Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
Santa Cruz County Super. Ct. No. CV155631
McAdams, J.
Appellant Pajaro Wall Street Inn, LLC (Pajaro) appeals from a judgment entered after the trial court denied its petition to vacate an award resulting from an appraisal proceeding conducted pursuant to Insurance Code section 2071. The appraisal panel had determined the actual cash value of fire damage to a commercial building that Pajaro owned, as well as the value of Pajaro’s business income loss after the fire. The respondents (AXIS Surplus Insurance Company, Lloyd’s of London, Essex Insurance Company, United States Fire Insurance Company, and Westchester Surplus Lines Insurance Company (hereafter Insurers)) covered the loss.
Unless otherwise stated, all further statutory references are to the Insurance Code.
As a threshold matter, Pajaro argues that the petition should have been granted because Insurers’ response to the petition was not timely. On the merits, Pajaro contends that the panel made improper coverage determinations when it concluded that some of the component parts of the building were not damaged in the fire. Pajaro asserts the appraisal panel exceeded its authority when it based its award on the cost of using certain replacement materials, rather than the cost of using the materials that were used in the original construction and that the panel erred when it determined that the replacement materials were “of like kind and quality” as the original materials as required by section 2071. Pajaro argues that the appraisal award must be vacated because the panel did not determine the value of all of the items that Pajaro submitted for appraisal. Pajaro contends that the appraisers exceeded their authority when they based their award of business income losses on a period of time that was less than the 62-month period that Pajaro claimed. Pajaro argues that the award must be vacated because the umpire and Insurers’ appraiser corrupted the appraisal process. We find no grounds for vacating the award and affirm the judgment.
Facts and Procedural History
I. The Building and the Fire
This appeal arises out of a dispute over the value of damages sustained by Pajaro as the result of a fire that occurred on January 5, 2005, at the Pajaro Wall Street Inn located at 30 West Beach Street, Watsonville, California. The four-story structure was built in 1911 and was originally used as a hotel. Insurers described it as “a Neoclassical Revival building designed by prominent California architect William H. Weeks.” The parties disputed whether the building had been declared to be of historical significance or value prior to the fire. The interior framing and roofing, interior finish carpentry, and window frames in the original building were constructed of clear heart redwood lumber. The interior walls were constructed of wood lath and plaster.
In the early 1970’s, the building was converted to mixed-use, with four commercial units on the ground floor and 52 residential apartment units on the second through fourth floors. Most of the apartment units were “Section 8” housing with government-subsidized rents. At the time of the fire, the commercial tenants included a pool hall/bar, a beauty salon, a photo processing shop, and one other business. The nature of the fourth business is not disclosed in the record.
Section 8 of the United States Housing Act of 1937 (42 U.S.C. § 1437f) sets forth requirements for low income housing assistance under the federal private housing subsidy program.
Pajaro purchased the building in October 2004, about two months before the fire, for approximately $4.5 million. For the purposes of the insurance coverage, the property was valued at approximately $4,320,000.
The fire started in one of the fourth floor apartments. The fire caused significant damage to the upper floors of the building, including the roof. The lower floors suffered primarily water damage from the efforts to extinguish the fire.
II. Insurance Claim
Immediately after the fire, Insurers retained Steve Johnson, an independent adjuster with Crawford Technical Services, to handle the claim. Johnson told Pajaro it was necessary to put a temporary roof on the building to protect it from further damage. Johnson obtained a bid and a contract from Ream Construction (Ream), a local contractor that specializes in fire loss restoration, to build the temporary roof and told Pajaro that Insurers had offered to pay for the temporary roof. By the time of the appraisal hearing in May 2007, Pajaro had not arranged for installation of the temporary roof.
Insurers also asked Ream to estimate the cost of restoring the building to its pre-fire condition. Ream estimated the cost of restoring the building at $3,861,850.56. Ream signed a contract and stood ready, willing and able to do the repairs for that price.
After the fire, Pajaro retained Greenspan and Company (Greenspan), public adjusters, to represent its interests in the insurance claim. Greenspan retained Saylor Consulting Group to prepare an estimate of the cost of repairing the property (hereafter Greenspan estimate). In May 2005, Greenspan estimated the cost of repair at $8,391,689.
Pajaro subsequently dismissed Greenspan and retained a second public adjuster. The second public adjuster relied on the Greenspan estimate. By September 2006, Pajaro had dismissed its second public adjuster and retained Kevin Dawson of Professional Insurance Evaluations as its public adjuster.
After the fire, Pajaro filed an application with the city planning department to increase the number of apartments in the building to 74 units. Its application was approved. According to Dawson, they were to be studio apartments.
III. Request for Appraisal
The parties were unable to agree on the value of the loss and on September 1, 2006, Dawson sent a letter to Insurers demanding an appraisal of Pajaro’s building and business income losses pursuant to section 2071, the standard form fire insurance policy in California, and the terms of Insurers’ policy.
Section 2071, subdivision (a) provides in part: “In case the insured and [the insurer] shall fail to agree as to the actual cash value or the amount of loss, then, on the written request of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of the request. Where the request is accepted, the appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon the umpire, then, on request of the insured or [the insurer], the umpire shall be selected by a judge of a court of record in the state in which the property covered is located.”
In his September 1, 2006 letter, Dawson nominated Keith Charleston as the appraiser for Pajaro. Insurers nominated Gil Malmgren as their appraiser. After Pajaro objected that Malmgren was neither competent nor disinterested, Insurers withdrew Malmgren’s name and nominated Gary Halpin as their appraiser.
Subsequently, the appraisers were unable to agree on an umpire. In November 2006, Pajaro filed a petition to compel appointment of an appraisal umpire. In December 2006, the court granted the petition and appointed Austin Comstock as the umpire. We shall hereafter refer to the appraisers and the umpire jointly as the “appraisal panel,” the “panel,” or the “appraisers.”
IV. The Krueger Estimate
On January 18, 2007, Dawson retained Krueger Brothers Builders (Krueger) of San Francisco to investigate the loss and prepare another estimate to repair the building using “as-built materials.” Krueger submitted its proposal for the restoration work to Pajaro on February 28, 2007. Krueger’s proposal was based in part on the Greenspan estimate and work done by design professionals hired by Pajaro. According to one defense expert, the Krueger estimate was not an independent estimate; Krueger took the two-year-old Greenspan estimate, escalated it by 10.8 percent and added items that were not in the Greenspan estimate, some of which were related to the planned conversion to 74 units. Krueger estimated the cost of reconstruction as $16,390,831.
V. Appraisal Hearing
The appraisal proceeding was scheduled for May 14 through May 17, 2007. On May 1, 2007, the parties exchanged documents and submitted their exhibits to the panel for review. Pajaro’s exhibits included a 13-page statement of loss, which was based on the Krueger proposal, and a proposed form of award, which followed the format of the statement of loss. Insurers claim that Dawson did not disclose the Krueger proposal to them until the time of the document exchange, two weeks before the appraisal hearing.
Presumably this was a revised statement of loss. The record does not contain a copy of Pajaro’s original statement of loss, which Pajaro was required to submit within 60 days of the fire under section 2071 and 90 days of the fire under the terms of Insurers’ policy.
In its statement of loss, Pajaro claimed:
Professional fees to establish amount payable: $48,408.20
Loss of Building (actual cash value): $15,912,512.00
Pajaro’s Statement of Loss calculated the “replacement cost” of the building as $16,225,120. The amount claimed as “actual cash value” included some deductions for “depreciation.”
Business Income (actual cash value): $3,596,854.00
Total: $19,557,774.20
Pajaro’s business income loss claim covered the 62-month period from January 5, 2005 (the date of the fire), until March 4, 2010. It was based on the assumption that Insurers would pay the appraisal award by July 5, 2007, and that it would take 32 months from that date to complete the construction and to achieve a reasonable rate of occupancy.
