Opinion
No. 01 Civ. 9291 (MBM).
December 1, 2004
APPEARANCES: PAUL R. KOEPFF, ESQ. (Attorney for Plaintiff-Counterclaim Defendant Zurich American Insurance Company) O'Melveny Myers LLP New York, NY.
LAURA A. FOGGAN, ESQ. DALE E. HAUSMAN, ESQ. (Attorneys for Plaintiff-Counterclaim Defendant Zurich American Insurance Company) Wiley Rein Fielding LLP Washington, DC.
KEVIN T. COUGHLIN, ESQ. (Attorney for Plaintiff-Counterclaim Defendant Zurich American Insurance Company) Coughlin Duffy LLP New York, NY.
HERBERT M. WACHTELL, ESQ. PETER C. HEIN, ESQ. ERIC M. ROTH, ESQ. MARC WOLINSKY, ESQ. (Attorneys for Defendants-Counterclaimants World Trade Center Properties LLC, Silverstein Properties Inc., Silverstein WTC Mgmt. Co. LLC, 1 World Trade Center LLC, 2 World Trade Center LLC, 4 World Trade Center LLC, and 5 World Trade Center LLC) Wachtell, Lipton, Rosen Katz New York, NY.
JOHN H. GROSS, ESQ. LOIS THOMPSON, ESQ. MARK DAVIDSON, ESQ. (Attorneys for Defendants-Counterclaimants World Trade Center Properties LLC, Silverstein Properties Inc., Silverstein WTC Mgmt. Co. LLC, 1 World Trade Center LLC, 2 World Trade Center LLC, 4 World Trade Center LLC, and 5 World Trade Center LLC) Proskauer Rose LLP New York, NY.
OPINION AND ORDER
Now before the court is a motion by Zurich American Insurance Company ("Zurich") to participate in an appraisal to determine the dollar value of insurable losses sustained at the World Trade Center due to the terrorist attack of September 11, 2001. The related entities that have been referred to in this litigation as the Silverstein Parties oppose Zurich's motion to participate, arguing that the insurer waived its appraisal rights by failing to invoke them in a timely fashion. However, as discussed below, Zurich's participation is not "impractical or impossible" at this stage, and because granting Zurich's motion to participate will ensure that a single comprehensive proceeding determines the losses at issue, it appears that Zurich's rights were "exercised within a reasonable period, [based] upon the facts of the case."See Peck v. Planet Ins. Co., No. 93 Civ. 4961, 1994 WL 381544, at *2 (S.D.N.Y. July 21, 1994) (citation omitted). Accordingly, the motion is granted.
I.
The following facts are drawn primarily from the parties' papers and prior opinions in this litigation, familiarity with which is assumed. In January 2002, the Silverstein Parties filed a proof of loss for the actual cash value of the insured properties totaling approximately $6.5 billion. (Silverstein Parties' Mem. in Opp'n to Zurich Am. Ins. Co.'s Mot. to Participate in Appraisal at 1 ("Silverstein Parties' Mem. in Opp'n").) In August 2002, Judge Martin issued an order granting Allianz Insurance Company's motion to compel appraisal, SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, No. 01 Civ. 9291, 2002 WL 1905968 (S.D.N.Y. Aug. 19, 2002), and shortly thereafter, almost all the remaining insurers, but not Zurich, sought to participate in the appraisal. Judge Martin granted the motions in March 2003, concluding that "all of the policy forms under discussion contained an appraisal provision" and that the insurer's demands for appraisal were filed in a timely manner. See SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, No. 01 Civ. 9291, 2003 WL 1344882, at *1, 2 (S.D.N.Y. Mar. 18, 2003).
Two months later, in an order dated May 15, 2003, Zurich and SR International Business Insurance Company ("Swiss Re") were granted observer status in the appraisal proceedings. That order stated in relevant part:
Swiss Re and Zurich shall be entitled to be present at any proceedings presided over by the appraisers and/or the umpire on the same basis (including nonuse in litigation and confidentiality) and to the same extent as any Appraising Insurer has access thereto, but Swiss Re and Zurich shall act solely as an observer in any such proceedings.
(Hein Decl. Ex. 1 at 1-2.) That order embodied terms stipulated by the parties "without prejudice to the position of any party as to whether the Court should enforce any appraisal provision in any insurance contract" beyond the Court's August 2002 and March 2003 rulings. (Id. Ex. 1-A ¶ 7.) In July 2004, two months after the Phase I proceedings in this litigation had concluded, and with damages discovery underway and the members of the Appraisal Panel already appointed, Zurich filed its motion to participate in the appraisal.
