Appraiser Declarations Inadmissible When Offered to Challenge the Merits of an Appraisal Award

Christopher Kendrick and Valerie A. Moore | Haight Brown & Bonesteel | March 1, 2018

In Khorsand v. Liberty Mutual Fire Ins. Co. (No. B280273, filed 2/27/18), a California appeals court affirmed an appraisal award favorable to a homeowners insurer, ruling that it was improper to admit as evidence in opposition to a petition to confirm the award a declaration from the policyholders’ appraiser, except for the limited purpose of showing improprieties in the appraisal, bias, partiality or other improper conduct.

The homeowners had a pipe leak and submitted a claim. The insurer responded to an estimate from the owners’ adjuster by retaining an expert and paying an undisputed amount that was significantly less. Eleven months later the owners had upper deck damage and submitted another claim. Relying on the same expert, the insurer paid another undisputed amount significantly less than the owner’s estimate. The owners requested appraisal but the insurer denied the request, contending that the dispute was over coverage and outside the scope of appraisal.

The owners’ petition for appraisal was granted, with the court ordering separate listing of items the insurer disputed regarding coverage or causation. The appraisal panel issued an award stating that total damage was $132,293, of which $96,530 was contested by the insurer. The insurer filed a petition to confirm the award, which was granted despite the fact that the owners’ appraiser had refused to sign it.

In opposing confirmation of the award, the owners submitted a declaration from their appraiser, in which he provided an account of the appraisal proceedings, including the evidence presented and the appraisers’ deliberations, and set forth his reasons for declining to sign the award. This included facts regarding the owners’ claim that the insurer could not dispute increased deck repair estimates despite having learned facts that it was not covered, because it had initially agreed to cover the loss.

The result hinged on whether the appraiser’s declaration was admissible to oppose confirmation of the award. The insurer had objected to the declaration based on Evidence Code section 703.5, which states that: “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 … Section 170.1 of the Code of Civil Procedure.”

Concluding that appraisers come within the purview of the statute, the appeals court agreed it was error to admit all but a small portion of the declaration. The court cited Cobler v. Stanley, Barber, Southard, Brown & Associates (1990) 217 Cal.App.3d 518, for the proposition that admissibility is limited to the four purposes specified in the statute, but not “[t]he merits of the controversy, the manner in which evidence was weighed or the mental processes of the arbitrators in reaching their decision.” The Cobler court held that arbitrator declarations were only admissible “when a dissenting arbitrator charged improprieties in the arbitration, and when others charged bias, partiality or improper conduct, but were not admissible to challenge the merits of the award.” (Citing Code Civ. Proc., § 1286.2(a)(1).)

The Khorsand court held that the only statements in the appraiser’s declaration that could be admitted were those statements regarding the owners’ charge that the insurer and its coverage counsel had engaged in “fraud” regarding the minimum scope of the deck loss, by having agreed to and paid the initial estimate for the repair, but then disputing any increased award for the deck after discovering a causation issue. The owners argued that the insurer was bound by its earlier representations regarding coverage, and it was fraud to argue otherwise.

But having concluded that the declaration was admissible for that limited purpose, the appeals court proceeded to find that judicial estoppel precluded any fraud argument by the owners because they had successfully argued for a broad application of the appraisers’ powers in the fight to limit the scope of the appraisal. They had successfully opposed the insurer’s application to limit the scope of the appraisal by arguing that the appraisal panel was authorized to make independent determinations regarding the existence and actual value of the losses, that the panel was not bound by the representations of either party regarding the scope of loss, but that the appraisers’ own estimates, not earlier estimates prepared by the parties, defined the scope of an appraisal award. Thus, the owners were estopped from arguing that the insurer was bound by its earlier statements regarding coverage.

Otherwise, the Khorsand court concluded that the owners were merely arguing the merits of the appraisal award which was not a basis to vacate the award as entered.

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Claims Handling Requirements by State – California

Robert Trautmann | Property Insurance Coverage Law Blog | February 21, 2018

As I am writing this blog, most of the country is in the middle of a deep freeze. Here in New Jersey, the forecast doesn’t show any signs of warming up:

So naturally, my mind turned to more temperate climates and so today we are going to chat about the claims handling guidelines in California.

