Massey v. Farmers Insurance Group , 837 P.2d 880 ( 1992 )

SIMMS, Justice.

Certified Question of Law from the United States Court of Appeals for the Tenth Circuit.

Appellees, Harold and Dorothy Massey, purchased a fire insurance policy on their home from appellant, Farmers Insurance Group d/b/a Truck Insurance Exchange/Truck Underwriters Association (Farmers). The policy conformed to the statutory requirements of a standard fire insurance policy as mandated by 36 O.S. 1981, § 4803, and contained a clause permitting the amount of loss to be determined by an appraisal of the property by appointed experts. This clause reads as follows:

“Appraisal. In case the insured and this Company shall fail to agree as to the actual cash value or 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.” 36 O.S.1981, § 4803(G).

After a fire damaged their home, the Masseys made claim upon Farmers under the policy. The parties could not reach an agreement upon the amount of the loss, and the Masseys filed an action against Farmers in Atoka County District Court. Farmers then invoked the appraisal provision, and both parties appointed appraisers who figured the estimate for repair.

Farmers moved the court to appoint an umpire pursuant to the appraisal clause, and the court appointed a local builder suggested by Farmers’ appraiser and attorneys. The umpire surveyed the property and reviewed the recommendations of the appraisers determining the damage to be repairable for $49,146.00.

A supplemental record and a filed affidavit indicate that the umpire attempted to contact each of the appraisers to obtain further detailed information, and though he received such information from Farmers’ appraiser, he could not reach the Massey’s appraiser. A letter from the appraiser appointed by Farmers shows that they agreed with the umpire’s determination. It is unclear whether the award was filed with Farmers per the requirement of the provision, however, it was apparently sent to the district court. The Masseys did not file a formal objection to the award. Rather, they discharged their attorney and filed a ;pro se Motion to Reconsider the appointment of the umpire. They then retained new counsel, dismissed the Atoka County action without prejudice, and filed a new action on the policy as well as a bad faith claim in the United States District Court for the Eastern District of Oklahoma. The federal suit went to trial over the objection of Farmers, and the jury returned a verdict for the Masseys exceeding $4,000,000.00 in actual, consequential and punitive damages.

On appeal to the United States Court of Appeals for the Tenth Circuit, Farmers asserted the umpire’s damage appraisal was preclusive as to damages. In reviewing this assertion, the Tenth Circuit Court determined that it contained an issue not addressed by the courts of Oklahoma and certified the following question of law pursuant to the Uniform Certification of Questions of Law Act, 20 O.S. 1981, § 1601, et seq.:

“Under Oklahoma law, what is the pre-clusive effect of a court-appointed umpire’s damage appraisal under a statutorily-mandated provision of a fire insurance policy, where the insured, as of right, dismisses without prejudice an initial lawsuit without challenging the umpire’s appraisal and, thereafter, institutes a subsequent lawsuit on the same cause of action in another court?”

We hold that the umpire’s damage appraisal award made pursuant to the policy provision mandated by 36 O.S.1981, § 4803 has no preclusive effect upon issues raised and litigated by the party who did not make demand to enter into the appraisal process.

The legislature enacted § 4803 in 1957, and this Court has had little opportunity to interpret the appraisal portion of it. However, such appraisal clauses have been a part of standard fire insurance policies for well over one hundred years. See Appalachian Ins. Co. v. Rivcom Corp., 130 Cal.App.3d 818, 182 Cal.Rptr. 11 (1982) (citing Old Saucelito Land & Dry-Dock Co. v. Commercial Union Assurance Co., 66 Cal. 253, 5 P. 232 (1884)). Furthermore, this Court has approved of such appraisal provisions in fire insurance contracts since 1912. See Home Ins. Co. of New York v. Ballard, 32 Okla. 723, 124 P. 316 (1912); Rochester German Ins. Co. of Rochester, N.Y. v. Rodenhouse, 36 Okla. 378, 128 P. 508 (1912).