After the Second Circuit's opinion in September 2003 affirming Judge Martin's decisions on summary judgment, World Trade Ctr. Props., LLC v. Hartford Fire Ins. Co., 345 F.3d 154 (2d Cir. 2003), this court divided the litigation into three phases: Phase I to determine which insurers had bound coverage on the Silverstein broker's "WilProp" form, Phase II to decide whether the terrorist attack of September 11, 2001 constituted one or two occurrences under the governing policy forms, and Phase III to determine damages.
As of the May 7, 2004 preliminary report of Jonathon Held, the appraising insurers' party appraiser, eight insurers were participating in the appraisal process: Allianz Insurance Company, Employers Insurance of Wausau, Federal Insurance Company, Gulf Insurance Company, Industrial Risk Insurers, the London Insurers, Royal Indemnity Company, and Travelers Indemnity Company. (Hausman Decl. Ex. K at 1 n. 1.)
The Silverstein Parties argue that Zurich's motion comes far too late. First, the Silverstein Parties contend that Zurich waived its right to compel appraisal by consenting to the May 2003 Order, focusing in particular on the provision that "Zurich shall act solely as an observer in any such proceedings." (Silverstein Parties' Mem. in Opp'n at 5 (emphasis added).) Second, citing Zurich's "repeated fail[ure] to act to demand appraisal long after other insurers . . . had sought appraisal," the Silverstein Parties argue that Zurich independently waived its appraisal rights by failing to invoke them in a timely fashion, waiting almost two-and-a-half years after Allianz Insurance Company's initial demand. (Id. at 1, 5.) According to the Silverstein Parties, "prejudice [to the insured] is not a prerequisite for demonstrating waiver," and even if it is, such prejudice arises from the possibility that Zurich will use its participation to inject a new policy form into the appraisal and undermine the Silverstein Parties' alleged entitlement to pre-judgment interest under the relevant policy. (Id. at 6.) Finally, the Silverstein Parties propose in the alternative that if Zurich is nevertheless allowed to participate in the appraisal, it do so subject to certain conditions — namely, that it forego any change in its obligation to pay pre-judgment interest and that it participate on the same terms as the other insurers, as if the Travelers Indemnity Company ("Travelers") form applied. (Id. at 15-16.)
Zurich's response, first and most significantly, is that its participation in the appraisal proceedings will not result in any prejudice to the Silverstein Parties because "Silverstein would have done absolutely nothing different had Zurich requested appraisal earlier." (Zurich Am. Ins. Co.'s Reply in Supp. of Mot. to Participate in Appraisal at 2 ("Zurich Reply"); see also id. at 7 ("Zurich's demand for appraisal has had no effect on the appraisal process, Silverstein's rebuilding efforts, or the prosecution of Silverstein's claims.").) Second, Zurich contends that its decision to wait until after the Phase I verdicts to assert its appraisal rights was justified because had Zurich been found to have bound coverage on the WilProp form, the Silverstein broker's form that used a one-occurrence definition, appraisal would have been "largely unnecessary." (Id. at 8 (citing SR Int'l Bus. Ins. Co., 2003 WL 1344882, at *2 ("[S]ince . . . it appears that on a single occurrence basis the loss will exceed the limits of these policies, there may, at the end of the day, be no need for either an appraisal proceeding or a jury trial on the damage issue with respect to insurers who bound to the WilProp form."); see also Zurich Am. Ins. Co.'s Mot. to Participate in Appraisal at 8 ("Zurich Mot. to Participate") (arguing that coverage disputes must be resolved before appraisal).) Third, Zurich correctly argues that although the May 2003 Order allowed Zurich to act "solely" as an observer at the appraisal, that Order was entered "without prejudice" to Zurich's appraisal rights, thus allowing Zurich to move "seamlessly" to full participant status at a later date. (Id. at 10-11.) Finally, responding to the Silverstein Parties' alternative argument that Zurich be allowed to participate in the appraisal only subject to certain conditions, Zurich concedes that it is willing to participate on the same terms as the other insurers and be governed by the Travelers form for purposes of appraisal. Zurich notes, however, that any dispute over pre-judgment interest is not at issue on this motion and should be decided for all of the appraising insurers together when the issue becomes ripe. (Id. at 12-13.)
II.
