Opinion
Civil Action Nos. 99-3689, 00-2482.
July 9, 2004
Kenneth T. Levine, Claudia D. McCarron, Nelson Levine Deluca Horst, Blue Bell, PA, for Plaintiffs.
Craig E. Parles, Herbert C. Klein, Michael J. Palma, Nowell Amoroso Klein Bierman, P.A., Hackensack, NJ, for Defendant.
MEMORANDUM ORDER
Presently before the Court is Specialty Insurance Company's ("Specialty") Motion for Summary Judgment (Doc. No. 35 in 99-cv-3689; Doc. No. 24 in 00-2482). For the following reasons, Specialty's Motion will be denied.
I. BACKGROUND
A. Facts
Royal Indemnity Company d/b/a Royal Insurance is incorporated in the state of Delaware, with its principal place of business in Charlotte, North Carolina. Specialty is incorporated in the state of New Jersey, with its principal place of business in Manasquan, New Jersey. On July 1, 1988, Royalty entered into an agreement with Specialty, whereby Specialty would act as Royal's agent for an insurance program offered in the restaurant industry. The business relationship, which lasted more than eight years, was governed by the terms of the Managing General Agency Agreement ("MGA"). In entering into the MGA, Specialty, as managing agent, had authority to solicit, underwrite, bind and issue policies in accordance with the "underwriting guideline, [and any] bulletin or instruction which may be issued by Royal from time to time." (MGA at 1-2, Ex. A to Specialty's Mot. for Summ. J.) Specifically, the Restaurant Program Underwriting Guidelines state, in part:
Royal SunAlliance USA, Inc. is Royal's assignee and successor company.
The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332, as this is a dispute between citizens of different states, and the amount in controversy exceeds $75,000.
V. Financial
• Risk must be in business a minimum of three years at the present location.
• Risk must have a DB [Dun and Bradstreet] report or Profit Loss statement available to support the success of the business.
• Any risk having experienced a criminal, civil, or liquor law violation within the last five years should not be written.
• Any risk exhibiting signs of financial difficulty (other than shown on the DB or PL) such as claim frequency, lawsuits, citations, or revocation of license, should not be written.
• Any risk whose principals and/or managers have violated criminal or civil laws should not be written.
Financial stability is vital to the success of any business. The best indicator of a financially sound risk is a growing business, under the same management, at the same location for a minimum of three years. Financial stability needs to ensure that the insured can:
• Pay their bills
• Employ capable staff at competitive salaries
• Provide employees and public a properly maintained and safe environment
Part of your underwriting evaluation should include financial evaluation.
("Restaurant Program Underwriting Guidelines, Ex. D to Royal's First Mot. for Summ. J (emphasis in original).)
Specialty contends that Royal did not monitor the program, other than "through review of a few random accounts once or at most, twice a year," and did not become involved "until there was a claim." (Specialty's Br. in Supp. of Mot. for Summ. J. at 4.) Royal counters by claiming that "during the course of the relationship between Royal and Specialty, Royal sent auditors to examine the accounts being accepted by Specialty as part of the restaurant program." (Royal Indemnity Co.'s Mem. of Law in Opp'n to Specialty Insurance Agency's Mot. for Summ. J. [hereinafter Royal's Mem. in Opp'n to Specialty's Summ. J.] at 4.) In support of its contention, Royal cites various documents that indicate audits were performed in 1994, 1995, and on several occasions in 1996. (Exs. B-3 — B-8, B-10 of Royal's Mot. for Summ. J. in 99-3689.)
The policy at issue provided comprehensive insurance coverage for Ristorante Mamma Maria, Inc. ("Mamma Maria"), located in Philadelphia, Pennsylvania. The policy was written by Thomas Aderente, Specialty's Vice-president of Underwriting. Royal claims that in 1997, Specialty received two coverage applications from Mamma Maria, one from the Louis Savadove Agency ("Savadove"), and the other from the Butrus and Whalon Agency. (Aderente Dep. at 72-76.) Thereafter, Mamma Maria informed Specialty that Savadove was its official broker, and Specialty relied upon the Savadove information to quote and bind coverage. (Id. at 81.) The Savadove application indicated that Mamma Maria had been in the same location for five years, but, according to Aderente, did not provide additional financial information. (Id. at 82 ("Nothing specifically as far as financials go other than that they had been at that location five-plus years. . . .").)
