Pollock v. Federal Insurance Company

Background

Thomas Pollock and Eileen Tabios sued Federal Insurance Company over insurance coverage following the September 2020 Glass Fire. The fire destroyed the property’s guesthouse and caused other alleged damage to structures, infrastructure, landscaping, land, and contents. Federal paid $1,249,080.39 based on its estimate for replacing the guesthouse. The homeowners later submitted a sworn proof of loss seeking $7,375,568.51 for that replacement.

The insurance policy included an appraisal provision. It allowed either side to demand an appraisal if the parties could not agree on the amount of loss. Each party would select an appraiser, and those appraisers would select a third appraiser, or “umpire,” if needed. The homeowners demanded an appraisal concerning the replacement cost of the guesthouse, but Federal refused.

The parties’ arguments

The homeowners argued that the policy’s appraisal provision was an arbitration agreement enforceable under the Federal Arbitration Act. They maintained that the parties had a straightforward dispute over the amount of loss and that the court’s role was limited to deciding whether a valid appraisal agreement covered that dispute.

Federal argued that California’s standard fire-insurance policy included an exception for losses resulting from government-declared disasters and that the exception should be read into the policy even though the policy did not contain it. Federal also argued that appraisal should not proceed while coverage questions remained unresolved and while the homeowners had not completed all requested post-loss duties, including providing documents and participating in examinations under oath.

Court’s analysis

The court treated the policy’s appraisal provision as an arbitration agreement. Under the Federal Arbitration Act, the court explained, it had to determine whether a valid arbitration agreement existed and whether it covered the dispute. If both conditions were met, the court had to enforce the agreement according to its terms.

The court rejected Federal’s argument that the government-declared-disaster exception should be added to the policy. It reasoned that California law does not permit statutory insurance provisions to be incorporated into a policy to the insured’s detriment. Reading the exception into this policy would prevent the homeowners from using the appraisal right that the policy gave them. The court also concluded that Federal’s cited cases did not establish that an insurer could use statutory incorporation to limit protection otherwise provided by the policy.

The court also rejected Federal’s request to deny or stay appraisal because of unresolved coverage issues or alleged noncooperation. It stated that appraisers could assign values to disputed items while making clear that the appraisal would not decide coverage or Federal’s obligation to pay. The court found that, even accepting Federal’s account of the outstanding information, the homeowners had not refused to cooperate to a degree requiring appraisal to be denied or delayed. The court further concluded that the Federal Arbitration Act did not give it discretion to delay appraisal in these circumstances.

Ruling and instructions

Judge Joseph Spero granted the homeowners’ motion to compel arbitration. Under the policy, the appraisal panel was directed to appraise the loss concerning all manmade structures on the property, excluding soil, landscaping, contents, and loss of use. The appraisal would determine amounts of loss, not coverage or Federal’s liability to pay.

The court declined to establish the homeowners’ proposed Invitation to Bid appraisal protocol. Instead, it directed the parties to meet and confer about appraisal procedures and allowed them to submit competing proposals if they could not agree. The court also required the homeowners to provide specified construction, architectural, and occupancy documents by July 22, 2022, required each party to select an appraiser within 20 days of the order, and stated that the court would choose the umpire if the party-appointed appraisers could not agree.