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Insurance Law News - June 2015

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Appraisers of Building Fire Damage Not Required to Assign Loss Values to Items That Are Undamaged or Demonstrably Never Existed

A court may not require appraisers to assign loss values to items that are undamaged or that demonstrably never existed. (Lee v. California Capital Insurance Company (2015) 2015 WL 3797827)

Facts

Li-Lin Sung Lee owned an apartment building with four units on each of three levels (for a total of twelve units). A fire started in one of the first-floor units. At the time of the fire, California Capital Insurance Company insured Lee's interest in the building.

Lee retained a public adjuster to assist in the presentation of her claim. The public adjuster asserted that all the interior rooms of six of the twelve apartment units needed to be completely dismantled and then replaced. In addition, the public adjuster asserted that a portion of the building's stucco exterior needed to be removed and replaced. Further, the repair estimate the public adjuster submitted included windows that, according to California Capital, did not even exist.

Because of their dispute about the scope of the damage, Lee and California Capital could not agree on the cost of repairs. Therefore, Lee obtained a court order compelling appraisal. Each party selected an appraiser and, after the two appraisers could not agree on an umpire, the court appointed an umpire.

Eventually, the court ordered the three-member appraisal panel to determine the amount of loss to items that both Lee and California Capital agreed had fire damage and to additional (disputed) items that Lee asserted had fire damage. The court expressly directed the panel not to make any causation or coverage determinations, and further stated that the parties could resolve in separate litigation issues such as "whether an appraised item was covered by the policy, whether the item was damaged, and whether the item was damaged by the fire."

Ultimately, the appraisal panel issued an award attached to which were two exhibits. "Exhibit A" (based on California Capital's scope of loss) listed a replacement cost figure of $190,505.21 and an actual cash value figure of $186,041.74. "Exhibit B" (based on Lee's scope of loss) listed a replacement cost loss figure of $813,884.89 and an actual cash value figure of $788,057.02. The award specifically stated that it did not address "whether the items claimed existed" or "whether items claimed were in fact damaged/destroyed by the fire."

Over California Capital's objection, the trial court confirmed the appraisal panel's award. The award specifically stated that it did not address "whether the items claimed existed" or "whether items claimed were in fact damaged/destroyed by the fire." California Capital appealed.

Holding

The Court of Appeal reversed the judgment confirming the appraisal award. The Court held that, where the appraisal panel is able to assess a damaged item without simply having to rely on the insured's representations about the item, the appraisal panel has authority to determine whether the claimed item existed and whether the claimed item was in fact damaged. The Court further held that, irrespective of what an insured might assert about an item, if the panel determines the item has no damage of any kind, the panel has authority to state on the face of the award that item has no damage.

The Court also held that, if there is a factual dispute about whether a claimed item ever existed and the panel cannot independently assess the item (e.g., because the item allegedly was stolen or allegedly was completely consumed by fire), the panel cannot determine the item did (or did not) exist. However, the panel can determine a value for such an item based on the insured's description, although the insurer remains free to contest coverage for the item in a separate forum (e.g., litigation).

Comment

This is an important case for several reasons. First, this case dispels the notion that the parties need to agree on the scope of damage before either one can compel appraisal. Second, this case reinforces the principle that, although appraisers cannot determine coverage issues (such as the cause of damage), appraisers can determine that specific items have no damage from any cause. Third, this case reinforces the principle (set forth in Safeco Ins. Co. v. Sharma (1984) 160 Cal.App.3d 1060) that, if a claimed item is not available for the appraisal panel's inspection (e.g., because the insured claims the item was stolen or burned out of sight), the appraisal panel must render an award based on the insured's description of the item – even though the insurer remains free to contest coverage at the conclusion of the appraisal process. Fourth, this case illustrates the importance of requiring the appraisal panel to issue a detailed, itemized award, especially if there are issues regarding the cause of damage or scope of repairs.

The Lee court specifically noted that, in order to avoid disputes about whether a panel exceeded its authority by assigning a value of zero to certain claimed items of loss, the better practice is to explain in the award why nothing was awarded. In other words, instead of simply placing a "zero" next to certain items of loss (thus leaving open to debate whether the panel based its decision upon an improper coverage determination), the panel could indicate "undamaged" next to a particular item, or it could clarify in notes accompanying the award that items assigned a loss value of zero were not damaged or did not exist at the property.

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