Tuesday, April 20, 2010

Impact of New York's New Laws on Compelling Appraisal Under Property Insurance Policies

For those who may have already read my post from last Thursday (the one preceding this post) on New York's new laws regarding compelling appraisal under New York property insurance policies, I've added some of my thoughts on the impact of these legislative changes.  If appraisal is something you deal with from time to time, consider this:

Impact of the New Law:

The impact of these statutory changes is severalfold:
  1. 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.

  2. 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. 

  3. 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.


Anonymous said...

I do not see how this resolves the scope vs. amount issue, if anything the new law makes it more confusing. Do you agree?

Roy A. Mura said...

I don't think the legislation was intended to address or resolve the scope vs. amount issue. Although some may argue that it does, the new legislation should not affect the scope issue, in my opinion, except to the extent that it may require insurers to be more particular in how they reserve and then exercise their right to decline payment for what they believe is not covered, even after a compelled appraisal.