Farmers Auto. Ins. Ass'n v. Union Pac. Ry.

• Decision Date: 10 July 2009
• Docket Number: No. 2007AP1992.,2007AP1992.
• Citation: 768 N.W.2d 596,2009 WI 73
• Parties: The FARMERS AUTOMOBILE INSURANCE ASSOCIATION, Plaintiff, v. UNION PACIFIC RAILWAY COMPANY, Defendant. Joseph P. Donaubauer, Plaintiff-Appellant-Petitioner, v. The Farmers Automobile Insurance Association, Defendant-Respondent, Union Pacific Railroad Company, Defendant.
• Court: Wisconsin Supreme Court

768 N.W.2d 596

2009 WI 73

The FARMERS AUTOMOBILE INSURANCE ASSOCIATION, Plaintiff, v. UNION PACIFIC RAILWAY COMPANY, Defendant.

Joseph P. Donaubauer, Plaintiff-Appellant-Petitioner, v. The Farmers Automobile Insurance Association, Defendant-Respondent, Union Pacific Railroad Company, Defendant.

No. 2007AP1992.

Supreme Court of Wisconsin.

Argued April 16, 2009.

Decided July 10, 2009.

For the plaintiff-appellant-petitioner there were briefs by John V. McCoy, Chad R. Levanetz, and McCoy & Hofbauer, S.C., Waukesha, and oral argument by John V. McCoy.

For the defendant-respondent there was a brief by Monte Weiss, Charles W. Kramer, and Deutch & Weiss, LLC, Milwaukee, and oral argument by Monte Weiss.

An amicus curiae brief was filed by James A. Friedman, Patricia L. Wheeler, and Godfrey & Kahn, S.C., Madison, on behalf of the Wisconsin Insurance Alliance.

¶ 1 MICHAEL J. GABLEMAN, J

This is a review of a published decision of the court of appeals¹ affirming the entry of summary judgment against Joseph Donaubauer ("Donaubauer") by the Circuit Court for Milwaukee County, Francis Wasielewski, Judge. This case is a dispute between an insurer and an insured over the proper replacement value of a home that had burned down. Donaubauer, the homeowner, challenges the validity and outcome of an appraisal award determining the replacement value of the home.

¶ 2 Three issues concern us today. First, did the circuit court err when it compelled Donaubauer to participate in the binding appraisal process? Second, should the appraisal award be vacated or modified? Third, did the circuit court err in denying Donaubauer's request to depose the appraiser and a third party contractor who assisted in the appraisal process?²

¶ 3 We hold that the circuit court did not erroneously exercise its discretion in enforcing the agreement between the parties to participate in the binding appraisal process. We also hold that the circuit court properly affirmed the appraisal award because there was no evidence that the appraisers engaged in fraud, bad faith, material mistake, or that they lacked understanding of their contractually assigned task. Finally, we hold that the circuit court did not erroneously exercise its discretion when it denied Donaubauer the opportunity to conduct discovery into the appraisal process. For these reasons, the holding of the court of appeals is affirmed.

I. BACKGROUND

¶ 4 On April 15, 2003, Joseph Donaubauer's home located at 9277 South Pennsylvania Avenue in Oak Creek, Wisconsin was completely destroyed by a fire. Apparently, sparks from a Union Pacific train running near Donaubauer's home started a grass fire that spread to his property.

¶ 5 Donaubauer had purchased a homeowner's insurance policy from The Farmers Automobile Insurance Association ("Farmers")³ with a policy period running from October 1, 2002, through October 1, 2003. The policy had several different types of coverage.

¶ 6 First, Donaubauer's policy contained a "Dwelling" coverage for which he received $301,350. This payment consisted of the full $287,000 limit of liability under this coverage, plus five percent for debris removal. Donaubauer also had "Personal Property" coverage. Farmers paid the full limit of $172,200 for this coverage. Third, Donaubauer's policy had "Loss of Use" coverage for which Farmers paid an additional $57,400—again the full limit for that policy coverage. Thus, apart from the coverage for replacement value at issue in this case, Farmers paid Donaubauer approximately $530,950 for claims relating to his home burning down.⁴

¶ 7 The coverage Donaubauer purchased also included a "Home Guard Endorsement" (hereafter, the "Policy"). The Policy provided additional coverage above the $287,000 "Dwelling" limit if the cost to replace the home was more than this amount. Several provisions of the Policy are relevant to this dispute.

¶ 8 The Policy defines "replacement value" as "the current cost at time of loss, without deduction for depreciation, to replace the damaged, destroyed or stolen property with articles of like kind and quality."

