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Court Holds that Coverage Disputes Preclude Appraisal in Long-Running Lawsuit for Superstorm Sandy Damages (NY)

October 29, 2020

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<p style="text-align: justify;">In a coverage dispute relating to property damage and lost income sustained by chocolatier Madelaine Chocolate Novelties after Superstorm Sandy, Magistrate Judge Steven Gold of the Eastern District of New York recently rejected Great Northern Insurance Company’s effort to force appraisal of the claim. In 2018, the Second Circuit overturned a 2017 Eastern District of New York decision which granted summary judgment to the Queens-based chocolatier based on the application of the policy’s “flood” exclusion, which barred coverage for damage caused by waves, tidal water, or the overflowing of the oceans. The case is likely headed to trial in the coming months.</p>
<p style="text-align: justify;">At this late stage of litigation, <a href="https://www.wcmlaw.com/wp-content/uploads/2020/10/Great-Northern-moved-to-compel.pdf">Great Northern moved to compel</a> appraisal based on the policy’s Appraisal Clause, which applies where the parties “disagree on the value of the property or the amount of the loss.” Under New York law, issues relating to liability and/or coverage are not subject to appraisal; rather, only the issue of damages is subject to such a clause. While there were also issues regarding whether the demand for appraisal was made in good faith and whether it was untimely, <a href="https://www.wcmlaw.com/wp-content/uploads/2020/10/Madelaines-primary-argument-opposing-the-motion.pdf">Madelaine’s primary argument opposing the motion</a> is that there remains a large dispute as to how the parties interpret the phrase “replacement cost” – i.e., whether or not it refers to the replacement cost for used machinery or new machinery. Separately, Madelaine pointed to the dispute over whether certain costs would be calculated as part of their business interruption damages.</p>
<p style="text-align: justify;">Although the order by Judge Gold denying Great Northern’s motion did not expound upon the rationale (and a transcript of oral argument was not made available at the time of publishing), there is analogous support in the case law for Madelaine’s position that likely formed the basis for Judge Gold’s decision. Specifically, in <em>Duane Reade, Inc. v. St. Paul Fire &amp; Marine Ins. Co</em>., 261 F.Supp.2d 293 (S.D.N.Y. 2003) the court held that the specific determination of the scope of the phrase “Restoration Period” was a coverage dispute for the court and not subject to appraisal. Great Northern did cite a decision from later proceedings in the same case, <em>Duane Reade, Inc. v. St. Paul Fire &amp; Marine Ins. Co</em>., 279 F.Supp.2d 235 (S.D.N.Y. 2003), where the court held the appraisal panel could determine the actual length of the period; however, the court did so only after it determined how that period could be determined. Applying that logic to this case, only after a court determines what makes up the “replacement cost” can an appraisal panel determine its value.</p>
Thanks to Doug Giombarrese for his contribution to this post. If you have any questions or comments, please contact <a href="mailto:chayes@wcmlaw.com">Colleen Hayes</a>.

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