United States District Court, S.D. New York
January 14, 2005.
THE PHILADELPHIA PARKING AUTHORITY, Plaintiff,
FEDERAL INSURANCE COMPANY, Defendant.
The opinion of the court was delivered by: DEBORAH BATTS, District Judge
Plaintiff Philadelphia Parking Authority (the "Parking
Authority"), as insured, brings this action against its insurer,
Defendant Federal Insurance Company ("Federal"), for breach of
contract and bad faith conduct in processing Plaintiff's claim
arising under its Property Insurance Policy (the "Insurance
Policy") for losses sustained from the Federal Aviation
Administration's order grounding all civil aircraft after the
terrorist attacks on September 11, 2001.
Defendant has moved to dismiss the Complaint pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure. For the reasons
that follow, the Court GRANTS Defendant's Motion to Dismiss in
Plaintiff Parking Authority is a Pennsylvania state agency that
operates parking garages at the Philadelphia International Airport.*fn1 (Compl. ¶¶ 3, 43.) Defendant Federal, a
property and casualty insurance company owned by the Chubb Group,
sold Plaintiff a Property Insurance Policy, effective March 31,
2001 through March 31, 2002, which covered various locations in
Philadelphia including the airport parking facilities. (Id. ¶¶ 4,
8-10.) The Complaint identifies three specific policy provisions
under which Plaintiff seeks to recoup its business losses. (Id.
¶¶ 12, 20, 24.) The first is the Business Income and Extra
Expense Provision ("Business Income Provision"), which states:
We will pay for the loss of Business Income and Extra
Expense which you incur due to the actual
interruption of your operations during the period of
indemnity. This actual interruption of your
operations must be caused by direct physical loss or
damage caused by a covered cause of loss to: A.
covered property. . . .
(Compl. at Ex. A (emphasis omitted).) The second is the
Contingent Business Provision ("Contingent Business Provision"),
which requires Defendant to
pay for the loss of Business Income and Extra Expense
which you incur due to the actual interruption of
your operations during the period of indemnity as a
result of direct physical loss or damage caused by a
covered cause of loss to property not otherwise
excluded at contingent business premises.
(Id. (emphasis omitted).) Finally, the third is the Civil
Authority Provision (the "Civil Authority Provision"), providing
for the loss of Business Income and Extra Expenses
which you incur due [to] the actual interruption of
your operations during the period of indemnity when a
civil authority prohibits access to your covered
property because of direct physical loss or damage
caused by a covered cause of loss to property not
otherwise excluded in the vicinity of your covered
(Id. (emphasis omitted).)
On September 11, 2001, terrorists hijacked four civil aircraft
in the eastern United States. (Compl. ¶ 26.) Hijackers flew one
plane into Building One of the World Trade Center in New York
City at 8:46 A.M. and a second plane into Building Two at 9:02
A.M. (Id. ¶¶ 27-28.) At 9:06 A.M., the Federal Aviation
Administration ("FAA") issued a "First Tier" groundstop, which
"banned takeoffs of all flights bound to or through the airspace
of New York Center" from airports throughout the northeastern
United States. (Id. ¶ 30.) This order, Plaintiff claims,
effectively closed the Philadelphia International Airport, which
is considered to be part of the New York Center. (Id. ¶ 31.) The
FAA then issued a national groundstop at 9:26 A.M., which grounded all flights regardless of destination. (Id. ¶ 33.)
At 9:40 A.M., hijackers flew a third plane into the Pentagon
building near Washington D.C.*fn2 (Id. ¶ 34.) The FAA issued
an order at 9:45 a.m. directing all civil aircraft then in flight
to land as soon as possible. (Id. ¶ 35.) The fourth plane crashed
in Somerset County, Pennsylvania at 10:07 a.m. (Id. ¶ 37.) The
FAA reaffirmed its earlier order and issued a Notice to Airmen
("NOTAM") at 10:39 a.m. which halted takeoffs and landings at all
airports in the United States. (Id. ¶ 41.) The NOTAM stated:
SPECIAL NOTICE DUE TO EXTRAORDINARY CIRCUMSTANCES
AND FOR REASONS OF SAFETY. ATTENTION ALL AIRCRAFT
OPERATORS, BY ORDER OF THE FEDERAL AVATION [sic]
COMMAND CENTER, ALL AIRPORTS/AIRDROMES ARE NOT
AUTHORIZED FOR LANDING AND TAKEOFF. ALL TRAFFIC
INCLUDING AIRBORNE AIRCRAFT ARE ENCOURAGE [sic] TO
(Pl.'s Mem. of Law at Ex. 2.)*fn3
Since Plaintiff's garage is part of Philadelphia International
Airport and Plaintiff depends on the airport to attract its
customers, Plaintiff's business was interrupted as a result of the groundstop. (Id. ¶¶ 44, 48-49.) This interruption
caused Plaintiff to lose income, for which Plaintiff submitted a
claim under the Insurance Policy to Defendant on December 7,
2001. (Compl. ¶¶ 51-52.)
