Friday v. Trinity Universal of Kansas

939 P.2d 869, 262 Kan. 347, 1997 Kan. LEXIS 89

• Court: Supreme Court of Kansas
• Decided: May 30, 1997
• Docket: 74,666
• Status: Published

Opinions

The opinion of the court was delivered by

Abbott, J.:

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 invoice 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, it violated 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)(l). 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)(l). 22 Kan. App. 2d at 940.

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 (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)(l), 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 Syndicate Co. v. Insurance Co., 85 Kan. 367, 116 Pac. 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, 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, finding that the appraisal provision was an unenforceable arbitration clause. The insurer offered School Dist. No. 1 v. Globe & Republic Ins. Co., 146 Mont. 208, 404 P.2d 889 (1965), as support for its positiqn, but the court did not find it persuasive. Nebraska continues to adhere to the common-law doctrine that “arbitration agreements entered into before a dispute arises which purport to deny the parties the right to resort to the courts nonetheless oust the courts of their jurisdiction and are thus against public policy and therefore void and unenforceable. The doctrine applies to contracts of insurance.” Rawlings, 231 Neb. at 875.

Based on this authority, we hold the Kansas Legislature intended the prohibition in K.S.A. 5-401(c)(1) to apply to all insurance contracts that require any form of arbitration. We also hold that the appraisal provision before us is a form of an arbitration clause and is therefore prohibited in the insurance contract by K.S.A. 5-401(c)(1).

II. FEDERAL ARBITRATION ACT

The remaining issue is whether K.S.A. 5-401(c)(l), which bars enforcement of arbitration clauses in insurance contracts, is preempted by the FAA.

The trial court, relying on Skewes v. Shearson Lehman Bros., 250 Kan. 574, 829 P.2d 874 (1992), held that even if the appraisal provision were an arbitration clause, the FAA would preempt K.S.A. 5-401(c)(1), so that the provision would nonetheless be enforceable. Skewes involved a stockbroker’s claim of retaliatory discharge against his employer and considered whether the FAA preempted the K.S.A. 5-401 prohibition of arbitration of tort claims. This court held that the FAA preempted K.S.A. 5-401. However, that case is not helpful because it did not involve an arbitration provision in an insurance contract. The McCarran-Ferguson Act controls this issue. The McCarran-Ferguson Act provides in part: “No act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance.” 15 U.S.C. § 1012(b) (1994).

The issue of whether the FAA preempts K.S.A. 5-401(c)(l) was addressed in Mutual Reinsurance Bureau v. Great Plains Mut., 969 F.2d 931 (10th Cir.), cert. denied 506 U.S. 1001 (1992). That case involved a dispute between a reinsurer and a property casualty insurer that was submitted to arbitration pursuant to an arbitration clause in the reinsurance agreement. The reinsurer sought to confirm the arbitration award against the property casualty insurer, as provided in the FAA. The federal district court in Kansas confirmed the award, but the Tenth Circuit reversed and remanded, holding that because K.S.A. 5-401 regulated the business of insurance, the McCarran-Ferguson Act precluded application of the FAA and the arbitration clause was unenforceable because of K.S.A. 5-401(c)(1).

K.S.A. 5-401 was amended in 1995 to provide that reinsurance contracts are not to be considered contracts of insurance within 5-401(c)(1), thus legislatively overruling Mutual Reinsurance Bureau. See K.S.A. 1996 Supp. 5-401. However, because the Trinity policy is not a reinsurance contract, the Mutual Reinsurance Bureau statutory interpretations apply to this case. Thus, the trial court erred in holding the FAA preempts K.S.A. 5-401(c)(1).

The judgment of the Court of Appeals is affirmed, and the judgment of the trial court is reversed.