Friday v. Trinity Universal of Kansas

• Decision Date: 30 May 1997
• Docket Number: No. 74666,74666
• Parties: Tommie L. FRIDAY, Appellant, v. TRINITY UNIVERSAL OF KANSAS, Appellee.
• Court: Kansas Supreme Court

Page 869

939 P.2d 869

262 Kan. 347

Tommie L. FRIDAY, Appellant, v. TRINITY UNIVERSAL OF KANSAS, Appellee.

No. 74666.

Supreme Court of Kansas.

May 30, 1997.

Syllabus by the Court

1. Regardless of the construction given a written contract by a district court, an appellate court may construe a written contract and determine its legal effect.

2. The record is examined and it is held: The appraisal clause in the fire insurance policy involved in this appeal is a form of arbitration and therefore prohibited by K.S.A. 5-401(c)(1) and (2). Because K.S.A. 5-401 regulates the business of insurance, the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015 (1994), precludes application of the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (1994); thus the Federal Arbitration Act does not preempt K.S.A. 5-401(c)(1).

Jack Shelton, Wichita, argued the cause and was on the briefs for appellant.

F.C. McMaster, of McMaster & McMaster, Wichita, argued the cause and was on the brief for appellee.

ABBOTT, Justice:

Plaintiff Tommie L. Friday (Friday), the insured, appealed an order dismissing her lawsuit against Trinity Universal of Kansas (Trinity) for breach of a fire insurance policy as premature for failure to comply with an amount of loss appraisal provision in the policy. In Friday v. Trinity Universal of Kansas, 22 Kan.App.2d 935, 924 P.2d 1284 (1996), the Court of Appeals reversed, determining that the appraisal provision was an arbitration clause which was unenforceable under K.S.A. 5-401(c)(1). This court granted Trinity's petition for review.

Friday's house was insured by Trinity. On October 28, 1994, the house was damaged by a fire. Friday and Trinity did not agree on the amount of loss caused by the fire. Trinity made an offer of payment to Friday and stated that if the company and Friday could not agree on the amount of the loss, Trinity intended to invoke the appraisal provision of the insurance policy. Friday rejected the offer and informed Trinity that she was filing a lawsuit in district court. Friday contended that the appraisal provision was merely an arbitration agreement by another name, itviolated K.S.A. 5-401, and it was not enforceable.

Friday filed a petition seeking to recover $46,805.39 as the benefits due under the insurance policy. Trinity filed a motion to dismiss the suit as being premature because the insurance policy stated that no action could be brought unless the policy provisions had been complied with, and Friday had refused to comply with the mandatory appraisal provision of the contract. A hearing was held on this motion, and the parties submitted briefs. The trial court dismissed the lawsuit, finding that the appraisal clause was not an arbitration agreement. The ruling also stated that even if it were construed as an arbitration agreement, the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (FAA), would probably preempt the Kansas Arbitration Act.

The appraisal provision in the policy provided:

"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 twenty (20) days after receiving a written request from the other. The two appraisers will choose an umpire .... 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 the umpire. A decision agreed to by any two will set the amount of the loss."

Another part of the policy states: "Suits Against Us. No action can be brought unless the policy provisions have been complied with."

The Court of Appeals reversed the trial court, determining that the appraisal provision in the Trinity policy was an arbitration clause which was unenforceable under K.S.A. 5-401(c)(1). The Court of Appeals also determined that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015 (1994), prevents the FAA from preempting K.S.A. 5-401(c)(1). 22 Kan.App.2d at 940, 924 P.2d 1284.

I. APPRAISAL PROVISION

The Court of Appeals' opinion correctly states the standard of review: "Regardless of the construction given a written contract by a district court, an appellate court may construe a written contract and determine its legal effect." 22 Kan.App.2d at 936, 924 P.2d 1284 (citing Federal Land Bank of Wichita v. Krug, 253 Kan. 307, 311-12, 856 P.2d 111 [1993] ).

Because Judge Bell considered factual information beyond what was contained in Friday's petition, Trinity's motion to dismiss should be treated as a summary judgment motion and disposed of as provided in K.S.A. 60-256(c). See K.S.A. 60-212(b).

