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March 29, 2003


The opinion of the court was delivered by: Harold Baer, United States District Judge


Defendant Allianz Insurance Co. ("Allianz") moves to compel plaintiffs to proceed with an appraisal, purportedly pursuant to the contractual terms of plaintiffs' insurance policy. For the following reasons, defendant's motion to compel is granted-in-part and denied-in-part.


This lawsuit arises from a dispute in regard to payments under an insurance policy for damage caused to plaintiffs' office buildings by the World Trade Center collapse. Following September 11, 2001. Allianz paid Zar under the policy a sum of $6,476,811 for 100 Church Street and $1,400,500 for 90 Washington Street to reimburse Zar for the direct physical loss and damage incurred to their buildings. In addition, Allianz paid Zar $7,025,000 for loss of rental value at 100 Church Street to cover the period from September 11, 2001 up to and including January 31, 2002. In February 2002, Ambient Group Inc. ("Ambient"), the environmental consulting firm hired by Zar, reported that the premises at 100 Church Street were cleared for re-occupancy. Upon receiving that news, Allianz advised plaintiffs in a March 11, 2002 letter that it did not consider itself obligated to make any further payments under the policy for certain losses and damages. Def. Exh. 3 at 2. Allianz noted that it would give further consideration to other claims for losses and damages if supplied with additional environmental information, which it would first have evaluated by its own expert, Lawrence Kornreich. Def. Mem. at 4.

To quantify the additional sums claimed by Zar, Allianz requested in a May 22, 2002 letter sworn proof of loss statements. Allianz received six proof of loss statements from plaintiffs, which it rejected because they were unexecuted and thus did not comply with the requirements of the policy. Id. at 5. Perhaps to Allianz's chagrin, Zar submitted subsequently nine sworn proof of loss statements to recover almost $14 million in loss and damage payments, a much higher amount than that sought in the original six unexecuted proof of loss statements. The new loss statements, among other things, included claims for alleged rental loss incurred during the six months from January 2002, and for services allegedly provided by Ziruale, Inc. ("Ziruale") to help remove toxic materials that allegedly contaminated plaintiffs' property. After it received plaintiffs' nine proof of loss statements, Allianz responded in a July 19, 2002 letter that it received the statements and that it wished to examine several witnesses about the claimed loss. Def. Exh. 11. Settlement discussions began in August 2002, but eventually fell apart and plaintiffs filed the instant lawsuit.


Plaintiffs argue that the appraisal called for in the policy applies only to loss and damage caused by fire, lightning or removal, and that in the instant case, none of these perils apply to the loss and damage at issue. Alternatively, plaintiffs argue that the dispute involves a denial of coverage under the policy, and therefore the dispute cannot be resolved by an appraisal. The Standard Fire Policy Provisions ("Fire Policy") provides that if the insured and insurer "fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a[n] . . . appraiser." Def. Exh. A (Fire Policy) at 2.

Defendant, citing SR International Business Ins. Co. v. World Trade Center Properties LLC, 2002 WL 1905968 (S.D.N.Y. Aug. 19, 2002), contends that this Court has the authority to order an appraisal in this case. Plaintiffs Reply Mem. at 6. Although I agree that I have the authority, upon motion, to compel an appraisal, I find SR International is not dispositive, as defendant suggests. In SR International, defendant Allianz, in another litigation, sought to compel the Silverstein Parties under N.Y. C.P.L.R. § 7601 ("CPLR § 7601") to submit their dispute concerning the amount of loss to an appraisal, pursuant to terms of the insured's insurance policy. SR Int'l, 2002 WL 1905968, at *1. The Silverstein Parties opposed Allianz's application on the grounds that the application is: (1) preempted by the Air Transportation and System Stabilization Act, (2) too late, and (3) inappropriate because it would subject them to possibly inconsistent results from a jury trial in another case. Id. According to CPLR § 7601, a "special proceeding may be commenced to specifically enforce an agreement, other than one contained in the standard fire insurance policy of the state, that a question of valuation. appraisal or other issue or controversy be determined by a person named or to be selected." N.Y. C.P.L.R. § 7601 (McKinney 1998) (emphasis added). Thus, CPLR § 7601 carves out an exception to a party's right to commence a special proceeding to have a court enforce an appraisal provision if contained in a standard fire insurance policy, such as in the instant case. Notwithstanding the exception, the Court in SR International found no grounds to deprive it of jurisdiction to refer the valuation issue to an appraiser. In light of Allianz's reliance on CPLR § 7601 and Silverstein Parties' silence as to the language of the exception, it is likely that the appraisal provision was not a part of the fire insurance policy, which would otherwise preclude the Court from compelling an appraisal. In any event, the law provides that "[n]otwithstanding any other provision of law to the contrary, the provisions of the appraisal clause set out on the . . . standard fire policy . . . shall be binding on all parties to the contract of fire insurance evidenced by the policy." N.Y. Ins. Law § 3404 (McKinney 2000) (emphasis added). According to the New York Insurance Department:

