What Must Be Appraised In An Insurance Claim Depends What The Dispute Is According To A New California Case

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Property policies in California have provisions requiring that disputes over the “amount of loss” be appraised, if demanded by the insurer or the insured.  Appraisal is non-Court proceeding where a panel decides issues relating to the amount of loss at issue in a property damage claim.  Appraisal provisions are provided for under California’s statute for basic fire policies.  (California Insurance Code §2071(a).)  Oftentimes, there are disputes over the scope of the appraisal, what items of claimed damage should or should not be addressed, and what factual issues the can be decided by the appraisers.

On June 18, 2015, the California Court of Appeal published an opinion, Lee v. California Capital Insurance Company (2015) — Cal.Rptr.3d —, 2015 WL 3797827, addressing appraisal in connection with a fire loss in an apartment building in Oakland.  The fire started on the ground floor, but the insured claimed the upper units suffered smoke damage that required remediation.

The issue in dispute is whether the appraisal panel had to appraise the scope of loss the insured provided.  The insurance company asserted that the only thing that could be appraised is the value items of property damage that “the parties agree . . . is within the scope of damage and is covered under the policy.”  (Id. at *7.)   TheLeeopinion rejected that position, holding that appraisal is not only to a scope that “the parties agree” upon.   (Id. at *8.)

This was a sensible holding.  However, the Lee Court went on to hold that although “disputed items” can be appraised, a Court cannot order appraisal of “items that inspection reveals are not damaged or plainly never existed.”  (Id.)  This of course begs the question as to who determines whether property was or was not damaged, or did or did not exist, if not the appraisal panel.  The Lee‘s opinion’s holding is further complicated by the fact that property may have been damaged, but remediated or repaired at the time of the appraisal, rendering an “inspection” to determine damage of limited utility.  This is particularly so in the context of the smoke damage, one of the issue in the Lee case, which is often cleaned up following a loss to make the home habitable.  Whether a given property suffered smoke damage often cannot be adequately addressed by an inspection at the time of appraisal, after remediation.  To prove such damages after remediation, evidence is usually submitted regarding the damage at the time of loss, before cleaning or remediation, and the remediation efforts made by the insured.  Moreover, with respect to whether property existed or not, prior case law had held that an appraisal panel is not authorized to decide whether an insured “lost what he claimed to have lost or something different.”  (Safeco Ins. Co. v. Sharma (1984) 160 Cal.App.3d 1060, 1065-66.)

The Lee holding attempts to address these uncertainties by drawing a distinction between “identity and quality or condition” of the property being appraised.  (Lee,supra, at *9.)  This distinction does not appear to be clear, however.  Indeed, the Leeopinion suggests that where “the identity of property damaged . . . is at issue,” an appraisal panel may elect to “place more than one value on the loss . . .based on assumptions concerning the property’s pre-loss condition.”  (Id. .)

Lee concludes that, while an appraisal panel cannot make “causation or other coverage determinations,” it can decline to value the loss for items of property it concludes “were not damaged or never existed.”  (Id. at 10.)  The Lee decision represents good illustration of the complicated and uncertain nature of appraisal, and why it often leads to further disputes, issues, and litigation.  Insureds who are faced with an appraisal over an insurance loss should understand that appraisal is often the beginning, not the end, of the dispute relating to a claim.