What is “Competent and Disinterested”?
California Insurance Code, at § 2071 provides a method by which an insured and insurer may quickly, and informally, resolve disputes concerning the amount of loss. Although called “appraisal” it is really a contractual arbitration agreement mandated by statute where the court is required to treat the award of the appraisers and umpire in the case at bench as a confirmed award in arbitration.
Therefore, when an insurer and its insured fail to agree on the amount of loss following a fire, the California Insurance Code allows each of them to select a “competent and disinterested appraiser,” who are in turn required to agree on a “competent and disinterested umpire” (or request appointment of one by the court) to form a three-member panel to adjudge the amount of loss. The award of the appraisers will be treated as an award of arbitrators and when confirmed will be an enforceable judgment of the court.
California courts have concluded this adjudication must be conducted pursuant to the provisions of the California Arbitration Act, Code of Civil Procedure section 1280 et seq. (Arbitration Act).
Section 1281.9 of the Arbitration Act requires proposed neutral arbitrators to disclose to opposing parties the existence of any potential grounds for disqualification. If a party objects to the proposed neutral arbitrator, section 1281.91 requires the objecting party to serve a notice of disqualification within 15 days of receipt of the disclosure statement.
Do the disclosure required by the Arbitration Act and its disqualification provisions apply only to the jointly proposed umpire in a loss appraisal proceeding or also to the “competent and disinterested” appraisers unilaterally designated by the parties?
If they do not apply, under what circumstances may a party to the appraisal proceeding disqualify an opposing party appraiser for cause?
In Mahnke v. Superior Court of Los Angeles County, 180 Cal.App.4th 565, 103 Cal.Rptr.3d 197 (Cal.App. Dist.2 12/21/2009) the Court of Appeal resolved an issue of disqualification and allowed a party-selected appraiser who disclosed a potential conflict in favor of allowing the appraiser to serve. The Mahnke court explained:
Party-selected appraisers, however, have been treated differently from party arbitrators due to Insurance Code section 2071’s specification that each party select a “competent and disinterested appraiser.” This requirement, incorporated into every fire insurance policy issued in California, in effect constitutes a contractual agreement between the parties to select neutral appraisers. … As the Gebers [Gebers v. State Farm General Ins. Co. (1995) 38 Cal.App.4th 1648]court explained, “current or prospective financial dealings with a party are well recognized as grounds for an arbitrator’s disqualification.” (Gebers, at p. 1653.)
The insurer, California FAIR Plan Association (CFPA), sought to disqualify the party appraiser selected by their insureds, Peter and Patricia Mahnke. The trial court granted CFPA’s petition, concluding that section 1281.9’s disclosure and disqualification standards that required “requires a proposed neutral arbitrator to disclose: “(1) The existence of any ground specified in Section 170.1 for disqualification of a judge” and that it applied to party-selected appraisers. The Mahnkes’ party-appraiser’s retention as an expert witness by another client of the Mahnkes’ counsel was an impermissible conflict of interest requiring his disqualification.
The Court of Appeal disagreed with the superior court’s analysis on both points and granted the petition for writ of mandate filed by the Mahnkes and directed the superior court to vacate its order disqualifying the party appraiser and to enter a new order denying CFPA’s petition to disqualify him.
Factual and Procedural Background
After the Mahnkes’ home was severely damaged in the November 2008 Sylmar wildfires, they tendered a claim to CFPA. CFPA acknowledged coverage, adjusted the claim and offered payment. The Mahnkes did not agree with CFPA’s assessment of their damages and elected to proceed under the appraisal provision of the policy.
