Class Issues to be Resolved Before Appraisal

Alexander v. Farmers Insurance Company
(Cal. Ct. of App., 2d Dist.), filed September 23, 2013, published September 25, 2013

KEY FACTS

Frances Marc Alexander and Thomas and Anna Downie sustained fire losses. At the time of the losses, they were insured under property insurance policies issued by Fire Insurance Exchange, a member of the Farmers Insurance Group of Companies.

By statute, a fire insurance policy requires the insurer to pay “the actual cash value of the property at the time of loss.” 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.”

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.”

Alexander and the Downies filed a class action lawsuit against Farmers 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 complaint alleged that Farmers failed to comply with the method for determining the actual cash value set forth in section 2051(b). It alleged that, “[I]nstead, 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.” The complaint also 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.”

Farmers moved for an order that the amount of Alexander and the Downies’ losses be resolved through “appraisal,” a process established in the Insurance Code and policy for establishing the actual cash value of a loss when the parties cannot otherwise agree on it.

The trial court denied the motion without prejudice, holding that it could be renewed after the court ruled on the proper method for Farmers to follow in determining actual cash value.

HOLDING & REASONING

The Court of Appeal affirmed. It found that under the circumstances, the trial court did not abuse its discretion.

In an appraisal, the function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is not their function to resolve questions of coverage or to interpret provisions of the policy. Likewise, an appraisal panel generally lacks the authority to determine whether an insured lost what he [or she] claimed to have lost. Those things are for a court to determine.

Because appraisers are not to resolve questions of coverage or to interpret provisions of the policy, they cannot perform their function without the court’s guidance on whether the actual cash value can be determined using a formula based on a lost or damaged item’s age. It was not an abuse of discretion for the trial court to have elected to resolve the interpretation issue first.

The court followed the decisions in Kirkwood v. California State Automobile Assn. Inter-Ins. Bureau, 193 Cal.App.4th 49 (2011) and Doan v. State Farm General Ins. Co., 195 Cal.App.4th 1082 (2011) rather than Community Assisting Recovery, Inc. v. Aegis Security Ins. Co., 92 Cal.App.4th 886 (2001). Among other things, Community Assisting Recoverywas decided before the Legislature amended the Insurance Code to address the proper method of determining the actual cash value of a loss.

The court noted:

“[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.”

The court found that the same considerations applied to the case before it.

ANALYSIS

This is one more case that emphasizes the relatively narrow job appraisers often have in connection with insurance claims.

We will keep our readers posted on any further holdings related to this case.