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BANK OF TAIWAN NEW YORK AGENCY v. GRANITE STATE INS. CO.

United States District Court, Southern District of New York


July 9, 2003

BANK OF TAIWAN NEW YORK AGENCY, HUA NAN COMMERCIAL BANK, LTD NEW YORK AGENCY & TAIPEI BANK NEW YORK AGENCY, PLAINTIFFS,
v.
GRANITE STATE INSURANCE COMPANY, DEFENDANT.

The opinion of the court was delivered by: Andrew Peck, Magistrate Judge

REPORT AND RECOMMENDATION

This suit arises from identical insurance policies (the "Policy") that the Bank of Taiwan, Hua Nan Commercial Bank, and Taipei Bank (collectively, "the Banks") purchased from Granite State Insurance Company ("Granite") to cover the Banks' offices in the World Trade Center. (Dkt. No. 1: Compl. ¶¶ 1, 19-24.) After the World Trade Center was destroyed by the September 11, 2001 terrorist attacks (Compl. ¶ 27-28), the Banks submitted insurance claims and Granite compensated them for the actual cash value, but not the replacement cost, of the improvements made to their offices. (E.g., Compl. ¶¶ 1, 6, 9.) The Banks sued, seeking, inter alia, the replacement cost of the leasehold improvements pursuant to the Policy. (Compl. ¶ 4.) Granite refused to pay replacement cost on the ground that upon installation the improvements became the property of the lessor, the Port Authority, and therefore were not covered by the Policy's replacement cost provision. (Compl. ¶ 32 & Ex. D.) Presently before the Court are the parties' cross-motions for summary judgment to interpret the unambiguous terms of the Policy. (Dkt. Nos. 13, 17-19, 21: Banks S.J. Papers; Dkt. Nos. 14-16, 20: Granite S.J. Papers.)

For the reasons set forth below, Granite's summary judgment motion should be GRANTED and the complaint dismissed.

FACTS

The Insurance Policy

Bank of Taiwan, Hua Nan Bank, and Taipei Bank each purchased a "Commercial General Liability Insurance Policy, including Commercial Property Coverage" (the "Policy") from Granite (Dkt. No. 1: Compl. ¶¶ 1-4 & Exs. A-C),*fn1 which reads, in relevant part:

A. COVERAGE

We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.
1. Covered Property

b. Your Business Personal Property located in [the Premises] . . . consisting of the following . . .:
1) Furniture and fixtures;

2) Machinery and equipment;

3) "Stock";

4) All other personal property owned by you and used in your business;
6) Your use interest as tenant in improvements and betterments. Improvements and betterments are fixtures, alterations, installations or additions:
a) Made a part of the building or structure you occupy but do not own; and
b) You acquired or made at your expense but cannot legally remove;
c. Personal Property of Others that is:

1) In your care, custody or control; and

2) Located in or on [the Premises]. . . .

E. LOSS CONDITIONS

7. Valuation

We will determine the value of Covered Property in the event of loss or damage as follows:
a. At actual cash value as of the time of loss or damage, except as provided in b., c., d., e. and f. below.
e. Tenant's Improvements and Betterments at:

1) Actual cash value of the lost or damaged property if you make repairs promptly.
2) A proportion of your original cost if you do not make repairs promptly. We will determine the proportionate value as follows:
a) Multiply the original cost by the number of days from the loss or damage to the expiration of the lease; and
b) Divide the amount determined in (a) above by the number of days from the installation of improvements to the expiration of the lease.
If your lease contains a renewal option, the expiration of the renewal option period will replace the expiration of the lease in this procedure.
3) Nothing if others pay for repairs or replacement.
G. OPTIONAL COVERAGES

If shown in the declarations, the following Optional Coverages apply separately to each item.

2. Replacement Cost

a. Replacement Cost (without deduction for depreciation) replaces Actual Cash Value in the Loss Condition, Valuation, of this Coverage Form.
b. This Optional Coverage does not apply to:

1) Property of others;

d. We will not pay on a replacement cost basis for any loss or damage:
1) Until the lost or damaged property is actually repaired or replaced; and
2) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.
e. We will not pay more for loss or damage on a replacement cost basis than the least of:
1) The Limit of Insurance applicable to the lost or damaged property;
2) The cost to replace, on the same premises, the lost or damaged property with other property:
a) Of comparable material and quality; and

b) Used for the same purposes; or

3) The amount you actually spend that is necessary to repair or replace the lost or damaged property.
(Compl. Ex. A: "Building and Personal Property Coverage Form" Policy, emphasis added.)