Insurers submitted their exhibits, a proposed appraisal award form, and an appraisal brief to the panel. Insurers relied on the Ream estimate to define the scope of the loss. In their brief, Insurers argued that “with the exercise of due diligence and dispatch,” it should have taken 24 months from the date of the loss to rebuild, repair or replace the damaged property. They argued that Pajaro was not entitled to business income loss for the two-year period that the building had been vacant since the loss, that there was no authority that supported awarding business income losses while the parties awaited the appraisal award, and that part of Pajaro’s 32-month reconstruction estimate included time that was necessary to convert the property to Pajaro’s proposed 74-unit residential use. Insurers also argued that Pajaro inflated the value of the rental income.
The parties’ proposed appraisal award forms set forth categories of items to be evaluated by the appraisers, but were blank with regard to the amounts to be awarded. The parties’ appraisal award forms were different from one another. Pajaro’s proposed award form followed the format of its statement of loss and asked the panel to appraise the building’s structures, systems, and constructions costs in over 200 line items. Insurers’ award form was shorter; it used 92 lines to describe the building’s structures, systems, and construction costs. However, there was some repetition or overlap, with the Insurers asking the panel to appraise some categories of items for both “like kind and quality” and “building code upgrades.” Under “Rough Carpentry,” the Insurers gave the panel the option of appraising “conventional framing” or “redwood framing where applicable, if appropriate.” Under “Finishes,” the Insurers gave the panel the option of appraising plaster over sheetrock or wood lath and plaster.
According to Dawson’s declaration in support of the petition to vacate, there were 227 line items on the proposed form of award. However, some of the lines he counted appear to be subheadings. According to Pajaro’s opening brief, there were 277 line items. For the purpose of our analysis it is sufficient to note that there were over 200 line items on Pajaro’s proposed form of award.
The appraisal panel inspected the building on May 11, 2007.
The four-day hearing took place as scheduled. Pajaro was represented at the appraisal hearing by its public adjuster, Dawson. Abe Novin, the managing representative of Pajaro, did not appear at the hearing. Insurers were represented at the appraisal hearing by their attorney, Larry Arnold. Johnson, Insurers’ independent adjuster, also attended the hearing.
On the first day of the hearing, Dawson presented a memorandum to the panel, in which he complained that Insurers’ brief and award form placed multiple coverage issues before the panel. He stated that the Insurers’ award form “creates the opportunity for the appraisal panel to exceed their authority by interpreting coverage, determining the existence or non-existence of damage, cause of loss or damage and invites the appraisers to find alternate causes of the loss.” He stated that Insurers sought “to substitute material and construction techniques consistent with their interpretation of the replacement cost provision of the … policy.”
During the hearing, Dawson testified regarding Pajaro’s exhibits. He did not present any witnesses. Throughout the proceeding, Dawson repeatedly stated that Pajaro’s claim was based on the actual cash value of the building and business income losses at the time of the fire. He told the panel “[W]e are not making a replacement cost claim at this time or any time in the future[,] ever. We will never make a replacement cost claim.” He also told the panel Pajaro was claiming building code upgrades, since they are covered by the policy.
Although we have the full transcript of the appraisal hearing, the record on appeal does not contain all of the exhibits that were presented to the panel.
Insurers presented documentary evidence and the testimony of several witnesses, including Kent Sasaki (a structural engineer), Daniel O’Brien (a mechanical engineer specializing in air conditioning, lighting, plumbing, and ventilation design), Thomas Pinkerton (an electrical contractor), Rafael Adame (the building official for Watsonville), Hamid Arabzadeh (a certified industrial hygienist), Charles Flannery (an architect who specializes in damage assessment), adjuster Johnson, Thomas Sullivan (the senior estimator at Ream), Tom Boyd (a general contractor/cost estimator), Chris Carneghi (a real estate appraiser), Dixon Grier (a certified public accountant), and John Kidd (a construction management consultant with Young and Associates (hereafter sometimes Young)).
The parties and the panel spent considerable time at the beginning of the hearing discussing the proposed appraisal award forms. On May 15, 2007, the second day of the hearing, Umpire Comstock met with the court in chambers to address issues related to the proper form of the award. Pajaro’s counsel, Insurers’ counsel, Dawson, and Johnson were present. At that time, Pajaro objected to Insurers’ form of award and objected that Insurers were improperly seeking to have the panel determine coverage issues rather than the actual cash value of the loss. The panel and the parties returned to court to meet with the judge on May 16, 2007. The results of the court proceedings are not evident from the record.
Defense expert Kidd prepared an exhibit that compared the dollar values and the scope of work in the construction estimates and attempted to explain the differences between the estimates (hereafter the Kidd analysis). Kidd testified that the Ream estimate proposed returning the building to its pre-loss condition without regard for any code upgrades. After Ream prepared its estimate, Kidd (who was involved with the project from its inception) determined that the repair project would require some code upgrades consistent with the requirements of the California Historic Building Code. In his analysis, Kidd set forth Young’s estimate for the cost of code upgrades per the Historic Building Code and included a column that combined the Ream and Young estimates.
At the conclusion of the appraisal hearing, the umpire directed Dawson and Arnold to attempt to reach an agreement with respect to the form of the appraisal award. He suggested the award form be based on the Kidd analysis. The parties were unable to agree on the form of the award. At the end of May 2007, both parties submitted revised appraisal award forms to the panel.
VI. Appraisal Award
Thereafter, Appraiser Charleston and Appraiser Halpin submitted their appraisals on different forms to the umpire. Apparently they did not agree on the value of the loss. The umpire agreed with the form and content of the award prepared by Halpin. On August 2, 2007, the panel issued an award in the following amounts, which was signed by Halpin and Comstock:
Description
Actual Cash Value of Loss
Code Upgrades
Building
$4,716,784.17
$810,218.24
Professional fees to establish loss
$48,408.20
Time to repair
16 months
2 months
Loss of rental income from 1/5/05 to 1/4/07 (24months)
$718,966.00
Loss of rents during extended period of indemnity (12month maximum)
$116,925.00
As proposed by the parties, the award stated: “Attached to this award is a breakdown which sets forth the above award in detail and is made without consideration of any deductible amount or any coverage or other provision of the above policy which might affect the amount of the insurer’s liability thereunder. This award does not include any emergency services costs incurred, any amounts paid or under consideration.” For the most part, the panel’s breakdown followed the format of the Kidd analysis in terms of the categories of repair work to be evaluated.
VII. Pajaro’s Request to Correct the Award.
On August 16, 2007, Pajaro sent the panel a written request to correct the appraisal award. It objected that the award did not “appraise the claim as presented by [Pajaro], and thus mistakenly described the property” because it failed to state a value for each line item of Pajaro’s claim. Pajaro complained that approximately 190 items submitted for appraisal had not been valued in the award. Pajaro argued that by adopting the values of the different and lesser materials proposed by Ream, the panelists did not appraise the actual cash value of its loss. Pajaro also complained that the panel had improperly valued some of its losses at zero, that the award should not include a finding regarding the time to repair, that the business income loss should be based on the full time period claimed by Pajaro, and that the award did not describe the Insurers or Pajaro completely and accurately.
The panel did not respond to Pajaro’s request to correct the award within 30 days and the request was therefore deemed denied. (Code Civ. Proc., § 1284.)
VIII. Petition to Vacate Appraisal Award
On September 18, 2007, Pajaro filed a petition to vacate or correct the appraisal award. Pajaro argued that the award was defective because the panel did not appraise its entire claim. It argued that the panel erred when it failed to appraise portions of its claim, including metals, stonework, concrete installation, streets and earthwork, and when it limited the business income loss to 24 months. Pajaro argued that the panel made improper coverage determinations when it awarded zero for some of the building components and when it based its award on different and inferior building materials. In particular, Pajaro argued that the panel relied on the Ream bid, which used Douglas fir in place of the original redwood in the framing and the windows and plaster over gypsum drywall in place of the original wood lath and plaster. Pajaro argued that the panel based its award in part on an improper coverage determination that the property should be valued based on the “Historical Replacement Cost” provision of the policy and improper coverage arguments regarding causation. Pajaro argued that the panel erred in determining a time to repair that was different from the 62 months it had claimed, that the award was procured by corruption and undue means, and that its rights were prejudiced by the misconduct of the umpire, who adopted the improper coverage arguments and appraisal form submitted by Insurers. Finally, Pajaro argued that the award did not properly identify the insured, the insurers, or the applicable insurance policies. Pajaro asked the court to order rehearing before the same appraisal panel.
