Plaintiff The Doan brought this action against defendant State Farm General Insurance Company. Suing for himself and a class of similarly situated policyholders, Doan alleged that State Farm breached its property
This appeal concerns the proper interpretation of Insurance Code provisions, particularly Insurance Code section 2071,
Doan and the other policyholders were insured under property insurance policies issued by State Farm.
Doan and the other policyholders suffered property losses covered under their policies. In Doan's case, a fire in June 2006 destroyed his home and its contents.
In October 2006, Doan "submitted his personal property claim to State Farm." Instead of using State Farm's form, Doan submitted his claim "on an excel spreadsheet, which set forth a physical depreciation amount for his personal property based on the actual condition of each item at the time of loss." By Doan's calculations, after deducting for depreciation "based upon the items' physical condition," the actual cash value of his personal property was nearly $174,000.
Doan "challenged the settlement offer, in particular the excessive depreciation" but "State Farm refused to re-open the claim for a determination of the true amount of physical depreciation of the personal property. State Farm likewise refused to alter its method of calculating depreciation."
Doan did not demand an appraisal under section 2071 "because an appraiser has no authority to determine whether State Farm's method of calculating depreciation is a breach of contract and a violation of section 2051."
In December 2008, Doan filed his initial complaint in this matter, asserting causes of action for breach of contract, breach of implied covenant, and violation of the unfair competition law (UCL) (Bus. & Prof. Code, § 17200 et seq.). In January 2009, Doan filed a first amended complaint, which added a fourth cause of action for violation of the Consumers Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq.).
In March 2009, State Farm responded with a demurrer, which attacked all four causes of action of the complaint, and with a concurrent motion to strike, which was directed both at the class allegations and at the injunctive and restitutionary remedies sought in connection with the UCL claims. State Farm also filed an appendix of federal authority, and a request for judicial notice that contained court orders and decisions from other jurisdictions. In support of its demurrer, State Farm first argued that Doan could not state a cause of action for breach of contract or for breach of the implied covenant, because he had failed to submit his valuation dispute to appraisal as required by section 2071. State Farm next argued that Doan could not state a cause of action under the CLRA, because the act does not apply to insurance. State Farm also argued that the claims in the complaint are not suitable for class treatment.
Doan opposed the demurrer and motion to strike. He argued that his legal remedies under the Insurance Code are not limited to an appraisal, that his
State Farm replied to Doan's opposition, and it also objected to a declaration filed by his attorney.
In April 2009, following a hearing on the demurrer and motion to strike, the court issued its written order. After granting State Farm's request for judicial notice, the trial court sustained the demurrer in its entirety, giving plaintiffs 20 days' leave to amend. With respect to each of the first three causes of action of the complaint, the court explained: "Plaintiff failed to plead sufficient facts showing that he has satisfied the requirement of appraisal of such disputes." With respect to the fourth cause of action of the complaint, the court explained: "Plaintiff failed to plead sufficient facts showing that the CLRA applies to insurance." The court partially granted State Farm's motion to strike. As to the UCL remedies, the court struck Doan's request for restitution but refused to strike his request for injunctive relief; the court also refused to strike the class allegations in the complaint.
In May 2009, Doan filed a second amended complaint based on the same factual allegations. As before, Doan alleged that "instead of considering the actual condition of the lost or destroyed items of personal property, State Farm uses a standard estimating system known as the `Depreciation Guide'" that "arbitrarily calculates a depreciation percentage based on age and type of item, rather than the actual condition of a particular item." Doan further alleged that State Farm "does not provide that document to its insureds or otherwise explain how it calculates depreciation for the insured's loss." By doing so, Doan asserted, "State Farm violated its contracts" and insurance law, specifically section 2051 and its accompanying regulation. Doan also asserted: "State Farm's offer to settle personal property claims for less than the true value of such claims has resulted in damage to Plaintiff and the Class equal to the difference between the true value of the claim and the amount offered by State Farm." In addition to the four previous causes of action—breach of contract, breach of implied covenant, violation of the UCL, and violation of the CLRA—the second amended complaint also contained a new first cause of action for declaratory relief.
State Farm responded with a demurrer addressed to all causes of action of the complaint, with a motion to strike directed at the class allegations, and with a request for judicial notice. Doan filed opposition to the demurrer and motion to strike, to which State Farm replied.
