Opinion
CV 22-00477-TUC-JAS (MAA)
08-17-2023
Patrick J. Mitchell, Arizona resident; et al. Plaintiffs, v. State Farm Fire and Casualty Company, an Illinois corporation, Defendant.
REPORT AND RECOMMENDATION
HONORABLE MICHAEL A. AMBRI UNITED STATES MAGISTRATE JUDGE.
Pending before the court is the defendant's Motion to Partially Vacate Appraisal Award, filed on April 6, 2023. (Doc. 31) The plaintiff's filed a response on May 11, 2023. (Doc. 37) The defendant filed a reply on May 25, 2023. (Doc. 41)
The case has been referred to Magistrate Judge Ambri for report and recommendation pursuant to the Local Rules of Practice. LRCiv 72.1. The court finds the motion suitable for decision without oral argument. See LRCiv 7.2(f).
The court finds that the motion should be denied without prejudice. The appraisal award for personal property loss should be vacated if the homeowners failed to comply with the policy's “cooperation clause.” That issue will be determined at trial.
Background
On or about December 1, 2020, the plaintiffs suffered water damage to their home due to a broken washing machine supply line. (Doc. 31, pp. 2-3); (Doc. 41, p. 4) The home was insured by State Farm. (Doc. 31, p. 4) The insurance policy contains three property coverages: “Coverage A (dwelling structure, including water mitigation services), Coverage B (personal property and belongings), and Coverage C (alternative living expenses, or ‘ALE').” Id., p. 3. At issue here is Coverage B.
The sequence of events that followed the homeowners' discovery of the water damage is in some dispute. It appears that they first contacted State Farm, which directed them to a vender, ServPro, for water mitigation services. (Doc. 41, pp. 3-4); (Doc. 37, pp. 4-5) ServPro in turn contacted FRSTeam and Furniture Medic, vendors that specialize in salvaging personal property. (Doc. 41, p. 4) The homeowners, however, became uncomfortable with the way that the salvage operation was proceeding. (Doc. 37, p. 6) They refused to sign a contract authorizing ServPro to act as their remediation contractor, but they allowed ServPro to remain at the site and dry out the home. Id.
The homeowners hired a public adjuster, Doug Waldie. (Doc. 37-1, p. 12) Waldie apparently arranged for the personal property to be removed by Arizona Pack Out, which, according to the plaintiffs, inspected the personal property, evaluated the damage, “photographed each item and prepared an inventory of items deemed non-salvageable.” (Doc. 37, p. 7); (Doc. 37-1, pp. 14-15) ServPro remained on the site until December 5. (Doc. 37, p. 7)
Approximately one month later on January 8, 2021, State Farm's adjuster Heather Ramonett inspected the property. (Doc. 31, p. 4) She authorized payment of approximately $45,552 to repair the structure. Id., p. 4 Waldie estimated the damages to the structure at approximately $194,964. (Doc. 31, p. 4) After some back and forth, State Farm issued a supplemental payment of approximately $12,312 on March 1, 2021, and a supplemental payment of approximately $117 on March 31, 2021. Id.
Waldie also sent State Farm an inventory listing the damaged personal property and estimating those damages at approximately $170,148. Id., p. 5. On February 8, 2021, Ramonett sent Waldie a letter requesting documentation to support the damage inventory. (Doc. 31-2, pp. 27-31) She specifically requested information about what efforts had been made to clean the textiles, restore the furniture, and test the electronics. (Doc. 31-2, p. 27) State Farm believed it likely that many of the listed items of personal property could be repaired or restored. (Doc. 31, p. 5)
On April 2, 2021, Waldie demanded that the damages be determined by appraisal in accordance with the terms of the insurance policy. (Doc. 31, p. 7) State Farm's appraisal counsel, Jennifer Boldi, believed that only Coverage A, structural damage, was ripe for appraisal. (Doc. 31, p. 7) She attempted to clarify the scope of the appraisal with Waldie, but she was unable to do so to her satisfaction. Id. It was Waldie's position that the appraisal should resolve the “full loss” without further elaboration. Id.
