Alexander v. Farmers Insurance

Filed 9/23/13
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
FRANCES MARC ALEXANDER et al., B239840
Plaintiffs and Respondents. (Los Angeles County
Super. Ct. No. BC460992)
v.
FARMERS INSURANCE COMPANY,
INC., et al.,
Defendants and Appellants,
APPEAL from an order of the Superior Court of Los Angeles County.
Carl J. West, Judge. Affirmed.
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.
__________________________________
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 Code2 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
1
Appellants note that Farmers Insurance Company, Inc. is a Kansas corporation
which does not write policies in California and has been erroneously sued. However, it
appears that Fire Insurance Exchange (Fire) and Farmers Insurance Company are
affiliated. The Farmers Insurance logo is prominently displayed on Respondents‘
policies, which is included in the record, and the trial court refers to appellants as
Farmers. For ease of reference, we will refer to appellants collectively as Farmers, but by
doing so, do not intend to imply Farmers Insurance Company, Inc. is a proper party in
this action.
2
All further section references are to the Insurance Code unless otherwise specified.
2
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,
3
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
4
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 complaint3 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
3
The facts and allegations are taken from the first amended complaint, which is the
operative complaint.
5
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
6
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
7
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 first to an extended discussion of the relevant case law.
I. Relevant Case Law
In Community Assisting, the plaintiff non-profit corporation brought an action on
behalf of the general public under Business and Professions Code section 17204 against
194 insurance companies which provided polices in California with language
substantially identical to that required under section 2071. (Community Assisting, supra,
92 Cal.App.4th at p. 890.) The complaint alleged that the insurance companies
improperly adjusted property loss claims on the basis of replacement cost less
depreciation rather than on fair market value in violation of Jefferson, supra, 3 Cal.3d
8
398 (Jefferson). The plaintiff sought injunctive relief to compel readjustment of all
claims based on this alleged unlawful business practice. (Community Assisting, supra, at
p. 891.)
The insurance companies‘ demurrers were sustained without leave to amend and
the judgment was affirmed on appeal. The appellate court determined that the complaint
failed to state an unlawful business practice because the ―simplistic legal formulation‖
mischaracterized the holding in Jefferson and failed to take into consideration the
safeguard of the appraisal process. (Community Assisting, supra, at p. 892.) Reasoning
that ―[t]he Legislature has provided more than one measure to adjust claims under
Insurance Code section 2071, ‗actual cash value‘ being only one,‖ the court held that
appraisal was the proper remedy. (Id. at p. 895.) ―Thus, notwithstanding how the insurer
approaches valuation of the damaged property during adjustment of the claim, the
Legislature has provided the remedy to which the parties must resort for determination of
the amount of loss.‖ (Id. at p. 893.) The complaint failed to adequately allege that the
insurance companies‘ method of valuation was an ―‗unfair practice.‘‖ There was no
allegation the standard form language was not included in the policy, that the insurers
interfered with the appraisal process or engaged in any act which might have been a
breach of the contract. (Id. at p. 894.)
Following Community Assisting and the 2003 wildfires in Southern California, the
Legislature amended section 2051 in 2004 to set out actual cash value as the sole measure
to adjust claims under section 2071. The amendments also provided the precise formula
to determine actual cash value. (See Stats. 2004, ch. 605, § 2, p. 4763.) These
amendments were introduced as part of the Homeowner‘s Bill of Rights.
Kirkwood, supra, 193 Cal.App.4th at pages 58-60 and Doan, supra, 195
Cal.App.4th at page 1104 were decided after the 2004 amendments. In Kirkwood, the
First District Court of Appeal held that appraisal was properly deferred until after the trial
court ruled on the contractual and statutory interpretation issues presented in the insured‘s
declaratory relief action since these issues could not be determined by the appraisers.
There, the insured submitted a personal property claim to the insurer after a fire destroyed
9
his home and personal belongings. (Kirkwood, supra, at p. 54.) He provided a physical
depreciation amount based on the actual condition of each item at the time of the loss.
The insurer applied a blanket depreciation of 50-80 percent to most categories of
property. The depreciation was tied to the age of the item without regard to its condition.
(Id. at p. 55.) When the insured complained of ―excessive depreciation,‖ the insurer
responded that there were no guidelines provided by the Department of Insurance on how
to determine actual cash value but that the language of the contract justified the insurer‘s
approach.
The insured then sued for declaratory relief, breach of contract, bad faith, and
violation of the unfair competition law on a class basis. (Kirkwood, supra, at p. 56.)
The declaratory relief cause of action asserted a present controversy as to whether the
insurer violated section 2051(b) and various regulations by depreciating personal
property without regard to the actual physical condition of the property. The insurer
moved to compel appraisal, which was denied by the trial court without prejudice. (Id. at
p. 57.) Distinguishing several federal cases (discussed post) as well as Community
Assisting, the court of appeal affirmed the trial court‘s order, reasoning that ―[o]nly the
court, not an appraiser, can deliver declaratory relief as to the proper meaning of section
2051 within the context of [the insurer‘s] insurance adjusting practices.‖ (Id. at p. 62.)
Kirkwood distinguished Community Assisting, noting it was decided before the
2004 amendment of section 2051, setting forth how actual cash value should be
calculated. Prior to the enactment of the new provisions relating to depreciation, ―there
was no statutory direction dictating how the insurer was to measure the actual cash value
of recovery under an open policy.‖4 (Kirkwood, supra, 193 Cal.App.4th at p. 60.)
Therefore, the Community Assisting court did not ―construe the statute and regulation
governing depreciation practices under an open policy.‖ (Kirkwood, supra, 193
Cal.App.4th at p. 60.)
4
In an open policy, ―the value of the subject matter is not agreed upon, but is left to
be ascertained in case of loss.‖ (§ 411.)
