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Property Insurance Policy’s Appraisal Procedure Cannot Be Used to Resolve Legal Question Regarding Interpretation of the Policy

On April 3, 2019, the Second Circuit issued a decision in Milligan v. CCC Information Servs. Inc., Dkt. Nos. 18-1405-cv, 18-1407-cv, holding that the appraisal procedure in a property insurance policy could not be used to resolve legal questions regarding the interpretation of the policy, but only to determine the amount of the covered loss.

Milligan is a putative class action, alleging that GEICO “violated Regulation 64, a New York State insurance regulation,” incorporated into the Policy, “which requires an insurer, in the case of a total loss of a current model year vehicle, to reimburse the owner for the reasonable purchase price less any applicable deductible and depreciation allowances.”  GEICO argued that its valuation methodology complied with Regulation 64, and it moved to compel an appraisal of the dispute.  Property insurance policies frequently allow for “appraisal” of a dispute over the value of the loss – a form of ADR that is similar in some respects to arbitration.  The appraisal provision at issue here allowed either party to demand “appraisal” of the amount of the loss.  In the event of such a demand, the insurer and the insured would each pick a “competent appraiser” each of whom would separately determine the amount of the loss.  The appraisers, in turn, would select an “umpire” to resolve the loss valuation if they could not agree.

The district court dismissed GEICO’s motion to compel an appraisal on various grounds, and “suggested that appraisal was inappropriate in this case because the appraisal sought would effectively constitute an opinion on the extent and nature of the coverage provided under the Policy, and under New York law an appraiser may not resolve legal questions regarding interpretation of the Policy.”  The Second Circuit affirmed, explaining:

In Amerex Grp., Inc. v. Lexington Ins. Co., 678 F.3d 193, 204–05 (2d Cir. 2012), we explained that an appraiser may not resolve coverage disputes raising legal questions about the interpretation of an insurance policy. That principle has been applied in several cases decided under New York law. In Kawa v. Nationwide Mutual Fire Ins. Co., 174 Misc.2d 407 (N.Y. Sup. Ct. 1997), for example, the insured residence was damaged in a windstorm. Id. at 407. The defendant insurer contended that the relevant policy required that it indemnify the insured only in a manner that would return the residence to its pre-windstorm condition.  The insured claimed that the relevant policy required replacement of the entire damaged aluminum siding with new vinyl siding. Id. The court deemed this a dispute over the proper interpretation of the policy’s coverage, which could be resolved only by the court’s legal analysis.

Similarly, in Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F. Supp. 2d 235, 241–42 (S.D.N.Y. 2003), aff’d 411 F.3d 384 (2d Cir. 2005), the district court reserved for itself how to interpret the term “Restoration Period” under a policy indemnifying Duane Reade for certain business income losses following the terrorist attacks of September 11, 2001. Duane Reade asserted a right to recover under the policy for business interruption losses for the entire period until the complex which would replace the World Trade Center was rebuilt.  The insurer argued that the Restoration Period terminated when Duane Reade could have restored operations at locations other than the World Trade Center.  Holding that this was not a dispute to be resolved by appraisal, the district court decided as a matter of law that the Restoration Period ended when Duane Reade was able to resume operations in the location where its World Trade Center store once stood.

An appraisal is appropriate not to resolve legal questions, but rather to address factual disputes over the amount of loss for which an insurer is liable. . . .

Applying these principles, we conclude that appraisal is not appropriate in this case. The dispute here concerns a legal issue about the meaning of Regulation 64. Milligan is not claiming simply that the value of her loss was greater than GEICO’s calculation. Rather, her complaint is that by calculating her loss using the average of three comparable vehicles available in the market (the methodology used in the Market Valuation Report), GEICO failed to comply with Regulation 64, which is incorporated into the Policy. Defendants’ argument that this case does not present a coverage issue because GEICO paid Milligan’s claim under the Policy misses the mark. Whether a loss is covered is not the only legal question presented in an insurance case.  Questions over the extent of coverage and how to define the amount of loss also present legal questions of contract interpretation. The dispute here concerns the meaning of “the reasonable purchase price to the insured on the date of loss of a new identical vehicle.” That is a legal question requiring the interpretation of Regulation 64.

Appraisal can be a useful tool for resolving valuation disputes with property insurers.  However, as this decision illustrates, the scope of such an appraisal is limited to factual matters relating to the amount of the loss and does not include legal issues concerning the interpretation of the policy, which must be resolved by a Court.

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