THEY ARE BACK
INSURANCE APPRAISAL YESTERDAY AND TODAY
By: Gidon R. Vardi, Ph.D
In a December 1996 article published in Claims magazine the author declared “for better or worse the good ol’ days are gone forever. Signing an award on the hood of a truck is only a romantic notion to be resurrected someday in a novel.” It took 19 years but today the author can declare that he was wrong and the good ol’ days are returning. Though it is not likely that awards will return to be signed on the hood of a truck the basic procedure for an insurance appraisal has finally returned to its simple roots.
After three decades of issues left unresolved by the Safeco Ins. Co. v. Sharma (1984) 160 Cal.App.3d case, the California Court of Appeal handed down a landmark decision in June 2015 bringing back balance and clarifying the role of appraisers in the insurance appraisal process. The restraints of Sharma have been loosened.
The June 2015 published decision by the California Court of Appeal in Case Number A136280, Li-Lin Sung Lee v. California Capital Insurance Co. (2015) Cal.App 3d simply and succinctly states:
“An assessment of whether an item is damaged or existed is fundamental to a valuation of the amount of the loss”
Since 1984 when the Sharma case was published various parties representing both the insureds and insurers, but mostly representing the insureds, argued that under Sharma the appraisal panel can only consider the scope of damaged items submitted by the insureds even if those items were not damaged or did not exist. As noted by the Justices in the Li-Li Sung Lee published opinion
“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”
This purpose of this article is not to analyze the background of the issues involving the case of Li-Lin Sung Lee v. California Capital Insurance Co. (2015). The purpose is to define the consequences of the published decision as it will affect the appraisal process for what may be many decades into the future. However, a summary of the facts surrounding the Lin-Lin Sung Lee case is essential:
In November 2010 a fire damaged an apartment building in Oakland owned by the insured. The property was a four-story building containing 12 units, with four apartments on each of the three levels and the garage on the ground level. Capital Insurance Company insured the property.
The insurance company investigated the fire loss and determined that only Unit No. 3 was damaged by the fire and further determined that the total cost of repair came to $69,255.34. This company submitted a payment for the undisputed amount of the claim in the amount of $46,755.34.
Unhappy with the insurance company’s adjustment, the insured hired a public adjuster who submitted a claim amount which exceeded $800,000. The claim included damage to all the other apartments and exterior elements which the insurance company claimed were not damaged.
The insurance company requested the right to inspect the property following the new claim by the public adjuster. The public adjuster resisted the request by the insurance company for additional investigation. In March 2011 the public adjuster made a written demand for the appraisal process based on California Insurance Code Sect. 2071. The Insurance company countered and contended that a request for the appraisal is improper because it had not had a chance to complete its investigation. In April 2011 the insured filed a petition to compel the appraisal process. At a hearing by the court to determine the issues surrounding this claim the court ordered a continuation of the matter in order to allow the insurance company to reinspect the additional claims by the insured. Following the re-inspection the insurance company issued an additional payment to the insured in the amount of $109,367.41.
The insured continue to be unsatisfied with the insurance company’s adjustment and returned to the court with a demand that the appraisal process be allowed. The insurance company disagreed that the appraisal process was the right avenue since there were items in dispute which should not be a part of any appraisal process. Further, the insurance company argued that the court cannot compel the appraisal based on a disputed item doctrine.
Ultimately after back-and-forth arguments in court hearings, including the assignment of the Umpire by the court, the Court disagreed with the insurance company and in June 2011 granted the insureds petition to compel the insurance appraisal. The Court ordered the appraisal panel to issue an Award based on the following general scope:
- items of loss agreed by the parties to have been damaged by the fire;
- Items of loss asserted by the insured to have been damaged by the fire but where the insurance company disputes coverage;
- Items of loss asserted by the insurance company to have been damaged by fire but where the insured did not assert a claim
In February 2012 the appraisal panel issued an award based on the scope of the appraisal as outlined by the Court as follows:
Exhibit A replacement cost loss (insurer’s scope): $ 190,505.21
Exhibit A actual cash value loss (insurer’s scope): $ 186,041.74
Exhibit B replacement cost loss (insured’s scope): $ 813,884.89
Exhibit B actual cash value loss (insured’s scope): $ 788,057.02
In March 2012 the insurance company “filed a petition to vacate or, in the alternative, to correct the appraisal award.” The insurance company argued “that the appraisal panel exceeded its authority by failing to value the loss and instead issuing two vastly different valuations of the same fire loss.” In their published decision, Page 1, the justices stated the following:
“We agree with California Capital that the award issued in this case pursuant to the trial court’s directive neither complies with the terms of the governing statute nor accomplishes the objectives of an appraisal. It was error to compel the appraisal panel to assign loss values to items simply because they were listed in the insured’s scope of loss and regardless of whether inspection revealed that they were undamaged or never existed. Accordingly, we reverse.”