By letter dated March 11, 2002, Defendant identified the
"relevant sources of coverage" as the Business Income, Contingent
Business Premises, and Civil Authority Provisions of the
Insurance Policy and denied coverage under all three provisions.
(Compl. at Ex. C.) Defendant stated that it was denying coverage
under the Business Income and Contingent Business Premises
Provisions because no "direct physical loss or damage" had
occurred "to the insured premises." (Id.) Defendant further
determined that under the Civil Authority Provision Plaintiff
"ha[d] not demonstrated that access to its covered property was
prohibited by a civil authority," and that
it was not the direct physical loss or damage to the
World Trade Center, Pentagon or the airplanes
crashing into those structures that caused or
resulted in interruption of The Philadelphia Parking
Authority operations. Rather it was concern about
future terrorist attacks that led to the shutdown of
the air transportation system, which does not satisfy
this element of coverage.
Plaintiff wrote to Defendant again on April 11, 2002, restating its claim for coverage under the Policy and disputing
Defendant's reasons for denial. (Compl. ¶ 55.) The Parking
Authority further added that "as a direct result of the Federal
Aviation Authority's . . . ground stop order, the City of
Philadelphia Department of Aviation (the `City DOA'), a `second
civil authority,' prohibited access to [Plaintiff's] airport
parking facilities." (Compl. at Ex. D.)
On April 30, 2002, Defendant's counsel, Cozen O'Conner
("Cozen"), notified Plaintiff by letter that it would analyze the
Insurance Policy and advise Defendant on the matter. (Compl. ¶
56.) By letter dated May 24, 2002, Cozen reiterated Defendant's
denial of coverage. (Id. ¶ 57.) Cozen restated that Defendant was
aware of "no physical loss or damage suffered at the Philadelphia
Airport . . . or to the parking facilities owned or operated by
[Plaintiff]." (Compl. at Ex. F.) With regard to the Civil
Authority provision, Cozen stated that, even assuming the City
DOA order prohibited access to Plaintiff's covered property,
"there is no direct nexus between physical loss or damage and the
closure of the airport or the insured's parking facilities."
(Id.) In addition to reiterating these two reasons (originally
given by Defendant in its March 11, 2002 letter), Cozen further
stated that the property damage caused by the plane crashes in New York, Washington D.C., and Western Pennsylvania "was not in
the vicinity of" Plaintiff's covered property. (Id.)
On August 13, 2002, Plaintiff wrote Defendant asking "whether
Federal formally adopt[ed] the position taken in the opinion
letter [from Cozen], and whether Federal intend[ed] to further
change its position about why it [was] denying coverage." (Compl.
at Ex. G.) Cozen replied by letter dated September 19, 2002,
affirming that the position stated in its May 24th letter was
Defendant's response to Plaintiff's claim. (Id. ¶ 62.)
Plaintiff also sent Defendant a letter on August 14, 2002
requesting access to all documents on which Defendant based its
denial of coverage. (Id. ¶ 60.) Defendant has not made its files
available for Plaintiff's review. (Id. ¶ 61.)
Plaintiff filed suit seeking declaratory judgment and damages
for breach of contract and Defendant's alleged bad faith conduct.
(Id. ¶¶ 67-68, 70-72, 76-78.) Plaintiff claims damages of
approximately $10.2 million. (Id. ¶ 71.) Defendant has moved to
dismiss pursuant to Rule 12(b) (6) of the Federal Rules of Civil
Procedure. II. DISCUSSION
A. Standard for Motion to Dismiss
In deciding a motion to dismiss for failure to state a claim,
the Court "must accept the allegations contained therein as true
and draw all reasonable inferences therefrom in favor of the
plaintiff." Gryl ex rel. Shire Pharms. Group PLC v. Shire
Pharms. Group PLC, 298 F.3d 136, 140 (2d Cir. 2002). The Court's
task "is merely to assess the legal feasibility of the complaint,
not to assay the weight of the evidence which might be offered in
support thereof." Sims v. Artuz, 230 F.3d 14, 20 (2d Cir. 2000)
(quoting Ryder Energy Distribution Corp. v. Merrill Lynch
Commodities Inc., 748 F.2d 774, 779 (2d Cir. 1984) (internal
quotations omitted)). Thus, the Court should dismiss the
complaint for failure to state a claim only where "it appears
beyond doubt that the plaintiff can prove no set of facts in
support of his claim which would entitle him to relief." Conley
v. Gibson, 355 U.S. 41, 45-46 (1957); see also ICOM Holding,
Inc. v. MCI Worldcom, Inc., 238 F.3d 219, 221 (2d Cir. 2001).