10
―The result favored by [the insurer] and the federal district court decisions . . . bear
the real, deleterious consequence of forcing insureds to pay for an appraisal prior to a
definitive judicial declaration establishing the correct legal basis for determining actual
cash value. A judicial declaration that [the insurer‘s] interpretation of section 2051(b)
and its policy does not violate the statute would be the end of the line: no appraisal would
be necessary, and insureds . . . would not be forced to pay for an appraisal. On the other
hand, a contrary judicial declaration would inform the appraisal in this case and would
have the meritorious effect of staving off future appraisals and litigation based on the
same unlawful behavior. In our view judicial economy favors resort to declaratory relief
in this instance by heading off duplicative future actions challenging [the insurer‘s]
statutory interpretation as reflected in its adjustment policy.‖ (Kirkwood, supra, at pp.
62-63.)
Three months later, the Sixth Appellate District Court of Appeal concurred with
Kirkwood’s holding in Doan, supra, 195 Cal.App.4th at page 1104. There, the plaintiff
held a property insurance policy from State Farm which contained the standard form
appraisal clause. After the insured‘s home and its contents were destroyed by a fire, the
parties were unable to agree on the value of the lost personal property. Acting on behalf
of himself and other State Farm policyholders in California, the insured filed a putative
class action for declaratory and other relief, alleging that State Farm‘s method of
calculating depreciation violated the terms of the policy and the Insurance Code. (Id. at
pp. 1087-1089.) The trial court sustained State Farm‘s demurrer to the complaint without
leave to amend on the ground that the insured had failed to first submit his valuation
dispute to an appraisal. (Id. at p. 1090.) The judgment was reversed on appeal. The
appellate court held that the insured could pursue his cause of action for declaratory relief
because the statutory and contractual interpretation issues raised in his action were
beyond the limited authority of an appraisal panel to decide. (Id. at p. 1098.)
Turning to the question of whether the interpretation issues or the valuation issue
should be resolved first, the court concluded that, under Code of Civil Procedure section
1281.2, subdivision (c), ―insurance appraisals – like arbitration proceedings – may be
11
stayed pending the resolution of legal issues that lie outside the appraiser‘s jurisdiction.‖
(Doan, supra, 195 Cal.App.4th at p. 1101.) The court further observed that ―it is
particularly appropriate to do so where a determination of the legal issues may obviate
the need for an appraisal or inform the appraisal process.‖ (Ibid.) Given the insured‘s
allegations, a judicial declaration that State Farm‘s depreciation practice did not violate
the Insurance Code or the policy could make an appraisal unnecessary. (Id. at p. 1104.)
Because it appeared the trial court was unaware of its discretionary authority under Code
of Civil Procedure section 1281.2, the matter was remanded to the trial court with
directions to exercise its discretion to consider whether and when declaratory relief
should be granted. (Doan, at p. 1105.)
Seven months after Doan was decided, the federal district court issued an opinion
in Pivonka, supra, 2011 U.S.Dist. Lexis 142770, distinguishing Kirkwood and Doan.
There, a group of plaintiffs sued Allstate for declaratory relief, breach of contract, unfair
competition and bad faith. Plaintiffs alleged that Allstate used a secret, standardized
schedule rather than the actual physical condition of the property to calculate
depreciation. (Pivonka, supra, at p. *3.) Allstate moved to compel appraisal, ―arguing
Doan and Kirkwood are inapplicable because unlike the parties in those cases, ‗the parties
here do not have a dispute about the standard that governs appropriate depreciation —
and indeed Allstate quoted from the standard in pre-litigation correspondence.‘‖ (Id. at
p. *7.) In the referenced pre-litigation correspondence, Allstate advised its insured that:
―As you are aware, under the State of California‘s Department of Insurance regulations,
an insurer must consider the age and condition of an item during its evaluation. The
damaged/destroyed items were input in to the estimate using an average condition
however, if you can substantiate that the items were in better than average condition,
please submit this information to me.‖ (Id. at pp. *7-*8.) The district court found that
―Plaintiffs make the conclusory argument that statutory and regulatory questions have to
be clarified before these factual disputes are decided, this argument is based on
unsupported contentions and does not show the need to clarify the parties‘ legal relations
before appraisal is ordered.‖ (Id. at pp. *12-*13.) As a result, the parties were ordered to
12
appraisal and the case was stayed pending the conclusion of the appraisal process. (Id. at
p. *13.)
Pivonka relied upon Enger, supra, 407 Fed.Appx. 191, an unpublished Ninth
Circuit opinion.5 In Enger, the plaintiff alleged that Allstate improperly undervalued her
damaged property because it failed properly to calculate actual cash value under section
2051. The Enger court stated, ―By the plain language of the insurance policy, it is
immaterial that Enger believes the cause of the disagreement concerning the actual cash
value is Allstate‘s alleged use of an improper valuation method. The contract makes no
exception where the source of the dispute is the valuation method used: so long as the
parties ‗fail to agree as to the actual cash value or amount of loss,‘ the appraisal remedy is
triggered at the request of either party.‖6 (Enger, at p. 193.)
II. Analysis
Faced with substantially the same facts and procedural posture as the cases
discussed above, we conclude that Kirkwood and Doan provide the better reasoned
approach to resolving this issue. We agree that a trial court has the discretion to defer
appraisal in appropriate circumstances, just as it has ―the power to sever arbitrable claims
from inarbitrable ones and to stay either the arbitration or the judicial proceedings
pending the outcome of the other.‖ (Doan, supra, 195 Cal.App.4th at pp. 1098-1099.)
Although Code of Civil Procedure section 1281.2 generally requires a trial court to order
the parties to arbitration once the existence of a valid arbitration agreement covering the
dispute is established, it expressly provides an exception: ―If the court determines that
5
Under rule 32.1 of the Federal Rules of Appellate Procedure, citation to
unpublished opinions issued on or after January 1, 2007, is permitted.
6
Kirkwood criticized the trial court‘s opinion in Enger v. Allstate Ins. Co. (E.D.
2009) 682 F.Supp.2d 1094, for ―blindly‖ embracing an incorrect interpretation of
Community Assisting that the appraisal process must be exhausted before suit may be
brought. According to Kirkwood, the Enger trial court failed to discuss the nature of the
declaratory relief claim or delve into the propriety of invoking that relief. (Kirkwood,
supra, 193 Cal.App.4th at p. 61.) We believe the Kirkwood court would have similar
criticisms of the Ninth Circuit‘s opinion in Enger. It is four pages long and fails to cite to
Community Assisting or discuss the propriety of invoking declaratory relief.