The Historical Replacement Cost provision of the policy provides: “With respect to buildings which are declared by a local, state or federal authority to be of historical significance or of historical value, such rebuilding, repairing or replacement shall be with material, workmanship processes, technologies and designs publicly abailable [sic]within the current marketplace and shall not include the cost of creating outdated, archaic or antiquated materials, workmanship, processes, technologies or design.”
In its petition, Pajaro stated that it had claimed 74 months of business income loss, covering the period from January 5, 2005 (the date of the fire), until March 5, 2011. However, its statement of loss only covered the 62-month period from January 5, 2005, until March 5, 2010.
Insurers opposed the petition, arguing that the panel properly determined the actual cash value of the loss, that there was no evidence that the panel had decided any coverage issues, and that the panel appropriately determined the time for repair and the business income losses, which Pajaro had expressly submitted to appraisal. Insurers argued that Pajaro had not established that the award was procured by corruption or undue means and that there was insufficient evidence that Insurers made improper arguments that the panel did not adopt. Finally, it asserted there were no grounds for correcting the parties’ names on the award.
On December 21, 2007, the court denied the petition to vacate the award without making any specific factual findings, but granted the request to correct the names of the parties on the award. On March 7, 2008, the court entered judgment pursuant to the terms of the corrected appraisal award. In accordance with Louise Gardens of Encino Homeowners’ Assn., Inc. v. Truck Ins. Exchange (2000) 82 Cal.App.4th 648, 656, 661, the judgment stated, “This is not a money judgment and only confirms the matters determined by appraisal.” Pajaro appeals.
Discussion
I. Timeliness of Insurers’ Opposition to Petition to Vacate Award
Pajaro contends that the court should have granted its petition to vacate the appraisal award because Insurers’ response to the petition was filed one day late.
On September 18, 2007, Pajaro served the petition to vacate via overnight mail on both Steven Soltman (the attorney who represented Insurers on the petition to compel appointment of the umpire) and Arnold (the attorney who represented Insurers at the appraisal hearing). We shall assume, without deciding, that service of the petition to vacate via overnight mail was appropriate in this case. (See Code Civ. Proc., § 1290.4, subd. (c).)
Insurers’ response was due “within 10 days after service of the petition” (Code Civ. Proc., § 1290.6, italics added), which would have been September 28, 2007. Since the time to respond was triggered by service of the petition and the petition was served via overnight mail, the time to respond was extended “by two court days.” (Code Civ. Proc., § 1013, subd. (c) [“any right … to do any act or make any response within any period or on a date certain after the service of the document … shall be extended by two court days,” italics added]; Camper v. Workers Compensation Appeals Board (1992) 3 Cal.4th 679, 684-685.) Two court days after Friday, September 28, 2007, was Tuesday, October 2, 2007. Thus, Insurers’ response to the petition, which was filed and served on October 2, 2007, was timely.
In light of our conclusion, we shall not reach Insurers’ contention that the response was not late because the petition was not served properly.
II. Standard of Review
It is well settled that an agreement in an insurance policy to submit a claim to the appraisal process is an “agreement” within the meaning of Code of Civil Procedure section 1280, subdivision (a), and is therefore considered to be an arbitration agreement subject to the statutory contractual arbitration law. (Lambert v. Carneghi (2008) 158 Cal.App.4th 1120, 1129-1130; Kacha v. Allstate Insurance Company (2006) 140 Cal.App.4th 1023, 1031 (Kacha) [“Appraisal hearings are a form of arbitration and are generally subject to rules governing arbitration”].)
Judicial review of arbitration and appraisal awards is circumscribed. (Kacha, supra, 140 Cal.App.4th at p. 1031.) A court may not review the merits of the controversy or the sufficiency of the evidence supporting the award. (Ibid.) The grounds for vacating an arbitration or appraisal award are set forth in Code of Civil Procedure section 1286.2, which provides in relevant part: “the court shall vacate the award if the court determines any of the following: [¶] (1) The award was procured by corruption, fraud or other undue means. [¶] (2) There was corruption in any of the arbitrators. [¶] … [¶] (4) The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.”
Although the proceedings are similar, appraisers generally have more limited powers than arbitrators. (Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, 402 (Jefferson).) “Generally an arbitration proceeding encompasses questions both of fact and of law; hence, ‘the merits of the award, either on questions of law or fact, are generally not subject to review.’ [Citation.] In contrast, appraisers have the power only to determine a specific question of fact, ‘namely, the actual cash value of the insured [item].’ ” (Safeco Ins. Co. v. Sharma (1984) 160 Cal.App.3d 1060, 1063 (Safeco), citing Jefferson, at p. 402.) “ ‘The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration.’ ” (Jefferson,at p. 403.) “Accordingly, the merits of an appraisal award on the question of fact presented, i.e., the value or amount of loss, will not be reviewed on appeal. However, this court may examine the record to ascertain what the appraisers considered the factual issue to be, in order to determine whether they exceeded their powers.” (Safeco, at pp. 1063-1064, citing Jefferson, at p. 403.)
“We review the trial court’s ruling on a challenge to an appraisal award under a de novo standard, drawing every reasonable inference to support the award. [Citation.] To the extent the court’s ruling rests on issues of disputed fact, however, we apply the substantial evidence test. [Citation.] ‘ “[I]f the word ‘substantial’ means anything at all, it clearly implies that such evidence must be of ponderable legal significance. Obviously the word cannot be deemed synonymous with ‘any’ evidence. It must be reasonable in nature, credible, and of solid value; it must actually be ‘substantial’ proof of the essentials which the law requires in a particular case.” ’ ” (Kacha, supra, 140 Cal.App.4th at p. 1031.)
III. General Rules Regarding Appraisals
Section 2071 sets forth the standard form fire insurance policy. Section 2070 provides that all fire insurance polices must be on the standard form. However, a policy that covers “the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy … provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.” (§ 2070.)
The standard form fire insurance policy provides coverage “to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair, and without compensation for loss resulting from interruption of business or manufacture….” (Ins. Code, § 2071, subd. (a), italics added.) The phrase “actual cash value” as used in section 2071 “is synonymous with ‘fair market value.’ ” (Jefferson, supra, 3 Cal.3d at p. 402.) It means the price that a willing buyer would pay a willing seller. It does not mean replacement cost less depreciation. (Ibid.; Cheeks v. California Fair Plan Assn. (1998) 61 Cal.App.4th 423.)
The policy in this case provided replacement cost coverage instead of the standard form policy coverage based on actual cash value. It provided that the value of the loss “shall be … based on the cost of repairing or replacing (whichever is the lesser amount), at the time of the loss without deduction for depreciation with another building … of comparable material and quality for the same use or occupancy.” The policy also provided that the “insured may [¶] … [¶] submit [a] claim based on the actual cash value of the property lost or damaged until the actual repair … has been completed” and provided that the insured could thereafter claim the “additional coverage which replacement cost provides,” provided it had given timely notice of its intent to pursue a replacement cost claim. Finally, it provided: “If the insured … does not repair or replace the property within two (2) years from the date of loss, the basis of valuation will revert to the actual cash value.” The policy defined “actual cash value” as “the market value of the property at the time and place of the loss or damage with proper deduction for depreciation.” Throughout the proceedings, Dawson stated that Pajaro was pursuing an actual cash value claim.