The Court did not completely reverse Sharma. In Page 16 of the decision the Court notes the following:
“There may be cases in which the identity of property damaged in the fire or other calamity is at issue, such as when an item is totally destroyed or beyond recognition.”
“In such cases, it may be appropriate to apply the Sharma holding and required [SIC] the appraisal panel to assign a value to items of loss claimed by the insured, without resolving the question of whether the items actually existed. The pre-loss condition of the property is relevant and that is a dispute over the condition of the property prior to the loss, the panel may place more than one value on the loss provided that each value is based on different and explicitly stated assumptions concerning the property’s pre-loss condition.”
The Court continues to clarify,
“But in the typical situation involving fire damage, where the quality or condition of the property is readily ascertainable and there is no dispute concerning its pre-loss condition, an appraisal panel is not compelled by Sharma to assign values to non-existent or incorrectly described items of loss simply because they are claimed by the insured.”
In another important clarification noted in this decision the Court explains in clear terms where the appraisal panel was wrong in the Kacha case. Kacha v. Allstate Ins. Co. (2006) 140 Cal.App.4th involved overturning an appraisal award based in part on the finding that the appraisal panel exceeded its authority in submitting an award with zero values to certain line items. The Court in the Li-Lin Sung Lee explains the problem with that award as follows:
“...an appraisal panel does not necessarily exceed its authority by assigning a value of zero to items of loss submitted to it for consideration. If inspection reveals an item is undamaged or never never existed, it is appropriate for the panel to award nothing for the loss or damage to that item. The existence of damage to an item as well as the nature of the claimed item are factors that directly bear upon a valuation of the loss, including cost to repair or replace the item.”
However the Court continues on explaining that
“...the better practice maybe 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 bases its decision upon an improper coverage determination, the panel could indicated “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.”
Finally, the Court states the following with respect to the lower court’s improper order to the appraisal panel to provide two different valuation of the same loss:
“It is the responsibility of the appraisal panel to resolve these factual disputes and arrive at a valuation of the loss. It may be appropriate to segregate some items from the others because there is a dispute as to coverage or causation, but an appraisal should ordinarily not contain two competing valuations for the same item.”
As experienced appraisers and umpires with over 40 years in the construction and insurance industries, and over 300 appraisals, we find this landmark decision to finally clarify and support what we have been arguing for nearly a quarter of a century.
It has been our opinion for all these many years that a panel of qualified, experienced, and competent appraisers must be allowed to determine the scope of damage be it a fire, wind, water, earthquake, hail, hurricane, or any other covered damage which is subject to the appraisal provision of a given policy. Doing less is simply a waste of time, money and resources.
Unlike Sharma this court acknowledged that the scope from time to time may also need to segregate issues of existence, or as the Court stated “identity” versus “quality or condition” such as when the insured claims items that existed which the appraisal panel cannot positively verify by any available means, methods, experience, education and training. However, those items cannot have two values within the scope of items that the appraisal panel has valued meaning that only one set of values is to be given to an item. For example: if the insurer states that an item which was not damaged or did not exist has a value of ‘X’ (including no value such as zero value) and the insured states that it has a value of ‘Y’ the panel must provide a single value only be it ‘X’, ‘Y’ or its own appraised value of ‘Z’. That value has to be segregated from the rest of the award with an explanation such as the item was determined to be “undamaged” or “was damaged” or “did not exist”.
The law continues to forbid the appraisal panel from determining causation and coverage unless specifically allowed to do so by written directive of all parties to an appraisal.
In California the appraisal panel can finally get back to the business of arriving at a balanced scope and value of a claim. The only caveat is that the appraisal award needs to be defined and written in a clear unambiguous manner in order to avoid as much as possible the need for courts to make decisions that sometimes take decades to overcome.