Opinion ID: 799603
Heading Depth: 2
Heading Rank: 2

Heading: Scope of Appraisal

Text: Amerex next contends that the district court should not have upheld the appraisal award because the Panel improperly decided questions of law. Amerex correctly identifies the limit to an appraisal panel's authority under New York law. A basic proposition of insurance law provides that the scope of coverage provided by an insurance policy is a purely legal issue that cannot be determined by an appraisal, which is limited to factual disputes over the amount of loss for which an insurer is liable. Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384, 389 (2d Cir.2005); see also Indian Chef, 2003 WL 329054, at ; 15 Couch on Ins. § 210:42 (3d ed. 2011). Amerex errs, however, in its application of that principle to the facts at hand. In many cases, distinguishing between coverage and amount of loss will be straightforward. For example, in Kawa v. Nationwide Mutual Fire Insurance Co., 174 Misc.2d 407, 664 N.Y.S.2d 430 (N.Y.Sup.Ct.1997), a wind storm damaged the insured's house. After an inspection, the insurance company tendered its settlement offer. The insured rejected the offer and sued, demanding appraisal. [3] The dispute concerned whether the policy required the insurer to repair the house only to its predamaged condition, or, as the insured contended, to replace the house's damaged aluminum siding with vinyl siding. Id. at 431. The court denied the insured's motion to compel appraisal, deeming the dispute one of coverage, rather than damages. Id. Kawa illustrates the legal principle. It was for a court to interpret the policy to resolve the dispute, as an appraiser's assessment of the value of the claim would depend upon the resolution of that legal question. Id. at 431-32. The distinction between coverage and damages becomes more difficult when, as here, the insured seeks coverage for lost business income. In some cases, the policy itself specifies the method of calculating lost business income. See, e.g., HTI Holdings, Inc. v. Hartford Cas. Ins. Co., No. 10-cv-06021, 2011 WL 4595799, at  (D.Or. Aug. 24, 2011). In others, the calculation is necessarily speculative and involves complex apportionments of competing causal factors. Moreover, the calculation of the restoration period, or period during which business income losses can be attributed to the covered event, can broach both legal and factual elements, creating a boundary that will require careful analysis to delimit. The Southern District of New York's treatment of this boundary in the context of business income losses is instructive. 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 ) concerned a dispute between Duane Reade, Inc., and its insurer St. Paul Fire & Marine Insurance Company, after the destruction, on September 11, 2001, of one of Duane Reade's pharmacies located near the World Trade Center. St. Paul Fire 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 terrorists [sic] attacks. Duane Reade I, 261 F.Supp.2d at 294. Thus, the argument in Duane Reade I did not concern the factual determination of the restoration period's end date, but whether the policy calculated that period with reference to an exogenous eventthe reconstruction of the World Trade Center. The district court in Duane Reade I appropriately reserved the determination of that legal dispute for itself, rather than delegating it to an appraisal panel. See also Indian Chef, 2003 WL 329054, at  (concluding that, because the parties disagree[d] about which provisions of the policy apply to the calculation of lost business income, the question was one of coverage rather than damages). 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 that, on the facts of that case, the appropriate scope of the restoration period was the time it would take to rebuild, repair, or replace the damaged property. 279 F.Supp.2d at 239. Once the district court had 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. Id. at 242. The Duane Reade cases illustrate three principles of New York law. First, an appraiser may not resolve coverage disputes or legal questions regarding the interpretation of the policy. Second, the calculation of the restoration period, unless subject to legal challenges, is a factual question about damagesalbeit sometimes a complex and contentious oneappropriately addressed by an appraiser. And third, 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. The Panel's valuation of damages did not violate these principles. While the present dispute certainly included legal arguments concerning the policy's coverage, those disputes were not implicated in the appraisal's resolution. The Panel instead focused solely on determining the extent of the damages, including calculating the relevant restoration period, and did not address whether the Excess Insurers' policies covered those damages. Thus, the Panel did not address conflicting views of the applicable policies, but rather resolved factual questions regarding claims about the conflicting causes of the lost business income. Those were factual questions that can be resolved by a duly appointed appraisal panel, aided by the opinions of experts, including forensic accountants such as those who testified before the Panel below. One of the principal issues before the Panel, for example, was when the effect of the rack collapse stopped influencing the decline of Amerex's business, such that the weak state of its revenues in contrast to prior years could be attributed to other, independent business conditions unrelated to the casualty. That is essentially a factual question about business conditions; it is to be resolved by making factual judgments about events in the world, not legal analyses of the meaning of the insurance contract. The parties contracted to submit such factual issues bearing on the value of the claim to a panel of appraisers rather than to the courts. The Panel's decision was obviously controversial. Such controversy is not unexpected. Apportioning damage causation from among the many factors that influenced the state of Amerex's business in the summer and fall of 2001including the rack collapse, the 2001 recession, the September 11 terrorist attacks, and the bankruptcies of several of Amerex's leading customerswas a factually laborious task that might have led to widely differing outcomes. The appraisal necessarily involved the exercise of judgment and discretion in weighing competing arguments regarding causation and loss. That an appraisal panel exercises judgement or produces a controversial result, however, does not turn factual disputes regarding damages into legal disputes regarding coverage. The complexity of the calculations of Amerex's business losses required appraisers to do more than mechanistically consult objective market values. But while the Panel made a complex decision among several competing factual theories, it did not adjudicate the law. For Amerex to succeed in challenging the Panel's decision as ultra vires, it must identify the questions regarding the meaning of the policy that the Panel decided. Amerex does not and cannot make that identification. Beyond conclusory assertions that the valuation must necessarily have addressed coverage questions, Amerex has failed to identify any specific legal issue of contract interpretation that either the Panel decided or that was necessary to untangle the factual question of whether and to what extent Amerex's business fortunes were attributable to the insured event.