The Banks' Lease with the Port Authority for the World Trade Center Premises

The Banks' lease*fn2 with the Port Authority for World Trade Center office space included the following provisions:

Section 1. Letting

The Port Authority hereby lets to the Lessee [Bank] and the Lessee hereby hires and takes from the Port Authority, at the World Trade Center (sometimes hereinafter referred to as the "Facility"), in the Borough of Manhattan, City, County and State of New York, the space [as indicated on an exhibit to the lease], together with the fixtures, improvements and other property of the Port Authority located or to be located therein or thereon, the said space, fixtures, improvements and other property of the Port Authority being hereinafter collectively referred to as the "premises.". . . .
Section 12. Construction by the Lessee

The Lessee [Bank] shall not erect any structures, make any modifications, alterations, additions, improvements, repairs or replacements or do any construction work on or to the premises, or install any fixtures in or on the premises (other than trade fixtures, removable without injury to the premises) without the prior consent of the Port Authority, and in the event any construction, improvement, alteration, modification, addition, repair or replacement is made or done with or without such consent and unless the consent of the Port Authority shall expressly provide otherwise, the same shall immediately become the property of the Port Authority and the Lessee shall have no right to change or remove the same either during the term or at the expiration thereof. Notwithstanding the forgoing, immediately upon notice from the Port Authority given at any time during the letting, the Lessee shall remove or change any of the same made or done by it without the Port Authority's consent, and in the case of any of the same made or done with the Port Authority's consent, the Lessee if so required by notice from the Port Authority, shall remove or change the same immediately upon the expiration or termination of the letting, or immediately upon receipt of such notice as may be given within sixty (60) days after such expiration or termination. With respect to any modifications, additions, alterations, improvements, installations or construction made or done by the Port Authority at the request of the Lessee either prior to or during the term of the letting, the Lessee shall have the same obligations as provided above with respect to that made or done by the Lessee with the Port Authority's consent.
(Dkt. No. 16: Jacobson Aff. Ex. 2: Bank of Taiwan — Port Authority Lease Agreement, §§ 1, 12.)

A Supplemental Agreement between the Port Authority and Bank of Taiwan made as of October 19, 1999 extended the lease term and further confirmed that:

Title to and property in the construction and installation work and to all fixtures, equipment and systems installed pursuant hereto and any replacement or replacements thereof shall vest in the Port Authority upon the construction, installation or replacement thereof and the Lessee shall execute such necessary documents confirming the same as the Port Authority may require.
(Dkt. No. 16: Jacobson Aff. Ex. 2: Bank of Taiwan — Port Authority Supplemental Agreement, ¶ 4(d).)

Granite Rejects The Banks' Claim for Replacement Cost

After the World Trade Center was destroyed by the September 11, 2001 terrorist attacks (Dkt. No. 1: Compl. ¶¶ 27-28), the Banks submitted insurance claims to Granite on a replacement cost basis. (E.g., Compl. ¶ 1.) The Banks claimed replacement costs of over $2.25 million. (Compl. ¶ 7). Bank of Taiwan claimed replacement costs of $744,663; Hua Nan Bank claimed $826,041; and Taipei Bank claimed $815,786. (Id.) Granite, however, compensated the Banks for the actual cash value, but not the replacement cost, of the improvements made to their offices. (E.g., Compl. ¶ 1.) The amount Granite paid as the actual cash value is not in the record.

Granite's adjusters sent each Bank a virtually identical letter dated June 18, 2002, explaining Granite's position that the Banks improvements were to be valued at actual cash value rather than replacement cost because they were Port Authority property:

Please be advised that we have concluded our evaluation of several elements of [the] claim asserted by [the Banks] and direct your attention to the enclosed Statement of Loss and accompanying schedules which we have prepared for discussion purposes only. . . .
Concerning the Leasehold Improvements, AIG Technical Services [Granite's affiliated company] has obtained a legal opinion which confirms that the terms of the lease agreement between Port Authority and [the Banks] stipulate that all improvements upon installation shall become the property of the Port Authority. As you are aware, the Optional Coverage section of the policy contains a Replacement Cost feature. However, this feature does not apply to "Property of Others." Consequently, improvements and betterments are to be valued at actual cash value if the insured makes repairs promptly or a proportion of the original cost if the insured does not make repairs promptly.
(Compl. Ex. D; see also Compl. ¶¶ 8, 32.)*fn3

The Banks' Complaint

The Banks' complaint asserts five causes of action. (Compl. ¶¶ 11, 38-62.) The Banks' first cause of action (Compl. ¶¶ 38-42) seeks a judicial declaration that the Banks are entitled to the replacement cost of the Leasehold Improvements (Compl. ¶¶ 40, 42).

