Doctrine of Accord and Satisfaction Bars Suit for Additional ACV Payment

COMMERCIAL PROPERTY – ACV SETTLEMENT PAYMENT – ACCORD & SATISFACTION
Rose Inn of Ithaca, Inc. v. Great Am. Ins. Co.
(3rd Dept., decided 7/1/2010)

A 2004 fire destroyed plaintiffs' country inn.  Because plainitiffs decided not to rebuild the inn, the policy entitled them to the actual cash value (ACV) of the loss.

The inn's owner, Charles Rosemann, who had decades of experience in the hospitality industry and had negotiated a prior insurance claim involving a fire at the inn, conducted the claim negotiations on this fire himself.  In that role, the Rosemann dealt regularly with the independent adjuster to assess the degree of damage to the inn and, after receiving the preliminary estimate of the damage, contended that over 200 items in it required revision.  Rosemann raised a number of issues with regard to the revised estimate as well, and his efforts resulted in a final estimate of property damage that was almost $250,000 higher than the preliminary one. He also negotiated directly with Great American Insurance Company, rejecting multiple settlement offers and arguing that surviving portion of inn was a total loss.  After several months of these extensive discussions, the claim was settled for the ACV of those parts of the inn that had been destroyed, leaving unresolved only the issue of whether plaintiffs were entitled to payment for the surviving portion of the inn.  The final settlement amount of approximately $4.3 million was over $300,000 more than Great American's initial offer.

Plaintiffs then commenced this action asserting two breach of contract claims: (1) that Great American had omitted items from its ACV calculation of the damages it paid; and (2) that Great American should have determined that the surviving portion of the inn was a total loss and awarded plaintiffs its ACV, as well.  Great American answered and raised the affirmative defense of accord and satisfaction.  Plaintiffs subsequently moved for partial summary judgment on the first claim insofar as it related to architectural and engineering fees allegedly omitted from the ACV calculation, and Great American cross-moved for summary judgment dismissing the entire complaint.  Supreme Court, Tompkins County (Garry, J.) granted plaintiffs' motion as to the issue of liability on the first claim, and granted Great American's cross motion to the extent of dismissing the second claim.  Great American appealed.

In MODIFYING the order appealed from to grant complete summary judgment to Great American, dismissing the entire complaint, the Third Department held that the equitable doctrine of accord and satisfaction barred the complaint's first cause of action (underpayment of ACV damages), as well:

We agree with defendant that the first claim should have been dismissed in its entirety, and modify Supreme Court's order accordingly. As defendant asserts, an accord and satisfaction is effected when "the parties . . . enter into a new contract wherein they agree that a stipulated performance will be accepted in the future, in lieu of an existing claim" (Altamuro v Capoccetta, 212 AD2d 904, 904 [1995], lv denied 85 NY2d 808 [1995]; see Environmental Prods. & Servs. v Consolidated Rail Corp., 285 AD2d 700, 702 [2001]). That is, an accord and satisfaction requires a "dispute as to the amount due and knowing acceptance by the creditor of a lesser amount" (Consolidated Edison Co. of N.Y. v Jet Asphalt Corp., 132 AD2d 296, 303 [1987]; see Marine Midland Bank v Scallen, 161 AD2d 103, 105 [1990]). Inasmuch as an accord and satisfaction constitutes a contract, it must be shown that the parties set forth the essential elements thereof and had a meeting of the minds to resolve the disputed claim (see Sorrye v Kennedy, 267 AD2d 587, 589 [1999]; Altamuro v Capoccetta, 212 AD2d at 905).

