Judge William A. Crowfoot, Case Number: 23AHCP00246, Date: 2023-09-14 Tentative Ruling

Judge: William A. Crowfoot, Case: 23AHCP00246, Date: 2023-09-14 Tentative Ruling

On June 9, 2023, petitioner Fire Insurance Exchange (“FIE”) filed this petition to correct or vacate an appraisal award in favor of respondents Narine Keleshyan (“Keleshyan”) and Gevork Keleshyan (collectively, “Respondents”). FIE alleges that on December 26, 2019, Respondents suffered a fire loss at the premises located at 2075 Minoru Drive in Altadena, California. FIE had issued an insurance policy to Keleshyan, which is attached to the petition as Exhibit A.

After reporting the claim, FIE and Respondents could not agree on the amount of the loss and the parties entered into the appraisal process pursuant to the terms of the insurance policy and Insurance Code section 2071.

On March 10, 2023, an appraisal award was served on FIE. The award, attached to the Petition as Exhibit B, was in favor of Respondents. FIE contends that the appraisal panel exceeded its powers by: (1) awarding $125,042.54 for items that did not exist at the property at the time of the fire; (2) awarding $28,789.50 for the speculative amounts for labor “contingencies”, (3) awarding $124,971.16 for items (the home’s contents) that were not part of the panel’s deliberation, for which no evidence was presented at the appraisal hearing and no substantive discussions were held on the contents items; and (4) failing to postpone the appraisal panel’s decision on the claim, ignoring FIE’s request for the panel to address and offer evidence material to the contents claim, which was ultimately made part of the appraisal award. (Petition, p. 14.)

In its petition (“Petition”), FIE requests that the Court correct the appraisal award by reducing the award by $278,803.20 or, in the alternative, that the Court vacate the appraisal award and order a new hearing before an appraisal panel with a new umpire. The Petition did not include a memorandum of points and authorities.

On August 14, 2023, Respondents filed a response to the petition (“Response”). Within the Response, Respondents requested that the Court confirm the appraisal award.

On August 15, 2023, FIE filed a motion to correct or vacate the appraisal award (“Motion”); this Motion included a memorandum of points and authorities. The Motion reiterates FIE’s request for relief as stated in its Petition.

On August 22, 2023, FIE filed its own response to Respondent’s cross-petition. The response incorporates its arguments made in its Motion.

On September 6, 2023, FIE filed a reply brief in connection with its Motion (“Reply”).

On September 6, 2023, Respondents filed an “objection” claiming that the Reply brief was an improper “sur-reply.”

After hearing oral argument on September 14, 2023, the Court continued the hearing to October 17, 2023, and ordered the parties to provide supplemental briefing. The parties filed supplemental briefs on October 4, 2023. Respondents additionally filed evidentiary objections and an objection to FIE’s Motion, which they labeled “new evidence in reply.”

All fire policies issued in California must be on a standard form that includes an appraisal provision as set forth in Insurance Code section 2071. (Ins. Code, §§ 2070, 2071.) Under the statutorily-mandated appraisal provision, the parties are required to participate in an informal appraisal proceeding in the event there is a disagreement about the actual cash value or the amount of the loss and the insurer or insured makes a written request for an appraisal. It is the insured's initial responsibility to establish the “actual cash value” of the property damaged; if the insured disagrees with a value suggested by the insurer, the appraisal process provides the means by which the dispute is to be settled. (Community Assisting Recovery, Inc. v. Aegis Security Ins. Co. (2001) 92 Cal.App.4th 886, 895.)

Appraisal hearings are a form of arbitration and are generally subject to the rules governing arbitration. Judicial review of an arbitration, or appraisal award, is circumscribed. (See Sy First Family Ltd. Partnership v. Cheung (1999) 70 Cal.App.4th 1334, 1345].) “‘Courts may not review either the merits of the controversy or the sufficiency of the evidence supporting the award.’” (Ibid.) If a petition or response under this chapter is duly served and filed, the court shall confirm the award as made, whether rendered in this state or another state, unless it corrects the award and confirms it as corrected, vacates the award or dismisses the proceedings. (Code Civ. Proc., § 1286.)

The court shall correct an appraisal award if the arbitrators exceeded their powers, and the award may be corrected “without affecting the merits of the decision upon the controversy submitted.” (Code Civ. Proc., § 1286.6, subd. (b).) If the award cannot be corrected without affecting the merits of the decision, then the award shall be vacated. (Code Civ. Proc., § 1286.2, subd. (a)(4).) An arbitration award shall also be vacated if a party were substantially prejudiced by a refusal to postpone the hearing upon sufficient cause being shown therefore or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title. (Code Civ. Proc., § 1286.2 subd. (a)(5).)

