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Douglas Kirkwood v. California State Automobile Association Inter-Insurance

February 28, 2011


(San Francisco City and County Super. Ct. No. CGC-09-489919) Trial Court: San Francisco Superior Court Trial Judge: Hon. Harold E. Kahn

The opinion of the court was delivered by: Reardon, J.


Insurance Code*fn1 section 2071 calls for an appraisal process to resolve disputes between the parties to a standard form fire insurance policy over the actual cash value of property loss claims. However, the appraisal panel's power is restricted to the factual task of valuing the items of property submitted for appraisal. Matters of statutory construction, contract interpretation and policy coverage are not encompassed within the ambit of a section 2071 appraisal.

In this action for declaratory and other relief, respondent Douglas Kirkwood has asserted that appellant California State Automobile Association Inter-Insurance Bureau (CSAA) is improperly interpreting and applying the 2004 amendments to section 2051, which set out the precise method of determining actual cash value of lost or injured property under an open policy of fire insurance. The trial court denied, without prejudice, CSAA's motion to compel appraisal, reasoning that Kirkwood had properly invoked its declaratory relief powers to resolve a matter that was outside the scope of a statutory and contractual appraisal. CSAA appeals the order denying its motion to compel appraisal. We conclude the trial court properly denied the motion, and accordingly affirm the order.


A. Legal Underpinnings

In California, the Insurance Code establishes the terms of standard fire insurance policies. Such policies "shall be on the standard form . . . ." (§ 2070.) Section 2071 details the standard provisions. The standard insuring clause calls for coverage "to the extent of 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 within a reasonable time after the loss . . . ." (§ 2071, italics added.)

In 2004, with the passage of Assembly Bill No. 2962 introduced as part of the Homeowners Bill of Rights following the 2003 wildfires in Southern California, section 2051 was amended to state exactly how the measure of actual cash value should be determined. (See Stats. 2004, ch. 605, § 2.) Section 2051, subdivision (b) (section 2051(b)) now reads, in part: "(b) Under an open policy that requires payment of the actual cash value, the measure of the actual cash value recovery, in whole or partial settlement of the claim, shall be determined as follows: [¶] . . . [¶] (2) In case of a partial loss to the structure, or loss to its contents, the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less." (Italics added.)

Implementing regulations promulgated thereafter now mandate that the insurer itemize, justify and fully explain all adjustments to the amount claimed, including for depreciation, and that depreciation must be attributable to the condition and age of the property: "When the amount claimed is adjusted because of . . . depreciation . . . , all justification for the adjustment shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the . . . depreciation . . . . Any adjustments for . . . depreciation shall reflect a measurable difference in market value attributable to the condition and age of the property and apply only to property normally subject to repair and replacement during the useful life of the property. The basis for any adjustment shall be fully explained to the claimant in writing." (Cal. Code Regs., tit. 10, § 2695.9, subd. (f), italics added.)

Section 2071 specifies several additional provisions pertinent to this appeal. The paragraph entitled "Requirements in case loss occurs" requires the insured to give the insurer written notice of loss, and furnish "a complete inventory" of the destroyed property, "showing in detail quantities, costs, actual cash value and amount of loss claimed . . . ." In the event the insured and insurer disagree as to the actual cash value or amount of loss, the "Appraisal" provision*fn2 requires the parties to take part in an informal appraisal proceeding (unless they mutually agree otherwise), in which each party selects a "competent and disinterested appraiser," who in turn selects a "competent and disinterested umpire . . . ." The appraisers selected by the parties are required to appraise the loss, "stating separately actual cash value and loss to each item"; if they fail to agree, they submit their differences to the umpire. And finally, the paragraph denoted "Suit" reads: "No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with . . . ."

B. Factual Background

Kirkwood was insured by CSAA under a homeowner's policy. It was an "open" policy in which the value of the covered items was not agreed upon, but was left to be determined following a loss. (§ 411.) The policy provided that CSAA would pay actual cash value or the replacement cost of lost or damaged personal property. In his complaint Kirkwood alleged that on August 21, 2007, his home and personal property were destroyed as the result of a fire. He submitted his personal property claim to CSAA, setting forth a physical depreciation amount based on the actual condition of each item at the time of the loss. CSAA provided Kirkwood with a contents inventory summary, which showed that a blanket depreciation schedule was applied to certain categories of property. For instance, many items were depreciated at 50 to 80 percent, and the depreciation was tied to the age of the item without regard to its condition.

Kirkwood challenged the settlement offer, in particular what he asserted was "excessive depreciation" that was nearly triple what he had calculated, and accused CSAA of violating section 2051(b) (quoted in pt. I.A., ante). CSAA responded that it was aware of section 2051, had asked the Department of Insurance for guidelines on how to determine actual cash value using the language of fair and reasonable deduction for physical depreciation, but indicated the department had no guidelines. CSAA stated it did "not believe the code changes the language of the contract between an insured and their carrier."

Thereafter Kirkwood sued CSAA for declaratory relief, breach of contract, bad faith, and violation of the unfair competition law (UCL). (Bus. & Prof. Code, ยง 17200.) The complaint included Kirkwood's individual claims as well as class action allegations, all relating to the assertion that CSAA's use of standardized depreciation schedules to determine depreciation of personal property items ran afoul of California law as well as the parties' insurance contract. The declaratory relief cause of action asserted a present controversy as to whether CSAA violated section 2051(b) and various regulations by depreciating personal property "through a secret, standardized schedule rather than through an examination of the actual physical condition of the property," and whether CSAA was "entitled to conceal its method of depreciation from its insureds." Kirkwood sought "a declaration that defines the rights and obligations under the policy, on behalf of himself and all others similarly situated," and asserted he was entitled to "a judicial determination of the parties' rights and obligations regarding section 2051." The breach of contract cause of action alleged that CSAA breached its obligation under the contracts of insurance with Kirkwood and each class member "by failing to make a ...

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