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The Doan v. State Farm General Insurance Company

May 24, 2011

THE DOAN, PLAINTIFF AND APPELLANT,
v.
STATE FARM GENERAL INSURANCE COMPANY, DEFENDANT AND RESPONDENT.



(Santa Clara County Super.Ct.No. CV129264)

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

CERTIFIED FOR PUBLICATION

Plaintiff The Doan brought this action against defendant State Farm General Insurance Company. Suing for himself and a class of similarly situated policy holders, Doan alleged that State Farm breached its property insurance contracts and violated California law in settling claims by employing improper valuation methods that overstate depreciation. The trial court sustained State Farm's demurrer to the second amended complaint, without leave to amend, and this appeal followed.

This appeal concerns the proper interpretation of Insurance Code provisions, particularly section 2071,*fn1 which requires an appraisal in cases where property valuation is disputed. As explained below, we conclude that the trial court has discretion to defer an appraisal pending a judicial declaration of the parties' rights under the insurance policies and statutes. Based on that conclusion, we reverse the judgment of dismissal as to the first four causes of action of Doan's complaint.

STATEMENT OF THE CASE

I. Factual Background*fn2

Doan and the other plaintiffs were insured under property insurance policies issued by State Farm.*fn3 Doan's "policy stated that State Farm would pay the costs to repair or replace personal property at the time of the loss less depreciation. Depreciation is not defined in the policy."

Doan and the other plaintiffs suffered property losses covered under their policies. In Doan's case, a fire in June 2006 destroyed his home and its contents.

In October 2006, Doan "submitted his personal property claim to State Farm." Instead of using State Farm's form, Doan submitted his claim "on an excel spreadsheet, which set forth a physical depreciation amount for his personal property based on the actual condition of each item at the time of loss." By Doan's calculations, after deducting for depreciation "based upon the items' physical condition," the actual cash value of his personal property was nearly $174,000.

State Farm responded with a settlement offer that placed the actual cash value of Doan's personal property below $130,000. State Farm's value reflected depreciation of almost $82,000--nearly two and half times Doan's depreciation figure. State Farm gave "no explanation" for the "depreciation increases." State Farm's depreciation figure "could not have been based on the condition of the item because the only information regarding the condition of [the] item" came from Doan's claim, and "State Farm never inspected any of the items or took any steps to determine the true amount of physical depreciation."

Doan "challenged the settlement offer, in particular the excessive depreciation" but "State Farm refused to re-open the claim for a determination of the true amount of physical depreciation of the personal property. State Farm likewise refused to alter its method of calculating depreciation."

Doan did not demand an appraisal under section 2071 "because an appraiser has no authority to determine whether State Farm's method of calculating depreciation is a breach of contract and a violation of section 2051."

II. Procedural Background A. Initial Complaints and Demurrer

In December 2008, Doan filed his initial complaint in this matter, asserting causes of action for breach of contract, breach of implied covenant, and violation of the Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200, et seq.). In January 2009, Doan filed a first amended complaint, which added a fourth cause of action for violation of the Consumer Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq.).

In March 2009, State Farm responded with a demurrer, which attacked all four causes of action of the complaint, and with a concurrent motion to strike, which was directed both at the class allegations and at the injunctive and restitutionary remedies sought in connection with the UCL claims. State Farm also filed an appendix of federal authority, and a request for judicial notice that contained court orders and decisions from other jurisdictions. In support of its demurrer, State Farm first argued that Doan could not state a cause of action for breach of contract or for breach of the implied covenant, because he had failed to submit his valuation dispute to appraisal as required by section 2071. State Farm next argued that Doan could not state a cause of action under the CLRA, because the act does not apply to insurance. State Farm also argued that the claims in the complaint are not suitable for class treatment.

Doan opposed the demurrer and motion to strike. He argued that his legal remedies under the Insurance Code are not limited to an appraisal, that his CLRA claims are viable, and that all of the claims asserted in the complaint are suitable for class treatment.

