Summary
referring to arbitration principles when ordering appraisal
Summary of this case from 6700 Arrowhead Owners Ass'n v. State Farm Fire & Cas. Co.Opinion
No. CV-2005-697-PHX-ROS.
November 15, 2005
OPINION AND ORDER
Pending before the Court is Plaintiff's Motion to Compel Appraisal. [Doc. #10]. For the reasons stated below, the motion is granted.
BACKGROUND
On August 4, 2004, a fire occurred in a garbage can outside the home of Plaintiff Rick Ori ("Ori"). [Resp. to Pl.'s Mot. to Compel Appraisal ¶ 2] The fire was contained to the exterior of the home and an interior wall. [Id.] Plaintiff had previously contracted with Defendant American Family Mutual Insurance Company ("American Family") for insurance on the home. Under the parties' insurance agreement, American Family had agreed to cover damage to Ori's property caused by fire and smoke. [O'Toole Aff. ¶¶ 5, 6] American Family obtained an estimate of $8,310.43 for cleaning and repairs. [Resp. to Pl.'s Mot. Compel Appraisal ¶ 3] Ori retained a public adjuster who submitted a substantially higher repair estimate of $63,289.33. [Id. ¶ 4] The difference in estimates is largely due to disagreement about whether the ceiling needs to be dropped to remove the smoke odor, whether the entire home needs to be repainted and the carpet re-cleaned, and whether all of the furniture needs to be removed, stored, and replaced (Id. ¶ 6).
Neither party provided a complete copy of the insurance policy. But there does not appear to be any dispute that damage by smoke and fire is a covered event under the policy.
The insurance policy between Ori and American Family provides:
If you [Ori] and we [American Family] fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent and disinterested appraiser within 20 days after receiving a written request from the other. The two appraisers will choose a competent and disinterested umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a court of record in the state where the insured premises is located. The appraiers will separately set the amount of loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of loss. If they fail to agree within a reasonable time, they will submit their differences to the umpire. Written agreement signed by any two of these three will set the amount of the loss.
[O'Toole Aff. Ex. 1]. Because the parties had obtained different repair estimates, Ori requested an appraisal of the amount of loss on September 15, 2004. [O'Toole Aff. Ex. 2 at Ori 000018]. American Family refused Ori's request for appraisal, asserting that "cause of loss, scope of repairs, and direct physical loss" are coverage issues not subject to appraisal and many of Ori's requested repairs were "not needed." [O'Toole Aff. at Ori 000013-14]. American Family also stated that Ori "did not repair or replace fire damaged building materials prior to having the interior of the house cleaned" which resulted in further damage not covered under the policy. [Resp. to Pl.'s Motion to Compel Appraisal ¶ 5]. Finally, American Family concluded that there was only a $153.00 difference between its repair estimate and Ori's repair estimate once unnecessary items were removed from the estimate. American Family offered to simply pay this difference and thereby avoid appraisal. Ori responded to these claims by reaffirming his belief that there was a dispute over the amount of loss and insisted upon appraisal. [Ori 000005]
On February 1, 2005, Ori filed suit against American Family in Maricopa County Superior Court. That suit alleged bad faith and breach of contract. Ori filed a Motion to Compel Appraisal at the same time he filed his complaint. [Reply @ 7] On March 4, 2005, American Family removed this action to Federal District Court pursuant to 28 U.S.C. §§ 1332, 1441, and 1446. [Doc. #1]. Ori renewed his Motion to Compel Appraisal before this Court on July 11, 2005. [Doc. #10].
JURISDICTION
Ori is a citizen and resident of Arizona and American Family is a Wisconsin corporation with its principal place of business in Madison, Wisconsin. (Doc. # 1) Ori seeks contract damages in excess of $63,000 and also seeks bad faith and punitive damages. Thus, it does not appear to a legal certainty that Ori's claims are below $75,000 in value. Therefore, the Court has jurisdiction in this cause of action pursuant to 28 U.S.C. § 1332.
