Mandatory Appraisal of Scope or Cause of Loss Disputes Cannot be Compelled

Vuksanaj v. Nationwide Mutual Fire Insurance Company

The none of you who has read and memorized my curriculum vitae knows that back in November of 1996, I hosted a seminar for insurance claims professionals entitled "Mandatory Appraisal of Property Insurance Claims in New York -- Historical Background, Legal Pre-requisites, Procedural Guidelines and Practical Advice".  That was the Scope seminar -- complete with the halitosis-ridding mini bottle of Scope mouthwash for each attendee, meant to visually imprint what then was only my professional opinion, viz, that disputes between property insurers and their insureds over the scope or extent of a covered loss was not amenable to the appraisal process because such a dispute was inherently one involving a legal question of coverage.

Approximately one year later I was fortunate to obtain for Nationwide Insurance what became the seminal and oft-cited case in New York on this issue:  Kawa v. Nationwide Mutual Fire Ins. Co.  In Kawa, Erie County Supreme Court Justice Thomas Flaherty agreed with  my argument and held that the parties' dispute over whether the policyholder's wind-damaged siding needed to be completely  replaced or could be repaired was essentially a coverage dispute rather than one simply involving the amount or value of the loss and was therefore not amenable to the policy's appraisal condition.  With few exceptions, Kawa has remained "good law" in New York -- being cited several times since for the same proposition.

In an effort legislatively to overturn Kawa and another reported decision involving the question of whether appraisal could be compelled by legal action --  Fahrenholz v. Security Mut. Ins. Co., 291 876 (4th Dept. 2002) -- a certain New York public adjusting company headquartered in Western New York lobbied for years for the passage of a bill to eliminate CPLR § 7601's then exception of an appraisal under the New York standard fire insurance policy from a special proceeding for specific performance of such a condition.   Finally, in 2010, those lobbying efforts paid off, with the passage and enactment of Senate Bill 2088-A (2010), which amended New York Insurance Law §§ 3404 and 3408 and CPLR § 7601.  I blogged about those new statutory sections here and here.

With respect to the impact of the statutory changes, in April 2010 I wrote the following:

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.  

It did not take long for there to arise a dispute within which to test the new laws' reach, specifically with respect to whether scope or coverage disputes were now subject to compulsory appraisal in New York.  Once again, I was fortunate enough to represent Nationwide Insurance in such a dispute, one that stems from damage to a residential structure caused by a tree that was blown onto the house in a windstorm.  The wide disparity between the parties' respective repair damage estimates related mostly to a dispute over how much damage the windstorm and tree actually caused to the house.  When Nationwide declined to submit that scope dispute to "mandatory" and binding appraisal, the policyholder brought suit in New York state court.  After Nationwide removed that action to federal court, the policyholder moved for partial summary judgment to compel that appraisal pursuant to the recently added subsection (c) of New York Insurance Law § 3408.

The issue was fully briefed and Southern District of New York District Court Judge Cathy Seibel heard oral arguments from me and the policyholder's counsel, Johnathan Lerner of Lerner, Arnold & Winston, LLP, on June 6, 2011.  In agreeing with my arguments and denying the plaintiff's motion for partial summary judgment, Judge Seibel delivered her carefully reasoned decision in Vuksanaj v. Nationwide Mut. Fire Ins. Co., from the bench:

The issue raised by the motion is a narrow one. It is whether a dispute regarding the value of damage to an insured property that implicates a determination regarding the cause or source of such damage is appropriate for appraisal under the insurance contract. The plaintiff argues that the term "amount of loss," as that term is used in the appraisal provision, entails more than just the amount of damages, but also includes a determination of the scope of loss; in other words, what caused the loss.

The defendant responds with four arguments:

One, that the plaintiff has not met the appropriate requirements for a "summary judgment" motion; 

Two, that the dispute is inherently one regarding whether there was a "accidental direct physical loss," and there is a coverage dispute not amenable to appraisal as matter of law; 

Third, that the policy expressly states that appraisers are not to determine coverage issues; and  

Fourth, that the plaintiff's home is likely no longer in the same condition as it was after the windstorm, and, therefore, appraisal is not practical.

I do not need to address the first and fourth, because I find the second and third dispositive.

Defendant argues that under the section of the policy entitled, quote, "Perils Insured Against," the policy specifies that it covers only "accidental direct physical loss" to the property, and therefore, according to the defendant, even before engaging in an inquiry concerning the amount of loss and determining whether the amount of loss may be sent to appraisal, it first has to be decided whether there was an accidental direct physical loss so as to trigger coverage. 

Defendant argues that because it has not been determined whether the damages in dispute -- in other words, the loss corresponding to the disputed portion of the parties' estimates -- even constitute accidental direct physical loss, appraisal is premature at this juncture. 

