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Khorsand v. Liberty Mutual Fire Insurance Co.

California Court of Appeals, Second District, Fourth Division

February 27, 2018

ARASH KHORSAND et al., Plaintiffs and Appellants,
LIBERTY MUTUAL FIRE INSURANCE COMPANY et al., Defendants and Respondents.


         APPEAL from a judgment of the Superior Court of Los Angeles County No. YC070063, Stuart Rice, Judge. Affirmed.

          Robert H. Roe; Abir Cohen Treyzon Salo, Boris Treyzon and Cynthia Goodman for Plaintiffs and Appellants.

          Sedgwick, Susan K. Sullivan and Douglas J. Collodel; Cozen O'Connor, Maria Louise Cousinesu and Dina R. Richman for Defendants and Respondents.

          MANELLA, J.

         Appellants Arash Khorsand and Mahshid Fahandeza challenge the confirmation of an appraisal award under homeowners insurance policies issued by respondents Liberty Mutual Fire Insurance Company and Liberty Insurance Corporation (collectively, Liberty Mutual). Appellants contend the appraisers exceeded their authority regarding the award and that it was the product of fraud. In the published portion of this decision, we conclude that the trial court erred under Evidence Code section 703.5 in admitting part of an appraiser's declaration that appellants offered in opposing confirmation of the award. In the unpublished portion of this decision, we reject appellants' challenges to the confirmation of the award. We thus affirm the judgment confirming the award.



         In March 2013, appellants' two-story house in Pacific Palisades was insured under a homeowners policy issued by Liberty Mutual. On March 5, 2013, they reported damage due to water from an upstairs water pipe. After they submitted a claim (the pipe claim), Liberty Mutual initially paid $7, 996.84. Appellants hired adjuster Robert Barton, who estimated that the loss totaled $482, 490.37. After Liberty Mutual retained an engineering firm, “Exponent Failure Analysis” (Exponent), to assess the damage, a contractor retained by Liberty Mutual estimated the cost of repairs to be $34, 487.82. Based on that estimate, Liberty Mutual made an additional payment for undisputed loss.

         In late February 2014, following a heavy rainstorm, appellants reported damage to an upper deck and other areas, and submitted another claim (the deck claim).[1] After Exponent provided an estimate of the loss, Liberty Mutual made payments to appellants totaling between $59, 618.34 and $66, 077.[2] Appellants' contractor estimated the total loss to be approximately $288, 000.

         When adjuster Barton, acting on behalf of appellants, requested an appraisal relating to the pipe claim, Liberty Mutual denied the request, contending that disputes regarding coverage issues and the scope of the loss made an appraisal inappropriate.[3] Appellants petitioned the trial court to compel the appraisal, and in November 2014, the court granted appellants' petition. In ordering the appraisal, the court directed the appraisers to value separately items of loss regarding which Liberty Mutual disputed coverage or causation.[4] Later, in March 2015, appellants requested that the deck claim be included within the existing appraisal. Liberty Mutual agreed.

         In February 2016, during the appraisal proceedings, Liberty Mutual filed an ex parte application for an order limiting the proceedings to the items of loss appellants had originally submitted in their claims. The trial court denied the application.[5]

         On April 27, 2016, the appraisal panel issued its award. The award was signed by the umpire and Liberty Mutual's selected appraiser, but not by appellants' selected appraiser. The award stated that the total loss was $132, 293.04, and that the total loss to items regarding which Liberty Mutual disputed causation or coverage was $96, 530.37.

         When Liberty Mutual filed a petition to confirm the award, appellants opposed that petition and filed a motion to correct or vacate the award. Following a hearing, the trial court denied appellants' motion and confirmed the award. On January 10, 2017, the court entered judgment in favor of Liberty Mutual and against appellants in accordance with its rulings. This appeal followed.


         Appellants maintain that the trial court erred in failing to vacate the award, contending that the appraisal panel exceeded its authority in issuing the award and that it was the product of fraud. They argue that the panel erred in appraising items whose estimated damage Liberty Mutual had previously not disputed, in disregarding other items of loss, in placing more than one valuation of damage on the losses, and in failing to allocate the items of loss between the two claims. As explained below, we reject these contentions.

         A. Standard of Review

         Because appraisal proceedings are a type of arbitration, judicial review of an appraisal award is circumscribed.[6] (See Lee, supra, 237 Cal.App.4th at p. 1154.) Generally, “[i]t is not the [trial] court's role to review the merits of the controversy or to determine whether the evidence is sufficient to support the appraisal award. [Citation.] [¶] The exclusive grounds for vacating an appraisal award are set forth in Code of Civil Procedure section 1286.2, subdivision (a). [Citation.]” (Ibid.) Pertinent here are the grounds that “[t]he award was procured by corruption, fraud, or other undue means, ” and that “[t]he arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted” (Code Civ. Proc., § 1286.2, subds. (a)(1), (a)(4)).[7]

         The trial court's ruling on a challenge to an appraisal award is reviewed “under a de novo standard, drawing every reasonable inference to support the award. [Citation.] To the extent the court's ruling rests on issues of disputed fact, however, we apply the substantial evidence test.” (Kacha v. Allstate Ins. Co. (2006) 140 Cal.App.4th 1023, 1031 (Kacha).) As the record lacks a statement of decision and does not reflect the rationale for the ruling, we will imply all factual findings necessary to support it, and examine those findings for the existence of substantial evidence. (ECC Capital Corp. v. Manatt, Phelps & Phillips, LLP (2017) 9 Cal.App.5th 885, 900-901.)[8]

