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by Wm. Gerald McElroy, Jr.

In B.R.S. Real Estate Inc. v. Certain Underwriters At Lloyds, London, 110 F.4th 442 (lst Cir. 2024), the First Circuit upheld a decision by a federal district court granting summary judgment in an insurer’s favor and declining to vacate an appraisal award. This commentary will focus on the court’s treatment of the requirements under Rhode Island law for challenging the impartiality of an appraiser and the impartiality and competence of an umpire in a tri-partite appraisal.

The case involves a dispute concerning the amount due to B.R.S. Real Estate, Inc. (“B.R.S.”) under an insurance policy issued by Certain Underwriters at Lloyds (“Lloyds”) for a loss involving the freezing and bursting of pipes at a building owned by B.R.S. (hereinafter the “Property”). Quaker Special Risk, which managed the policy, and Lloyds (collectively the “Insurers”) retained Rebecca Girouard of LaMarche Associates (“Girouard”) as their loss adjustment investigator. B.R.S. retained Douglas Soscia of RI Adjusting Services (“Soscia”) as its public adjuster for the claim. After initial remediation work was performed on the Property, Girouard and Soscia submitted differing preliminary replacement cost and remediation cost estimates. The Insurers then issued a payment to B.R.S. for the undisputed portion of the claim. 110 F. 4th at 445. 

Given the dispute over the remaining amount due for the claim, B.R.S. demanded an appraisal under the terms of the Policy, which provided:

If [the Insurers] and [B.R.S.] disagree on the value of the property or the amount of the loss, either may make a written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences [Id., at 445-46]

B.R.S. made a second demand for an appraisal after the Insurers and Soscia evaluated further the electrical portion of B.R.S.’s claim and B.R.S. submitted an additional estimate for repairs. Id., at 446.

B.R.S. selected John Zarlenga of Adrien & Son (“Zarenga”) as its appraiser. The Insurers chose James Boudreau (“Boudreau”), an engineer/building consultant at Vertex Companies, Inc. (“Vertex”) as their appraiser. Boudreau had previously been hired by the Insurers in connection with the evaluation of B.R.S.’s additional estimate for repairs. Neither B.R.S. nor the Insurers objected to these appraiser selections at that time. Zarenga and Boudreau then selected William Monahan of Monahan & Associates (“Monahan”) to serve as the umpire Id.  

After an inspection of the Property by the appraisers and a series of “back-and-forths between Soscia and Girouard,” Monahan and Boudreau signed an appraisal award on August 15, 2019. Zarenga did not sign the award. [Id.] After Soscia notified the Insurers that the initial appraisal award did not take into account the replacement cost value of certain materials and appliances, Monahan and Boudreau signed an amended award. Zarenga again did not sign the award. Id.

B.R.S. subsequently filed suit in Rhode Island state court, and the Insurers removed the case to federal court. B.R.S. alleged the appraisal award was invalid because Boudreau was not an “impartial” appraiser as required by the Policy since he had previously performed work for the Insurers related to the insurance claim at issue and in the past had done extensive work for insurance companies. B.R.S. also claimed the umpire was incompetent and biased because he was a lawyer who worked for insurance companies. See B.R.S. Real Est., Inc. v. Certain Underwriters at Lloyd’s, London, 682 F.Supp.3d 204, 206 (D.R.I. 2023).

After discovery was completed, the Insurers moved for summary judgment and to confirm the appraisal award. The court granted the Insurers’ motion. Based on the record before it, the court concluded that no reasonable jury could conclude that Boudreau was an impermissibly biased appraiser or that Monahan was an incompetent umpire. 110 F.4th at 447. BRS then filed an appeal seeking to vacate the arbitration award.

The Rhode Island Supreme Court has ruled that an appraisal process involving two party-appointed appraisers and a disinterested umpire can be equated with arbitration and therefore is subject to the same standards of review. See Waradzin v. Aetna Cas. & Sur. Co., 570 A.2d 649, 650 (R.I. 1990). According to the First Circuit, B.R.S. faced an “uphill battle” in challenging the appraisal award since there is a “strong presumption” under Rhode Island law in favor of the validity of arbitration awards “given the ‘strong public policy in favor of the finality of arbitration awards.’” 110 F.4th at 448 (quoting Pierce v. R.I. Hosp., 875 A.2d 424, 426 (R.I. 2005) (quoting Prudential Prop. & Cas. Ins. Co. v. Flynn, 687 A.2d 440, 441 (R.I. 1996).