Both parties essentially renewed the arguments they had made earlier in supporting and opposing the first demurrer. Their arguments thus addressed
Following a hearing in late June 2009, the trial court issued its written order on State Farm's demurrer, motion to strike, and request for judicial notice. After granting the request for judicial notice, the court sustained State Farm's demurrer in its entirety, this time without leave to amend. Employing the same language as its earlier order, the court dispatched each of the first four causes of action of the complaint on the ground that "Plaintiff failed to plead sufficient facts showing that he has satisfied the requirement of appraisal of such disputes." The court also sustained the demurrer to the fifth cause of action of the complaint, again using the same language as its earlier order, on the ground that "Plaintiff failed to plead sufficient facts showing that the CLRA applies to insurance." The court denied State Farm's motion to strike as moot.
This appeal followed.
The sole issue on appeal arises from Doan's Insurance Code claims, which underlie the first four causes of action of the second amended complaint.
On appeal from a judgment of dismissal following sustentation of a demurrer, we exercise our independent judgment in determining whether the complaint states a cause of action under any legal theory. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415 [106 Cal.Rptr.2d 271, 21 P.3d 1189]; Buller v. Sutter Health (2008) 160 Cal.App.4th 981, 986 [74 Cal.Rptr.3d 47].) In undertaking our independent review, "we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 [216 Cal.Rptr. 718, 703 P.2d 58]; see Schifando v. City of Los Angeles, supra, 31 Cal.4th at p. 1081.)
We review the court's denial of leave to amend for an abuse of discretion. (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126 [119 Cal.Rptr.2d 709, 45 P.3d 1171]; Buller v. Sutter Health, supra, 160 Cal.App.4th at p. 986.) "It is an abuse of discretion to sustain a demurrer if there is a reasonable probability that the defect can be cured by amendment." (Williams v. Housing Authority of Los Angeles (2004) 121 Cal.App.4th 708, 719 [17 Cal.Rptr.3d 374].) "Nevertheless, where the nature of the plaintiff's claim is clear, and under substantive law no liability exists, a court should deny leave to amend because no amendment could change the result." (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459 [80 Cal.Rptr.2d 329].) Where the issue of substantive law presents a question of statutory interpretation, our review is de novo. (Kramer v. Intuit Inc. (2004) 121 Cal.App.4th 574, 578 [18 Cal.Rptr.3d 412]; see Louise Gardens of Encino Homeowners' Assn., Inc. v. Truck Ins. Exchange, Inc. (2000) 82 Cal.App.4th 648, 657 [98 Cal.Rptr.2d 378] [on appeal from confirmation of insurance appraisal award, court reviews de novo issues that "primarily involve the interpretation of relevant statutes"].)
As provided in the accompanying regulations, any depreciation adjustments "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." (Cal. Code Regs., tit. 10, § 2695.9, subd. (f); see Kirkwood, supra, 193 Cal.App.4th at p. 54.)
The parties dispute whether the statutory appraisal remedy is exclusive. Arguing that it is not, Doan asserts a statutory right to a judicial declaration under Code of Civil Procedure section 1060. In its brief, State Farm argues: "The trial court was well within its discretion to dismiss plaintiff's cause of action for declaratory relief, particularly since it was added only after State Farm's demurrer was sustained, and only in an effort to circumvent section 2071's statutorily mandated procedure for resolving disputes regarding the amount of an insured's loss." The parties' opposing views on this point reflect their larger disagreement over the nature of Doan's claims. According to Doan, the pivotal question underlying his claims "is whether State Farm's conduct violates California law, its insurance contract, and its duties to its policy holders." By contrast, State Farm maintains that these claims are based entirely on Doan's assertion that it "offered him less than the full amount of the actual cash value of his damaged property." State Farm thus offers this argument in its brief: "Because each of plaintiff's causes of action seeks damages based upon the amount of his actual cash value loss, plaintiff must comply with the preliminary and necessary step of resolving the amount of the loss through an appraisal." As we now explain, we agree with Doan. Given the nature of Doan's claims, appraisal is not his exclusive remedy.
