It took the New York State Legislature eight years, but they've finally overturned me. Okay, maybe not me, but an appellate decision I obtained in 2002 for an insurer client on the issue of whether an insurer could be compelled to proceed with an appraisal under a property insurance policy.
In Fahrenholz v. Security Mut. Ins. Co., 291 876 (4th Dept. 2002), the Appellate Division, Fourth Department, correctly noted, as had then Erie County Supreme Court Justice Eugene Fahey (who now sits on the Fourth Department) on the motion below, that the then-existing version of New York Insurance Law § 3404 "did not eliminate the prohibition against seeking specific performance of the appraisal provision in the standard fire insurance policy set forth in CPLR § 7601". Implying that it did not approve of that statutory prohibition, however, the Fourth Department added that "[f]urther legislative action is required to eliminate that prohibition."
That legislative action has finally occurred with the passage of Senate Bill 2088-A, which took effect immediately upon Governor Paterson's signing of the bill on March 30, 2010. The bill:
- amends Insurance Law § 3404(g);
- adds new subsection (c) to Insurance Law § 3408; and
- amends CPLR § 7601.
________________________________________________________________________ 2088--A Cal. No. 50 2009-2010 Regular Sessions I N S E N A T E February 11, 2009 ___________ Introduced by Sen. BRESLIN -- read twice and ordered printed, and when printed to be committed to the Committee on Insurance -- reported favorably from said committee, ordered to first and second report, ordered to a third reading, passed by Senate and delivered to the Assembly, recalled, vote reconsidered, restored to third reading -- reported favorably from said committee and committed to the Committee on Rules -- committee discharged, bill amended, ordered reprinted as amended and recommitted to said committee AN ACT to amend the insurance law and the civil practice law and rules, in relation to standard fire insurance policies THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: 1 Section 1. Subsection (g) of section 3404 of the insurance law, as 2 added by chapter 27 of the laws of 1990, is amended to read as follows: 3 (g) Notwithstanding any other provision of law to the contrary, the 4 provisions of the appraisal clause set out on the second page of the 5 standard fire policy and the provisions of section three thousand four 6 hundred eight of this [chapter] ARTICLE, including determinations as to 7 the amount of loss or damage rendered thereunder, shall be binding on 8 all parties to the contract of [fire] insurance evidenced by the policy 9 AND MAY BE ENFORCED BY EITHER THE INSURER OR THE INSURED BY APPLICATION 10 MADE PURSUANT TO SUBSECTION (C) OF SECTION THREE THOUSAND FOUR HUNDRED 11 EIGHT OF THIS ARTICLE. 12 S 2. Section 3408 of the insurance law is amended by adding a new 13 subsection (c) to read as follows: 14 (C) IN THE EVENT OF A COVERED LOSS, WHENEVER AN INSURED OR INSURER 15 FAILS TO PROCEED WITH AN APPRAISAL UPON DEMAND OF THE OTHER, EITHER 16 PARTY MAY APPLY TO THE COURT IN THE MANNER PROVIDED IN SUBSECTION (A) OF 17 THIS SECTION FOR AN ORDER DIRECTING THE OTHER TO COMPLY WITH SUCH 18 DEMAND. IF AN APPRAISAL IS SO ORDERED, IT SHALL BE LIMITED TO A DETERMI- 19 NATION OF ACTUAL CASH VALUE AND/OR REPLACEMENT COST, OR THE AMOUNT OF EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD03015-06-9 S. 2088--A 2 1 LOSS WHICH SHALL BE DETERMINED AS SPECIFIED IN THE POLICY AND SHALL 2 PROCEED PURSUANT TO THE TERMS OF THE APPLICABLE APPRAISAL CLAUSE OF THE 3 INSURANCE POLICY AND NOT AS AN ARBITRATION. 4 S 3. Section 7601 of the civil practice law and rules is amended to 5 read as follows: 6 S 7601. Special proceeding to enforce agreement that issue or contro- 7 versy be determined by a person named or to be selected. A special 8 proceeding may be commenced to specifically enforce an agreement[, other 9 than one contained in the standard fire insurance policy of the state,] 10 that a question of valuation, appraisal or other issue or controversy be 11 determined by a person named or to be selected. The court may enforce 12 such an agreement as if it were an arbitration agreement, in which case 13 the proceeding shall be conducted as if brought under article seventy- 14 five OF THIS CHAPTER. Where there is a defense which would require 15 dismissal of an action for breach of the agreement, the proceeding shall 16 be dismissed. PROVIDED, HOWEVER, THAT THIS SECTION SHALL NOT APPLY TO 17 ANY AGREEMENT CONTAINED IN THE STANDARD FIRE INSURANCE POLICY OF THE 18 STATE WITH THE EXCEPTION OF AN ACTION TO ENFORCE THE APPRAISAL CLAUSE 19 PURSUANT TO SECTION THREE THOUSAND FOUR HUNDRED EIGHT OF THE INSURANCE 20 LAW WHICH SHALL NOT BE ENFORCED AS AN ARBITRATION AGREEMENT. 21 S 4. This act shall take effect immediately.
