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MONARCH, INC. v. ST. PAUL PROPERTY & LIABILITY INSURANCE CO.

United States District Court, E.D. Pennsylvania


July 29, 2004.

MONARCH, INC.
v.
THE ST. PAUL PROPERTY AND LIABILITY INSURANCE COMPANY, et al.

The opinion of the court was delivered by: BRUCE KAUFFMAN, District Judge

MEMORANDUM AND ORDER

Plaintiff Monarch, Inc. ("Plaintiff") brings claims against Defendants The St. Paul Property and Liability Insurance Co. and The Northbrook Property and Casualty Insurance Co. ("Defendants") for breach of contract and violation of the Pennsylvania bad faith statute, 42 Pa. Cons. Stat. § 8371. Now before the Court is Defendants' Motion for Summary Judgment (the "Motion").*fn1 For the reasons stated below, the Motion will be granted.

BACKGROUND

  On the basis of diversity jurisdiction, this case was removed from the Delaware County Court of Common Pleas. Plaintiff's claims arise from its attempt to collect on an insurance policy (the "policy") following a fire in May 2000 at the McClatchy Building in Upper Darby. The parties dispute the extent of Defendants' liability and whether certain conditions precedent bar Plaintiff from collecting on the policy at this time. Prior to Plaintiff's formal claim for policy proceeds, Defendants made two separate payments for property damages: (1) $100,000 on or about June 20, 2000, and (2) $349,888.42 on or about February 9, 2001. Motion at 7-9. On or about August 29, 2001, Defendants also paid $147,811.17 claimed for loss of rents. Id. The total of these payments was $597,699.59.

  Plaintiff submitted its Proof of Loss form on August 9, 2002, seeking $1,570,890.10. Complaint Ex. A. The losses are broken down into the categories of property damage ($896,628.42); loss of rents ($147,811.00); and ordinance and law, or "code upgrades" ($531,450.70).*fn2 Id.; Defendants' Supplemental Brief at 3.

  Of the amounts listed on the Proof of Loss form, the code upgrades and a portion of the property damages remain in dispute. Plaintiff contends that the failure to pay these amounts constitutes a breach of contract and that Defendants' conduct violates Pennsylvania's bad faith statute. Plaintiff also claims that Defendants are liable for the value of a lease with Bally Total Fitness Corporation ("Bally's") allegedly abandoned due to the delay in the adjustment process. LEGAL STANDARD

  In deciding a motion for summary judgment pursuant to Fed.R.Civ.P. 56, "[the] test is whether there is a genuine issue of material fact and, if not, whether the moving party is entitled to judgment as a matter of law." Medical Protective Co. v. Watkins, 198 F.3d 100, 103 (3d Cir. 1999) (quoting Armbruster v. Unisys Corp., 32 F.3d 768, 777 (3d Cir. 1994)). "[S]ummary judgment will not lie if the dispute about a material fact is `genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The Court must examine the evidence in the light most favorable to the nonmoving party and resolve all reasonable inferences in that party's favor. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). However, "there can be `no genuine issue as to any material fact' . . . [where the nonmoving party's] complete failure of proof concerning an essential element of [its] case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

  ANALYSIS

  A. Appraisal Provision

  Defendants argue that Plaintiff's claims are barred for failure to invoke the policy's appraisal provision.*fn3 Pennsylvania law requires that appraisal provisions be included in all fire insurance policies. 40 Pa. Cons. Stat. § 636; see also Ice City, Inc. v. Insurance Co. of North America, 314 A.2d 236, 238 (Pa. 1974). When an insurance company admits liability and disputes only the amount of the loss, appraisal is the favored method of settling the dispute. Ice City, 314 A.2d at 240. Appraisal provisions are revocable, however, and an insurance company "may not assert the existence of the appraisal clause despite its own failure to comply with the clause as a defense to the innocent party's action on the policy." Id. at 239. Accordingly, in Hodges v. Pennsylvania Millers Mutual Insurance Co., 673 A.2d 973, 975 (Pa. Super. 1996), the Court found that the defendant had waived the appraisal provision when it first requested appraisal 23 months after receiving notice of the plaintiff's loss. Id. The Court considered the circumstances of that case, including the fact that a trial date had been set, and concluded that the defendant's request was untimely and did not bar the plaintiff's claim. Id.

