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Bishops, Inc. v. Penn National Insurance

November 24, 2009

BISHOPS, INC., A PENNSYLVANIA CORPORATION, APPELLANT
v.
PENN NATIONAL INSURANCE, A MUTUAL COMPANY, APPELLEE
BISHOPS, INC., A PENNSYLVANIA CORPORATION, APPELLEE
v.
PENN NATIONAL INSURANCE, A MUTUAL COMPANY, APPELLANT



Appeal from the Order December 10, 2007 In the Court of Common Pleas of Allegheny County Civil Division at No. G.D. 05-15366 Appeal from the Judgment Entered December 11, 2007 In the Court of Common Pleas of Allegheny County Civil Division at Nos.: GD 05-015366 GD 0-015366.

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

BEFORE: BENDER, BOWES and CLELAND, JJ.

OPINION

¶ 1 Bishops, Inc., (Bishops) and Penn National Insurance (Penn National) cross-appeal the trial court's orders granting summary judgment and awarding damages in favor of Bishops limited to the $5000 in coverage afforded by an extra-cost endorsement (the Penn Pac Endorsement) to an all-risks insurance policy that Bishops purchased from Penn National. In its cross-appeal, designated by the parties as primary pursuant to Pa.R.A.P. 2136(a), Penn National asserts that Bishops' claim is precluded by the concurrent cause provision of the basic policy to which the Penn Pac Endorsement was added because the damage for which Bishops claimed coverage was jointly caused by flooding.*fn1 In its cross appeal, Bishops rejoins that this Court has rendered concurrent causation clauses unenforceable, declining to recognize them in the presence of an affirmative grant of coverage for which the insured paid an added premium. Bishops argues further that the Penn Pac Endorsement, which provided coverage for sewer or drain back up, changed the definition of a "covered cause of loss" in the underlying policy to provide coverage to both physical losses contemplated by the endorsement itself and losses sustained by business interruption occasioned by the events that caused the physical loss. Upon review, we find Penn National's concurrent cause exclusion unenforceable. Moreover, we conclude that Bishops is entitled to coverage under both the Penn Pac Endorsement and the Business Income (and Extra Expense) Coverage Form of the underlying policy. Accordingly, we affirm in part, vacate in part, and remand this case for additional proceedings consistent with this disposition.

¶ 2 Bishops' claim arises out of sewer and drain back-up followed by extensive flooding of its business premises on September 17, 2004, during Hurricane Ivan. Bishops is a fabric wholesaler located in the Borough of Millvale, Allegheny County.*fn2 During the hurricane, Bishops suffered a total loss of inventory and office equipment when water runoff backed up through the municipal drainage system during torrential rains and nearby bodies of water overflowed their banks, inundating much of the town. When, subsequently, Bishops filed its claim with Penn National, the insurer tendered coverage for damaged office equipment under an Electronic Data Processing Endorsement Bishops had purchased at extra cost but refused to pay any amount for the physical damage sustained by Bishops' premises and inventory. In a first letter to Bishops' president Rhea Nicotra, dated October 8, 2004, Penn National asserted only the policy exclusions in the basic policy relating to generalized flooding and ground water. Those exclusions, as cited by Penn National's claims representative, provide as follows:

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.

g. Water

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

(2) Mudslide or mudflow;

(3) Water that backs up or overflows from a sewer, drain or sump;

(4) Water under the ground surface pressing on, or flowing or seeping through:

(a) Foundations, walls, floors or paved surfaces;

(b) Basements, whether paved or not; or

(c) Doors, windows or other openings.

Letter of James J. Kepins to Rhea Nicotra, 10/8/04, at 1 (Reproduced Record (R.R.) at 64a) (quoting Penn National Insurance Policy No. CX9 0603870, Causes of Loss -- Special Form, p. 2 of 7). In a follow-up letter dated October 13, 2004, following a telephone conversation with Mrs. Nicotra, Penn National asserted policy definitions to reinforce the surface and ground water exclusions found in the basic policy. The letter noted specifically that

"Ground Water" means:

a. water that backs up through a sewer or drain; or

b. water below the surface of the ground. This includes water that exerts pressure on or flows, seeps, or leaks through or into a building, sidewalk, driveway, foundation, swimming pool, or other structure.

