Insurance Appraisals Law and Landmark California Cases
All fire policies issued in California must be on a standard form that includes an appraisal provision as set forth in Insurance Code section 2071. (Ins. Code, 2070, 2071.)
Under the statutorily mandated appraisal provision, the parties are required to participate in an informal appraisal proceeding in the event there is a disagreement about the actual cash value or the amount of the loss and the insurer or insured makes a written request for an appraisal.
The California Capital policy in this case included an appraisal provision consistent with Insurance Code section 2071.
The appraisal provision in Insurance Code section 2071 provides as follows:
"In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written request of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of the request. Where the request is accepted, the appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon the umpire, then, on request of the insured or this company, the umpire shall be selected by a judge of a court of record in the state in which the property covered is located. 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, 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. In the event of a government-declared disaster, as defined in the Government Code, appraisal may be requested by either the insured or this company but shall not be compelled."
The appraisal process is limited in scope. (Kirkwood v. California State Automobile Assn. Inter-Ins. Bureau (2011) 193 Cal.App.4th 49, 58 122 Cal. Rptr. 3d 480 (Kirkwood).)
"Although an appraisal is a specific form of limited arbitration, there are significant differences between the powers of an arbitrator and those of an appraiser." (Ibid.) An arbitrator typically exercises "'essentially judicial functions,'" including deciding issues of law, and often resolves the entire dispute between the parties. (Id. at pp. 58-59.)
By contrast, "an appraiser has authority to determine only a question of fact, namely the actual cash value or amount of loss of a given item." (Id. at p. 59.)
"'The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions of the policy.'" (Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, 403 90 Cal. Rptr. 608, 475 P.2d 880.)
A number of published California cases have sought to define the limits of an appraisal panel's authority. In Safeco Ins. Co. v. Sharma (1984) 160 Cal.App.3d 1060, 1065-1066 207 Cal. Rptr. 104 (Sharma), the court held that the appraisal panel exceeded its authority by deciding, in effect, that the policyholder misrepresented the nature of the insured item that was stolen.
As explained further below, while we have no dispute with the Sharma court's holding based upon the facts of that case, in our view Sharma and its progeny have been misconstrued to suggest that an appraisal panel is compelled to assign a loss value to anything that is submitted to it for consideration by an insured, regardless of whether the item was damaged or ever existed. The vastly different and competing valuations of loss arrived at by the appraisal panel in this case, together with the various disclaimers as to the meaning of the valuations, are largely the product of this overly expansive interpretation of Sharma.
In order to put the issue into perspective, we briefly summarize three of the key cases bearing upon an appraisal panel's inability to decide issues other than the actual cash value or amount of loss of an item: (1) Sharma, supra, 160 Cal.App.3d 1060; (2) Kacha, supra, 140 Cal.App.4th 1023; and (3) Devonwood Condominium Owners Assn. v. Farmers Ins. Exchange (2008) 162 Cal.App.4th 1498 77 Cal. Rptr. 3d 88 (Devonwood).
In Safeco Ins. Co. v. Sharma (1984) the Court held that the appraisal panel exceeded its authority by deciding, in effect, that the policyholder misrepresented the nature of the insured item that was stolen.
In that case, the insured filed a claim for items stolen in a home burglary. (Sharma, supra, 160 Cal.App.3d at p. 1062.)
The insured and insurer could not agree on the value to assign to a set of 36 18th-century Indian "Bundi School" miniature paintings. The insured demanded an appraisal. (Ibid.)
The insured claimed the paintings were a matched set, which would be more valuable than an unmatched set of paintings.
In valuing the paintings, the appraisal panel effectively concluded the paintings were an unmatched set based upon an expert's opinion that there were no matched sets of Bundi School paintings on the West Coast and that any such sets would be in a museum or a well-known private collection. (Id. at p. 1065.) Consequently, the panel determined the missing artwork was of "'average quality'" and valued it accordingly. (Id. at p. 1063.)
The court in Sharma held the appraisal panel had exceeded its authority by deciding a factual issue not properly before it. (Sharma, supra, 160 Cal.App.3d at p. 1066.)
According to the court, "in no authority is it suggested that an appraisal panel is empowered to determine whether an insured lost what he claimed to have lost or something different. When an insurer disputes an insured's description in identification of the lost or destroyed property, it necessarily claims the insured misrepresented--whether innocently or intentionally--the character of the loss in filing a proof of loss. In turn, this claim opens the door to allegations of fraud. Were an insurer permitted to include the former issue within the scope of an appraisal, a determination in the insurer's favor would foreclose a court from determining one essential element of fraud in any subsequent litigation. Certainly, an insurer is free to litigate whether the insured has misrepresented what he lost; but it is beyond the scope of an appraisal." (Id. at pp. 1065-1066.)