The Court OVERRULES Respondents’ objections to the Declaration of Jeff Caulkins and SUSTAINS the objections to the Declaration of Mark Blaha on the grounds that the objected-to portions of the declaration lack foundation. Additionally, the Court interposes and sustains, sua sponte, its own objections to the Declaration of Jeff Caulkins and the Declaration of Craig Bordon. “As a general rule, a party opposing confirmation of an appraisal award cannot use testimony of a party-selected appraiser. Such testimony is generally inadmissible, except for the limited purpose of showing improprieties in the appraisal, bias, partiality or other improper conduct.” (Khorsand v. Liberty Mutual Fire Ins. Co. (2018) 20 Cal.App.5th 1028.) Evidence Code section 703.5(g) states:

No person presiding at any judicial or quasi-judicial proceeding, and no arbitrator or mediator, shall be competent to testify, in any subsequent civil proceeding, as to any statement, conduct, decision, or ruling, occurring at or in conjunction with the prior proceeding, except as to a statement or conduct that could (a) give rise to civil or criminal contempt, (b) constitute a crime, (c) be the subject of investigation by the State Bar or Commission on Judicial Performance, or (d) give rise to disqualification proceedings under paragraph (1) or (6) of subdivision (a) of Section 170.1 of the Code of Civil Procedure.z

This is consistent with the general rule that "[t]he merits of the controversy, the manner in which evidence was weighed or the mental processes of the arbitrators in reaching their decision are not subject to judicial review." (Cobler v. Stanley, Barber, Southard, Brown Associates (1990) 217 Cal.App.3d 518

The Court OVERRULES Respondents’ objections to the Motion and Reply. Respondents argue that the Petition is defective because it lacks a memorandum of points and authorities supported by evidence in the form of declarations and exhibits as required by rule 3.1113 of the California Rules of Court. In multiple pleadings, Respondent characterizes the Motion, which is accompanied by declarations, as a reply brief with “new evidence” and argues that the Court should disregard the Motion. Rule 3.1113 is part of Division 11 of the California Rules of Court, which addresses law and motion. “Law and motion” includes an application for an order regarding the enforcement of an award by arbitration. (CRC 3.1103, subd. (a)(2).) The procedures by which a party may confirm, correct, or vacate an arbitration award are described in a Chapter of the Code of Procedure entitled “Enforcement of the Award.” (Code Civ. Proc., §§ 128501288.8.) Therefore, CRC 3.1113 applies to a petition to vacate an arbitration award and requires a petitioning party to include a memorandum of points and authorities.

Rule 3.1113 also permits the Court to “construe the absence of memorandum as an admission that the motion . . . is not meritorious and cause for its denial.” (CRC 3.1113, subd. (a).) Here, the Court declines to conclude that FIE has tacitly admitted that its Petition is not meritorious, especially as FIE filed the Motion, complete with a memorandum of points and authorities, declarations, and exhibits, the day after Respondents highlighted its mistake.

Similarly, the Court also disagrees with FIE’s representation that Respondents failed to file a “substantive opposition” to the Motion. The Response is a substantive opposition to the Petition which, for all intents and purposes, is identical to the Motion.

Therefore, in ruling on FIE’s Petition, the Court considers all the substantive pleadings which have been filed, including the Petition, Response, Motion, Reply, and supplemental briefing filed on October 4, 2023.

FIE claims that the appraisal panel, which consisted of Craig Bordon (“Bordon”) (the appraiser appointed by Keleshyan), Jeff Caulkins (“Caulkins”) (the appraiser appointed by FIE), and umpire Paul Poncio (“Poncio”), exceeded its authority by: (1) awarding $125,042.54 for items that did not exist at the property at the time of the fire, (2) awarding $28,789.50 for labor “contingencies” which FIE contends is speculative, (3) awarding $124,971.16 for Respondents’ contents claim and failing to postpone the panel’s decision and ignoring FIE’s request for a hearing to address and offer evidence material to the contents claim. FIE requests that the Court correct the appraisal award by reducing the award by $278,803.20. In the alternative, if the appraisal award is vacated, FIE requests that a new appraisal hearing be conducted before an appraisal panel with a new umpire.

“Although arbitrators are frequently, by the terms of the agreement providing for arbitration, … given broad powers [citation], appraisers generally have more limited powers.” (Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, 403.) ‘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.” (Hughes v. Potomac Ins. Co. (1962) 199 Cal.App.2d 239, 253; see also Figi v. New Hampshire Ins. Co. (1980) 108 Cal. App. 3d 772, 777 [an appraiser “only evaluates the loss and does not consider questions of policy, interpretation or scope of coverage”].) Thus, an appraisal panel “does not necessarily exceed its authority by appraising items within a disputed scope of loss when the disputes turn on issues of coverage, causation, or other legal issues that an appraisal panel is not authorized to decide.” (Lee v. California Capital Ins. Co. (2015) 237 Cal.App.4th 1154, 1171.)

