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Alexander. v. Farmers Insurance Co. Inc.

California Court of Appeals, Second District, Eighth Division

September 23, 2013

FRANCES MARC ALEXANDER et al., Plaintiffs and Respondents.
v.
FARMERS INSURANCE COMPANY, INC., et al., Defendants and Appellants,

APPEAL from an order of the Superior Court of Los Angeles County No. BC460992, Carl J. West, Judge.

Barger & Wolen, Steven H. Weinstein and Peter Sindhuphak, for Defendants and Appellants Farmers Insurance Company and Farmers Insurance Exchange.

Kerr & Wagstaffe, Michael Von Loewenfeldt, Ivo Labar and Kelly Corcoran, for Plaintiffs and Respondents Frances Marc Alexander, et al.

BIGELOW, P. J.

Frances Marc Alexander and Thomas and Anna Downie (Respondents) brought a class action lawsuit against Farmers Insurance Company, Inc.[1] and Fire Insurance Exchange alleging illegal adjusting practices. In particular, Respondents alleged that Farmers failed to comply with the method for determining actual cash value set forth in the Insurance Code[2] for a partial loss in a fire. Farmers moved to compel an appraisal of the Respondents’ claims, contending that the dispute centered on the value of the Respondents’ loss. The trial court denied Farmer’s motion without prejudice to renewing it at a later stage of the litigation. We affirm the trial court’s ruling.

FACTUAL AND PROCEDURAL HISTORY

Respondents were insured under Farmers homeowners policies when they each suffered partial losses to their homes and personal belongings due to fire in 2009 and 2010. They submitted property claims to Farmers, identifying the damaged property and the estimated actual cash value of each item. Respondents disputed Farmers’ adjustment of their claims, complaining that Farmers’ method of calculating depreciation was illegal under the Insurance Code.

I. Relevant Provisions of the Insurance Code

Section 2070 requires that all fire policies in California be on a standard form, which is set forth in section 2071. The standard form fire policy requires the insurer to pay “the actual cash value of the property at the time of loss.” In the event of a loss, the insured must give written notice to the insurer and “furnish a complete inventory of the destroyed, damaged and undamaged property, showing in detail quantities, costs, actual cash value and amount of loss claimed[.]” Actual cash value is determined by the following calculation under the statute: “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. In case of a partial loss to the structure, a deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life of that structure.” (§ 2051, subd. (b)(2).)

In the Code of Regulations enforcing fair claims settlement practices, the Insurance Commissioner has explained, “When the amount claimed is adjusted because of betterment, depreciation, or salvage, 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 betterment, depreciation, or salvage. Any adjustments for betterment or 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).)

If the parties fail to agree on the actual cash value or the amount of loss, they are required to participate in an appraisal. Once an appraisal demand is made and accepted, each party selects a “competent and disinterested” appraiser. Each party’s appraiser will state separately the actual cash value and loss of each item. If they disagree, they will submit their differences to a competent and disinterested umpire who they have jointly selected. (§ 2071.) “Appraisal proceedings are informal unless the insured and this company mutually agree otherwise. For purposes of this section, ‘informal’ means that no formal discovery shall be conducted, including depositions, interrogatories, requests for admission, or other forms of formal civil discovery, no formal rules of evidence shall be applied, and no court reporter shall be used for the proceedings. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him or her and the expenses of appraisal and umpire shall be paid by the parties equally.” (§ 2071.)

“An appraisal provision in an insurance policy constitutes an agreement for contractual arbitration. [Citations.]” (Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082, 1093 (Doan); see also Louise Gardens of Encino Homeowners’ Assn., Inc. v. Truck Ins. Exchange, Inc. (2000) 82 Cal.App.4th 648, 658 [“[a]n agreement to conduct an appraisal contained in a policy of insurance... is considered to be an arbitration agreement subject to the statutory contractual arbitration law”].) Accordingly, “[a]ppraisal hearings are a form of arbitration and are generally subject to rules governing arbitration.” (Kacha v. Allstate Ins. Co. (2006) 140 Cal.App.4th 1023, 1031; see also Devonwood Condominium Owners Assn. v. Farmers Ins. Exchange (2008) 162 Cal.App.4th 1498, 1505 [“appraisal award proceedings are subject to the arbitration provisions outlined in the California Arbitration Act”].) However, while “arbitrators are frequently, by the terms of the agreement providing for arbitration, ... given broad powers [citation], ... appraisers generally have more limited powers.” (Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, 403, italics omitted (Jefferson).)

