Foran Glennon Palandech Ponzi & Rudloff

August 2015

What’s New In Appraisal?

Edward Murphy

The First Appellate District in California in Li-Lin Sung Lee v. California Capital Insurance Company added further clarification on the ongoing controversy over whether an appraisal panel can enter an appraisal award that includes disputes over policy coverage and causation. It held that an appraisal panel can assign a value to items even when the parties disagree on coverage or causation.  An appraisal panel is not, however, required to turn a “blind eye.” It can also rightly decide the quality of an item or that an item had no damage or did not exist in determining value.  In situations where the appraisal award values items for which a dispute exists on coverage or causation, the First Appellate Court also reaffirmed that the appraisal award cannot be enforced as a money judgment because it would merely establish values.

Factual BackgroundPlaintiff Li-Lin Sung Lee (“Lee”) had fire damage to her apartment building.  There was a disagreement between Lee and California Capital Insurance Company (“California Capital”) over how many of the 12 units in the four story building were damaged.  Lee retained a public adjuster who demanded appraisal and later filed a petition to compel appraisal.  California Capital opposed the petition on three grounds: 1) it was premature as California Capital had not completed its adjustment; 2) the petition improperly sought to appraise only Lee’s scope; and 3) the petition sought appraisal of a disputed scope of loss, which California Capital contended was not authorized.  The court granted the petition and initially limited the appraisal to value only the items damaged by fire and agreed by the parties to have been damaged in the fire.  The appraisal panel was not to address coverage or causation.  The appraisal hearing was suspended after Lee’s public adjuster demanded that the appraisal panel value Lee’s entire scope of loss.  The umpire sought clarification from the court and the court modified its order.  The appraisal panel was now to value three categories: 1) items of loss both parties agreed was damaged by the fire; 2) items of loss asserted by Lee to have been damaged and California Capital disagreed; and 3) items of loss California Capital contended was damaged and Lee disagreed.   The appraisal panel entered an award on only two of the categories as no items fell into category number three.  The appraisal award included, in part, the following limiting language: “it does not address the question of whether items claimed were in fact damaged / destroyed by the fire…. The panel has made no determination whether the items claimed existed.”  California Capital petitioned to vacate the award on the grounds that the panel exceeded its power.  The appraisal panel failed to value the loss and the appraisal panel valued a theoretical loss, including items not damaged or that did not exist. Lee opposed the petition and filed her own petition to confirm the award.  The court denied California Capital’s petition to correct and / or vacate the award leading to the appeal.

Decision on Appeal.  The appellate court started with the standard form fire policy appraisal provision found in the California Insurance Code.  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 loss…” From this starting point, the appellate court examined three key published California cases that dealt with the limit of an appraisal panel’s authority. The appellate court concluded that these cases had been misconstrued to argue that an appraisal panel must value anything submitted to it for consideration by the insured.  An appraisal panel does not need to ignore the fact that an item was not damaged or never existed.  On the other hand, an appraisal panel does not exceed its power if it appraises items where there is a dispute on coverage, causation or policy interpretation.  The appraisal panel can assign values to the disputed items leaving the legal issues to be resolved in subsequent litigation.  An appraisal panel need not accept the insured’s representation of an item’s condition if an inspection would reveal that the item was not damaged or never existed.  The appellate court reasoned that “an assessment of whether an item is damaged or existed is fundamental to a valuation of the amount of the loss.”  An appraisal panel cannot, however, assign a loss value of zero for an item if that value is based on determining what caused the damage.  When there is a dispute on causation, it is proper for the appraisal panel to set different amounts of loss. The appraisal panel should then clearly label the assumptions about the condition of the property leading to the different values.  An appraisal award should provide a single valuation of loss and not value two competing valuations with different scopes.  It is the role of the appraisal panel to resolve factual disputes to arrive at one valuation.  When there are disputes over coverage or causation, it is appropriate for the appraisal panel to segregate the disputed items.  Yet, the appraisal award should generally not contain two competing values for the same item.  In sum, the court did not err in compelling California Capital to appraise this loss even though there were disputes on what items were damaged by the fire.  The court did err, however, in directing the appraisal of items not damaged or that never existed.  The judgment confirming the appraisal award was reversed and remanded for further proceedings consistent with the views expressed in the opinion.

DiscussionIn a perfect world, the insurance policy’s appraisal provision is a mechanism designed to resolve disagreements over value in an informal process without litigation.   In the real world, it has devolved into where an insured often attempts to force appraisal where the disagreement is not over value.  Rather, the dispute is over causation or coverage or scope.  This appellate decision reinforces the use of appraisal even where the dispute includes causation or coverage or policy interpretation.  This decision, though, interjects some much needed sanity into the appraisal process.  An appraisal panel need not blindly accept an insured’s scope for appraisal.  The panel is rightly to account for the condition of the item to be appraised if it can be determined when setting value.  An appraisal panel also need not appraised a theoretical scope – especially if the item never existed.  This decision also clarifies that an appraisal panel is not to simply appraise an insured’s scope when disagreements exist on causation or coverage.  Rather, it is entirely appropriate for the appraisal panel to segregate out items from the appraisal where a disagreement exists.  In fact, the decision upholds that it is appropriate for the panel to contain more than one value for a disputed item. While we may not live in a perfect world, this appellate decision does at least place some needed limits on abuses in the appraisal process.

The case is Li-Lin Sung Lee v. California Capital Insurance Company, 237 Cal.App.4th 1154 (2015).