California property insurers must follow the Fair Claims Settlement Practices Regulations. The regulations define their purpose as being “[t]o delineate certain minimum standards for the settlement of claims” and to “promote the good faith, prompt, efficient and equitable settlement of claims on a cost-effective basis.”1

A California insurance carrier must acknowledge the notice of claim, provide all necessary claim forms and instructions and begin the investigation of the claim within 15 calendar days of receipt of the notice of claim.2 The investigation must be thorough, fair and objective and the carrier must not request information not relating to the claim.3 The carrier must appropriately reply to all communications from a claimant regarding the claim where a reasonable person would expect a response.4 They must immediately (but no later than 30 calendar days) pay the portion of the claim not in dispute.5 The carrier must advise as to the acceptance or rejection of the claim in whole or in part within 40 days of their receipt of the notice of the claim.6 They must give the insured updates as to the status of the claim every 30 days that it remains open.7 Any denial must be in writing detailing the factual and legal basis therefore.8

No California insurance carrier make an offer to settle a claim that is unreasonably low.9Needless to say, the insurance carriers must not discriminate against their insured based on, among other things, age, race, religion, or sexual orientation.10 Finally, the insurance carrier must advise unrepresented first party claimants that a statute of limitations or other time limit is going to expire no less than 60 days before the expiration of the time limit.11

California has additional standards for first-party residential and commercial property insurance policies:12

(1) When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for depreciation nor any other cost except for the applicable deductible.

(2) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance.

(b) No insurer shall require that the insured have the property repaired by a specific individual or entity.

(c) No insurer shall suggest or recommend that the insured have the property repaired by a specific individual or entity unless:

(1) the referral is expressly requested by the claimant; or

(2) the claimant has been informed in writing of the right to select a repair individual or entity and, if the claimant accepts the suggestion or recommendation, the insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and repaired in a manner which meets accepted trade standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations.

(d) If losses are settled on the basis of a written scope and/or estimate prepared by or for the insurer, the insurer shall supply the claimant with a copy of each document upon which the settlement is based. The estimate prepared by or for the insurer shall be in accordance with applicable policy provisions, of an amount which will restore the damaged property to no less than its condition prior to the loss and which will allow for repairs to be made in a manner which meets accepted trade standards for good and workmanlike construction. The insurer shall take reasonable steps to verify that the repair or rebuilding costs utilized by the insurer or its claims agents are accurate and representative of costs in the local market area. If the claimant subsequently contends, based upon a written estimate which he or she obtains, that necessary repairs will exceed the written estimate prepared by or for the insurer, the insurer shall:

(1) pay the difference between its written estimate and a higher estimate obtained by the claimant; or,

(2) if requested by the claimant, promptly provide the claimant with the name of at least one repair individual or entity that will make the repairs for the amount of the written estimate. The insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and which will allow for repairs in a manner which meets accepted trade standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations; or,

(3) reasonably adjust any written estimates prepared by the repair individual or entity of the insured’s choice and provide a copy of the adjusted estimate to the claimant.

(e) Once the appraisal provision under an insurance policy is invoked, the appraisal process shall not include any legal proceeding or procedure not specified under California Insurance Code Section 2071. Nothing herein is intended to preclude separate legal proceedings on issues unrelated to the appraisal process.

(f) When the amount claimed is adjusted because of betterment, depreciation, or salvage, all justification for the adjustment shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the betterment, depreciation, or salvage. Any adjustments for betterment or depreciation shall reflect a measurable difference in market value attributable to the condition and age of the property and apply only to property normally subject to repair and replacement during the useful life of the property. The basis for any adjustment shall be fully explained to the claimant in writing.

(1) Under a policy, subject to California Insurance Code Section 2071, where the insurer is required to pay the expense of repairing, rebuilding or replacing the property destroyed or damaged with other of like kind and quality, the measure of recovery is determined by the actual cash value of the damaged or destroyed property, as set forth in California Insurance Code Section 2051. Except for the intrinsic labor costs that are included in the cost of manufactured materials or goods, the expense of labor necessary to repair, rebuild or replace covered property is not a component of physical depreciation and shall not be subject to depreciation or betterment.

