Where a policyholder’s appraiser was serving as an expert for the policyholder’s attorney in an unrelated case, there was no “impression of possible bias” and no basis to disqualify the appraiser from the appraisal panel. ( Mahnke v. Superior Court (2009) 180 Cal.App.4th 565)
Facts
After Peter and Patricia Mahnke’s residence was severely damaged by a wildfire, they made a claim to their insurer, California Fair Plan Association (CFPA). The Mahnkes did not agree with CFPA’s assessment of their damages, and therefore elected to proceed under the appraisal provision of their policy.
CFPA designated Bruce Reid as its appraiser, and the Mahnkes designated Robert McConihay as their appraiser. Each appraiser made a written disclosure in an effort to demonstrate that he was not only “competent” but also “disinterested.” Reid disclosed that he was serving, in a separate appraisal proceeding, as CFPA’s party-appointed appraiser. McConihay disclosed that he was serving, in an unrelated case, as a construction expert for the law firm that was representing the Mahnkes.
McConihay’s resume, which was attached to his written disclosure, listed the law firm representing the Mahnkes as one of 14 law firm references. His resume further listed 30 other cases – none of which involved the Mahnkes’ counsel – in which he had participated as a lead expert or consultant.
CFPA demanded the Mahnkes withdraw McConihay as their appraiser based on McConihay’s concurrent association with another party represented by the Mahnkes’ counsel. When the Mahnkes refused, CFPA filed a petition in the superior court in an effort to disqualify McConihay from acting as the Mahnkes’ designated appraiser. The superior court granted the petition, largely on the grounds McConihay’s professional relationship with another client of the law firm representing the Mahnkes created “an impression of possible bias” that warranted his disqualification. The Mahnkes then sought relief from the Court of Appeal.
Holding
In California, appraisals must be conducted pursuant to the provisions of the California Arbitration Act, which is set forth in Code of Civil Procedure section 1280 et seq. (the “Arbitration Act”). Section 1281.9 of the Arbitration Act requires a proposed neutral arbitrator – such as the umpire in an appraisal proceeding – to disclose in writing to opposing parties the existence of any potential grounds for disqualification. If a party objects to the proposed umpire, section 1281.91 requires the objecting party to serve a notice of disqualification within 15 days of receipt of the proposed umpire’s disclosure statement.
The statutory disclosure requirements set forth in the Arbitration Act apply only to the neutral arbitrator, and do not apply to party-appointed arbitrators. Although the Arbitration Act, as written, does not require a party-appointed arbitrator to make any disclosure, Insurance Code section 2071 nonetheless contains a statutory requirement that party-appointed appraisers be not only “competent” but “disinterested.” This requirement, incorporated into every fire insurance policy issued in California, in effect constitutes a contractual agreement between the parties to select unbiased appraisers.
Although a party-appointed appraiser does not have a statutory obligation to make a disclosure, a party-appointed appraiser nonetheless has a judicially-created obligation to disclose any facts that might cause a reasonable person to have an “ impression of possible bias.”
Based on the fact that McConihay was only serving as an expert for the Mahnkes’ attorney on one unrelated case, the Court found that a reasonable person would not have on “impression of possible bias” by McConihay. Thus, the Court of Appeal directed the trial court to reinstate McConihay as the Mahnkes’ party-appointed appraiser.
Comment
Most property insurance policies provide that, when the insurer and its insured fail to agree on the amount of a loss, either party can demand appraisal. Under California law, appraisal is a limited form of arbitration in which the appraisal panel determines only the “amount of loss.” In the event one party demands appraisal, Insurance Code 2071 requires each party to select a “competent and disinterested appraiser.” The two party-appointed appraisers, in turn, are required to agree on a “competent and disinterested umpire” (or request appointment of one by the court) to form a three-member panel to determine the amount of loss.
Although the Insurance Code requires that appraisal proceedings be “informal,” the proceedings must also conform to the procedural requirements of the Arbitration Act. Therefore, it is imperative that the members of the appraisal panel (the two party-appointed appraisers and the neutral umpire) understand and adhere to the procedural requirements of the Arbitration Act. Otherwise, the parties risk having a court set aside the award.