In accordance with the policy terms, an appraisal is conducted by two appraisers who choose an “umpire” if the two appraisers do not agree on damages. State Farm chose Adam Salene as its appraiser, and the homeowners chose Duane Martin. (Doc. 31, p. 8) On June 27, 2021, Martin suggested that the two “meet at the loss to inspect the damage” by which he apparently meant the structure, which is located in Oro Valley. (Doc. 31, pp. 8, 9) Salene noted that he had not had an opportunity to “inspect any of the claimed content damages,” and therefore had no position about their value. (Doc. 31, p. 8) It is State Farm's understanding that the contents of the home are currently in storage in Tucson. (Doc. 31, p. 9) In September, the two “appraisers agreed to use Jason Mosher as umpire.” (Doc. 31, p. 9)
On March 14, 2022, Mosher floated a proposed appraisal award setting the “Dwelling” loss at $289,443.46 RCV (replacement cost value) and “Personal Property” loss at $135,636.65 RCV. (Doc. 31, p. 9) Salene asserted that he did not agree to any personal property award because he had “yet to be presented with any clear evidence of damages to a large majority of the items presented.” Id. He noted as follows: “If I recall correctly, during our hearing, I thought that we all agreed to inspect the storage unit that contains the contents to better see what the damages are.” (Doc. 31, pp. 9-10) The proposed award was withdrawn by Mosher.
Over then next few months, the appraisers negotiated over the award for the structure and argued over whether the personal property loss required further investigation. The homeowners' appraiser, Martin, insisted that the loss could be determined based on the inventory supplied by the plaintiffs' adjuster, Waldie, and the photographs taken during “packout.” (Doc. 31, p. 10) State Farm's appraiser, Salene, objected to that suggestion because the photographs were insufficiently detailed. Id. He insisted that the panel inspect the personal property before determining the value of the loss. Id.
On June 2, 2022, Martin and the umpire, Mosher, signed a partial appraisal award setting the Dwelling loss at $235,638.22. (Doc. 31, p. 10) The partial award stated that the personal property loss was “not determined.” Id. Mosher stated as follows: “I believe an inspection of the contents is warranted to allow both party [sic] to address their concerns.” (Doc. 31, pp. 1011) “I will await your thoughts on an inspection of the contents . . . .” (Doc. 31, p. 11) The parties continued to debate the personal property issue.
On August 2, 2022, Mosher stated, “I agree [that] State Farm (Adam) should have an opportunity to inspect the contents. I will reach out to Arizona Pack Out, and ask that they provide available dates [for inspection].” (Doc. 31, p. 11) Martin asserted that before an inspection could take place, the parties must agree on who would pay the costs for that inspection. Id. The issue was never resolved. Martin passed away on October 20, 2022, and his son Rex Martin (“Rex”) was appointed to take his place. Id.
Rex suggested that the parties adopt the proposed appraisal award originally floated by the umpire, Mosher, back on March 14, 2022. Salene reiterated his position that the packout photos were insufficient and “reminded Mosher he had offered to contact Arizona Pack Out about dates for an inspection.” (Doc. 31, pp. 11-12)
On October 14, 2022, the homeowners filed the pending action in U.S. District Court. (Doc. 1) They claim that State Farm breached the insurance contract and acted in bad faith. Id. Among other things, they assert that State Farm must “promptly complete a fair adjustment of the personal property loss . . . .” (Doc. 1, p. 8)
On January 19, 2023, State Farm's appraisal counsel, Jennifer Boldi, offered the following to the appraisers:
State Farm will not pay for items which are not covered, or which were never ripe for appraisal to begin with. With this, I am of course referring to the issues related to the contents claim, on which disputes were never articulated, and therefore is inappropriate to appraise as it does not meet the policy requirements of being appraisable. Further, my client, as well as the panel (to my knowledge) has requested a contents inspection on several occasions and the insured has never presented these items for inspection pursuant to their obligations under the policy.(Doc. 31-4, p. 12) On January 31, 2023, the umpire, Mosher, wrote that “I believe a final inspection [of the personal property] is warranted as none of the current panel has inspected the damages . . . In light of the continued dispute between the parties . . . I believe it is prudent that we address the final portion of the contents loss with an inspection . . . .” (Doc. 31, p 12) However, on February 10, 2023, State Farm's appraiser, Salene, apparently reversed his position and responded as follows: “Based on [Boldi's] email of late in which State Farm stated their position on the contents not being appraisable, I see no reason for me to pursue the inspection of the contents at this time.” (Doc. 31, pp. 12-13)
On February 14, 2023, Rex and the umpire, Mosher, signed a Final Appraisal Award, which set the personal property loss at $135,636.65 RCV. (Doc 31, p. 13) Mosher explained that the amount was set based on Waldie's inventory and the packout photos. Id. The actual items were never viewed by the appraisers. Id.