Specifically, “‘[t]he function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration.’” (Jefferson, supra, at p. 403; see also Safeco Ins. Co. v. Sharma (1984) 160 Cal.App.3d 1060, 1063 [“appraisers have the power only to determine a specific question of fact, ‘namely, the actual cash value of the insured [item]’”].) It is “‘not their function to resolve questions of coverage and interpret provisions of the policy.’” (Jefferson, supra, at p. 403; see also Kirkwood v. California State Automobile Assn. Inter-Ins. Bureau (2011) 193 Cal.App.4th 49, 58-59 (Kirkwood) [“[a]ppraisers have no power to interpret the insurance contract or the governing statutes”]; Doan, supra, 195 Cal.App.4th at p. 1094 [“‘[m]atters of statutory construction, contract interpretation and policy coverage are not encompassed within the ambit of [an insurance] appraisal’”].) Likewise, an appraisal panel generally lacks the authority “to determine whether an insured lost what he [or she] claimed to have lost or something different.” (Safeco, supra, at p. 1065.)

Section 2071 provides that “[n]o 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, and unless commenced within 12 months next after inception of the loss.” (§ 2071.) Under the California Code of Regulations, title 10, section 2695.9, subdivision (e), “[o]nce the appraisal provision under an insurance policy is invoked, the appraisal process shall not include any legal proceeding or procedure not specified under California Insurance Code Section 2071. Nothing herein is intended to preclude separate legal proceedings on issues unrelated to the appraisal process.”

II. Class Action Lawsuit

Respondents brought suit on May 6, 2011, on behalf of a class of homeowners who received a settlement or an offer of settlement from Farmers of a partial loss property claim for less than the applicable policy limits within the statute of limitations period. The complaint[3] alleged that Farmers failed to comply with the method for determining actual cash value set forth in section 2051(b). “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.” Respondents further alleged that Farmers did not consider the pre-loss physical condition of damaged property and arbitrarily deducted the depreciation based on “its secret formula based on age.”

As examples, Respondents alleged that the Downies submitted claims for a set of lead crystal longchamp wine glasses that was 10 years old with a replacement cost of $82.13. Farmers calculated the actual cash value of the wine glasses to be 82 cents. Similarly, a 20-year old solid walnut china buffet with a replacement cost calculated by the Downies of $1, 594.32 was calculated by Farmers to have a $15.94 actual cash value. When the Downies complained, Farmers “arbitrarily depreciated the majority of items by 50 percent.” Respondents alleged these depreciation rates were contrary to section 2051, which permits “reasonable deduction for physical depreciation based upon its condition at the time of the injury...” (§ 2051, subd. (b)(2).) Respondents alleged Farmers did not ask for or receive any information about the condition of the items claimed in the loss.

Respondents alleged Farmers applied a similar illegal practice to the structural components of damaged buildings. Under section 2051, “a deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life of that structure.” (§ 2051, subd. (b)(2).) Respondents complained that “Farmers is taking depreciation from structural components that are not normally repaired or replaced within the useful life of the structure. Second, Farmers calculates a depreciation percentage on a straightline basis by dividing the age of the component by an estimate of the component’s useful life. Both of these practices violate Insurance Code section 2051.” For example, Respondents alleged that “Farmers depreciated all of the following types of components despite acknowledging that they had a useful life of at least 150 years (and thus are clearly not normally subject to repair or replacement during the useful life of the house): Baseboards, insulation, doors, closets, window framing, wiring, and fireplace components.” Respondents alleged that Farmers’ unlawful depreciation methodology resulted in “lowballing” claims to insureds who were then “coerce[d]... into mandatory appraisal of the insurance policy, despite the fact that the appraisal provisions of the standard form policy are not applicable to a dispute over the interpretation of Insurance Code section 2051.”

