COMMERCIAL PROPERTY – REPLACEMENT COST COVERAGE – RES JUDICATA – 2-YEAR CONTRACTUAL SUIT LIMITATIONS PERIODO & 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.
