Case Number: BC531703    Hearing Date: July 16, 2014    Dept: 32

CASE NAME: Jack Farahi v Travelers Commercial Insurance Co, et al.
CASE NO.: BC531703
HEARING DATE: 07/16/14
DEPARTMENT: 32
CALENDAR NO.: 2
SUBJECT: Motion to Compel Arbitration
MOVING PARTY: Plaintiff Jack Farahi
RESP. PARTY: Defendants Travelers Commercial Insurance Co.

COURT’S TENTATIVE RULING

Motion to Compel Arbitration Granted, but arbitration is stayed pending resolution of coverage issues and determination of the specific items to be the subject of the appraisal process under the policy.

ANALYSIS

Plaintiff’s Evidentiary Objections

Declaration of Eric Kongsli

(1) Overruled.
(2) Overruled.
(3) Overruled.
(4) Overruled.
(5) Overruled.
(6) Sustained.
(7) Sustained.
(8) Duplicative of Objection No. 7
(9) Sustained.
(10) Overruled.

Defendant’s Request for Judicial Notice

Exhibit 1 – GRANTED. The Court may judicially notice Plaintiff’s complaint.

Motion to Compel Appraisal

This is a motion to compel arbitration under a homeowner’s insurance policy issued by the defendant. The subject of the controversy involves water damage to the plaintiff’s property. The subject policy has a provision which mandates the use of an appraisal process to resolve disputes over the amount of any monetary loss. The provision is apparently one required by law and has in one form or another been part of California law for a substantial period of time. While considered an arbitration provision, it is more limited in the sense that the appraisers set a monetary amount of loss for the items covered by the policy rather than the broader form of decision making found in most arbitration agreements. Under the provision, the parties each select an appraiser and the two party appointed appraisers jointly select an “impartial umpire.”
For the reasons set forth below, the court concludes that while Plaintiff is entitled to the appraisal process set forth in the policy, because the parties’ currently have coverage disputes, the arbitration (or appraisal) is premature until the scope of the arbitration has been defined in this proceeding.
The relevant law on a motion to compel is set forth in the Code of Civil Procedure (“CCP”) as follows: “On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate a controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” (CCP § 1281.2.) The right to compel arbitration exists unless the court finds that the right has been waived by a party’s conduct, other grounds exist for revocation of the agreement, or where a pending court action arising out of the same transaction creates the possibility of conflicting rulings on a common issue of law or fact. (CCP § 1281.2(a)-(c).)

Existence of Appraisal Provision in Insurance Policy

Defendant acknowledges that the insurance policy at issue contains an appraisal provision that allows either party to make a written request for appraisal of any dispute regarding the “amount of loss.” (See Oppo. 4-5; Mot. Exh. A at 48-49.) The relevant appraisal provision states the following:

Appraisal. If you and we fail to agree on the amount of loss, then, either
party may make a written request for an appraisal. In this event, each party will select a competent and impartial appraiser. Each party shall notify the other of the appraiser selected within 20 days of the request. Where the request is accepted, the two appraisers will select a competent and impartial umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a court of record in the state where the “residence premises” is located. The appraisers will appraise the loss, stating separately the loss to each item. If they fail to agree, they will submit their differences to the umpire. An award in writing, agreed to by any two, will set the amount of loss. (Mot. Exh. A at 48-49.)

“An agreement to conduct an appraisal included in a standard fire insurance policy constitutes an “agreement” within the meaning of Code of Civil Procedure section 1280, subdivision (a), and thus is considered to be an arbitration agreement subject to the statutory contractual arbitration law.” (Kirkwood v. California State Auto. Assn. Inter-Insurance Bureau (2011)
193 Cal.App.4th 49, 57.)

Disputed Causation Items and Disputed Damage Items

Defendant contends that an appraisal would be improper, or at least premature, because Plaintiff and Defendant disagree as to whether there is coverage for certain disputed causation items and disputed damage items.

As noted above, the role of the appraisers under the policy is to determine a monetary value for the item(s) of loss. “’Section 2071 constrains the role of the appraiser to that of appraising ‘the loss, stating separately actual cash value and loss to each item….’ Appraisers have no power to interpret the insurance contract or the governing statutes. ‘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 of the policy.’ [Citations.] Under section 2071, an appraiser has authority to determine only a question of fact, namely the actual cash value or amount of loss of a given item.’” (Kirkwood v. California State Auto. Assn. Inter-Insurance Bureau (2011) 193 Cal.App.4th 49, 58-59.)

In Kirkwood, supra, the court of appeal affirmed the trial court’s order denying without prejudice the defendant insurer’s motion to compel appraisal. The court of appeal held that the appraisal was properly deferred pending the determination of the plaintiff’s declaratory relief action regarding whether the insurer’s practice of calculating depreciation based solely on age, and not physical depreciation or actual condition violated CCP Sec. 2051(b).

