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July 1, 1988

Francis Giovannitti, an individual, Plaintiff,
Nationwide Insurance Company, an Ohio corporation, Defendant

The opinion of the court was delivered by: COHILL

 This case is before us this time to resolve questions concerning the proper verdict amount owing from defendant Nationwide Insurance Company ("Nationwide") to plaintiff Francis Giovannitti. A jury rendered a verdict in his favor with respect to his liability claims against Nationwide. Because of previously unresolved legal issues relating to the proper measure of damages, though, the jury was instructed to respond to special interrogatories concerning plaintiff's damage claims; such responses were designed to provide a factual basis for the measure of damages which we award. Having made this determination, as explained below, we will enter judgment in favor of plaintiff Francis Giovannitti and against defendant Nationwide in the amount of $ 203,119.56, plus pre- and post- judgment interest at the rate of six percent per annum.


 On August 21, 1984, a fire damaged property at 439 Market Street in the City of Pittsburgh, Pennsylvania. Plaintiff owned this property, but had leased it to others for the operation of a restaurant, then known as Alexander's Graham Bell.

 Nationwide had previously issued a fire insurance policy to the plaintiff, attached as Exhibit A to plaintiff's complaints (the "Insurance Policy"), which covered the Market Street property and its contents. Under the policy, Mr. Giovannitti is entitled to recover the actual cash value of insured property at the time of the loss, with the qualification that such recovery cannot exceed the amount it would cost to repair or replace such property with materials of like kind and quality. Insurance Policy, § VII (Valuation). The policy further limits any recovery in this regard to $ 577,000. Id., at § I (Limit of Liability). The policy also contains a Loss of Rents Endorsement which permits recovery by the lesser amount of $ 100,000 or the actual loss of rents during a reasonable period of repairs. Id., Loss of Rents Endorsement.

 Plaintiff submitted a timely proof of loss under this policy after the fire, but his claim was rejected due to Nationwide's assertion that the fire was intentionally set by the plaintiff alone or in conspiracy with others.

 After this denial of his claim, plaintiff filed suit against Nationwide in the above-captioned cases, seeking damages for breach of the insurance contract and a declaratory judgment defining the rights and obligations of the parties under the terms of the policy.

 The case proceeded to a jury trial on March 17, 1988. The parties had agreed in advance to bifurcate the trial so that the jury would first make a determination on liability and then consider plaintiff's damage claims, if necessary. After five days of trial, the jury retired and returned a verdict on liability in favor of the plaintiff on March 23, 1988.

 The trial was then reconvened with the same jury on April 11, 1988 for consideration of plaintiff's damage claims. Because of legal issues concerning the proper measure of damages, which we did not wish to resolve in haste, special interrogatories were prepared for the jury. These interrogatories were designed to elicit factual responses from which we could, hopefully, mold a final verdict, depending on the measure of damages we determined to be correct.

 More specifically, the Court was and is faced with the issue of whether or not the plaintiff can recover consequential damages in his action for breach of contract, such consequential damages possibly allowing recovery of damages beyond the limits of the insurance policy. In particular, plaintiff argues that, in addition to the recoveries permitted under the policy, he should also receive, as consequential damages, the increase in the cost of repair and replacement of the property resulting from economic inflation, deterioration of the building and the change in building codes during the delay in his receipt of the insurance proceeds. Similarly, plaintiff contends that he should also be compensated for all rents lost between the time of the fire and the time the jury returned with a verdict in his favor. At the very least, plaintiff urges that the repair period circumscribing his entitlement to loss of rents should be measured with respect to present repairs rather than the time of repair needed right after the fire. In addition, he seeks consequential damages for: (1) the depreciation in the value of the Market Street property since the time of the fire, due to declining economic conditions in the area, see Statement of Francis A. Giovannitti, attached to Plaintiff's Pretrial Statement; (2) clean-up costs after the fire, for which he was billed by the City of Pittsburgh; and (3) interest penalties and attorney's fees which the plaintiff incurred due to his inability to pay a mortgage on the property after the fire loss and in seeking to prevent foreclosure on this mortgage.

 The defendant argues in response that the insurance policy is a contract to pay a fixed sum, and, therefore, when Nationwide is liable for a breach due to a failure to honor an insured's claim and pay the amount due, an insured is only entitled to that fixed sum plus interest for the delay in payment.

 As previously mentioned, we decided to defer ruling on this dispute. However, mindful that under Pennsylvania law consequential damages can be recovered if "they were reasonably foreseeable and within the contemplation of the parties at the time they made the contract," Mellon Bank, N.A. v. Aetna Business Credit, 500 F. Supp. 1312, 1317 (W.D. Pa. 1980), we determined prior to the damage portion of the trial that if consequential damages are proper in this case, Nationwide could have reasonably foreseen as a matter of law that the repair costs and the period of repair for the Market Street property might increase due to inflation, deterioration of the building and building code changes during the time of any delay in payment.

