Scope of Appraisal vs. Appraisal of Scope -- New York

There has been a good deal of conflicting case law over the years over what kinds of property loss disputes are and are not amenable to the appraisal process. This post discusses four of those court decisions and concludes with what I think is the current state of the law in New York on the proper scope of property loss appraisals.

425 West Main Associates LP v. Selective Insurance Company of South Carolina 

(Supreme Court, Genesee Co., 2018)

The policyholder, 425 West Main Associates LP commenced this special proceeding to compel an appraisal of its reported roof damage/loss claim.  The policyholder claimed that on March 8, 2017, the roof of its commercial premises was damaged as a result of wind and weight of ice and snow, which resulted in further damage to the interior of the premises. 

425 West Main hired National Fire Adjustment Company, Inc. (NFA) to assist in determining the damage and submitting claims to its insurer, Selective Insurance Company, for replacement of the roof and repair for the interior of the building. After NFA's analysis, 425 West Main claimed damages of more than $530,000.00.

425 West Main's wind damage claim was tendered to Selective on March 22, 2017. Before Selective's inspection of the property, a roofer had already removed the allegedly wind-damaged roofing and made temporary repairs. Selective inspected the roof on March 28, 2017.  Selective's general adjuster indicated that tenants of the property had advised him that they were experiencing leaking and staining of ceiling tiles before the date of loss. Furthermore, a forensic engineer concluded the defects in the roofing system were caused by long-term deterioration as opposed to a wind event.

On April 12, 2017, Selective sent 425 West Main a detailed letter and the engineering report advising 425 West Main of the basis for covering only a portion of the roof. Selective denied coverage for the full replacement of the roof on the ground that the damage was not caused by wind, but rather wear and tear or deterioration. Selective would only cover the cost to tarp and patch one section of the roof, and replace only the membrane of that section.

On October 24, 2017, 425 West Main demanded an appraisal pursuant to the policy. The policy provided:

If we and you disagree on the value of the property, the extent of the loss or damage or the amount of the loss or damage, either may make a written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser and notify the other of the appraiser selected within twenty days of such demand.

After 425 West Main demanded the appraisal on October 24, 2017, Selective advised 425 West Main in a November 6, 2017 letter that it would not proceed with appraisal. Selective claimed that the dispute was not subject to the appraisal condition in the policy because it did not involve the value of the property or the extent or amount of the loss or damage. Instead, Selective claimed, the dispute centered on the cause of the loss or damage and whether it is covered under the policy.

In DENYING the policyholder's petition to compel appraisal and dismissing the special proceeding, Supreme Court Justice Henry Nowak ruled:

    425 West Main claims that Selective's refusal is a mere pretext to refuse to engage in the appraisal pursuant to the policy and unnecessarily delay providing 425 West Main the insurance proceeds to which it is entitled. Selective contends that the property is not an appropriate candidate for appraisal because the very legitimacy of 425 West Main's claim remains in dispute. Insurance Law § 3408(c) provides that the appraisal provision in a policy triggers only where there is a "covered loss," and specifically prohibits appraisal to "determine whether the policy actually provides coverage for any portion of the claimed loss or damage" (see also Pilkenton v New York Cent. Mut. Fire Ins. Co., 112 AD3d 1327 [4th Dept 2013]). 425 West Main claims that because Selective agreed to cover a portion of the roof, it constitutes a "covered loss" thereby subjecting Selective to the appraisal provision.

    In Louati v State Farm Fire & Cas. Co., 161 AD3d 701, 702 (1st Dept 2018), the parties disputed whether water damage on the floor of a bathroom at the petitioner's premises "was caused by a burst pipe (a covered cause of loss) or by another, excluded cause." The parties also disputed whether it was necessary to retile the entire first floor when the covered loss directly affected only the bathroom (id.). The petitioner sought to conduct an appraisal for the property, all while respondent opposed the appraisal until the cause of the damage could be resolved (id.). The trial court denied the motion to compel the appraisal in order to await resolution of the coverage issues in a plenary action, and the Appellate Division unanimously affirmed (id.).

    Similarly, in this action, significant coverage issues exist as to the cause of the loss in this case — whether it was damage created as a result of the windstorm or long-term water infiltration. As in Louati, this court denies the petition to compel the appraisal and dismisses the proceeding without prejudice after resolution of the coverage issues in a plenary action.

On January 31, 20202, the Fourth Department unanimously affirmed Justice Nowak’s order “for reasons stated in the decision at Supreme Court.” On March 11, 2020, the policyholder plaintiff moved the Fourth Department for leave to appeal to the New York Court of Appeals. On July 17, 2020, the Fourth Department denied that motion and, as far as I can tell, the policyholder did not move the Court of Appeals for leave to appeal, ending that action.

Phillips v. New York Central Mut. Fire Ins. Co. 

(Index. No. 811860/2021 [Sup. Ct., Erie Co., 2021])

In this case, which involved a reported hail damage/roof claim, Erie County Supreme Court Justice Donna Siwek DENIED the policyholder's motion for an order under Insurance Law § 3408 compelling appraisal, reasoning:

    We have considered all the papers submitted in this matter, including the affidavits and a Memoranda of Law and find that the issue between Petitioner and Respondent involves a question of coverage, and as a result, the Petition to compel appraisal is denied without prejudice until the coverage issues are resolved. It is not disputed that an appraisal may only be invoked to examine and or consider "the extent of the loss or damage and the amount of the loss" when there are no coverage issues involved. If any portion of the claimed loss or damage involves a coverage issue, that issue may not be determined through the appraisal process. Insurance Law §3408 is clear that the appraisal process cannot be utilized to determine a coverage issue. We agree with Respondent that the question of whether there is coverage for replacing the three sides of the house that were not damaged as a result of the hailstorm is a coverage issue. The New York Central policy language requires the carrier to pay Petitioner for the replacement cost "of that part of the building damaged with material of like kind and quality and for like use". (See Respondent's Exhibit '"A", Section I - CONDITIONS, C. Loss Settlement 2. a. (2)., NYSCEF Document # 15)

    In the absence of any damage to the other three sides of the homes' siding, we agree with the carrier that there is a question as to whether or not the coverage requires New York Central to pay to replace the undamaged portions of the siding because it will no longer match the north side of the home that was actually damaged and for which New York Central will pay to replace with siding of "like kind and quality and for like use". Respondent takes the position that providing matching siding for purposes of aesthetics is not covered under the policy. We agree that this issue requires a coverage determination. The language the policy provision's need to be interpreted by a court in order to resolve the parties' dispute. The coverage questions to be answered include:

• What constitutes a "direct physical loss" under the policy?

• Does the policy require New York Central to replace the undamaged siding because it will no longer match the new siding?

• Does the coverage preclude payment for the non-damaged siding due to policy exclusions for "wear and tear", .., deterioration and the "'inherent vice" existent in the building materials?

• Does the policy language which requires New York Central to replace the siding with "material of like kind and quality and for like use" require New York Central to pay for the three undamaged sides because they can not match up the old siding with "material of like kind and quality"?

    Where a parties' dispute is essentially a difference regarding coverage, the request for appraisal should be denied. See, Kawa v. Nationwide, l 74 Misc.2d 407 (S. Ct. Erie Co. 1997); Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384 (2d Cir. 2005); Indian Chef Inc. v. Fire & Cas. Ins. Co. of Connecticut, 2003 WL 329054 (SDNY Feb. 13, 2003).

The policyholder in Phillips did not appeal Justice Siwek’s corresponding order.

Matter of Pottenburgh v. Dryden Mut. Ins. Co. 

(Supreme Court, Tompkins Co., 2017)

Policyholder counsel and public adjusters are fond of citing this decision, thinking it provides more than, in my opinion, it actually does.  In GRANTING the policyholder’s petition to compel and ordering Dryden Mutual to proceed with an appraisal of the homeowner insureds’ vandalism claim, Justice Rumsey held:

    Notably, respondent has not denied liability for damages sustained in the vandalism incident and it does not identify any policy provisions that need to be interpreted by the court to resolve the parties' dispute. Rather, it is clear from the parties' respective submissions that the basis for respondent's objections to an appraisal is limited to the extent of work required to repair the damage caused by the vandalism incident. Such disputes "are factual questions that fall squarely within the scope of the policy's appraisal clause" (Quick Response Commercial Div., LLC v Cincinnati Ins. Co., 2015 WL 5306093, *3, 2015 US Dist LEXIS 120415, *8 [ND NY, Sept. 10, 2015, No. 1:14-cv-779 (GLS/DEP)] [citations omitted] [applying New York law]; see also Hyman, 2016 NY Slip Op 32700[U], *2, quoting Quick Response). Respondent cites Kawa v Nationwide Mut. Fire Ins. Co. (174 Misc 2d 407 [1997]) for the proposition that a dispute over whether it was necessary to repair or replace the house siding is one involving the scope of coverage. However, in Kawa, the fundamental dispute was not the extent of necessary repairs; rather, it was one of causation, namely, whether the condition of the aluminum siding on the home was a result of improper maintenance that had been performed prior to the windstorm incident, or whether it resulted from the insured's efforts to secure the siding during the windstorm, and the court held that the issue of causation was incidental to an underlying legal controversy regarding the meaning of the policy and its application to the facts (see Kawa, 174 Misc 2d at 408-409).

