New York has expanded the usefulness of appraisals for settling disputed property insurance losses. The revision clarifies that the scope of the damage is a proper subject for appraisal. The change passed both houses of the legislature unanimously and was signed by Governor Cuomo on November 24, 2014.

Almost all property insurance policies include a provision for appraisal when the insured and the insurer don’t agree on the amount of damage. Here’s a Cliff-Notes type outline of the appraisal clause:

If the insured and insurer can’t agree on the amount of the loss, either may demand an appraisal.
Each side picks its own appraiser, who must be “competent and impartial.”
The appraisers select an umpire. If they can’t agree on an umpire, a court can be asked to appoint.
Appraisers state separately the value of the property and amount of loss.
If they differ, they submit their differences to the umpire. A decision  agreed to by any two is binding.

Each party pays its own appraiser and  one-half of the other costs. Appraisal provisions are not new. The  current ISO provisions are very similar to those specified in the New York Standard Fire Policy (SFP) adopted in 1943. In New York and many other states, property insurance policies are required to provide coverage at least equal to the SFP. The SFP wording was changed in 1986 to conform to “simplified wording” standards. For example, the SFP called for the appraiser to be “competent and disinterested.” “Disinterested” meant that the appraiser had no financial interest in the outcome. Common usage gives it an “I couldn’t care less” connotation. Not a desirable characteristic for an appraiser. It was replaced with “impartial” in the current forms. The appraisal process remains the same.

For many years, appraisal was little used in New York. The courts had ruled that an insurance company did not have to comply with the insured’s request for appraisal; the matter could immediately go to a lawsuit if the insured wished to challenge the insurer’s settlement offer. This changed in 2010 when then-Governor Paterson signed legislation making it binding on both the insured and the insurer to proceed with appraisal when it is demanded by the other party.1

The case illustrating the need for the current change originated almost 20 years ago. In February 1997, a windstorm dam- aged the house owned by Brian Kawa and his wife. Nationwide, which provided their homeowners coverage, had the loss inspected and sent the Kawas a check for the amount its adjuster calculated was sufficient to repair the damaged aluminum siding. The Kawas returned the check. They wanted a complete replacement of the siding and demanded an appraisal to settle the question.

Nationwide rejected the Kawas’ demand for an appraisal. It argued that the dispute involved a question of coverage, not just a disagreement over the amount of the loss. The court agreed that whether the damage to the siding was sufficient to require that it all be replaced was a question of coverage and was not a matter that could be decided by appraisal.2

The revised version of the law allows appraisers to consider such questions. It amended the 2010 law to read: “An appraisal shall determine the actual cash value, the replacement cost, the extent of the loss or damage (emphasis added) and the amount of the loss or damage which shall be determined as specified in the pol- icy.” The italicized words were added by the new law.

The insurance industry pushed for additional wording that was included in the law as enacted. That wording reads as follows: “Notwithstanding the provisions of this subsection, an appraisal shall not determine whether the policy actually pro- vides coverage for any portion of the claimed loss or damage.”

It appears to me that there will be a gray area between the meaning of extent of loss or damage and the determination of coverage. I asked five insurance attorneys if they thought the following situations would be subject to resolution by appraisal under the revised provision:

The insured claims that the property is damaged beyond repair. The insurance company says that it can be repaired.
The insured claims that five squares of roofing must be replaced. The insurer says that only two need replacement.
The insured and insurer agree that there was covered damage, but disagree on how much of the damage was preexisting.

I received three replies. One attorney, who usually represents insureds who are suing for coverage, felt that all three would be subject to appraisal under the revised law. A second, who also usually represents insureds, said the same, but added that he could see arguments for an opposite position. The third, who generally defends insurance companies, felt that appraisal would be proper for the first two, but not for the third. He commented that he could envision someone making the opposite arguments.

The consensus appears to be that the revision in the law will expand the scope of appraisal. Just how great that expansion will be remains to be seen.