Choice of Law
On April 6, 2023, State Farm filed the pending Motion to Partially Vacate Appraisal Award. (Doc. 31) State Farm maintains that its motion should proceed pursuant to A.R.S. § 12-1512. (Doc. 31, p. 16) The plaintiffs, however, argue that the Federal Arbitration Act (FAA) applies, 9 U.S.C. §§ 1-14. (Doc. 37, p. 11) Neither party, however, has directed the court to controlling authority on the issue, and the court has found none.
The Ninth Circuit has explained that “[arbitration and appraisal are distinct methods of dispute resolution and it cannot be assumed that because the FAA governs the former it necessarily must apply to the latter.” Portland Gen. Elec. Co. v. U.S. Bank Tr. Nat. Ass'n, 218 F.3d 1085, 1089 (9th Cir. 2000). The FAA will apply to contract provisions that call for “appraisal” but only if State law holds that an “appraisal” qualifies as an “arbitration.” Id. (noting that under California law an arbitration agreement includes “agreements providing for valuations, appraisals and similar proceedings”) (emphasis added). Unfortunately, Arizona law on the issue is somewhat ambiguous. And consequently, the case law is mixed. Compare Ori v. Am. Fam. Mut. Ins. Co., 2005 WL 3079044, at *2 (D. Ariz. 2005) (applying the FAA because “Arizona courts have concluded that ‘appraisal is analogous to arbitration'”) with Harvey Prop. Mgmt. Co. v. Travelers Indem. Co., 2012 WL 5488898, at *2, *3 n. 23 (D. Ariz. 2012) (declining to apply the FAA because “although Arizona courts have determined that principles of arbitration law should apply to the analysis of appraisal clauses, they have not used the FAA to resolve appraisal disputes, and this Court declines to do so in the absence of such an indication,” because if the Court sits in diversity, the Court applies “Arizona law to substantive legal issues.”).
This court need not decide the issue, however, because the Arizona statutes cited by State Farm are not materially different from the analogous provisions in the FAA. Compare A.R.S. § 12-1512(A)(3) (“The arbitrators exceeded their powers.”) and § 12-1512(A)(4) (“The arbitrators . . . refused to hear evidence material to the controversy . . . .”) with 9 U.S.C. § 10(a)(4) (An award may be vacated “where the arbitrators exceeded their powers.”) and § 10(a)(3) (An award may be vacated “where the arbitrators were guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy . . . .”). Assuming without deciding that State Farm is correct and the Arizona statutory scheme applies, State Farm's motion should be denied.
Discussion
In the pending motion, State Farm asserts that the appraisal award for personal property should be vacated. State Farm argues first that the plaintiffs never properly presented their claim for personal property loss and their original demand that this claim proceed to appraisal was invalid. (Doc. 31, p. 13) This argument is based on the construction of the policy. The court will start there.
The homeowners' policy contains what State Farm terms a “cooperation clause.” (Doc. 31), p. 3) The policy reads in pertinent part as follows:
SECTION I - CONDITIONS
* * *
2. Your Duties after Loss
[Y]ou must cooperate with us in the investigation of the claim and also . . .
a. give immediate notice to us or our agent . . .
b. protect the property from further damage or loss . . .
c. prepare an inventory of damaged . . .personal property . . . attaching all . . . related documents that substantiate the figures in the inventory;
d. as often as we reasonably require . . . exhibit the damaged property . . . .(Doc. 31-1, p. 26) (emphasis in original)
The policy also contains an appraisal clause that begins as follows: “If you and we fail to agree on the amount of loss, either party can demand that the amount of the loss be set by appraisal.” (Doc. 31-1, p. 27) “You must comply with SECTION I - CONDITIONS, Your Duties After Loss before making a demand for appraisal.” Id. If such a demand is made, each party is entitled to select one appraiser. Id. “The appraisers will then attempt to set the amount of loss of each item in dispute as specified by each party . . . .” Id. If they are unable to agree, the appraisers will choose an umpire who serves as the “tiebreaker.” Id.
