New California Court Decision Prescribes Rules for Conducting Insurance Loss Appraisals

The California Insurance Code provides a mandatory method of resolving property insurance claim disputes by informal appraisal proceedings before two appraisers and an umpire. The appraisers are charged with the obligation of appraising the loss and stating separately actual cash value and loss to each item of property. Since 1970, it has been settled that “the function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions of the policy.” (Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 98, 403.)

What happens, then, when the insurer and insured do not agree on the scope of the loss, and especially when actual cash value and loss depend on the identity or nature of the property, or even on whether the property existed? Building upon several Court of Appeal decisions, the First District Court of Appeal of California on June 18, 2015 attempted to provide guidance under these and related circumstances. In reversing a trial court decision that upheld an insurance appraisal award, the Court of Appeal in Lee v. California Capital Ins. Co., 2015 Cal.App. LEXIS 530, explained that a trial court, in ruling on a petition to compel appraisal of a property insurance loss, may in its discretion defer appraisal proceedings altogether pending resolution of issues not appropriate for appraisal through an appropriate declaratory relief action.

In the alternative, in its discretion, the trial court may on such a petition compel appraisal of disputed items before litigation, even when the valuation disputes between the parties turn on issues of coverage, causation, or policy interpretation. Such legal issues can be resolved in post-appraisal litigation, and the appraisal panel instructed to explain in detail in its award the assumptions for each value provided in the award.

The Court of Appeal held, too, that there are limits to the assumption approach. When, for example, loss valuation disputes turn on the condition or quality of damaged or destroyed items, or even their existence at the time of loss, where it is possible for the panel to assess an item’s condition, quality or existence without having to rely on the insured’s representation, it is error to compel the appraisal panel to assign values to items that a simple inspection reveals were not damaged or did not ever exist. Ruling in this case, the Court of Appeal held that the trial court stepped into error because it directed the appraisal panel to assign loss values to items without regard to whether they were actually damaged.

In the course of its ruling, the Court of Appeal rejected the insurer’s contention that the assumption process of appraisal is wasteful because it requires the parties to engage in a two-step process to resolve a claim. The insurer argued that the appraisal process should be the end, not the beginning of the process of resolving the valuation dispute regarding the loss. The court found that the procedure the insurer proposed would be even more wasteful. The court stated:

“Plainly, it is more efficient to value all items of loss, including disputed items, at the time an appraisal is performed. If it is determined there is no coverage for certain items, those items can simply be stricken from the award without requiring a further referral to an appraisal panel. . . . [A] panel does not necessarily exceed its authority by appraising items within a disputed scope of loss when the disputes turn on issues of coverage, causation, or other legal issues that an appraisal panel is not authorized to decide.”

On the other hand, the appellate court stated that it does not think it appropriate for a trial court to order an appraisal panel to assign loss values to items that inspection reveals were not damaged or never existed.

Finally, the court held that the appraisal panel may not hide behind assumptions to avoid resolving factual questions about the condition and quality of the property damaged in the loss. Thus, an appraisal award should ordinarily not contain two competing valuations for the same item of property. For example, the court said, “the panel should apply a single set of measurements to a physical space and determine what is required to effect a repair, instead of offering two dueling versions of required repairs. If one side claims a room has one window and the other side claims the room has two windows, it is the appraisal panel’s obligation to resolve the dispute to arrive at a single value for the loss.” (In a footnote, the court said that there may be limited circumstances when it is appropriate for an appraisal award to contain more than one value for an item of loss, such as when the property’s pre-loss condition is disputed and relevant to the valuation. In such a case, the appraisal award should clearly specify the assumptions underlying its competing valuations.)

Richard B. Wolf is a partner in the Los Angeles office of the nationwide law firm of Lewis Brisbois Bisgaard & Smith LLP. Since 1970, Wolf has specialized in insurance coverage advice and litigation.