New Jersey Federal Court Holds That Insurance Coverage Issues Do Not Need To Be Decided Before Appraisal

A federal court recently held that ongoing insurance coverage issues should not prevent an appraisal from going forward as per an appraisal clause in the insurance policy. In DC Plastic Products Corp. v. Westchester Surplus Lines Insurance Co. Case No. 17-13092 (D.N.J. May 19, 2021), the District Court of New Jersey directed the parties to proceed with the appraisal process as set forth in the relevant policy, despite the defendant-insurer’s argument that appraisal is improper under New Jersey law where unresolved coverage issues exist.

Plaintiff DC Plastics Products Corporation (“DC Plastics”) made an insurance claim to its insurance carrier Westchester Surplus Lines Insurance Co. (“Westchester”) after DC Plastics’ premises in Bayonne, New Jersey was damaged as a result of Superstorm Sandy in 2012. Since that time, the parties have disagreed over whether certain additional payments were required under the terms of the policy.  The policy at issue contained an appraisal provision that allowed either party to make a written demand for an appraisal if the parties disagreed on the amount of loss. This provision also specified that if the separate appraisers selected by both sides cannot agree on an umpire, “either may request that selection be made by a judge of a court having jurisdiction.” DC Plastics filed a motion for the court to appoint an umpire.

Westchester argued that that the court should refrain from selecting an umpire because, under New Jersey law, appraisal is improper where unresolved coverage issues exist. The court disagreed and pointed out that the case law cited by Westchester did not support its argument and only “makes it clear that appraisers (and umpires) cannot make legal determinations and may only determine a disputed amount of loss, not a party’s liability.” More specifically, the court found that Westchester’s reliance on Rastelli Bros., Inc. v. Netherlands Ins. Co., 68 F. Supp. 2d 448 (D.N.J. 1999) was misplaced because the Rastelli court specifically based its decision to deny the insured’s request for appraisal on the fact that the parties only disputed whether the loss was covered and did not dispute the amount of loss, so there was nothing for the appraiser to determine.  Here, in contrast, Westchester and DC Plastics disagreed on the amount of loss.  Thus, the court held there was no reason to delay an appraisal simply to determine the amount of loss.  Further, the court noted that the applicable appraisal provision allowed Westchester to retain its right to contest liability regardless of the outcome of the appraisal. 

The District Court of New Jersey’s decision in this case is another example of a court holding that ongoing coverage issues during an insurance claim should not delay a properly requested appraisal from determining the value of a disputed loss. For example, in State Farm Lloyds v. Johnson, 290 S.W.3d 866 (Tex. Sup. Ct. 2009), the insurer argued that the homeowner plaintiff’s request for an appraisal under the terms of the policy was improper because the parties disagreed as to causation of damage to plaintiff’s home. The Texas Supreme Court ordered the appraisal to be conducted despite this disagreement holding that the appraiser’s job is to determine the amount of loss and not to decide who must pay for the damages. Thus, the court reasoned, the amount of loss can be determined by an appraiser, and any issues as to causation can be determined later by the court.

In light of decisions like DC Plastics and Johnson, insurers should be fully prepared for an appraisal to take place even if there are disagreements as to who will pay for the loss.  To that end, insurers should focus on selecting the best appraiser for a particular claim even if there are ongoing coverage or causation disputes. Further, and perhaps most importantly, insurers should use clear and unambiguous language to reserve their rights with regard to the ongoing disputes.  This will be critical to guard against any argument that the insurer has fully accepted coverage, or waived its right to deny coverage. 

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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