As a threshold matter, Plaintiff claims that Defendant's
submission of materials outside the Complaint should convert
Defendant's motion to dismiss into one for summary judgment.
(Pl.'s Mem. of Law at 7.) Under Rule 12(b) (6) of the Federal Rules of Civil Procedure, where "matters outside the pleading are
presented to and not excluded by the court, the motion shall be
treated as one for summary judgment and disposed of as provided
in Rule 56, and all parties shall be given reasonable opportunity
to present all material made pertinent to such a motion by Rule
56." Specifically, Plaintiff identifies two documents attached to
Defendant's Affidavit of H. Christopher Boehning: 1) excerpts
from the Hearing of the National Commission On Terrorist Attacks
Upon the United States, Day 2, Civil Aviation Security, which
took place on May 23, 2003; and 2) World Trade Center Shutdowns
May Trigger Insurance Coverage, a 2001 article by John N.
Ellison and Claudine Q. Homolash.
The "mere attachment of affidavits or exhibits [however,] to a
Defendant's papers is not sufficient to require conversion to a
motion for summary judgment." Salichs v. Tortorelli, 01 Civ.
7288, 2004 WL 602784, at *1 (S.D.N.Y. Mar. 29, 2004) (citation
omitted). Indeed, "reversal for lack of conversion is not
required unless there is reason to believe that the extrinsic
evidence actually affected the district court's decision and thus
was not at least implicitly excluded." Amaker v. Weiner,
179 F.3d 48, 50 (2d Cir. 1999).
Moreover, the Court is not prohibited from examining all extrinsic documents. See Chambers v. Time Warner,
282 F.3d 147 (2d Cir. 2002). Courts should look to "a plaintiff's reliance
on the terms and effect of a document in drafting the complaint"
as "a necessary prerequisite to the court's consideration of the
document on a dismissal motion." Id. at 153. Where a plaintiff
relies upon a document of undisputed authenticity, "a court may
consider `documents attached to the complaint as an exhibit or
incorporated in it by reference . . ., matters of which judicial
notice may be taken, or . . . documents either in plaintiffs'
possession or of which plaintiffs had knowledge and relied on in
bringing suit.'" Id. (quoting Brass v. American Film
Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993)). "To be
incorporated by reference, the Complaint must make a clear,
definite and substantial reference to the documents." Thomas v.
Westchester County Health Care Corp., 232 F.Supp. 2d 273, 275
(S.D.N.Y. 2002). Even where documents are not explicitly
incorporated, a court may consider them if they are integral to
the complaint. Id.; Int'l Audiotext Network, Inc. v. American
Tel. and Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995) (Court may
consider commercial agreement not incorporated by reference
because it is "integral" to complaint relying on its terms and
effect); Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991) (holding that a plaintiff may not avoid
consideration of document integral to his complaint by failing to
attach or incorporate it by reference and that a defendant may
produce the document when moving to dismiss).
The Court decides this motion solely on the Complaint and
without relying on the two extraneous materials presented by
Defendant. The Court has, however, relied on several documents to
which Plaintiff made reference in the Complaint and which
Plaintiff attached to the Complaint as Exhibits A-I. Conversion
to a motion for summary judgment is thus unnecessary.
B. Choice of Law
Federal courts sitting in diversity are required to apply the
choice-of-law rules of the state in which they reside. See
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941);
Maryland Cas. Co. v. Continental Cas. Co., 332 F.3d 145, 150-51
(2d Cir. 2003) (affirming a district court's application of New
York choice-of-law rules to an insurance dispute). This Court,
therefore, applies New York choice-of-law rules.