An action for declaratory relief is authorized by Code of Civil Procedure section 1060, which provides in pertinent part: "Any person interested under a written instrument, . . . may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court for a declaration of his or her rights and
This provision "must be read together with section 1061, which states: `The court may refuse to [grant declaratory relief] in any case where its declaration or determination is not necessary or proper at the time under all the circumstances.'" (Meyer v. Sprint Spectrum L.P. (2009) 45 Cal.4th 634, 647 [88 Cal.Rptr.3d 859, 200 P.3d 295].) "Admittedly the granting of [declaratory] relief is committed to the sound discretion of the court; but it has been held that where a multiplicity of actions would result unless the parties' rights are first declared and relief given in the same action, it is an abuse of discretion to deny the relief requested." (Bridges v. Cal-Pacific Leasing Co. (1971) 16 Cal.App.3d 118, 127 [93 Cal.Rptr. 796].) "The discretion to refuse to entertain an action in declaratory relief . . . may be exercised only when there is a basis in fact for the conclusion that the declaration is not necessary or proper." (Warren v. Kaiser Foundation Health Plan, Inc. (1975) 47 Cal.App.3d 678, 683 [121 Cal.Rptr. 19]; see also, e.g., In re Claudia E. (2008) 163 Cal.App.4th 627, 634 [77 Cal.Rptr.3d 722].) In other words, "declaratory relief must be granted when the facts justifying that course are sufficiently alleged." (Kessloff v. Pearson (1951) 37 Cal.2d 609, 613 [233 P.2d 899]; see Columbia Pictures Corp. v. DeToth (1945) 26 Cal.2d 753, 762 [161 P.2d 217]; Californians for Native Salmon etc. Assn. v. Department of Forestry, supra, 221 Cal.App.3d at p. 1427.)
In urging a contrary result, State Farm relies on Community Assisting, supra, 92 Cal.App.4th 886. As we now explain, that case does not assist State Farm. As the Community Assisting court stated, "notwithstanding how the
Apart from its lack of discussion concerning declaratory relief, there are other reasons for not applying Community Assisting, supra, 92 Cal.App.4th 886. Most importantly, that case can be distinguished based on the nature of the underlying allegations and their treatment by the court.
In Community Assisting, the plaintiff asserted an unfair business practice claim, which the court rejected for lack of any allegations that the defendants had "interfered with the appraisal process, deceived or coerced the insureds to settle for replacement cost less depreciation, or that they engaged in any acts which might have been a breach of the standard form policy." (Community Assisting, supra, 92 Cal.App.4th at p. 894.)
Here, by contrast, Doan alleges deception—the use of "secret" depreciation schedules "intended to hide State Farm's noncompliance with section 2051 from consumers"—as well as conduct constituting a breach of the policy.
The plaintiff in Community Assisting also asserted an unlawful business practice claim based on the allegation that the defendants were "`adjusting property loss claims on the basis of replacement cost less depreciation rather than on the basis of fair market value, in violation of the mandates set forth in Jefferson . . . .'" (Community Assisting, supra, 92 Cal.App.4th at p. 891, citing Jefferson Ins. Co. v. Superior Court, supra, 3 Cal.3d 398.) Rejecting that claim, the court concluded that "plaintiff's complaint does not state an `unlawful business practice' under the UCL because the simplistic legal formulation of the claim [(1)] mischaracterizes the holding in Jefferson and [(2)] fails to take into consideration the safeguard of the appraisal process provided by the Legislature within Insurance Code section 2071." (Community Assisting, supra, at p. 892.)
The unlawful business practice claim asserted in this case is distinguishable on both of the grounds cited in Community Assisting, supra, 92 Cal.App.4th at
Beyond pleading differences, Doan's substantive claims have yet to be considered by a court, whereas in Community Assisting, the court reached the plaintiff's claims, rejecting them on the merits. (Community Assisting, supra, 92 Cal.App.4th at pp. 891-892, 894.) Here, the stated basis for the trial court's having sustained State Farm's demurrer was Doan's failure to satisfy "the requirement of appraisal of such disputes." The court thus did not reach the substance of Doan's claims.
In light of these distinctions, and because Community Assisting does not address the availability of declaratory relief, that case does not compel the conclusion that the appraisal procedure is exclusive, thereby making declaratory relief unavailable.
The authority to bifurcate and stay raises another question: Which issues should be resolved first? Not surprisingly, the parties offer divergent answers to this question. Doan argues that the statutory and contractual interpretation issues should be taken up first. He characterizes those issues as "preliminary to any valuation of the amount of his loss under the insurance policy." In Doan's view, "until such questions are determined by the superior court, appraisal of the amount of loss would be both futile and premature." State Farm disagrees, urging that the appraisal must be undertaken first. State Farm characterizes the appraisal as "a preliminary process by which the insured must first demonstrate that the insurer paid less than the full amount of the insured's damaged or destroyed property." (Fn. omitted.) In State Farm's view, until it has been established through the appraisal process that plaintiff was paid less than the full amount of his loss, his other claims are "entirely premature and contrary to the law." Moreover, State Farm posits, "unless plaintiff can establish that he suffered damages as a result of State Farm's alleged violation of law . . . it is legally irrelevant that State Farm allegedly failed to comply with sections 2051 or 2695.9[, subdivision] (f)."