The appraisal clause provisions of the standard fire insurance policy in New York contain no limitation on an insured's or an insurer's right to obtain an appraisal with respect to the amount of any component of the actual cash value or the amount of loss in the event there is a disagreement as to actual cash value or amount of loss. Therefore, an insured or insurer can obtain an appraisal with respect to the amount of any of the components of actual cash value or amount of loss any time where there has been a disagreement. Def. Reply Mem. Appendix (NY Ins. Dep't General Counsel Opinion 3-6-2001).
Although CPLR § 7601 appears at odds with Insurance Law § 3404, they may be reconciled by taking note that the legislature enacted § 3404 after CPLR § 7601. Cf. N.Y. C.P.L.R. § 7601 (added 1958) with N.Y. Ins. Law § 3404 (added 1990); see also Sanders v. Winship, 57 N.Y.2d 391, 396 (1982) (holding that all parts of the statute should be harmonized and given its full effect and meaning if possible). Presumably, the legislature, fully aware of the exception created by CPLR § 7601. enacted § 3404 to enable parties to enforce the appraisal clause in the standard fire insurance policy, "[n]otwithstanding any other provision of law to the contrary." N.Y. Ins. Law § 3404. Taken together, CPLR § 7601 and Insurance Law § 3404 indicate the legislature's intent to provide parties to an insurance contract the right to enforce an appraisal provision, such as the one at issue here. But see Fahrenholz v. Security Mutual Ins. Co., 738 N.Y.S.2d 623, 624 (4th Dep't 2002) (holding that New York Insurance § 3404 does not erase the prohibition on parties from seeking specific performance under CPLR § 7601*fn1). The Department's General Cournsel's opinion comports with my understanding of New York Insurance Law § 3404.1 find no impediment to my authority to compel an appraisal pursuant to the Fire Policy, upon motion, where the parties dispute the amount of damage or loss owed under the policy.

Plaintiffs additionally argue that the provisions contained in the Fire Policy, as the name seems to imply, should apply only to fire losses. Plaintiffs Opp. at 18. Plaintiffs' argument fails, however, to account for the other terms in the Fire Policy and attached Property Coverage Form, which indicate that the appraisal procedure is available for disputes arising from perils other than fire. None of the parties dispute that the Property Coverage Form does not provide a dispute resolution mechanism (such as that found in the Fire Policy) if the insurer and insured disagree about the "actual cash value or amount of loss." The Property Coverage Form of the policy at issue states that "matters not provided for under [the] Property Coverage Form or any attached endorsement(s), shall be governed by the `printed policy forms' attached" to the policy. Def. Exh. A (Property Coverage Form, General Condition X) at 11 (emphasis added). The Fire Policy is among the forms listed as a "printed policy form." Def. Exh. A (Property Coverage Form, Definition U) at 37. Although the Fire Policy, in its opening paragraph indicates that its policy conditions apply to "fire, lightning or removal," nothing in the Fire Policy limits the appraisal provision to only those perils when integrated as a part of an insurance policy that covers other risks. Indeed, the Fire Policy states that perils, other than those listed at the beginning therein, may be covered by its provisions, including the provision that outlines the appraisal procedure, if they are added "by endorsement in writing hereon or added hereto." Def. Exh. A (Fire Policy) at 1 (emphasis added). The Forms and Endorsement List ("FAEL") of the policy expressly acknowledges that the Fire Policy has "been attached to and made a part of the policy at inception." Def. Exh. A (FAEL) (emphasis added). Clearly, the Fire Policy is part of an integrated document that forms the plaintiffs' entire insurance policy, which plaintiffs must admit covers other risks. See Plaintiffs Opp. at 20. Thus, the appraisal procedure outlined by the Fire Policy must apply to those other risks. See Proc v. Home Insurance Co., 17 N.Y.2d 239, 243-44 (1966) (holding that provisions in a fire policy apply to risks other than fire loss when the language of the fire policy so indicates that it applies to other risks).

Plaintiffs further argue that the introductory language of the Fire Policy "apply only insofar as its provisions are `more liberal,' that is, are more to the insured's benefit, than other policy conditions." Plaintiffs Opp. at 20. Plaintiffs contend that the appraisal provision is, in effect, "a waiver of Zar's right to trial by jury" and therefore it is not a "liberal" provision that is to the insured's benefit. Plaintiffs Opp. at 20. Plaintiffs' logic and attempt to truncate the introductory language of the Fire Policy cannot save its argument. The introductory language, to which plaintiffs refer, states in full: "If any conditions of this form are construed to be more liberal than other policy conditions relating to the perils of fire, lightning or removal, the conditions of this form will apply." Def. Exh. A (Fire Policy) at 1 (emphasis added). As plaintiffs correctly observed, however, this sentence refers only to the perils of fire, lightning and removal, and therefore it is inapposite to the perils that caused the damage to plaintiffs' buildings. See Plaintiffs Opp. at 18. Furthermore, plaintiffs cite to no provision or "condition" in the Fire Policy form (or the rest of the policy for that matter) that is "more liberal" than the appraisal provision when there is a dispute in regard to the "actual cash value or amount of loss." Def. Exh. A (Fire Policy) at 2. Assuming I adopted plaintiffs' position that the appraisal provision is not a "liberal" provision and that I must disregard it in favor of the insured's right to a jury trial, I would be forced to reach the farfetched conclusion that the appraisal provision is not binding on the insured despite the clear language of § 3404. I decline to do so.