State Farm replied to Doan's opposition, and it also objected to a declaration filed by his attorney.

In April 2009, following a hearing on the demurrer and motion to strike, the court issued its written order. After granting State Farm's request for judicial notice, the trial court sustained the demurrer in its entirety, giving plaintiffs 20 days' leave to amend. With respect to each of the first three causes of action of the complaint, the court explained: "Plaintiff failed to plead sufficient facts showing that he has satisfied the requirement of appraisal of such disputes." With respect to the fourth cause of action of the complaint, the court explained: "Plaintiff failed to plead sufficient facts showing that the CLRA applies to insurance." The court partially granted State Farm's motion to strike. As to the UCL remedies, the court struck Doan's request for restitution but refused to strike his request for injunctive relief; the court also refused to strike the class allegations in the complaint.

B. Second Amended Complaint and Demurrer

In May 2009, Doan filed a second amended complaint based on the same factual allegations. As before, Doan alleged that "instead of considering the actual condition of the lost or destroyed items of personal property, State Farm uses a standard estimating system known as the 'Depreciation Guide' " that "arbitrarily calculates a depreciation percentage based on age and type of item, rather than the actual condition of a particular item." Doan further alleged that State Farm "does not provide that document to its insureds or otherwise explain how it calculates depreciation for the insured's loss." By doing so, Doan asserted, "State Farm violated its contracts" and insurance law, specifically section 2051 and its accompanying regulation. Doan also asserted: "State Farm's offer to settle personal property claims for less than the true value of such claims has resulted in damage to Plaintiff and the Class equal to the difference between the true value of the claim and the amount offered by State Farm." In addition to the four previous causes of action--breach of contract, breach of implied covenant, violation of the UCL, and violation of the CLRA--the second amended complaint also contained a new first cause of action for declaratory relief.

State Farm responded with a demurrer addressed to all causes of action of the complaint, with a motion to strike directed at the class allegations, and with a request for judicial notice. Doan filed opposition to the demurrer and motion to strike, to which State Farm replied.

Both parties essentially renewed the arguments they had made earlier in supporting and opposing the first demurrer. Their arguments thus addressed the need for an appraisal under the Insurance Code, the applicability of the CLRA, and the suitability of the claims for class treatment. According to State Farm, Doan's addition of a cause of action for declaratory relief did nothing to cure the defects in his earlier pleading's Insurance Code claims. In State Farm's words, "as before, none of these causes of action is valid because an insured is required to submit a dispute regarding the amount of the calculated actual cash value of a loss to an appraisal." Doan disagreed, asserting that his "legal and equitable claims require determination and resolution of factual and legal issues far outside the ambit of what an appraiser may decide under the Insurance Code."

Following a hearing in late June 2009, the trial court issued its written order on State Farm's demurrer, motion to strike, and request for judicial notice. After granting the request for judicial notice, the court sustained State Farm's demurrer in its entirety, this time without leave to amend. Employing the same language as its earlier order, the court dispatched each of the first four causes of action of the complaint on the ground that "Plaintiff failed to plead sufficient facts showing that he has satisfied the requirement of appraisal of such disputes." The court also sustained the demurrer to the fifth cause of action of the complaint, again using the same language as its earlier order, on the ground that "Plaintiff failed to plead sufficient facts showing that the CLRA applies to insurance." The court denied State Farm's motion to strike as moot.

This appeal followed.*fn4

DISCUSSION

The sole issue on appeal arises from Doan's Insurance Code claims, which underlie the first four causes of action of the second amended complaint.*fn5 The pivotal question is whether Doan may seek a judicial declaration of his rights under the statute and policy before submitting his valuation dispute to the statutory appraisal process. Doan argues that he has a statutory right to such a declaration and that the trial court erred in concluding that appraisal is his exclusive remedy. State Farm disputes the point in its respondent's brief, arguing that the statutory appraisal provision is mandatory, that it must be satisfied before seeking other relief, and that Doan's addition of a declaratory relief cause of action is an attempt to circumvent the statutory requirement. However, at ...


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