  This record is devoid of any evidence that Defendants ever made a formal request for appraisal. Defendants argued for the first time that appraisal barred Plaintiff's claims in their Supplemental Brief on the Motion, which was filed in June, 2004, approximately 22 months after Plaintiff filed its Proof of Loss form. This delay is highly prejudicial to Plaintiff, whose litigation has involved multiple Court filings, hearings, and conferences over the past year. There is no doubt that a prompt invocation of the appraisal clause would have been a more efficient way to resolve the dispute. However, given the circumstances of this case, Defendants' right to invoke appraisal as a defense has been waived.*fn4

  B. Count I: Breach of Contract

  To prove breach of contract, Plaintiff must demonstrate (1) the existence of a contract, including its essential terms, (2) a breach, and (3) damages resulting therefrom. Corestates Bank, N.A. v. Cutillo, 723 A.2d 1053, 1058 (Pa. Super. 1999). In Pennsylvania, recovery on a breach of contract may include:

whatever damages [were] suffered, provided (1) they were such as would naturally and ordinarily result from the breach, or (2) they were reasonably foreseeable and within the contemplation of the parties at the time they made the contract, and (3) they can be proved with reasonable certainty.
Ferrer v. Trustees of the University of Pennsylvania, 825 A.2d 591, 610 (Pa. 2002) (quoting Taylor v. Kaufhold, 84 A.2d 347, 351 (Pa. 1951).

  1. Property Damages and Code Upgrades

  Plaintiff asserts that Defendants' failure to pay the full amount demanded for property damages and code upgrades constitutes a breach of contract. The policy states that Defendants are not obligated to pay property damages on a replacement cost basis "until [the] property has actually been replaced." See Policy at 14 of 19 ("St. Paul Premier Property Protection"). Furthermore, the code upgrades provision provides that Defendants have no obligation to pay for code upgrades "until the property is actually repaired or replaced." Id. Accordingly, an insured is barred from collecting either the replacement cost value of the property damages or the costs of bringing the building up to code until the property is repaired or replaced.*fn5 If the insured decides not to rebuild, then property damages may be collected at their actual cash value, but code upgrades may be collected only for "the amount you actually spend to demolish and clear the site of the described premises." Id.

  The parties do not dispute that the policy is a replacement cost policy and that the McClatchy Building has not yet been repaired or replaced. See Complaint Ex. B ("St. Paul Premier Property Protection Coverage Summary"); Response at 6. Nor do they dispute Plaintiff's intention to repair or replace the property. Motion at 14; Response at 5-6. The estimates submitted by Plaintiff to support the Proof of Loss form are estimates for building renovations, not for the cash value of the building or for its demolition. See Motion Ex. 13. Plaintiff's efforts to obtain state approval for its planned renovations also indicate that it plans to rebuild. See Willner Examination Under Oath, Plaintiff's Response in Opposition to Defendants' Motion ("Response") Ex. D at 139. Accordingly, the Court agrees with Defendants that Plaintiff's claims for property damages and code upgrades are premature.*fn6 Until Plaintiff actually repairs or replaces the building, Defendants are under no contractual obligation to pay.

  2. Loss of Rents and Potential Bally's Lease

  Defendants seek summary judgment with respect to Plaintiff's claim for loss of rents. Motion at 33. As explained supra, Defendants paid the full loss of rents amount claimed by Plaintiff an entire year before the Proof of Loss form was submitted. Plaintiff contends that it nonetheless has a valid claim because the check is being held in escrow by its mortgagee until Plaintiff can demonstrate that it has sufficient funds to repair the building. Response at 22. Defendants, however, have absolutely no control over the terms of Plaintiff's mortgage and are not accountable for the mortgage company's decision to hold the funds in escrow. See Willner Deposition, Response Ex. F at 178-79. Because Defendants have fulfilled their obligations under the policy, judgment will be granted for Defendants on that portion of Count I that relates to the loss of rents claim on the Proof of Loss form.

  Plaintiff asserts that it lost additional rental income because Defendants' "delay in meeting with state officials and subsequent failure to respond to [Plaintiff's code upgrades] estimate deprived [Plaintiff] of policy proceeds" and frustrated its plans to enter into the Bally's lease. Response at 12.*fn7 Defendants, however, were under no obligation to pay Plaintiff anything on the code upgrades claim until the building was actually repaired. Accordingly, Plaintiff cannot be held liable for any consequential losses incurred because the code upgrades claim has not been paid.*fn8

  Plaintiff's breach of contract claims are premature because the McClatchy building has not yet been repaired or replaced. Defendants have not breached any of their obligations under the policy, and summary judgment will be granted with respect to Count I.

  C. Count II: Bad Faith

  Pennsylvania's bad faith statute provides:

In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:
(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.
42 Pa. Cons. Stat. § 8371. Bad faith is defined as "any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent." Terletsky v. Prudential Property and Casualty Insurance Co., 649 A.2d 680, 688 (Pa. Super. 1994). However, "mere negligence or bad judgment is not bad faith." Id. To succeed on its bad faith claim, Plaintiff must prove by clear and convincing evidence that Defendants "did not have a reasonable basis for denying benefits under the policy and . . . knew or recklessly disregarded [their] lack of reasonable basis in denying the claim." Id. A bad faith claim may be based on the insurance company's behavior during the course of litigation. O'Donnell v. Allstate Insurance Co., 734 A.2d 901, 907 ( Pa. Super. 1999). Bad faith may exist even if no breach of contract occurred. March v. Paradise Mutual Insurance Co., 646 A.2d 1254, 1256 (Pa. Super. 1994).

