Appraiser Declarations Inadmissible When Offered to Challenge the Merits of an Appraisal Award

In Khorsand v. Liberty Mutual Fire Ins. Co. (No. B280273, filed 2/27/18), a California appeals court affirmed an appraisal award favorable to a homeowners insurer, ruling that it was improper to admit as evidence in opposition to a petition to confirm the award a declaration from the policyholders’ appraiser, except for the limited purpose of showing improprieties in the appraisal, bias, partiality or other improper conduct.

The homeowners had a pipe leak and submitted a claim. The insurer responded to an estimate from the owners’ adjuster by retaining an expert and paying an undisputed amount that was significantly less. Eleven months later the owners had upper deck damage and submitted another claim. Relying on the same expert, the insurer paid another undisputed amount significantly less than the owner’s estimate. The owners requested appraisal but the insurer denied the request, contending that the dispute was over coverage and outside the scope of appraisal.

The owners’ petition for appraisal was granted, with the court ordering separate listing of items the insurer disputed regarding coverage or causation. The appraisal panel issued an award stating that total damage was $132,293, of which $96,530 was contested by the insurer. The insurer filed a petition to confirm the award, which was granted despite the fact that the owners’ appraiser had refused to sign it.

In opposing confirmation of the award, the owners submitted a declaration from their appraiser, in which he provided an account of the appraisal proceedings, including the evidence presented and the appraisers’ deliberations, and set forth his reasons for declining to sign the award. This included facts regarding the owners’ claim that the insurer could not dispute increased deck repair estimates despite having learned facts that it was not covered, because it had initially agreed to cover the loss.

The result hinged on whether the appraiser’s declaration was admissible to oppose confirmation of the award. The insurer had objected to the declaration based on Evidence Code section 703.5, which states that: “No person presiding at any judicial or quasi-judicial proceeding, and no arbitrator or mediator, shall be competent to testify, in any subsequent civil proceeding, as to any statement, conduct, decision, or ruling, occurring at or in conjunction with the prior proceeding, except as to a statement or conduct that could (a) give rise to civil or criminal contempt, (b) constitute a crime, (c) be the subject of investigation by the State Bar or Commission on Judicial Performance, or (d) give rise to disqualification proceedings under … Section 170.1 of the Code of Civil Procedure.”

Concluding that appraisers come within the purview of the statute, the appeals court agreed it was error to admit all but a small portion of the declaration. The court cited Cobler v. Stanley, Barber, Southard, Brown & Associates (1990) 217 Cal.App.3d 518, for the proposition that admissibility is limited to the four purposes specified in the statute, but not “[t]he merits of the controversy, the manner in which evidence was weighed or the mental processes of the arbitrators in reaching their decision.” The Cobler court held that arbitrator declarations were only admissible “when a dissenting arbitrator charged improprieties in the arbitration, and when others charged bias, partiality or improper conduct, but were not admissible to challenge the merits of the award.” (Citing Code Civ. Proc., § 1286.2(a)(1).)

The Khorsand court held that the only statements in the appraiser’s declaration that could be admitted were those statements regarding the owners’ charge that the insurer and its coverage counsel had engaged in “fraud” regarding the minimum scope of the deck loss, by having agreed to and paid the initial estimate for the repair, but then disputing any increased award for the deck after discovering a causation issue. The owners argued that the insurer was bound by its earlier representations regarding coverage, and it was fraud to argue otherwise.

But having concluded that the declaration was admissible for that limited purpose, the appeals court proceeded to find that judicial estoppel precluded any fraud argument by the owners because they had successfully argued for a broad application of the appraisers’ powers in the fight to limit the scope of the appraisal. They had successfully opposed the insurer’s application to limit the scope of the appraisal by arguing that the appraisal panel was authorized to make independent determinations regarding the existence and actual value of the losses, that the panel was not bound by the representations of either party regarding the scope of loss, but that the appraisers’ own estimates, not earlier estimates prepared by the parties, defined the scope of an appraisal award. Thus, the owners were estopped from arguing that the insurer was bound by its earlier statements regarding coverage.

Otherwise, the Khorsand court concluded that the owners were merely arguing the merits of the appraisal award which was not a basis to vacate the award as entered.

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March 1, 2018