         B. Governing Principles

         Under Insurance Code section 2071, homeowners insurance policies providing fire coverage must authorize appraisal conforming to the standard policy clause set forth in that statute. (Gerbers v. State Farm General Ins. Co. (1995) 38 Cal.App.4th 1648, 1651.) The standard clause provides that the policyholder and the insurer are permitted to seek appraisal when they “fail to agree as to the actual cash value or the amount of loss....” (Ins. Code, § 2071, subd. (a).) Upon a request for appraisal, each party may nominate a “competent and disinterested” appraiser; the two appraisers are then authorized to select a “competent and disinterested umpire” and conduct informal appraisal proceedings, unless the parties agree to more rigorous procedures. (Ibid.) The standard policy clause further states: “The appraisers shall... 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 [the insurer] shall determine the amount of actual cash value and loss.” (Ibid.)

         Although the statutorily mandated policy clause constitutes an agreement for arbitration, appraisal “is a special form of limited arbitration.” (Kirkwood v. California State Automobile Assn. Inter-Insurance Bureau (2011) 193 Cal.App.4th 49, 58.) “The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration[, ]... not... to resolve questions of coverage and interpret provisions of the policy.” (Hughes v. Potomac Ins. Co. (1962) 199 Cal.App.2d 239, 253, disapproved on another ground in Sabella v. Wisler (1963) 59 Cal.2d 21, 34.) Rather, appraisers are empowered only to determine a specific question of fact, namely, “the actual cash value or amount of loss of a given item.” (Kirkwood, supra, at p. 59.)

         In view of that limitation, appraisers may decide only certain types of disputes. They are authorized to resolve a dispute regarding the existence or value of loss to an item, provided the dispute hinges on a feature of the item -- namely, its existence or condition -- directly amenable to inspection. (Lee, supra, 237 Cal.App.4th at pp. 1169-1175.) In contrast, they are barred from resolving disputes that hinge on issues relating to coverage or causation of the alleged damage (Kacha, supra, 140 Cal.App.4th at pp. 1035-1038), as well as from resolving factual disputes not amenable to determination through inspection (Safeco Ins. Co. v. Sharma (1984) 160 Cal.App.3d 1060, 1064-1065 [in valuing paintings claimed stolen, appraisers improperly resolved factual question regarding the paintings' provenance]).

         The limited nature of appraisal also imposes constraints on appraisal awards. When a specific item is subject to a dispute regarding coverage or causation, an award may value the loss to the item, provided that value is segregated so as to permit an adjustment to the award's determination of the total loss upon resolution of the dispute. (Devonwood Condominium Owners Assn. v. Farmers Ins. Exchange (2008) 162 Cal.App.4th 1498, 1502-1507 (Devonwood); see Lee, supra, 237 Cal.App.4th at pp. 1169-1170.) However, when the loss to a specific item is subject to a factual dispute amenable to resolution through inspection, the award may not state alternative values for the loss based on different resolutions of the dispute, as the appraisers are required to put an end to such disputes. (Lee, supra, at pp. 1175-1176.) Thus, regarding such an item, the appraisers may -- if appropriate -- properly assign a value of $0 to the claimed loss. (Id. at p. 1173.)

         The restrictions on appraisal set forth above are subject to modification. Under Insurance Code section 2071, subdivision (a), the requirements of the standard provisions may be waived by an express writing. (Kacha, supra, 140 Cal.App.4th at p. 1033.) Additionally, in an arbitration, a party may not voluntarily submit an issue to arbitration, “await the outcome, and if the decision is unfavorable, challenge the authority of the arbitrator to act.” (University of San Francisco Faculty Assn. v. University of San Francisco (1983) 142 Cal.App.3d 942, 954; Felner v. Meritplan Ins. Co. (1970) 6 Cal.App.3d 540, 544 (Felner); Hernandez v. State Farm Ins. Co. (1969) 272 Cal.App.2d 255, 256-257.)

         C. Admission of Appraiser's Declaration

         At the threshold of our inquiry into the confirmation of the award, we examine an issue regarding the evidence properly considered in reviewing that ruling, namely, the extent to which the court properly admitted a declaration by appellants' selected appraiser. After the court granted appellants' petition to compel appraisal, appellants selected Andrew Fraraccio as their appraiser and Liberty Mutual selected Jeff Caulkins as its appraiser; Fraraccio and Caulkins then chose Robert Mann to act as umpire. In challenging the award, appellants submitted a declaration from Fraraccio, who offered an account of the appraisal proceedings. Liberty Mutual asserted objections to the declaration under Evidence Code section 703.5, which the trial court overruled. On appeal, Liberty Mutual challenges that ruling.

         Although Liberty Mutual noticed no cross-appeal from the judgment, we may consider the extent to which the declaration was inadmissible under Evidence Code section 703.5. “As a general rule, respondents who fail to file a cross-appeal cannot claim error in connection with the opposing party's appeal. [Citation.] A limited exception to this rule is provided by [Code of Civil Procedure] section 906, which states in pertinent part: ‘The respondent... may, without appealing from [the] judgment, request the reviewing court to and it may review any of the foregoing [described orders or rulings] for the purpose of determining whether or not the appellant was prejudiced by the error or errors upon which he relies for reversal or modification of the judgment from which the appeal is taken.' [Citation.] ‘“The purpose of the statutory exception is to allow a respondent to assert a legal theory which ...

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