13
there are other issues between the petitioner and the respondent which are not subject to
arbitration and which are the subject of a pending action or special proceeding between
the petitioner and the respondent and that a determination of such issues may make the
arbitration unnecessary, the court may delay its order to arbitrate until the determination
of such other issues or until such earlier time as the court specifies.‖ (Code. Civ. Proc.,
§ 1281.2, subd. (c), 3d par.) As the rules governing arbitration apply with equal force to
insurance appraisals, the decision whether to stay the appraisal is committed to the trial
court‘s sound discretion. (Doan, supra, at p. 1100.)
Farmers argues that section 2071 requires that ―appraisal must be exhausted before
a suit or action is ‗sustainable in any court.‘‖ Farmers relies on Community Assisting for
the proposition that appraisal is the mandatory remedy, even if the insureds challenge the
valuation methodology. Community Assisting is distinguishable. As noted by Kirkwood,
Community Assisting was decided prior to the 2004 amendments. Also, the court in
Community Assisting found that the plaintiff failed to assert an unlawful business claim
because it failed to allege the defendant‘s conduct was unlawful. In particular, the
plaintiff failed to allege the defendant ―engaged in any acts which might have been a
breach of the standard form policy.‖ (Community Assisting, supra, 92 Cal.App.4th at p.
894.) Community Assisting was not asked to consider the availability of declaratory relief
to construe the Insurance Code and its attendant regulations. The court had already
reached the merits of the plaintiffs‘ claim and found it lacking. The demurrer was
sustained without leave to amend. Thus, it did not need to invoke Code of Civil
Procedure section 1281.2 to determine whether other issues not subject to appraisal
needed to be determined prior to appraisal. Here, there has been no such conclusion on
the merits of Respondents‘ claims and the trial court retains discretion to delay its order
to arbitrate under Code of Civil Procedure section 12.81.2.
Not only is appraisal a statutory prerequisite to a lawsuit, Farmers contends
Respondents lack standing to advance their other causes of action without a showing of
economic injury, which can only come about after an appraisal. Farmers argues that ―[i]f
appraisers conclude that the amount of the loss is equal to or less than the amount Fire
14
paid to Respondents, they would have no damages or standing to seek relief against Fire.
Only if the appraisers determine that [] the amount of loss exceeds the amount Fire paid
to Respondents, would there be some basis to proceed with the lawsuit.‖ As explained in
Doan, ―there is no need to demonstrate damages in order to qualify for declaratory
relief.‖ (Doan, supra, 195 Cal.App.4th at p. 1104.) Section 1060 of the Code of Civil
Procedure specifically provides that ―[t]he declaration may be had before there has been
any breach of the obligation in respect to which said declaration is sought.‖
Having determined that the trial court has discretion to defer appraisal, we review
its denial of the motion to compel appraisal for abuse of that discretion.7 (Doan, supra, at
p. 1102, fn. 8.) We find none. Here, the trial court exercised its discretion to defer an
appraisal pending a judicial declaration of the parties‘ rights under the insurance policies
and statutes. The trial court reasoned that Kirkwood was directly on point and observed
that ―the allegations of Kirkwood are strikingly similar to those at issue in the instant
litigation, and counsel in Kirkwood are the same as those here.‖ Respondents alleged in
their complaint that controversies exist regarding the rights and obligations of the parties
under the statutes and policy. On appeal, Respondents summarize these controversies as
―(1) whether certain structural items may legally be depreciated at all, and (2) whether
Farmers may deduct formulaic depreciation of personal property and structural
components based on age, instead of only taking depreciation for the physical wear and
tear of items.‖ The trial court concluded that ―[t]he motion is premature, due to the
Plaintiffs‘ challenge of the alleged unlawful institutional practice of Farmers under
Insurance Code § 2051 and attendant regulations, the legality of [which] must be assessed
in advance of any appraisal.‖
7
Farmers argues that the standard of review is de novo. We disagree. It is true that
a court‘s decision as to arbitrability is subject to de novo review. (Molecular Analytical
Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 707.) But here,
Farmers acknowledges that the claims regarding its valuation methodology are not
subject to appraisal. There is no dispute that valuation of the loss items is subject to
appraisal. The question here is whether that appraisal may be deferred, and an abuse of
discretion standard of review is applicable.
15
Kirkwood’s view on judicial economy applies equally here: ―[a] judicial
declaration that [the insurer‘s] interpretation of section 2051(b) and its policy does not
violate the statute would be the end of the line: no appraisal would be necessary, and
insureds . . . would not be forced to pay for an appraisal. On the other hand, a contrary
judicial declaration would inform the appraisal in this case and would have the
meritorious effect of staving off future appraisals and litigation based on the same
unlawful behavior. In our view judicial economy favors resort to declaratory relief in this
instance by heading off duplicative future actions challenging [the insurer‘s] statutory
interpretation as reflected in its adjustment policy.‖ (Kirkwood, supra, 193 Cal.App.4th
at p. 63.)
Appraisal may also be averted if Respondents receive the declaratory judgment
they seek. At oral argument, Respondents‘ counsel indicated they want a declaration that
Farmers‘ practices are illegal as well as an order that Farmers readjust the claims in
conformity with section 2051. If Farmers conducts a new adjustment conforming to the
law, all parties may be satisfied. Then, there would be no dispute about the amount of the
loss and no appraisal would be necessary. Moreover, a judicial declaration of what the
statute means would, as in Kirkwood, ―inform the appraisal.‖ For example, the trial court
could declare that certain components are not ―normally subject to repair and
replacement‖ under section 2051(b)(2) if they have a life expectancy exceeding 100 years
or if their life expectancy exceeds a certain proportion of the useful life of the structure to
which it is attached. We acknowledge that it may not be workable for a trial court to
determine that certain structural components, such as framing or electrical or plumbing,
are categorically not normally subject to repair or replacement. We do not agree with
Farmers, however, that whether something is ―normally‖ subject to repair and
replacement should be considered on a case-by-case basis. Without some guidance from
the courts regarding the meaning of section 2051, it is virtually guaranteed that all partial
losses will result in litigation and appraisal.