B.R.S argued on appeal that Beaudreau was an impermissibly partial appraiser and the appraisal award should be vacated based on Boudreau’s pre-existing business relationship with the Insurers and the Insurers’ prior retention of Boudreau to appraise the Property and assess B.R.S.’s supplemental claims. 110 F.4th at 448. According to the First Circuit, a court must “make an order vacating [an arbitration] award…[w]here there was evident partiality or corruption on the part of the arbitrators, or either of them.” 110 F.4th at 448 (quoting R.I. Gen. Laws §10-3-12(2)) Under Rhode Island law, “evident partiality” exists where a “reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” Aetna Cas. & Sur. Co. v. Grabbert, 590 A.2d 88, 96 (R.I. 1991). It “requires a showing of more than an appearance of bias but less than actual bias.” Id. The party challenging the award bears the burden of providing facts that would establish a reasonable impression of partiality. 110 F.4th at 448.

The federal district court ruled that Boudreau’s previous work for insurance companies raised an appearance of impartiality and bias but nothing more. 682 F.Supp.3d at 209. The First Circuit did not rule on the merits of B.R.S.’s claim regarding Boudreau’s bias but instead ruled that BRS was barred from asserting such a claim based on its failure to raise the issue before the appraisal took place. According to the court, “B.R.S. knew well before the appraisal began that the Insurers had previously retained Boudreau to reinspect the Property.” Under Rhode Island law, B.R.S. could not “debut its challenge to Boudreau post-decision.” 110 F.4th at 448.

Similarly, the First Circuit ruled that B.R.S. could not obtain a “redo” with respect to the issue of the competence and credentials of the umpire Monahan. In seeking to vacate the appraisal award, B.R.S. argued that “because Monahan is a lawyer without specific construction knowledge or an understanding of what is required to repair a commercial building like the Property, he was not a ‘competent’ umpire under the terms of the Policy.” 110 F.4th at 448. Nor, B.R.S. added, “would a competent umpire have ‘permitted’ Girouard and Soscia to be so heavily involved in the appraisal process, treating the process as a ‘free for all’ settlement between the parties.” Id. 

The First Circuit’s “simple rejoinder” to B.R.S.’s argument is that “B.R.S. seeks a redo based on information that it had before the appraisal was undertaken. Indeed, B.R.S.’s appointee helped pick the umpire. That B.R.S. now claims to have second thoughts provides no basis for challenging the award.” 110 F.4th at 448-49.

In contrast to its treatment of the impartiality argument with respect to Boudreau, the First Circuit gave a “longer rejoinder” with respect to the umpire competence issue and stated in dicta is disagreement with B.S.R.’s position. Id. at 449. According to the court:

 ….“it is not essential to competency that an arbitrator be an expert qualified to determine the submitted matters from personal knowledge and examination without the aid of the other evidence.” 15 Couch on Insurance § 211.27 (3d ed. 2024) Instead, “an attorney, otherwise qualified, may act as an appraiser …even though he or she is not a contractor or architect.” Id.

The First Circuit’s position on this issue is consistent with insurance industry practice with respect to appraisals since attorneys are frequently selected as umpires in property insurance loss appraisals. The First Circuit also rejected B.R.S.’s argument that it was improper for Monahan to allow Soscia and Girouard to be involved in the appraisal process or that such involvement led to an award that “substantially prejudiced” the rights of the parties. Id. In sum, the court stated, “B.R.S.’s challenge to the umpire on his conduct is too little and too late.”

As reflected in the First Circuit’s B.R.S. decision, it is extremely difficult under Rhode Island law to convince a court that an appraisal award should be vacated based upon the purported lack of competence or impartiality of an umpire or the impartiality of a party-appointed appraiser. The decision also emphasizes the importance of the “you snooze you lose rule:” a party failing to challenge on a timely basis the competence and impartiality of an umpire or impartiality of the party appointed appraiser in connection with a tri-partite appraisal proceeding will not succeed in later raising these challenges in connection with an attempt to vacate an appraisal award. 

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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.