In Lee, the Second Appellate District reversed the trial court’s order which directed the appraisal panel to appraise a hypothetical loss by evaluating all items of loss claimed by the insured, regardless of any damage or whether it existed, and the appraisal panel expressly disclaimed that its valuation did not determine whether particular items were in fact damaged or ever existed. (Id. at pp. 1171, 1174.) “[W]hen the disputes turn on the condition or quality of damaged or destroyed items – and it is possible for the panel to assess an item’s condition or quality without simply having to rely on the insured’s representation – it is error to compel the appraisal panel to assign values to items that inspection reveals were not damaged or did not ever exist.” (Id. at p. 1169.) The Lee court provided several examples of where providing a valuation would be inappropriate, such as where an insured claims damages to granite counters but a “simple visual examination reveals they [the counters] consist of a much less expensive material”, or where the insured claims damages to 4 floors in a three-story building. (Id. at pp. 1171-1172.) “If an inspection reveals an item is undamaged or never existed, it is appropriate for the panel to award nothing for 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 the valuation of the loss, including the cost to repair or replace them” (Id. at p. 1173.)

The Lee court additionally stated that “[i]t is the responsibility of the appraisal panel to resolve [] 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. (Lee v. California Capital Ins. Co. (2015) 237 Cal.App.4th 1154, 1175.)

FIE argues that the appraisal panel awarded $125,042.54 for 175 items which either did not exist at the property at the time of the fire or were not damaged. FIE’s appraiser, Caulkins, states that he inspected the property, reviewed photographs and other documents, and found that there were 175 items in the appraisal award, totaling $125,042.54, that were either not at the property at the time of the fire or were not damaged. (Caulkins Decl., ¶ 7.) Caulkins identifies these 175 items in a spreadsheet attached as Exhibit 1 to his declaration. As an example, Caulkins points to the award for A35 framing angles, which are metal connectors that fasten wood framing together. (Caulkins Decl., ¶ 8.) Caulkins declares that these frame angles were not in the home at the time of the fire. (Ibid.) Caulkins also points out that in 7 out of 9 instances where A35 frames are mentioned, the quantity is expressed with a number ending a decimal point, even though “[y]ou can’t have a fraction of a metal connector.” (Ibid.) Caulkins also points out that the award includes two additional central air condenser units included in Lines 598 and 703, but the home only had one central air conditioning unit. (Caulkins Decl., ¶ 9.) Last, Caulkins states that built-in closets were identified in Lines 265 and 392, but the closets were mirror sliding doors, not built-in closets. (Id. at ¶ 10.) ‘

As described above, the Declaration of Jeff Caulkins is inadmissible for purposes of showing that the appraised items did not exist. Notwithstanding the inadmissibility of Caulkins’s testimony, the question of existence that FIE requests the Court review appears to be a factual dispute. However, the Court does not have the authority to override the appraisal panel’s factual findings. (Moncharsh v. Heily & Blasé (1992) 3 Cal.4th 1, 11.) Insofar as FIE relies on Lee, the procedural posture of Lee makes it inapposite as the Court is not compelling an appraisal of any items but reviewing an appraisal panel’s valuation.

Similarly, to the extent that FIE relies on Lee to argue that labor contingencies are “speculative” because the cost of labor is already calculated into the appraisal, this interpretation would require the Court to review the appraisal board’s findings of fact. Therefore, the Court does not find that the appraisers exceeded their powers by awarding amounts for the purported nonexistent/undamaged items or labor contingencies.

Additionally, FIE is required to cover “labor contingencies” pursuant to California Code of Regulations tit. 10 § 2695.9(a), because they are essentially “consequential damages” in making any repairs or replacements. Therefore, FIE’s complaint that the appraisal panel inappropriately included an estimate for “labor contingencies” runs contrary to the policy it issued to Respondents, which requires appraisers to determine “the estimated costs of repair or replacement of each item of property.”

FIE argues that it was substantially prejudiced because there was no evidence or discussion presented to the appraisal panel at the hearing by either party regarding the contents. (Memo., pp. 10-11.)

An appraisal proceeding is “informal” in the sense that the formal rules of civil discovery and evidence do not apply, and there is no court reporter. (Ins. Code, § 2071.) However, except as otherwise provided, appraisal proceedings are subject to the rules governing contractual arbitration proceedings. (See Code Civ. Proc. § 1280, subd. (a).) If a neutral arbitrator intends to base an award upon information not obtained at the hearing, he shall disclose the information to all parties to the arbitration and give the parties an opportunity to meet it. (Code Civ. Proc., § 1282.2, subd. (g).)

The appraisal listed $124,971.16 of contents items for which “there was no presentation or dispute at the informal hearing.” At the hearing, FIE’s counsel and adjuster demanded that if the appraisal panel would consider the contents claim, that FIE have an opportunity to present evidence relating to those contents. (Blaha Decl., ¶¶ 12-13; Winston Decl., ¶¶4-5.) FIE received an e-mail with the substance of Respondents’ contents claim on July 13, 2023. Although FIE complains that it was not given an opportunity to address the evidence that was shared, it has not shown how it was substantially prejudiced. FIE’s papers lack any description of the evidence that would have been presented which would have changed the outcome of the appraisal.

William A. Crowfoot

Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the Court at ALHDEPT3@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org. Please be advised that if you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the matter. Unless you receive a submission from all other parties in the matter, you should assume that others might appear at the hearing to argue. If the Court does not receive emails from the parties indicating submission on this tentative ruling and there are no appearances at the hearing, the Court may, at its discretion, adopt the tentative as the final order or place the motion off calendar.