1 Cal. Code Regs. Tit 10 § 2695.1.
2 Cal. Code Regs. Tit 10 § 2695.5(e).
3 Cal. Code Regs. Tit 10 § 2695.7(d).
4 Cal. Code Regs. Tit 10 § 2695.5(b).
5 Cal. Code Regs. Tit 10 § 2695.7(h).
6 Cal. Code Regs. Tit 10 § 2695.7(b)(1).
7 Cal. Code Regs. Tit 10 § 2695.7(c)(1).
8 Cal. Code Regs. Tit 10 § 2695.7(b)(1).
9 Cal. Code Regs. Tit 10 § 2695.7(g).
10 Cal. Code Regs. Tit 10 § 2695.7(a).
11 Cal. Code Regs. Tit 10 § 2695.7(f).
12 Cal. Code Regs. Tit 10 § 2695.9.

Direct Contractors In California Should Take Steps Now To Reduce Exposure For Unpaid Wages By Subcontractors

Nora Stilestein, Candace Matson and Mercedes Cook | Construction & Infrastructure Law Blog | February 6, 2018

As of January 1, 2018, direct contractors in California who make or take a contract “for the erection, construction, alteration, or repair of a building, structure, or other private work” are jointly and severally liable with their subcontractors for any unpaid wages, fringe benefits and other benefit payments or contributions owed to wage claimants. Governor Brown approved AB 1701 on October 14, 2017. The new law puts the onus on direct contractors to not only monitor their own payroll practices, but to ensure that their subcontractors and lower tier subcontractors are engaging in proper payroll practices.

AB 1701 does not afford individual workers a direct right to sue contractors. Instead, only three groups have the right to sue directly: the Labor Commissioner; a joint labor-management cooperation committee (29 U.S.C. §175a); or a third party owed fringe or other benefits on a wage claimant’s behalf. The bill also precludes recovery of liquidated damages or penalties. Nevertheless, critics of the bill anticipate that it will ultimately increase building costs, and will only exacerbate the current shortage of affordable housing in California. Indeed, direct contractors who have already paid a subcontractor in full for completed work may later find themselves on the hook for unpaid wages to subcontractors’ employees as well as lower tier subcontractors.  A direct contractor wishing to avoid that outcome must bear the burden of monitoring subcontractors’ payroll practices, including confirming that employees were timely paid with owed wages.

To reduce potential exposure, contracts may need to be revised to include provisions:

  • requiring subcontractors to indemnify and defend against claims for unpaid wages and benefits;
  • requiring all subcontractors to obtain payment bonds;
  • establishing firm deadlines for subcontractors to provide payroll records upon request or even as a condition precedent to payment; and
  • creating systems and protocols to confirm timely payment of wages to subcontractors’ workers.

AB 1701 “does not prohibit a direct contractor or subcontractor at any tier from establishing by contract or enforcing any otherwise lawful remedies against a subcontractor it hires for liability created…”  Accordingly, direct contractors across California should take a closer look at the terms of their agreements with subcontractors.

Joint employment liability has been an ongoing trend in California. All California employers should be reminded of Labor Code section 2810.3, which went into effect on January 1, 2016. Section 2810.3 requires businesses using workers provided by a staffing firm to share “all civil legal responsibility and civil liability” for wage payments and workers’ compensation coverage. Employers should ensure that workers provided by staffing firms are paid correctly and covered by workers’ compensation insurance, and should also carefully examine and draft indemnification agreements with staffing firms. It is expected that joint employer liability will be a top priority for the Labor Commissioner in 2018.

California Supreme Court Holds that the Right to Repair Act is a Homeowner’s Exclusive Remedy for Damages Arising from Construction Defects for New Residential Construction

Robert Nobel | TLSS Construction Law Blog | February 15, 2018

In McMillin Albany LLC et al. v. The Superior Court of Kern County (Van Tassel) [Case No. S229762], the California Supreme Court held that California Civil Code §§ 895 et seq. (the “Right to Repair Act”) provides the exclusive remedy for construction defect claims for economic loss and resulting property damages arising from new residential construction. The Supreme Court also held that homeowners are required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act.