The parties agree that New York law applies.  In New York, the law is clear that the appraisal clause in an insurance contract only applies to disputes as to the amount of loss or damage, not to disputes where the insurer denies coverage or liability altogether. Maimes v. Automobile Insurance Company, 183 N.Y.S. 690, at 691, a case from Monroe County in 1920 that was affirmed by the Fourth Department; Accord Indian Chef v. Fire & Casualty Insurance Company, 2003 Westlaw 329054, at Page 3. 

Although there is a split of authority, both within and outside New York, on the subject, the heavy weight of authority supports the defendant's position that this dispute implicates a coverage question under the contract and is, therefore, not suitable for appraisal. 

The seminal case on this issue under New York law is Kawa v. Nationwide Mutual Fire Insurance Company, 664 N.Y.S.2d 430, from Erie County Supreme Court in 1997.  Although it is only a trial court from a far-flung county, it has become the seminal case, even if not a binding one. 

Although plaintiff has done an admirable job in attempting to distinguish it, it seems to me that it is very much on point.  In that case, as in this one, the insureds' residence was damaged in a windstorm.  After inspecting the residence, the insurer tendered a settlement offer for the cost of repair, which the insureds rejected. They claimed that the insurer was required to replace all of the aluminum siding, which was the most prominent area of damage, with new siding, and that appraisal was the appropriate procedure for resolution of the dispute.  The insurer claimed that most of the damage to the aluminum siding was pre-existing, and, therefore, excluded from coverage.  The insurer maintained that the issue presented was not an "amount of loss" dispute, but rather a coverage dispute, which was properly resolved by the Court.  The Court agreed, saying the following: 

"The parties agree that the fundamental question presented is whether their dispute constitutes a question of coverage or a question as to the amount of loss . . . the appraisal clause only applies to a case with an agreement" quote, " 'as to the amount of loss or damage' " -- unquote -- "and not where the insurer denies liability. Based upon the submissions hereon, this Court concludes that defendant contests liability and is not merely disagreeing as to the value of loss.  In reaching this conclusion, the Court notes that the . . . affidavit of defendant's claims adjuster . . . clearly raises a question as to liability.  She opines that the condition of the house siding she observed was the result of age, wear and tear and/ or poor or improper maintenance, and that the face nailing she observed was the result of prior efforts to repair the aluminum siding, and was not the results of plaintiff's actions during the windstorm."  That is from Page 431. 

Similarly, Mr . Delillo, who the defendant retained for its final estimate, stated in his affidavit that in his opinion -- and I am quoting -- "almost 57,000" -- that's not a quote -- "of the repairs and costs listed in plaintiff's estimate are for items that were not damaged by or due to the fallen tree."  That is from Paragraph 14 of his affidavit. 

And the remainder of the difference between the estimates, he notes, is due to a disagreement as to value of the losses covered by the tree. Both sides seem to agree that that difference would be amenable to appraisal. But the biggest chunk of the difference is due to what Mr. Delillo believes is damage that was not caused by the tree. 

The Court in Kawa ultimately held that the dispute goes to coverage under the policy, and can only be resolved by analysis and application of the policy. And the same may be said about this case. The dispute here regarding the, quote, "amount of loss" is incidental to the larger question of which damage to the house was caused by the windstorm, a question regarding coverage and liability that must be determined before the case is submitted to appraisal. 

Plaintiff argues that the defendant has implicitly consented to her entire claim being covered under the policy by issuing partial payment on the claim, but that argument is untenable. 

First, the plaintiff has been unable to cite to any cases where the courts have held that partial payment under similar circumstances constitutes consent to coverage. Second, and more importantly, the defendant's partial payment pertains only to the loss which both parties agree was caused by the windstorm -- that is, the loss that is indisputably covered by the insurance contract -- not the loss that defendant maintains was pre-existing or caused by something else. 

Therefore, while the defendant has agreed that the loss caused by the windstorm is covered by the contract, it has not agreed that the remaining damage to the house is covered under the contract. Had the defendant given plaintiff a check for any amount that it maintains corresponds to nonwindstorm damage, that would be a different story, but that is not the case here. 

Federal courts, both in New York and elsewhere, have  followed the reasoning laid out in the Kawa case.  For example, a series of cases in this district stemming from the 9/11 attacks follow the Kawa rule.  Zar Realty Management Corp. v. Allianz Insurance Company involved the situation where the insurance company  made various payments for damages directly caused by the attacks, but the insureds also claimed for, among other things, the cleanup of lead present in the HVAC system and ductwork of the subject premises. The insurer had the view that that condition pre-existed the attacks. The Court concluded that the essential dispute concerned the scope of defendant' s policy coverage, and not the computation of the amount of loss, and, accordingly, an appraisal was not appropriate to resolve the dispute. That is 2003 Westlaw 1744288, at Page 4, a Southern District case from 2003. See also, Duane Reade, Inc., v. St. Paul Fire & Marine Insurance Company , 261 F.Supp.2d 293, at 296, also from 2003. Courts in other jurisdictions have applied the same rule in similar situations. 

