This article provides an overview of some issues that you may encounter related to demands for appraisal you may want to make or you may receive on Superstorm Sandy claims, including the timing and procedure for demanding appraisal, the scope of appraisal, and the interplay between appraisal and litigation. We have analyzed these issues under New York, New Jersey, and Connecticut law. Generally, these states are in accord on most issues related to appraisal but we note a few of the differences below.
Timing and procedure for demanding appraisal
A typical appraisal provision gives either party the right to demand an appraisal if the parties find that they “disagree on the amount of loss.” See Hala Cleaners, Inc. v. Sussex Mut. Ins. Co., 115 N.J. Super. 11, 13 (Ch.Div. 1971); Drescher v. Excelsior Ins. Co., 188 F. Supp. 158, 159 (D.N.J. 1960) (the insurer has “no right to prevent plaintiffs, the insured, from obtaining the appraisal which they have demanded”). If either side refuses to appoint an appraiser after a proper demand has been made, the court will either compel the refusing party to appoint an appraiser or the court will appoint an umpire. Drescher v. Excelsior Ins. Co., 188 F. Supp. 158, 159 (D.N.J. 1960) (if a party refuses to appoint an appraiser, the court should appoint an umpire and then allow the refusing party to appoint an appraiser to protect its interests); Hala Cleaners, 115 N.J. Super. at 13 (if a party refuses to appoint an appraiser, the court should compel the party to appoint one).
While some appraisal provisions state that a party must demand appraisal within a certain period of time, for example within 60 days of the proof of loss, other appraisal provisions do not provide a specific deadline.
New York has embraced a rather loose rule for determining the timing for demanding appraisal if none is listed, which involves a case-specific determination of whether the timing of the demand was “reasonable.” In SR Int’l Bus. Ins. Co. v. World Trade Ctr. Props., LLC, the court noted that “New York public policy favors an appraisal proceeding over a trial on damages,” and as such “waiver of the right to an appraisal is not lightly inferred.” 2004 U.S. Dist. LEXIS 25642, *8-9 (S.D.N.Y. Dec. 1, 2004). The court stated that when a policy does not specify a time limit for demanding appraisal, “the court must determine whether the demand was exercised within a reasonable period, depending upon the facts of the case.” Id. at *9. In making this determination, courts may look at the following three factors: “(i) whether the appraisal sought is impractical or impossible (that is, whether granting an insurer’s appraisal demand would result in prejudice to the insured party); (ii) whether the parties engaged in good-faith negotiations over valuation of the loss prior to the appraisal demand; and (iii) whether an appraisal is desirable or necessary under the circumstances.” Id. at *9-10. In that case, the court granted the insurer’s motion to compel appraisal due to the lack of prejudice to the insured and the general rule favoring appraisal.
In Peck v. Planet Ins. Co., the court held that the insurer’s demand for appraisal thirteen months after the loss and four months into trial was reasonable because the parties “continually were negotiating and working toward an agreement on the amount of loss.” 1994 U.S. Dist. LEXIS 9957, *3 (S.D.N.Y. July 20, 1994). In Amerex Group, Inc. v. Lexington Ins. Co., the appellate court held that it was reasonable for the insurer to demand appraisal nearly four years after the insured submitted its proof of loss and two months after the insured filed a breach of contract suit. 678 F.3d 193, 197-198 (2d Cir. N.Y. 2012). Affirming that “reasonableness” is a case-specific inquiry, the court noted that cutting off the right to demand appraisal when a party files litigation is the minority rule. Id. at 201.
On the contrary, under Connecticut law, a party can waive the right to appraisal by initiating litigation on the same issue. Giulietti v. Connecticut Ins. Placement Facility, 534 A.2d 213, 216 (Conn. 1987) (“the trial court properly directed a verdict for the defendant on this count, because the plaintiffs, by proceeding to trial before the jury upon the question of the amount of their loss, the very issue to be determined by appraisers, effectively waived their rights under the appraisal clause.). In Trojanowski v. Worcester Ins. Co., the court held that a provision providing that an insured must take “action” against the insurer within 12 months of the loss does not apply to appraisal. 1996 Conn. Super. LEXIS 1404, *2-5 (Conn. Super. Ct. May 28, 1996) (allowing the insured to demand appraisal 14 months after the loss).
Scope of appraisal
In general, appraisals are limited to disputes over the “amount of loss” or value, whereas determinations of coverage are reserved for the courts. Amerex Group, Inc. v. Lexington Ins. Co., 678 F.3d 193, 204 (2d Cir. N.Y. 2012); Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384, 389 (2d Cir. 2005) (applying New York law and holding that appraisal was inappropriate where the insurer contested liability for a windstorm loss). However, the line between “coverage” and “amount of loss” can be difficult to draw and different jurisdictions have come to varied conclusions.
