Appraisers’ Failure to Perform Assessment of Property’s Existence or Damage is Reversible Error

In Lee v. California Capital Insurance Co. (No. A136280; filed 6/18/15), a California Court of Appeal held that it was error for an appraisal panel to assign loss values to items simply because they were listed in the insured’s scope of loss, and regardless of whether inspection revealed they were undamaged or never existed.

California Capital insured a twelve unit apartment building owned by Ms. Lee in Oakland, California. When a fire damaged one unit, the insurer prepared an estimate of $69,255 and paid an undisputed amount of $46,755, which was the amount of the estimate less depreciation and the deductible.

But Ms. Lee claimed that six of the units had been damaged, and she retained a public adjuster who submitted a claim exceeding $800,000. This included cleaning, asbestos abatement, reconstruction of the affected apartments, and loss of rent. She claimed burn damage to one unit and smoke damage requiring complete replacement of all the interior rooms of five apartments, along with removal of a portion of the stucco exterior and iron balcony railings and repainting of the entire building.

Ms. Lee obstructed further investigation and petitioned to compel arbitration, which was granted over the objection of California Capital. The court ordered that the appraisal include: “(a) items of loss agreed by the parties to have been damaged by the fire; (b) items of loss asserted by Lee to have been damaged by the fire but where [California Capital] disputes coverage; and (c) items of loss asserted by [California Capital] to have been damaged by the fire but where Lee does not assert a claim.” The order directed the panel not to make any causation or coverage determinations, or to value the loss of rental or business income. The order also stated: “Following the appraisal proceedings, the parties can through other proceedings 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 court also issued an order allowing California Capital to re-inspect, after which it issued an additional payment to Ms. Lee in the amount of $109,367.41.

The appraisal panel rendered an award that did nothing more than list the appraisers’ determination of the replacement cost and actual cash value amounts for each of the two parties’ opposing scopes of repair. The appraisers refused California Capital’s request to inspect the property, and ignored its protests that items on Ms. Lee’s scope did not even exist. Ms. Lee was successful in getting the court to confirm the award, albeit with the limiting language from its earlier order that it did not address causation or coverage. A judgment was entered attaching the award, and California Capital appealed.

The appeals court agreed that the appraisers had exceeded their powers: “[A] trial court does not necessarily err in compelling appraisal of disputed items when the disputes turn on issues such as coverage, causation, or policy interpretation. Those legal issues can be resolved in subsequent litigation, although it may be appropriate in certain cases to stay an appraisal pending resolution of the disputed issues. However, 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 ever exist. In this case, the court erred because it directed the appraisal panel to assign loss values to items without regard to whether they were actually damaged.”

The court went on: “An assessment of whether an item is damaged or existed is fundamental to a valuation of the amount of the loss. As set forth in Insurance Code section 2071, the standard insuring language in a fire policy requires the insurer to pay ‘the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality . . . .’ If an item is undamaged, there is no repair cost and no need to replace the item. Indeed, our Supreme Court has stated that ‘[t]he function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration.’”

According to the appeals court: “The appraisal award is fundamentally deficient because it does not provide a single valuation of the loss suffered by the insured. Instead, it presents two competing valuations with an express disclaimer that the appraisal did not determine the appropriate scope and method of repair or whether the submitted items were damaged or ever existed. In effect, the panel simply assigned values to the scopes of damage submitted by each side, without resolving any factual questions about the condition and quality of the property that was damaged in the fire. For example, the competing appraisal amounts contain different estimates for the repair of a single bedroom in one of the affected units. The competing estimates do not contain the same list of items requiring repair in the bedroom and apply different square footage numbers for the same spaces. In the case of a kitchen in one unit, one appraisal amount includes the cost of replacing one window, whereas the competing appraisal amount includes the cost of replacing two windows. It is the responsibility of the appraisal panel to resolve these factual disputes and arrive at a valuation of the loss. It may be appropriate to segregate some items from the others because there is a dispute as to coverage or causation, but an appraisal should ordinarily not contain two competing valuations for the same item.”

The appeals court explained what it takes: “The competing appraisal amounts appear to be the result of the view that an appraisal panel is required to apply a value to every item that is presented to it by a party, without regard to whether the item was damaged or ever existed. As explained above, the panel is not required to assign a value to every item submitted to it for appraisal. If inspection reveals that an item is undamaged or never existed, the panel should not apply a loss value to the item. In addition, 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.”

Because the appraisers had failed to assess the property in the face of a factual dispute, although it would have been possible to do so, the judgment was reversed with an order for further proceedings.

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June 22, 2015