Here, the relevant facts are not in dispute. The adjuster who handled plaintiffs' claim for defendant stated in deposition testimony that the architectural and engineering fees incurred in the rebuilding of a structure are a component of replacement cost. She also acknowledged that replacement cost is reduced by depreciation to arrive at the actual cash value of a structure. Nevertheless, the adjuster omitted the architectural and engineering fees from the final settlement amount because plaintiffs decided not to rebuild the inn. Rosemann asserted that he was unaware that defendant did not intend to pay the fees. Long before accepting the settlement amount, however, Rosemann had questioned whether the fees should be included in the estimate that became the basis for the final calculation of replacement cost. Although the dispute over the fees evidently was not expressly resolved, plaintiffs nonetheless accepted the settlement. As such, there was no "mistake as to matters that were not within the contemplation of the parties" that would permit plaintiffs to avoid the creation of an accord and satisfaction (13-70 Corbin on Contracts § 70.14 [2010]). Inasmuch as plaintiffs elected to accept the settlement without asserting their current claim that they were entitled to an additional amount representing the architectural and engineering fees, the settlement gave rise to an accord and satisfaction (see Gimper, Inc. v Giacchetta, 221 AD2d 682, 684 [1995]; Hemingway v State Farm Fire & Cas. Co., 187 AD2d 814, 815-816 [1992]; Restatement [Second] of Contracts § 154; cf. Sabbagh v Pantano, 170 AD2d 411, 412 [1991]; Ginsburg v Equitable Life Assur. Socy. of U.S., 254 App Div 445, 447 [1938], lv denied 279 NY 810 [1938]). 

Plaintiffs' remaining claims for damages, arising from items allegedly omitted or undervalued in the final calculation of actual cash value, are similarly barred by accord and satisfaction. As with the above fees, while Rosemann stated that he did not know that sales tax was omitted from the calculation of replacement cost, the record reveals that he inquired about the inclusion of the tax prior to settling the claim. Plaintiffs further complain that the valuation of unit costs in the settlement was too low, but Rosemann had affirmatively challenged those costs prior to settling the claim. Finally, plaintiffs concede that damages for additional tear-out and removal costs are unavailable given the dismissal of the second claim. 

Key to the application of the doctrine of accord and satisfaction is a showing that the parties discussed, negotiated and agreed upon a compromised figure in settlement of a disputed claim.  In this case, evidence of the extensive negotiations preceding plaintiffs' acceptance of Great American's ACV settlement offer supported the doctrine's application to bar plaintiffs' suit for additional damages.

Insureds Allowed to Continue Suit Against Neighbors Even After Receiving Insurance Payment for Garage Crushed by Neighbor's Tree

HOMEOWNERS – ACTUAL CASH VALUE – SUIT AGAINST TORTFEASOR
Hopper v. McCollum
(2nd Dept., decided 8/25/2009)

If insureds collect payment from their homeowners insurer for damage to their garage crushed by their neighbor's rotted tree, can they then also sue their neighbor for damages?  Yes, says the Appellate Division, Second Department.

Plaintiffs' garage was damaged when portions of an allegedly decayed and fractured tree located on their neighbor's adjacent property fell onto it. Plaintiffs made a claim under their homeowners' insurance policy and were paid the policy limit, defined as the actual cash value of the loss under a policy provision entitled "Other Structures Protection."  Plaintiffs then commenced this action against their neighbor.  The defendant moved to dismiss the complaint pursuant to CPLR 3211(a)(5) on the ground that the plaintiffs had received payment through their homeowners' insurance policy and were not entitled to any additional recovery from her.  Putnam Supreme converted the motion to dismiss into one for summary judgment and granted the motion.

In REVERSING the motion court's decision and reinstating plaintiffs' complaint, the Second Department held:

Contrary to the defendant's contention, the plaintiffs are not precluded from maintaining this action against the defendant simply because they received payment from their insurance carrier (see generally Fisher v Qualico Contr. Corp., 98 NY2d 534, 538; Spectra Audio Research, Inc. v Chon, 62 AD3d 561; Corsa v Pacific Indem. Co., 52 AD3d 450, 451; Winkelmann v Hockins, 204 AD2d 623, 623-624). If the trier of facts in this matter finds the defendant liable and awards damages to the plaintiffs, then the plaintiffs' receipt of the insurance payment may be relevant as a possible setoff against the damages award (see CPLR 4545[c]; Fisher v Qualico Contr. Corp., 98 NY2d at 539-540). 