The court agrees with State Farm that the policy requires the insured to comply with the provisions of the “cooperation clause” and give State Farm a chance in the first instance to adjust the loss. Only after State Farm adjusts the loss, and the homeowner disagrees with State Farm's valuation, can the homeowner demand that the amount of the loss be set by appraisal. See Galindo v. ARI Mut. Ins. Co., 203 F.3d 771, 777 (11th Cir. 2000) (“Therefore, we hold that these insureds must comply with the post-loss terms of their respective homeowner's policies, which enables the insurance companies to investigate the insureds' claims and to disagree with the loss amount before the appraisal term becomes effective.”); Tavilla v. Emp. Mut. Cas. Ins. Co., No. 1 CA-CV 06-0764, 2008 WL 2154800, at *3 (Ariz.Ct.App. May 20, 2008) (“[T]he Tavillas were required to fulfill their post-loss duties and make a good-faith attempt to come to an agreement on the amount of the loss before invoking the appraisal clause.”) (unpublished). If the homeowner could demand appraisal immediately after a loss, the “cooperation clause” would become meaningless, and State Farm would lose the opportunity to properly investigate and resolve the claim in a timely manner. See also Clark Equip. Co. v. Arizona Prop. & Cas. Ins. Guar. Fund, 189 Ariz. 433, 442, 943 P.2d 793, 802 (Ct. App. 1997) (“[C]ooperation provisions in an insurance contract are designed to protect the insurer's right to a fair adjudication of the insured's liability. . . .”) (punctuation modified).
If the plaintiffs failed to properly comply with the “cooperation clause,” their demand for appraisal of the personal property loss was improper and that portion of the Final Appraisal Award must be vacated. See also A.R.S. § 12-1501 (A . . . provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.). Did they properly comply? The issue is not yet ripe.
State Farm argues that the plaintiffs did not comply with the “cooperation clause” because they never produced their personal property for inspection. And without actually looking at the property, it is impossible to determine which articles are non-salvageable. The plaintiffs disagree. They argue that the inventory and photographs provided by Arizona Pack Out are sufficient to determine which items are non-salvageable. (Doc. 37, pp. 7-8, 12) They maintain that they complied with the “cooperation clause” by giving State Farm all the information that they had about the damaged property. (Doc. 37, pp. 8-9) Moreover, they assert that State Farm had ample opportunity to view the personal property while the house was being dried out by Servpro and prior to its removal by Arizona Pack Out. (Doc. 37, pp. 6-9) They further maintain that State Farm never asked to view their personal property until March of 2023, after the appraisal was concluded. (Doc. 37, p. 7) And even then, the plaintiffs assert, it failed to finalize the appointment with Arizona Pack Out. Id.
Based on this record, a reasonable trier of fact could find for either party. Accordingly, on this record there remains a genuine issue of material fact. See also Tavilla v. Emp. Mut. Cas. Ins. Co., No. 1 CA-CV 06-0764, 2008 WL 2154800, at *5 (Ariz.Ct.App. May 20, 2008) (“The proposed instruction essentially restates the Tavillas' position that they . . . had substantially complied with the contract. As explained above, this was a question of fact for the jury to decide.”) (unpublished). Addressing the issue now would waste scarce judicial resources, risk inconsistent judgments, and compromise the plaintiffs' right to a jury trial. See also 13B Fed. Prac. & Proc. Juris. § 3532, n. 16 (3d ed.); Kindra Lake Towning [sic] L.P. v. Donat Ins. Servs., LLC, No. 16 C 3916, 2017 WL 622224, at *4 (N.D. Ill. Feb. 15, 2017) (“[T]he concern is one of timing-this Court must decide whether to address Plaintiffs' claims now or later-a classic issue to be addressed by ripeness principles.”). State Farm's motion to vacate the personal property award pursuant to the “cooperation clause” issue should be denied without prejudice. See also Clark Equip. Co. v. Arizona Prop. & Cas. Ins. Guar. Fund, 189 Ariz. 433, 442, 943 P.2d 793, 802 (Ct. App. 1997) (“[A]n insured's breach of a cooperation provision normally relieves an insurer of liability, but only if the insurer has been substantially prejudiced thereby. Whether an insurer has suffered substantial prejudice is a question for the trier of fact.”).
