Opinion
CIVIL ACTION No. 99-0465.
March 11, 2004
MEMORANDUM
In January 1999, plaintiff F.P. Woll Company ("Woll") brought this diversity action against defendant Valiant Insurance Company ("Valiant") based on an insurance coverage dispute. In October 2001, Woll filed an amended complaint that added (1) a count of bad faith denial of an insurance claim and (2) a demand for punitive damages. Valiant now moves for partial summary judgment on Woll's bad faith claim and demand for punitive damages.
Factual and Procedural Background
Woll, a company engaged in the manufacture and production of hair-based cushioning products, held a commercial property insurance policy with Valiant. On January 29, 1996, a fire severely damaged one of two buildings at Woll's manufacturing facility on Comly Street in Philadelphia ("the Comly facility"). To resume operations promptly, Woll leased a building at Sandmeyer Lane in Northeast Philadelphia ("the Sandmeyer facility") in early February 1996. The lease included an option to purchase, contingent on the level of environmental contamination found at the site, as the Sandmeyer facility was adjacent to a known Superfund site. Woll undertook to test the contamination of the site and discovered the presence of low trichloroethylene and polychlorinated biphenyl ("PCB") contaminants, along with possible elevated levels of heavy metals. Seeking to minimize potential environmental liability for any future cleanup of the site, Woll sought "Act 2" clearance under Pennsylvania's Land Recycling and Environmental Remediation Standards Act, 35 P.S. § 6026, which would release Woll from liability for remediation of any toxic contaminants on the property at pre-purchase levels as long as the contaminants fell within certain regulatory parameters. In July 1998, Woll purchased the Sandmeyer facility, although the company did not obtain the Act 2 release until later.
Woll filed claims under its insurance policy with Valiant. By May 1998 the parties had reached agreement on the majority of the claims, with Woll receiving $1,200,726.20 for the loss of business income and extra expense, and $1,043,971.25 for the loss of the Comly facility. Woll's lawsuit is based on additional claims made in November 1998 for legal and negotiation fees, environmental testing costs, construction costs, and architectural fees associated with the procurement of the Sandmeyer facility — claims that Woll asserts should be paid under the "extra expenses" provision of the policy. Valiant denies the legitimacy of the claims, taking the position that the costs and fees were not "extra expenses" within the meaning comprehended by the policy.
On October 3, 2002, I granted Valiant's motion for partial summary judgment as to Woll's claims for construction costs and architectural fees associated with its expansion of office space at the Sandmeyer facility, finding that Valiant had already compensated Woll for these costs. I denied Valiant's motion in all other respects. Subsequently, on July 3, 2003, Valiant filed the present motion for partial summary judgment on Woll's bad faith claim and demand for punitive damages.
Standard for Summary Judgment
Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The existence of a genuine issue of material fact is reflected in evidence from which a reasonable juror could find for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). At the summary judgment stage, the court must view the evidence, and draw all reasonable inferences, in the light most favorable to the non-moving party. See Dici v. Pennsylvania, 91 F.3d 542, 547 (3d Cir. 1996). However, the non-moving party may not defeat a motion for summary judgment by resting on the allegations set forth in its pleadings; instead, the non-moving party must set forth specific evidence that demonstrates a genuine issue of fact. Big Apple BMW, Inc. v. BMW of North America, Inc., 974 F.2d 1358, 1362-63 (3d Cir. 1992). When the non-moving party "bears the burden of persuasion at trial, the moving party may meet its burden on summary judgment by showing that the nonmoving party's evidence is insufficient to carry that burden." Wetzel v. Tucker, 139 F.3d 380, 383 n. 2 (3d Cir. 1998).
The Insurance Policy
Because the parties' dispute stems from different interpretations of the insurance policy, it is appropriate to reproduce the relevant "extra expense" provision, which appears as section A.3.a of the policy's Business Income Coverage Form:
Extra Expense means necessary expenses you incur during the "period of restoration" that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.
(1) We will pay any Extra Expense to avoid or minimize the suspension of business and to continue "operations":
(a) At the described premises; or
(b) At replacement premises or at temporary locations, including:
(I) Relocation expenses; and
(ii) Costs to equip and operate the replacement or temporary locations.