The Court's authority to compel an appraisal is not, however, without limits. As plaintiffs correctly note, disputes that concern coverage denial should not be referred for appraisal. See Indian Chef Inc. v. Fire and Casualty Insurance Co. of Connecticut, 2003 WL 329054, at *3 (S.D.N.Y. Feb. 13, 2003); Kawa v. Nationwide Mutual Fire Ins. Co., 664 N.Y.S.2d 430, 431 (N.Y. Sup. Ct. 1997) ("appraisal clause only applies to a case with a disagreement `as to the amount of loss or damage's and not where the insurer denies liablity"). Here, portions of the controversy clearly center on defendant's denials of liability under the policy and not on the valuation of the loss. Upon receiving word from plaintiffs' environmental expert. Ambient, that it found the 100 Church Street fit for re-occupancy, defendant has consistently denied having any further liability under the policy for rental coverage. In the March 11, 2002 letter for instance, defendant states that "from at least February 1. 2002, no Rental Value coverage is afforded by Coverage Part D of the policy of insurance issued by [Allianz] to ZAR." Def. Exh. 3 at 2 (emphasis added). In light of Ambient's clearance of plaintiffs' building for re-occupancy, Allianz asserted that the asbestos allegedly present in the carpet "would not render the premises untenantable," and thus "Coverage Part A of the policy. `Property Damage'. affords no coverage for the cost of replacing the carpet located in the portion of the premises leased to the New York City Law Department." Id. (emphasis added). As to plaintiffs' claims for clean-up of lead present in the HVAC system and duct work, Allianz concluded that this condition "preexisted the [September 11, 2001] occurrence and [is] unrelated thereto," and thus it is not responsible for the lead clean-up under the policy. Id. at 3. The essential dispute in regard to the above-listed matters concern the scope of defendant's policy coverage and not the computation of the amount of loss. Accordingly, an appraisal will not be appropriate to resolve the dispute in regard to those matters, Penn Central Corp. v. Consol. Rail Corp., 56 N.Y.2d 120, 127 (1982), and should not be referred for appraisal. See Indian Chef, 2002 WL 329054, at *3; Kawa, 664 N.Y.S.2d at 431. Moreover, in light of defendant's repudiation of liability in its March 11, 2002 letter, defendant's motion to compel plaintiffs' compliance with the policy's appraisal provision must be denied as to those losses and damages rejected by that letter. See Foreign Credit Corp. v. Aetna Casualty and Surety Co., 276 F. Supp. 791, 793 (S.D.N.Y. 1967) ("A repudiation of liability by an insurance company excuses the insured from further performance on his part of the conditions of the policies." (quoting Beckley v. Otsego County Farmers Coop. Fire Ins. Co., 159 N.Y.S.2d 270, 274 (3d Dep't 1957)).

With respect to the other loss or damage claimed, however, Allianz has continued to entertain the possibility of reimbursing plaintiffs if they. as noted in its March 11, 2002 letter. "demonstrate[] that [the] loss or damage for which recovery is sought is in addition to the loss and/or damage for which [Allianz] has reimbursed ZAR, and that such alleged additional loss or damage was sustained as a direct result of the original World Trade Center incident." Def. Exh. 3 at 2. Allianz rejected the first series of proof of loss statements, not because they fell outside the scope of the insurance coverage, but rather because they were neither signed nor sworn. See Def. Exhs. 8-9. Despite this deficiency, Allianz agreed to review the unexecuted proof of loss statements and to advise plaintiffs of whether it intended to examine witnesses under oath in the event it perceived discrepancies concerning the amount of loss claimed. See Def. Exh. 9. Plaintiffs submitted executed proof of loss statements in July 2002 to replace those earlier submitted. Def. Exh. 10. As discussed above, defendant denied liability for some of plaintiffs' claims already in regard to reimbursement of lost rent after January 31, 2002, replacement of carpet at the New York City Law Department, and clean up of lead in the HVAC system. These claims are not subject to appraisal. Cf. Def. Exh. 9 with Def. Exh. 3. As for the other losses and damage sustained,*fn2 defendant sought clarification concerning the incomplete attachments to the proof of loss statements, and reiterated its intent to examine specific individuals in connection with the proof of loss statements. Defendant did not outright reject defendant's claims under the policy, but rather requested additional evidence to support those claims. Except for those matters identified above, the dispute, for now, centers on ascertaining the cost of loss incurred in connection with the balance of the items set forth below. Although defendant, upon ...

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