On Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civil No. 90-04288)
Before: Becker, Greenberg and Garth, Circuit Judges
This appeal presents for our review the District Court's non-jury judgment in favor of the plaintiffs Stewart Dickler, Beech Tree Run, Inc. and Wantagh Union Free School District (the "Dickler Group") under an insurance policy with defendants CIGNA and Pacific Employers Insurance Company ("CIGNA").*fn1 The District Court, while denying punitive damages, awarded compensatory damages of $7,381,490 to the Dickler Group for the loss of certain school premises that had been destroyed by fire. Deferring in large part to the District Court's findings, we agree that the Dickler Group is entitled to compensatory damages and is not entitled to punitive damages. Our interpretation of the policy's provisions, however, results in a damage award which differs from that found by the District Court in that we hold that the District Court overestimated the building's replacement cost and failed to find and subtract an amount for physical depreciation in order to calculate actual cash value.
Thus, we will instruct the District Court to modify its order so as to award the Dickler Group the building's replacement cost, which we hold to be $5,389,208, less an amount for the building's physical depreciation. Because the District Court excluded the Dickler Group's evidence regarding the building's physical depreciation but admitted CIGNA's physical depreciation figure of $3,043,383, the District Court should allow the Dickler Group to either stipulate to a physical depreciation amount of $3,043,383, and thus accept an award of $5,389,208 less $3,043,383, or the District Court must determine the amount of physical depreciation after a hearing limited solely to that issue. In addition, we will instruct the District Court to award the Dickler Group $180,000 for demolition costs and provide in its order for interest and for CIGNA's obligations in the event the Dickler Group undertakes to rebuild.
In August of 1986, the Wantagh Union Free School District ("School District") contracted to sell a former schoolhouse to Stewart Dickler for $2,175,000. The parties agreed to delay the closing while the school district sought, and eventually received, voter approval for the sale.
On June 27, 1988, less than three months before the scheduled closing, a fire destroyed a substantial part of the building. As a result, the School District could not deliver the building to Dickler in the contracted-for condition but instead assigned to Dickler the proceeds of any insurance recovery. Dickler, in turn, assigned those rights to Beech Tree Run, Inc., a company he and his associates had formed to serve as owner and ultimate developer of the site.
The building, along with eight other buildings owned by the School District, was insured against loss by fire under a $49,015,070 insurance policy issued by CIGNA. The policy provided that, in the event of property loss, CIGNA would compensate the insured for the property's actual cash value. Alternatively, the policy provided that an insured who repaired or replaced the property would receive full replacement cost:
if there is a loss to covered property, we will use either the " replacement cost " method or the " actual cash value " method to calculate its value. . . .
We will only use the replacement cost method if you actually repair or replace the damaged property. . . .
(A. 983a). The policy defined "replacement cost" as "the amount it would take to replace property with property of the same kind and quality, determined at the time of loss" (A. 1002a), and "actual cash value" as "the replacement cost, at the time of loss, of the property damaged or destroyed, less depreciation." (A. 999a). The policy did not define "depreciation."
Under the policy, an insured could opt to initially receive compensation for the damaged building's "actual cash value" and then, if the property was rebuilt within one year of the loss, would receive the difference between the building's actual cash value and its replacement cost:
If you choose, we will use the actual cash value method to settle losses for property that would normally be valued on a replacement cost basis. If you make this choice, you can change your mind and have us change back to the replacement cost method at any time within one year after the loss. However, you will only have this privilege if you actually rebuild or replace the damaged property.
(A. 983a). In such cases, the actual cash value award would provide capital to allow rebuilding to commence.
The Dickler Group, which did not itself possess a copy of the policy, engaged a public adjuster to represent its interests and to file and process its claim with CIGNA.*fn2 The public adjuster communicated with CIGNA and requested a copy of the policy in order to "know the terms and conditions . . . for the adjustment." CIGNA did not respond and took no action to adjust the loss. The public adjuster then retained Casella Construction Company ("Casella") to estimate the fire damage. On October 3, 1988, Casella estimated the replacement cost of the entire building to be $5,103,040 and estimated that the fire had destroyed 55% of the building. Casella did not estimate the building's actual cash value because the Dickler Group's adjuster, not having access to a copy of the policy, apparently was unaware that the policy required a determination of actual cash value before the insured could receive any funds prior to rebuilding.*fn3 A copy of Casella's report was forwarded to CIGNA, which still took no action to negotiate with the Dickler Group.