As the court explained in Everett v. State Farm General Insurance Company (2008) 162 Cal.App.4th 649, 658, “ ‘actual cash value’ coverage” is “oftentimes … insufficient to repair or replace the property.” Thus, replacement cost coverage “ ‘ “is intended to compensate the insured for the shortfall in coverage the results from rebuilding under a policy that pays only for actual cash value.” ’ ” (Ibid., citing Conway v. Farmers Home Mut. Ins. Co. (1994) 26 Cal.App.4th 1185, 1189.) As we have noted, the insurer may provide coverage that is “equivalent to or more favorable to the insured than that contained in” the standard form fire insurance policy. (§ 2070.)
Under the heading “Requirements in case of loss,” section 2071 provides: “The insured shall give written notice to [the insurer] of any loss without unnecessary delay, protect the property from further damage, forthwith separate the damaged and undamaged personal property, put it in the best possible order, furnish a complete inventory of the destroyed, damaged and undamaged property, showing in detail quantities, costs, actual cash value and amount of loss claimed; and within 60 days after the loss, …, the insured shall render to [the insurer] a proof of loss, signed and sworn to by the insured, stating the knowledge and belief of the insured as to the following: the time and origin of the loss, the interest of the insured and of all others in the property, the actual cash value of each item thereof and the amount of loss thereto….” (§ 2071, subd. (a), italics added.)
A fire insurance policy must provide for an appraisal when the insured and the insurer fail to agree on “the actual cash value or the amount of loss.” (§ 2071, subd. (a), italics added.) The appraisal provision of the statute provides that the “appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with [the insurer] shall determine the amount of actual cash value and loss.” (§ 2071, subd. (a), italics added.) The policy at issue here contains an appraisal provision with language that is substantially similar to the statutory language and the parties do not dispute the applicability of the appraisal provision in section 2071.
The appraisal provision in the policy provides for an appraisal when the parties “fail to agree on the amount of loss” and provides that “the appraisers shall appraise the loss stating separately the value at the time of loss and the amount of loss.”
Under the express language of section 2071, and in particular the language italicized above, the appraisers are charged with determining two facts: (1) the actual cash value of each item and (2) the amount of loss to each item.
As noted above, “ ‘[t]he function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions of the policy.’ ” (Jefferson, supra, 3 Cal.3d at p. 403; Figi v. New Hampshire Ins. Co. (1980) 108 Cal.App.3d 772, 777 [appraiser only evaluates the loss and “does not consider questions of policy, interpretation or scope of coverage”].) “When an appraisal panel exceeds its powers by deciding coverage issues, and the award cannot be corrected without affecting the merits of the decision, the decision must be vacated.” (Kacha, supra, 140 Cal.App.4th at p. 1033, citing Safeco, supra, 160 Cal.App.3d at p. 1066.)
Case law provides examples of appraisals that crossed the line between the proper determination of the value of damaged property and an improper coverage determination. As explained below, the courts in Safeco and Kacha held that the appraisers exceeded their powers by making improper coverage determinations.
In Safeco, the court observed that determinations of the quality or the condition of an item are “factor[s] necessarily involved in an appraisal of value.” (Safeco, supra, 160 Cal.App.3d at pp. 1064, 1066.) However, an appraisal panel is not empowered to determine the identity of the item, i.e., whether an insured lost what he or she claims to have lost or something different. (Id. at pp. 1065-1066.) The court explained: “When an insurer disputes an insured’s description … of the lost or destroyed property, it necessarily claims the insured misrepresented -- whether innocently or intentionally -- the character of the loss in filing a proof of loss. In turn, this claim opens the door to allegations of fraud. Were an insurer permitted to include the former issue within the scope of an appraisal, a determination in the insurer’s favor would foreclose a court from determining one essential element of fraud in any subsequent litigation. Certainly, an insurer is free to litigate whether the insured has misrepresented what he [or she] lost; but it is beyond the scope of an appraisal.” (Id. at p. 1066.) The court held that the appraisal panel exceeded the scope of its powers when it determined that the “ ‘set of 36 Rajput miniature paintings, Bundi School, India, late 18th century’ ” that the insured submitted for appraisal was “unmatched (i.e., from various schools).” (Id. at pp. 1062, 1064.)
Kacha involved damages to a single family home and personal property as a result of fire. (Kacha, supra, 140 Cal.App.4th at p. 1027.) The appraisal award included amounts of zero for numerous items. (Id. at p. 1029.) The court concluded that the panel exceeded its authority by making some coverage determinations and ordered that the award be vacated. (Id. at pp. 1036, 1038.) The court gave two examples based on the insurer’s arguments at the appraisal hearing, both of which involved determinations of the cause of the damage. The insurer had argued: (1) that the deck was not damaged by the fire and that the unevenness of the deck was caused by improperly set and unsecured joists and (2) that the damage to the front door preexisted the fire and that the discoloration of the door “ ‘could have been caused by sunlight, weather and/or a breakdown of the factory applied finish.’ ” (Id. at p. 1036.) The court held that by awarding zero damages for these items, the “appraisal panel made at least some coverage determinations, thereby exceeding its authority.” (Id. at p. 1036.)
Dawson was the public adjuster in Kacha and Charleston was nominated as the insured’s appraiser in that case. (Kacha, supra, 140 Cal.App.4th at p. 1027.)
IV. Analysis
Before we address Pajaro’s arguments, we briefly examine the nature of the loss and Pajaro’s insurance claim. There were three general components to the claim: (1) damage to the building, (2) loss of business income, and (3) professional fees to establish the loss.
There is no issue on appeal with regard to this third component of the claim. Although we do not have a complete copy of the insurance policy in the record, since this is undisputed, we assume the policy covered such fees.
With regard to the damage to the building, section 2071 provides for coverage “to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss.” (Italics added.) As we have noted, “actual cash value” in this statute means fair market value. (Jefferson, supra, 3 Cal.3d at p. 402.) Although Dawson repeatedly stated that Pajaro’s claim was based on the actual cash value of the building, which he defined as “the condition of the building at or a day before the loss,” the record before us does not contain any real estate appraisals or other evidence of the fair market value of the building at the time of the fire. The only evidence of the market value of the building prior to the fire is the statement in the Insurer’s appraisal brief that Pajaro purchased the building for “approximately” $4,500,000 two months before the fire. Instead, both sides relied on contractor estimates of the cost to repair the building. Since the parties relied on repair estimates to define the loss, the panel’s award was necessarily based on the repair estimates.
A. Appraisal of Damage to Building
Pajaro argues that rather than value the building loss, the panel made improper coverage determinations when it concluded that some of the component parts of the building were not damaged in the fire. Pajaro contends the appraisal panel exceeded its authority when it based its award on the cost of using certain replacement materials, rather than the cost of using the materials that were used in the original construction and that the panel erred when it determined that the replacement materials were “of like kind and quality” as the original materials. Pajaro also contends that the appraisal award must be vacated because the panel did not determine the value of all of the items that Pajaro submitted for appraisal.
1. Appraisal Panel Did Not Exceed Its Authority When It Concluded That Some of the Items Claimed Were Not Damaged
In its first argument, Pajaro contends that the panel made improper coverage determinations when it concluded that some of the component parts of the building were not damaged in the fire. This contention has two parts. First, Pajaro argues that the panel made improper coverage determinations when it awarded zero damages for: (1) street and earthwork, (2) structural enhancement, (3) metals, (4) access doors, (5) storefronts, and (6) electronic security and safety. Second, it contends the panel made improper coverage determinations when, although it awarded damages in the following categories, it concluded that some of the wood windows, steel windows, cabinets, electrical systems, plumbing, and finish carpentry were not damaged by the fire. Citing Kacha and Safeco, Pajaro argues that the panel’s conclusion that certain items were not damaged in the fire is an impermissible coverage determination.
Pajaro includes carpentry in this group. But the panel awarded $208,830 for rough carpentry and $304,537 for finish carpentry, plus $26,550 for rough carpentry code upgrades. The panel awarded zero for finish carpentry code upgrades. But it also awarded zero for code upgrades in several other categories that Pajaro does not challenge. The panel awarded Pajaro $22,456 for electronic safety and security as a code upgrade. It therefore did not value this line item at zero as Pajaro alleges.
