Understanding the Appraisal Process

California Insurance Code requires the appraisal procedure to be contained in every policy containing fire coverage, and it is frequently found in other property and casualty policies. It is critical for all insurance agents to understand the appraisal process so they can advise their clients what an appraisal is and what the process entails should clients incur a loss.

Prior to 2001, the appraisal procedure was mandatory. In 2001, Section 2071 of the Code was amended to narrow the circumstances under which the parties can be compelled to participate in an appraisal. That created uncertainty about what the circumstances are.

In the event of a governmentally declared disaster, an appraisal may be requested by the insurer or the insured, but cannot be compelled. The amended section does not state whether appraisal is voluntary or compulsory in other cases. The section states an appraisal may be “requested” by either party, but it is ambiguous whether the request triggers mandatory participation in circumstances other than natural disasters.

The Code provides that appraisal proceedings are a form of arbitration. Louise Gardens of Encino Homeowners’ Ass’n., Inc. v. Truck Ins. Exch., Inc. (2000) 82 Cal. App. 4th 648. Yet there are distinctions between appraisal and arbitration.

First, an arbitration agreement generally makes arbitration mandatory upon the demand of either party. At least as to government-declared disasters, the appraisal procedures cannot be compelled.

Second, in arbitration, each party designates its own arbitrator, and it is generally understood that party-appointed arbitrators are advocates on behalf of the party by whom they are appointed. In appraisal proceedings, the appraisers must be “disinterested.”

Third, arbitrators are frequently given broad powers, whereas appraisers generally have more limited powers. Jefferson Ins. Co. v. Superior Court (1970) 3 Cal. 3rd 398.

Section 2071 provides that, unless the insured and insurer agree otherwise, the proceedings are “informal.” No formal discovery can be conducted, formal rules of evidence do not apply, and, unless the parties agree otherwise, a court reporter is not used. Coopers & Lybrand v. Superior Court (1989) 212 Cal. App. 3rd 524.

According to the Code, a formal evidentiary hearing is not required, although the parties can present evidence and cross-examine witnesses, and require that witnesses’ testimony be given under oath. The parties also have the right to be represented by an attorney. Appraisers are not, however, limited to evidence presented at any hearing. They have a right to make their own independent investigation, as long as notice is given to the parties.

The parties can request an appraisal even though there is a pending lawsuit. Keating v. Superior Court (1982) 31 Cal. 3rd 582, and the right to an appraisal is not a waiver by engaging in limited discovery in a lawsuit. Lake Communications, Inc. v. Kollgel Co., Ltd. (9th Cir. 1984) 738 F. 2nd 1473. However, a court “should appropriately stay a pending lawsuit until the appraisal has been completed.” Cook v. Superior Court (1966) 240 Cal. App. 2nd 880.

Appraisers have more limited powers than arbitrators. As stated in Hughes v. Potomac Ins. Co. (1962) 199 Cal. App. 2nd 239, 253, “The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions in the policy.”

The sole function of appraisers is to determine the actual cash value of the loss. ACV is synonymous with “fair market value,” not replacement cost value less depreciation. Jefferson Ins. Co., supra at 402. Simply put, an appraisal resolves the question of the amount of the loss, but not the question of the amount, if anything, which might be owed under the terms of the policy.

Appraisers are also precluded from determining whether a claim might be fraudulent or factually inaccurate. For example, in Safeco Ins. Co. v. Sharma (1984) 160 Cal. App. 3rd 1060, the insured claimed that a matched set of 36 Indian paintings was stolen. The appraisal panel determined the paintings were not a matched set, and that their value was less than claimed. The Court of Appeal concluded that the appraisal panel exceeded its power by improperly addressing whether the paintings the insured actually owned were those he claimed to have owned:

“When an insurer disputes an insured’s description and identification of the lost or destroyed properly, it necessarily claims that the insured misrepresented … the character of the loss in filing a proof of loss. … This claim opens the door to allegations of fraud. Were an insurer permitted to include the former issue within the scope of an appraisal, a determination in the insurer’s favor would foreclose a court from determining one essential element of fraud at any subsequent litigation.”

Likewise, appraisers cannot determine the cause of loss, or whether there is coverage. In Kancha v. Allstate Ins. Co. (2006) 140 Cal. App. 4th 1023, the insured submitted a claim for personal property damaged in a wildfire. The appraisal award set forth the loss, which the appraisal panel concluded was caused by the fire, but the award attributed no loss to property the panel concluded was not caused by the fire. The Court of Appeal ruled the appraisers exceeded their authority because they may not consider questions of causation or coverage.

In Turnstone Consulting Corp. v. United States Fidelity & Guarantee Co. (N.D. Cal. 2007) 2007 W.L. 1430033, the insured submitted a business interruption loss resulting from a burglary. The insured contended his business was interrupted for about eight weeks, while the insurer claimed the business interruption loss was only two weeks. The carrier moved the court to compel the insured to participate in a binding appraisal to determine the amount of business interruption loss. The court ruled that an appraisal panel had no authority to make such a determination. “The appraisal panel’s role is only to determine the monetary value of the interruption to [the insured’s] business. The panel’s role is not to determine whether the policy covers that interruption.”

Prior to 2001, when the two party-appointed appraisers were unable to reach an agreement on loss and damage, appraisers were required to jointly select a third person, an umpire. Section 2071 eliminates the requirement of a disagreement between appraisers and requires an umpire to be selected in all appraisals

All of the appraisers, including the umpire, must be “competent” and “disinterested.” Gebers v. State Farm Gen. Ins. Co. (1995) 38 Cal. App. 4th 1648. That case held that the appraisers and the umpire are “held to a higher standard of impartiality than are arbitrators generally,” and ruled that a policy provision requiring that the appraisers be “independent,” failed to comply with the “disinterested” test. The court stated that the insurer could not, by altering the language specified by Section 2071, dilute the guaranty of impartiality. The court ruled that the appraiser selected by the insurer must be disqualified because he was concurrently retained by the insurer as an expert witness in two pending court actions. The court held that the ongoing litigation was a “direct pecuniary interest, which casts considerable doubt on the appraiser’s ability to act impartially.”

Gebers relied upon Fiji v. New Hampshire Ins. Co. (1980) 108 Cal. App. 3rd 772, which evaluated whether the neutral umpire should be disqualified where he worked as an accountant, not for the insurer but for an appraiser chosen by the insurer. The court held that given that relationship, the umpire could not be “disinterested.” Although an appraiser must be “disinterested,” the existence of past business dealings between the appraiser and the party, by itself, does not disqualify the appraiser.

In the real world, insurers and insureds generally select a “known quantity,” i.e., someone they expect to be sympathetic to their position. Because compromise frequently occurs in an appraisal, the insurer and insured generally look for advocates for their positions.

When two of the three appraisers agree, they must submit a written appraisal award separately stating the cash value and loss to each item. A party can then petition the court to confirm the award. While the court must enter a judgment in accordance with the award, no monetary judgment can be entered; the award only determines the amount of the loss, not whether the loss is covered. Challenges to an appraisal award must be submitted no later than 100 days after the award has been handed down. Koubnikin v. California Fair Plan Ass’n. (1978) 84 Cal. App. 3rd 393.