16
Farmers attempts to distinguish Kirkwood and Doan by adopting Allstate‘s
successful strategy in Pivonka. In its opening brief, Farmers claims there is no dispute
between the parties as to the meaning of section 2051. Farmers ―acknowledges that
depreciation cannot be based solely on age and does not dispute that section 2051
requires consideration of condition.‖ Farmers also agrees that it may not depreciate
―structural components that are not normally repaired and replaced during the useful life
of a structure.‖ ―Thus, a judicial declaration on the meaning of the statute is unnecessary
in this case . . . If the appraisal confirms that Fire did in fact pay Respondents the ‗actual
cash value‘ (or more) to which they were entitled, further litigation over Fire‘s allegedly
improper valuation practices at the time of Respondents‘ losses – especially on the
classwide basis that Respondents are attempting to pursue here – would be a complete
waste of time and resources.‖ We are not persuaded to accept Farmers‘
―acknowledgment‖ at face value.
First, this argument was not presented below and is waived. In its demurrer to the
first amended complaint, Farmers argued that ―[t]he essence of Plaintiffs‘ argument is
that the words ‗physical depreciation‘ as used in section 2051(b)(2) restrict insurers and
appraisers to depreciation based on the damaged property‘s observable condition just
prior to the loss and nothing else. This is wrong.‖ Farmers urged the trial court to
interpret section 2051(b)(2) to allow an item‘s age to be considered in depreciating lost or
damaged property ―because a legal determination of the meaning of this statute is subject
to resolution by this Court at the pleading stage.‖ Farmers‘ attorney‘s statements during
hearings at the trial court that condition could also be considered in calculating actual
cash value is not equal to an argument that declaratory relief is unnecessary because there
is no dispute as to the meaning of section 2051(b)(2). To the contrary, Farmers
recognized there was a dispute over the meaning of section 2051(b)(2).
Second, Farmers‘ ―acknowledgment‖ that condition is to be considered in
calculating depreciation does not lay the dispute to rest. The complaint sufficiently
describes a valuation process that does not take into consideration a loss item‘s condition.
That Farmers now, on appeal, concedes it must take condition into consideration in no
17
way erases those allegations. Nor does Farmers‘ acknowledgment that certain structural
losses are not subject to depreciation circumvent the allegations in the complaint.
At oral argument, Farmers counsel noted that Farmers advised Alexander in a
letter that ―[a]ny depreciation applied to this estimate of repair is based on average
quality, condition, age and useful life, unless otherwise noted.‖ Unlike in Pivonka, where
Allstate explained to its insureds that it did take physical condition into consideration and
offered to recalculate depreciation if its insureds could show their items were of superior,
rather than average, quality, there is no indication in the record that Farmers did the same
in adjusting Respondents‘ claims, despite the generic language in its letter. There is also
no indication that Farmers‘ acknowledgment on appeal translates into changed
adjustment practices in the future. Thus, we disagree with Farmers‘ argument that
―whether or not Fire sufficiently considered condition in arriving at an item‘s actual cash
value in evaluating Respondents‘ losses is – for purposes of determining whether the
matter is subject to appraisal – beside the point and not grounds to avoid an appraisal.
The dispute, at best, is one of degree in Fire‘s consideration of condition, and not a
statutory interpretation disagreement requiring declaratory relief.‖
Third, we do not agree that further litigation of Farmers‘ alleged illegal valuation
practices would be obviated if it turns out the appraisal amount is equal to or more than
what Farmers has offered to pay Respondents. Indeed, Farmers concedes that after
appraisal is complete, ―Respondents may proceed with a challenge to Fire‘s alleged
improper practice for calculating depreciation.‖ Whether the appraisers correctly
calculate actual cash value of Respondents‘ losses is irrelevant to whether Farmers
correctly calculated actual cash value when it adjusted the claims.
18
DISPOSITION
We affirm the order denying, without prejudice, Farmers‘ motion to compel
appraisal. Respondents are awarded costs on appeal.
CERTIFIED FOR PUBLICATION
BIGELOW, P. J.
I concur:
RUBIN, J.
19
Alexander et al. v. Farmers Insurance Company, Inc., et al.
B239840
Grimes, J., Dissenting.
I respectfully dissent, because I conclude the appraisal Farmers has demanded
under the insurance contract and the statute may not be deferred while the trial court
resolves legal issues that cannot be decided by the appraisers. I believe the trial court
abused its discretion when it denied Farmers‘ motion to compel an appraisal. The
arbitration statute specifies that the court may delay an appraisal only when the court
finds that decision of other issues that cannot be decided in an appraisal may make the
appraisal unnecessary. No such finding was made or could reasonably be made in this
1
case. Moreover, even if the Kirkwood and Doan cases are correct that appraisal may be
deferred for a declaratory judgment on statutory interpretation issues, there are none in
this case; the issues are factual ones about whether Farmers does what section 2051
requires it to do. A declaratory judgment that Farmers does or does not do what
section 2051 requires will not assist or inform an appraisal, as the appraisers are in any
event bound to follow section 2051. Consequently, there is no justification for failing to
follow the mandate of section 2071, requiring an appraisal on demand.
Before I elaborate, it may be helpful to mention the following. I agree that an
appraiser cannot, and appraisal will not, resolve the principal legal issue plaintiffs raise:
whether Farmers‘ methodology for determining actual cash value is illegal. An appraisal
will simply determine the actual cash value of plaintiffs‘ lost or damaged property. And
if plaintiffs‘ allegations are true, Farmers has caused them harm. But requiring plaintiffs
to comply with the appraisal provisions of the contract does not erect a barrier to the
pursuit of their claims. If the appraisers apply the legally required standard, plaintiffs
will receive the full amount due under the insurance contract for their property loss, and
1
See Kirkwood v. California State Automobile Assn. (2011) 193 Cal.App.4th 49(Kirkwood) and Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082(Doan).
1
will do so sooner rather than later, after protracted discovery and courtroom proceedings.
If the appraisers fail to use the legally required standard, the appraisal award may be
vacated just as it was in Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398(Jefferson). But in either case, plaintiffs may pursue their claims after the appraisal.
