Opinion ID: 799603
Heading Depth: 2
Heading Rank: 1

Heading: Appraisal Demand

Text: Amerex contends that the Excess Insurers' appraisal rights under the contract were waived, as their June 4, 2007, demand was untimely. Amerex is correct that, notwithstanding the policies' silence on a time limit for the appraisal demand, New York recognizes that the right to require an appraisal is not indefinite as to time, but must be exercised within a reasonable period. Chainless Cycle Mfg. Co. v. Sec. Ins. Co., 169 N.Y. 304, 310, 62 N.E. 392 (1901). We therefore must determine whether the Excess Insurers' delay in making the appraisal demand was reasonable. In doing so, we recognize that the meaning of that term, in this context, will depend[ ] upon the facts of the particular case. Id. We also recognize that New York public policy favors an appraisal proceeding over a trial on damages, and under New York law, waiver of the right to an appraisal is not lightly inferred. SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, No. 01 Civ. 9291, 2004 WL 2979790, at  (S.D.N.Y. Dec. 1, 2004), citing S & E Motor Hire Corp. v. N.Y. Indem. Co., 255 N.Y. 69, 72, 174 N.E. 65 (1930) (internal quotation marks omitted); see also In re Penn Cent. Corp. (Consol. Rail Corp.), 56 N.Y.2d 120, 127, 451 N.Y.S.2d 62, 436 N.E.2d 512 (1982); In re Delmar Box Co. (Aetna Ins. Co.), 309 N.Y. 60, 63, 127 N.E.2d 808 (1955). In applying New York law to determine the scope of reasonableness for purposes of appraisal demands, Amerex urges us to accept the rule articulated by the Wisconsin Court of Appeals in Lynch v. American Family Mutual Insurance Co., 163 Wis.2d 1003, 473 N.W.2d 515 (Wis.Ct. App.1991). The Lynch court held that absent a policy provision to the contrary, an insurance company may not demand an appraisal of a loss after the commencement of an action by the insured on that loss when the insurance company failed to demand the appraisal prior to the lawsuit even though it had an opportunity to do so. Id. at 517. While at least one district court, applying New York law, has expressly considered and rejected the Lynch court's formulation of this rule, see Peck v. Planet Ins. Co., No. 93 Civ. 4961, 1994 WL 381544, at  (S.D.N.Y. July 21, 1994), the New York Court of Appeals appears not to have analyzed this issue. [2] Because of that lack of guidance, we must either (1) predict how the New York Court of Appeals would resolve the question, or (2) certify the question to the New York Court of Appeals for a definitive resolution. Highland Capital Mgmt. LP, 460 F.3d at 316. See also N.Y. Comp.Codes R. & Regs. tit. 22, § 500.27(a) (authorizing certification of determinative questions of New York law... for which no controlling precedent of the [New York] Court of Appeals exists); Morris v. Schroder Capital Mgmt. Int'l, 445 F.3d 525, 530-31 (2d Cir.2006). We resort to certification only sparingly, mindful that, in diversity cases that require us to apply state law, it is our job to predict how the [New York Court of Appeals] would decide the issues before us. See DiBella v. Hopkins, 403 F.3d 102, 111 (2d Cir.2005) (internal quotation marks omitted). Therefore, we do not certify questions of law where sufficient precedents exist for us to make [a] determination. Id. The precedents here provide us with an adequate basis for determining, without certification, that the New York Court of Appeals would not follow the Lynch court in holding that an appraisal demand is automatically rendered untimely once the opposing party has initiated litigation. The New York Court of Appeals has held that the exercise of appraisal rights must occur within a reasonable period of time, and that this reasonableness determination must depend[ ] on the facts of the particular case. Chainless Cycle Mfg. Co., 169 N.Y. at 310, 62 N.E. 392. Because the application of the term reasonable requires a fact-sensitive analysis, we interpret the intent of the New York Court of Appeals to allow courts to address questions of timeliness on a case-by-case basis, even after litigation has commenced, as several federal district courts have already done. See e.g., SR Int'l Bus. Ins. Co., 2004 WL 2979790, at ; Indian Chef, Inc. v. Fire & Cas. Ins. Co. of Conn., No. 02 Civ. 3401, 2003 WL 329054 (S.D.N.Y. Feb. 13, 2003); Peck, 1994 WL 381544, at . In light of the kind of inquiry that New York courts instruct us to make when determining the timeliness of an appraisal demand, we do not believe that the New York Court of Appeals would adopt the mechanistic and fact-insensitive rule that Amerex suggests. Instead, we agree with the framework followed by the district courts that have applied New York law in this area. This framework includes three factors, none dispositive: (1) 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); (2) whether the parties engaged in good-faith negotiations over valuation of the loss prior to the appraisal demand; and (3) whether an appraisal is desirable or necessary under the circumstances. SR Int'l Bus. Ins. Co., 2004 WL 2979790, at , quoting Peck, 1994 WL 381544, at  (internal numbering altered). We conclude that the New York Court of Appeals would adopt this analytical framework for three reasons. First, these factors allow courts to determine whether waiver is appropriate based on the particular circumstances of each case, which is what New York appellate