Where an insured seeks declaratory relief regarding the interpretation of policy provisions, statutes and regulations pertaining to depreciation, a court has discretion to allow the declaratory relief action to proceed before requiring the insured to submit the issue of valuation to appraisal. ( Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082)
Facts
The Doan filed a suit in which he alleged that he and other similarly-situated plaintiffs were insured under property insurance policies issued by State Farm General Insurance Company. The policies provided that State Farm would pay the costs to repair or replace personal property less depreciation, but the policies did not define “depreciation.”
Doan alleged that a fire destroyed his house and personal property. He further alleged that, after the fire, he submitted an inventory 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, the actual cash value (i.e., replacement cost less depreciation) of his personal property was about $174,000. However, State Farm asserted that the actual cash value of the property was only about $130,000.
Doan alleged that 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.” He also alleged that State Farm’s depreciation figures “could not have been based on the condition of the item because the only information regarding the condition of [each] 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 alleged that he challenged State Farm’s “excessive depreciation” but that State Farm refused to re-open the claim for a determination of the true amount of physical depreciation of the personal property and that State Farm likewise refused to alter its method of calculating depreciation.
Doan did not demand appraisal but, instead, filed suit against State Farm and sought, among other things, (1) damages for breach of contract, (2) damages for bad faith and (3) declaratory relief. However, the trial court eventually dismissed Doan’s complaint, largely on the grounds that Doan had failed to submit to the valuation issue to appraisal.
Holding
The Court of Appeal reversed, holding that the trial court has discretion to defer an appraisal pending a judicial declaration of the parties’ rights under the insurance policies and relevant statutes. Insurance Code section 2051 provides that, when an open policy “requires payment of actual cash value” for a structure’s contents, “the measure of the actual cash value recovery” is “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.” Further, section 2695.9 (f) of the Fair Claims Settlement Practices Regulations provides that any depreciation applied “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.”
In addition, the Court of Appeal noted that, when there is a controversy relating to the legal rights and duties of parties in connection with a statute, contract or written instrument, any interested party may seek declaratory relief pursuant to Code of Civil Procedure section 1060. The Court also noted that Fair Claims Settlement Practices Regulations section 2695.9 (e) provides as follows: “Once 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 .”
Comment
Under California law, appraisal is a limited form of arbitration in which the appraisers decide only the issue of the amount of the loss, not issues of coverage, policy interpretation or claim handling. Insurance appraisals – like other arbitration proceedings – may be stayed pending the resolution of legal issues that lie outside the appraiser’s jurisdiction.
Note that this case does not stand for the proposition that an insured can circumvent the appraisal process simply by filing a suit that includes a cause of action for declaratory relief. Instead, this case stands for the proposition that, if the insured seeks declaratory relief, the trial judge has discretion to allow the claim for declaratory relief to proceed before requiring the insured to submit to the appraisal process.