"The burden on the party seeking summary judgment is a strict one. The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case. On appeal we apply the same rule, and where we find reasonable minds could differ as to the conclusions drawn from the evidence, summary judgment must be denied. [Citations omitted.]" Mitzner v. State Dept. of SRS, 257 Kan. 258, 260-61, 891 P.2d 435 (1995).

A majority of this court is of the opinion that the determining factor in this case is the legislature's intent in adopting K.S.A. 5-401(c)(1). K.S.A. 5-401(b) provides that a written contract may provide for arbitration of future controversies between the parties and that such a provision is "valid, enforceable, and irrevocable, except upon such grounds as exist at law or in equity for the revocation of any contract." The provision in question, 5-401(c)(1), states: "The provisions of subsection (b) shall not apply to: (1) Contracts of insurance." The determinative question is whether the legislature intended to include appraisals as a form of arbitration when it precluded arbitration clauses in insurance contracts or whether it intended for appraisals to be of a separate nature than arbitration and allowable in insurance contracts.

We do not deem it necessary to set forth the Court of Appeals' reasoning. We agree with the Court of Appeals' conclusion, and to its reasoning we add the following:

We do not place much reliance on McKenzie v. Fidelity-Phenix Fire Ins. Co., 133 Kan. 721, 3 P.2d 477 (1931), and Amusement Syndicate Co. v. Prussian Nat. Insurance Co., 85 Kan. 367, 116 P. 620 (1911). Both cases are readily distinguishable, and both cases preceded the adoption of K.S.A. 5-401.

An insurer and insured can agree to arbitrate a controversy at the present time. That is not the issue in this case. The issue is what the legislature intended when it prohibited a contract of insurance from providing for mandatory arbitration of future controversies. We do not see a meaningful distinction between appraisal and arbitration.

Arbitration can be for all or any part of a controversy. The parties can limit the issues to be arbitrated and can, for example, limit arbitration to the value of a loss. Actually, arbitration is a more adversarial proceeding than a normal appraisal. However, the end result is the same. A controversy is settled.

Here, the legislature was faced with unilateral contracts providing for a mandatory method of setting the loss, thereby denying the insured redress in the courts. The legislature is presumed to know the law, and it would have been aware that an entire controversy or only one part of a controversy may be arbitrated. We see no indication that the legislature understood there to be some distinction between arbitration and appraisal, terms that appellate courts frequently use interchangeably. The following cases support the Court of Appeals' conclusion that appraisal is a form of arbitration:

In 1989, the Florida Court of Appeals considered a nearly identical insurance clause. If the clause was an arbitration clause, the court planned to compel arbitration, and if the clause was an appraisal clause, the court planned not to compel arbitration. Three other Florida Court of Appeals cases were cited, all holding that the appraisal provision in the policy was in fact an agreement to submit the amount of the loss to arbitration. Intracoastal Ventures v. Safeco Ins. Co., 540 So.2d 162 (Fla.Dist.App.1989).

The Illinois Court of Appeals considered the same clause to determine if the insurer could compel arbitration under the appraisal provision when the property sought to be appraised was totally destroyed in a fire and no longer available to appraise. The court cited several prior Illinois appellate court decisions, holding that an "appraisal clause" is similar to an "arbitration clause" and recognizing an appraisal proceeding as a form of arbitration. The court then held that the clause covered "all loss" (as does the policy before us), and granted the insurer's motion to "compel arbitration." Beard v. Mount Carroll Mut. Fire Ins., 203 Ill.App.3d 724, 727-30, 148 Ill.Dec. 810, 561 N.E.2d 116 (1990).

In Rawlings v. Amco Ins. Co., 231 Neb. 874, 438 N.W.2d 769 (1989), the homeowner insureds filed suit against the insurer for tornado damage to their residence under their homeowners' policy. The district court sustained summary judgment for the insurer and dismissed the petition, based on the insureds' refusal to submit to an appraisal as set forth in the appraisal clause in the policy. The Supreme Court of Nebraska reversed and remanded,...