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Somerset Industries, Inc. v. Lexington Insurance Co.

July 7, 2009

SOMERSET INDUSTRIES, INC., ET AL
v.
LEXINGTON INSURANCE COMPANY



The opinion of the court was delivered by: Goldberg, J.

MEMORANDUM OPINION

This case involves an insurance coverage dispute between plaintiffs, Somerset Industries, Inc. and Springhouse Partners, Inc. (hereinafter, collectively referred to as "Somerset") and Lexington Insurance Company (hereinafter, referred to as "Lexington"). The claims at issue stem from a rainstorm which Somerset has alleged caused severe water damage to their warehouse and inventory contained therein.

Before the Court is Lexington's Motion for Summary Judgment seeking the dismissal of both the breach of contract and bad faith causes of action. For the reasons stated below, Lexington's Motion is denied as to the breach of contract claim, but granted regarding the bad faith claim.

I. Facts

Somerset owns and operates a food distribution facility that housed dry, frozen, and refrigerated food products. On July 18, 2006, following a major rainstorm, Somerset's warehouse and the goods stored inside the facility suffered water damage. The storm also caused a temporary power outage which resulted in damage to frozen goods. (Statements of Undisputed Facts, ¶¶ 3, 4, and 31). According to the Complaint, Somerset "sustained serious direct, consequential and ongoing losses and financial damages, including but not limited to electrical equipment, compressors, generators, building and property damage, dry and frozen inventory, various business equipment, costs and expenses for removal of damaged property, repairs and construction and an ongoing interruption of business . . ." (Complaint, ¶ 9).

Somerset subsequently requested coverage from Lexington for damage to the exterior and interior of the warehouse, dry goods, and refrigerated goods stored in the warehouse.*fn1 Somerset also filed a claim for loss of business income. (Argument 4/15/09, Summ. J. Mot., pp. 4-8).

The original insurance policy issued by Lexington was an all-risk policy, which excluded the following:

B. EXCLUSIONS

1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

1) Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not;

3) Water that backs up from a sewer or drain; or However, Somerset paid an additional premium so that the flood and surface water exclusion referenced above was amended to remove the exclusion for flood and surface water, but maintain g. Water the exclusion for "water that backs up from a sewer or drain." The amendment, and thus the final, controlling exclusion language, states:

FLOOD ENDORSEMENT

1. In consideration of an additional premium of [] it is understood and agreed that Paragraph B. EXCLUSIONS, Item g. Water . . . is amended as follows:

g. Water

1) Water that backs up from a sewer or drain; or . . .

Thus, the effect of this amendment was to remove the exclusion for damage caused by "flood, surface water, . . . overflow of any body of water," and maintain the exclusion for damage caused by "water that backs up from a sewer or drain." (Policy, Fergusson Affidavit, Exhibit A).

Other pertinent sections of the policy included a limitation for coverage regarding damage caused by rain:

C. LIMITATIONS

1. We will not pay for loss of or damage to: . . .

c. The interior of any building or structure caused by or resulting from rain, snow, sleet, ice, sand, or dust, whether driven by wind or not, unless:

1) The building or structure first sustains damage by a Covered Cause of Loss to its roof or walls through which the rain, snow, sleet, ice, sand, or dust enters; or

2) The loss or damage is caused by or results from thawing of snow, sleet or ice on the building or structure.

(Policy, Fergusson Affidavit, Exhibit A).

Finally, regarding business income loss at issue, the Policy states:

A. COVERAGE

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" during the "period of restoration." The suspension must be caused by direct physical loss of or damage to property . . . caused by or resulting from any Covered Cause of Loss.

On July 24, 2006, Lexington retained an accounting firm to assist in the verification of the various claimed damages. After performing a preliminary investigation of the premises, Lexington issued a reservation of rights letter on August 7, 2006. From the time the accounting firm was retained until the suit was filed, Lexington continued its investigation of the claim, repeatedly requesting from Somerset additional information regarding the claimed damage.*fn2 On January 16, 2007, Lexington denied Somerset's requests for an advance payment.*fn3 (Statements of Undisputed Facts, ¶¶ 37, 53; Somerset's Statement of Undisputed Facts, ¶¶ 73-95).

Somerset filed suit on April 25, 2007, raising three causes of action: (1) Bad Faith (Count I); (2) Breach of Contract(Count II); and (3) Violation of the Unfair Trade Practices and Consumer Protection Law (Count III), which was subsequently dismissed by stipulation. On February 27, ...


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