10-4163-cv
Amerex Group, Inc. v. Lexington Ins. Co. et al.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2011
(Argued: November 28, 2011 Decided: May 10, 2012)
Docket No. 10-4163-cv
AMEREX GROUP, INC., AMEREX USA INC.,
Plaintiffs-Appellants,
— v. —
LEXINGTON INSURANCE COMPANY, WESTCHESTER SURPLUS LINES INSURANCE
COMPANY,
Defendants-Appellees,
ACE USA,
Defendant.
B e f o r e:
HALL, LYNCH, and CHIN, Circuit Judges.
__________________
Plaintiffs-appellants appeal an order of appraisal in the United States District Court
for the Southern District of New York (Harold Baer, J.), and the court’s subsequent order
confirming the appraisal award and granting defendants-appellees’ motion for partial
summary judgment. Appellants argue that (1) appellees waived their appraisal rights by
failing to invoke them within a reasonable time period, (2) the appraisers exceeded their
power by deciding legal issues, and (3) the appraisal was improperly conducted in
violation of appellants’ due process rights. Finding these arguments without merit, we
affirm the district court’s grant of partial summary judgment to appellees and its dismissal
of appellants’ complaint.
DENNIS T. D’ANTONIO, Weg & Myers, P.C., New York, New York (Joshua L.
Mallin, Jonathan C. Corbett, on the brief), for Plaintiffs-Appellants.
MARK L. ANTIN, Gennet, Kallmann, Antin & Robinson, P.C., Parsippany, New
Jersey, for Defendants-Appellees.
GERARD E. LYNCH, Circuit Judge:
This case arises from a longstanding insurance dispute between plaintiffs-
appellants Amerex Group, Inc., and Amerex USA Inc. (“Amerex”), and their excess
insurers, defendants-appellees Lexington Insurance Company and Westchester Surplus
Lines Insurance Company (“Excess Insurers”). Amerex initiated this suit on April 23,
2007, in the United States District Court for the Southern District of New York, after
nearly four years of investigation of its claim by the Excess Insurers and mediation
between the parties. The Excess Insurers responded to the complaint by moving to
compel appraisal according to the terms of the insurance policies. The district court
(Harold Baer, J.) granted the Excess Insurers’ motion. In accordance with the parties’
contract, each side appointed a member of the appraisal panel (“Panel”), and, when the
parties failed to agree on the appointment of the Panel’s umpire, the district court
2
appointed one at their request. The fully-constituted Panel conducted its 30-month
valuation and ultimately quantified Amerex’s loss at less than the value of its primary
insurance contract, thus rendering the Excess Insurers’ policies inapplicable to Amerex’s
claims. The Excess Insurers moved thereafter for partial summary judgment1 on the basis
of this appraisal, and the district court granted the motion, dismissing Amerex’s
complaint.
Amerex now appeals both the order to compel appraisal and the subsequent order
confirming the appraisal and dismissing its complaint, arguing that (1) the Excess Insurers
waived their appraisal rights by failing to demand appraisal prior to the initiation of
litigation; (2) the appraisers decided questions of coverage, contrary to New York law;
and (3) the appraisal process became an arbitration with one-sided discovery, thus
violating Amerex’s due process rights. We conclude that a demand for appraisal was not
untimely; that the appraisers did not decide questions of coverage; and that the appraisal
procedures did not violate Amerex’s due process rights even though the appraisal process
allowed the Excess Insurers to make use of evidence gained through their previous
1
In both the motion to compel appraisal and the motion to confirm the appraisal
award once determined, the Excess Insurers moved for partial summary judgment. These
motions were appropriate, given the various legal claims that Amerex pressed in its
original complaint that the Excess Insurers disputed in their answer that had nothing to do
with the question of appraisal, before or after it was conducted. Nevertheless, the
granting of the second motion for partial summary judgment fully disposed of the case, as
the confirmed appraisal award meant that the Excess Insurers bore no liability under their
policies. There is no dispute that the district court’s order granting the motion, however
styled, was an appealable final order, as it disposed of the entire case by dismissing
Amerex’s complaint.
3
investigations without allowing Amerex to pursue the additional documentary and
testimonial discovery that the company sought. The district court’s orders are thus
affirmed in all respects.
BACKGROUND
I. Facts
The facts in this case are largely undisputed, except where noted. Because the
district court granted the Excess Insurers’ motion for summary judgment, we review
disputed facts in the light most favorable to Amerex. See Amador v. Andrews, 655 F.3d
89, 94 (2d Cir. 2011).
Amerex distributes outerwear in the United States, acting as an intermediary
between its wholesale customers and overseas clothing manufacturers. The company
stored some of the clothing that awaited shipment to its customers in its warehouse in
Avenel, New Jersey, on a large rack system that facilitated the clothing’s storage and
organization.