The Savadove application, which identifies Claudio and Santa Chiavatti as the owners, also represents that neither Mamma Maria nor its owners has ever been involved in bankruptcy, tax liens, or any litigation. This is not true. It appears that Aderente did not conduct any investigation related to this representation, prior to binding coverage. (Ex. F to Royal's Mot. for Summ. J. in 99-3689.) We also note that the deposition of Richard Lofberg, Specialty's expert witness, states that Specialty's decision to file for bankruptcy was due, in part, to the tax payments having been stolen from Mamma Maria.
Q. Do you have any idea why it filed for bankruptcy?
A. Based on the deposition Mr. Chiavat[t]i gave, yes, I do.
Q. What is the reason?
A. Mr. Chiavat[t]i's daughter, Paula, had a fiancee who was charged with handling the books at the restaurant. The fiancee was also charged with making payment of taxes and I assume the other bills, everything was paid by check from what I can see, except for various tax payments to the City, the State and the Federal Government.
. . . .
And Mr. Chiavat[t]i or his daughter would take the money out for the cash register and give it to him and he would go down and say he made the payments. He did not make the payments. He disappeared before these events, shortly before October of 1996, and as far as I can tell the cash went with him.
(Lofberg Dep. at 86-87.)
We also note that the application asks for total receipts during the past three years. However, the Mamma Maria application simply states that its 1996 receipts were $500,000. (Ex. E to Specialty's Brief in Support of its Mot. for Summ. J. in 99-cv-3689.)
The DB report was issued on April 23, 1997, after the coverage was bound.
Q: So was coverage already bound on April 23, 1997?
A: Yes.
. . . .
Q: So is it fair to say coverage was bound before you received the Dunn Bradstreet report; is that right?
A: Yes.
(Id. at 89, 90.)
After receiving the DB report, Aderente received a correspondence from Attorney John S. Galati, informing Aderente that Galati had been retained to organize Mamma Maria's payment plan to the IRS. (Letter from Galati to Whom it May Concern of 4/23/1997; Ex. H of Royal's Mot. for Summ. J. in 99-3689.) Aderente also received a copy of a court order dismissing the bankruptcy proceedings, but the order did not provide a reason for the dismissal. (Id. at 98; Ex. I to Royal's Mot. for Summ. J. in 99-cv-3689.)
On June 8, 1997, Mamma Maria was damaged by fire. (Aderente Dep. at 103.) Specialty states that the fire caused approximately $600,000 worth of damage. (Specialty's Br. in Supp. of Mot. for Summ. J. at 5.) Royal ultimately settled for $550,000. (Attanasi Dep. at 44, Ex. M of Royal's Mot. for Summ. J. in 99-3689.)
B. Procedural History
Royal filed suit against Specialty in the Court of Common Pleas, Philadelphia County. The case was subsequently removed to this Court on July 21, 1999. Royal's two-count Complaint alleges that Specialty (1) breached its contract with Royal; and (2) was negligent in writing and issuing the Mamma Maria insurance policy.
On August 2, 1999, Specialty filed suit against Royal in the District Court for the District of New Jersey. The case was transferred to this Court in May 2000, and is docketed as 00-cv-2482. Specialty's six-count Complaint alleges: breach of good faith and fair dealing; violations of New York insurance law; breach of contract; and negligent failure to obtain an insurance license. Those claims are not a part of the instant analysis. On April 29, 2002, the two cases were consolidated. (Doc. No. 13 in 00-2482.)
II. LEGAL STANDARD
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 any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). The moving party bears the burden of proving that no genuine issue of material fact is in dispute. Adickes v. S.H. Kress Co., 398 U.S. 144, 157 (1970). Once the moving party carries this initial burden, the nonmoving party may not rest upon the mere allegations in its pleading, but must set forth specific facts showing that there is a genuine issue for trial. FED. R. CIV. P. 56(e). However, in considering the motion, we will not resolve factual disputes or make credibility determinations, and we must view facts and inferences in the light most favorable to the nonmoving party. Siegel Transfer, Inc. v. Carrier Express, Inc., 54 F.3d 1125, 1127 (3d Cir. 1995).
III. DISCUSSION
Specialty's claims that summary judgment is appropriate because: (1) "the Underwriting Guidelines did not prohibit Specialty from underwriting the Mamma Maria account;" (2) "there is no proximate cause relationship between Specialty's actions and Royal's losses;" and (3) "Royal is estopped from pursuing an action against Specialty." (Specialty's Br. in Supp. of Mot. for Summ. J. at 7, 14, 19, 21, 23.)
Specialty also argues that "Royal has no valid argument against Specialty due to the failure of Specialty to obtain a signed application," and that "Royal's expert, Dr. Cather, should not be allowed to testify since his opinion is not the proper subject of expert testimony." In light of our decisions entered today on the various outstanding motions, we need not address these arguments.