Pajaro relies on the following statement in Halpin’s declaration in opposition to the petition to vacate the award: “I concluded some items for which Pajaro made claim had not been damaged, and accordingly assigned zero value for those items. I never concluded any items were excluded by the policy or that they had suffered damage by a cause other than the fire. I simply concluded that they had suffered no damage.” In the same paragraph, Halpin stated, “I rendered my decisions making the assumption that all claimed items that were damaged had been damaged by the fire.” In our view, Pajaro’s reliance on this evidence is misplaced, since Halpin states that he did not make any coverage determinations.
Without much discussion or analysis, Pajaro also relies on the Kidd analysis, which compared the dollar values in the three construction estimates and explained the differences between the estimates, to support his contention. According to Kidd, Ream and Greenspan had agreed that only 80 windows were damaged and needed replacing, while Krueger’s estimate included the cost of replacing all 199 windows, which was required for the planned conversion to 74 units but was not necessary for the restoration of the building to its pre-fire condition. Under steel windows and storefronts, Kidd explained that “Greenspan simply made a mistake in the count of damaged steel windows. There were only 8 instead of 36” and that Greenspan and Ream agreed that “[s]torefronts were not damaged in the loss.” Under street and earthwork and structural enhancement, Kidd stated that these items were not required to return the building to its pre-loss condition. Under metals, Kidd stated that no metals work was required, except for two items that were included under other line items. Kidd noted that the Ream estimate included amounts for access doors and stated it was not clear what the additional amounts bid by Krueger in this category were for. With regard to cabinets, the difference between the Ream and Greenspan estimates was that Ream planned “to protect and refinish the undamaged bar and decorative wood bench instead of replacing them.” With regard to electrical, Greenspan had estimated the cost of a new main switchboard, even though the original was undamaged. Under finish carpentry, Kidd noted that most of the wood trim in the lobby and stairwells was undamaged. There were no comments indicating that any of the plumbing was undamaged.
There was evidence that shortly before Greenspan was dismissed, Greenspan and Ream were close to agreeing on the scope of the repair, even though their prices were different.
Our review of the record persuades us that the panel did not make improper coverage determinations when it concluded that some of the building components were undamaged and awarded zero in repair costs in some categories and lower figures than what Pajaro claimed in other categories. First, the building was not a total loss. Although the roof was completely destroyed and there was significant damage to the fourth floor, portions of the lower floors were undamaged. Some areas, although undamaged by fire, had smoke or water damage. Many of the building components were salvageable. As we noted previously, under the express language of section 2071, the panel was empowered to determine the actual cash value of the damaged items, as well as the amount of loss or damage thereto. Thus, it was within the panel’s authority to determine that some of the building components were not damaged. For example, Pajaro claimed the cost of repairing all 199 wood windows. Insurers argued that only 80 windows needed to be repaired. It was within the panel’s authority to resolve this factual dispute, to determine the “amount of the loss,” and consequently the number of windows that need to be repaired.
Second, as the court observed in Safeco, determinations regarding the quality or the condition of an item are “factor[s] necessarily involved in an appraisal of value.” (Safeco, supra, 160 Cal.App.3d at pp. 1064, 1066.) The determination that a component part of the building is undamaged is a determination regarding its condition. It was well within the appraisers’ authority to determine that an item was not damaged and conclude that it need not be repaired or replaced.
Third, the determination that certain items merited a zero award because they were undamaged is distinguishable from the panel’s improper coverage determination in Kacha. In Kacha, the panel awarded zero damages after it determined that the items, although damaged, were not damaged in the fire. The appellate court held that it made an impermissible coverage determination regarding the cause of the damage. (Kacha, supra, 140 Cal.App.4th at pp. 1035-1036.) Here, the panel made a factual finding that certain items that were included in Pajaro’s statement of loss were not damaged and did not require repair. Logically, the panel made no finding about what caused the lack of damage.
Finally, the panel’s conclusion that certain items were not damaged in the fire is also distinguishable from the panel decision in Safeco, where the appraisal panel determined that the items that the insured claimed to have lost (a matched set of Indian paintings) were unmatched and not what the insured claimed to have owned. In Safeco, the panel was making a determination regarding the nature of the items prior to the loss. In this case, the panel did not conclude that Pajaro had misrepresented the nature of the building prior to the loss.
For these reasons, we reject Pajaro’s assertion that the panel exceeded it authority and made impermissible coverage determinations when it made factual findings that portions of the building were not damaged in the fire and did not need to be repaired to return the building to its pre-loss condition.
2. Appraisal Panel Did Not Err When It Determined That Replacement Materials Were of “Like Kind and Quality” as the Original Materials
Pajaro contends the appraisal panel exceeded its authority when it based its award on the cost of using replacement materials to repair certain building components, rather than the cost of using the materials that were originally used to construct those components. In particular, Pajaro claims the panel exceeded its authority: (1) when it based its award on the Ream estimate of the cost of repairing the roof framing and the interior framing using Douglas fir, rather than the clear heart redwood that was used in the original construction; (2) when it based its award on the Ream estimate for repairing or replacing the wooden windows using windows made of pine rather than the painted redwood windows that were used in the original construction; and (3) when it based its award on the Ream’s estimated cost of installing plaster over gypsum board in place of the original wood lath and plaster. Pajaro contends these findings do not meet the requirement of section 2071 that the appraisal award be based on the “cost to repair or replace the property with material of like kind and quality.”
According to the Kidd analysis, the difference in cost between using redwood and using Douglas fir for the rough framing, including the roof structures, was $662,277; the difference in cost between using windows made of redwood and windows made of pine was $320,651; and the difference in cost between using wood lath and plaster and using plaster over gypsum on the interior walls was $1,328,243.
Ream estimated $208,830 for rough carpentry and roof structures using Douglas fir; the Krueger estimate included $871,107 for this line item, based on using redwood. Ream estimated $91,060 for wood windows; Krueger estimated $732,362 for the same line item. The $641,302 difference in the estimates for wooden windows was based on multiple factors; Kidd opined that $320,651 of the difference was due to the use of different materials. Ream estimated $808,427 for two coats of veneer plaster on sheetrock (gypsum) lath; Krueger estimated $2,136,670 for wood lath and plaster.
Section 2051, subdivision (a) provides: “(a) Under an open policy, the measure of indemnity in fire insurance is the expense to the insured of replacing the thing lost or injured in its condition at the time of the injury, the expense being computed as of the time of the commencement of the fire.”
“An open policy is one in which the value of the subject matter is not agreed upon, but is left to be ascertained in case of loss.” (§ 411.)
Section 2071, subdivision (a) provides that the property is insured “to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair….” (Italics added.)
The replacement cost provision in the policy at issue here provided that the value of the loss “shall be … based on the cost of repairing or replacing (whichever is the lesser amount), at the time of loss without deduction for depreciation with another building … of comparable material and quality for the same use or occupancy.” (Italics added.)
Pajaro argues that the phrase “comparable material and quality” from the policy is synonymous with “material of like kind and quality” in the statute and we agree with that construction. (See discussion of definition of “like” below.) Pajaro also argues that this language from the standard form policy and the policy at issue here required Insurers to reconstruct the building using the identical materials that were in place at the time of the fire: redwood in the framing and painted windows and wood lath and plaster on the walls. We disagree with this construction.
“In statutory construction cases, our fundamental task is to ascertain the intent of the lawmakers so as to effectuate the purpose of the statute. [Citation.] ‘We begin by examining the statutory language, giving the words their usual and ordinary meaning.’ [Citations.] If the terms of the statute are unambiguous, we presume the lawmakers meant what they said, and the plain meaning of the language governs. [Citations.] If there is ambiguity, however, we may then look to extrinsic sources, including the ostensible objects to be achieved and the legislative history. [Citation.] In such cases, we ‘ “ ‘select the construction that comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general purpose of the statute, and avoid an interpretation that would lead to absurd consequences.’ ” ’ ” (Estate of Griswold (2001) 25 Cal.4th 904, 910-911, quoting Day v. City of Fontana (2001) 25 Cal.4th 268, 272.)