On August 3, 2001, the rack collapsed, activating the warehouse’s sprinkler
system, which flooded the premises. The water not only damaged Amerex’s
merchandise, but also rendered its computer system inoperable for “one to three weeks,”
and thus prevented Amerex from making promised deliveries. The damages associated
with the collapse included lost merchandise, cancellation of orders, late charges for orders
fulfilled, and lost business income.
4
To manage the risk of such losses, Amerex carried three insurance policies. The
first, issued by Fireman’s Fund Insurance Company (“Fireman’s Fund”), served as
Amerex’s primary insurance, and covered damages associated with the warehouse,
business personal property, business income, and other such losses, up to a limit of $2.5
million. The second and third policies, issued by appellees, provided insurance in excess
of the Fireman’s Fund policy. Each excess policy had a liability limit of $5 million, for a
total of $10 million beyond the coverage provided by Fireman’s Fund.
The excess insurance policies contained substantially identical clauses that allowed
either party to insist in writing on the appointment of an appraisal panel to determine the
extent of losses associated with any claim. The appraisal clause does not specify any time
limit for making such a demand, and instead focuses on the procedure used to appoint the
Panel.
Two years after the rack collapse, on or about June 12, 2003, Amerex submitted its
proof of loss to Fireman’s Fund and the Excess Insurers, claiming total damages of $8.8
million. Fireman’s Fund paid the full amount of its policy; Amerex then sought coverage
from the Excess Insurers for the remaining $6.3 million. The Excess Insurers investigated
the claim until October 2005. During the course of this investigation, the Excess Insurers
interviewed certain Amerex employees concerning the nature of the business and
reviewed financial statements and other documents.
At times, Amerex appears to have prolonged the Excess Insurers’ investigation.
Some documents requested were not immediately forthcoming. The Insurers also
5
requested, but Amerex could not produce, various other documents concerning Amerex’s
shipping and delivery reports and the quantities and/or prices of merchandise shipped
during the period preceding the rack collapse.
Ultimately, on February 21, 2006, the Excess Insurers rejected Amerex’s claim on
three bases: (1) Amerex’s failure to substantiate a number of aspects of its claims, due to
the lack of documentary evidence; (2) alternative explanations for the loss of business
income that Amerex reported, including the September 11, 2001, terrorist attacks,
economic recession, and the bankruptcies of some major customers; and (3) Amerex’s
improper determination of the proper “restoration period,” that is, the date after which
business losses could no longer be attributed to the rack collapse or computer failure.
The parties agreed to meet to discuss the terms of the rejection and the Excess
Insurers’ claim analysis. During the meeting, the Excess Insurers’ consultants and
forensic accountants discussed with Amerex the findings that led them to recommend
rejecting Amerex’s claim. After that meeting, in April 2006, the parties agreed to mediate
their dispute. In the mediation, the Excess Insurers provided significant documentary
evidence to Amerex. Amerex’s own experts also presented their calculation of damages
to the mediator. In April 2007, after conferring with the mediator, the Excess Insurers
made a final offer. Without responding to that offer, Amerex filed the present lawsuit on
April 23, 2007.
6
II. District Court Proceedings
On June 4, 2007, after Amerex had filed its complaint, the Excess Insurers wrote
to Amerex demanding appraisal and answered the complaint the next day, listing the
appraisal demand among their affirmative defenses. The Excess Insurers then moved to
compel an appraisal. Amerex rejected the demand and contested the motion, claiming
that the demand was untimely and was asserted only to preclude Amerex from
prosecuting its claim and obtaining discovery. Amerex also argued that appraisal was
inappropriate because the nature of its claims would require the appraiser to resolve
issues of coverage, which, under governing law, the appraiser was not permitted to do.
The district court granted the Excess Insurers’ motion to compel appraisal on
September 19, 2007. Subject to the terms of their contract, each party appointed one
member of the Panel, and, when the parties could not agree on the Panel’s umpire, they
petitioned the district court to make that appointment. The district court did so and then
stayed the litigation pending resolution of the appraisal.
III. Appraisal
In conducting the appraisal, the Panel reviewed documentary and testimonial
evidence similar to that reviewed during both the Excess Insurers’ initial investigation
and the subsequent mediation. The appraisal proceeding included the examination and
cross-examination of witnesses, and a day exclusively set aside for Amerex’s rebuttal.
On June 15, 2010, after almost two and a half years of review, the Panel issued its
valuation decision, finding that Amerex’s damages amounted to approximately $1.3
7
million, just more than half of the value of Amerex’s insurance policy with Fireman’s
Fund. Pursuant to the parties’ agreement, the Panel did not disclose most of its valuation
methodology. It did, however, determine that the period of restoration concluded on
October 31, 2001. Amerex’s appointed Panel member did not register a vote on the
appraisal, declining to indicate whether he agreed or disagreed with the Umpire’s
conclusions.