Senate Bill 2088-A was substituted for the Assembly's version, Bill A4758A, which included a sponsor's memo that set forth the following justification for the Assembly's version of the bill:
Impact of the New Law:The appraisal provision required by law in the standard fire insurance policy is a vehicle to assist in quickly settling contract disputes between the insured and insurer, rather than more time consuming litigation. Without the appraisal process the insured is forced to accept an offer from the carrier that they think is deficient or to pursue recovery through litigation which is made cast [sic] prohibitive by the expenses of bringing the action. A 2002 decision of the Supreme Court, Appellate Division, Fourth Department (THOMAS H. FAHRENHOLZ V. SECURITY MUTUAL INSURANCE COMPANY AND THE KREINER COMPANY, INC), pointed out that further legislative action is required to eliminate the prohibition set forth in CPLR 7601 against seeking specific performance of the appraisal provision in the standard fire insurance policy[.] Section 7601 of the Civil Practice Law and Rules which now allows an individual to start a special proceeding to enforce a contract or agreement, exempts fire insurance policies from such proceedings. This bill would remedy the problems inherent in CPLR 7601 by providing clear language to allow either party to utilize the appraisal process more frequently and thereby avoid the high costs and delays inherent in protracted litigation.
The impact of these statutory changes is severalfold:
- Special Proceedings to Compel Appraisal: "In the event of a covered loss", insureds and insurers can now compel the other to proceed with a requested appraisal. What if the insurer believes, however, that part of the insured's claimed loss is not covered? Can a requested appraisal still be compelled? Probably, although the insurer should issue a partial coverage declination letter and reserve its rights to decline payment for items of loss it believes are not covered under the subject insurance policy.
- Scope Disputes: Although the new and amended statutory sections should not disturb the 1997 decision I obtained for Nationwide in Kawa v. Nationwide Mut. Fire Ins. Co., 174 Misc.2d 407 (Sup.Ct., Erie Co., 1997), in which the court held, in effect, that the scope of a covered loss is not amenable to appraisal, some will likely argue that scope disputes, i.e., disagreements over whether certain claimed damages are covered as either having been caused by a covered peril or being excluded by the policy, are now amenable to resolution via a compelled appraisal process. I would disagree with such an argument, especially in light of subsection 3808(c)'s "it shall be limited to a determination of actual cash value and/or replacement cost" language. Scope disputes are coverage disputes, and, in my opinion, this new legislation does not require insurers to surrender disputed coverage issues to resolution in the appraisal process. Although it may be difficult to keep disputed scope issues from being included in a compelled appraisal process, insurers should insist on a detailed appraisal award that sets forth each and every item being awarded so that the insurer may pay only what is covered and reaffirm its declination of coverage for what is not.
- Replacement Cost: By expressly mentioning "replacement cost", this bill seemingly overrides of the January 2006 Decision and Order of US District Court Judge Charles Siragusa in Woodworth v. Erie Ins. Co., No. 05-CV-6344 CJS, in which the court rejected the plaintiffs' argument that an insured need not actually rebuild before invoking the appraisal clause, instead holding, without citing to any case law, federal or state, that "no appraisal of such a loss can be performed until after the repair or replacement occurs." Of course, some property insurers may continue to argue that RC is not ripe for appraisal, as a coverage issue, until the repairs or replacement is completed. The Woodworth decision has never been favorably cited by any New York state court for this proposition and the validity of its ruling on the appraisability of replacement cost is questionable, especially now with the enactment of Insurance Law § 3408(c). Insurance practitioners and professionals should note that the New York State Insurance Department's Office of General Counsel has previously opined that the repair/replacement cost of a building is amenable to the appraisal process, even in instances where the parties have already agreed on the RC figure but merely disagree on the physical depreciation needed to determine the loss's physical actual cash value (ACV) figure. See, Standard Fire Insurance Policy: Appraisal, New York State Insurance Department Office General Counsel, Opinion No. 01-03-05.