  "Since plaintiff's burden at trial [on bad faith claims] is higher than preponderance of the evidence, plaintiff's burden in opposing summary judgment is also higher." McCabe v. State Farm Mutual Automobile Insurance Co., 36 F. Supp.2d 666, 670 (E.D. Pa. 1999). Summary judgment will be granted against a bad faith claimant if "there is no clear and convincing evidence that the insurer's conduct was unreasonable and that it knew or recklessly disregarded its lack of a reasonable basis in denying the claim." Bostick v. ITT Hartford Group, Inc., 56 F. Supp.2d 580, 587 (E.D. Pa. 1999).

  Plaintiff's bad faith claim has four parts. The Complaint states that Defendants acted in bad faith by invoking a two-year limitations period on the code upgrades claim after previously indicating that it would not be enforced. Response at 18; Complaint ¶¶ 15-19. In a letter dated July 16, 2003, Plaintiff's Counsel informed Defense Counsel of two additional bases for the bad faith claim. Motion Ex. 3. First, Plaintiff alleged that Defendants refused to participate in discussions with the state on code upgrades issues when they knew that their participation was necessary. Id.; Response at 15. Plaintiff's letter also suggested that Defendants' failure to make a settlement offer commensurate with its reserves constituted bad faith.*fn9 Motion Ex. 3. Plaintiff made a fourth argument at Oral Argument on the Motion regarding alleged interference with Plaintiff's ability to perform on the contract. Upon consideration of these arguments, summary judgment must be granted in favor of Defendants on the bad faith claim.

  1. Two-Year Limitations Defense

  Plaintiff argues that Defendants acted in bad faith by invoking a two-year statute of limitations on the code upgrades claim. Response at 10-11, 21-22. The provision applies only to the code upgrades portion of the policy and bars collection unless the repairs are made "as soon as reasonably possible, but not more than two years after the loss or damage." Policy at 14 of 19 ("St. Paul Premier Property Protection"). Accordingly, if the provision applies, Plaintiff is barred from collecting on its code upgrades claim because no repairs were completed before May 2002. The parties agree that Defendants did not invoke the provision during the adjustment process and willingly negotiated after two years had passed. Motion at 32; Response at 10. They also agree that the provision was raised for the first time in Defendants' Answer to the Complaint.*fn10 Response at 21-22.

  Defendants contend that their willingness to waive the two-year limitations period was conditioned on continuing settlement negotiations. Motion at 32. Deposition testimony cited by Plaintiff supports this contention. Plaintiff's adjustor, Larkin, testified that he believed the provision was irrelevant "as long as the parties are talking, going back and forth, evaluating each other's estimates, et cetera, as long as the lines of communication are open." Larkin Deposition, Response Ex. E at 38. Larkin also reported that Defendants' adjustors told him "that the clock was not running on us for so long as we were continuing to work toward an amicable settlement of the case." Id. Plaintiff's sole shareholder, Morris Willner, testified that he was told that the time limitation "would not be an issue because we were continuing to negotiate." Willner Deposition, Response Ex. F at 152-53.

  During the adjustment process, Defendants sent two letters to Plaintiff expressly reserving all rights under the policy. Motion Ex. 37. The first letter, dated March 16, 2001, requested information from Plaintiff and quoted the policy provision containing the two-year limitations period. Id. The letter also stated, "[t]he writing of this letter and the continuing of our investigation should not be construed as a waiver of any of our respective rights under the terms and conditions of our policy contracts." Id. A second letter was sent on June 27, 2002, after the two-year period had run. Id. That letter provided Plaintiff with Defendants' valuation of the claim, including the code upgrades, and asked Plaintiff to submit a Proof of Loss form.*fn11 Id. The letter also included a reservation of all "rights and privileges under the terms of the policy and the law, none of which are to be deemed waived, modified or relinquished in any way." Id. Plaintiff has not produced any evidence to contradict Defendants' assertion that they intended to reserve all rights under the policy and communicated this intention to Plaintiff on several occasions. The Court concludes that when Defendants filed their Answer, they had a good-faith argument that the two-year limitations period applied. Thus, their decision to invoke the provision did not constitute bad faith even though they may not ultimately prevail on that interpretation.