 As to whether Nationwide could reasonably foresee that rental loss would continue to occur beyond a reasonable period of repair and throughout any delay in payment and also that plaintiff would suffer the other consequential damages claimed, however, we found that these questions of reasonable foreseeability should be resolved by the jury, pending our final determination of plaintiff's right to consequential damages in this situation. We further concluded that plaintiff's "actual loss" of rents could be measured in terms of the lease in effect at the time of the fire; we found that insufficient evidence was presented showing that this lease would not continue and therefore did not believe plaintiff's "actual loss" of rents presented a factual issue.

 Accordingly, we submitted special interrogatories to the jury which addressed the remaining factual issues, a copy of which is attached hereto as "Appendix A." Questions 1 and 2 address the cost and period of repair immediately after the fire occurred. Out of concern that an increase in repair cost and time might otherwise be nonrecoverable due to exclusions in the policy, Insurance Policy, § VI(a) (This policy does not insure . . . against loss occasioned directly or indirectly by enforcement of any ordinance or law regulating the . . . construction, repair of buildings) and Loss of Rents Endorsement, § 6(a)(1) (same), each question was, in turn, broken into subparts which addressed the cost and period of repair in accordance with and without regard to applicable building codes and regulations. The jury found that the cost of repair immediately after the fire would be $ 255,000 and that the reasonable period of time necessary for such repairs would be six months; no distinction was found to exist in regards to whether such repair was or was not to be done in accordance with applicable building codes.

 Questions 3 and 4 concern the present cost and period of repair. The jury found that if present repairs were conducted in accordance with applicable building codes and regulations, the repair cost would be $ 363,000, and the repair period, seven months. If repairs were accomplished without regard to applicable building codes and regulations, the jury concluded that the repair cost would be $ 308,000, and the repair period, 6 months.

 In response to questions 5 and 6, the jury found that the plaintiff had not failed to mitigate his damages.

 Finally, in answering interrogatories 7 - 10, the jury found that the defendant could not have reasonably foreseen, at the time the insurance contract was made, that as a result of the fire loss and defendant's denial of coverage: (1) plaintiff would lose rental income beyond the policy limits; (2) a reduction in the value of the land might occur; (3) plaintiff would receive and be unable to pay a bill for clean-up costs of the property after the fire; and (4) plaintiff would be unable to pay his mortgage on the property and would thereby incur interest penalties as well as attorney's fees in seeking to prevent foreclosure on this mortgage.

 Following receipt of these answers, we directed the parties to submit legal memoranda on the issue of plaintiff's entitlement to consequential damages. We also directed the parties to submit a stipulation as to the loss of rents for the six month period following the fire and for the six and seven month periods following the return of the jury's findings on damages. A copy of this stipulation has been received, and the parties have agreed, subject to defendant's objection to whether the existence of the lease forecloses the question of "actual loss," that for the six month period following the fire, the loss of rents is $ 32,907; for the six month period following the return of the jury's finding on damages, $ 39,502; and for the seven month period following this return of findings, $ 45,561. We have also received the parties' legal memoranda.


 Resolution of this controversy is governed by principles of Pennsylvania law as we have jurisdiction pursuant to diversity of citizenship; plaintiff is a Pennsylvania resident and the defendant, an Ohio business corporation. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938) (federal court having jurisdiction through diversity of citizenship must apply substantive law of forum state).

 We therefore look to Pennsylvania law in our analysis of what we perceive to be the seminal issue before us -- whether or not the insurance agreement between the parties is a "contract to pay money" with damages for delay in payment being limited to interest. In so doing, we determine for various reasons that the insurance policy is such a contract, with interest providing the sole remedy for delay in payment.

 First, we note that this Court has previously found a fire insurance policy to be a contract to pay money. In Commercial Union Assurance Co. v. Pucci, 523 F. Supp. 1310 (W.D. Pa. 1981), a fire damaged the insureds' - the Puccis' - residence. This residence was insured against loss from fire by the plaintiff insurance company, Commercial Union. Commercial Union declined to satisfy the Puccis' claim for damages to the property, though, because of a dispute as to who owned the property and who was therefore entitled to the insurance proceeds. Commercial Union paid the amount in dispute into the court registry and filed an interpleader action seeking a declaratory judgment as to who owned the property and should receive the proceeds of the insurance policy; the Puccis counterclaimed for breach of contract and punitive damages. Id. at 1312.

 We found that the Puccis, alone, had a legal right to assert a claim against Commercial Union for the fire loss. Id. at 1315-17. A question then arose as to the value of the loss which the Puccis were entitled to recover. The Puccis claimed that they should receive not only the monetary value of the damage at the time of the loss, but also the increase in the cost of repair due to inflation, during the period from the time of the loss to the time judgment was rendered in their favor. Id. at 1319.

 The policy specified that Commercial Union's liability for loss shall not exceed "the actual cash value of that part of the building structure damaged or destroyed." Id. Examining Pennsylvania law, we found that the Pennsylvania Supreme Court has construed such "actual cash value" to mean "what it would cost to replace a building or a chattel as of the date of fire." Id. (citing Fedas v. Insurance Company of Pennsylvania, 300 Pa. 555, 562, 151 A. 285, 288 (1930)) (emphasis added). Therefore, we held that the Puccis were only entitled to recover the cost of repair as of the date of the loss. 523 F. Supp. at 1319.

 More importantly, in further holding that the Puccis could instead recover interest for the delay in payment, we implicitly recognized the ...

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