The Complaint was filed before the appraisers returned a personal property award. It therefore does not address the propriety of that award and states only that State Farm must “promptly complete a fair adjustment of the personal property loss . . . .” (Doc. 1, p. 8) The court assumes nevertheless that the propriety of that award and the homeowners' demand for appraisal will be resolved by the time this action is concluded. See Fed.R.Civ.P. 15(b) (Issues not raised in the pleadings may be tried by the parties' express or implied consent.).
In the alternative, State Farm argues that the appraisal panel exceeded its powers by returning a personal property appraisal when there was no “disagreement” about that amount of loss. (Doc. 31, p. 16) This argument is similar to State Farm's policy construction argument, but it also incorporates Arizona arbitration law.
In Arizona, the process of arbitration is codified at A.R.S. § 12-1501, et seq. The statutory scheme allows a motion to confirm an arbitration award pursuant to Section 12-1511, which reads as follows:
A party seeking confirmation of an award shall file and serve an application therefor in the same manner in which complaints are filed and served in civil actions. Upon the expiration of twenty days from service of the application, which shall be made upon the party against whom the award has been made, the court shall enter judgment upon the award unless opposition is made in accordance with § 12-1512.
Section 12-1512 allows a motion to oppose an arbitration award and reads in pertinent part as follows:
A. Upon filing of a pleading in opposition to an award, and upon an adequate showing in support thereof, the court shall decline to confirm and [sic] award and enter judgment thereon where:
1. The award was procured by corruption, fraud or other undue means;
2. There was evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or misconduct prejudicing the rights of any party;
3. The arbitrators exceeded their powers;
4. The arbitrators refused to postpone the hearing upon sufficient cause being shown therefor or refused to hear evidence material to the controversy or otherwise so conducted the hearing, contrary to the provisions of § 12-1505, as to prejudice substantially the rights of a party; or
5. There was no arbitration agreement and the issue was not adversely determined in proceedings under § 12-1502 and the adverse party did not participate in the arbitration hearing without raising the objection . . . .
“Generally, in the absence of fraud or mistake the action of an arbiter empowered by a contract or statute to construe and determine its conditions is final and conclusive upon the parties.” Park Imperial, Inc. v. E. L. Farmer Const. Co., 9 Ariz.App. 511, 513-14, 454 P.2d 181, 183-84 (1969). “If it were otherwise, the ostensible purpose for resort to arbitration, i.e., avoidance of litigation, would be frustrated.” Id. Accordingly, “the trial court [is] required to view the arbitration award in a light most favorable to upholding the said award. . . .” Id.
“[A]n arbitration award is not subject to attack merely because one party believes that the arbitrators erred with respect to factual determinations or legal interpretations.” Hirt v. Hervey, 118 Ariz. 543, 545, 578 P.2d 624, 626 (Ct. App. 1978). “Apart from questions of fraud or corruption, the decisions of the arbitrators on questions of fact and of law are final and conclusive, except when they conflict with express guidelines or standards set forth or adopted in the arbitration agreement.” Id. (punctuation modified) And the court will presume “that arbitrators decided only those issues submitted for arbitration.” Einhorn v. Valley Med. Specialists, P.C., 172 Ariz. 571, 573 (App. 1992). “The party challenging the arbitration award has the burden of proving the existence of grounds to vacate the award.” Fisher on Behalf of Fisher v. Nat'l Gen. Ins. Co., 192 Ariz. 366, 369, 965 P.2d 100, 103 (Ct. App. 1998).