DISCUSSION
The Federal Arbitration Act (FAA) creates "a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act." Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24 (1983). The FAA applies to any "written provision in . . . a contract evidencing a transaction involving commerce." 9 U.S.C. § 2. The FAA includes a broad definition of the term commerce, 9 U.S.C. § 1, and the insurance policy at issue here falls under that definition. See Wailua Assoc. v. Aetna Casualty Sur. Co., 904 F. Supp. 1142, 1147 n. 2 (D. Haw. 1995) (stating that insurance contracts have long been recognized as involving commerce); Perry v. Thomas, 482 U.S. 483, 490 (1987) (holding FAA "embodies Congress' intent to provide for the enforcement of arbitration agreements within the full reach of the Commerce Clause"). The FAA does not, however, include a definition of the term "arbitration." In the Ninth Circuit, courts may look to state law definitions of that term for guidance. Wasyl, Inc. v. First Boston Corp., 813 F.2d 1579, 1582 (9th Cir. 1987) (looking to California law for guidance); but see Salt Lake Tribune Publishing Co., LLC v. Management Planning, Inc., 390 F.3d 684, 689 (10th Cir. 2004) (holding that Congress did not intend for definition of "arbitration" to vary by state). Arizona courts have concluded that "appraisal is analogous to arbitration" and the "principles of arbitration law" should be applied to proceedings involving appraisals. Meineke v. Twin City Fire Insurance Co., 892 P.2d 1365, 1369 (Ariz.Ct.App. 1995). Thus, the appraisal clause at issue here falls under the FAA. The terms "appraisal" and "arbitration" are used interchangeably throughout this order.
The parties seem confused as to whether Arizona or federal law should apply to the arbitration clause. Neither party squarely addresses which arbitration regime should apply. There is, however, a "strong default presumption . . . that the FAA, not state law, supplies the rules for arbitration." Sovak v. Chugai Pharmaceutical Co., 280 F.3d 1266, 1269 (9th Cir. 2002). Therefore, the Court has analyzed the issues presented under federal law.
Pursuant to the FAA, arbitration agreements are "valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The FAA also allows District Courts to compel arbitration where necessary. 9 U.S.C. § 4. But a Court is very limited in its power to refuse a motion to compel arbitration. As observed by the Supreme Court, the FAA "mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985) (citing 9 U.S.C. §§ 3, 4). Thus, "agreements to arbitrate must be enforced, absent a ground for revocation of the contractual agreement."Id. Such grounds for revocation include "generally applicable contract defenses, such as fraud, duress, or unconscionability."Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996). Waiver of the arbitration clause is also a possible defense. Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 25 (1983).
In its Response to the Motion to Compel Appraisal, American Family presents two arguments. First, that Ori waived the right to an appraisal. Second, that Ori is seeking to "use the appraisal process to determine the scope and existence of coverage, not to resolve a valuation dispute." The Court addresses each argument below.
I. Waiver
"A party seeking to prove waiver of a right to arbitration must demonstrate: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts." Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 1986). "Because waiver of the right to arbitration is disfavored, `any party arguing waiver of arbitration bears a heavy burden of proof.'" Id. (quotingBelke v. Merrill Lynch, Pierce, Fenner Smith, 693 F.2d 1023, 1025 (11th Cir. 1982)). American Family claims that Ori knew about his right to arbitrate and that he failed to file a motion to compel arbitration until four months after the case was removed to federal court. [Response @ 5] This four-month delay, according to American Family, should be interpreted as an act inconsistent with Ori's right to arbitration. American family concedes, however, that Ori "attempted to arbitrate pre-litigation and originally requested arbitration at the same time of the state court filing." [Id.] There is, therefore, some dispute over whether Ori's actions were inconsistent with a desire to arbitrate. But even if the Court were to agree that Ori's delay in reasserting his right to arbitration was inconsistent with his wish to arbitrate, the question of prejudice would remain.
Prejudice in this context may consist of expense, duplication of effort in separate forums, or advantage to the other party.Mitsui Co. (USA) v. C H Refinery, Inc., 492 F. Supp. 115, 118-20 (N.D. Cal. 1980). There is no obvious evidence of prejudice and American Family "made no attempt . . . to articulate how [it] was prejudiced" by the four-month delay.Sovak v. Chugai Pharmaceutical Co., 280 F.3d 1266, 1270 (9th Cir. 2002). Accordingly, American family did not carry its "heavy burden of proof" and the Court concludes that Ori did not waive his right to arbitration. Fisher, 791 F.2d at 694 (quotation omitted).