The long-awaited holding in McMillin resolved a split in authority among the California Court of Appeals, and effectively overruled the holdings in Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC [(2013) 219 Cal.App.4th 98 (“Liberty”)] and Burch v. Superior Court [(2014) 223 Cal.App.4th 1411 (“Burch”)], to the extent inconsistent with McMillin. In Liberty and Burch, the California Court of Appeals held that the Right to Repair Act is not the exclusive remedy for construction defect lawsuits that allege  resulting property damage arising from new residential construction. Homeowners were thus not required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act because such lawsuits could be maintained as common law claims.  As to construction defect lawsuits where resulting property damage had not occurred (i.e. pure economic loss), such claims are barred by the holding in Aas v. Superior Court [(2000) 24 Cal.4th 627] unless they can be brought under the Right to Repair Act.

In McMillin, a construction defect lawsuit was brought by the purchasers of 37 new single-family homes from McMillin Albany LLC. The homes were purchased at various times after January 2003, thus implicating the Right to Repair Act. In 2013, the homeowners initiated the lawsuit against McMillin Albany LLC alleging numerous construction defects in their respective homes. The complaint included common law causes of action for negligence, strict products liability, breach of contract and breach of warranty, as well as a claim for violation of the Right to Repair Act.

In the trial court, McMillin Albany LLC moved for an order staying litigation to allow the parties to engage in the pre-litigation notice and cure procedures under the Right to Repair Act. The trial court denied the motion, relying upon the California Court of Appeals holding in Liberty.  McMillin Albany LLC appealed the trial court ruling.

On appeal, and disagreeing with the holdings in Liberty and Burch, the California Court of Appeals ruled that the parties must follow the pre-litigation notice and cure procedures because the Right to Repair Act is the exclusive remedy for construction defect claims where property damage has occurred.  The Court of Appeals observed that “the Legislature intended that all claims arising out of defects in residential construction involving post-2003 sales of new homes be subject to the standards and requirements of the Act.”

The California Supreme Court affirmed the ruling of the California Court of Appeals.  In its analysis, the Supreme Court looked to the language of the Right to Repair Act and its legislative history to determine whether the common law had been supplanted where construction defect claims resulted in property damages.  In this regard, the Supreme Court recognized that Section 896 states the Right to Repair Act applies to “any action” seeking damages for construction defect.  This section also states that “claims or causes of action shall be limited to violation of” the functionality standards set forth in the Right to Repair Act and apply only to “original construction intended to be sold as an individual dwelling unit.”

Moreover, Section 944 identifies what damages may be recovered under the Right to Repair Act by a homeowner, which covers the kinds of damages recoverable in a construction defect lawsuit, and Section 943 establishes that such damages may only be recovered under the Right to Repair Action, absent an express exception. The damages recoverable under the Right to Repair Act include pure economic losses, unlike a common law claim.

Furthermore, the Supreme Court recognized that “the creation of a mandatory pre-litigation process and the granting of a right to repair, would be thwarted if we were to read the Act to permit homeowners to continue to sue as before at common law, without abiding by the procedural requirements of the Act, for construction defect claims involving damages other than economic loss.”

Accordingly, the Supreme Court held the Right to Repair Act shows a legislative intent to modify the common law and effectively “provides that construction defect claims not involving personal injury will be treated the same procedurally going forward whether or not the underlying defects gave rise to any property damage.”  Therefore, “claims seeking recovery for construction defect damage are subject to the Act’s pre-litigation procedures regardless of how they are pleaded.”

And the Winner Is . . . The Right to Repair Act!

Garret Murai | California Construction Law Blog | February 7, 2018

Civil litigation attorneys often talk about “damages.” Because without damages . . .  well . . . you’re out of luck.

But damages come in different flavors. In construction litigation, when it comes to defective construction, there are two basic flavors: actual damages and economic damages. Actual damages include property damage and personal injury, such as a defective roof that causes water damage into the interior of the structure or collapses causing injury to someone inside the structure. In contrast, economic damages would be the cost to repair or replace the defective roof, without any resulting property damage or personal injury.


In Aas v. Superior Court (1998) 64 Cal.4th 916, the California Supreme Court held that economic damages arising from construction defects are not recoverable if the basis for liability is negligence or strict liability. Note, however, that Aas does not limit the ability of a plaintiff to sue for negligence or strict liability for actual damages, and the court’s decision does not limit the ability of a plaintiff to sue for economic damages if the basis for liability is breach of contract.