Although the court's decision mentions that plaintiffs received the policy limit from their homeowners insurer, it also states that "the plaintiffs could have sought additional reimbursement from their insurance carrier if they submitted proof that they repaired, rebuilt, or replaced the garage within 180 days of payment, [which] they did not do[.]"  I'm not sure which is true, but it probably does not matter to the holding.  If the actual cash value of the plaintiffs' garage exceeded the limit of their "Other Structures Protection" coverage, they could sue for their uninsured loss.  The decision does not indicate why the plaintiffs' homeowners insurer did not join as a co-plaintiff to recover its payment or whether it had commenced a separate subrogation action against plaintiffs' neighbor. 

What if the plaintiffs were unsuccessful in their claim of negligence against their neighbor?  Would that finding collaterally estop their homeowners insurer from pursuing its subrogation claim?  It shouldn't.  Proceeding as a subrogee is different than suing as an assignee, and only assignees should be collaterally estopped by a finding on the merits against their assignors.  Moreover, to the extent that plaintiffs such as the ones in this case either are subject to a setoff against a damages award for payments they had received from their insurer or can be said not to be able to recover for those insurance payments in the first place, the insurer's subrogation interest is not at issue in an insured's separate tort action to recover the insured's uninsured loss. 

No Replacement of Property Within 2 Years Results in Dismissal of RC Holdback Suit

PROPERTY – REPLACEMENT COST COVERAGE – DEADLINE TO REPAIR OR REPLACE – CONTRACTUAL SUIT LIMITATIONS PERIOD – DECLARATORY JUDGMENT
Alloush v. Nationwide Mut. Fire Ins. Co.
(NDNY, decided 2/26/2008)

Went to the Mura & Storm archives for this one. Kudos to my partner, Scott Storm, for obtaining this excellent result.

This case addresses two, occasionally recurring questions in property claims: (1) How long does an insured really have to repair or replace an insured dwelling to obtain the RC holdback?; and (2) Can an insured use a declaratory judgment action to obtain a ruling on whether a certain, unpurchased property qualifies for RCV coverage? Answers from this decision are: (1) Two years. (2) No.

Mr. Alloush sustained a fire loss to his home on August 24, 2003. Nationwide estimated the dwelling damage to be $196,849.26 on a RCV basis and $141,825.24 on an ACV basis, leaving the potentially recoverable depreciation (commonly referred to as the "RC holdback") to be $55,024.02.

Nationwide paid the dwelling ACV on February 19, 2004. Mr. Alloush completed repairs on the insured dwelling but did not make a claim for the RC holdback because he could not substantiate expenditures in repairing the insured premises in excess of what Nationwide had paid in ACV. Instead, even though Mr. Alloush had decided to repair the insured premises and continued to reside there, he wanted to recover the RC holdback by purchasing another property.

In July 2005 (the month before the two-year anniversary of the loss date), Mr. Alloush contacted Nationwide and informed it that he intended to buy a single-family house in New Jersey as a replacement for the insured premises (Mr. Alloush's ex-wife happened to own that home and lived there with four of their eight children). In response, Nationwide reminded Mr. Alloush and his public adjuster of the policy's two-year contractual suit limitation condition and the need for Mr. Alloush to replace the insured premises and file his RC holdback claim before that time period expired. At the time he filed this action, however, Mr. Alloush had not replaced the insured premises.

In granting summary judgment to Nationwide, Senior Judge Frederick Scullin ruled that: (1) since the policy unambiguously stated that Nationwide was not required to pay any more than the ACV of the insured premises "until the repair or replacement is made," and Mr. Alloush had not replaced the insured premises, Nationwide had not breached the policy; and (2) Mr. Alloush was improperly seeking an advisory opinion about a future event that may or may not occur, namely, the replacement of the insured dwelling:

[T]his case would only be ripe for decision if and when Plaintiff purchased a replacement for the insured premises and incurred some costs in doing so. Moreover, dispute would still be hypothetical unless and until Plaintiff filed a claim to recover those replacement costs and Defendant refused to pay that claim. Therefore, the Court concludes that there is no current controversy between these parties and dismisses the complaint for lack of jurisdiction.