Plaintiff cites to a case called Wausau Insurance Company v. Herbert Halperin Distribution Corp., 664 F. Supp. 987, from the District of Maryland in 1987, in support of the argument that the phrase "amount of loss," as used in the appraisal clause here, is not limited to merely cash value, but the case itself does not really support that argument. 

First, the language of the appraisal clause there is different from the one in this case, in that the one in the Wausau case provided for an appraisal where the parties failed to agree as to either the cash value or the amount of the loss, which is different from our language. Second, and in any event, the Court in Wausau held that the causation dispute there concerned neither the actual cash value nor the amount of loss, and, therefore, was unsuitable for appraisal; basically, the same law as in Kawa.

In that case, there was a roof collapse, and an inspection revealed that the collapsed areas were rotten and decayed by fungus and mold due to long-term exposure to moisture. The insureds wanted the entire roof replaced because they claimed it was structurally impossible to repair one area alone.  The insurer maintained that it was liable only for the immediate and direct damage from the partial collapse, because the remaining damage was caused by the pre-existing fungus and mold that was excluded. 

The Court agreed with the insurer and denied the insured's request for appraisal until the coverage dispute regarding which portions of the roof were covered was resolved.  It noted in dicta that "If the insurer was disputing that as a factual matter a larger area than that immediately damaged by the occurrence had to be repaired in order to repair the immediate damage itself, that would constitute an 'amount of loss' question," but that was not the case, and, therefore, it was not an appropriate situation for an appraisal. The same applies here. 

If the dispute in our case were simply regarding the value of the loss or the cost to replace the loss that both parties agree was caused by the tree, that would be an "amount of loss" question, but the question here is whether the disputed damages were caused by the tree or something else.  See also De La Cruz v. Bankers Insurance Company, 237 F. Supp.2d 1370, 1376; Auto-owners Insurance Company v. Kwaiser, 476 N.W.2d 467, at 469 to 70; and Hawkinson Tread Tire Service Company v. Indiana Lumbermen Mutual Insurance Company , 245 S.W.2d 24, at 28. 

Plaintiff relies on a few cases that adhere to the minority view that disputes regarding cause of loss are not coverage questions, but rather, valuation questions appropriate for appraisal. 

Plaintiff relies heavily on CIGNA Insurance Company  v. 23 Didimoi Property Holdings, N. V. , 110 F. Supp. 2d 259, at 268, where the district court in Delaware ruled that a dispute as to the cause of a loss was a  matter for the appraiser, not the Court. 

In that case, the question was whether a portion of the damage for which the insured sought to be indemnified was caused by a building fire, which was a covered peril under the policy, or by asbestos and microbial agents already present in the building, which were not covered.  CIGNA explored the conflicting case law, but ultimately adopted the minority view, holding that, although, quote, "coverage questions, such as whether damage is excluded for reasons beyond fire damage, are legal questions for the Court as this case progresses . . . the Court believes that whether a particular item was damaged as a result of fire or fire-fighting efforts is appropriately reserved for the appraisal process." 

CIGNA, however, was decided under Delaware law, and  the Court based its holding, at least in part, on the public policy in Delaware "favoring alternate resolution procedures like appraisal."  Plaintiff has not shown that the same policy exists under New York law. Indeed, New York courts have made clear that appraisal is not the same as alternative dispute resolution procedures. New York courts have drawn sharp distinctions between appraisal and arbitration, for example, noting that appraisal is not designed to put an end to the controversy between contentious parties, but instead, concerns collateral matters, and leaves the rest of the controversy open for adjudication in the legal forum. That is In re American Insurance Company, 203 N.Y.S. 206, at 208, from the First Department back in 1924. See also, In re Delmar Box Company, 309 N.Y. 60, at 63 to 64 from 1955; and Kawa, 664 N.Y.S.2d, at 431 to 32. 

Plaintiff also cites to two New York State trial court decisions in line with CIGNA, but neither of those cases persuade me. 

The first is Yeshiva Eitz Chaim, Inc., v. Foremost Insurance Co., New York Supreme Court, Rockland County, 11 February 24, 2009, which Mr. Lerner attached to his affidavit as Exhibit G.  That was a windstorm case. The parties disagreed over the extent of the damages that should be included in the calculation in the amount of loss, and the Court held that that term would include not only the cost of repairs, but also the scope of the damage covered under the contract. The Court did not acknowledge the contrary holding in Kawa, which in nearly all cases is the starting point in the discussion.  Indeed, it did not cite any case law, and I therefore do not find it persuasive. 