In my view, the trial court failed to follow the dictates of both section 2071 and
the general arbitration statutes when the court denied, ―without prejudice to renewal,‖
Farmers‘ motion to compel appraisal.
First, the statutory and contractual language of section 2071 is clear. To the extent
plaintiffs are suing ―on this policy for the recovery of any claim,‖ they may not do so
unless ―all the requirements of this policy shall have been complied with . . . .‖ (§ 2071.)
One of those requirements is an appraisal, on demand of either party, in any instance
where ―the insured and this company shall fail to agree as to the actual cash value or the
amount of loss . . . .‖ (Ibid.) That has happened in this case.
Second, the arbitration statutes compel the same result. Code of Civil Procedure
section 1281.2 requires a trial court to order arbitration (the court ―shall order the
[parties] to arbitrate‖) if an agreement to arbitrate exists. Here, an agreement, mandated
by statute, exists. The trial court has the discretion to delay an order to arbitrate, but that
discretion is not unlimited; it is specifically circumscribed by statute. The court has
discretion to delay an order to arbitrate if it determines that (as here) there are other issues
not subject to appraisal that are the subject of a pending action, but only if it also finds
that ―a determination of such issues may make the [appraisal] unnecessary . . . .‖
(§ 1281.2, subd. (c), 3d par.; see also Acquire II, Ltd. v. Colton Real Estate Group (2013)
213 Cal.App.4th 959, 978 (Acquire II) [―When the dispute between parties to an
arbitration agreement includes both arbitrable and nonarbitrable claims, section 1281.2(c)
limits the trial court‘s discretion to delaying arbitration, and only if the court first
2
determines that resolving the nonarbitrable claims in court may make arbitration of the
2
arbitrable claims unnecessary.‖].)
Here, the trial court made no such determination, and it is hard to see how the
court could have done so. Indeed, the trial court said, ―[t]his is not to say that appraisal
may not be viable at a later stage of the litigation.‖ It does not appear that the trial court
believed, when it delayed the appraisal, that appraisal would be unnecessary – or even
that there was any significant possibility it would be unnecessary – after the court issues a
declaration on the legality of Farmers‘ practices. That being so, the court had no
authority under the arbitration statutes to delay the appraisal.
The trial court understandably relied on the Kirkwood and Doan cases, involving
issues virtually identical to those in this case. In Kirkwood, the court affirmed the trial
court‘s order denying, without prejudice, the insurer‘s motion to compel appraisal.
Kirkwood described the trial court‘s order as ―a matter of sequencing, in effect deferring
the appraisal until the interpretation issues were resolved.‖ (Kirkwood, supra, 193
Cal.App.4th at p. 60.) Kirkwood held that ―[t]his approach does not run afoul of
section 2071 or the arbitration statutes.‖ (Ibid.) It is on this point that I disagree with
Kirkwood. In my view, Code of Civil Procedure section 1281.2 does not give the court
discretion to ―sequenc[e]‖ the appraisal for case management purposes; it may defer the
appraisal only if it finds a determination of other issues may make the appraisal
unnecessary.
But even if I agreed with Kirkwood on that point, in this case – in contrast to
Kirkwood – counsel for Farmers has advised this court that Farmers now agrees with
plaintiffs on the legal interpretation of section 2051: namely, that depreciation may not
2
―If the court determines that there are other issues between the petitioner and the
respondent which are not subject to arbitration and which are the subject of a pending
action or special proceeding between the petitioner and the respondent and that a
determination of such issues may make the arbitration unnecessary, the court may delay
its order to arbitrate until the determination of such other issues or until such earlier time
as the court specifies.‖ (Code Civ. Proc., § 1281.2, subd. (c), 3d par., italics added.)
3
be based solely on age and that consideration of physical condition is required. While
this concession – made for the first time in the trial court on the day of the hearing –
appears to be a belated attempt to strengthen its position that appraisal is required now
rather than later, Farmers is bound by that concession, and in fact there is no need to
construe the meaning of the statute. Of course the question remains whether Farmers in
fact complies with the statute, but that is a very different question, and will remain to be
litigated no matter what value the appraisers put on plaintiffs‘ loss.
Before I elaborate on these points, it may be useful to summarize the rationale that
brought the Kirkwood and Doan courts to a conclusion different from mine.
1. Kirkwood
As stated above, the Kirkwood court was presented with claims much like the
plaintiffs‘ claims in this case. In Kirkwood, the court affirmed the trial court‘s order
denying, without prejudice, the insurer‘s motion to compel appraisal, agreeing with the
trial court‘s reasoning ―that [the plaintiff] had properly invoked its declaratory relief
powers to resolve a matter that was outside the scope of a statutory and contractual
appraisal.‖ (Kirkwood, supra, 193 Cal.App.4th at p. 53.) The court said:
―We think the trial court was right in its conclusion that an appraisal
was not mandated ‗right now‘ because the declaratory relief cause of action
asked the court to make a declaration that [the insurer] was misconstruing
section 2051(b). Denying the motion to compel appraisal without
prejudice, the [trial] court was clear: ‗I don‘t see how the plaintiff gets out
of an appraisal later.‘ In other words, given the limited role of an appraisal,
the court essentially bifurcated the case, determining that it should first
issue a declaration on the statutory issue, ‗and then have it inform the
appraisal when it goes forward.‘ In short the court ruled that the agreement
to arbitrate did not include the threshold contract and statutory
interpretation issues, which were beyond the purview of the appraisers. We
agree.‖ (Kirkwood, supra, 193 Cal.App.4th at p. 57, italics added.)
Kirkwood‘s analysis consisted first of the conclusion that deferring the appraisal
did not ―run afoul of section 2071 or the arbitration statutes,‖ and second, of an analysis
and rejection of the California and federal cases (more on these cases, post) suggesting
that appraisal must precede other litigation. Kirkwood said that the federal cases did not
4
address ―the central reality of this case, namely that the trial court determined [the
plaintiff] properly invoked its declaratory relief powers, thereby justifying its
nonprejudicial rejection of [the insurer‘s] motion to compel appraisal.‖ (Kirkwood,
supra, 193 Cal.App.4th at p. 62.) In other words, because the appraiser cannot resolve
contractual and statutory interpretation issues, ―therefore appraisal was properly deferred
in this case.‖ (Ibid.)