"New York courts have long recognized the role of appraisals in resolving disputes between an insurer and insured where the disagreement is over the value or amount of loss." Indian Chef, Inc. v. Fire Cas. Ins. Co., No. 02 Civ. 3401, 2003 WL 329054, at *3 (S.D.N.Y. Feb. 13, 2003) (citations omitted). 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., 2003 WL 1344882, at *3, 4 (citing Stony Brook Marine Transp. Corp. v. Wilton, No. 94 Civ. 5880, 1997 WL 538913, at *7 (E.D.N.Y. Apr. 21, 1997); S E Motor Hire Corp. v. N.Y. Indem. Co., 255 N.Y. 69, 72 (1930)). "Waiver is generally defined as an intentional relinquishment of a known right" and "a party asserting a waiver defense bears the burden of proof in establishing that defense." Ingersoll Milling Mach. Co. v. M/V Bodena, 829 F.2d 293, 300 (2d Cir. 1987).
Where, as here, an insurance policy does not specify a time limit for an appraisal demand, the court must determine whether the demand was "exercised within a reasonable period, depending upon the facts of the case." See Peck v. Planet Ins. Co., No. 93 Civ. 4961, 1994 WL 381544, at *2 (S.D.N.Y. July 21, 1994) (quoting Chainless Cycle Mfg. Co. v. Security Ins. Co., 169 N.Y. 304, 310 (1901)). Although the New York courts, unlike others, do not appear to have explicitly cited particular factors as "decisive" in the reasonableness inquiry, the following three factors are usually relevant: (i) 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); (ii) whether the parties engaged in good-faith negotiations over valuation of the loss prior to the appraisal demand; and (iii) whether an appraisal is desirable or necessary under the circumstances. See Peck, 1994 WL 381544, at *2-3; cf. Kester v. State Farm Fire Cas. Co., 726 F. Supp. 1015, 1019-20 (E.D. Pa. 1989) ("[T]he `circumstances' which have proven to be most decisive are two: prejudice resulting from the delay and the breakdown of good-faith negotiations concerning the amount of the loss suffered by the insured.") (citations omitted).
In Peck, this court found that an insurer had not waived its right to an appraisal despite "waiting to exercise that right until 13 months after the [loss], and four months after [the] lawsuit was commenced." Peck, 1994 WL 381544, at *2. Holding that "elapsed time does not in itself make [the insurer's] demand unreasonable under the circumstances," the court granted the motion to compel appraisal. Id. The court reasoned in part that the insured had not shown "that an appraisal is impossible or impracticable, or that [the insurer] has thwarted the possibility of having an appraisal performed."Id. In so holding, the court distinguished earlier New York state court cases in which "appraisal was impeded by the very party that requested the remedy," including Chainless Cycle Mfg. Co. v. Security Ins. Co., 169 N.Y. 304 (1901), where the "insurance company acted in bad faith" by seeking an appraisal after the insured "had already sold a substantial part of the damaged property, in justifiable reliance" on the insurer's adjustment of the loss. Peck, 1994 WL 381544, at *2; see also Indian Chef, Inc. v. Fire Cas. Ins. Co., No. 02 Civ. 3401, 2003 WL 329054, at *2 (S.D.N.Y. Feb. 13, 2003) ("Where a delay in demanding an appraisal has resulted in the removal, destruction, or repair of the damaged property, an appraisal is no longer practical.").
Peck, however, did not rest its holding solely on the absence of prejudice to the insured party from an appraisal. The court also found that because the parties "continually were negotiating and working toward an agreement on the amount of loss, it was not unreasonable for [the insurer] to wait 13 months after the fire to demand an appraisal." Peck, 1994 WL 381544, at *3 (ongoing discussions "made an appraisal at first unnecessary"). In addition, the court cited the desirability of proceeding with an appraisal, concluding that "[a]t its core, this case remains a dispute over the value of plaintiff's losses, and plaintiff is best served by a speedy resolution of her claims." Id. ("The delays and disparity in valuation are most efficiently addressed through the appraisal process.").