Learning Point: Suggest an appraisal when a client and the insurer can’t agree on the valuation of a loss. It can be a much quicker and less expensive process than a lawsuit. It doesn’t have to be a trial-like proceeding.

All I Want For Xmas is a— Drone?

This Christmas, the gift for the child who has everything may have been a drone. They’re certainly turning up in unlikely spots—the White House grounds, football stadiums, etc. There’s another place they’ve turned up: insurance exclusions.

ISO just announced (January 30, 2015) that its drone endorsement filing has been approved in 36 jurisdictions including New Jersey, but not New York and Connecticut where approvals are pending. The endorsements will be available for policies written on and after June 1, 2015 in most states. In some states, including New Jersey, each insurer determines its own effective date.3

ISO was ahead of the curve on this one—work on the issue probably began two years ago. ISO has a group that brain- storms about exposures that may be generated by emerging technologies. When Amazon boasted that it might use drones to make deliveries, you could almost hear the alarms go off at ISO.

ISO has filed three CGL endorsements excluding or limiting liability coverage for drones.4 Because the CGL policy contains an exclusion for aircraft liability, you might ask why the endorsements are necessary. The answer is that the aircraft exclusion is not absolute; for example, an exception to the exclusion provides coverage for tort liability assumed under contract. The endorsements will permit insurers to eliminate even that coverage. Furthermore, two of the endorsements add back some coverage.

Drones aren’t big. Two feet by two feet is a common size. But there is a possibility of huge losses. They’re not ICBMs, but if one tangles with a jumbo jet, the loss might be the stuff of nightmares.

Because of their photographic capabilities, personal injury coverage, particularly invasion of privacy, is a real possibility. For example, a firm might use a drone to photograph a large area that it is considering for a plant location, in the process capturing images of numerous individuals on private property. (A military drone is said to be able to launch in San Francisco and map the entire state of Maine, before having to return.5) Suppose the images are posted on the Internet in error or deliberately by a hacker or a disgruntled employee. That might generate hundreds, even thousands, of claims for invasion of privacy.

The first endorsement, CG 21 09 06 15 Exclusion – Unmanned Aircraft, amends the Aircraft, Auto or Watercraft exclusion by adding a lead-in stating that:

“This insurance does not apply to… (1) Unmanned Aircraft ‘Bodily injury’ or ‘property dam- age’ arising out of the ownership, maintenance, use or entrustment to others of any aircraft that is an ‘unmanned aircraft’. Use includes operation and ‘loading or unloading’. This Paragraph…applies even if the claims against any insured allege negligence or other wrong- doing in the supervision, hiring, employment, training or monitoring of others by that insured, if the ‘occurrence’ which caused the ‘bodily injury’ or ‘property dam- age’ involved the ownership, maintenance, use or entrustment to others of any aircraft that is an ‘unmanned aircraft’.”

Unmanned aircraft is defined to mean an aircraft that is not designed, manufactured or modified after manufacture to be controlled directly by a person from within or on the aircraft. This totally excludes liability coverage for drones.

The second exclusion version CG 21 10 06 15 Exclusion – Unmanned Aircraft (Coverage A Only) applies only, as the title indicates, to claims for bodily injury and property damage. Not excluded are the personal injury and advertising exposures enumerated in Coverage B. This version of the exclusion would leave coverage in place for invasion of privacy as well as libel, slander and other personal injury perils.

The third exclusion version, CG 21 11 06 15 Exclusion – Unmanned Aircraft (Coverage B Only) would exclude personal and advertising injury claims, but leave coverage in place for bodily injury and property damage.

Drone Coverage in Other Lines of Business

Commercial property policies exclude coverage for vehicles or self-propelled machines, including aircraft that are operated principally away from the insured’s premises. That will eliminate coverage for most drones, but if a firm uses the drones primarily on premises, there apparently would be coverage for loss or damage by covered perils to the drones. There would be coverage for loss by covered perils caused by drones in any event.

