Alexander v. Farmers Insurance Company, Inc.

In Alexander v. Farmers Ins. Co., Inc., 219 Cal.App.4th 1183 (September 23, 2013), the California Second District Court of Appeal affirmed the trial court’s order denying Farmers’ motion to compel appraisal of the insured’s claims for first party property loss before proceeding with a cross-action lawsuit against Farmers. The parties’ dispute arose out of Farmer’s alleged practices in connection with adjusting property loss claims. The plaintiffs were insured under Farmers’ homeowners policies when they each suffered partial losses to their homes and personal belongings due to fires in 2009 and 2010. They submitted property claims to Farmers, identifying the damaged property and the estimated cash value of each item. The plaintiffs disputed Farmers’ adjustment of the claims, complaining that Farmers’ method of calculating depreciation was illegal under Insurance Code sections 2071 and 2051.

Essentially plaintiffs alleged that Farmers used a secret formula in determining the replacement cost of damage to property. According to plaintiffs, Farmers deducts depreciation of property according to a secret schedule that is based on the age of the item. Plaintiffs allege that Farmers did not consider the pre-loss physical condition of the damaged property and arbitrarily deducted the depreciation based on “it’s secret formula based on age.”

As a result of Farmers’ alleged illegal conduct, plaintiffs filed claims for declaratory relief, unfair competition under Business & Professions Code section 17200, breach of contract and bad faith. The plaintiffs alleged as follows in connection with Farmers’ wrongful conduct:

Defendant is violating Insurance Code section 2051(b) and the other regulations cited herein, including but not limited to: (1) whether Defendant is complying with Insurance Code section 2051(b) and California Code of Regulation section 2695.9(f) when it adjusts partial losses to contents claims; (2) whether Defendant may only consider age or useful life of an item, or excessively rely on age or useful life, in determining depreciation; (3) whether Insurance Code section 2051(b) permits Farmers to depreciate property through a standardized schedule rather than through an examination of the condition of the property; (4) whether Farmers is entitled to conceal its method of depreciation from its insureds; and (5) whether Farmers must first adjust the claim and calculate [actual cash value) in compliance with Insurance Code section 2051 before it can invoke the appraisal provision of the policies.”

Respondents alleged similar controversies exist with relation to how Farmers adjusted partial losses to structural loss claims: “(1) whether Defendant is complying with Insurance Code section 2051(b) and California Code of Regulation section 2695.9(f) when it adjusts partial losses to structural loss claims; (2) whether Defendant is taking depreciation on structural components that are not normally subject to repair and replacement during the useful life of the structure; (3) whether Defendant may only consider age or useful life of an item, or excessively rely on age and useful life, in determining depreciation; (4) whether Insurance Code section 2051(b) permits Farmers to depreciate property through a standardized schedule rather than through an examination of the condition of the property; (5) whether Farmers is entitled to conceal its method of depreciation from its insureds; and (6) whether Farmers must first adjust the claim and calculate in compliance with Insurance Code section 2051 before it can invoke the appraisal provision of the policies.”

In response, Farmers demurred to plaintiffs’ complaint and argued that the insureds were contractually obligated to first complete an appraisal. Farmers also moved to compel appraisal pursuant to the policy provisions. The trial court overruled Farmers’ demurrer in its entirety, but without prejudice to renewal of the motion to compel appraisal at a later stage of the litigation. The trial court reasoned the motion was premature but that it could be viable at a later stage after certain legal and factual issues were determined in anticipation of class certification. Thereafter, Farmers appealed the denial of its motion to compel appraisal.

In affirming the trial court’s decision, the Court of Appeal held as follows:

Faced with substantially the same facts and procedural posture as the cases discussed above, we conclude that Kirkwood and Doan provide the better reasoned approach to resolving this issue. We agree that a trial court has the discretion to defer appraisal in appropriate circumstances, just as it has "the power to sever arbitrable claims from inarbitrable ones and to stay either the arbitration or the judicial proceedings pending the outcome of the other." (Doan, supra, 195 Cal.App.4th at pp. 1098-1099.) Although Code of Civil Procedure section 1281.2 generally requires a trial court to order the parties to arbitration once the existence of a valid arbitration agreement covering the dispute is established, it expressly provides an exception: “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.” (Code. Civ. Proc., § 12812, subd. (c), 3d par.) As the rules governing arbitration apply with equal force to insurance appraisals, the decision whether to stay the appraisal is committed to the trial court's sound discretion. (Doan, supra, at p. 1100.)