Section 2071 requires that the building be repaired or replaced “with material of like kind and quality.” The parties do not cite any cases that discuss the meaning of the phrase “like kind and quality” in the context of section 2071, other than McCorkle v. State Farm Ins. Co. (1990) 221 Cal.App.3d 610 (McCorkle), which we discuss in detail below. Black’s Law Dictionary does not define the phrase “like kind and quality”; however, it does define the word “like” as “equal in quantity, quality, or degree; corresponding exactly” and “similar or substantially similar.” (Black’s Law Dict. (8th ed. 2004) p. 947, col. 1.) Merriam-Webster’s Collegiate Dictionary (10th ed. 1999) page 674 defines “like” as “the same or nearly the same (as in appearance, character, or quantity),” “having the characteristics of: similar to,” and “comparable to: approximating.” Under both definitions, “like” can be either identical to the original or similar to the original. In our view, these definitions do not require that the exact same material be used to repair the damaged structure, only that the material be similar in kind and quality.
For a comprehensive discussion of the phrase “like kind and quality” in the context of automobile insurance and replacement auto parts as relevant to the issue of class certification, see Lebrilla v. Farmers Group, Inc. (2004) 119 Cal.App.4th 1070, 1081-1084.
In this case, Ream proposed using Douglas fir, not redwood, for the framing and pine, not redwood, for the windows. Douglas fir, pine, and redwood are materials of like kind; they are types of wood used in construction. In addition, there was evidence that the Douglas fir that Ream proposed to use was of like quality to the redwood used in the original construction in terms of strength and its use as a structural component. Ream estimator Sullivan testified that he used the specifications provided by the structural engineers to bid a roof of “comparable quality” and that in some areas he proposed using larger dimension Douglas fir to compensate for the differences between Douglas fir and redwood in the framing. Kidd opined that the strength of Douglas fir in the enhanced size would “exceed the strength of the damaged full dimensioned Redwood.” There was no evidence that the redwood was exposed or visible or that it contributed anything to the building in terms of aesthetic, as opposed to structural, value. It was used for framing in the roof structures and walls; the redwood windows were painted. Moreover, there was evidence that Douglas fir was used to frame the interior walls that were added in 1971 when the building was converted from a hotel to apartments. With regard to those portions of the structure, the material proposed by Ream was identical to what was in place at the time of the fire. Finally, Ream proposed using windows made of “ ‘paint grade mill wood of equal or greater durability commonly used today,’ ” for the painted wood windows.
Wood lath and plaster and plaster-coated gypsum are also materials of like kind since they both produce a plaster finish on interior walls. Architect Flannery testified that plaster over gypsum was superior in quality (“an upgrade,” a “betterment”) to the wood lath and plaster. It is 133 to 166 percent stronger than wood lath and plaster in terms of shear capacity and provides a one-hour fire rating, which wood lath and plaster does not. According to Flannery, there were two types of wall finishes in the building at the time of the fire. The walls that were added in the 1971 conversion were made of gypsum wallboard without a plaster finish; the walls that were part of the original construction were made of wood lath with a plaster finish. Flannery did not know what percentage of the interior walls were built using Douglas fir and gypsum wall board.
In light of our interpretation of the phrase “like kind and quality” and the evidence outlined above, we conclude that the appraisal panel did not exceed its authority when, under the circumstances of this case, it found that the substitute materials that Ream proposed using to repair the structure were of “like kind and quality” to the original materials used in the building and based its award on the use of those materials.
Pajaro argues that McCorkle, supra, 221 Cal.App.3d 610 compels a different result. In McCorkle, a homeowner’s garage was completely destroyed by fire. The original garage had a wooden floor. The building official required that the floor in the replacement garage be built of cement, which required additional foundation support. The cost of rebuilding the garage with a wood floor was $29,350; the cost of rebuilding the garage with a cement floor was $58,448. (Id. at p. 613.) The loss settlement clause in the insurance policy in McCorkle provided that the insurer would pay “the replacement cost … for equivalent construction and use.” (Id. at p. 614.) In granting summary judgment, the trial court held that the policy language was unambiguous and “found that the replacement of a wooden floor with a concrete one resulting in a 100 percent increase in the replacement cost did not constitute ‘equivalent construction’ within the meaning of this clause.” (Ibid.)
The appellate court agreed with the trial court’s construction of the policy. In construing the insurance policy, the appellate court relied on the “like kind and quality” language from section 2071. (McCorkle, supra, 221 Cal.App.3d at p. 614.) The court observed that “the ‘like kind and quality’ language is substantially similar to the ‘equivalent construction’ language of the McCorkles’ policy” and concluded that “this provision does not require an insurer to provide the insured with a structurally more valuable building than was destroyed, even if the structural improvements are required to bring the replacement structure into compliance with changed building codes.” (Ibid.) The court also noted that its conclusion was “consistent with the purpose of fire insurance – to compensate for the actual loss sustained, not to place the insured in a better position than he or she was before the fire.” (Id. at pp. 614-615.)
Pajaro argues that under McCorkle, “the appropriate measure of actual cash value is the cost to replace the original material with the same material regardless of whether there is a significant cost difference between the original material and the purported replacement, and regardless of whether the original material is – or is alleged to be – ‘archaic,’ obsolete, of greater cost, or even illegal under current building codes.” Pajaro contends that “the appraisal panel’s only authority was to determine the actual cash value of the materials which comprised the insured building at the time of the loss” and that “[b]y determining the value of substantially cheaper and inferior substitutes for the existing building components,” “materials other than those existing in [the] building at the time of the loss,” the panel exceeded its authority.
Pajaro interprets McCorkle too narrowly and its reliance on McCorkle is misplaced. First, McCorkle was not interpreting section 2071 or the phrase “material of like kind and quality”; instead it interpreted the phrase “equivalent construction” in the insurance policy at issue in that case. (McCorkle, supra, 221 Cal.App.3d at p. 614.) Second, it held that under the insurance policy at issue in that case, the insureds were not entitled to the increased cost of upgrading the garage floor to meet modern building code requirements. (Ibid.) Third, McCorkle is factually distinguishable from this case. As we explained above, the evidence supported the panel’s implied findings that the materials included in the Ream estimate were of like kind and quality to those used in the original construction. In contrast, in McCorkle, the materials at issue (wood and cement) were not of like kind.
Finally, our conclusion is “consistent with the purpose of fire insurance – to compensate for the actual loss sustained, not to place the insured in a better position than he or she was before the fire.” (McCorkle, supra, 221 Cal.App.3d at pp. 614-615.) If we were to apply the holding in McCorkle as Pajaro suggests, and require that the cost of repair include the cost of the materials used in the original construction, it would place Pajaro in a much better position than it was before the fire. Kidd estimated that the cost of using redwood for the framing and windows and wood lath would have increased the cost of repair by $2,311,171 ($662,277 for the framing, $320,651 for the wood windows, and $1,328,243 for the lath and plaster). The panel awarded $4,716,784.17 as the “actual cash value” of the loss, plus an additional $810,218.24 for code upgrades, which exceeded the $4,500,000 that Pajaro paid for the building by over $1,000,000. Awarding another $2,311,171 to cover the cost of using redwood and wood lath and plaster would have placed Pajaro in a much better position than it was prior to the fire.
For these reasons, we conclude the panel did not exceed its authority when it based its award on reconstruction costs using materials of like kind and quality that were not identical to the materials used in the original construction.
3. Panel Did Not Fail to Appraise Any Items
Pajaro contends the appraisal award must be vacated because the panel did not determine the value of all of the items that Pajaro submitted for appraisal as part of the damages to the building.