  2. Delayed Consultations with State Officials

  Plaintiff next alleges that Defendants caused unnecessary delay by refusing to participate in discussions with the state regarding code upgrades. Defendants, however, assert that they initially were not aware that it was necessary for them to meet with state officials because they believed that only the local municipality needed to approve the code upgrades. Dunaway Deposition, Response Ex. B at 116. They also contend that Plaintiff bears primary responsibility for the delays in obtaining state approval. Motion at 25-26.

  Plaintiff's Response includes a January 16, 2002 email from Jim Dunaway, Defendants' adjuster, to Charles Murray, who also worked for Defendants. Response Ex. H. According to Plaintiff, the email indicates that Defendants knew that state approval was necessary to process the claim. Response at 8-9. The email is ambiguous, however, and arguably indicates that Defendants understood that state approval was unnecessary under the circumstances.*fn12 Deposition testimony attached by Plaintiff is similarly ambiguous.*fn13 The evidence in this case indicates that Defendants helped Plaintiff's efforts to obtain state approval soon after Plaintiff's request for assistance.*fn14 Accordingly, Plaintiff has failed to produce clear and convincing evidence of any bad faith delay by Defendants.

  3. Reserves

  Plaintiff contends that Defendants' failure to offer the full amount held in reserve on the claim is evidence of bad faith. Response at 13-14. "[S]etting aside reserves does not amount to an admission of liability." Fidelity and Deposit Co. of Maryland v. McCulloch, 168 F.R.D. 516, 525 (E.D. Pa. 1996). Accordingly, even if Plaintiff could prove that Defendants' settlement offers fell short of their reserves, this would not be clear and convincing evidence of bad faith. See Williams v. Nationwide Mutual Insurance Co., 750 A.2d 881, 887 (Pa. Super. 2000) ("Reserves are merely amounts set aside by insurers to cover potential future liabilities."); Williams v. Hartford Casualty Insurance Co., 83 F. Supp.2d 567, 575-76 (E.D. Pa. 2000) ("the setting of reserves is an estimate of an insurer's exposure under a claim . . . [but] the court is reluctant to fashion a rule requiring an insurer to make an offer reflecting the reserve as soon as it is set."). The evidence is especially weak in this case because the alleged difference between the highest settlement offer and the reserves was relatively small.*fn15 According to Plaintiff's adjustor, the difference between Plaintiff's and Defendants' settlement offers was even narrower.*fn16 The Court concludes that Plaintiff's evidence on Defendants' reserves fails to raise a material question of fact on the bad faith claim.

  4. Interference With Contract Performance

  At oral argument, Plaintiff's counsel argued that Defendants acted in bad faith by making it impossible for Plaintiff to comply with the contract provisions. Because Plaintiff could not afford to make the code repairs without the insurance money, and because the contract made completion of the repairs a condition of payment, that portion of the coverage became worthless to Plaintiff. If Defendants knew about this bind, Plaintiff contends, then their refusal to compromise would have been unreasonable and would have constituted bad faith.*fn17 Interference with or failure to cooperate in another party's performance of a contract may rise to the level of bad faith. See Williams v. Nationwide Mutual Insurance Co., 750 A.2d 881, 887 (Pa. Super. 2000). However, in this case, "the provision at issue is unambiguous and we cannot rewrite the contract as suggested by the insureds." Id. at 886. Plaintiff, an indisputably sophisticated party, entered an agreement with Defendants that conditioned payment on completion of the code upgrades. As Plaintiff's counsel acknowledged at oral argument, the policy placed no obligation on Defendants to pay before the upgrades were completed, or even to reach an agreement to pay.

  Within approximately fifteen months of the fire, Defendants tendered almost $600,000 on Plaintiff's claim. Motion at 7-9; Compl. Ex. A. These payments were made despite the fact that Plaintiff had not yet submitted the Proof of Loss form. Defendants conducted an extensive investigation of the claim and ultimately concluded that it was worth less than Plaintiff's demand See Charles Murray Deposition, Response Ex. C at 20-24. To the extent that the parties continue to disagree about the value of the claim, their disagreement has a reasonable basis. Because no juror could find by clear and convincing evidence that Defendants acted in bad faith, summary judgment will be granted in their favor on Count II.

  CONCLUSION

  For the aforementioned reasons, the Motion for Summary Judgment will be granted.*fn18 An appropriate Order follows. ORDER

  AND NOW, this ____ day of July, 2004, upon consideration of Defendants' Motion for Summary Judgment (docket no. 15), Plaintiff's response thereto (docket nos. 19 and 21), Defendants' Reply Briefs (docket nos. 20 and 22), Defendants' Supplemental Brief (docket no. 28), Plaintiff's Supplemental Memorandum of Law (docket no. 29), and Oral Argument held on February 11, 2004, it is ORDERED that Defendants' Motion is GRANTED. Judgment is entered in favor of Defendants and against Plaintiff. The Clerk of the Court shall mark this matter CLOSED for statistical purposes.


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