Letter of James J. Kepins to Rhea Nicotra, 10/8/04, at 1 (R.R. at 66a-67a) (quoting Cause of Loss Form CP 10 30 06 95, p. 1 of 9, Definitions). Significantly, neither letter acknowledged Bishops' coverage for sewer and drain backup under the Penn Pac Endorsement or business interruption under the Business Income (and Extra Expense) Coverage Form.

¶ 3 In follow-up correspondence, Mrs. Nicotra informed Penn National expressly that Bishops had purchased the Penn Pac Endorsement and noted that "the endorsement specifically removes from the language you cite . . . exclusion B(1)(g)(3), i.e., water that backs up from a sewer or drain." Letter of Rhea Nicotra to James J. Kepins, undated (R.R. at 68a). In response, Penn National acknowledged the Penn Pac Endorsement but declined to extend coverage, asserting that the damage Bishops suffered was caused concurrently by generalized flooding, which is excluded as a covered cause of loss under the basic policy. In support, Penn National cited the "Causes of Loss - Special Form" as quoted above. Letter of James J. Kepins to Rhea Nicotra, 11/18/04, at 2 (citing Penn National Insurance Policy No. CX9 0603870, Causes of Loss -- Special Form, p.2 of 7 (R.R. at 70a). Applying the concurrent cause limitation of that provision, Penn National asserted that the policy excludes from coverage even covered causes of loss if the damage at issue is caused concurrently by any excluded cause. Penn National then explained that although it had re-evaluated its earlier analysis of the policy provisions, it had concluded that "the coverage opinions expressed in our October 8th and October 16th, 2004 letters are correct and on point with the cause of loss occurring on September 17, 2004." Id. Following Penn National's final refusal, Bishops retained counsel and commenced this action, asserting that its purchase of the Penn Pac Endorsement provided an affirmative grant of coverage for the losses it suffered and rendered the concurrent cause exclusion of the basic policy unenforceable.

¶ 4 In its complaint, Bishops pled causes of action for breach of contract and insurance bad faith in violation of 42 Pa.C.S. § 8371. After the parties completed discovery, Penn National filed a motion for partial summary judgment on Bishops' breach of contract claim, requesting that the court enforce the concurrent cause exclusion. In response, Bishops filed a cross-motion requesting that the court deem its losses subject to coverage under the Penn Pac Endorsement and find further that sewer and drain back-up, as a covered cause of loss, entitled Bishops to coverage under the Business Income (and Extra Expense) Coverage Form up to the policy limits of $600,000. In preparation for argument, the parties entered an extensive set of Stipulated Facts, which appear in pertinent part as follows:

3. [Bishops'] action is based upon the interpretation of commercial insurance policy No. CX90603879 (hereafter referred to as the "Policy"), including endorsements and forms [issued to Bishops by Penn National].

6. On or about September 17, 2004, a substantial amount of rain fell in the Pittsburgh area, specifically in Millvale, as a consequence of Hurricane Ivan.

7. Because of the significant rainfall of September 17, 2004, the sewer system in the Millvale area generally, and specifically near the location of Plaintiff's place of business, was subject to water and sewage backup through sewers, drains and pipes, causing some degree of damage to the Plaintiff's premises.

8. Subsequent to the initial backup of sewage, the significant rainfall of September 17, 2004 also caused outside flood waters to rise and enter the Plaintiff's building through windows, doors and other openings, causing additional damage to Plaintiff's building and premises.

9. It is not possible to divide or separate the damage sustained at the time of the initial sewer backup from the damage done as a result of the subsequent flood.

12. The Policy provides "all risks" property damage coverage. Accordingly, all property damage to the insured premises is a "Covered Cause of Loss" unless it is specifically excluded. If an exclusion applies to a particular type of property damage, that damage is removed from the Policy's definition of "Covered Cause of Loss." The parties agree that all of the property damage suffered by Plaintiff would be covered under the Policy if there was no applicable exclusion.

13. [The primary property damage protection is set forth in a policy form entitled "Causes Of Loss -- Special Form".] The "Causes of Loss -- Special Form" of the Policy sets forth the following exclusions . . . :

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.

g. Water

(1) Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all ...


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