(2) We will pay any Extra Expense to minimize the suspension of business if you cannot continue "operations."
(3) We will pay any Extra Expense to:
(a) Repair or replace any property; or
(b) Research, replace or restore the lost information on damaged valuable papers and records,
to the extent it reduces the amount of loss that otherwise would have been payable under this Coverage Form.
Section G.3 of the same Business Income Coverage Form then defines "period of restoration" as the period of time that:
a. Begins with the date of direct physical loss or damage caused by or resulting from any Covered Cause of Loss at the described premises; and
b. Ends on the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.
Discussion
Valiant seeks summary judgment both on Woll's bad faith claim and on Woll's demand for punitive damages. These will be addressed in turn.
A. Bad faith
The Pennsylvania legislature has created a statutory remedy for bad faith on the part of insurers. 42 Pa. C.S. § 8371. Although the term "bad faith" is not defined in the statute, the Pennsylvania courts have defined it as "`any frivolous or unfounded refusal to pay proceeds of a policy.'" Terletsky v. Prudential Prop. Cas. Ins. Co., 649 A.2d 680, 688 (Pa.Super.Ct. 1994) (quoting Black's Law Dictionary 139 (6th ed. 1990)). To make out a claim of bad faith, a plaintiff must show by clear and convincing evidence that the insurer (1) did not have a reasonable basis for denying benefits under the policy; and (2) knew or recklessly disregarded its lack of reasonable basis in denying the claim. Keefe v. Prudential Prop. Cas. Ins. Co., 203 F.3d 218, 225 (3d Cir. 2000). Mere negligence or bad judgment on the part of the insurer is not bad faith. Terletsky, 649 A.2d at 688 (quoting Black's Law Dictionary at 139). As the plaintiff must prove both elements by clear and convincing evidence, "the plaintiff's burden in opposing a summary judgment motion is commensurately high, because the court must view the evidence presented in light of the substantive evidentiary burden at trial." Kosierowski v. Allstate Ins. Co., 51 F. Supp. 2d 583, 588 (E.D. Pa. 1999).
1. Did Valiant have a reasonable basis for denying Woll's claim under the "extra expenses" provision?
To determine whether Valiant's coverage denial was reasonable requires an examination of three provisions in the policy language excerpted above: section A.3.a(1), section A.3.a(3), and section G.3. The parties disagree as to the proper interpretation of each provision.
a. Section A.3.a(1)
Woll's central contention is that the environmental testing it authorized at the Sandmeyer facility served to "avoid or minimize the suspension of business . . . [a]t replacement premises," qualifying the testing costs as extra expenses covered under section A.3.a(1). According to Woll, leasing the Sandmeyer property was merely a short-term effort to comply with its obligation to mitigate business interruption losses while the company sought to purchase a building. Woll contends that environmental testing was an integral part of finding a suitable long-term site for its manufacturing business. In fact, Woll argues, its purpose was to ensure that there were no environmental hazards that would eventually force Woll to move again, prompting another suspension of business.
Valiant counters with two arguments. First, Valiant maintains that the expenses could not have served to "minimize the suspension of business," because they were incurred after Woll's business had already resumed in the leased Sandmeyer facility. In Valiant's view, Woll could have continued to lease the facility without any further suspension of business. To the extent that Woll incurred expenses in determining whether to purchase the Sandmeyer facility, Valiant argues, it was the result of Woll's own choice to obtain the tax benefits of property ownership — not an effort to minimize the suspension of business. Alternatively, Valiant contends that the use of the conjunctive "and" in section A.3.a(1) suggests that extra expenses are covered only when they are incurred for both purposes: "to avoid or minimize the suspension of business and to continue `operations'" (emphasis added). Valiant notes that the expenses at issue were not incurred "to continue operations" — a point that Woll does not appear to contest. Therefore, according to Valiant, the expenses do not satisfy both criteria under section A.3.a(1), and are not covered under the policy.