Finally, the plaintiff brought to my attention the Kirkpatrick case which it enclosed with its December 24th letter. Kirkpatrick concerned a petition to appoint an umpire, not a motion for summary judgment to compel appraisal.  Indeed, the insurer and the insured in Kirkpatrick had already entered into an agreement to submit the dispute to appraisal. Nothing in that case indicates that there was indicated a dispute regarding what caused the loss -- whether, for instance, there was a dispute regarding whether a covered peril or a  pre-existing condition caused the loss -- and the Court noted that the insurer had never contested coverage as the defendant does here. The Court in Kirkpatrick distinguished Kawa on those grounds.  For the same reasons, Kirkpatrick is distinguishable from our case. 

So I conclude that plaintiff cannot overcome the weight of authority, both in New York and elsewhere, holding that a dispute as to what caused the loss goes to coverage under the policy and cannot be resolved by appraisal. 

Now, plaintiff's last argument is that if I decline to compel appraisal, I am cutting against the very purpose and objective of insurance. But Kawa and its progeny do not somehow support a wholesale disregard for an insured's position. They merely say that such determinations of coverage should be made by the Court, not by appraisers. 

The parties will fight this one out. If the finder of fact -- I do not know if it will be me or a jury -- agrees with the plaintiff that the entirety of the losses claimed are covered under the contract, the plaintiff will then have the  opportunity to pursue indemnification for those losses. If the parties cannot agree on the cost, that can be appraised. See Kawa at Page 431. 

Finally, the language of the appraisal clause itself supports denial of the plaintiff's motion. As the defendant points out, the appraisal clause here is different than those in the cases I discussed a moment ago, in that it expressly states that appraisers may not determine questions of coverage or issues relating to conditions precedent, such as, for example, whether a particular damage to the subject property was due to "an accidental direct physical loss." 

And even if the appraisal. clause did not contain such exclusionary language, the instant dispute would nonetheless be inappropriate for appraisal, as Judge Scheindlin so held in the Secord case, which I have as 2011 Westlaw 814743, where the "introductory appraisal clause" language is identical to that here. 

There, the insureds sought indemnification for losses due to a nearby blasting activity. The insured and the insurer agreed that damage due to the blasting was covered under the contract, but the insurer said that sane of the loss that the insureds sought to recoup had pre-existed the blasting and were caused by general wear and tear. The clause there did not expressly state that the appraisers were prohibited from addressing issues regarding coverage and conditions precedent, but it contained nearly identical introductory language as we have here, specifying that "If you and we fail to agree on the amount of loss, either party may make a written demand that each selects an independent appraiser." 

Now, that case was decided under Connecticut law, but there was no Connecticut case law on point, and it was decided as a matter of contract interpretation. 

Judge Scheindlin, in rejecting the magistrate judge's recommendation, reasoned as follows: 

"The insurance company could have included a general arbitration clause in its policy, but it did not.  Alternatively, the parties could have expressly authorized the appraisers to decide scope and coverage issues in determining loss amount, but they did not.  What the parties did, however, was alert this Court to a legal dispute that must be resolved as a prerequisite to bringing suit. The appraisers will be able to determine the amount of the loss only after this Court separates the losses attributable to the blasting activities (covered) from those attributable to general wear and tear (not covered). To direct the parties to proceed with an appraisal, before the exact contours of insurer liability have been judicially established, would place the proverbial cart before the horse." 

That rationale applies with equal force here.  So even from a "contract interpretation" standpoint, the plaintiff's claim must fail.  Once this Court separates the covered losses from the tree from the noncovered losses, if there be any, the appraisers will be able to determine the dollar value of the loss. 

Lastly, the plaintiff argues that the recent amendments to Section 3408 (c) of the New York Insurance Law compel the reference of this dispute to appraisal. The section reads: 

"In the event of a covered loss, whenever an insured or insurer fails to proceed with an appraisal upon demand of the other, either party may apply to the Court ... for an order directing the other to comply with such demand. If an appraisal is so ordered, it shall be limited to a determination of actual cash value and/or replacement cost, or the amount of loss which shall be determined as specified in the policy and shall proceed pursuant to the terms of the applicable appraisal clause of the insurance policy and not as an arbitration." 

First, that language is clear that the Court retains discretion to order parties to proceed to appraisal.  It does not suggest appraisal is somehow mandatory in the circumstances we have here. 

Second, as the defendant points out, the statute clearly conditions the submission of a dispute to appraisal on a determination that the loss claimed is covered by the insurance policy.  For the reasons discussed above, that has to be  determined in this court. 

So for the foregoing reasons, the motion to compel appraisal is denied.

I suppose I'd rather live in a "far-flung county" than have my legal arguments reside in such territory.  A transcript of Judge Seibel's otherwise unreported decision is here.  But now it's a single microfiber in the fabric of the Internet, so New York property insurers may at least know it's out there.  If anyone would like to see the memoranda of law from the motion, shoot me an email.