Further, Kirkwood pointed to ―the real, deleterious consequence of forcing
insureds to pay for an appraisal prior to a definitive judicial declaration establishing the
correct legal basis for determining actual cash value.‖ (Kirkwood, supra, 193
Cal.App.4th at p. 62.) The court observed that a judicial declaration in the insurer‘s favor
would be ―the end of the line,‖ with no need for an appraisal, saving the insured from
being forced to pay for one. (Ibid.) And, if the court found otherwise, the declaration
―would inform the appraisal in this case and would have the meritorious effect of staving
off future appraisals and litigation based on the same unlawful behavior.‖ (Id. at pp. 62-
63.) The court concluded that ―judicial economy favors resort to declaratory relief in this
instance by heading off duplicative future actions challenging [the insurer‘s] statutory
interpretation as reflected in its adjustment policy.‖ (Id. at p. 63.)
I am not persuaded that a request for declaratory relief – a discretionary remedy in
equity – allows the trial court to ignore a specific statutory restriction on its discretion to
delay an appraisal. Policy considerations such as judicial economy in ―staving off future
appraisals and litigation based on the same unlawful behavior‖ (Kirkwood, supra, 193
Cal.App.4th at p. 63) or the ―strong policy favoring declaratory relief‖ (Doan, supra, 195
Cal.App.4th at p. 1101) have no place in a trial court‘s exercise of its discretion to delay
appraisal; the only consideration is the one stated in the statute: if the court finds
resolution of other issues may make the appraisal unnecessary. (Cf. Acquire II, supra,
213 Cal.App.4th at p. 978 [―a trial court must decide whether [Code of Civil Procedure]
section 1281.2(c) applies based only on the three conditions identified in that
subdivision‖; ―[o]nly then may the court consider judicial economy and other similar
factors in deciding how to exercise the discretion section 1281.2(c) confers‖].)
5
So, in my view, Kirkwood used an erroneous standard when it concluded appraisal
could properly be deferred based on the appraiser‘s inability to decide statutory and
contractual interpretation issues. And, the suggestion by the Kirkwood court that no
appraisal would be necessary if the trial court determined that the insurer‘s practices did
not violate section 2051 (which seemed rather unlikely) appears to be speculative and
contrary to the trial court‘s own statement that ―appraisal later‖ was likely.
2. Doan
The other case plaintiffs rely on to support the trial court‘s denial of Farmers‘
motion to compel appraisal is Doan, supra, 195 Cal.App.4th 1082, where the court
concluded the trial court ―has discretion to stay the appraisal proceeding pending
resolution of the legal questions.‖ (Id. at p. 1099.) Doan presented the ―identical‖
question ―decided in Kirkwood: Must a party submit to an appraisal under section 2071
prior to obtaining a judicial determination of the meaning of section 2051?‖ (Id. at p.
1102.) Doan continued: ―Kirkwood answered that question in the negative, concluding
that a decision to stay the appraisal, in order the resolve ‗the interpretation issues‘ first,
‗does not run afoul of section 2071 or the arbitration statutes.‘‖ (Ibid., quoting Kirkwood,
supra, 193 Cal.App.4th at p. 60.)
Doan, unlike Kirkwood, referred to and quoted the pertinent arbitration statute,
giving the court discretion to delay an arbitration. (Doan, supra, 195 Cal.App.4th at p.
1100.) The Doan court found, citing Code of Civil Procedure section 1281.2,
subdivision (c), that Kirkwood‘s rationale was ―bolstered by explicit statutory authority
permitting the discretionary stay of appraisal proceedings pending resolution of issues
3
outside the appraisers‘ limited jurisdiction.‖ (Doan, at p. 1104.)
3
The Doan court observed that the trial court there was apparently unaware of its
discretion under Code of Civil Procedure section 1281.2 to stay the appraisal pending
resolution of the legal questions (Doan, supra, 195 Cal.App.4th at p. 1099), and
ultimately directed the trial court to exercise its discretion, concluding that ―[g]iven the
court‘s discretion to stay the appraisal, section 2071 cannot be interpreted to include an
inflexible requirement compelling an insured to submit to an appraisal before seeking a
6
But Doan, despite quoting the statute, does not acknowledge or address the
express limitation on the court‘s discretion: a finding that delaying the appraisal for the
resolution of other issues ―may make the [appraisal] unnecessary . . . .‖ (Code Civ. Proc.,
§ 1281.2, subd. (c), 3d par.; see also Acquire II, supra, 213 Cal.App.4th at p. 978; RN
Solution, Inc. v. Catholic Healthcare West (2008) 165 Cal.App.4th 1511, 1521 [―The
court would then have had discretion to delay its order to arbitrate the arbitrable claims
under section 1281.2(c), only if it first determined that the adjudication of the
nonarbitrable claims in court might make the arbitration unnecessary.‖ (italics added)].)
Instead, the Doan court observed that the ―decision whether to stay the appraisal pending
resolution of the interpretation issues is committed to the trial court‘s sound discretion,‖
and that ―[a] number of factors inform that decision, including policy considerations.‖
(Doan, supra, 195 Cal.App.4th at p. 1100.) Doan enumerated several policies the trial
court could consider, including the ―strong policy favoring arbitration,‖ the ―strong
policy favoring declaratory relief,‖ and judicial economy. (Id. at pp. 1100-1101.)
None of the cases Doan cites on the trial court‘s discretion involves the court‘s
discretion to delay arbitration between two parties who have agreed to arbitrate; they
involve the court‘s discretion under Code of Civil Procedure section 1281.2,
subdivision (c), where litigation with third parties is at issue. (E.g., Cronus Investments,
Inc. v. Concierge Services (2005) 35 Cal.4th 376.) That provision of the arbitration
statute is irrelevant to this case. In short, Doan does not persuade me that policy
considerations not identified in the arbitration statute may be used to ―inform‖ the court‘s
decision on whether to delay an appraisal.