Respondents’ complaint alleged claims for declaratory relief, unfair competition under Business and Professions Code section 17200, breach of contract and bad faith. As to the declaratory relief cause of action, Respondents alleged that “[a]n actual controversy has arisen and now exists between the parties concerning whether Defendant is violating Insurance Code section 2051(b) and the other regulations cited herein, including but not limited to: (1) whether Defendant is complying with Insurance Code section 2051(b) and California Code of Regulation section 2695.9(f) when it adjusts partial losses to contents claims; (2) whether Defendant may only consider age or useful life of an item, or excessively rely on age or useful life, in determining depreciation; (3) whether Insurance Code section 2051(b) permits Farmers to depreciate property through a standardized schedule rather than through an examination of the condition of the property; (4) whether Farmers is entitled to conceal its method of depreciation from its insureds; and (5) whether Farmers must first adjust the claim and calculate [actual cash value] in compliance with Insurance Code section 2051 before it can invoke the appraisal provision of the policies.”

Respondents alleged similar controversies exist with relation to how Farmers adjusted partial losses to structural loss claims: “(1) whether Defendant is complying with Insurance Code section 2051(b) and California Code of Regulation section 2695.9(f) when it adjusts partial losses to structural loss claims; (2) whether Defendant is taking depreciation on structural components that are not normally subject to repair and replacement during the useful life of the structure; (3) whether Defendant may only consider age or useful life of an item, or excessively rely on age and useful life, in determining depreciation; (4) whether Insurance Code section 2051(b) permits Farmers to depreciate property through a standardized schedule rather than through an examination of the condition of the property; (5) whether Farmers is entitled to conceal its method of depreciation from its insureds; and (6) whether Farmers must first adjust the claim and calculate [actual cash value] in compliance with Insurance Code section 2051 before it can invoke the appraisal provision of the policies.”

Farmers demurred to and moved to strike the complaint on grounds that there was no violation of section 2051 and the insureds were contractually obligated to first complete an appraisal. Farmers also moved to compel appraisal pursuant to the policy provisions. The demurrer was overruled in its entirety and the motion to strike was denied, with the exception of certain allegations relating to restitution not at issue here.

The trial court also denied the motion to compel appraisal, but without prejudice to a renewal of the motion at a later stage of the litigation. The court reasoned the motion was premature but that it could be viable at a later stage after certain legal and factual issues were determined in anticipation of class certification. Farmers timely appealed the denial of its motion to compel appraisal.

DISCUSSION

The parties disagree about the underlying nature of their dispute. Farmers characterizes it as a valuation dispute about the actual value of the insured property, which is subject to appraisal. Respondents describe it as a dispute over the legality of Farmer’s uniform depreciation policies, which is not subject to appraisal. This matter is about both of those issues. The question we are faced with is whether appraisal may be deferred pending resolution of the claims that cannot be decided by an appraisal.

Farmers relies on a line of decisions which hold that the remedy for an insured in such circumstances is appraisal. (Community Assisting Recovery, Inc. v. Aegis Security Ins. Co. (2001) 92 Cal.App.4th 886 (Community Assisting); Pivonka v. Allstate Ins. Co. (E.D.Cal. Dec. 9, 2011, Civ. No. 2:11-cv-1759-GEB-CKD) 2011 U.S.Dist. Lexis 142770 (Pivonka); Enger v. Allstate Ins. Co. (9th Cir. 2010) 407 Fed.Appx. 191, 193 (Enger).) Respondents, on the other hand, rely on a series of state court decisions which hold that the trial court has discretion to defer appraisal pending a judicial determination of non-arbitrable issues raised in a declaratory relief claim. (Kirkwood, supra, 193 Cal.App.4th at pp. 58-60; Doan, supra, 195 Cal.App.4th at p. 1104.)

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. We turn ...


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