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June 2011

The Doan v. State Farm General Insurance Company ? Declaratory Relief Action Can Proceed Prior To Appraisal

Appraisal Of Property Under Insurance Code Section 2071 May Be Deferred Pending A Declaratory Relief Action

(May 24, 2011) _____Cal.App.4th ____; 11 C.D.O.S. 6214

The California Court of Appeal for the Sixth Appellate District issued a decision reversing the trial court's ruling sustaining a demurrer in favor of the insurer and holding that the trial court should have exercised its discretion to consider whether to defer an appraisal in which the value of property is disputed, pending a judicial declaration of the parties' rights. 

The Doan ("Doan") was insured under a property insurance policy issued by State Farm General Insurance Company ("State Farm") that provided that "State Farm would pay the costs to repair or replace personal property at the time of the loss less depreciation."  Doan's home and its contents were destroyed by a fire and Doan submitted a claim to State Farm calculating his personal property, less depreciation, at $174,000 based on the actual condition of each item at the time of loss.  State Farm responded with a settlement offer of $130,000, and refused to explain the basis for the increase in depreciation applied. 

Doan filed a class action lawsuit against State Farm, asserting claims for breach of contract, breach of implied covenant, violation of Unfair Competition Law (UCL), and violation of the Consumer Legal Remedies Act (CLRA).  State Farm filed a demurrer arguing, among other things, that Doan's contract claims failed because he did not submit his valuation dispute to appraisal per Insurance Code section 2071.  The trial court sustained the demurrer with leave to amend finding that Doan failed to plead sufficient facts showing he satisfied the appraisal requirement.

Doan filed an amended complaint with the same factual allegations but added a new cause of action for declaratory relief asserting State Farm violated its contracts, insurance law, including section 2051, and its accompanying regulations.  Doan claimed that State Farm applied an improper valuation methods that overstated depreciation instead of determining the actual condition of property involved.  State Farm again filed a demurrer raising similar arguments as before, and the trial court sustained the demurrer without leave to amend on the same grounds it relied upon previously.  An appeal followed.

The Court of Appeal first analyzed the relevant Insurance Code provisions, noting that section 2071 requires standard-form fire insurance policies contain appraisal provisions to settle disagreements concerning the amount of loss.  It further requires that each policy contain a Suit provision preventing actions on the policy until all other policy requirements have been complied with and commenced within 12 months after inception of the loss.

The Court of Appeal also analyzed section 2051 which states that when an open policy (i.e., a policy under which value is not agreed upon up front but instead determined after a loss) "requires payment of actual cash value" for a structure's contents, "the measure of the actual cash value recovery" is "the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less." 

The Court of Appeal held that Doan could seek judicial declaration of his rights under the Insurance statutes and policy before submitting his valuation dispute to statutory appraisal. Declaratory relief is authorized by Section 1060 of the Code of Civil Procedure, and the trial court has discretion as whether to exercise declaratory relief, and it is an abuse of discretion not to grant declaratory relief where a multiplicity of actions would result unless the parties rights are first declared.  Although the remedy of declaratory relief is cumulative and does not restrict any other remedies, it should not be used where the Legislature has specified an "exclusive procedure" for resolving disputes. 

The Court of Appeal determined the Legislature has not provided, in the appraisal provisions, an exclusive procedure for resolving disputes that extend beyond the amount of an insured's loss.  The Court of Appeal relied upon Kirkwood v. California State Automobile Association (2011) 193 Cal.App.4th 49, 53-54 (Kirkwood) which held that "the regulations explicitly document that the section 2071 appraisal procedure does not limit recourse to other remedies." 

The Court of Appeal rejected State Farm's reliance on Community Assisting Recovery Inc. v. Aegis Security (2001) 92 Cal.App.4th 886, 893 (Community Assisting) which contained language indicating the appraisal remedy was exclusive.  The Court of Appeal again relied on Kirkwood which distinguished Community Assisting because it was determined prior to the 2004 amendments to section 2051 and there was no statutory direction dictating how the insurer was to measure the actual cash value of recovery under an open policy.  The court in Community Assisting was also not asked to determine the availability of declaratory relief.   

Finally, the Court of Appeal determined that the trial court has discretion to stay the appraisal proceeding pending resolution of Doan's declaratory relief action, and held that the failure to exercise such discretion was an abuse of discretion.  In reaching this conclusion, the Court of Appeal first held that section 1281.2 of the Code of Civil Procedure gives the trial court discretion to stay an appraisal if resolution of the non-appraisal claims might make the appraisal unnecessary. 

The Court of Appeal also relied upon the Kirkwood decision which held that the trial court could stay an appraisal to resolve issues that are beyond the appraiser's limited jurisdiction (such as statutory interpretation) and because a stay would promote judicial economy since resolution of the statutory and policy issues in favor of Doan would render an appraisal unnecessary, while a ruling in favor of State Farm would stave off future appraisals and litigation alleging the same unlawful behavior.  

Accordingly, the Court of Appeal reversed the judgment of dismissal in part and directed the trial court to enter a new order overruling State Farm's demurrer to the first four causes of action, and to exercise its discretion to consider whether declaratory relief should be granted.
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This opinion is not final.  Though it has been certified for publication, it may be modified on rehearing, or granted review by the Supreme Court of the State of California.  Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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David L. Jones
Aaron P. Rudin