The Court of Appeal of the State of California, First District, recently reversed a judgment confirming an appraisal award in an action for damages to an apartment building arising from a fire, as the appraisal panel incorrectly assigned a loss value to all items submitted to it for consideration by the insured, regardless of whether the item was damaged or ever existed.

A copy of the opinion is available at: Link to Opinion.

The insured filed a hazard insurance claim for an apartment building as a result of a fire.  The insurer investigated the claim and issued initial payment of $46,755.34 based on its interim estimate of damage for one unit, less depreciation and the applicable deductible.  The insurer made additional payments directly to various vendors for demolition and fire restoration.

The insured, however, claimed the fire damaged six of the 12 apartments with fire or smoke, and provided a statement of loss in excess of $800,000, including replacement of common walls in all the interior rooms of the other five apartments as well as a portion of the stucco exterior around the building, removal of iron balcony railings, and repainting of the entire building.

The insured filed a petition to compel an insurance appraisal and to appoint an umpire to oversee the appraisal.  The insurer was permitted to re-inspect the subject property and thereafter issued an additional payment of $109,367.41.

The insured again demanded that the court order an appraisal of the full extent of the loss, which the trial court granted.  While at the initial appraisal hearing, the parties disputed the scope of loss to be appraised and appraisal was suspended pending clarification from the trial court.  Thereafter, the insured filed a separate lawsuit for breach of contract and bad faith against the insurer.

The insurer then moved to dismiss the petition for appraisal.  The trial court denied the motion and modified its order compelling appraisal directing the appraisal panel to “value three categories of items: (a) items of loss agreed by the parties to have been damaged by the fire; (b) items of loss asserted by [the insured] to have been damaged by the fire but where [the insurer] dispute coverage; and (c) items of loss asserted by [the insurer] to have been damaged by the fire but where [the insured] does not assert a claim.”

The modified order further directed the panel not to make any causation or coverage determinations, or value the loss of rental or business income, and specifically stated that following the appraisal, the parties could resolve “their disputes regarding whether an appraised item was covered by the policy, whether the item was damaged, and whether the item was damaged by the fire.”

The panel issued an appraisal award with two separate calculations of replacement cost and actual cash values based on the different scopes of loss provided by the insured and the insurer.

In response, the insurer petitioned to vacate the award as the panel issued two vastly different valuations of the same fire loss, and valued a theoretical loss, including items that were not damaged or that never existed.  The trial court denied the petition stating it was not the appraisal panel’s role to decide whether particular items were actually damaged in the fire or replaceable under the policy, or even whether they existed at the time of the fire.

The trial court then confirmed the appraisal award and entered judgment, and the insurer timely appealed.

As you may recall, all fire policies issued in California must be on a standard form that includes an appraisal provision as set forth in California Insurance Code section 2071, under which the parties are required to participate in an informal appraisal proceeding in the event there is a disagreement about the actual cash value or the amount of the loss and the insurer or insured makes a written request for an appraisal.

The Appellate Court stated the appraisal process is limited in scope.  Citing precedent, the Court noted that “an appraiser has authority to determine only a question of fact, namely the actual cash value or amount of loss of a given item.”  The Court also noted that “[t]he 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.”

The Appellate Court distinguished three California cases that define the limits of an appraisal panel’s authority: Safeco Ins. Co. v. Sharma (1984) 160 Cal.App.3d 1060, (“Sharma”); Kacha v. Allstate Ins. Co. (2006) 140 Cal. App. 4th 1023 (“Kacha”); and Devonwood Condominium Owners Association v. Farmers Insurance Exchange (2008) 162 Cal.App.4th 1498 (“Devonwood”).

In Sharma, the appellate court held an appraisal panel exceeded its authority by deciding a factual issue not properly before it when finding a set of 36 eighteenth century Indian paintings were unmatched and therefore less valuable.  There, an appraisal panel was not empowered to determine whether an insured lost what he claimed to have lost or something different, and any dispute as to a description in identification of lost or destroyed property should be raised before the trial court as a potential misrepresentation or fraud.

In Kacha, an appraisal panel determined claimed damage to various items was caused by something other than a wildfire.  The appellate court in Kacha held that the panel exceeded its authority by deciding causation issues and making coverage determinations.

In Devonwood, an appraisal panel issued an award segregating the replacement cost of disputed interior painting from the replacement cost of all other items, and the trial court confirmed the appraisal award and issued a money judgment for the entire amount.  The appellate court in Devonwood vacated the judgment because it did not conform to the appraisal award, which merely addressed values but did not address liability, and stated that a judgment after confirmation of an appraisal award fixing the cash value of loss does not preclude further litigation on other issues between the parties to an insurance policy.

After addressing these cases, the Appellate Court stated that Sharma and its progeny have been misconstrued to suggest that an appraisal panel is compelled to assign a loss value to anything that is submitted to it for consideration by an insured, regardless of whether the item was damaged or ever existed, and it was an error to compel the appraisal panel to assign values to such items.

The Appellate Court held that, although an appraisal is not limited to items of loss that the parties agree are covered under a policy, such an award does not establish coverage or the insurer’s liability to pay, as coverage is a separate legal issue that must be resolved outside of the appraisal process.

Moreover, the Appellate Court held that it is not appropriate to order a panel to assign loss values to items that inspection reveals are not damaged or plainly never existed.  Citing Jefferson Ins. Co. v. Superior Court (1970) 3 Cal. 3d 398 and Sharma, the Court acknowledge that the function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration, which includes an item’s quality or condition as well as whether an item is undamaged or did not exist.

The Appellate Court separately addressed whether the appraisal panel here exceeded its authority by issuing two completely different amounts of loss.  The Court noted that, although this challenge was technically moot based on the initial finding of error, the Court provided additional guidance acknowledging that the appraisal award was fundamentally deficient because it did not provide a single valuation of the loss suffered by the insured.

The Court specifically held that it is the responsibility of the appraisal panel to resolve factual disputes about the condition and quality of the damaged property, and 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 competing versions of required repairs.

Accordingly, the Court reversed and remanded the judgment confirming the appraisal award.