    In sum, issues of causation relate to the scope of coverage, which is not a proper subject for an appraisal, and issues regarding the extent of necessary repairs involve valuation of damages, which are properly submitted for an appraisal. This conclusion is supported by the persuasive and extensive analysis set forth in Lee v California Capital Ins. Co. (237 Cal App 4th 1154, 1170-1173, 188 Cal Rptr 3d 753, 764-767 [2015]), in which the court held, like the court in Kawa, that issues of causation are not properly submitted to appraisal because they involve the scope of coverage, while the issue of whether property was damaged at all is properly determined by the appraisers, because the scope of repairs made necessary by a covered loss, and the cost of any such repairs, directly bear upon the valuation of the loss.[2]

Kawa v. Nationwide was my case, by the way. I’ve been litigating issues relating to property insurance policies appraisal clause since 1995.

Dryden Mutual appealed Pottenburgh to the Third Department, and in October 2017, the Third Department affirmed the trial court’s decision. I can’t give you a Google Scholar address for that decision, because the very next month, Dryden moved to vacate that appellate decision, which the Third Department granted, leaving Supreme Court’s decision in place.

Whatever you think of the trial-level Pottenburgh decision, note that it does explicitly state that “issues of causation relate to the scope of coverage, which is not a proper subject for an appraisal[.]”

Matter of Louati v. State Farm Fire & Cas. Co.

(161 AD3d 701, 702 (1st Dept 2018)

In this case, the parties disputed whether water damage on the floor of a bathroom at the policyholder's premises "was caused by a burst pipe (a covered cause of loss) or by another, excluded cause." The parties also disputed whether it was necessary to retile the entire first floor when the covered loss directly affected only the bathroom.  The policyholder sought to conduct an appraisal for the property, and State Farm opposed the appraisal until the cause of the damage could be resolved. The trial court DENIED the motion to compel the appraisal in order to await resolution of the coverage issues in a plenary action, and the Appellate Division unanimously AFFIRMED, holding: 

    The court correctly found that policy coverage issues exist that must be resolved before an appraisal can proceed (see Insurance Law § 3408 [c]).

    An issue exists as to whether the water damage on the floor of the first-floor bathroom was caused by a burst pipe (a covered cause of loss) or by another, excluded cause (see Matter of Pottenburgh v Dryden Mut. Ins. Co., 55 Misc 3d 775, 778 [Sup Ct, Tompkins County 2017], citing Kawa v Nationwide Mut. Fire Ins. Co., 174 Misc 2d 407, 408-409 [Sup Ct, Erie County 1997]). An issue also exists as to whether petitioner's failure to retain the floor tiles for inspection is a basis to deny coverage (see Fuchs v Sun Ins. Off., Ltd., 149 Misc 600, 600-601 [Mun Ct, NY County 1933], citing Johnson v Hartford Fire Ins. Co., 94 Misc 163, 167 [App Term, 1st Dept 1916]).

    However, to the extent the parties dispute whether it was necessary to re-tile the entire first floor when the covered loss directly affected the bathroom only, or whether it was necessary to replace any floor tiles given respondent's failure, upon inspection, to observe any damage to the floor, these disputes present factual questions that are properly decided in an appraisal (see Pottenburgh, 55 Misc 3d at 777-778; Quick Response Commercial Div., LLC v Cincinnati Ins. Co., 2015 WL 5306093, *3-4, 2015 US Dist LEXIS 120415, *6-9 [ND NY, Sept. 10, 2015, No. 1:14-cv-779 (GLS/DEP)]).

* * * CONCLUSION* * *

In my opinion (which you should not necessarily rely on because this blog DOES NOT GIVE OR REPRESENT LEGAL ADVICE [see the footer of this page]), the current state of the case law in New York on the proper scope of appraisal is:

• coverage questions or issues—including questions of covered versus non-covered or excluded causes of loss (i.e., causation issues)—are not amenable to the appraisal process; but
• disputes over the extent of a covered loss, or whether damaged property can be repaired or must be replaced (which the Pottenburgh court called the “scope of repairs”), appear to be amenable to the appraisal process.

