Scope of Appraisal vs. Appraisal of Scope — New York
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.
(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[.]”
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; butdisputes 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.
