A Review of Diminution in Value

Barry Zalma & ClaimSchool, Inc.

In this article the newly court mandated limitation on the right to disqualify a party appointed appraiser in a California insurance Appraisal/Arbitration is discussed.

The California Insurance Code, at § 2071, provides a method by which an insured and insurer may quickly, and informally, resolve disputes concerning the amount of loss. Although called “appraisal” it is, in California a contractual arbitration agreement mandated by statute.

When an insurer and its insured fail to agree on the amount of loss following a fire, the California Insurance Code allows each of them to select a “competent and disinterested appraiser,” who are in turn required to agree on a “competent and disinterested umpire” (or request appointment of one by the court) to form a three-member panel to adjudge the amount of loss. The award of the appraisers is treated as an award of arbitrators and when confirmed will be an enforceable judgment of the court.

California courts have concluded this adjudication must be conducted pursuant to the provisions of the California Arbitration Act, Code of Civil Procedure section 1280 et seq. (Arbitration Act).

Section 1281.9 of the Arbitration Act requires proposed neutral arbitrators to disclose to opposing parties the existence of any potential grounds for disqualification. If a party objects to the proposed neutral arbitrator, section 1281.91 requires the objecting party to serve a notice of disqualification within 15 days of receipt of the disclosure statement.

Fire insurance policies on California properties have long been required to use standard language specified by the Legislature. Among other policy provisions, in the event the insurer and the insured disagree about the amount of loss, Insurance Code § 2071provides a method by which their differences may be resolved, called “appraisal.” Each party is required to select “a competent and disinterested appraiser,” who together must then select (or, if the party-selected appraisers cannot agree, have the court appoint) “a competent and disinterested umpire.” The party-selected appraisers are each required to appraise the loss and, in the event of disagreement, submit their differences to the umpire for adjudication.

The key to disqualifying a party appointed appraiser is whether there is a “substantial” business relationship between the party appointed appraiser and a party to the appraisal, their counsel, or the umpire. Impartial arbitrators/appraisers must disclose to the parties any dealings that might “create an impression of possible bias.” The test is whether a reasonable member of the public at large, aware of all of the facts, would fairly entertain doubts concerning the arbitrator’s/appraiser’s impartiality, the arbitrator/appraiser is not subject to disqualification.

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