The trial court‘s failure to follow the mandate of Code of Civil Procedure
section 1281.2 is a sufficient reason to reverse the trial court‘s order denying Farmers‘
motion to compel appraisal as an abuse of discretion. But other reasons likewise support
the conclusion that reversal is appropriate.
judicial determination of issues that are not within the ambit of the appraisal.‖ (Doan, at
p. 1104.)
7
First, there is no real statutory interpretation issue in this case. Farmers has
conceded that the plain language of section 2051 requires it, as plaintiffs contend, to
consider the physical condition of the property in arriving at the actual cash value, and to
apply depreciation to structural components only if they are normally repaired or replaced
within the useful life of the structure. The only dispute to be resolved by declaratory
relief is whether Farmers in fact does this.
Second, there is no reason to think a judicial declaration that Farmers does not, in
fact, follow the statute, will somehow ―inform the appraisal in this case,‖ thereby
justifying delay of the appraisal. The appraisers are required to follow the statute, and if
they make an award based on a misconception of the law, the award may be vacated.
(Jefferson, supra, 3 Cal.3d at p. 403.) But there is no reason to believe the appraisers will
misconceive the law. In short, the declaratory relief plaintiffs seek – in substance, a
declaration that Farmers does not use the condition of the item to determine physical
depreciation in violation of section 2051, subdivision (b)(2) – will do nothing at all to
affect or ―inform‖ the appraisal process, and there is thus no purpose to be served by
declaratory relief in advance of the appraisal.
This point becomes clear if we consider this question: what declaration about the
illegality of Farmers‘ practices can the trial court provide that will assist the appraiser in
determining the ―actual cash value and loss to each item‖? (§ 2071.) Stated differently,
what will the trial court‘s declaration tell an expert appraiser that he or she does not
4
already know about determining the actual cash value of an item?
4
In their cause of action for declaratory relief, plaintiffs seek a judicial
determination of ―the parties‘ rights and obligations regarding . . . section 2051,‖ and
describe the ―actual controversy‖ as ―whether [Farmers] is complying‖ with the statute
and regulations when it adjusts partial losses, ―whether [Farmers] is taking depreciation
on structural components that are not normally subject to repair and replacement during
the useful life of the structure‖; ―whether [Farmers] may only consider age or useful life
of an item, or excessively rely on age or useful life, in determining depreciation‖;
whether the statute ―permits Farmers to depreciate property through a standardized
schedule rather than through an examination of the condition of the property‖; ―whether
Farmers is entitled to conceal its method of depreciation from its insureds‖; and ―whether
8
The answers to questions about Farmers‘ practices (e.g., whether Farmers may
depreciate property through a standardized schedule rather than through examination of
the condition of the property) are of no use to an appraiser, who has only one mission: to
determine the actual cash value of the property. It simply does not matter to an appraiser
what Farmers has done or not done. The appraiser‘s task is to determine the actual cash
value (§ 2071), that is, ―the amount it would cost‖ to repair or replace the thing lost, ―less
a fair and reasonable deduction for physical depreciation based upon its condition at the
time of the injury.‖ (§ 2051, subd. (b)(2).) Nothing the trial court says about the legality
of Farmers‘ adjustment practices will add to the appraiser‘s expertise in making that
factual determination of value.
Under questioning at oral argument, plaintiffs‘ counsel indicated that plaintiffs
first want discovery, to find out what Farmers is actually doing, and then want a
declaration from the court that those practices are illegal (and an order to Farmers to
readjust the claims in conformity with section 2051). As to personal property, plaintiffs
want the trial court to declare, for example, that physical depreciation means ―wear and
tear only,‖ that items may not be depreciated based on age, and that Farmers is not
allowed to use a standardized depreciation schedule. As to structural components,
plaintiffs want the court to declare, for example, that depreciation may not be deducted
for framing and other designated categories of structural components they contend are not
normally subject to repair and replacement during the useful life of the structure.
In my view, it is unnecessary for such a declaration to precede the appraisal
Farmers has requested, and to which it is entitled under section 2071. Expert appraisers
already know what ―physical depreciation‖ and ―condition‖ mean, and they do not need
the court to explain them.
I find it particularly striking that the trial court should be asked to declare that
specific categories of structural components – framing, for example (the complaint also
Farmers must first adjust the claim and calculate [actual cash value] in compliance with
. . . section 2051 before it can invoke the appraisal provision of the policies.‖
9
mentions ―electrical, floor coverings, fencing, . . . cement, carpentry/trimwork, finishes,
. . . rough carpentry, [and] plumbing,‖ among a number of other categories) – are not
―normally subject to repair and replacement‖ during the useful life of the structure and
therefore may not be depreciated. Who better than an expert appraiser would know the
useful life of a structure, and who better than an expert appraiser would know which of
the components of a structure are ―normally subject to repair and replacement‖ during
that structure‘s useful life? Plaintiffs say an appraiser cannot decide whether a particular
type of component is ―normally‖ repaired or replaced during the useful life of a structure
because that is not a ―valuation‖ question. But of course it is a valuation question. The
appraiser is charged with determining ―the amount it would cost the insured to repair,
rebuild, or replace‖ a partial loss to the structure, and the appraiser cannot do that – he or
she cannot come to a loss amount – without knowing or deciding which components are
and which components are not normally repaired or replaced during the structure‘s useful
5
life.
5
I note that the trial court took judicial notice of the legislative history of Assembly
Bill No. 2962, the act amending section 2051 of the Insurance Code in 2004. (Stats. 2004
(2004 Reg. Sess.) ch. 605, § 2, p. 665.) I am also aware that not all documents in a
legislative history are cognizable to show legislative intent (see Kaufman & Broad
Communities, Inc. v. Performance Plastering, Inc. (2005) 133 Cal.App.4th 26, 37
[authoring legislator‘s files not communicated to the Legislature as a whole are among
documents not constituting legislative history].) Here, the legislative history includes,
from the files of Assembly Bill No. 2962‘s author, a list of ―committee questions‖ to the
author of the bill, with answers. One of those questions was whether the Department of
Insurance should ―list all non-depreciable components of a structure in regulation.‖ The
answer was: ―No. It would be difficult to have a comprehensive list of such non-
depreciable items listed in regulations as it involves commercial property, residential
property and personal property. The major difficulty involves commercial property
machinery and inventory, wherein it would be difficult to create a comprehensive list. It
would be more appropriate to approach any questions (on whether a particular property
should be depreciated) on a case-by-case basis.‖ (Assem. Bill No. 2962 (Pavley)
Questions and Answers (rev. 6/15/2004), italics added.) Whether this is ―cognizable‖
legislative history or not, it demonstrates a common sense view of how the appraisal
process should work.