A. The Underwriting Guidelines
Specialty claims that there exists no genuine issue of material fact with regard to the propriety of its underwriting the Mamma Maria account. Specialty argues that the Guidelines do not prohibit the writing of the business because it is unclear whether a financial evaluation was required in every instance. Specialty also argues that the Guidelines' statement that policies for parties that do not meet certain financial criteria "should not be written," does not mean that the financial evaluation was the only factor to consider.
Specialty is correct in stating that "[a]mbiguity is interpreted against the drafter of the contract." (Specialty's Br. in Supp. of Mot. for Summ. J. at 8.) However, Specialty contends that the MGA's language is ambiguous because "it is `reasonably susceptible to different constructions and capable of being understood in more than one sense.'" (Id.) Specialty proposes that either the language is ambiguous, or the clear meaning of the language is that "financial instability is merely one factor which can be considered along with everything else." We disagree. As discussed in our Memorandum Order granting Royal's Summary Judgment, the plain meaning of the language in the Guidelines, and our overall interpretation of the document, clearly indicate that Specialty was required to assess the financial strength of all the applicants before binding Royal. Specialty's suggested alternative interpretation cannot create ambiguity in light of the clear intent of the Guidelines and the MGA.
Mere assertion by one that contract language means something to him, where it is otherwise clear, unequivocal and understandable when read in connection with the whole contract, is not in and of itself enough to raise a triable issue of fact. It has long been the rule that when a contract is clear in and of itself, circumstances, extrinsic to the document may not be considered . . . and that where the intention of the parties may be gathered from the four corners of the instrument, interpretation of the contract is a question of law and no trial is necessary to determine the legal effect of the contract.Oswegatchie Light Power Co. v. Niagara Mohawk Power Corp., 167 N.Y.S.2d 587, 591 (N.Y.App.Div. 1957) (internal citations omitted) (quoting Bethlehem Steel Co. v. Turner Constr. Co., 2 N.Y.2d 456, 460 (N.Y. 1957)). We also note that even if one were to conclude that Specialty was not required to obtain a positive DB before binding coverage, Specialty nevertheless breached the agreement when it failed to cancel Mamma Maria's policy upon receipt of the negative DB which also demonstrated that Mamma Maria had misrepresented material information on its application.
Specialty next contends that the MGA only dissuades Specialty from underwriting risks that demonstrate financial instability that do not appear on the DB. That is, if the indicators of financial stability appear on the DB, those indicators do not preclude Specialty from refusing to underwrite the policy because Specialty would then be able to investigate those indicators and make a determination as to the restaurant's financial strength. Specialty argues that "[w]hile the intent of the language apparently was that the underwriter should consider and be on the lookout for potential hidden signs that a restaurant is financially unstable, there are no prohibitions as to writing risks whose problems do appear on the DB and can be investigated to the agent's satisfaction." We disagree. The Guidelines clearly state that the DB (or Profit Loss statement) must support a finding of financial success. (Guidelines at V; Ex. D to Royal's Motion for Summ. J. in 99-3689 ("Risk must have a DB report or Profit Loss statement available to support the financial success of the business.").) The DB in question indicated that Mamma Maria had filed for bankruptcy within six months of applying for insurance, had tax liens to federal and state authorities in excess of $140,000, and that Mamma Maria had two judgments against it. This information simply does not "support the financial success of the business."
Specialty also argues that the Guidelines did not prohibit Specialty from underwriting Mamma Maria because there was no evidence Mamma Maria had violated a criminal or civil law. As discussed in our Memorandum Order granting Royal's Motion for Summary Judgment, we need not consider Mamma Maria's civil or criminal status at this juncture. It is sufficient to note that Mamma Maria's state and federal tax liability, in excess of $140,000, does not support a finding of financial stability.
B. Proximate Cause
Specialty claims that there is no proximate cause between Specialty's actions and Royal's losses. In support of this contention, Specialty proffers three arguments. First, Mamma Maria's alleged financial instability was not causally related to the fire. Next Specialty argues that because of the timing of the fire, Royal could not have canceled the Mamma Maria policy before the fire occurred. Specialty's final causation argument is that Royal has failed to prove that the settlement with Mamma Maria was fair and reasonable. (Specialty's Br. in Supp. of Mot. for Summ. J. at 17.)