Pajaro argues that it submitted a statement of loss that contained over 200 separate line items and asked the panel to determine the actual cash value of each item, as required by section 2071. Pajaro asserts that rather than determine the value of the items in its claim, the panel appraised 64 categories of items that did not correspond to the items in Pajaro’s claim. As an example, Pajaro argues that rather than appraise the 66 line items that Pajaro submitted under the category “General Requirements,” the panel only appraised the nine line items that Insurers submitted under this category. Pajaro contends that “[a]s a consequence, the … panel did not value numerous items in [its] claim.” Pajaro asserts that there were “over 190 separate line items” that were not valued by the panel.
We begin by observing that under the category “real and personal property” losses, there was a single item that was submitted for appraisal: the Pajaro Wall Street Inn. As we noted before, the parties asked the panel to evaluate the damage to the building based on their respective estimates of the cost to repair the building. Nothing in section 2071 required the panel to follow the format of one estimate over the other or to assign a dollar value to every line item in the estimates. The panel determined that the actual cash value of the building loss was $4,716,784.17 and awarded an additional $810,218.24 for code upgrades. That was all it was required to do.
Although the panel appraised a single item (the building), in arriving at its award, the panel broke the repair estimates down into categories, based on the various building systems and other components of the repair estimates (i.e., “Supervision & Management,” “Roofing,” “Painting,” and “Wood Windows”). The panel provided the parties with a two-page exhibit that itemized the amounts it awarded in the various categories. It appears the panel’s exhibit adopted the categories used in the Kidd analysis. Although Kidd may have categorized the work differently than Krueger did, it is clear from his analysis that Kidd accounted for every dollar in the Krueger estimate and assigned all of the costs enumerated in the Krueger estimate to line items on the Kidd analysis.
For these reasons, we reject Pajaro’s contention that “numerous items were not appraised.”
B. Appraisal of Business Income Losses
1. Parties’ Contentions on Appeal
Pajaro contends the panel made an improper coverage determination and thereby exceeded its authority when it determined that Pajaro was only entitled to compensation for its business income losses for a 24-month period of reconstruction plus additional funds to cover its losses until the building was re-leased under the coverage for the “extended period of restoration.” Pajaro argues that it asked the panel to determine its business income losses for the 62-month period from the date of the fire until March 5, 2010, and that the panel had no authority to alter the time period for which the business income losses were claimed. It argues that Insurers cannot preclude it “from obtaining valuation of its entire business income loss claim” and that by limiting its recovery to 24 months, the panel necessarily adopted Insurers’ coverage argument that the policy limited coverage for the business income losses to 24 months.
Pajaro also contends the panel made an improper coverage determination when it found that the time to repair was 16 months for the regular construction and 2 months for the code upgrades.
Insurers assert that the calculation of business income losses necessarily includes the calculation of a period of restoration. They argue that no coverage issues are impacted by the panel’s answer to the question “How long will the property take to repair?” On the other hand, they also state: “[n]o business income claim can be determined without resorting to coverage issues, including an analysis of an appropriate period of restoration.”
2. Section 2071 and Policy Provisions Regarding Business Income Losses
The standard form fire policy does not provide for the recovery of business income losses. (§ 2071 [statutory policy covers “the extent of the actual cash value of the property at the time of loss … without compensation for loss resulting from interruption of business”].)
But the policy at issue here did cover business income losses. It provided “Blanket Building & Rental Income/Value Coverage (including 12 month extended period of recovery).” The policy covered “the actual loss of income sustained by the insured resulting directly from the necessary untenantability, caused by loss, damage or destruction by any of the perils covered … but not exceeding the reduction in income less charges and expenses which do not necessarily continue during the period of untenantability.” The policy defined the “period of indemnity” for business income losses as “the period from the time of direct physical damage … to the time [¶] … when with due diligence and dispatch, physically damaged buildings could be: [¶] i) repaired or replaced, and [¶] ii) business operations could have commenced.”
The policy also provided for an extended period of indemnity “ending no later than twelve (12) months after a certificate of occupancy is issued by the responsible legal authority, and with the exercise of due diligence and dispatch the property is re-leased on the same or equivalent terms and conditions that existed prior” to the loss.
3. Issues and Evidence Presented at Appraisal Hearing
Although business income losses are not expressly covered under section 2071, as summarized below, the record indisputably supports the conclusion that the parties submitted Pajaro’s contractual business income loss claim to appraisal.
Pajaro’s Statement of Loss sets forth its business income loss claim in detail. In the Statement of Loss, Pajaro claimed $3,596,854 in losses for both residential and commercial rents during the 62-month period from January 5, 2005, until March 5, 2010. Pajaro claimed increases in residential rents of 15 percent on February 1, 2005, 15 percent on October 1, 2005, and 15 percent on October 1, 2006. Pajaro claimed that the residential rents would increase by 5 percent each year thereafter. Attached to the statement of loss were schedules that Greenspan had prepared with projections for lost rental revenue, summaries of the residential and commercial rental payments, summaries of other projected revenue, and a list of expenses for November and December 2004. Dawson acknowledged that Pajaro’s statement of loss did not contain any credits for expenses it would not have to pay during the 62-month period after the fire and left it up to the panel to determine the amount of such credits. During the hearing, Pajaro did not present any expert testimony on the business income loss claim. Pajaro’s proposed form of award included lines for “loss of business income” and “extended period of restoration.”
In their appraisal brief, Insurers argued that Pajaro’s “loss of rents claim has little correlation to the reasonable time for repairs or the property’s prior rental history.” Insurers argued that Pajaro was not entitled to loss of income during the period prior to the appraisal or the for the six-month period that Pajaro included in its claim to cover the time the award was pending after the appraisal. Insurers contended that the 32 months that Pajaro claimed to complete the work was excessive and argued that the repair work should have taken 24 months from loss through the commencement of business operations. Insurers argued that Pajaro’s time estimate included time to upgrade or convert the building for another use. Insurers asserted that Pajaro inflated the rental rates, that there was no basis for the rental increases claimed, and that the claim failed to account for non-continuing expenses.
At the hearing, the parties presented the following evidence regarding the time to repair: Ream estimated that it would take 13 months to rebuild the building. Tom Boyd of Young and Associates testified that it would take 24 months to restore the structure. The 24-month estimate included assessment of the loss, the design phase, the permitting process, contracting, and mobilization. Krueger estimated that it was a three-year project.
Insurers presented evidence related to other aspects of the lost income claim. Chris Carneghi, a real estate appraiser retained by Insurers, opined that after the building was restored, Pajaro could rent one of the four commercial spaces every three months and testified that it would take up to one year for all of the commercial space to be leased. Since most of the residential space was Section 8 housing and Section 8 housing rents quickly, Carneghi estimated that it would take an average of four months each to rent the residential units.
Certified public accountant Grier submitted an exhibit that set forth projected rents for the entire period of Pajaro’s claim at rates that were much lower than what Greenspan had projected. The exhibit included offsets for vacancies, “non-collectability” and “non-continuing expenses.” Grier calculated the loss of business income for the period January 6, 2005 through March 5, 2010 (the entire period claimed by Pajaro) as $1,331,358, which was significantly less than what Pajaro claimed.
At the hearing, Grier relied on Young’s estimate that the property could be rebuilt within 24 months and Carneghi’s testimony regarding the amount of time required to re-lease the property to calculate the amount of the business income losses. He calculated the business income loss during the 24-month period of reconstruction as $718,996 and the business income loss from the time that construction was completed until the building was reoccupied as $116,925. Dawson told the panel he agreed with the credit calculations made by defense expert Grier, except for depreciation and the period of restoration.
Insurers’ proposed appraisal award form contained entries for “Loss of Rental Income” and “Loss of Rents During Extended Period of Indemnity (12 months Maximum.” The form suggested that Pajaro was entitled to 24 months of business income losses plus up to 12 months under the extended period of indemnity coverage.