We construed the appraisal provision of § 4803 in Fidelity-Phenix Fire Ins. Co. of New York v. Penick, 401 P.2d 514 (Okla.1965), and though we did not determine the preclusive effect of appraisal awards, we did discuss the effect of an insurer calling for appraisal without admitting liability. We held that the appraisal clause of § 4803 does not constitute a condition precedent for maintaining an action on a policy where the insurer, in making demand for an appraisal, reserves the right to litigate the question of liability. Moreover, denial of liability by an insurer waives the right of the .insurer to invoke the appraisal provision. Concordia Fire Ins. Co. of Milwaukee v. Barkett, 110 Okla. 177, 236 P. 890 (1925).

This holding finds support in the majority view concerning appraisal provisions, including the generally recognized rule that appraisal provisions permit appraisers or umpires to determine one issue, to wit, the amount of damage to the property. 14 G. Couch, Insurance § 50:54, at 204 (2d ed. 1982); Hamilton v. Liverpool, London & Globe Ins. Co., 136 U.S. 242, 10 S.Ct. 945, 34 L.Ed. 419 (1890); Casualty Indem. Exch. v. Yother, 439 So.2d 77 (Ala.1983); Hanson v. Commercial Union Ins. Co., 150 Ariz. 283, 723 P.2d 101 (Ct.App.1986); Safeco Ins. Co. of Am. v. Sharma, 160 Cal.App.3d 1060, 207 Cal.Rptr. 104 (1984); St. Paul Fire & Marine Ins. Co. v. Wright, 97 Nev. 308, 629 P.2d 1202 (1981); Elberon Bathing Co. v. Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978); In re Delmar Box Co., 309 N.Y. 60, 127 N.E.2d 808 (1955).

The majority view also concludes that although appraisal awards generally cannot determine the cause of a loss and do not discharge a cause of action on the policy, they are conclusive as to the amount of damages, and a confirmed award has the same preclusive effect as a judgment in a civil action. 14 G. Couch, Insurance § 50:55, at 205 (2d ed. 1982); 44 Am.Jur.2d, Insurance § 74 (1982); 45 C.J.S., Insurance § 1126 (1946); Hanson, supra; Safeco Ins. Co. of America, supra; Brethren Mut. Ins. Co. v. Filsinger, 54 Md.App. 357, 458 A.2d 880 (1983); Patriotic Order Sons of Am. Hall Ass’n v. Hartford Fire Ins. Co., 305 Pa. 107, 157 A. 259 (1931); Bainter v. United Pac. Ins. Co., 50 Wash.App. 242, 748 P.2d 260 (1988). The award in the case at bar was not confirmed by the state district court.

In joining the majority of jurisdictions, this Court recognized that awards made under the appraisal clauses of insurance contracts are conclusive as to the amount of loss. Aetna Ins. Co. v. Jester, 37 Okla. 413, 132 P. 130 (1913). After an award was made, plaintiff objected to it on several grounds and brought an action on the policy. The jury found that the appraisal was invalidated by the misconduct of the appraisers. On review, we held as follows:

“Where an appraisal has been fairly conducted in accordance with the law and the terms of the policy, the finding of the appraisers is binding upon the parties, and the insured cannot disregard the appraisal and offer independent evidence of the amount of his loss. His rights, so far as the extent of the loss is concerned, are limited by the award of the appraisers. It would seem, therefore, that [insured] should have an opportunity to make the same proof before the appraisers that he would have if the matter were being litigated in a court of justice, because the action of the appraisers will keep him from litigating the question again.” (Emphasis added) 132 P. at 132. Accord Mercantile Ins. Co. v. Murray, 171 Okl. 597, 43 P.2d 451 (1935); Camden Fire Ins. Ass’n v. Walker, 111 Okl. 35, 238 P. 462 (1925); Aetna Ins. Co. v. Murray, 66 F.2d 289, 290 (10th Cir.1933).

