Appraisers Authority Limited to Determining Actual Cash Value of Loss

When Insured and Insurer Disagree on Quantum of Loss Appraisal Resolves Dispute

Jul 26, 2021

FACTUAL BACKGROUND

Rees’s Paso Robles duplex sustained major flood damage during an unseasonably wet thunderstorm in July of 2015. He reported the damage to his flood insurer, American Security Insurance Company (ASIC), which immediately sent an adjuster to inspect the damage. The adjuster initially set the actual cash value (ACV) of Rees’s losses as $43,226.08 but later revised the amount to $64, 631.70 after Rees documented the need for additional repairs. ASIC notified Rees by letter on June 30, 2017 that it had finished reviewing his claim. Enclosed was a document titled “Building Estimate” that itemized the claim’s total labor and materials costs.

The figures in the Building Estimate fell far below what Rees expected. He disputed the amounts allocated for repairing and replacing most items, including wall plaster, HVAC ducting, cabinets, countertops, flooring, paint, and exterior stucco. Rees insisted his costs would exceed policy limits. He demanded ASIC correct its estimates to align with FEMA standards for water damage restoration and pay the higher rates charged by contractors when handling materials contaminated by Category 3 flood water. He also noted the Building Estimate did not allocate sufficient money to repair the subfloors and to excavate the crawl space under the house.

ASIC insisted it adjusted the claim properly. It eventually invoked a the condition requiring the insurer and the policyholder to resolve valuation disputes through an appraisal process. ASIC and Rees selected Kathleen Conway and Woodman White, respectively, to serve as their appraisers. Conway and White inspected the property and co-signed an appraisal award on July 17, 2018 setting the ACV of Rees’s losses at $94, 758.97 (the “Award”). This exceeded ASIC’s total ACV by more than $30, 000.00.

Rees petitioned the court to vacate the Award on the grounds the appraisers exceeded the scope of their authority. The trial court denied the petition after holding an evidentiary hearing.

DISCUSSION

Appraisal of Insured Losses

Appraisal is a form of arbitration designed to resolve disputes between insurers and policyholders over the value of covered losses. Appraisal provisions are considered “agreements” for the purposes of Code of Civil Procedure section 1280, subdivision (a) and thus subject to the statutes governing contractual arbitration. Judicial review of appraisal awards is circumscribed by those statutes to certain situations, such as when the appraisers “exceed[] their powers.” (§ 1286.2, subd. (a)(4); Kacha v. Allstate Ins. Co. (2006) 140 Cal.App.4th 1023, 1031 (Kacha).)

An appellate court will review the trial court’s ruling on a challenge to an appraisal award under a de novo standard, drawing every reasonable inference to support the award and applies the substantial evidence standard to the extent the ruling rests on factual determinations.

The Appraisers Did Not Exceed the Scope of Their Authority

Rees acknowledges the appraisers affixed higher ACV to his losses than ASIC did. He asserted that the Award nevertheless undervalues his losses because the appraisers improperly jettisoned undisputed parts of the Building Estimate. He contended their task was confined to re-assessing the Building Estimate’s costs line-by-line because he and ASIC’s adjuster considered the document the “[a]greed upon scope of repairs” for the damage observed in the days after the flood.

The ASIC policy delineates the authority of the appraisers succinctly: to “separately state the actual cash value, the replacement cost, and the amount of loss to each item.” Here, the Award states both actual cash value and replacement cost values.

The appraisers’ 25-page damages report compared with ASIC’s Building Estimate does not show the appraisers overlooked previously identified losses, as Rees alleges, or otherwise deliberately chose to ignore their duties. The record did not show that the appraisers omitted or reduced any damaged item’s value for improper reasons.

The court refused to rewrite the policy or read the policy as requiring the appraisers to overlay their revised estimates on top of ASIC’s line-by-line or restricting them to the area calculations, mitigation techniques, or adjusting methodologies described in the 2017 Building Estimate or other documents submitted to them by Rees. As a result the trial court properly denied Rees’ petition to vacate and motion for reconsideration.

The Trial Court Shall Confirm the Award on Remand

A court presented with a petition under the arbitration statutes must confirm, correct, or vacate the award. The trial court denied Rees’ petition to vacate and motion for reconsideration but did not explicitly confirm the Award in its written rulings. It shall do so on remand. The Award conformed in all respects to the appraisal provision contained in Rees’ residential flood policy.

ZALMA OPINION

Appraisers, applying their separate duty, were obligated to determine the ACV and RCV loss to the property. They do so independently and are not required to accept, as given, the agreements made by the insured and the insurer before the appraisal began. The two party appointed appraisers reached an agreement without seeking the assistance of the umpire. They did what the policy required and their conclusions became the law of the case and limited the recovery to their finding which will become a judgment.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts; and the last two issues of ZIFL at https://zalma.com/zalmas-insurance-fraud-letter-2/ podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4