Because the Panel valued Amerex’s losses at less than the $2.5 million the
company had already received from its primary insurance carrier, thereby precluding
recovery from the Excess Insurers under the terms of their policies, the Excess Insurers
moved in district court for summary judgment. The district court granted the Excess
Insurers’ motion and dismissed Amerex’s complaint. In doing so, the district court held,
inter alia, that “the appraisal panel . . . evaluated only the amount of loss of income
suffered by Amerex” and “did not evaluate, for example, the scope of coverage provided
by the insurance policy.” Amerex Grp., Inc. v. Lexington Ins. Co., No. 07 Civ. 3259,
2010 WL 3790637, at *2 (S.D.N.Y. Sept. 28, 2010) (internal quotation marks omitted).
This appeal ensued.
DISCUSSION
We review a grant of summary judgment de novo to determine “whether genuine
disputes over material fact exist . . . which should properly be submitted to a jury or
whether, where no issues of material fact are found, the moving party is entitled to
judgment as a matter of law.” Byrnie v. Town of Cromwell, Bd. of Educ., 243 F.3d 93,
8
101 (2d Cir. 2001). We “resolve all ambiguities and draw all inferences in favor of the
non-moving party.” Id. Because subject-matter jurisdiction for this suit stems from the
parties’ diverse citizenship, we apply New York law in interpreting the insurance policies.
See Wilson v. Nw. Mut. Ins. Co., 625 F.3d 54, 60 (2d Cir. 2010). We review de novo the
district court’s interpretation of New York law. See Salve Regina Coll. v. Russell, 499
U.S. 225, 231 (1991); Highland Capital Mgmt. LP v. Schneider, 460 F.3d 308, 316 (2d
Cir. 2006).
On appeal, Amerex claims that (1) the Excess Insurers’ appraisal rights were
waived because the Excess Insurers failed to invoke them within a reasonable period; (2)
the Panel resolved coverage issues, rather than valuation issues, contrary to New York
law; and (3) the appraisal was conducted as an arbitration whose discovery structure
violated Amerex’s due process rights. Amerex misapprehends the law in each respect.
I. Appraisal Demand
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 (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.”
9
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 *3 (S.D.N.Y. Dec. 1, 2004), citing S & E Motor Hire Corp.
v. N.Y. Indem. Co., 255 N.Y. 69, 72 (1930) (internal quotation marks omitted); see also
In re Penn Cent. Corp. (Consol. Rail Corp.), 56 N.Y. 2d 120, 127 (1982); In re Delmar
Box Co. (Aetna Ins. Co.), 309 N.Y. 60, 63 (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., 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 *3 (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
2
One New York Court of Appeals case not cited by the parties does address, albeit
very briefly, the nexus of a suit’s initiation and a demand for appraisal. In Littrell v.
Allemania Fire Insurance Co. of Pittsburgh, Pa., 250 N.Y. 628 (1929), the insured sued
the insurance company. After the trial court dismissed the complaint, the insured
demanded appraisal. Upon intermediate review, the New York Supreme Court’s
10
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
Appellate Division certified three questions to the New York Court of Appeals. The
second is relevant here: “Was plaintiffs’ demand for an appraisal, after the first complaint
had been dismissed, permitted by the policy?” Id. at 629. In its entirety, the Court’s
decision is as follows: “Order of the Appellate Division reversed and judgment of the
Special Term affirmed, with costs in this court and in the Appellate Division. First and
second questions certified answered in the negative; and the third question not answered;
no opinion.” Thus, while the Court apparently considered that litigation events can be the
trigger that results in a party’s waiver of its appraisal rights, the facts of that case are quite
different from those in the instant case. In Littrell, (1) the same party initiated the
litigation and subsequently demanded appraisal, and (2) the party did so after its
complaint had been dismissed, terminating the litigation unfavorably. Thus, the
triggering event for the waiver was not the initiation of the litigation but its termination,
and in any event it is unsurprising for a court to hold that a party waives an appraisal by
initiating litigation instead, and waiting to see whether it succeeds or fails before invoking
a different dispute-resolution remedy. Here, the question is whether New York law
allows one party’s initiation of litigation to waive its adversary’s appraisal rights. The
Excess Insurers here never opted for litigation over appraisal, immediately moving to
compel appraisal. Littrell thus offers no support for Amerex’s position.
11
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. 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 *3; 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 *3.
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
12
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 *3, quoting Peck,
1994 WL 381544, at *2 (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, 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., 404 P.2d 889, 893 (Mont. 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,
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,
13
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, 76 S.W. 22,
24 (Ky. App. 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., 182 S.W.2d 648, 650 (Ky. 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
14
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
15
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 *3, 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
16
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 *3. 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
17
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
18
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.