I find neither party's interpretation to be clearly compelled, or precluded, by the language of the policy. While I refrain at this point from deciding whose interpretation will ultimately prevail, the existence of a genuine ambiguity in the policy leads me to conclude that Valiant's reading of section A.3.a(1) is, at a minimum, reasonable.
b. Section A.3.a(3)
The second provision at issue is section A.3.a(3), which states that Valiant "will pay any Extra Expense to (a) Repair or replace any property . . . to the extent it reduces the amount of loss that otherwise would have been payable under this Coverage Form." Woll asserts that the environmental review it commissioned had the potential to avoid a second relocation, a suspension of business, and an associated loss which Woll claims would have been covered under the policy. Even assuming that a finding of serious contamination would have necessitated another relocation, the expenses Woll incurred only potentially reduced the amount of indemnifiable loss. Because the facility apparently received a clean bill of health, there is no evidence that the environmental testing actually led to any reduction in the amount of loss otherwise payable under the policy. Woll's argument based on section A.3.a(3) is unpersuasive.
c. Section G.3
The final provision open to interpretation concerns the time period during which expenses are indemnifiable. Under section A.3.a, Valiant is responsible for paying only those qualifying extra expenses that are incurred during the "period of restoration." Section G.3 defines the period of restoration as the period beginning with the date of damage and ending "on the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality."
Valiant argues that the restoration period lasts only as long as the theoretical time period to repair, rebuild, or replace the facility — whichever is shortest. Valiant suggests that in the present case the applicable restoration period ended when the Comly Street facility could reasonably have been rebuilt, which was in either (1) August 1996, according to its expert, Jonathon Held; or (2) December 1998, according to an estimate made by Woll vice president Stephen Woll in a March 1998 letter to a public adjuster. Under Valiant's interpretation, all of the environmental testing costs and legal fees incurred in 1999 and 2000 would have been outside either of the possible restoration periods and thus beyond the scope of the policy. The 1998 costs and fees would also be barred if Held's August 1996 rebuilding date is accepted.
Woll proposes a different reading of the period of restoration, interpreting the phrase "repaired, rebuilt or replaced" as offering the insured three choices. Because it chose to replace the destroyed Comly facility, Woll argues, the relevant period of restoration would be a reasonable amount of time for replacement of the Comly facility with a facility of "similar quality." Woll contends that testing for potential environmental hazards was essential to determining whether the Sandmeyer facility was of similar quality to the Comly facility, and therefore that the period of restoration extended at least until such testing was complete.
Even if Woll's interpretation of the provision were the better one, it is doubtful that even a reasonable replacement period could have extended for three or four years after the fire. Moreover, the provision defining the period of restoration expressly excludes any enlargement of time if an "ordinance or law . . . requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize or in any way respond to, or assess the effects of `pollutants.'" This clause does not apply to the present case, as Woll was not required by ordinance or law to conduct environmental testing. It seems counterintuitive, however, to imagine that the policy would cover testing that is within the discretion of the insured, but not testing that is compelled by law. Once again, Woll has failed to establish by clear and convincing evidence that Valiant's interpretation of the policy is unreasonable.
2. Did Valiant have a reasonable basis for denying Woll's claim under the "extra expenses" provision?
Because Woll has failed to establish the absence of a reasonable basis for Valiant's denial of coverage, Woll's claim that Valiant knowingly or recklessly disregarded its lack of reasonable basis necessarily fails as well. Accordingly, I will grant Valiant's motion for partial summary judgment on Woll's bad faith claim.
B. Punitive damages
Under 42 Pa. C.S. § 8371, the court is authorized to award punitive damages upon a finding of bad faith by the insurer. Woll's demand for punitive damages arises solely out of its bad faith claim. Because I find that Woll cannot prevail on its bad faith claim, Woll has no basis for recovering punitive damages, and I will grant Valiant's motion for partial summary judgment on the demand for punitive damages.
Conclusion
In an order accompanying this memorandum, Valiant's motion for partial summary judgment will be granted.
ORDER
AND NOW, this ___ day of March 2004, for the reasons stated in the accompanying memorandum, it is hereby ORDERED that:
(1) Defendant's Motion for Partial Summary Judgment is GRANTED;
(2) Judgment is ENTERED for Defendant on Plaintiff's claim of bad faith and demand for punitive damages.