courts have interpreted the reasonableness inquiry to require, see Chainless Cycle, 169 N.Y. at 310, 62 N.E. 392, and which is the usual inquiry signified in the law by the term reasonableness. And the inconvenience of bringing suit is just one circumstance to be considered in determining whether a delay in demanding appraisal was unreasonable. Sch. Dist. No. 1 of Silver Bow County v. Globe & Republic Ins. Co. of Am., 146 Mont. 208, 404 P.2d 889, 893 (1965). In some cases, the initiation of litigation may well be the appropriate event that triggers a party's waiver of its appraisal rights. In other cases, that will not be so, particularly where investigation or mediation of the dispute is still ongoing when the litigation is filed. Second, the doctrine of waiver appropriately focuses on the actionsor inactionof the party against whom waiver operates: a waiver is the voluntary and intentional relinquishment of a known right, which is not created by negligence, oversight, or silence. Plato Gen. Const. Corp./EMCO Tech Const. Corp. v. Dormitory Auth. of State, 89 A.D.3d 819, 932 N.Y.S.2d 504, 511 (2d Dep't 2011). Amerex's proposed rule undermines this principle. An adversary's decision to initiate litigation is outside of the party's control, thus taking the party's rights out of its own hands and placing them into the hands of its adversary. Similarly, while there may be instances where the initiation of litigation is the appropriate boundary for determining the timeliness of a demand, it cannot be the default rule, as such a default would encourage the premature initiation of litigation in derogation of contractually-favored alternative dispute mechanisms such as appraisal and mediation. See Terra Indus., Inc. v. Commonwealth Ins. Co. of Am., 981 F.Supp. 581, 601 (N.D.Iowa 1997) (applying Iowa law). And third, the Lynch court's rigid rule is in the minority: while many jurisdictions appear not to have reached this question, and some have done so only recently, see Rogers v. State Farm Fire & Cas. Co., 984 So.2d 382 (Ala.2007), our research has discovered only a single case in Kentucky that appears to follow a rule similar to the one announced in Lynch. See Continental Ins. Co. v. Vallandingham & Gentry, 116 Ky. 287, 76 S.W. 22, 24 (1903). (Unless the insurer asks for the arbitration or appraisal before suit brought [sic], the failure to appraise is not a defense.). Even in Kentucky, no case since 1944 has cited Continental Ins. Co. for this or any other proposition. See Upington v. Commonwealth Ins. Co. of N.Y., 298 Ky. 210, 182 S.W.2d 648, 650 (1944). Moreover, at least one other court applying state law, besides those applying New York law cited above, has expressly noted the Wisconsin rule and rejected it. See Terra Industries, Inc., 981 F.Supp. at 601. The Lynch court itself relies on Hayes v. Allstate Ins. Co., 722 F.2d 1332, 1335 (7th Cir.1983). While the Hayes court did state that a policy must expressly provide that no action may be maintained upon it until after the amount of loss is determined by appraisal in order for a post-litigation appraisal demand to be effective, there is reason to question the continued authority of this decision. The Hayes court, sitting in diversity, applied broad principles of Indiana insurance law to reach its conclusion. Id. But as the Lynch court acknowledges, an Indiana court has, post- Hayes, rejected the rule that Hayes appears to endorse, finding that a post-litigation appraisal demand by the defendant did not result in waiver when no evidence of prejudice resulting from the delay in demanding appraisal was presented to the trial court. Monroe Guar. Ins. Co. v. Backstage, Inc., 537 N.E.2d 528, 529 (Ind.Ct.App.1989). We regard the Indiana court's interpretation of Indiana law as more authoritative than the conflicting federal decision. Those courts that have addressed the issue have generally embraced a more flexible approach similar to the one utilized by federal district courts applying New York law. See Rogers, 984 So.2d at 387-88 (Alabama); Monroe Guar. Ins. Co., 537 N.E.2d at 529 (Indiana); School Dist. No. 1, 404 P.2d at 893-94 (Montana); Hanby v. Md. Cas. Co., 265 A.2d 28, 31 (Del.1970); see also Terra Indus., Inc., 981 F.Supp. at 601. Given the scant authority in favor of the Lynch court's rule, the support for a more flexible rule expressed in the multiple other jurisdictions to have considered the question, and the rule's other debilities cited above, we are confident that the New York courts would not join Wisconsin in this respect. Applying the framework set forth above, we conclude that the Excess Insurers did not waive their appraisal rights by asserting them after Amerex initiated litigation. The first factor, whether the appraisal demand would result in prejudice to the non-demanding party, SR Int'l Bus. Ins. Co., 2004 WL 2979790, at , must be assessed as of the time the demand is made, without the benefit of knowing how the appraisal unfolded after that demand. That the appraisal ultimately lasted three years is, therefore, of no moment for our analysis. Viewing the Excess Insurers' demand from that perspective, we see no reason to have expected that the appraisal process would be unduly burdensome for either party. Amerex's challenges of the Panel's ultimate valuation and the time taken to reach that valuation are merely post-hoc criticisms of the appraisal process and results and do not provide a reason why the district court should have anticipated at the time the appraisal was demanded that the appraisal would prejudice Amerex. Had the appraisal been conducted more expeditiously, and reached a result more favorable to Amerex, the prejudice Amerex claims would not have occurred. Nor is it clear that the actual appraisal process was more complex and time-consuming than litigation would have been, particularly in light of the fact that litigation would likely have resulted in motion practice addressed to assorted coverage issues raised in the Excess Insurers' Answer before the ultimately dispositive valuation of the claim even commenced. Amerex argues that the long delay between the rack collapse and the appraisal demand suggested that the Excess Insurers' appraisal demand would prejudice Amerex. The argument is unconvincing. Although the separation between the collapse and the appraisal demand was significantalmost six yearsit is undisputed that much of the delay was due to Amerex's inaction. The Excess Insurers assert, and Amerex does not dispute, that Amerex refused to interact with the Insurers between the date of the collapse and the presentation of its claim almost two years later. Moreover, the Insurers' subsequent two-year investigation included significant, apparently avoidable delays due to Amerex's failure to promptly produce documents necessary to the investigation. Indeed, many of the Excess Insurers' claims in mediation dealt with Amerex's failures to produce the information sought. The second factor asks whether the parties have engaged in good-faith negotiations over valuation of the loss prior to the appraisal demand. SR Int'l Bus. Ins. Co., 2004 WL 2979790, at . If so, a party's appraisal demand in the midst of negotiations is likely to be timely. The Excess Insurers' demand satisfies this test. That the insurers made a settlement offer just two weeks before Amerex filed suit, while mediation was still in progress, demonstrates that negotiations were continuing when the lawsuit was filed. It was Amerex, not the Excess Insurers, that terminated the mediation and settlement negotiations by initiating this action. Although Amerex claims that the appraisal demand was designed to deny it the opportunity to conduct discovery, in light of the evidence adduced above, we find no reason to conclude that the parties' ongoing negotiations and the Excess Insurers' previous investigation had been conducted for any purpose other than the fair resolution of Amerex's claims. The final inquiry is whether an appraisal is desirable . . . under the circumstances. Id. The factors relevant to inquiry include, among other factors, whether the appraisal is likely to facilitate a speedier resolution of the dispute than would occur in the district court proceeding; the expected expertise of an appraisal panel in making its valuation determinations; and the complexity of the valuation. Here, at the time the Excess Insurers made their demand, the district court's expressed expectation was that the appraisal process would facilitate a prompt resolution to an extended, complicated, wholly factual dispute concerning the extent of Amerex's damages, and that the Panel would be sufficiently expert to resolve the questions placed before it. It was eminently reasonable for the district court to conclude that, if the value of the claim could be authoritatively fixed, the parties might well be able to resolve the dispute by settlement, without the need to address legal issues regarding coverage. All of these factors suggest that the appraisal was thus desirable . . . under the circumstances when the demand was made. Id. The district court expressly anticipated that the appraisal process would lead to a prompt resolution of the most basic dispute between the parties. Given the parties' own participation in selecting the members of the Panel, the parties could help to ensure the Panel's expertise. Moreover, the complexity of the valuation undertaken here is beyond dispute. The widely differing valuations of lost business income advanced by each party and the length of the investigations conducted by the primary insurer, the Excess Insurers, and the mediator suggest that determining the valuation of Amerex's loss is highly technical and time-consuming. Such complexityor lack thereofis precisely why determining the timeliness of an appraisal demand is such a fact-intensive affair. In cases where insurance companies have ample experience and the valuation investigation is routine such as damage to an insured's house following a hurricanethe reasonable period during which the parties can demand appraisal will likely be relatively short. See, e.g., Sanchez v. Prop. & Cas., Ins. Co. of Hartford, No. H-09-1736, 2010 WL 413687 (S.D.Tex, Jan. 27, 2010) (holding that a near one-year delay in making an appraisal demand was unreasonable on the facts of that case). But the reasonable length of time during which appraisal can be demanded correlates directly with the complexity and novelty of the valuation: the more complex the valuation, the longer the period during which a party can assert its appraisal rights. In light of the foregoing analysis, we conclude that, under New York law, the Excess Insurers did not waive their contractual appraisal rights, and that their demand for appraisal was timely.