The Banks' second cause of action is for breach of contract, asserting that Granite breached the Policy by "baselessly concluding that the Banks' Leasehold Improvements were not covered by the Insurance Policies and by refusing to pay amounts due to the Banks [for replacement cost] under the Policies." (Compl. ¶¶ 44-45.) In addition to direct damages arising from this alleged breach (Compl. ¶ 45), the Banks seek consequential damages from Granite's "conducting an unreasonable investigation and otherwise delaying in paying" the Banks. (Compl. ¶¶ 46-47.)*fn4

The Banks' third cause of action alleges that Granite violated New York General Business Law § 349 because its "baseless decision to deny the Banks' claim related to the Leasehold Improvements . . . is part of a pattern and practice of deceptive acts of wrongfully calculating insurance benefits owed to Granite State's policyholders, including the Banks, by baselessly denying policyholders' rightful insurance coverage for `Leasehold Improvements.'" (Compl. 51.)

The Banks' fourth cause of action is for breach of Granite's duty of good faith and fair dealing by (1) "failing to adopt reasonable interpretations" of the Policy provisions; (2) "willfully interpreting provisions in the Insurance Policies, and the factual circumstances at issue, to resolve ambiguities and uncertainties against the Banks and in favor of Granite State's own interests"; (3) "failing to provide a reasonable explanation of the basis for denying insurance coverage for the disputed loss amounts"; and (4) "compelling the Banks, through Granite State's wrongful conduct, to initiate the instant litigation to obtain the insurance coverage to which the Banks are entitled under the Insurance Policies." (Compl. ¶ 58.)

Prior Proceedings in this Action

Granite initially moved to dismiss the Banks' second through fourth causes of action for failure to state a claim. (Dkt. Nos. 5, 7-9: Granite Motion to Dismiss Papers.)

At a hearing before this Court on May 21, 2003, the parties agreed that the insurance Policy was unambiguous and "clear on its face" and that, under New York law, contract interpretation is a matter of law to be decided by the court. (5/21/03 Conf. Transcript ["Tr."] 10-11.) The parties further agreed that if Granite's interpretation of the Policy language was correct, Granite would prevail on all of the Banks' claims, so that it made sense to determine the correct interpretation of the Policy before ruling on the motion to dismiss. (Tr. 5-7.) Accordingly, the Court directed the parties to cross-move for summary judgment on the Policy's interpretation (Tr. 12-14), and held Granite's motion to dismiss in abeyance pending determination of the cross-motions for summary judgment regarding the Policy's interpretation (Tr. 14-15).

ANALYSIS

I. STANDARDS FOR CONTRACT INTERPRETATION (INCLUDING INSURANCE POLICY CONTRACT) UNDER NEW YORK LAW*fn5
"It is black letter law that in a diversity action such as this, state substantive law applies." Contri v. Yellow Freight Sys., Inc., 92 Civ. 2603, 1996 WL 87237 at *2 (S.D.N.Y. Feb. 29, 1996) (Peck, M.J.) (citing Erie R.R. v. Tompkins, 304 U.S. 64,78, 58 S.Ct. 817, 822 (1938)). Here, the Banks and Granite State agree that New York substantive law governs this dispute. (5/21/03 Conf. Tr. at 6-7; Dkt. No. 13: Banks Br. at 3, 5; Dkt. No. 18: Banks Reply Br. at 5-6; Dkt. No. 15: Granite Br. at 9-11.) As the Second Circuit has stated, "the parties agree that New York substantive law governs . . . and `where the parties have agreed to the application of the forum law, their consent concludes the choice of law inquiry.'" Texaco A/S (Denmark) v. Commercial Ins. Co., 160 F.3d 124, 128 (2d Cir. 1998) (quoting American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997)); accord, e.g., Bellis v. Tokio Marine & Fire Ins. Co., 93 Civ. 6549, 2002 WL 193149 at *13 n. 20 (S.D.N.Y. Feb. 7, 2002).*fn6

