It is axiomatic that the appraisers’ task is solely to determine the amount of loss, as opposed to coverage or liability.  In Li-Lin Sung v. California Capital Ins. Co., 2015 WL 3797827, 2015 Cal. App. LEXIS 530 (Jun. 18, 2015), a unanimous panel of California’s Court of Appeal recently held that that necessarily entailed assessing whether components of the policyholder’s claim were actually damaged or even in existence at the time of the loss.  According to the opinion, it was error to compel the appraisers to assign loss values to each and every item the insured claimed — such as damage to non-existent windows or to a fourth story on a three-story building — because assessing the existence and nature of any damage is an integral part of the appraisers’ job.

The policyholder owned an apartment building in Oakland that was damaged by fire in November of 2010.  The blaze was confined to one unit, and the insurer valued the loss at approximately $180,000.  The insured contended that there was extensive fire and smoke damage to five other apartments, however, requiring that all six units be completely gutted and rebuilt and that the building’s exterior be renovated and repainted.  Her claim exceeded $800,000.

The policyholder petitioned the court to compel appraisal, and the judge granted the petition and directed the appraisers to prepare separate valuations for:  (1) all of the items of loss claimed to have been damaged by the insured; and (2) all of the items of loss admitted to have been damaged by the carrier.  The panel’s award had replacement cost valuations of $813,884.89 and $190,505.21 respectively.

The insurer moved to vacate the award, arguing that the insured’s scope included items that were demonstrably not damaged or simply did not exist at the time of the fire — the policyholder’s claim included extra windows and extra square footage in all of the units and even an extra story on the building!  The trial court denied the motion and confirmed the award, stating that questions about whether an item in the policyholder’s scope was damaged or in existence were “matters as to which the parties preserve a right to trial by jury, and which it was not within the province of the appraisers to determine.”

On appeal, the state’s intermediate level appellate court ruled that the lower court was in error, and it set the award aside.  The 3-0 decision was authored by Division One’s Presiding Justice William McGuiness.

According to the panel, three recent Court of Appeal cases had 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.”  That was incorrect.  As the decision explained:

when the disputes turn on the condition or quality of damaged or destroyed items — and it is possible for the panel to assess an item’s condition or quality without simply having to rely on the insured’s representation — it is error to compel the appraisal panel to assign values to items that inspection reveals were not damaged or did not exist.

Issues of coverage or liability are manifestly beyond the scope of an appraisal, but the amount of loss is not, and the court explained that “[a]n assessment of whether an item is damaged or existed is fundamental to valuation of the amount of the loss.”

For example, if an insured claims that damaged counters were made of granite but a simple visual examination reveals they consist of a much less expensive material, the panel is not compelled to assign a value for repairing or replacing granite countertops simply because the insured lists them on the items of loss submitted for the panel’s consideration.

The justices included a recommendation that an award that zeros out certain items include an explanation (such as “undamaged”) for the decision for the trial court’s benefit.

Finally, the appellate court also held that it was error to instruct the appraisers to reach two separate numbers because it was their job to “resolv[e] any factual questions about the condition and quality of the property that was damaged in the fire” and to prepare a single valuation for the loss.