Unbeknownst to the Dickler Group, CIGNA's adjuster retained an appraiser named Jonathan Held to estimate the damaged building's actual cash value. Held started with Casella's replacement cost estimate of $5,103,040 and subtracted several factors that, in his view, constituted the difference between replacement cost and actual cash value:
I looked at all factors that I believe should be included in the determination of actual cash value. I looked at replacement cost. I looked at depreciation. I looked at physical damage. I looked at pre-loss market value. I looked to see if there was any difference in the market value prior to the loss and after the loss. And I looked at the highest and best use of the site and whether or not there were any feasible, legal or viable uses for the building.
(A. 424a). Held concluded that the damaged property had no actual cash value. He based this Conclusion primarily on his determination that, after having ceased to serve as a school, the building had no profitable use and had actually decreased the value of the three and one half acres of prime residential real estate on which it stood. At the time that Held performed his calculations, he did not know that the policy defined actual cash value as replacement cost less depreciation. (A. 444a-445a). CIGNA did not at any time inform the Dickler Group of Held's Conclusions or attempt to negotiate and adjust the loss.
After a significant time had elapsed and CIGNA had still not provided the Dickler Group's adjuster with a copy of the policy or taken any other step to facilitate adjustment of the loss, the Dickler Group's lawyer asked CIGNA for a copy of the policy. CIGNA refused to comply with this request. Meanwhile, the Town of Hempstead, in which the building was located, fearing that the damaged building posed a danger to the public, pressured the Dickler Group to either repair the fire damage or to demolish the building. In April, 1989, almost nine months after the fire, the Dickler Group chose the latter option. Demolition costs totalled $180,000, constituting a $185,000 demolition fee less a $5,000 rebate for early payment. (A. 159a).
In June, 1989, CIGNA requested the Dickler Group to submit a proof of loss within sixty days. The Dickler Group retained Harvey Stark, a consulting engineer, to determine the replacement cost of the building. Stark estimated the building's replacement cost at $7,381,490. The Dickler Group submitted Stark's report to CIGNA as its proof of claim. By letter dated August 30, 1988, CIGNA rejected the Dickler Group's proof of claim for lack of compliance with the formula set forth in the policy. CIGNA did not enclose a copy of the policy in its August 30 letter.
In September, 1989, after several further attempts to procure a copy of the policy had failed and after CIGNA had continued in its refusal to negotiate with the Dickler Group, the Dickler Group commenced suit against CIGNA in the Pennsylvania state courts. Pursuant to a discovery request, CIGNA provided the Dickler Group with what it represented to be the policy. The parties resolved the state court action by agreeing that the Dickler Group would submit a new proof of loss that accorded with the terms of the policy that CIGNA had provided to the Dickler Group; that CIGNA would conduct an investigation of the loss; and that, if the Dickler Group were to bring another suit against CIGNA, it would do so only in federal court no later than June 27, 1990. Subsequent to the suit's dismissal, the Dickler Group discovered that the policy that CIGNA had provided in response to the discovery request was not, in fact, the policy that had been in effect at the time of the fire.
The Dickler Group submitted to CIGNA a second proof of loss, also based on Stark's estimate. CIGNA did not respond directly to this proof of loss, but instead instituted a declaratory judgment action against the Dickler Group in the United States District Court for the Eastern District of New York in May of 1990. CIGNA withdrew its action after the Dickler Group moved to dismiss the suit for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure.
On June 27, 1990, having received neither a response to its second proof of loss nor a copy of the relevant policy, the Dickler Group brought an action against CIGNA in the United States District Court for the Eastern District of Pennsylvania. All parties agreed that New York law governed the dispute because the insurance contract had been negotiated in New York and the insured property was located in New York.
The Dickler Group alleged that CIGNA had breached its insurance contract by failing to provide compensation for the property loss. The Dickler Group also alleged that CIGNA had acted in bad faith by failing to provide a copy of the policy; by falsely representing another policy to be the effective policy; by unjustifiably refraining from adjusting the loss and compensating the Dickler Group; and by instituting a frivolous lawsuit in the ...