In New York, the rules appear to be rigid. Here, the parties must resolve liability before submitting the issue of value to appraisal. Secord v. Chartis Inc., 2010 U.S. Dist. LEXIS 139852, *26 (S.D.N.Y. Dec. 8, 2010). For example, when an insurer argues that all or some of the alleged damage was the result of excluded wear and tear, the insurer is contesting liability and not merely disagreeing as to the value of the loss. Id., quoting Kawa, 664 NYS2d 430, 431 (Sup. Ct. 1997). This dispute must be resolved in (or outside of) court before the parties can conduct an appraisal as to the value of the alleged damage. Id. Some New York cases have allowed appraisal if the coverage dispute is independent of the valuation issue. Amerex Group, 678 F.3d at 205 (only “[c]overage disputes that are independent of the valuation of damages can stand in abeyance pending the appraisal.”). But, if the insurer denies coverage completely, appraisal would not be allowed.
This appears to be the rule under New Jersey law as well. In Rastelli Bros. v. Netherlands Ins. Co., the court refused to compel appraisal after the insurer denied liability for the insured’s extra expense claim. 68 F. Supp. 2d 448, 449 (D.N.J. 1999). The court noted that the appraisal provision in the policy gave the insurer the right to deny coverage even after an appraisal. The court held that since the issue was not the “amount of loss” but rather the insurer’s “liability for that amount,” the court would not compel appraisal. Id.
On the contrary, under Connecticut law, parties may proceed with an appraisal even if the insurer denies coverage. “Connecticut law does not mandate that the parties resolve their legal contentions before an appraisal may occur.” Secord v. Chartis Inc., 2010 U.S. Dist. LEXIS 139852, *26, citing Giulietti v. Connecticut Ins. Placement Facility, 205 Conn. 424 (Conn. 1987). In Giulietti, the insurer argued that it was not obligated to participate in an appraisal because it denied coverage and the appraisal therefore would be useless should it prevail on its liability defenses. Id. at 431. The Connecticut Supreme Court rejected this argument, however, stating that “[i]f the defendant’s proposition were sound, it would provide an effective and simple way to destroy the insured’s right of appraisal.” Id. at 432. The court added that “[a] determination of the amount of the plaintiffs’ loss by appraisers pursuant to the policy would not have precluded a subsequent determination of the liability issues at a trial.” Id.
Interplay between appraisal and litigation
Unlike Connecticut, courts in New York and New Jersey are clear that appraisal and arbitration are distinct procedures and that appraisals are not subject to the statutes governing arbitration. See Elberon Bathing Co. v. Ambassador Ins. Co., 77 N.J. 1, 16-18 (N.J. 1978) (holding that the New Jersey Arbitration Act is not applicable to appraisals).
In comparing appraisal and arbitration, the New Jersey Supreme Court has stated:
The purposes of both are the same: to submit disputes to third parties and effect their speedy and efficient resolution without recourse to the courts. To assure minimum judicial intervention, the scope of judicial review of both types of recourse is narrow. The distinctions are significant. An agreement for arbitration ordinarily encompasses the disposition of the entire controversy between the parties, and judgment may be entered upon the award, whereas an appraisal establishes only the amount of loss and not liability. Arbitration is conducted as a quasi-judicial proceeding, with hearings, notice of hearings, oaths of arbitrators and oaths of witnesses. Appraisers act on their own skill and knowledge, need not be sworn and need hold no formal hearings so long as both sides are given an opportunity to state their positions.
Elberon Bathing Co. v. Ambassador Ins. Co., 77 N.J. 1, 16-18 (N.J. 1978).
The Connecticut Supreme Court, on the other hand, has held that an appraisal clause in an insurance contract constitutes an agreement to arbitrate and falls within the ambit of Connecticut’s arbitration statutes. Covenant Ins. Co. v. Banks, 177 Conn. 273, 281 (Conn. 1979). Section 52-408 of the Connecticut General Statutes defines “agreement to arbitrate” as “[a]n agreement in any written contract, or in a separate writing executed by the parties to any written contract, to settle by arbitration any controversy thereafter arising out of such contract, or out of the failure or refusal to perform the whole or any part thereof.” As the Connecticut Supreme Court has noted, “[t]he parties themselves, by the agreement of submission, define the power of the arbitrator.” Bic Pen Corp v. Local No. 134, 183 Conn. 579 (Conn. 1981). Under Connecticut law, parties may agree to the parameters of the appraisal. See Middlesex Mutual Assurance Company v. Komondy, 120 Conn. App. 117, 991 A.2d 587, 589-90 (Conn. App. Ct. 2010) (after a fire destroyed the defendant’s home, the parties directed the appraisers to determine “the actual cash value of the loss caused by the fire.”).
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