This claim scenario must be contrasted with one in which the insurer denies all coverage based on one or more coverage defenses and does not pay ACV to the insured. See, discussion of the O&E Growers, Inc. v. Selective Ins. Co. of Amer. case in If At First You Don't Succeed, Sue Again. We obtained a similar result for Security Mutual Insurance Company in New York state court in Finley v. Security Mut. Ins. Co., Index No. 02-0594 (Sup.Ct., Jefferson Co., decided 6/21/2005). This is now the second decision that we are aware of in which a court has agreed that a property insurance policy's two-year contractual suit limitations period, in effect, represents the deadline by which an insured who has received a building ACV payment must repair or replace the building and submit the RC holdback claim.

What this case adds to the legal landscape, however, is authority for rejecting insureds' attempts to use the declaratory judgment suit mechanism as a means of "staying" that two-year deadline and attempting to obtain what can only be regarded as an advisory opinion, something DJ actions are not intended to provide.

If At First You Don't Succeed, Sue Again

COMMERCIAL PROPERTY – REPLACEMENT COST COVERAGE – RES JUDICATA – 2-YEAR CONTRACTUAL SUIT LIMITATIONS PERIOD
O & E Growers, Inc. v. Selective Ins. Co. of Amer.
(WDNY, decided 5/5/2008)

To the occasional surprise of judges, juries and many of my neighbors, most replacement cost property insurance policies pay actual cash value (ACV) first and require the insured to repair or replace the damaged or destroyed property before the withheld depreciation or "RC holdback" is paid. Most property insurance policies also require insureds to sue for policy proceeds within two years of the loss date - making the 2-year loss anniversary the effective deadline for the insured to repair or replace and claim for RC holdback benefits (see, Finley v. Security Mut. Ins. Co., Index No. 02-0594 [Sup.Ct., Jefferson Co., decided 6/21/2005]). But what if the insurer's denial of coverage, and non-payment of ACV, makes it economically impossible for the insured to repair or replace the damaged/destroyed property?

On March 8, 2001, a fire destroyed a large building and contents insured by Selective. Following its investigation of the fire, Selective denied coverage. In February 2003, the insureds sued Selective for policy benefits. In their original complaint in the first action, the insureds sought damages for breach of the insurance contract based on the ACV of the building and its contents. Selective asserted an "arson" defense, claiming that the fire was intentionally caused.

Shortly before trial in the first action, the plaintiffs obtained leave to amend the complaint to include an alternative claim for the full "replacement cost" (RC) of the building and its contents, relying on the policy's replacement cost provision. The RC claim, as set forth in the amended complaint in the first action, was based on the allegation that Selective's wrongful denial of coverage and its refusal to pay the ACV rendered it impossible for the plaintiffs to repair or replace their destroyed property, thereby preventing them from fulfilling the condition precedent of actual repair or replacement under the policy. The court granted the insureds leave to amend their complaint based on the rarely cited 1982 decision of the Southern District NY in Zaitchick v. American Motorists Ins. Co., 554 F. Supp. 209, 216-17 (SDNY 1982), aff'd, 742 F.2d 1441 (2d Cir.), cert. denied, 464 U.S. 851, 104 S. Ct. 162 (1983), in which the district court held that plaintiffs sustained their burden of proving that their insurer's refusal to pay ACV based on arson defense made it impossible for them to fulfill the policy's RC condition precedent, excusing their performance of that condition.

With their complaint so amended, the insureds proceeded to a jury trial in July 2006. After closing arguments, the court instructed the jury on the law pertaining to Selective's arson defense, as well as the insureds' right to recover damages based on either ACV or RC. The jury rendered its verdict by answering the four jury questions as follows:

1) Selective had not met its burden of proving by clear and convincing evidence that the fire was intentionally caused or procured by the plaintiffs;

2) the total cost of replacing the building was $1,077,705;

3) the ACV of the building immediately prior to the fire was $300,000, and the ACV of the contents of the building immediately prior to the fire was $1,054,492; and,

4) the plaintiffs had not met their burden of proving by a preponderance of the evidence that, under the circumstances of that case, they were excused from meeting the conditions precedent set forth in the policy and were therefore not entitled to recover the cost of replacement of the building.

