring to take their chances before a judge.
In some cases, the allegation is that the expense is unnecessary. For example, in Viam Construction, the insurer alleged the policy was void ab initio, and argued that the cost of the appraisal process was prejudicial. The British Columbia Court of Appeal held otherwise, ruling that the insurer could not avoid the process by simply raising the defence.
In Arlington Investments, the insurer alleged arson and fraud, arguing that it would be unable to establish fraud during appraisal, and that a successful defence rendered the process “redundant.” The insurer suggested the statutory power to appoint an appraiser and umpire was permissive, meaning that the court had discretion to refuse.
The British Columbia Court of Appeal did not rule out a residual discretion, but pointed out that fraud was a matter to be established at trial. The court held the mandatory wording of the statutory condition governed, and ordered that appraisal proceed.
In Town of Nipawin, disputes arose over a number of matters, including the appraisal methodology for pre-loss value. Citing the discretion referenced in Arlington Investments, the insured won in the first instance. The Saskatchewan Court of Appeal overturned the decision. Employing a contract law analysis, the court held the mandatory nature of the condition was unambiguous and could not be unilaterally waived by either party.
COURT JURISDICTION IN APPRAISAL PROCESS
While the courts are rather dismissive of attempts to avoid appraisal, that does not mean that they do not guard their own jurisdiction carefully. Where the appraisers and umpire stray outside matters of valuation, deference is at an end, and the courts will intervene.
Thus, in Shinkaruk Enterprises, where the valuation was based on the umpire’s interpretation of the policy, the court held that the umpire had exceeded his jurisdiction. In its decision, the court wrote: “[I]t is clear that Condition 11 . . . limits the appraisers’ and umpire’s powers to determining ‘the value of the property insured, the property saved, or the amount of loss.’…They are not empowered to make a disposition with the entire controversy between the parties as would a court in an ordinary case, or sometimes a board of arbitration.”
In other words, rather than determining whether the replacement cost or actual cash value provisions of the policy applied — and the role of depreciation in arriving at a valuation — the umpire should have provided valuations to cover each alternative, leaving the selection to be resolved by the trial judge.
Similarly, in Ferrier, there were disputes as to the quantity of property lost or damaged and its age and condition. On an application for directions, the court held these were matters to be determined at trial and not as part of the appraisal. The appraisers and umpire were not to choose the method by which replacement cost or actual cash value would be determined, the court decided. Values were to be rendered on each of the factual theories advanced by the parties; where quantities affected the amount of the claim, the award was to set forth the assumptions upon which it was based and to qualify any value by those assumptions.
These cases appear to draw a clear boundary: appraisers and umpires may only definitively determine value where facts are not in dispute. Otherwise, they should define the factual and legal disputes and structure any award so as to identify the effect that those disputes have on the valuation.
This may entail offering alternate values on the basis of differing methodologies. It may also require unit valuation, leaving quantities to be litigated at trial. Sometimes it will require valuation of the various components of the equation, such as the value of the property before damage, its residual value, the cost of replacement and the actual cash value, leaving it to the trial judge to total the equation after evidence has been presented.
It is possible, as the court recognized in Ferrier, that so many qualifications and assumptions are required that the umpire’s task is rendered impossible. Such circumstances may engage the residual discretion discussed in Arlington Investments or, alternatively, on the analysis employed in Shinkaruk (an adaptati on of the contractual doctrine of impossibility, leaving the matter of valuation to be dealt with at trial).