A trial court has discretion to defer an insurance appraisal proceeding until the resolution of a declaratory relief action regarding the legality of the insurer’s method of calculating depreciation. ( Alexander v. Farmers Ins. Co. (2013) 219 Cal.App.4th 183)
Facts
Three homeowners suffered losses to their houses and personal property caused by three separate fires. The homeowners submitted claims to their insurer, Farmers.
The homeowners identified the damaged personal property and the estimated actual cash value (ACV) of each item. However, Farmers paid a lower ACV for the damaged homes and personal property, based on Farmers’ calculation of depreciation for those items. Farmers allegedly applied a depreciation factor of 99 percent to some items and, when the homeowner complained, Farmers allegedly arbitrarily depreciated other items by 50 percent.
The homeowners filed a class action suit against Farmers, alleging causes of action for declaratory relief, unfair competition, breach of contract and bad faith. In their suit, the homeowners alleged that Farmers’ method of calculating ACV violated Insurance Code section 2051(b)(2), which provides that, in claims involving loss of personal property or partial loss of a structure, ACV is to be determined based on the replacement cost of property less a reasonable deduction for depreciation to reflect the condition of the property at the time of the loss.
Farmers responded to the complaint by filing a motion to compel appraisal. Farmers characterized the homeowners’ complaint as a dispute regarding the ACV of insured property, and argued that Insurance Code section 2071 required the homeowners to exhaust the appraisal process before filing a lawsuit.
The trial court denied Farmers’ motion to compel appraisal without prejudice (which gave Farmers the right to renew the motion at a later stage of the litigation). The trial court ruled that the appraisal could be deferred until the court ruled on the declaratory relief claim regarding the legality of Farmers’ method of calculating depreciation.
Holding
The Court of Appeal affirmed the trial court’s ruling. The Court found that the complaint described a valuation dispute regarding the ACV of the insured property (which was subject to appraisal) and a dispute regarding the legality of Farmers’ depreciation methodology (which was not subject to appraisal).
The Court followed the reasoning of two property insurance cases decided under similar circumstances which held that a trial judge had discretion to defer the appraisal. (See Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082; and Kirkwood v. California State Automobile Assn. Inter-Ins. Bureau (2011) 193 Cal.App.4th 49.) An appraisal provision in an insurance policy constitutes an agreement for contractual arbitration. Thus, the statutes governing arbitration, including Code of Civil Procedure section 1281.2, apply equally to insurance appraisals. Code of Civil Procedure section 1281.2(c) gives the trial court discretion to delay arbitration to determine issues between the parties that are not subject to arbitration and which may make the arbitration unnecessary.
After ruling that the trial court had discretion to defer an insurance appraisal, the Court of Appeal then analyzed whether the trial court abused its discretion under the facts of the case. The Court found no abuse of discretion. First, the Court held that the declaratory relief claim alleging Farmers’ illegal depreciation methodology was not subject to appraisal. Second, the Court found that the trial court’s ruling on the declaratory relief claim could obviate the need for an appraisal. If Farmers’ depreciation method complied with Insurance Code section 2051, no appraisal between the homeowners and Farmers would be necessary. On the other hand, if the trial court ruled that Farmers’ depreciation method violated Insurance Code section 2051, the ruling would provide guidance in the appraisal between the homeowners and Farmers and also stave off future appraisals and litigation based on the same unlawful depreciation methodology.
Comment
Based on this decision and the prior decisions in Doan and Kirkwood , it is clear that a court has the discretion to defer an appraisal if the insured files an action (such as a declaratory relief action) regarding the legality of the insurer’s method of determining the ACV of property. Appraisers have authority to resolve disputes regarding the value of property, but do not have authority to determine other issues (such as what is the proper formula for determining the ACV of property).
This decision also reaffirms the notion that, in determining ACV, insurers may not rely solely on rigid depreciation schedules, and may not apply blanket depreciation to entire categories of items. Instead, in determining how much depreciation of apply to an item, insurers should consider the age and condition of individual items.