So, if your loss involves causation and/or exclusion-based disputed coverage issues and defenses, it falls squarely in the not-amenable-to-appraisal category. So say all four of the above-discussed decisions.  

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.   

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.

Compelling Appraisal -- New York State Legislature Amends Insurance Law §§ 3404 and 3408 and CPLR § 7601

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:

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.

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.

Most legislative changes foster some challenging or defining litigation.  These changes likely will be no different in that regard.  Expect some litigation in the New York courts over the meaning and impact of these changes, and their effect on the rights of parties to New York property insurance contracts to the appraisal process as an informal dispute-resolution mechanism.

New York Supreme Grants Plaintiff Leave to Assert Consequential Damages in Amended Complaint and Denies Insurer's Motion to Compel Appraisal

COMMERCIAL PROPERTY – BI-ECONOMY – CONSEQUENTIAL DAMAGES – ATTORNEY'S FEES – DISCOVERY – ATTORNEY-CLIENT AND ATTORNEY WORK PRODUCT PRIVILEGES – APPRAISAL
De Martino v. Harleysville Worcester Ins. Co.
(Sup. Ct., New York Co., decided 1/21/2010)

On June 20, 2006, plaintiff's building allegedly suffered substantial damage due to the demolition, excavation and construction work plaintiff's neighbor was performing on property adjacent to plaintiff's building.  Plaintiff made a claim to her commercial property insurer, Harleysville Worcester Insurance Company, and a dispute arose over the value of plaintiff's covered loss.  Plaintiff's initial complaint, filed on October 1, 2008, alleged that Harleysville both failed to respond to plaintiff's claims in a timely manner and undervalued plaintiff's loss.

Three motions were at issue in this matter:  (1) by plaintiff to amend her complaint to assert a claim for consequential damages; (2) by plaintiff to compel the disclosure of certain email and fax communications between Harleysville and its contractor, and its attorneys and the contractor, withheld as privileged; and (3) by Harleysville to compel an appraisal of plaintiff's building loss. 

By memorandum decision and order dated September 9, 2009, New York Supreme Court Justice Marilyn Shafer granted plaintiff's motion to amend her complaint to assert a claim for consequential damages allegedly caused by Harleysville's delay in adjusting and paying her building loss claim:

Recent decisions of the Court of Appeals hold that a claim for consequential damages against an insurer may be asserted “so long as the damages were within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting [internal quotation marks and citation omitted]."  Panasia Estates, Inc. v Hudson Insurance Company, 10 NY3d 200, 203 (2008). The fact that the parties contemplated that plaintiff would be insured for losses sustained by a delay in payment and repair to her premises is found in the policy's business interruption clauses.

"The purpose served by business interruption coverage cannot be clearer-to insure that [plaintiff] had the financial support necessary to sustain [her] business operation in the event disaster occurred. The purpose of business interruption insurance is to indemnify the insured against losses arising from inability to continue normal business operation and functions due to the damage sustained as a result of the hazard insured against [internal quotation marks and citations omitted] ."

Bi-Economy Market, Inc. v Harleysville Insurance Company of New York, 10 NY3d 187, 194 (2008).

Because the proposed amendment is not palpably insufficient or patently devoid of merit, as supported by the reasoning in the above-quoted Court of Appeals cases, and the motion for leave to amend was made less than one year after the action commenced, there is no evidence that granting plaintiff's motion would prejudice or surprise defendant.  

With respect to plaintiff's motion to compel disclosure of the pre-suit communications with Harleysville's damage-estimating contractor, the court held that motion in abeyance and directed that Harleysville submit the withheld documents for the court's in camera review.  This decision followed that inspection and addressed Harleysville's motion to compel appraisal.

On plaintiff's request for clarification of the court's September 2009 decision and order, New York Supreme Court Justice Joan Kenney ruled that plaintiff's complaint "may be amended to include consequential damages for attorney’s fees and costs."  Citing the Court of Appeals' decision in Panasia Estates, Justice Kenney held:

Defendant only argued against inclusion of consequential damages because it asserted that plaintiff could not support the claim. In the instant matter, there are conflicting facts as to the manner in which the claim was handled, so that it cannot be determined at this juncture whether or not any alleged delays were reasonable under the circumstances, or which party caused such delays. However, the allegations are sufficient to place the matter before the trier of fact.

The decision of this court dated September 9, 2009, ordered that the complaint be amended in the proposed form annexed to the moving papers, which included the consequential damages plaintiff seeks. The discussion in that decision was directed only to plaintiff's claim for loss of business, because that was all that was argued by the parties in their papers at that time.