II. Scope of the Agreement
American Family's second argument against compelling the parties to proceed via arbitration is that Ori is seeking relief outside the scope of the arbitration clause. The appraisal clause provides that in the event Ori and American Family "fail to agree on the amount of loss, either may demand an appraisal of the loss." American Family contends that the controversy in this case is "the scope of the repairs to be done, the amount of repairs covered, [and] the actual work that is required to be done under the policy." [Response @ 7] These issues, according to American Family, do not involve the "amount of loss." This argument runs counter to established law and the facts contained in the record.
The Supreme Court has made clear that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Mercury Const. Corp., 460 U.S. at 24-25 (emphasis added). Also, "due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration." Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 476 (1989). Accordingly, the record in this case must be evaluated in light of this strong preference in favor of allowing Ori to invoke the appraisal clause.
According to the estimates in the record, Ori appraises loss due to the fire at $63,289.33 and American Family appraises loss at $8,646.36. The difference between the two figures stems from the parties' disagreement about the repairs necessary to restore the home to its pre-fire state. For example, the parties agree that the fire caused a smoke smell to build up in a ceiling cavity. Ori believes that the ceiling will have to be removed to facilitate the cleaning of damaged materials; American Family counters that alternative methods of cleaning will be sufficient and the ceiling need not be removed. The Court concludes that this type of disagreement is a disagreement about the "amount of loss" and is subject to arbitration.
The term "amount of loss" "necessarily includes . . . the amount it would cost to repair that which was lost." Cigna Insurance Co. v. Didimoi Property Holdings, N.V., 110 F. Supp. 2d 259, 264 (D. Del. 2000). In this case, the parties dispute how much it will cost to repair the home and return it to its pre-fire state. Ori believes that it will cost $63,289.33 to repair the home while American Family believes that it will only cost $8,646.36. The Court believes that a good faith dispute over the cost of necessary repairs is a dispute over the "amount of loss" and is subject to appraisal. Therefore, Ori was within his rights to demand appraisal.
In fact, in a letter claiming that no "amount of loss" dispute existed, American Family acknowledged that there was a $153.00 difference between American Family's estimate and Ori's estimate as corrected by American Family. American Family claims that it is willing to pay this difference and thereby avoid appraisal. Thus, American Family seems to admit that differences in the parties' estimates may be grounds to warrant appraisal.
American Family makes one final argument connected to the "amount of loss" argument. American Family asserts that some of the damages are a direct result of Ori's failure to repair or replace damaged material in a timely fashion. This alleged failure constituted a breach of the insurance contract and caused further damage to Ori's property. The Court concludes that appraisal will sufficiently address these concerns. An appraisal will determine the amount of loss due to the covered event (the fire); any loss not due to that event should not be included in the appraisal.
III. Stay of Proceedings
Having determined that Ori was entitled to invoke the appraisal clause, the Court must issue a stay as to the claims subject to that appraisal. 9 U.S.C. § 3. There are, however, other claims that are not subject to appraisal. The Court must determine if those claims should also be stayed or if they should be allowed to proceed. "Important factors to consider when determining whether the non-arbitrable issues should proceed include the predominance of the arbitrable claims, the merit of the non-arbitrable claims, the court's concern with controlling its own docket, and overall judicial economy." F.D. Imp. Exp. Corp. v. M/V REEFER SUN, 248 F. Supp. 2d 240, 251 (S.D.N.Y. 2002). In this case, the claims subject to appraisal will have a large impact on the non-appraisal eligible claims. If Ori prevails at the appraisal for the full amount of damages, that result would support his claim that American Family acted in bad faith in denying his request for appraisal. Also, the Court believes that appraisal may result in a settlement of the non-appraisal eligible claims. Thus, staying the non-appraisal eligible claims is the most effective method of conducting this litigation. In light of these considerations, all non-appraisal eligible claims in this matter are stayed pending the appraisal.
Accordingly,
ITS IS ORDERED that Plaintiff's Motion to Compel Appraisal (Doc. #10) is GRANTED.