"New York courts seek to apply the law of the jurisdiction with
the most significant interest in, or relationship to, the
dispute." Brink's Ltd. v. South African Airways, 93 F.3d 1022,
1030 (2d Cir. 1996). New York employs "a `center of gravity' or `grouping of contacts' approach," under which "courts may
consider a spectrum of significant contacts, including the place
of contracting, the places of negotiation and performance, the
location of the subject matter, and the domicile or place of
business of the contracting parties." Id. at 1030-31.
Not only do the parties agree that Pennsylvania substantive law
applies to this case, (Pl.'s Mem. of Law at 7 n. 3, 29 n. 14;
Def.'s Mem. of Law at 9 n. 4), but it is clear to the Court that
Pennsylvania has the "most significant interest in, or
relationship to, the dispute." Indeed, Plaintiff, a Pennsylvania
agency, initiated the purchase of the Insurance Policy from its
offices in Pennsylvania. (Pl.'s Mem. of Law at 7 n. 3.)
Plaintiff's insurance broker, with whom Plaintiff negotiated the
Policy, is located in Pennsylvania, and the subject matter of the
Policy, Plaintiff's garages, is also in Pennsylvania. (Id.)
Therefore, Pennsylvania law applies.
C. Declaratory Judgment and Breach of Contract Claims
Under Pennsylvania law, the construction of an insurance
contract is a question of law; in interpreting its terms, courts
should "examine the contract in its entirety, giving all of the
provisions their proper effect." Burton v. Republic Ins. Co.,
845 A.2d 889, 893 (Pa.Super.Ct. 2004) (citing Riccio v. American Republic Ins. Co., 550 Pa. 254, 705 A.2d 422 (1997)
(citation omitted)). The goal is "to ascertain the intent of the
parties as manifested by the language of the written instrument."
Neuhard v. Travelers Ins. Co., 831 A.2d 602, 604 (Pa.Super.
Ct. 2003) (quoting Madison Construction Co. v. The Harleysville
Mutual Ins. Co., 557 Pa. 595, 735 A.2d 100, 106 (1999)).
Each word in the insurance contract must be construed in its
"natural, plain, and ordinary sense." Riccio, 705 A.2d at 426.
When the language in the policy "is clear and unambiguous, the
court must give effect to the language of the contract." Id.
(citing Bateman v. Motorists Mutual Ins. Co., 527 Pa. 241, 245,
590 A.2d 281, 283 (1991)). If the provision at issue, however, is
ambiguous, then that "provision must be construed in favor of the
insured against the insurer as drafter of the instrument." Id.
This determination is a question for the court, DiFabio v.
Centaur Ins. Co., 531 A.2d 1141, 1143 (Pa.Super.Ct. 1987)
(citations omitted), and contractual language is ambiguous only
"if it is reasonably susceptible of different constructions and
capable of being understood in more than one sense." Madison,
735 A.2d at 106 (citation omitted). This analysis is furthermore
not . . . to be resolved in a vacuum. Rather, contractual terms are ambiguous if they are subject
to more than one reasonable interpretation when
applied to a particular set of facts. We will not,
however, distort the meaning of the language or
resort to a strained contrivance in order to find an
ambiguity. The polestar of our inquiry, therefore, is
the language of the insurance policy.
Id. (internal citations omitted). Finally, "an ambiguity does
not exist simply because the parties disagree on the proper
construction to be given a particular policy provision" since
courts "should read policy provisions to avoid an ambiguity if
possible." Neuhard, 831 A.2d at 605 (citation omitted).
1. Business Income and Contingent Business Provisions
Plaintiff claims the phrase "direct physical loss or damage" is
ambiguous because it is unclear whether "direct physical"
modifies "damage" as well as "loss." (Pl.'s Mem. of Law at
21-22.) Therefore, Plaintiff argues, the Court should construe
the phrase in Plaintiff's favor and read the word "damage" to
include economic damage. (Id.) The Parking Authority should
accordingly recover under the Policy's Business Income and
Contingent Business Provisions.
Defendant argues "direct physical" modifies both "loss" and
"damage," and thus, purely economic damage is not covered under
the Insurance Policy. (Def.'s Mem. of Law at 10.) Defendant cites
numerous cases from other jurisdictions in support of its position, though none apply Pennsylvania law or were decided by
that state's courts. (Id.) Defendant further argues that, when
read as a whole, the phrase is not ambiguous and that "[o]nly by
`torturing' the phrase . . . may Plaintiff argue that damage need
not be physical." (Id.) Thus, because Plaintiff has not alleged
any physical damage to its insured property, recovery under any
of the Policy's provisions would be precluded.