On January 26, 2009 the Mahnkes served CFPA with notice of this election and their choice of Robert McConihay to serve as their appraiser. The next day CFPA responded with the name of the appraiser it had selected, William Bruce Reid. On February 9, 2009 Mr. Reid mailed a disclosure statement indicating his own lack of financial interest in the outcome of the appraisal and disclosing he was currently serving as CFPA’s designated appraiser in another pending action. In a letter dated February 11, 2009 the Mahnkes’ counsel responded, “[t]hough we are unaware of a requirement to make the disclosure . . . your appraiser has made, out of courtesy we will do the same.” Mr. McConihay’s disclosure statement asserted he lacked any financial interest in the outcome of the proceeding and had no previous dealings with the parties. The declaration disclosed, however, he was currently engaged as a construction expert for another client of the law firm representing the Mahnkes. The letter also attached his resume, which recounted his professional experience and included the names of 14 lawyers, including the Mahnkes’ counsel, as references.
The Appraisal Provision of Insurance Code Section 2071
Fire insurance policies on California properties have long been required to use standard language specified by the Legislature. Among other policy provisions, in the event the insurer and the insured disagree about the amount of loss, Insurance Code section 2071provides a method by which their differences may be resolved, called “appraisal.” Each party is required to select “a competent and disinterested appraiser,” who together must then select (or, if the party-selected appraisers cannot agree, have the court appoint) “a competent and disinterested umpire.” The party-selected appraisers are each required to appraise the loss and, in the event of disagreement, submit their differences to the umpire for adjudication.
The “Appraisal” provision in the current version of the statute has remained largely unchanged since it was first enacted in 1949. In particular, the terms “competent and disinterested appraiser” and “competent and disinterested umpire” appear in the original, 1949 legislation. Amendments in 2000 insisted that the appraisal process be “informal.”
Notwithstanding this statutory direction to maintain the informality of appraisal proceedings, in general those proceedings must also conform to the procedural requirements of the Arbitration Act.
The Disclosure and Disqualification Provisions of the Arbitration Act
Courts have long struggled with the problem of ensuring not only the neutrality but also the perception of neutrality of arbitrators, who wield tremendous power to decide cases and whose actions lack, for the most part, substantive judicial review. It is difficult to conceive a way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias. The Legislature, by the Arbitration Act, requires such disclosure.
However, insurance appraisals are not run-of-the-mill arbitrations. As one court explained, “bias in a party arbitrator is expected and furnishes no ground for vacating an arbitration award, unless it amounts to ‘corruption.’” Party-selected appraisers have been treated differently from party arbitrators due to section 2071’s specification that each party select a “competent and disinterested appraiser.” This requirement, incorporated into every fire insurance policy issued in California, in effect constitutes a contractual agreement between the parties to select neutral appraisers.
Even if the evidence tends to establish that no actual bias, prejudice, influence, or fraud was disclosed on the part of the umpire, public policy and an unconscious predilection to favor one’s interest renders an arbitrator, directly or indirectly interested in the result of the arbitration, partial, incompetent, and disqualified.
For instance, in Gebers v. State Farm General Insurance Co. (1995) 38 Cal.App.4th 1648 (Gebers) the court concluded party-selected appraisers are held to a higher standard of impartiality than are party arbitrators precisely because of this legislative mandate. Because the insurer-selected appraiser in Gebers had a direct pecuniary interest in ongoing litigation work for State Farm, the court vacated the underlying arbitration award based on the appraiser’s presumed bias. A similar finding was made in Figi v. New Hampshire Ins. Co. (1980) 108 Cal.App.3d 772, 776-778 where an arbitration award was vacated based on a disinterested umpire’s failure to disclose ongoing business relationship between himself and insurer’s designated appraiser.
Section 1281.9 now imposes disclosure requirements on a “proposed neutral arbitrator.”
The term “proposed neutral arbitrator,” in turn, is defined in section 1280, subdivision (d), as one “who is (1) selected jointly by the parties or by the arbitrators selected by the parties or (2) appointed by the court when the parties or the arbitrators selected by the parties fail to select an arbitrator who was to be selected jointly by them.”
The statutory scheme now imposes a disclosure obligation exclusively on the “proposed neutral arbitrator” who, like the “umpire” contemplated in Insurance Code section 2071, is either selected jointly by the parties and their respective party arbitrators or appointed by the court upon the failure of the parties to agree. The Court of Appeal concluded:
The disclosure requirements in section 1281.9 and the Judicial Council’s Ethics Standards for Neutral Arbitrators do not apply to any arbitrator other than the jointly selected, or court-appointed, proposed neutral arbitrator-or, in the case of a contested appraisal proceeding, the competent and disinterested umpire.