However, these cases were concerned with whether the appraisal clause was binding on the parties to the contract and were written long before the appraisal provision became mandatory in § 4803. In other words, those contracts were entered into by both parties without any mandate from the Legislature to include an appraisal clause, and this Court approved of the clause as a part of that contract. The significant difference between those appraisal provisions and the one before us now is that the latter is imposed upon both the insurer and the insured by statute, and neither party can negotiate its inclusion or exclusion. Moreover, when one party demands that the appraisal process begin, the other party is compelled to submit to it whether they want to or not.

This distinction was significant to the Oregon Supreme Court when they considered a question almost identical to the one before this Court. In Molodyh v. Truck Ins. Exch., 304 Or. 290, 744 P.2d 992 (1987), the court held, as this Court did in Penick, supra, that a statutorily-mandated appraisal provision is not a condition precedent to litigation. Thus, the statute does not require compliance with the provision in order to litigate a claim. The court further held that once the appraisal process is demanded by one of the parties, the procedure of the statute and policy becomes mandatory. Hence, to the demanding party, the appraisal process is permissive because they have chosen to invoke it. However, once that party invokes it, the process becomes mandatory to the other party.

As a result, the provision compels one party to submit to appraisal upon the other party’s demand. The court in Molodyh concluded that the appraisal award that results is binding upon the party which demanded the appraisal because the provision is permissive to him and he chose the appraisal tribunal as his forum. However, where a statute requires mandatory compli-anee with the appraisal provision, the appraisal award is not binding upon the party who did not demand the appraisal because such binding nature of the appraisal award would violate the non-demanding party’s constitutional right to trial by jury. The court stated:

“One party may not unilaterally decide to have someone other than a jury determine the issues and thereby destroy the other’s right to a jury trial.” 744 P.2d at 998.

The reasoning of the Oregon court is sound, and we embrace it in our analysis of the case at bar. At the time this action was filed, the Oklahoma Constitution, Art. 2, § 19, provided:

“The right of trial by jury shall be and remain inviolate, except in civil cases wherein the amount in controversy does not exceed One Hundred Dollars ($100.00).”

Other than this monetary limit, no act of government may deny the right of trial by jury to a person. While as in the case of arbitration, a person may waive his right to jury trial, the legislature cannot waive it for him.¹

Since the appraisal provision statutorily-mandated in § 4803 compels the Masseys to submit to the appraisal process upon Farmers demand, Farmers has unilaterally decided which forum the issue of the amount of loss would be decided, namely the appraisal tribunal. Hence, a construction of the statutory appraisal provision in the same manner as similar provision in contracts would run afoul of the Art. 2, § 19 right of jury trial.

The Masseys urge this Court to strike down the appraisal provision as unconstitutional. However, we are constrained to construe statutes whenever possible so as to uphold their constitutionality. St. Paul Fire & Marine Ins. Co. v. Getty Oil Co., 782 P.2d 915, 918 (Okla.1989). Therefore, we hold, as the court in Molo-dyh did, that § 4803(G) makes appraisal awards binding upon the party invoking the appraisal process, yet makes those same awards non-binding upon the party compelled to participate due to the other party’s demand.²

Farmers argues that the appraisal process does not violate the right to trial by jury because the award is subject to judicial review for fraud, bad faith and manifest mistake per this Court’s holdings in Aetna Ins. Co. v. Jester, supra, Camden Fire Ins. Ass’n v. Walker, supra, and Mercantile Ins. Co. v. Murray, supra. However, under these cases, the jury does not determine the amount of loss unless they first find that the appraisal award was subject to fraud, bad faith or mistake. Thus, if the party cannot prove that the award lacks credibility, that party is denied the opportunity to have the jury determine the amount of loss. Under such a scheme, the right of jury trial is still thwarted.

