In Alexander v. Farmers Insurance Company, Inc., the California Court of Appeal, Second Appellate District, addressed whether an insured, claiming an insurer improperly valued property lost in a fire, must submit the claim to an appraisal before filing suit. The court held that, where the trial court is asked to decide issues not within the jurisdiction of an appraisal and the resolution of those issues may render an appraisal unnecessary, the trial court properly defers the appraisal pending resolution of those issues.
Farmers issued a homeowners’ insurance policy to plaintiffs Marc Alexander and Thomas and Anna Downie. Following a fire causing partial loss to their home and personal property, the plaintiffs filed a claim with Farmers identifying and setting forth the estimated value of the items lost. Farmers adjusted the claim, applying a uniform depreciation formula accounting only for the age of the property without taking into account the condition of the property prior to loss.
The plaintiffs brought a class action lawsuit against Farmers alleging unfair competition, breach of contract, and bad faith. They also sought a judicial declaration that Farmers’ adjusting practices were illegal in violation of California Insurance Code section 2051, which requires insurers to pay the actual cash value of covered property damaged or destroyed in a fire. Section 2051(b) provides that the actual cash value of damaged or destroyed property is determined by the cost of repair or replacement of the damaged or destroyed item, “less a fair and reasonable deduction for depreciation based upon its condition at the time of” loss, whichever is less. Section 2051(b) goes on to provide that deduction for depreciation shall only apply to “components of a structure that are normally subject to repair and replacement during the useful life of the structure.”
California Insurance Code section 2071 states that where the insured and insurer disagree about the actual cash value of items lost in a fire, they are required to participate in an appraisal prior to bringing suit. Because the dispute concerned actual cash value of the lost property, Farmers moved to compel appraisal. The trial court denied the motion without prejudice, reasoning that the motion was premature, but may be proper later in the litigation. Farmers appealed.
The appeal concerned the proper characterization of the dispute between the parties. Farmers characterized the dispute as concerning the actual cash value of the insured property and argued that such a dispute was the proper subject of appraisal. The plaintiffs characterized the dispute as concerning the legality of Farmers’ valuation methodology and argued that such a dispute was not the proper subject of appraisal. The plaintiffs alleged Farmers’ valuation methodology was illegal because structural items were improperly depreciated even though they are not usually repaired within the useful life of the structure and because Farmers applied a formulaic depreciation of insured property based on its age without taking into account the actual condition of the property prior to loss.
Farmers first argued that an appraisal agreement was analogous to an arbitration agreement. Pursuant to Code of Civil Procedure section 1281.2, parties to a valid arbitration agreement are not permitted to seek judicial intervention prior to submitting the dispute subject to that agreement to arbitration. Therefore, the parties to a valid appraisal agreement are required to submit to an appraisal before bringing suit.
The court agreed an appraisal is analogous to arbitration, but found that section 1281.2 provided an exception that, when applied to appraisals, allowed judicial resolution of issues not subject to the appraisal, the resolution of which might obviate the need for an appraisal. It concluded this exception applied and that a declaration regarding whether Farmers’ adjusting practices were illegal might obviate the need for an appraisal. If Farmers’ adjustment methodology was illegal, it would have to readjust the claim and an appraisal might be unnecessary. Further, judicial resolution would promote judicial economy by providing guidance regarding the legality of such practices and, thus, prevent future litigation on similar issues.
Farmers argued that the plaintiffs lacked standing to advance their claims for unfair competition, breach of contract and bad faith since they would only be able to show economic injury following an appraisal. The court disagreed, noting that the plaintiffs also sought declaratory relief and that California Code of Civil Procedure section 1060 provided such relief was available even absent a showing of a breach of any obligation.
Finally, Farmers argued that declaratory relief was improper because there was no dispute in controversy: Farmers acknowledged section 2051 requires consideration of the condition of the insured property prior to loss and that structural components not subject to repair or replacement during the useful life of the structure are not subject to depreciation. Moreover, if the appraisal revealed that Farmers did pay the plaintiffs the actual cash value to which they were entitled, further litigation over improper valuation would be unnecessary. The court was not persuaded. First, Farmers waived this argument because it did not raise it in the court below. Second, the allegations in the complaint sufficiently rebutted Farmers’ ostensible acknowledgement. Third, whether the appraisal accurately calculated the actual cash value is irrelevant to whether Farmers correctly did so.
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This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.
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