As explained below, we conclude that the trial court has discretion to stay the appraisal proceeding pending resolution of the legal questions. In this case, it appears that the trial court was unaware of its discretion to do so: the parties did not discuss Code of Civil Procedure section 1281.2 in their legal memoranda, and the court's ruling cites only section 2071 and Community Assisting, supra, 92 Cal.App.4th 886. For that reason, the order sustaining the demurrer as the first four causes of action of Doan's complaint cannot stand. (See In re Marriage of Gray (2007) 155 Cal.App.4th 504, 515 [66 Cal.Rptr.3d 87] ["trial court's failure to exercise discretion is itself an abuse of discretion"].)
The statutory authority for staying arbitration is found in Code of Civil Procedure section 1281.2. Under the general rule set forth in that provision, "the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists . . .," subject to enumerated exceptions. (Code Civ. Proc., § 1281.2, subd. (a); see Bouton v. USAA Casualty Ins. Co. (2008) 167 Cal.App.4th 412,
The decision whether to stay the appraisal pending resolution of the interpretation issues is committed to the trial court's sound discretion. (See Cronus Investments, Inc. v. Concierge Services, supra, 35 Cal.4th at p. 393.) A number of factors inform that decision, including policy considerations. For example, as relevant here, there is a strong policy favoring arbitration. (See, e.g., Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9 [10 Cal.Rptr.2d 183, 832 P.2d 899]; Valencia v. Smyth (2010) 185 Cal.App.4th 153, 176 [110 Cal.Rptr.3d 180] [doubts resolved in favor of arbitration]; but see Gravillis v. Coldwell Banker Residential Brokerage Co. (2006) 143 Cal.App.4th 761, 772
In that case, the insured (Kirkwood) sued his insurer (California State Automobile Association Inter-Insurance Bureau (CSAA)), asserting causes of action for declaratory relief, breach of contract, bad faith, and violation of the UCL. (Kirkwood, supra, 193 Cal.App.4th at p. 55.) As in this case, the parties disagreed about the nature of their dispute. (Id. at p. 57.) According to CSAA, the pivotal question was whether it had paid Kirkwood "the full amount of the actual cash value for his personal property," which made the dispute "subject to mandatory appraisal under section 2071." (Ibid.) According to Kirkwood, however, the dispute centered on "the meaning of section 2051[, subdivision] (b) and CSAA's obligations thereunder." (Ibid.) For that reason, Kirkwood argued, he could "obtain declaratory relief as to the correct interpretation of section 2051[, subdivision] (b) combined with injunctive relief requiring CSAA to comply with the statute" prior to submitting to the appraisal process. (Ibid.)
Agreeing with the insured, the trial court decided to consider his legal claims first, before ordering an appraisal. (Kirkwood, supra, 193 Cal.App.4th
In affirming the trial court's ruling, the Kirkwood court said this: "We think the trial court was right in its conclusion that an appraisal was not mandated `right now' because the declaratory relief cause of action asked the court to make a declaration that CSAA was misconstruing section 2051[, subdivision] (b). Denying the motion to compel appraisal without prejudice, the court was clear: `I don't see how the plaintiff gets out of an appraisal later.' In other words, given the limited role of an appraisal, the court essentially bifurcated the case, determining that it should first issue a declaration on the statutory issue, `and then have it inform the appraisal when it goes forward.' In short the court ruled that the agreement to arbitrate did not include the threshold contract and statutory interpretation issues, which were beyond the purview of the appraisers. We agree." (Kirkwood, supra, 193 Cal.App.4th at p. 57.) The Kirkwood court also recognized that the earlier decision in "Community Assisting does not mandate an appraisal in the first instance, before the section 2051[, subdivision] (b) interpretation issue is laid to rest." (Id. at p. 60, citing Community Assisting, supra, 92 Cal.App.4th at pp. 893-895.)
The issue before us here is identical to the question decided in Kirkwood: Must a party submit to an appraisal under section 2071 prior to obtaining a judicial determination of the meaning of section 2051? Kirkwood answered that question in the negative, concluding that a decision to stay the appraisal, in order to resolve "the interpretation issues" first, "does not run afoul of section 2071 or the arbitration statutes." (Kirkwood, supra, 193 Cal.App.4th at p. 60.) Although Kirkwood arose in a different procedural posture—a motion to compel appraisal rather than a demurrer—we nevertheless are convinced by its reasoning.
