United States District Court, E.D. Pennsylvania
July 29, 2004.
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.
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
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).
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
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
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
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
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
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.
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