¶ 9 In order to receive benefits under the Policy, the contract provided: "You agree to ... [r]epair or replace the damaged dwelling with equivalent construction and use on the same premises."⁵ In another place it further specifies "[Farmers] will not be liable for any loss under this endorsement until actual repair or replacement is completed."

¶ 10 The Policy also contained what we will call the "appraisal clause." It states as follows:

Appraisal. If you and we 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 appraiser within 20 days after receiving a written request from the other. The two appraisers will choose an 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 residence premises is located. The appraisers 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, they will submit their differences to an umpire. A decision agreed to by any two will set the amount of loss.

¶ 11 After his home burned down, Donaubauer submitted a claim under the Policy. Donaubauer then obtained an estimate for the replacement value of his home of approximately $553,000. In June 2003, Farmers obtained its own estimate of the replacement value; it totaled $380,819. Donaubauer argued that this offer was substantially below the true replacement value, and in the latter part of 2003, Farmers increased its offer to $471,000.

¶ 12 On April 12, 2004, Donaubauer filed suit in the Milwaukee County Circuit Court,⁶ alleging that Farmers refused to pay him the replacement value of the home pursuant to the terms of the Policy. His claims included misrepresentation, bad faith, and breach of contract. Farmers responded that they had no obligation to pay under the Policy until Donaubauer actually replaced his home, which he had not done.

¶ 13 Litigation regarding Donaubauer's contract claims ensued. On January 24, 2005, Donaubauer obtained another estimate for the cost of rebuilding his home, this time for $720,309.

¶ 14 On March 22, 2005, Farmers sent a letter to Donaubauer raising several issues. Farmers stated that the Home Guard Endorsement was clear that disbursement under the Policy was contingent upon Donaubauer actually repairing or replacing the dwelling. Farmers also asserted that the lawsuit violated the Policy and demanded resolution of the disagreement over the replacement value via the process outlined in the Policy's appraisal clause. Farmers stated that the Policy's appraisal clause, once invoked, was binding on the parties. Farmers also named its designated appraiser pursuant to the appraisal clause, and requested that Donaubauer designate his appraiser. Finally, Farmers stated that if Donaubauer "disagrees with the analysis set forth herein," he should respond in writing with "the legal and factual basis for the disagreement."

¶ 15 On March 25, 2005, Donaubauer sent a reply letter stating that he understood Farmers was requesting an appraisal and that he had to respond within 20 days (per the Policy). Donaubauer had recently had surgery, however, so he requested that Farmers toll the 20 day requirement until Donaubauer's doctor determined he was healthy enough to continue with the litigation. Farmers promptly responded by letter and granted Donaubauer's request.

¶ 16 On May 12, 2005, Donaubauer's attorney called the attorney for Farmers and informed him that Donaubauer was close to recovery, and that Donaubauer had agreed to the appraisal process referenced in the previous correspondence. Farmers' attorney confirmed this conversation by letter that same day, requesting that Donaubauer select his appraiser when he was sufficiently well.

¶ 17 The next day, May 13, 2005, Donaubauer's attorney confirmed by letter that Donaubauer was "willing to fulfill his contractual obligations and participate in the appraisal that your client has requested." Donaubauer confirmed again via letter on June 1, 2005, that he was "able to participate in the appraisal process" and asked to be contacted regarding the next step.

¶ 18 Farmers followed up on June 9, 2005, by explaining that the appraisal process would commence with Donaubauer's selection of an appraiser. The parties' respective appraisers would then select a third appraiser, the umpire, and proceed with the appraisal process outlined in the Policy. On June 27, 2005, Donaubauer informed Farmers of his selected appraiser.

¶ 19 On July 26, 2005, Farmers moved for summary judgment and dismissal of Donaubauer's lawsuit on the grounds that Farmers had no obligation to make payments under the Policy until Donaubauer completed repair or replacement of the dwelling. On September 16, 2005, the Milwaukee County Circuit Court agreed that, under the Policy, Donaubauer had to complete the actual repair or replacement of his home before Farmers was obligated to make further payments. The court dismissed with prejudice Donaubauer's claims and causes of action for misrepresentation, and deferred ruling on Donaubauer's other claims until after the appraisal process had been completed.

¶ 20 On September 29, 2005, Donaubauer sent a letter to Farmers indicating that he would only continue the appraisal process if it was not conducted pursuant to the Policy, and was simply considered part of the mediation process and non-binding.

¶ 21 On October 10, 2005, Farmers sent a response in which it stated that it was "not willing to deviate from the appraisal process that our Clients agreed to as is set forth in the insurance policy." On October 21, 2005, Donaubauer replied that he was agreeing to continue with the Policy's appraisal process except to the extent that...