The decision does not specify whether the attorney's fees plaintiff sought were for other than the prosecution of this action.  If they were not, the court's most recent decision in this case on attorney's fees ostensibly conflicts with the courts' rulings in Panasia Estates, especially  New York County Supreme Court Justice Karen Smith's initial decision and order in that case, which granted Hudson's motion only to the extent of precluding plaintiff Panasia Estates from asserting any claims for legal fees incurred in the prosecution of its action.  See, also, Authelet v Nationwide Mut. Ins. Co., 2008 NY Slip Op 32929(U) (Sup. Ct., Suffolk Co., decided 10/24/2008)("The Court further notes, to the extent that the plaintiff seeks consequential damages for 'having been compelled to * * * retain legal counsel to seek redress,' that an insured may not recover attorney’s fees or other legal expenses incurred in bringing an action against an insurer, as here, to determine its rights under a policy (citations omitted). Hence, any consequential damages to which the plaintiff may ultimately be entitled shall be exclusive of such expenses."); and Grinshpun v. Travelers Cas. Co. of Conn., 23 Misc 3d 1111(A) (Sup. Ct., Kings Co., decided 3/11/2009)("In the case at bar, Plaintiffs do not allege that they suffered any damages as a consequence of Defendant's bad faith refusal to pay their claims other than the costs associated with having to commence a legal action to enforce their claims.  Such damages are not consequential damages that were contemplated by the policy as in the situations in Bi-Economy and Panasia.")

After having reviewed the communications submitted for an in camera review, the court ruled that Harleysville's attorneys' pre-suit fax to Harleysville's damage-estimating contractor regarding building estimates, the attorneys' pre-suit email on this same subject, and the contractor's pre-suit email response to Harleysville's attorneys were not immune from disclosure based on the attorney-client and attorney work-product privileges, ostensibly finding that those communications were not made for the purpose of facilitating the rendition of legal advice or services, and were not prepared by counsel acting as such and did not otherwise uniquely reflect a lawyer's learning and professional skills.

In denying Harleysville's motion to compel an appraisal of plaintiff's building loss, Justice Kenney ruled, in effect, that Harleysville had waited too long to demand an appraisal under the policy, not having formally done so until nearly three years after the reported loss date and eight months after plaintiff had commenced this suit:

In the case at bar, the court agrees with plaintiff that the first written demand for an appraisal, as mandated by the provisions of the policy, was not made until May 29, 2009, several years after the occurrence and more than nine months after the initiation of the lawsuit. Defendant's letter of May 2 , 2008, only references the appraisal provision of the policy, which is non-obligatory and is only triggered by a written demand. The May 2, 2008, letter does not indicate that, at that time, defendant is demanding an appraisal; the letter merely implies that it may demand an appraisal if the parties cannot reach agreement.

Defendant's instant motion was made only after the lawsuit was filed and some discovery had taken placed. The plaintiff in this action is a 79-year old woman whose only source of income, allegedly, is revenue from the subject building. At this point, halting these proceedings for an appraisal would unduly delay a determination of the matter, and, therefore, is denied.

I'd hazard a guess that 79-year-old insureds on an allegedly fixed or limited income win more often than their insurers on motions such as these.  Although there are several reported decisions relating to the 9/11 World Trade Center tragedy in which insurers successfully invoked their right of appraisal after suit was commenced, the better practice, from an enforceability standpoint, would be to invoke the appraisal option or mechanism as soon as possible and prior to the insured's commencement of suit. 

Neither the September 2009 decision nor this one indicates whether:  (1) there were or are any coverage disputes affecting the parties' respective positions; (2) Harleysville issued any partial declinations of coverage; or (3) Harleysville made any payment of what it believed it owed for the loss to plaintiff.  What these decisions underscore, however, is that the Court of Appeals' February 2008 decisions in Bi-Economy Market and Panasia Estates will continue to be cited in support of insureds' claims of consequential damages against their property insurers whenever there is a denial of coverage or delay in paying a claim, and regardless of whether the insurance contract at issue contemplated such consequential damages.  As we approach the two-year anniversary of those decisions, the state of the case law in New York on the issue of consequential damages against insurers is:

1. consequential damages have not been limited only to claims arising under commercial property policies; 
2. they have not been limited only to policies that afford business interruption or business income loss coverage; 
3. an allegation of "bad faith" conduct by the insurer is not needed to state a claim for consequential damages; and 
4. in all but one reported decision since Bi-Economy and Panasia Estates were decided, New York courts have granted plaintiffs leave to amend their complaints to state claims for consequential damages against their insurers.