In response, the California legislature enacted SB 800, also known as the Right to Repair Act (Civil Code sections 895 et seq.), to limit Aas. The Right to Repair Act permits homeowners of newly constructed residential housing, including single family homes and condominiums (but not condominium conversions), to sue for economic damages alone, if the residential housing does not meet the construction standards set forth under the Right to Repair Act and the homeowner has gone through the prelitigation procedures provided under the Act.

Until this past month, there’s been an open question regarding whether homeowners have to comply with the Right to Repair Act’s prelitigation procedures if they are only claiming economic damages or if homeowners have to comply with the Right to Repair Act’s prelitigation procedures when claiming both economic damages and actual damages or actual damages alone. The California Courts of Appeal have reached contrary decisions. See our blog posts on Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98 (holding that the Right to Repair Act does not apply to claims for actual damages); McMillin Albany LLC v. Superior Court (2015) 239 Cal.App.4th 1132 (holding that the Right to Repair Act also applies to claims for actual damages); and Gillotti v. Stewart (2017) 11 Cal.App.5th 875 (holding that the Right to Repair Act also applies to claims for actual damages).

McMillin Albany LLC v. Superior Court

Resolving this appellate court split, the California Supreme Court granted review of the Fifth District Court of Appeals decision in McMillan, and this past month issued a unanimous decision in McMillin Albany LLC v. Superior Court, Case No. S229762 (January 18, 2018).

Analyzing the Right to Repair Act and its legislative history, the California Supreme Court held that following the Aas decision, while “the [California] Legislature preserved common law claims for personal injury, it made the [Right to Repair] Act the virtually exclusive remedy not just for economic loss but also for property damage arising from construction defects.” Thus, held the Supreme Court:

  1. Economic Damages: As to economic damages, “a party suffering economic [damages] from defective construction may now bring an action to recover these damages under the [Right to Repair] Act without having to wait until the defect has caused property damage or personal injury.” (Note: Although the Supreme Court states “now,” it was already well understood that homeowners claiming economic damages were required to comply with the prelitigation procedures of the Right to Repair Act before filing suit).
  2. Property Damage: As to property damage, “the [Right to Repair] Act expressly includes property damages resulting from construction defects among the categories of damages recoverable under the Act,” and thus, the Right to Repair Act provides “the exclusive way to recover such damages.”
  3. Personal Injuries: As to personal injuries, “personal injury damages are not listed as a category recoverable under the [Right to Repair] Act,” and thus, “[t]his omission places personal injury claims outside of the scope of [the Act].”

In addition to addressing the types of damage claims subject to the Right to Repair Act, the California Supreme Court also addressed whether a homeowner can bypass the Right to Repair Act’s prelitigation procedures if the homeowner claims a construction defect not specifically addressed in the construction standards of the Right to Repair Act. The Supreme Court held that a homeowner could not. The Supreme Court explained that in addition to the specific construction standards set forth under the Right to Repair Act, Civil Code section 897 also provides a “catchall standard” that provides that “[t]o the extent that a function or component of a structure is not addressed by these standards, it shall be actionable if it causes damages,” and that this “catchall standard” requires that construction defects not specifically addressed under the construction standards of the Right to Repair Act (whether they cause economic damages or property damages) must also  comply with the Right to Repair Act’s prelitigation procedures.


The California Supreme Court’s decision in McMillin is a big win for builders, general contractors, subcontractors, material suppliers, manufacturers, and design professionals and clarifies that for newly constructed residential housing purchased on or after January 1, 2003:

  1. With the exception of claims for personal injuries, claims for both economic damages, as well as property damage, are subject to the prelitigation procedure set forth under the Right to Repair Act; and
  2. The Right to Repair Act applies to all construction defect claims including construction defects not specifically addressed under the construction standards of the Right to Repair Act.

Although homeowners suffered a loss under McMillin, homeowners still have the ability even after the decision, to bring a claim for personal injuries, breach of contract, fraud and strict liability without first having to comply with the Right to Repair Act’s prelitigation procedures.