So long as the proposed neutral umpire is subject to the Arbitration Act’s disclosure and disqualification requirements, subjecting the party-selected appraisers to the same obligations and limitations is inconsistent with the spirit of the Legislature’s amendments.
Party-Selected Appraisers May Be Disqualified When a Substantial Business Relationship Exists Between the Appraiser and a Party
The interest or bias that disqualifies an arbitrator or appraiser must be direct, definite, and demonstrable as contrasted with remote, uncertain, or speculative. The key to disqualifying a party appointed appraiser is whether there is a “substantial” business relationship between the party appointed appraiser and a party to the appraisal, their counsel, or the umpire. Impartial arbitrators/appraisers must disclose to the parties any dealings that might “create an impression of possible bias.” The test is whether a reasonable member of the public at large, aware of all of the facts, would fairly entertain doubts concerning the arbitrator’s/appraiser’s impartiality, the arbitrator/appraiser is not subject to disqualification.
In Banwait v. Hernandez (1988) 205 Cal.App.3d 823 (Banwait), also cited by appellants, the arbitrator failed to disclose that he had once been represented as a client by the law firm representing the insurer in the underlying arbitration. The trial court found that the prior representation did not constitute a substantial business relationship, but nevertheless vacated the arbitration award. The Court of Appeal reversed. The Banwait court noted that California appellate courts had uniformly held that Commonwealth should govern the application of subdivisions (a) and (b) of section 1286.2. (Banwait, supra, at p. 828.) However, it found that the trial court’s findings precluded any conclusion that the arbitrator was corrupt or biased, thus there was no basis for setting aside the award.
A relationship where there exists a present or past business relationship between the arbitrator and a party, its counsel or a witness can suggest a pecuniary interest on the part of the arbitrator or that the arbitrator will place unusual trust or confidence in the party with whom the relationship existed. If the arbitrator provides a reason that would lead a reasonably prudent person to favor the party for reasons wholly unrelated to the merits of the arbitration, the arbitrator/appraiser may be disqualified if the business relationship is substantial.
An arbitrator cannot be expected to provide the parties with his complete and unexpurgated business biography. It is enough for the purposes of an appraisal to require that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed.
Mr. McConihay affirmed in his disclosure that he had no financial interest in the underlying dispute between the Mahnkes and CFPA. Regardless, it is presumed that he is being compensated by the other client, just as the Mahnkes are responsible for compensating him in their proceeding. Although compensation for services is often relevant to the question of ability to serve impartially, it is not determinative in this instance because any party-selected appraiser will necessarily be paid by the retaining party. Since most arbitrators are drawn from business and professional ranks, and are not full-time judicial officers with public responsibilities, to attract and obtain the most capable among them, a court should not demand divestment of all interests or withdrawal from all activities prohibited to judicial officers. Therefore, the arbitrator/appraiser may serve if the financial relationship is not substantial and must be more than the fact that he or she is being paid for services rendered.
The court concluded that:
Imposing overly rigorous standards on party-selected appraisers in informal proceedings under Insurance Code section 2071 would be both short- sighted and naïve about the realities of modern litigation practices. Viewed as a whole, Mr. McConihay’s resume demonstrates that he possesses experience qualifying him to act as a “competent” appraiser and that his broad client base distinguishes him from those professionals who regularly perform services for particular clients (or attorneys) and become financially dependent on them. Viewed from the standpoint of a reasonable member of the public, we see nothing that warrants Mr. McConihay’s disqualification.
A peremptory writ of mandate was issued directing the superior court to vacate its order granting CFPA’s petition to disqualify Mr. McConihay and to enter a new order denying the petition.
A person or insurer entering into an appraisal proceeding should find the Mahnke decision to broaden the field of available appraisers and limit the ability of either party to disqualify a party appointed appraiser.
© 2017 – Barry Zalma
This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
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