State Farm's second argument posits that the personal property award must be vacated because “[t]he arbitrators exceeded their powers.” A.R.S. § 12-1512(A)(3). And they exceeded their powers because they returned an award on the personal property claim before it became ripe for appraisal. And it never became ripe because the homeowners failed to comply with the “cooperation clause.”
The court need not address this argument because it will eventually prove moot. It relies on an initial finding that the homeowners failed to properly comply with the “cooperation clause.” But if the trier of fact decides that they did not properly comply, State Farm's policy construction argument is dispositive and the personal property award must be vacated because the conditions necessary for appraisal were not met. The court need not express an opinion as to whether the personal property appraisal should be vacated for the additional reason that the appraisers “exceeded their powers.” A.R.S. § 12-1512(A)(3).
Finally, State Farm argues that the award must be vacated because the appraisers “refused to hear evidence material to the controversy . . . or otherwise so conducted the hearing, contrary to the provisions of § 12-1505, as to prejudice substantially the rights of a party.” A.R.S. § 12-1512(A)(4). Section 12-1505 provides as follows: “Unless otherwise provided by the agreement . . . [t]he parties are entitled to be heard, present evidence material to the controversy and to cross-examine witnesses appearing at the hearing.”
State Farm argues specifically that the panel refused to view the personal property, and without doing so, it was impossible to determine which items were non-salvageable. The court agrees that viewing the property could have increased the accuracy of the appraisers' ultimate valuation, but it finds that the appraisers did not “refuse” to hear this evidence.
During the appraisal process, State Farm's appraiser, Salene, insisted on a number of occasions that the personal property should be viewed by the panel. In apparent deference to State Farm's position, the appraisers did not issue an appraisal of the personal property loss while this issue existed.
On January 19, 2023, however, Jennifer Boldi, clarified State Farm's position that the contents claim was not ripe for appraisal because the contents had never been inspected. (Doc. 31-4, p. 12) The umpire Mosher seemed to agree that, in light of State Farm's concern, the contents should be viewed by the panel. He stated as follows: “In light of the continued dispute between the parties . . . I believe it is prudent that we address the final portion of the contents loss with an inspection . . . .” (Doc. 31, p 12) Apparently, Mosher believed that the parties should view the personal property because State Farm wanted to submit that evidence not because he personally believed that viewing the evidence was necessary for the panel to determine the value of the personal property.
But on February 10, 2023, Salene responded as follows: “Based on [Boldi's] email of late in which State Farm stated their position on the contents not being appraisable, I see no reason for me to pursue the inspection of the contents at this time.'” (Doc. 31, pp. 12-13) (emphasis added) Four days later, the umpire, Mosher, and Rex signed the Final Appraisal Award setting the personal property loss at $135,636.65 RCV. (Doc. 31, p. 13)
The court finds that while Salene originally insisted that the panel view the personal property, he withdrew this request on February 10, 2023. Four days later, the Final Appraisal Award was signed. Apparently, Mosher and Rex decided that the “inventory furnished by Waldie and packout photos” contained enough information to return an informed decision on the personal property loss. See (Doc. 31, p. 13) The appraisers did not “refuse[] to hear evidence material to the controversy.” A.R.S. § 12-1512(A)(4) (emphasis added). When the appraisal award was signed, that evidence was no longer being offered by any party. State Farm's motion to vacate the personal property award should not be granted on this issue.
RECOMMENDATION
The Magistrate Judge recommends that the District Court, after its independent review of the record, enter an order
DENYING without prejudice the defendant's Motion to Partially Vacate Appraisal Award, filed on April 6, 2023. (Doc. 31) If the trier of fact determines at trial that the homeowners failed to properly comply with the “cooperation clause,” State Farm may renew its motion that the personal property appraisal award must be vacated.
Pursuant to 28 U.S.C. §636 (b), any party may serve and file written objections within 14 days of being served with a copy of this report and recommendation. If objections are not timely filed, the party's right to de novo review may be waived. The Local Rules permit the filing of a response to an objection. They do not permit the filing of a reply to a response without the permission of the District Court.