In this case, at least two factors initially appear to cut against Zurich's request. First, unlike Peck, it appears that no real negotiations over the valuation of the loss took place between the Silverstein Parties and Zurich prior to Zurich's appraisal demand. Second, Zurich's explanation (or "excuse," as the Silverstein Parties put it) for failing to invoke its appraisal rights along with the other insurers misapplies the underlying law. Citing cases such as Duane Reade, Inc. v. St. Paul Fire Marine Ins. Co., 261 F. Supp. 2d 293, 296 (S.D.N.Y. 2003), and Indian Chef, Inc. v. Fire Cas. Ins. Co., No. 02 Civ. 3401, 2003 WL 329054, at *3 (S.D.N.Y. Feb. 13, 2003), Zurich contends that it justifiably delayed invoking its appraisal rights until after the Phase I verdicts were returned. (See Zurich Mot. to Participate at 8 ("[A]n appraisal may be inappropriate before certain coverage issues are first resolved.").) The holdings in Duane Reade and Indian Chef, however, address only whether an appraisal proceeding must actually be held and when (i.e., pre- or post-trial), not when a party must invoke its appraisal rights, which necessarily must come at some earlier time. See Indian Chef, 2003 WL 329054, at *3 n. 3 (declining to decide whether insurer waived appraisal rights because the Court had "concluded that an appraisal is inappropriate in this case"); Duane Reade, 261 F. Supp. 2d at 296 (holding that appraisal itself, not appraisal demand, was "premature" where declaratory judgment claims regarding scope of coverage were pending trial); cf. SR Int'l Bus. Ins. Co., 2003 WL 1344882, at *2 (concluding, in this case, that even if resolving the WilProp form coverage dispute may eliminate the need for an appraisal altogether, since here "the appraisal process must begin before those issues are finally resolved," it was appropriate for the Court to decide, "at least preliminarily," whether certain insurers claiming coverage under WilProp had waived their appraisal rights) (emphasis added).
Although the parties exchanged expert reports regarding the amount of losses in August 2001 and negotiated the stipulation and order that granted Zurich observer status in May 2003, no negotiations over valuation have been cited by Zurich in its papers.
Nonetheless, the "facts of the case," see Chainless Cycle Mfg. Co. v. Security Ins. Co., 169 N.Y. 304, 310 (1901), demonstrate that Zurich's request to participate in the appraisal is not unreasonable. First, although Peck relied on the presence of ongoing negotiations between the parties as a justification for the insurer's delay in invoking its appraisal rights, the court did not treat such negotiations as a prerequisite to a finding of reasonableness. See Peck, 1994 WL 381544, at *3. Rather, any delay caused by good-faith negotiations between the parties is simply a part of the case-specific inquiry into reasonableness of an appraisal demand, along with the absence of prejudice and the desirability of appraisal. Second, although it might have been preferable if Zurich had invoked its appraisal rights at the same time as the other insurers, regardless of whether the underlying coverage issues had been resolved, Zurich's delay here is not fatal. Indeed, that some WilProp form insurers have withdrawn from or reduced their participation in the appraisal proceedings since Phase I (see Zurich Reply at 9-10) suggests that Zurich may not have gained any strategic advantage by failing to invoke its rights earlier, although it may have saved the cost of full participation by seeking mere observer status in May 2003.
In addition, the Silverstein Parties have made no showing of prejudice, impossibility, or impracticality arising from Zurich's appraisal demand. Zurich has conceded its willingness to participate in the appraisal on the same terms as the other appraising insurers, and to be subject to the Travelers form for purposes of appraisal, thus obviating any concern that Zurich will inject a new policy form into the proceedings. (See Zurich Reply at 11-12.) Nor is it persuasive for the Silverstein Parties to argue that they will be prejudiced if Zurich seeks to "parlay" its appraisal participation into avoiding pre-judgment interest. (See Silverstein Parties' Mem. in Opp'n at 13-14.) Zurich's pre-judgment interest obligation, if any, will rise or fall with the obligation of the other appraising insurers if and when the issue is decided in the future, just as it would have if Zurich had invoked its appraisal rights at the same time as the other insurers. The Silverstein Parties' objection therefore amounts only to disappointment, not prejudice.
This absence of prejudice to the Silverstein Parties, moreover, stands in contrast to the risks of "inconsistent outcomes" and "duplication of effort" that may arise if a separate damages trial or appraisal has to be held to determine Zurich's coverage obligations. (See Zurich Reply at 6-7.) This is particularly true because Zurich is the only Phase II insurer providing high-level excess coverage that is not currently participating in the appraisal, with the coverage at issue representing only 0.2% of the over-all insurance program. (Zurich Mot. to Participate at 7 n. 6.) As in Peck, once the jury returns its Phase II verdict, this case will become "[a]t its core . . . a dispute over the value of plaintiff's losses," and the "delays and disparity in valuation [will be] most efficiently addressed through the appraisal process." Peck, 1994 WL 381544, at *3. The desirability of a comprehensive appraisal proceeding to address all outstanding valuation issues, rather than a separate damages trial solely to determine Zurich's coverage obligations, further warrants granting Zurich's motion.
Zurich has already paid approximately $38 million on a one-occurrence basis for its coverage in the second and fifth layers of the insurance program, leaving only its $7.67 million share of the tenth layer, which is excess of $2.493 billion, at stake in appraisal. (See Zurich Mot. to Participate at 7 n. 6.)
* * *
For the reasons stated above, Zurich's motion is granted.
SO ORDERED: