Mahnke v. Superior Court

Opinion

When an insurer and its insured fail to agree on the amount of loss following a fire, the Insurance Code requires 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. (Ins. Code, § 2071.) 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.^[1] (Arbitration Act). (See, e.g., Lambert v. Carneghi (2008) 158 Cal.App.4th 1120 , 1129 [ 70 Cal.Rptr.3d 626 ].)

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 these disclosure and 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 this case the party-selected appraisers provided disclosure statements identifying potential conflicts. Two months after the disclosures, 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 (a) although section 1281.9’s disclosure and disqualification standards apply to party-selected appraisers, section 1281.91’s 15-day limitation period for disqualification petitions does not; and (b) the Mahnkes’ party-appraiser’s retention as an expert witness by another client of the Mahnkes’ counsel was an impermissible conflict of

On May 15, 2009 the Mahnkes petitioned this court for a writ of mandate compelling the trial court to vacate its order granting CFPA’s petition to disqualify their party-selected appraiser and to enter a new order denying the petition. At this court’s request CFPA filed its opposition to the petition, styled as a “return,” on June 4, 2009. On June 10, 2009 we issued an order to show cause why the relief requested in the petition should not be granted. CFPA filed a “second return” to the petition on June 30, 2009; the Mahnkes filed their reply on July 9, 2009.

DISCUSSION

1. 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. (See Ins. Code, § 2070; Burns v. California FAIR Plan Assn. (2007) 152 Cal.App.4th 646 , 656 [ 61 Cal.Rptr.3d 809 ].) Among other policy provisions, in the event the insurer and the insured disagree about the amount of loss, Insurance Code section 2071 requires the parties to participate in an informal appraisal proceeding in which each party selects “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.^[2]

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. (See Lambert v. Carneghi, supra, 158 Cal.App.4th at p. 1134 [“it is well settled that an appraisal pursuant to section 2071 is an arbitration as a matter of law”]; accord, Michael v. Aetna Life & Casualty Ins. Co. (2001) 88 Cal.App.4th 925 , 934 [ 106 Cal.Rptr.2d 240 ] (Michael); see generally Coopers & Lybrand v. Superior Court (1989) 212 Cal.App.3d 524 , 531-534 [ 260 Cal.Rptr. 713 ] [adoption of Arbitration Act in 1961 erased historical distinction between appraisal and arbitration proceedings; appraisals now subject to Arbitration Act].)

2. 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. As the United States Supreme Court observed in vacating an arbitration award under the Federal Arbitration Act, “It is true that arbitrators cannot sever all their ties with the business world, since they are not expected to get all their income from their work deciding cases, but

Disclosure requirements, therefore, have become standard components of arbitration legislation. Since 1994 section 1281.9 of the Arbitration Act has required proposed neutral arbitrators to disclose “all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.” (§ 1281.9, subd. (a).)^[4]

Few reported cases, however, have considered disclosures by party-selected arbitrators. As one court explained, “bias in a party arbitrator is expected and

Party-selected appraisers, however, have been treated differently from party arbitrators due to Insurance Code section 207l’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. (See, e.g., Louise Gardens of Encino Homeowners’ Assn., Inc. v. Truck Ins. Exchange, Inc. (2000) 82 Cal.App.4th 648 , 658 [ 98 Cal.Rptr.2d 378 ] [“[a]n agreement to conduct an appraisal contained in a policy of insurance constitutes an ‘agreement’ within the meaning of section 1280, subdivision (a), and therefore is considered to be an arbitration agreement subject to the statutory contractual arbitration law” (fn. omitted)]; see generally Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2008) ff 5:29 to 5:29.1, p. 5-21 (rev. # 1, 2008).) For instance, in Gebers v. State Farm General Ins. Co., supra, 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. (Id. at pp. 1652-1653; see Lambert v. Carneghi, supra, 158 Cal.App.4th at p. 1135.) 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. (Gebers, at p. 1652; see also Figi v. New Hampshire Ins. Co. (1980) 108 Cal.App.3d 772 , 776-778 [ 166 Cal.Rptr. 774 ] [vacating arbitration award based on disinterested umpire’s failure to disclose ongoing business relationship between himself and insurer’s designated appraiser].) As the Gebers 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 court expressly rejected State Farm’s reliance on Tate v. Saratoga Savings & Loan Assn., supra, 216 Cal.App.3d 843 and other cases accepting bias in a party arbitrator “because the Legislature made appraiser impartiality a statutory requirement.” (Gebers, at p. 1653.)

As the Michael court recognized, before the enactment of section 1281.9, California courts had applied the rule in Commonwealth, supra, 393 U.S. 145 in deciding motions to vacate based on arbitrator bias. (Michael, supra, 88 Cal.App.4th at p. 937.) The court concluded former section 1281.9, subdivision (e), had in essence embodied the Commonwealth rule and that “failure to disclose constitutes one form of ‘corruption’ ” under section 1286.2, subdivision (b). (Michael, at p. 936.) The court declined to vacate the award, however, after concluding the challenged appraiser’s business relationship with the insurer was not substantial and he had no material financial interest in the profits derived by partners in his law firm who performed work for the insurer in other states. (Id. at pp. 942-943.)

However, just months after Michael was decided, the Legislature rewrote section 1281.9.^[6] (See Stats. 2001, ch. 362, § 5.) Section 1281.9, subdivision (a) now imposes disclosure requirements on a “proposed neutral arbitrator,” and the statutory provision relied upon in Michael (former § 1281.9, subd. (e) [“[a]n arbitrator shall disclose”]), has been revised to state “the proposed neutral arbitrator shall disclose . . . .” (§ 1281.9, subd. (b).) In other words, the single reference in the previous version of section 1281.9 to “an arbitrator” is now restricted to “the proposed neutral arbitrator,” as are the

Accordingly, in the context of “competent and disinterested appraiser[s]” selected by parties in appraisal proceedings pursuant to Insurance Code section 2071, absent express statutory direction, we decline to recognize an automatic and unlimited right of disqualification for disclosures made by those appraisers.^[7]

If sections 1281.9 and 1281.91 do not apply to party-selected appraisers in Insurance Code section 2071 proceedings, under what circumstances may a party-selected appraiser be disqualified?

We start from the United States Supreme Court’s benchmark that impartial arbitrators must disclose to the parties any dealings that might “create an impression of possible bias.”^[8] (Commonwealth, supra, 393 U.S. at p. 149.) As implemented by California courts, “[t]he test is an objective one—whether such an impression is created in the eyes of the hypothetical reasonable person.” (Betz v. Pankow, supra, 31 Cal.App.4th at p. 1508.) Thus, unless “a reasonable member of the public at large, aware of all the facts, would fairly entertain doubts concerning the [arbitrator’s] impartiality . . . ,” the arbitrator is not subject to disqualification. (Flier v. Superior Court (1994) 23 Cal.App.4th 165 , 170 [ 28 Cal.Rptr.2d 383 ]; accord, Guseinov v. Burns (2006) 145 Cal.App.4th 944 , 957 [ 51 Cal.Rptr.3d 903 ]; see also § 170.1, subd. (a)(6)(A)(iii) [requiring disqualification of a judge if “[a] person aware of the facts might reasonably entertain a doubt that the judge would be able to be impartial”].) Moreover, “[potential bias and prejudice must clearly be established by an objective standard. [Citation.] ‘Courts must apply with restraint statutes authorizing disqualification of a judge due to bias.’ ” (People v. Chatman (2006) 38 Cal.4th 344 , 363 [ 42 Cal.Rptr.3d 621 , 133 P.3d 534 ] [construing § 170.1, subd. (a)(6)(A)(iii)].)

“A frequent cause for an impression of possible bias is the existence of a present or past business relationship between the arbitrator and a party, its counsel or a witness. [Citations.] Such a relationship suggests 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, thus giving the arbitrator reason to favor the party for reasons wholly unrelated to the merits of the arbitration.” (Betz v. Pankow, supra, 31 Cal.App.4th at pp. 1508-1509.) The business relationship, however, must be substantial. As Justice White cautioned in his concurring opinion in Commonwealth, “[An arbitrator] cannot be expected to provide the parties with his complete and unexpurgated business biography. But it is enough for present purposes to hold, as the Court does, that where the arbitrator has a substantial interest in a

4. The Disclosed Relationship Between McConihay and the Mahnkes’ Counsel Does Not Warrant His Disqualification

We independently determine whether the undisputed facts might cause a reasonable person to doubt Mr. McConihay’s impartiality.^[9]

At issue here is Mr. McConihay’s disclosure that he had been retained by another client of the Mahnkes’ counsel to testify as an expert witness on construction costs in a case that was then pending. In addition, as revealed by the resume attached to his disclosure statement, Mr. McConihay included the Mahnkes’ counsel as one of 14 lawyers listed as references for his services. His resume further explains he has been involved in the construction and building industry for more than 30 years; he is a licensed, bonded and insured general contractor; he has been a lead witness for general contracting and scope and cost of repair in approximately 700 mediations; and he has participated in numerous arbitrations, testified in trial and been deposed more than 100 times. His resume lists 30 cases in which he participated as a lead expert or consultant, none of which involves the Mahnkes’ counsel.

Based on these facts, would a reasonable member of the public fairly entertain a doubt as to Mr. McConihay’s ability to serve impartially as the Mahnkes’ party-selected appraiser? Mr. McConihay affirms he has no financial interest in the underlying dispute between the Mahnkes and CFPA. Yet