Under New York law, certain coverage disputes may not prevent appraisal. You may have heard the general rule that issues involving coverage disputes under an insurance policy are purely legal issues that should not be determined by an appraisal panel. Appraisal in the property insurance context is meant to resolve a disagreement over the amount of loss for which the insurance carrier is responsible. This seemingly clear rule becomes murky when the parties disagree on its application to the facts of the loss at hand.
We have seen several Sandy claims in New York where insurance carriers have refused appraisal demands, contending coverage issues prohibit appraisal. The distinction between coverage and damages may become challenging when business income is claimed. In some cases, the policy specifies the method of calculating lost business income. In others, the calculation involves complex apportionments of competing causal factors. Calculation of the restoration period, or period during which business income benefits are paid, can broach both legal and factual elements, creating a boundary that requires careful analysis to delimit.
The Southern District of New York discussed this boundary in Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Co., 261 F.Supp.2d 293 (S.D. N.Y. 2003) (“ Duane Reade I ”) and Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Co., 279 F.Supp.2d 235 (S.D. N.Y. 2003) (“Duane Reade II”). On September 11, 2001, one of Duane Reade’s pharmacies near the World Trade Center was destroyed. St. Paul demanded an appraisal to determine the precise scope of the restoration period. The parties disputed the policy’s coverage on this point: Duane Reade asserted “a right under the policy to recover business interruption losses for the entire period until the World Trade Center is rebuilt (if it is),” while St. Paul Fire insisted that the “plaintiff’s recoverable losses are limited to those suffered within 21 months following the terrorist attacks.” The argument in Duane Reade I did not concern the factual determination of the restoration period’s end date, but whether the period should be determined by the reconstruction of the World Trade Center.
The district court reserved the determination of that legal dispute for itself, rather than delegating it to an appraisal panel. Once the legal question was resolved, the factual question of determining the actual date of the restoration period was well within the appraisal panel’s scope.
In Duane Reade II, the district court resolved the legal question by dismissing both sides’ interpretations of the policy as extreme, concluding the appropriate scope of the restoration period was the “time it would take to rebuild, repair, or replace” the damaged property. Once the district court clarified the scope of the period of restoration within the meaning of the policy, defining that specific period was a sufficiently factual question to allow resolution by the appraisal panel.
The Second Circuit Court of Appeals, applying New York law, has stated “the presence of a coverage dispute does not preclude an appraisal demand. Only a coverage dispute that precedes the valuation of damages will prevent such a demand. Coverage disputes that are independent of the valuation of damages can stand in abeyance pending the appraisal.”1
This clarification is important in light of the fact there are many business interruption issues related to Hurricane Sandy in New York, and there have been many conflicting positions taken by insurance carriers in response to policyholders’ appraisal demands.