Moreover, Farmers asserts the right to trial by jury is only denied as to the single issue of the amount of loss, citing Appalachian Ins. Co. v. Rivcom Corp., 130 Cal.App.3d 818, 182 Cal.Rptr. 11 (1982). Therein, the court rejected the constitutional challenge to a statute requiring an appraisal clause in all insurance policies written in California. The insured argued the statute denied it the right to jury trial. However, the appellate court determined that the insured retained its right to pursue a separate civil action on all issues except the amount of loss, holding:

“Thus, Rivcom is not without jury trial rights. It simply has no jury trial right as regards the setting of the dollar amount of the loss under the policy, where the Legislature has established a standard form of policy providing for a particular procedure to be followed in one narrow aspect of the claim process. To hold otherwise would be to do violence to a longstanding and well settled body of law, where there is no reason to do so.” 182 Cal.Rptr. at 14.

We cannot agree with this rationale because such would ignore the clear mandate of our own constitutional provision. Indeed, the court in Molodyh considered the above-quoted language in its decision and held:

“Our constitution provides that the right to jury trial ‘shall remain inviolate.’ This right includes having a jury determine all issues of fact, not just those issues that remain after the legislature has narrowed the claims process. In many instances, the amount of the loss will be the only disputed issue.” 744 P.2d at 997.

Because Art. 2, § 19 of the Oklahoma Constitution provides for the right of jury trial to be and remain inviolate, we likewise conclude that legislative narrowing of the claims process is not effective to deny a party their right to have all fact issues decided by a jury.

Farmers further urges this Court to follow the holding in Erickson v. Farmers Union Mut. Ins. Co., 311 N.W.2d 579 (N.D.1981), a case in which a trial court granted the insured’s motion for summary judgment against the insurer, finding that the award, or amount of loss, arrived at by the appraisal tribunal was binding on the insurer. This case is distinguishable because it only involved a policy provision, there being no indication that the appraisal clause was imposed upon the parties by legislative enactment. Therefore, by entering into the insurance contract, the parties agreed to be bound by the appraisal award once invoked. As noted above, the Masseys had no choice as to the inclusion of the appraisal clause.

For the same reason, the cases of Chandos v. American Fire Ins. Co. of Philadelphia, 84 Wis. 184, 54 N.W. 390 (1893), and Young v. Pennsylvania Fire Ins. Co., 269 Mo. 1, 187 S.W. 856 (1916), among others cited by Farmers, are distinguishable.

Farmers’ final argument is that the appraisal process does not violate the constitutional right to trial by jury because at the time that the Oklahoma Constitution was adopted, cases were already written holding that an appraisal award was binding on both parties who entered into the process to determine amount of loss pursuant to a contractual provision in an insurance policy. Farmers cites Maryland National Ins. Co. v. District Court of Oklahoma County, 455 P.2d 690 (Okla.1969), which holds that Art. 2, § 19 only applies to those causes of action which were recognized under the common law as entitling the parties thereto to a jury trial at the time of adoption of the Oklahoma Constitution. This case and its well-settled law stand. However, it does not apply here because at the time of the adoption of the constitution, parties had a right to have a jury decide questions of fact pertaining to actions on fire insurance policies. The fact that case law recognized that a party could waive that right by entering into a contract which allowed the other party to invoke the appraisal process for the sole issue of amount of loss has no bearing upon this case for the reasons set out above. Thus, this contention has no merit.

We, therefore, conclude that a court-appointed umpire’s damage appraisal under the statutorily-mandated provision of a fire insurance policy, 36 O.S.1981, § 4803(G), has no preclusive effect upon the party who did not demand the appraisal process.

QUESTION ANSWERED.

HODGES, Y.C.J., and LAVENDER, SIMMS, HARGRAVE, and SUMMERS, JJ., concur. OPALA, C.J., and ALMA WILSON, J„ concur in result. KAUGER, J., not participating.

1 . Arbitration differs from the subject appraisal process in that arbitration is not forced upon the parties by statute. This Court noted in Voss v. City of Oklahoma City, 618 P.2d 925, 927 (Okla.1980), that arbitration is "the referral of a dispute by the voluntary agreement of the parties to one or more impartial arbitrators for a final and binding decision as a determination of their dispute.” (Emphasis added) The appraisal provision in the case at bar was not agreed to voluntarily, but rather, was required by statute.

2 . Unless there is fraud, bad faith or mistake.