Based on our review of the record, we conclude that the parties tendered the following issues for appraisal of the business income loss: (1) the duration of the loss, (2) the amount of gross rental income anticipated per month, (3) the amount of anticipated increases in rental income, and (4) the value of offsets for vacancy, non-collectability, and non-occurring expenses.
The panel rejected the figures in Pajaro’s statement of loss and relied on the defense experts’ testimony. It awarded $718,996 for the business income loss during a 24-month period of reconstruction and $116,925 for the business income loss from the time that construction was completed until the building could be reoccupied.
4. Analysis
There was a factual dispute between the parties over the amount of time required to reconstruct the building and resume full business operations. Since the loss of rental income occurs over a period of time, the calculation of Pajaro’s business income losses necessarily required the panel to make a factual finding regarding the amount of time that it would take to reconstruct the building and to return the building to full occupancy. In our view, such a finding was not an impermissible coverage determination.
As we have noted, under section 2071, an appraisal panel is authorized to make two types of factual findings: (1) the actual cash value of each item and (2) the amount of loss to each item. (§ 2071.) The policy language here also authorized the panel to determine “the value at the time of loss and the amount of loss.” In our view, the duration of a business income loss is but one factor to consider in determining the amount of the loss.
Civil Code section 3359 provides that “[d]amages must, in all cases, be reasonable….” As noted above, the policy required that the insured use “due diligence and dispatch” to both repair or replace the building and resume business operations. This requirement is consistent with the statutory requirement that damages be reasonable.
The panel was not asked to interpret the policy language, to apply a deductible, or to apply a policy exclusion. There is nothing to indicate that the panel was interpreting policy language related to the coverage for business income losses.
The panel was asked to make factual findings regarding the amount of time required to repair the building and to return the building to full occupancy after the repairs were done, the reasonable value of future rental income, and the value of the offsets. Such findings were necessary to determine the amount of the business income loss. Since the amounts awarded for the loss of business income were identical to those testified to by the defense experts, we conclude that the panel made a factual finding that 24 months was a reasonable period of time to reconstruct the building and that the panel agreed with the defense estimates of the amount of time required to re-lease the building after the construction was completed. Although the policy provided coverage for up to 12 months of business income losses under the extended period of indemnity coverage, the panel awarded business losses for less than a 12 month period after the completion of construction, based on the testimony of the defense experts. This reinforces our conclusion that the panel was making a factual finding as opposed to an impermissible coverage determination.
As we noted previously, where business income losses continue over a period of time, the appraisers are required to make findings regarding the duration of the loss in order to calculate the amount of the loss. The appraisers are not bound by the insured’s estimate of the duration of the loss as Pajaro contends and may make the factual finding necessary to determine the amount of the loss. We therefore reject Pajaro’s contention that the panel exceeded its authority when it appraised a period of business income loss that was different from the 62 months period that Pajaro claimed.
For these reasons, we conclude the panel did not make an impermissible coverage determination when it adopted Insurers’ calculation of the business income losses. Since the time to repair is subsumed within the calculation of the duration of the overall business income loss, we shall not address Pajaro’s contention that the panel made an impermissible coverage determination when it made a factual finding regarding the time to repair (16 months of regular repairs and 2 months for code upgrades). For these reasons we also reject Insurers’ contention that the calculation of the period of restoration necessarily involves a coverage determination.
In light of our conclusion, we shall not reach Pajaro’s contentions that it did not waive the appraisal condition of the policy when it submitted its business income loss claim to appraisal.
C. There Was No Corruption of the Appraisal Process
Code of Civil Procedure section 1286.2 provides that an arbitration award or an appraisal award must be vacated when: “(1) The award was procured by corruption, fraud or other undue means. [¶] (2) There was corruption in any of the arbitrators. [¶] (3) The rights of the party were substantially prejudiced by misconduct of a neutral arbitrator. (4) The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.” Section 2071 requires that the appraisers and the umpire be both disinterested and competent. Pajaro combines these two statutory provisions and argues that the award must be vacated because Umpire Comstock and Appraiser Halpin corrupted the appraisal process when they failed to act in a competent manner. Pajaro then sets forth a numbers of examples of the umpire’s and the appraiser’s alleged incompetence, which we address in greater detail below.
Other grounds for vacating the award enumerated in Code of Civil Procedure section 1286.2 include: “ (5) The rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title. [¶](6) An arbitrator making the award either: (A) failed to disclose … a ground for disqualification of which the arbitrator was then aware; or (B) was subject to disqualification upon grounds specified in Section 1281.91 but failed upon receipt of timely demand to disqualify himself or herself….” Pajaro does not rely on these grounds.
Pajaro does not cite any authority that supports its contention that incompetence by the appraisers falls under one of the statutory grounds for vacating the award. The cases it cites (Gebers v. State Farm General Ins. Co. (1995) 38 Cal.App.4th 1648, 1653; Betz v. Pankow (1993) 16 Cal.App.4th 931) involve appraiser bias. However, for the purpose of our analysis we shall assume without deciding that appraiser incompetence is a form of misconduct or corruption.
Under this heading, Pajaro repeats its previous arguments that the panel impermissibly determined coverage issues when it found that some items were not damaged and made findings regarding a reasonable time to repair the building. Since we have already concluded that the panel did not exceed its authority when it made these findings, we reject the contention that the panel was incompetent when it found that some of the building components were not damaged and made factual findings regarding the reasonable time to repair.
Pajaro argues that Umpire Comstock was incompetent when he: (1) “repeatedly, over Pajaro’s objections, considered and allowed the panel to hear evidence of [Insurers’] coverage arguments,” (2) admitted a copy of a coverage letter that Insurers’ counsel wrote, and (3) admitted evidence regarding the value of “dissimilar and inferior materials.” The coverage letter, which outlined Insurers’ evidence on the question whether the building was of historical value or significance, was admitted into evidence, without objection by Dawson.
Under section 2071 “[a]ppraisal proceedings are informal unless the insured and this company mutually agree otherwise. For purposes of [section 2071], ‘informal’ means that no formal discovery shall be conducted, including depositions, interrogatories, requests for admission, or other forms of formal civil discovery, no formal rules of evidence shall be applied, and no court reporter shall be used for the proceedings.”
Given the informal nature of the proceedings and the circumstances regarding the admission of the coverage letter, we reject Pajaro’s contention that the umpire was incompetent for admitting the letter into evidence. Even if the umpire erred in admitting the letter, Pajaro was not prejudiced by its admission, since the panel did not rely on the historical replacement cost provision of the policy to determine the value of the building loss. We find no incompetence in the admission of evidence regarding the allegedly “dissimilar and inferior” building materials, since that evidence was relevant to one of the primary factual issues presented at the appraisal: whether the materials proposed by Ream were of like kind and quality to the materials used in the original construction.
Pajaro contends the umpire was incompetent when he “attempted to compel” Pajaro to agree to a form of award that did not include all of the items in its claim. We conclude it was appropriate for the umpire to urge the parties to agree on the form of the award and thereby streamline the proceedings by determining where the parties were in agreement, which allowed the panel to focus on the disputed issues in the case.
Pajaro argues that Comstock and Halpin were incompetent when they agreed to Insurers’ form of award, which “dictated” a 24-month business income loss. But Insurers’ form of award was consistent with the evidence that Insurers presented on the issue of business income losses. The appraisers were not incompetent when they adopted a form of award that was consistent with the factual findings they made.
In summary, assuming without deciding that appraiser incompetence is a form of corruption that would support vacating an appraisal award, we find no merit to any of Pajaro’s claims that either Umpire Comstock or Appraiser Halpin was incompetent. To the contrary, the appraisers and the umpire conducted the proceedings in a highly professional manner and considered all of the evidence and argument by the parties. They were also knowledgeable about the appraisal process and their roles, as well as matters related to the reconstruction of the building.
Disposition
The judgment is affirmed.
WE CONCUR: Bamattre-Manoukian, Acting P.J., Duffy, J.