In Alexander v. Farmers Insurance Company, Inc. (No. B239840, filed 9/23/13), a California appeals court held that a trial court properly refused to compel appraisal before determining whether the insurer improperly calculates actual cash value for a fire loss.
In a class action, the insureds alleged that they had submitted fire claims to Farmers, identifying the damaged property and the estimated actual cash value of each item. But they disputed Farmers’ adjustment of their partial loss claims, complaining that the method of calculating depreciation was illegal under the Insurance Code and applicable regulations.
The policyholders alleged that Farmers violated the requirements of Insurance Code section 2051 and the applicable regulations, which define actual cash value and require consideration of the condition and age of the property. “Instead, Farmers determines the [actual cash value] of personal property contents and structural components in partial losses by first determining a replacement cost. Farmers then deducts depreciation according to a secret schedule that is based on the age of the item.” Further, they alleged that Farmers did not consider the pre-loss physical condition of damaged property and arbitrarily deducted depreciation using a “secret formula based on age.”
As examples, the policyholders cited a claim for lead crystal wine glasses 10 years old with a replacement cost of $82.13, for which Farmers calculated an actual cash value of 82 cents. Similarly, a 20-year old solid walnut buffet with a replacement cost of $1,594.32 was calculated by Farmers to have a $15.94 actual cash value. And when the policyholders complained, Farmers was alleged to have “arbitrarily depreciated the majority of items by 50 percent,” with no further information about the condition of the items, despite section 2051’s mandate that depreciation be based upon an item’s condition at the time of the injury.
The policyholders also alleged a similar practice for structural components of damaged buildings, limited under section 2051 to “components of a structure that are normally subject to repair and replacement during the useful life of that structure.” Farmers was alleged to have taken depreciation from structural components that are not normally repaired or replaced within the useful life of the structure, and calculated depreciation percentages on a straightline basis by dividing the age of the component by an estimate of the component’s useful life.
Farmers responded by moving to compel appraisal, arguing that the policyholders had failed to exhaust their statutory and contractual remedies. But the trial court denied the request, and the appeals court agreed.
The court noted a split in authority regarding whether appraisal can be compelled in the face of an argument that the insurer improperly values a loss. In Community Assisting Recovery, Inc. v. Aegis Security Ins. Co. (2001) 92 Cal.App.4th 886, the court ruled that appraisal should proceed before any lawsuit, stating that: “[N]otwithstanding how the insurer approaches valuation of the damaged property during adjustment of the claim, the Legislature has provided the remedy to which the parties must resort for determination of the amount of loss.”
But in Kirkwood v. California State Automobile Assn. Inter-Ins. Bureau (2011) 193 Cal.App.4th 49, the court held that “[a]ppraisers have no power to interpret the insurance contract or the governing statutes.” Thus, the Kirkwood court held that appraisal was properly deferred until after the trial court ruled on the contractual and statutory interpretation issues presented in the insured’s declaratory relief action, since those issues could not be determined by the appraisers.
Three months after Kirkwood, the court concurred in Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082, ruling that the insured could pursue his cause of action for declaratory relief because the statutory and contractual interpretation issues raised in his action were beyond the limited authority of an appraisal panel to decide.
The Alexander court agreed that appraisal belongs after a determination whether the insurer properly calculates valuation, stating that: “We conclude that the more reasoned approach lies with Kirkwood and Doan, which hold that the decision whether to stay the appraisal is committed to the trial court’s sound discretion.”
The Alexander court pointed out that following the 2001 Community Assisting decision and the 2003 wildfires in Southern California, the Legislature had amended section 2051 in 2004 to set out actual cash value as the sole measure to adjust fire insurance claims. Further, the amendments also provided the precise formula to determine actual cash value, all of which were introduced as part of a Homeowner’s Bill of Rights. The Alexander court stated that assessing the method of valuation is thus a matter of statutory interpretation and, therefore, a legal issue outside the appraisers’ jurisdiction.
The Alexander court also pointed out that determining the valuation issue first served to further judicial economy, since, if it were determined that the insurer’s method for valuation passed muster, there would be no need to proceed with appraisal, which would benefit insureds with limited resources. The court also said that “without some guidance from the courts regarding the meaning of section 2051, it is virtually guaranteed that all partial losses will result in litigation and appraisal.” Thus, the court ruled that appraisal was properly deferred by the trial court until after a determination whether Farmers violated the statutory valuation methods and applicable regulations.
The majority’s ruling drew a strong dissent from Associate Justice Grimes, who argued that the question of how Farmers calculates actual cash value is factual and not legal. Further, he said that if calculation of actual cash value were subjected to appraisal, the appraiser would be bound to independently apply the statute and regulations in making the valuation, which would necessarily establish whether Farmers had miscalculated. At that point, the insured would still retain a remedy to pursue damages from the insurer. The Justice felt that the inclusion of appraisal in the fire insurance statute evidenced a Legislative preference for the process, as well as in the general arbitration statutes, and that the insurer’s motion to compel appraisal should have been granted.
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