"Under New York law `the initial interpretation of a contract is a matter of law for the court to decide.' Included in this initial interpretation is the threshold question of whether the terms of the contract are ambiguous." Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, 136 F.3d 82, 86 (2d Cir. 1998) (citations omitted); accord, e.g., W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 443 (1990) ("Whether or not a writing is ambiguous is a question of law to be resolved by the court.") Sutton v. East River Sav. Bank, 55 N.Y.2d 550, 554, 450 N.Y.S.2d 460, 462 (1982) ("the threshold decision on whether a writing is ambiguous is the exclusive province of the court").*fn7

Under New York law, the construction of an unambiguous contract is a matter of law, appropriate for summary judgment resolution.*fn8 See, e.g., Adirondack Transit Lines, Inc. v. United Transp. Union, Local 1582, 305 F.3d 82, 85 (2d Cir. 2002) ("`The proper interpretation of an unambiguous contract is a question of law for the court, and a dispute on such an issue may properly be resolved by summary judgment.'") (quoting Omni Quartz, Ltd. v. CVS Corp., 287 F.3d 61, 64 (2d Cir. 2002)); Bouzo v. Citibank, N.A., 96 F.3d 51, 58 (2d Cir. 1996); Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d 1182, 1192 (2d Cir. 1996); Sayers v. Rochester Tel. Corp., 7 F.3d at 1094; Seiden Assoc., Inc. v. ANC Holdings. Inc., 959 F.2d at 428; Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884, 889 (2d Cir. 1990).*fn9

Where the terms of an agreement are clear and unambiguous, the Court will not look beyond the "four corners" of the agreement, and parol evidence of the parties' intentions is inadmissible. E.g., R/S Assoc. v. New York Job Dev. Auth., 98 N.Y.2d 29, 33, 744 N.Y.S.2d 358, 360 (2002) ("Unless the court finds ambiguity, the rules governing the interpretation of ambiguous contracts do not come into play. Thus, when interpreting an unambiguous contract term [e]vidence outside the four corners of the document . . . is generally inadmissible to add to or vary the writing. [E]xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.") (ellipsis & brackets in original, citations & internal quotations omitted) (quoting W.W.W. Assoc. Inc. v. Giancontieri, 77 N.Y.2d at 162-63, 565 N.Y.S.2d at 443); Weissman v. Sinorm Deli, Inc., 88 N.Y.2d 437, 447, 646 N.Y.S.2d 308, 313 (1996) ("[W]hen parties set down their agreement in a clear, complete document, evidence outside the four corners of the document as to what was actually intended is generally inadmissible."); Wells v. Shearson Lehman/American Express, Inc., 72 N.Y.2d 11, 19, 530 N.Y.S.2d 517, 521 (1988); see, e.g., RJE Corp. v. Northville Indus. Corp., 329 F.3d 310, 314 (2d Cir. 2003) ("Where a `contract is clear and unambiguous on its face, the intent of the parties must be gleaned from within the four corners of the instrument, and not from extrinsic evidence.'") (quoting De Luca v. De Luca, 300 A.D.2d 342, 342, 751 N.Y.S.2d 766, 766 (2d Dep't 2002)); Feifer v. Prudential Ins. Co., 306 F.3d 1202, 1210 (2d Cir. 2002) ("It is axiomatic that where the language of a contract is unambiguous, the parties' intent is determined within the four comers of the contract, without reference to external evidence."); Omni Quartz. Ltd. v. CVS Corp., 287 F.3d at 64; In re Revere Armored. Inc., No. 976112, 131 F.3d 132 (table), 1997 WL 794460 at *3 (2d Cir. Dec. 30, 1997) ("When the terms of a contract are clear and unambiguous, this Court will not look beyond the four corners of the contract itself to interpret the parties' intentions."); Mizuna, Ltd. v. Crossland Fed. Sav. Bank, 90 F.3d 650, 660 (2d Cir. 1996) (quoting W.W.W. Assoc., Inc. v. Giancontieri, supra); Goldman v. Commissioner of Internal Revenue, 39 F.3d 402 406 (2d Cir. 1994); Goodheart Clothing Co. v. Laura Goodman Enter. Inc 962 F.2d 268,272 (2d Cir. 1992); Seiden Assoc., Inc. v. ANC Holdings, Inc., 959 F.2d at 428.*fn10

Specifically, in the context of an insurance policy,

"The New York approach to the interpretation of contracts of insurance is to give effect to the intent of the parties as expressed in the clear language of the contract. Unambiguous terms are to be given their plain and ordinary meaning, and ambiguous language should be construed in accordance with the reasonable expectations of the insured when he entered into the contract."
United States v. American Home Assurance Co., 94 Civ. 7621, 2003 WL 21436219 at *2-3 (S.D.N.Y. June 19, 2003) (quoting McCarthy v. American Int'l Group, 283 F.3d 121, 124 (2d Cir. 2002)) (internal quotations omitted). Moreover, "`[w]here the terms of an insurance policy are clear and unambiguous, they should be given their plain and ordinary meaning, and courts should refrain from rewriting the agreement. However, where the policy is ambiguous and susceptible of two reasonable interpretations, extrinsic evidence may be admitted to resolve the ambiguity.'" United States v. American Home Assurance Co., 2003 WL 21436219 at *3 (quoting Matter of Ideal Mut. Ins. Co., 231 A.D.2d 59, 63, 659 N.Y.S.2d 273, 275 (1st Dep't 1997)).*fn11

"Contract language is not ambiguous if it has a `definite and precise meaning . . . concerning which there is no reasonable basis for a difference of opinion.'" Hunt Ltd. v. Lifschultz Fast Freight, Inc., 889 F.2d at 1277 (quoting Breed v. Ins. Co. of N. Am., 46 N.Y.2d 351, 355, 413 N.Y.S.2d 352, 355 (1978)).*fn12 Conversely, a contract is ambiguous if it is reasonably susceptible to more than one meaning. E.g., Chimart Assoc. v. Paul, 66 N.Y.2d 570, 763,498 N.Y.S.2d 344, 346 (1986) (to determine if ambiguity exists in contract court must determine "whether the agreement on its face is reasonably susceptible of more than one interpretation"); St. Mary v. Paul Smith's Coll. of Arts & Sciences, 247 A.D.2d 859, 859, 668 N.Y.S.2d 813, 813 (4th Dep't 1998) (same, quoting Chimart); Hutzel v. United States Aviation Underwriters. Inc., 132 A.D.2d 45, 49, 522 N.Y.S.2d 301, 303 (3d Dep't 1987) ("an ambiguity exists . . . when a term `is capable of more than one meaning'"), appeal denied, 71 N.Y.2d 804, 528 N.Y.S.2d 829 (1988); Walk-In Med. Ctrs., Inc. v. Breuer Capital Corp., 818 F.2d 260, 263 (2d Cir. 1987) ("An `ambiguous' word or phrase is one capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business."); Health-Chem Corp. v. Baker, 737 F. Supp. at 773 ("[A] term is ambiguous when it is `capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement . . .'").*fn13

Clear contractual language does not become ambiguous simply because the parties to the litigation argue different interpretations. E.g., Bethlehem Steel Co. v. Turner Constr. Co., 2 N.Y.2d 456,460, 161 N.Y.S.2d 90, 93 (1957) ("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."); Moore v. Kopel, 237 A.D.2d 124,125, 653 N.Y.S.2d 927, 929 (1st Dep't 1997) ("[A] contract is not rendered ambiguous just because one of the parties attaches a different, subjective meaning to one of its terms."); see, e.g., Sayers v. Rochester Tel. Corp., 7 F.3d at 1095; Seiden Assoc., Inc. v. ANC Holdings, Inc., 959 F.2d at 428 ("The language of a contract is not made ambiguous simply because the parties urge different interpretations."); Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d at 889 ("Language whose meaning is otherwise plain is not ambiguous merely because the parties urge different interpretations in the litigation.").*fn14

"[W]hen ambiguity exists and the resolution of the ambiguity hinges on such extrinsic matters as the credibility of witnesses or documents or upon choosing one among several reasonable inferences that may be drawn from such extrinsic evidence, a jury, and not a court, should decide what meaning is to be ascribed to the contract." Chase Manhattan Bank, N.A. v. Keystone Distrib., Inc., 873 F. Supp. at 811.*fn15 However, it is the Court's role to determine the value or existence of extrinsic evidence produced by the parties. Uniroyal, Inc. v. Home Ins. Co., 707 F. Supp. 1368,1375 (E.D.N.Y. 1988) (Weinstein, D.J.) ("The appraisal of the value or existence of extrinsic evidence is for the court as a matter of substantive law."). Thus, even when a contract is ambiguous, if the parol evidence offered by the parties does not resolve that ambiguity, or after opportunity to do so the parties do not offer extrinsic evidence to resolve the ambiguity, the Court must construe the contract as a matter of law on a summary judgment motion. E.g., State of New York v. Home Indem. Co., 66 N.Y.2d 669, 671, 495 N.Y.S.2d 969, 971 (1985) ("[I]f the tendered extrinsic evidence is itself conclusory and will not resolve the equivocality of the language of the contract, the issue remains a question of law for the court."); Kenavan v. Empire Blue Cross & Blue Shield, 248 A.D.2d 42,677 N.Y.S.2d 560, 563 (1st Dep't 1998) (where the "evidence introduced by the parties extrinsic to the [contract] was not dispositive of the [interpretation] issue . . . the proper interpretation is an issue of law for the court"); Primavera v. Rose & Kiernan, Inc., 248 A.D.2d 842, 670 N.Y.S.2d 223, 224-25 (3d Dep't 1998) ("If, however, extrinsic evidence does not resolve the ambiguity, the interpretation of the ambiguous contract terms remain a question of law for the court."); Econo Truck Body & Equip., Inc. v. Guaranty Nat'l Ins. Co., 162 A.D.2d 913, 915, 557 N.Y.S.2d 991, 993 (3d Dep't 1990).*fn16

Here, the parties agree that the Policy is clear and unambiguous, and they have not offered any extrinsic evidence to its meaning. (See 5/21/03 Conf. Tr. at 10-11; Dkt. No. 13: Banks Br. at 1 ("The Banks do note, however, that the insurance policies are unambiguous in their scope. . . ."); Dkt. No. 18: Banks Reply Br. at 2 ("In its briefs before this Court, Granite State correctly argues that its insurance policies are unambiguous. Granite State is also correct that the Court does not need to consider extrinsic evidence to rule on the appropriate interpretation of the insurance policies. . . ."); Dkt. No. 15: Granite Br. at 8 ("The Court need not look to extrinsic evidence since the policy language is unambiguous.").)

The Court thus turns to interpretation of the Policy as a matter of law on this summary judgment motion.

II. GRANITE SHOULD BE GRANTED SUMMARY JUDGMENT BECAUSE THE BANKS' LEASEHOLD IMPROVEMENTS BECAME PORT AUTHORITY PROPERTY UPON INSTALLATION AND THE BANKS ARE NOT ENTITLED TO REPLACEMENT COSTS FOR THE PROPERTY OF OTHERS
The Policy is clear and unambiguous. It provides coverage for the Banks' "use interest as tenant in improvements and betterments" that the Banks "made at [their] expense but cannot legally remove." (Compl. Ex. A: Policy, § A(1)(b).) As to the amount of coverage, the Policy provides that the value of "Tenant's Improvements and Betterments" is "actual cash value." (Id., § E(7)(a), (e).) The Policy's "Optional Coverage" section provides that "Replacement Cost . . . replaces Actual Cash Value," but specifically provides that "[t]his optional coverage does not apply to: 1) property of others." (Id., § G(2)(a)-(b).) Thus, recovery under the Policy for "property of others" is only for actual cash value, not replacement cost.

The issue, therefore, is whether the improvements and betterments that the Bank had installed in its World Trade Center premises are "property of others."

It is undisputed that under the Banks' leases with the Port Authority, fixtures became the Port Authority's property immediately upon installation. (See pages 6-7 above.) Indeed, the very Policy definition of "improvements and betterments" as "fixtures, alterations, installations or additions . . . [y]ou acquired or made at your expense but cannot legally remove" (Compl. Ex. A: Policy, § A(1)(b)(6)) clearly indicates that the improvements were not the Banks' property. In fact, the Banks agree that "[t]he installation of improvement[s] and betterments become a part of the building and cannot be legally removed." (Dkt. No. 18: Banks Reply Br. at 3.) The Banks assert, however, that "this was contemplated by Granite State when it sold these insurance policies" which "is why the `use interest' of improvements and betterments that cannot be removed are specifically covered by the insurance policies." (Id.) The latter part of the Banks' argument is a red herring: Granite does not dispute that the Banks had a covered insurable use interest in the improvements and betterments. (Dkt. No. 20: Granite Reply Br. at 3.)*fn17 "Granite State recognizes that the Banks have an insurable interest under the Policies in their leasehold improvements. This is why Granite State paid the Banks for those leasehold improvements at actual cash value. . . . The issue is whether those leasehold improvements are covered at replacement cost or actual cash value." (Id.)

The Policy clearly states that the optional Replacement Cost coverage does not apply to "[p]roperty of others." (Policy, § G(2)(b)(1).) The leasehold improvements are, by the Policy definition and the Port Authority lease, "property of others," i.e., the property of the Port Authority, not the Banks. Accordingly, the Banks' use interest in the improvements is covered, but only for actual cash value, not replacement cost.

The Court rejects the Banks' claim that the replacement cost exclusion for "[p]roperty of others" in § G(2)(b) refers to "Personal Property of Others" as defined in § A(1)(c). (Dkt. No. 13: Banks Br. at 4.) "Personal Property of Others" — such as bailment items (e.g., property of a Banks' customer in a safe deposit box at the premises) — is a subset of "property of others." The Policy drafters knew how to use the term "personal property of others" and the Court cannot read "property of others," a different and broader term, to merely have the same meaning as personal property of others. Property of others includes personal property of others, but is not so limited; it also includes leasehold improvements that are the property of the lessor Port Authority. Nor does this interpretation render the replacement cost coverage meaningless. Replacement cost coverage still applies to the Banks' furniture, machinery, equipment, and "other personal property owned by [the Banks] and used in [their] business" (Policy, § A(1)(b)(1)-(4)) — just not to improvements that are the Port Authority's property (or to the Banks' use interest in those improvements).*fn18

The Banks' interest in the leasehold improvements, as provided in their leases with the Port Authority, contrasts to lessee's rights in cases where the lease expressly reserves to the lessee title to leasehold improvements. See, e.g., Modern Music Shop v. Concordia Fire Ins. of Milwaukee, 131 Misc. 305, 307, 309, 226 N.Y.S. 630, 634, 635 (Mun. Ct. 1927) (insured entitled to recover for fire damage to improvements and betterments where it was an "undisputed fact that the landlord expressly agreed that the plaintiff [lessee] should have the absolute title to the improvements and betterments which it made" and court found plaintiff lessee "was at all times the absolute owner" of the improvements and betterments.)*fn19 Here, in contrast, under the lease the improvements immediately became the property of the Port Authority (see pages 6-7 above), the Banks only had a use interest in the improvements, and the improvements were not the Banks' "property."

The parties have not cited to any cases specifically dealing with the issue before the Court. The Court's research has turned up one case, directly on point (albeit from a different state) that reached the same conclusion as this Report and Recommendation has reached. Teague-Strebeck Motors. Inc. v. Chrysler Ins. Co., 127 N.M. 603, 619, 985 P.2d 1183, 1199 (1999) (The lower court did not err in awarding the insured the actual cash value rather than replacement cost where insured "may have had an insurable interest" in the property but "did not have an ownership interest in the property" and replacement cost provision excluded coverage for "[p]roperty of others."), appeal denied, 127 N.M. 391, 981 P.2d 1209 (1999).

Because the Banks' leasehold improvements became the property of the Port Authority upon installation, and the Policy's Replacement Cost provision does not apply to the "property of others," the Court finds that Granite properly compensated the Banks for the actual cash value of the improvements and betterments.

CONCLUSION

For the reasons set forth above, the Court should grant summary judgment to Granite dismissing the Banks' complaint in its entirety. This Report and Recommendation moots Granite's original motion to dismiss the second through fourth causes of action of the Banks' complaint.

FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION

Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections (and any responses to objections) shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Deborah A. Batts, 500 Pearl Street, Room 2510, and to my chambers, 500 Pearl Street, Room 1370. Any requests for an extension of time for filing objections must be directed to Judge Batts. Failure to file objections will result in a waiver of those objections for purposes of appeal. Thomas v. Arn, 474 U.S. 140, 106 S.Ct. 466 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993), cert. denied, 513 U.S. 822, 115 S.Ct. 86 (1994); Roldan v. Racette, 984 F.2d 85, 89 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir.), cert. denied, 506 U.S. 1038, 113 S.Ct. 825 (1992); Small v. Secretary of Health & Human Servs., 892 F.2d 15,16 (2d Cir. 1989); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarth v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983); 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72, 6(a), 6(e).


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