Judgment was entered for the insureds, with prejudgment interest in the amount of $591,100.30, and taxable costs in the amount of $ 7,940.86, resulting in final judgment in favor of plaintiffs in the amount of $1,953,533.16. The insureds did not appeal from the judgment, and Selective paid the entire judgment in September 2006.

One month later, counsel for the plaintiffs sent a letter to Selective advising:

. . . O & E intends to purchase a replacement commercial building located at 795 Wurlitzer Drive, North Tonawanda, New York 14120. O & E anticipates that the purchase price will exceed the sum of $ 1.1 million. You will recall that at trial, the jury awarded the sum of $300,000 as the actual cash value of the O & E building in Elba. Based upon this award and the further jury award of the actual cash value of the contents (business personal property) to the other two plaintiffs in the case . . . , we calculate that the "holdback" under the above-referenced Selective policy is equal to the sum of $ 777,706. O & E is prepared to close on the purchase of the Wurlitzer building and thereafter submit a claim under the policy for replacement cost benefits in the full amount of the holdback.

Not surprisingly, Selective said "nuts to that" (or words to that effect), and O & E then brought this action, seeking a declaration from the court that the policy remained in full force and effect and that, upon actual replacement of the building, O & E could recover up to $777,705 (representing the difference between the amount the jury determined as the building's RCV, $1,077,705, and the amount the jury awarded as its ACV, $300,000). O & E moved for summary judgment in its favor on this claim, and Selective cross-moved for summary judgment on the ground that this action was barred by the doctrine of res judicata, as well as by the policy's applicable 2-year contractual suit limitations period.

In granting summary judgment to Selective based on its finding that plaintiffs' second action was barred by the doctrine of res judicata the court held:

Clearly, the facts underlying O & E's claim for replacement costs in this action are directly related in time, space, origin and motivation to the same transaction that formed the basis of the claims which were fully litigated to judgment upon jury verdict in the previous insurance coverage action. Indeed, this declaratory judgment action seeks precisely the same relief that the plaintiffs sought in the prior action-declaring the rights and obligations of the parties to the same insurance policy. The facts essential to the claim made in this action regarding whether the policy provides the right to recover replacement cost were also present in the first action, and were fully addressed during the trial. However, the plaintiffs proceeded on the theory that those facts made it impossible to fulfill the replacement condition, a theory which the jury rejected. Based upon the jury's finding, the court entered an order containing specific language dismissing the plaintiffs' cause of action for recovery of replacement costs.

* * * * *

Based on these undisputable facts, the court has little difficulty concluding that O & E's replacement cost claim in this action is "sufficiently related to the claims that were asserted in the first proceeding that it should have been asserted in that proceeding." (citation omitted). Accordingly, O & E is precluded by the doctrine of res judicata from bringing this second coverage action against Selective.

The court also found that this second action - brought more than six years after the fire loss - was time-barred by the policy's 2-year contractual suit limitations period. The jury's determination that O & E's obligation to fulfill the condition precedent of repair or replacement had not been frustrated by Selective's refusal to provide coverage refuted O & E's contention that it should not be bound by the 2-year period because it could not have brought this action seeking recovery of replacement costs until the jury made its determination, in July 2006, that Selective was obligated to provide coverage. "The clear implication of [the jury's] finding is that Selective's conduct had no bearing on the ability of the plaintiffs (including O & E) to seek recovery of replacement costs upon fulfilling the condition precedent. Beyond this, O & E has made no showing that it was somehow otherwise misled by Selective into believing that the limitations provision in the policy would not be invoked."

Summary judgment for Selective, dismissing this second action for RC holdback benefits.