No special drone endorsements have been created for homeowners policies as yet. The property and liability sections of the ISO homeowners exclude aircraft designed for flight, but an exception to the definition of aircraft adds back coverage for model or hobby aircraft not used or designed to carry people or cargo. Provisions providing coverage for model and hobby aircraft were introduced back when drones meant people who talked incessantly, but those provisions would arguably provide homeowners property and liability coverage for the typical personal drone today. However, remember that the basic homeowners policy does not include personal injury liability coverage. With their photographic capabilities, invasion of privacy is an important coverage for drones. Some producers add personal injury coverage to their clients’ homeowners policies almost as a matter of routine. Others add it via umbrella coverage. You’ll want to be sure that the policies you’re using do, in fact, provide personal injury liability coverage for unmanned aircraft.

Governor Cuomo Signs Certificate of Insurance Law with Changes

Good news for producers bedeviled by Machiavellian requests for certificates of insurance changes. On January 29, 2015, Governor Cuomo signed the law that makes it illegal for anyone to request that a certificate be used to expand coverage; the NY Department of Financial Services (DFS) has previously made it illegal for producers to use a certificate for that purpose. That means when a prospective additional insured asks for special language or other changes to certificates, the producer can point out that it’s illegal for the producer to comply and it’s even illegal for the additional insured to request the expansions. The law is to take effect 90 days after enactment.6

The accompanying message noted: “As drafted… [the bill] contains a number of technical flaws and would not provide sufficient oversight authority to the Department of Financial Services. The Legislature has agreed to amend this bill and enact a chapter amendment to correct these deficiencies and on that basis, I am signing this bill.”

The amendments will revise the prohibited practices section of the law. In brief, the changes will:7

Prohibit persons and governmental entities from requiring certificates other than 1) a form issued by the carrier providing the insurance; 2) a standard industry form (i.e., ISO or ACORD) approved by the DFS ; or 3) any other form approved by the DFS.
Prohibit a person or governmental entity from requiring a certificate to affirm that the policy provides certain coverages or conditions that it does not actually provide.
Permit persons and governmental entities to set minimum insurance requirements.

Remove most of the enforcement provisions of the law and replace them with language authorizing the DFS to fine violators $1,000 for a first violation and $2,000 for subsequent violations.

Limit application of the law to certificates for bodily injury and property damage liability insurance. Thus, the law will not apply to certificates for property insurance or Workers’ Compensation.

The bill containing the amendments was introduced in the Assembly on February 4, 2015 by Majority Leader Morelle. The companion bill in the Senate has not been introduced as of this writing (2/4/15). It’s hoped that the changes will not dilute the intent of the new law.

The agents associations came close to getting this law enacted last year. Both houses passed it, but the Governor vetoed. Instead of giving up, the associations strove to come up with a workable compromise— the new ACORD form 855NY was part of that compromise.8 Hats off to the associations for their successful struggle to get this bill enacted!

Update: Geico to Insure Uber & Other Car-Sharing Drivers

In January I wrote about insurance coverage for Uber and other car-sharing drivers.9 There are coverage gaps in relying on a personal policy even when it’s combined with the coverage provided by the car-sharing companies. A better solution is a policy that covers both personal and car-sharing use. In January, I mentioned that Erie Insurance was experimenting with providing such coverage in Indiana and Illinois.

Now the ubiquitous TV lizard, Geico, has jumped in. It too is offering a policy that will cover the personal and car-sharing use of an auto. It has introduced the policy in Virginia, has received approval in Maryland and expects to offer the policy in most other states. Geico says that it will use a commercial policy with rates lower than those charged for taxis and other commercial uses.

Will other companies be offering coverage? We shall see.

Appraisal Rights Expanded; Drones and Insurance; Cuomo Signs C of I Legislation

Jerry Trupin