II. Scope of Appraisal
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 *3; 15 Couch on Ins. § 210:42 (3d ed. 2011).
Amerex errs, however, in its application of that principle to the facts at hand.
19
In many cases, distinguishing between “coverage” and “amount of loss” will be
straightforward. For example, in Kawa v. Nationwide Mutual Fire Insurance Co., 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 *13 (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
3
Notably, the Kawa court did not address whether the insured’s initiation of the
suit waived its right to an appraisal. The opinion suggests that New York litigants and
courts may no longer be cognizant of the brief and cryptic decision of the New York
Court of Appeals in Littrell, 250 N.Y. at 628.
20
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 *3 (concluding that, because the “parties disagree[d] about
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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,
22
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
23
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.
III. Due Process
Finally, Amerex argues that the appraisal process itself turned into an arbitration
that violated its due process rights. More specifically, Amerex alleges that it suffered a
due process violation because the Excess Insurers could use the results of their
investigation in the appraisal proceedings, while Amerex lacked a corresponding right to
seek discovery from the Excess Insurers regarding their own investigation. This
argument is unavailing.
24
Amerex is correct that New York law recognizes significant differences between
the authority and procedures applied in appraisals as opposed to arbitrations. The
distinction between the two is required by statute: an appraisal, if ordered, “shall proceed
pursuant to the terms of the applicable appraisal clause of the insurance policy and not as
an arbitration.” N.Y. Ins. Law § 3408(c). The distinction refers both to the scope of the
appraiser’s authority and to the procedures to be followed. As the New York Court of
Appeals has noted, an “arbitration generally resolves the whole controversy between the
parties and results in confirmation and the entry of judgment on the award, while
appraisal resolves only a valuation question leaving all other issues for resolution at a
plenary trial.” In re Penn Cent. Corp., 56 N.Y.2d at 127. Procedurally, “the prevailing
practice in appraisals is more informal and entirely different from the procedure
governing arbitration.” Id. (internal quotation marks and brackets omitted).
Amerex asserts that the Panel failed to recognize these distinctions, and thereby
transformed an appraisal into an arbitration. Moreover, Amerex further asserts that
because this “arbitration” did not grant Amerex the procedural rights usually associated
with arbitrations – principally extensive discovery relating to the Excess Insurers’ own
investigation of Amerex’s claim – the Panel violated its due process rights. This
argument suggests a misunderstanding of the nature of insurance appraisals. Insurance
investigations are necessarily one-sided: the insurer seeks to validate and quantify the
extent of the damages asserted by the insured. But the insured receives no corresponding
right to investigate the investigation. Indeed, if the scope of the appraisal is strictly to
25
determine the value of the damages that flowed from the covered event, it is unclear what
benefit would come from allowing the discovery that Amerex seeks. It was Amerex, not
the Excess Insurers, that possessed facts relevant to its business and the losses attributable
to the rack collapse.
In litigation or arbitration, the benefits of such discovery are obvious. Among
other claims, the insured can assert – and then attempt to locate the evidence to prove –
that the insurer lacked good faith, made material misrepresentations in its previous
investigation, failed to consider one or another factors in reaching its conclusions, or
otherwise failed to live up to its contractual obligations. Amerex stood ready to make
many of these arguments to the district court, the appropriate forum for such claims. But,
as noted above, the Panel did not resolve questions of coverage, and there were ultimately
no issues in the case regarding the Excess Insurers’ contractual obligations in handling or
denying of the claim. The principal task of the Panel was limited to determining the
extent of the business losses attributable to the covered casualty, as distinct from other
causes of business decline. In conducting that task, the Panel followed precisely the
“informal” practice appropriate to appraisal proceedings, rather than the kind of formal,
trial-type procedures, including extensive discovery, that are typical of litigation. When
the Panel determined that the extent of the loss was within the limits of Amerex’s primary
insurance policy, the inexorable results of that valuation decision were that Amerex had
no claim against the Excess Insurers, and no further legal questions needed to be
26
addressed to resolve the dispute. There was accordingly no requirement or need for
Amerex to receive the discovery that might have attended an arbitral or court proceeding.
Thus, while Amerex went into the appraisal with significantly less information
about the Excess Insurers than the Excess Insurers had about Amerex, there was no
violation of Amerex’s due process rights. It cannot be the rule that appraisals must
furnish insured parties the right to extensive discovery from the insurers, as such a rule
would turn appraisals into precisely the kind of quasi-judicial proceedings that New York
law forbids. We therefore conclude that the appraisal’s procedures did not violate
Amerex’s due process rights.
CONCLUSION
We have considered Amerex’s remaining arguments and consider them to be
without merit. For the foregoing reasons, we AFFIRM the judgment of the district court
in all respects.
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