We reject Specialty's assertion that, as a matter of law, there is no causal connection between Specialty's alleged failure to adequately assess Mamma Maria's financial strength and Royal's ultimate loss. It is clear that Royal's Guidelines were, at least in part, premised on the belief that such a connection was generally accepted in the industry. The Guidelines specifically state that "[f]inancial stability is vital to the success of any business." (Guidelines at § V; Ex. D to Royal's Mot. for Summ. J. in 99-3689.) In addition, it is apparent that the parties intended that Specialty would be liable for all costs related, even indirectly, to a breach of the MGA. The MGA states, in part:
AGENCY shall indemnify and hold harmless Royal . . . from and against any loss, cost, claim, expense, damage, liability, penalty, fine, punitive or exemplary damages . . . or expense (including reasonable outside attorney's fees) incurred, arising out of or in connection with or resulting directly or indirectly from the following:
a. A breach by Agency or any sub-producer of Agency of any term or condition of this agreement, and/or
b. Any error, omission or negligent act performed by Agency, its agent's servants, employees and service companies utilized by the Agency.
(MGA at ¶ 12, Ex. A to Royal's Mot. for Summ. J. in 99-cv-3689 (emphasis added).)
Specialty contends that "[b]y all accounts, this fire was totally accidental and unavoidable." (Specialty's Br. in Supp. of Mot. for Summ. J. at 14.) Specialty states that there is no evidence that arson or maintenance problems caused the fire. However, Specialty also states that it was unable to obtain a copy of a fire investigation report that identified the cause of the fire. Finally, Specialty states that Mamma Maria's claims file was "devoid of any findings as to the actual cause of fire." (Id.) The truth of the matter is that, based on the record presently before us, no one knows what caused the fire. Specialty's unsupported assertions that the fire was accidental and unavoidable do not support the conclusion that summary judgment is appropriate. Even if we were to assume that Specialty is correct when it states that "all the money in the world," (id.), would not have prevented the Mamma Maria fire, it does not automatically follow that there was no connection between Specialty's breach and the harm that Royal suffered.
Specialty cites Metropolitan Prop. and Liab. Ins. Co. v. Ins. Comm'r of the Commonwealth of Pa., 535 A.2d 588 (Pa. 1987) and argues that "it is fundamental insurance law that in order for an insurance company to disclaim coverage due to misrepresentation, the misrepresentation has to be material to the loss that is claimed." (Specialty's Brief in Support of Mot. for Summ. J. at 14.) However unlike Metropolitan, the instant case is not predicated on an alleged misrepresentation of material fact, but rather a breach of contract. In a claim for breach of contract, the aggrieved party is entitled to damages if: "(1) they were such as would naturally and ordinarily result from the breach, or (2) they were reasonably foreseeable and within the contemplation of the parties at the time they made the contract, and (3) they can be proved with reasonable certainty."Taylor v. Kaufhold, 84 A.2d 347, 351 (Pa. 1951). The parties specifically agreed that Specialty would be liable for all costs related to a breach of the MGA. Those costs were "foreseeable and within the contemplation of the parties at the time they made the contract." Id. Moreover, the entire "Financial" section of the Guidelines is premised on the belief that there is a strong causal connection between an applicant's financial strength and the risks insured against. As Royal emphasizes, "Specialty's own expert concedes that it is recognized in the industry that poor financial health increases the likelihood that the business will be unable to maintain its property and conduct its business activities in a safe manner." (Royal's Opp'n to Specialty's Mot. for Summ. J. at 13.)
Both parties have applied Pennsylvania law in addressing proximate cause. We note that the same result would be reached in applying New York law. Haughey v. Belmont Quadrangle Dailling Corp., 284 N.Y. 136, 142 (N.Y. 1940) ("The `loss directly and naturally resulting, in the ordinary course of events,' from a breach of contract is the measure of damages . . . in actions to recover damages for breach of . . . contracts." (internal citations omitted)); White v. Blue Cross and Blue Shield of Greater New York, 549 N.Y.S.2d 598, 600 (N.Y.Sup.Ct. 1989) ("It is well established that in actions for breach of contract, the nonbreaching party may recover general damages which are the natural and probable consequence of the breach.").
If you can't pay your bills, you don't do your maintenance. If you can't pay your bills, you don't clean the grills. If you can't pay your bills, you throw the stock down the stair and if you can't pay your bills, your employees are working on tips, and you are hoping that the employee isn't stealing too much from you.
(Lofberg Dep. at 32.)
Accordingly, we cannot agree that the harm that Royal suffered was not the type that would ordinarily result from Specialty's alleged breach. If Specialty had rejected Mamma Maria's application as it should have, Royal would not have suffered the loss that it did some six or eight weeks later.