The record here shows that there is at least one relevant dispute as to coverage. As Plaintiff concedes in reply, Defendant denied coverage for Plaintiff’s roof on the basis that the roof damage was not caused by a “Covered Cause of Loss” as defined in the policy but rather by wear and tear. (See Reply 2; Kongsli Decl. Para 3-4. Exh. A [March 26, 2012 letter to Plaintiff].) But, it also appears from the reply that the disputes between the parties go beyond coverage issues and also extend to the amount of loss of concededly covered item(s). Plaintiff argues in reply that “the Court should require in its appraisal order that the panel not consider the cost of the roof when preparing its appraisal award and focus instead on the amount of loss with respect to the rest of plaintiff’s property.” (Reply 3:5-12.) Plaintiff cites no authorities suggesting that this type of order would be appropriate. The authorities cited by Defendant suggest that the court should not order an appraisal until the parties agree or the court issues an order, as to the damaged items covered by the policy. (See Kirkwood, supra; Kacha v. Allstate Ins. Co. (2006) 140 Cal.App.4th 1023, 1026-1031 [appellate court directed trial court to vacate appraisal award because “it is apparent that the appraisal panel made at least some coverage determinations, thereby exceeding its authority.”])
Kongsli also argues in his declaration that Defendant did not pay for repair costs in Plaintiff’s “Barton Estimate” that are for the repair or replacement of items that were not damaged by the roof leak. (Kongsli Decl. Para. 9.) Although it is unclear whether Defendant raised this issue in its correspondence with Plaintiff regarding the claim, this evidence suggests another issue regarding the scope of coverage that cannot be resolved in an appraisal.
Thus, prior to the arbitration, or appraisal, there needs to be a clear definition of what will be appraised. Put another way, before there is an appraisal on “the amount of loss” there must be a definition of what constitutes the loss. Until that point, it would be premature to commence the actual appraisal process.

Plaintiff’s Prior Demand

Defendant contends that it never received an appraisal demand from Plaintiff so that Plaintiff did not meet his moving burden on this motion. CCP Sec. 1281.2 requires “a party seeking to compel arbitration to plead and prove a prior demand for arbitration under the parties’ arbitration agreement and a refusal to arbitrate under the agreement.” (Mansouri v. Superior Court (2010) 181 Cal.App.4th 633, 640-641.)

Plaintiff’s counsel states under penalty of perjury that he sent a demand for appraisal to adjuster Kongsli on December 17, 2013. (Cohen Decl. Para. 14; Exh. J.) Kongsli declares in opposition that Defendant did not receive this demand, and that it did not receive any notice that Plaintiff sough appraisal prior to this motion. (Kongsli Decl. Para. 12.) As noted by the Defendant, Plaintiff did not attach either the certified mail receipt or the e mail verification. Clearly, it would have been preferable for the Plaintiff to have attached the documentary evidence in further support of the motion, particularly after challenge. Nevertheless, Plaintiff does have a declaration under penalty of perjury from his counsel to the effect that the letter was mailed and on that basis the court resolves this conflict of evidence in favor of Plaintiff. The opposition papers reflect that Defendant does not intend to submit to appraisal without court order, which is consistent with paragraph 14 of Cohen’s declaration. The court also notes that Plaintiff pleaded demand and Defendant’s failure to respond to demand in the complaint, filed December 24, 2013. (See Compl. ¶ 16.)

Plaintiff’s Breach of Contract Action

“If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies.” (CCP Sec. 1281.2(c).)

Defendant contends, citing CCP Sec. 1281.2(c), that in the determination of Plaintiff’s pending breach of contract claim, any controversy concerning the “actual cash value, amount of loss or damage, and the cost of repair or replacement of” the loss will necessarily be determined, thus obviating the need for any further appraisal process. However, CCP Sec. 1281.2(c) does not appear directly on point. The coverage dispute discussed by Defendant appears to be directed only at portions of the claim, such as the roof. Therefore, even assuming that coverage issue was resolved in favor of Defendant, it would not eliminate the need for an appraisal of the undisputed items covered by the policy. Thus, this argument is unpersuasive. Under the facts here, the court concludes that the most appropriate approach is to allow arbitration but defer it until the scope of the arbitration is established in these proceedings or otherwise. There is no real dispute that Plaintiff will be entitled to arbitrate the damage issues once they are delineated. However, if arbitration were ordered before that occurred, the appraisers would potentially be addressing matters not in dispute.

Estoppel

Plaintiff argues in the moving papers that Defendant should be estopped from raising any coverage issues because it violated Department of Insurance Regulations when it investigated and adjusted Plaintiff’s claim. Specifically, Plaintiff contends that Defendant violated Insurance Department regulations by failing to respond to two proofs of claim provided by Plaintiff in August 2012 and November 2012. (Mot. 12.) Plaintiff contends that such violations provide an equitable basis for estopping Defendant from now arguing that coverage issues preclude appraisal of Plaintiff’s insurance claims.

Plaintiff has not cited a case granting a motion to compel appraisal or arbitration based on this estoppel theory. The primary case cited by Plaintiff, Spray, Gould & Bowers v. Associated Internat. Ins. Co. (2011) 71 Cal.App.4th 1260, held that the trial court erred in granting summary judgment for the insurer on the basis that the lawsuit was not filed within the limitations period stated in the policy, since the insurer’s violation of the administrative regulations raised a triable issue of fact as to whether the insurer was estopped to assert the limitations defense. However, Spray does not suggest that the violations asserted by Plaintiff are sufficient to waive any defense to appraisal. Moreover, as conceded in reply, Defendant did raise at least one coverage issue in its March 2012 letter to Plaintiff. (Reply 2; Kongsli Decl. Exh. A.)

Based on the foregoing, the motion is granted but the arbitration is stayed pending a determination on the scope of the arbitration. Plaintiff may apply to lift this stay once there has been a determination made of what items will be covered by the appraisal process.