The Kirkwood court offered a two-prong rationale for its conclusion. The premise for each of Kirkwood's analytic prongs is present in this case.
Like Kirkwood, this case presents interpretation issues that are beyond the appraiser's jurisdiction. (Kirkwood, supra, 193 Cal.App.4th at p. 62.) As alleged in Doan's second amended complaint: "An appraiser or panel of appraisers under the standard form insurance contract has no authority to determine whether State Farm's conduct as alleged herein violates section 2051[, subdivision] (b)" and its accompanying regulation. Here, as in Kirkwood, plaintiff "has invoked the court's declaratory relief powers, requesting a declaration as to whether [the insurer's] practice of calculating depreciation based solely on age, and not physical depreciation or actual condition, violates section 2051[, subdivision] (b) and companion regulations. This claim is not subject to appraisal." (Id. at p. 60.)
This first prong of Kirkwood supports bifurcating the issues reserved to the court from those entrusted to the appraiser.
Kirkwood's second prong rests on principles of judicial economy, with the goal of avoiding "duplicative future actions challenging [the insurer's] statutory interpretation as reflected in its adjustment policy." (Kirkwood, supra, 193 Cal.App.4th at p. 63.)
Principles of judicial economy point to the same result in this case as in Kirkwood. (Kirkwood, supra, 193 Cal.App.4th at p. 63.) Doan has alleged on information and belief that "the appraisal process would be cost prohibitive." Doan has also alleged that he "cannot obtain a fair hearing in the appraisal process unless and until State Farm is ordered and enjoined to stop violating section 2051 and section 2695.9[, subdivision] (f)." Finally, based on the insurance appraiser's limited authority, Doan has alleged that "it would be entirely futile for Plaintiff and the Class to submit any of their claims herein
As the Kirkwood court observed: "A judicial declaration that [the insurer's] interpretation of section 2051[, subdivision] (b) and its policy does not violate the statute would be the end of the line: no appraisal would be necessary, and insureds . . . would not be forced to pay for an appraisal. On the other hand, a contrary judicial declaration would inform the appraisal in this case and would have the meritorious effect of staving off future appraisals and litigation based on the same unlawful behavior." (Kirkwood, supra, 193 Cal.App.4th at p. 63.) The same can be said here.
This second prong of Kirkwood supports a stay of the appraisal to allow a judicial determination of the interpretation issues.
We agree with Kirkwood's rationale, and we adopt it here. The Kirkwood analysis is bolstered by explicit statutory authority permitting the discretionary stay of appraisal proceedings pending resolution of issues outside the appraisers' limited jurisdiction. (Code Civ. Proc., § 1281.2, subd. (c).)
Because the trial court apparently relied on a contrary interpretation of section 2071 in sustaining State Farm's demurrer to the first four causes of action of Doan's complaint, the judgment dismissing those causes of action cannot stand.
The judgment of dismissal is reversed in part and affirmed in part. The trial court is directed to (1) enter a new and different order overruling State Farm's demurrer to the first four causes of action of Doan's second amended complaint and sustaining the demurrer to the fifth cause of action only, and (2) exercise its discretion to consider whether and when declaratory relief should be granted. Doan shall have costs on appeal.
Bamattre-Manoukian, Acting P. J., and Lucas, J.,
Additionally, there were other contested issues below, including the suitability of this action for class litigation and the availability of certain remedies in connection with Doan's UCL claims. Because neither party raises those issues in their appellate briefs, we do not address them here. (Tiernan v. Trustees of Cal. State University & Colleges (1982) 33 Cal.3d 211, 216, fn. 4 [188 Cal.Rptr. 115, 655 P.2d 317].)
For purposes of deciding this case, we will operate on the assumption that the appraisal provision is mandatory for disputes within its ambit. As the Insurance Code itself provides, "the word `shall' is mandatory and the word `may' is permissive, unless otherwise apparent from the context." (§ 16; see Caminetti v. Superior Court (1941) 16 Cal.2d 838, 842 [108 P.2d 911].) Case law likewise suggests that the provision is mandatory. (Community Assisting Recovery, Inc. v. Aegis Security Ins. Co. (2001) 92 Cal.App.4th 886, 893 [112 Cal.Rptr.2d 304] (Community Assisting) ["section 2071 requires appraisal for resolution of contested claims"].)