Specialty also contends that summary judgment is appropriate because, given the timing of the events, there was not enough time between receipt of the DB and the fire to release Royal from its obligation to insure Mamma Maria. This argument overlooks Royal's central complaint, that Specialty breached its obligation to Royal by approving Mamma Maria in the first place. Moreover, this argument is simply incorrect. Under Pennsylvania law, Specialty would have had to provide Mamma Maria with a thirty-day notice before a rescission would have become effective. 40 PA. CONS. STAT. § 3407. Specialty received the negative DB on or about April 18, 1997, (Specialty's Br. in Supp. of Mot. for Summ. J. in 99-cv-3689 at 17), and the fire did not occur until June 8, 1997, (id). Specialty had at least a two-week window during which it could have rescinded the policy. Specialty failed to do so, despite the clear evidence that Mamma Maria was in financial trouble, and despite the realization that Mamma Maria had provided false information when it submitted its application. We are unconvinced by Specialty's argument that the timing of the events prevented Specialty from rescinding the policy upon receipt of the DB.
Specialty has stated that the DB was issued on April 23, 1997. This difference is in date is not controlling in the present analysis.
Specialty's final argument is that Royal cannot prove that the $550,000 settlement to Mamma Maria was fair and reasonable. Specialty itself states that "[A] fire took place at Mamma Maria's on June 8, 1997, causing approximately $600,000 worth of damage." (Specialty's Br. in Supp. of Mot. for Summ. J. at 6.) In addition, Barry Moffett, President of Specialty, states in his deposition that he did not believe that Royal should have denied Mamma Maria's claim.
Q. [Specialty] paid them somewhere in the area of $550,000. Were you of the belief that they should not have paid Mam[m]a Maria $550,000?
A. No.
(Barry Moffett Dep. at 131.) Apparently, at that time Specialty considered the $550,000 settlement fair and reasonable.
C. Estoppel
Specialty contends that "Royal had given virtually unfettered authority to Specialty," and that as a result, Royal's "Monday-morning quaterbacking" should be estopped. (Specialty's Br. in Supp. of Summ. J. at 19.) In support of its contention, Specialty relies First Fed. Savings Loan Assoc. of Lancaster v. Swift, 321 A.2d 895 (Pa. 1974), and Home Owners' Loan Corp. v. Crouse, 30 A.2d 330 (Pa.Super.Ct. 1943). However, it is unclear how Swift, holding that a tax sale could not be set aside in equity due to a mistake of fact, is applicable to the instant case. In addition, Crouse states that "courts ofequity will not relieve a party from the consequences of an error due to his own ignorance or carelessness when there were available means which would have enabled him to avoid the mistake if reasonable care could have been exercised." 30 A.2d at 332 (emphasis added). Unlike the plaintiff in Crouse, Royal seeks monetary damages for breach of contract. Moreover, Specialty's argument that Royal should have more effectively monitored Specialty so as to have avoided this harm, contradicts Specialty's position that Mamma Maria was a financially sound applicant.
Specialty states that the Court should be liberal in respecting Specialty's discretion to determine which restaurants were suitable applicants, "absent clear violations of the guidelines." (Specialty's Br. in Supp. of Mot. for Summ. J. at 19 (emphasis in original).) As discussed herein above, we cannot agree with Specialty's suggestion that the Guidelines are, as a matter of law, either ambiguous, or clear in their intention to create no affirmative duty to adequately investigate the applicant's financial strength.
Specialty also argues that Royal should be estopped from bringing this suit because Royal benefitted from "play[ing] dumb regarding the applications." (Specialty's Br. in Supp. of Mot. for Summ. J. at 20.) Specialty provides no support for this argument. Moreover, it appears from the MGA and Guidelines that the very purpose of the contractual relationship between the parties was to delegate to Specialty the responsibility, (in accordance with the Guidelines), of selecting only financially stable restaurants. In light of Specialty's admission that Royal conducted annual or semi-annual audits, we are not persuaded by Specialty's assertion that Royal made "a conscious decision to bury its head in the sand and not be concerned with potential underwriting mistakes." (Specialty's Br. in Supp. of Summ. J. at 19.) Accordingly, we reject Specialty's assertions that Royal is estopped from pursuing this action.
IV. CONCLUSION
For the foregoing reasons, Specialty Insurance Company's Motion for Summary Judgment (Doc. No. 35 in 99-cv-3689; Doc. No. 24 in 00-2482), will be denied.
An appropriate Order follows.
ORDER
AND NOW, this ____ day of July, 2004, upon consideration of Specialty Insurance Company's Motion for Summary Judgment (Doc. No. 35 in 99-cv-3689; Doc. No. 24 in 00-2482), and all papers filed in support thereof and opposition thereto, it is ORDERED that Specialty's Motion is DENIED.IT IS SO ORDERED.