Aetna Cas. & Sur. Co. v. Insurance Com'r

• Decision Date: 13 May 1982
• Docket Number: No. 62,62
• Parties: The AETNA CASUALTY & SURETY COMPANY v. INSURANCE COMMISSIONER, State of Maryland et al.
• Court: Maryland Court of Appeals

Page 409

293 Md. 409

445 A.2d 14

The AETNA CASUALTY & SURETY COMPANY v. INSURANCE COMMISSIONER, State of Maryland et al.

No. 62.

Court of Appeals of Maryland.

May 13, 1982.

George M. Radcliffe and Scott A. Hunsicker, Baltimore, for appellant.

Michael L. Cohen, Asst. Atty. Gen., Baltimore (Stephen H. Sachs, Atty. Gen., Baltimore, on the brief), for appellee, Insurance Commissioner.

Thomas N. Biddison, Jr., Baltimore, for appellee, Archdiocese of Baltimore.

Argued before MURPHY, C. J., and SMITH, DIGGES, ^* ELDRIDGE, COLE, DAVIDSON and RODOWSKY, JJ.

DAVIDSON, Judge.

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 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.

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 dissatisfied 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 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 declaratory 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:

"[W]here 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 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, Park Construction Co. v. Independent School District, 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...