10
Thus, even disregarding what I see as the clear mandate of section 2071 and the
general arbitration statute, the rationale for delaying an appraisal – grounded on
―inform[ing] the appraisal‖ (Kirkwood, supra, 193 Cal.App.4th at p. 63) – is unfounded.
Appraisers do not need a judicial opinion on the legality of Farmers‘ practices, or on the
meaning of ―physical depreciation,‖ or on precisely which structural components are
normally repaired or replaced during the structure‘s useful life.
Finally, I cannot end without observing that there is California and federal
precedent supporting the view that, entirely aside from the strictures of Code of Civil
Procedure section 1281.2, subdivision (c), appraisal may not be delayed.
In Community Assisting Recovery, Inc. v. Aegis Security Ins. Co. (2001) 92
Cal.App.4th 886 (Community Assisting), the plaintiff brought an unfair competition law
claim against 194 insurance companies, alleging they used the wrong standard to adjust
property loss claims (replacement cost less depreciation, rather than the fair market value
standard the Jefferson court had held was the proper standard), and seeking injunctive
relief to compel readjustment of all claims based on fair market value (unless
replacement cost less depreciation would be more favorable to the insured). (Community
Assisting, at p. 890.) The appellate court affirmed the dismissal of the action on
demurrer, finding the complaint did not state an unlawful business practice, because it
―mischaracterize[d] the holding in Jefferson and fail[ed] to take into consideration the
safeguard of the appraisal process provided by the Legislature . . . .‖ (Community
Assisting, at p. 892.) Among other things, the court said that section 2071 ―requires
appraisal for resolution of contested claims‖; the appraisal term ―creates an arbitration
agreement subject to the statutory contractual arbitration law‖; the appraisal award ―may
be vacated or confirmed‖; and so, ―notwithstanding how the insurer approaches valuation
of the damaged property during adjustment of the claim, the Legislature has provided the
remedy to which the parties must resort for determination of the amount of the loss.‖
(Community Assisting, at p. 893.)
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In short, Community Assisting tells us that, as here, the insurer‘s method of valuing
property – legal or not – was irrelevant to the determination of the amount of the loss,
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which the Legislature placed in the hands of the appraisers.
In addition, federal cases have resolved complaints alleging insurers used an
improper valuation method by concluding appraisal is required first. In Enger v. Allstate
Ins. Co. (9th Cir. 2010) 407 Fed.Appx. 191, 193, the Ninth Circuit viewed the issue
raised by the individual plaintiff as ―a straightforward question of contract
interpretation,‖ despite the plaintiff‘s ―attempts to characterize her suit as raising issues
of statutory interpretation warranting declaratory relief . . . .‖ (Id. at pp. 192-193.) ―The
contract makes no exception where the source of the dispute is the valuation method
used: so long as the parties ‗fail to agree as to the actual cash value or amount of loss,‘
the appraisal remedy is triggered at the request of either party,‖ and ―because ‗full
compliance with the policy terms‘ is a contractual prerequisite to bringing suit, [the
plaintiff] first must submit to the appraisal.‖ (Id. at p. 193.)
The federal district court in Pivonka v. Allstate Ins. Co. (E.D.Cal. Dec. 12, 2011,
No. 2:11-cv-1759-GEB-CKD) 2011 U.S.Dist. Lexis 142770 (Pivonka) reached the same
conclusion, granting the insurer‘s motion for appraisal and staying the case pending the
conclusion of the appraisal process. In Pivonka, as here, the insurers pointed out that,
unlike Kirkwood and Doan, the parties in Pivonka ―‗do not have a dispute about the
standard that governs appropriate depreciation,‘‖ as shown by prelitigation
correspondence from the insurer. (Pivonka, at pp. *7-*8.) Pivonka concluded the record
presented ―factual disputes concerning whether [the insurer] failed to pay the actual cash
value of the subject property, and falsely represented that the amount set forth in its
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Community Assisting‘s additional conclusion – that, in light of the appraisal
scheme in section 2071, the plaintiff ―failed to demonstrate an unlawful or unfair
practice‖ – does not apply in this case. (Community Assisting, supra, 92 Cal.App.4th at
p. 895.) In Community Assisting, the complaint ―[did] not allege that [the insurers]
coerced the insureds to settle for replacement cost less depreciation, or that they engaged
in any acts which might have been a breach of the standard form policy.‖ (Id. at p. 894.)
That is not the case here.
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settlement was the ‗actual cash value.‘ The gravamen of each pled claim depends on
resolution of these factual disputes.‖ (Id. at p. *12.) The court saw no need ―to clarify
the parties‘ legal relations before appraisal is ordered.‖ (Id. at p. *13.)
In summary, I am not suggesting that plaintiffs‘ claims should not go forward in
due course. Plaintiffs are entitled to discovery and a chance to show Farmers engages in
illegal practices that result in unnecessary appraisals or that effectively coerce insureds
into settlements for less than the actual cash value of their lost property. I do, however,
assign great importance to statutory mandates. Here, the statutes tell us, first, that
Farmers is entitled to an appraisal on demand (§ 2071) and second, that the trial court has
discretion to delay an appraisal only where the court‘s decision on other issues between
the parties may make the appraisal unnecessary (Code Civ. Proc., § 1281.2, subd. (c), 3d
par.). As the latter finding cannot be made here, Farmers is entitled to an appraisal now,
not later. Moreover, nothing in the declaratory relief plaintiffs seek will do anything to
assist an appraiser in his or her task, which is limited to determining the ―actual cash
value and loss‖ for each item under clear statutory direction, a task the appraiser is
uniquely qualified to do.
GRIMES, J.
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