It is clear to the Court that the Business Income Provision
requires four elements be established to invoke coverage: 1) the
loss must be "due to the actual interruption of . . . operations
during the period of indemnity"; 2) the "actual interruption . . .
must be caused by direct physical loss or damage"; 3) the
"direct physical loss or damage" must be "caused by a covered
cause of loss"; and 4) the "direct physical loss or damage" must
have occurred to insured property. (Compl. at Ex. A.) In other
words, a "covered cause of loss" must result in some "direct
physical loss or damage," which in turn must interrupt the
insured's business operations.
Nowhere in the Complaint does Plaintiff allege that the
economic damage for which it seeks recovery actually caused the
interruption of the Parking Authority's business. Instead, it
appears the interruption of Plaintiff's business caused Plaintiff's economic damage. Indeed, Plaintiff states as much in
the Complaint: "In particular, [Plaintiff] suffered losses of
income . . . as a result of the business interruption, during
the period of indemnity as enumerated under the Policy." (Compl.
¶ 51 (emphasis added).) This clearly does not fit the plain
language of the Business Income Provision. Even assuming,
arguendo, that "direct physical loss or damage" could be
construed to include purely economic damage, Plaintiff has failed
to state a claim for coverage under this Provision of its Policy.
The same reasoning applies to the Contingent Business Premises
Provision. Here too, the Provision requires that the interruption
of operations take place "as a result of direct physical loss or
damage." (Compl. at Ex. A.) Since Plaintiff makes no allegation
in its Complaint that the interruption of its business resulted
from its economic damage, Plaintiff fails to state a claim under
the Contingent Business Premises Provision.
It is clear to the Court, moreover, that Plaintiff's claims
under both these Provisions fail because "direct physical loss or
damage" is unambiguous when read in the broader context of the
Policy. Indeed, the Policy specifically excludes "any increase in
loss caused by or resulting from . . . interference at the
location(s) by strikers or other persons causing a delay in rebuilding, repairing or replacing the covered property or
resuming operations." (Id. (emphasis omitted).) "Rebuild,"
"repair" and "replace" all strongly suggest that the damage
contemplated by the Policy is physical in nature. Similarly,
these words are again used in the Policy's "period of indemnity,"
which "begin[s] on the date of direct physical loss or damage . . .
and continue[s] thereafter until such time as the covered
property could have been repaired, replaced or restored. . . ."
(Id. (emphasis omitted).) Even if the Court construed this period
to begin on the first date that the insured experienced economic
damage, the Policy would provide no logical termination of the
indemnity period since there would be no lost or damaged "covered
property" to "repair?, replace?, or restore?."
Furthermore, if Plaintiff's proffered interpretation of the
language were correct, the Provisions' requirements would be
unreasonable as applied to a business interruption claim based on
purely economic damage. As discussed above, an insured making
such a claim would need to show not only that the economic damage
(to either the insured's covered property or a contingent
business premises) resulted from a "covered cause of loss," but
also that the economic damage itself caused the interruption in
the insured's business operations. It is difficult to imagine such a situation actually taking place. Moreover, it was clearly
not the situation here.
However, if, as Defendant argues, "direct physical" modifies
both loss and damage, the Provisions' requirements make sense:
the interruption in business must be caused by some physical
problem with the covered property (or the contingent business
premises), which must be caused by a "covered cause of loss." For
example, if an insured business had to temporarily close its
store because of structural damage caused by a fire, the Business
Income and Extra Expense Provision would clearly cover the
resulting losses. In that instance, the "direct physical loss or
damage" would be the structural damage, and the "covered cause of
loss" would be the fire. Thus, the Court will not adopt
Plaintiff's "torturing the phrase" merely to create an ambiguity
which does not exist when the contractual text is read in context
and its words construed in their commonplace meanings.
Finally, Plaintiff's citations to case law to support its
argument that this Court should find the phrase "direct physical
loss or damage" ambiguous are wholly inapposite. (Pl.'s Mem. of
Law at 22-24.) In Dri-Kleen, Inc. v. Western National Mutual Insurance Group, an unpublished decision,*fn4 No.
C2-01-2105, 2002 WL 1611507, at *5-6 (Minn.Ct.App. July 23,
2002), the Minnesota Court of Appeals interpreted an insurance
provision prohibiting suit more than "2 years after the date on
which the direct physical loss or damage occurred." The court
there found it was unclear whether "direct physical" modified
both "loss" and "damage." Id.
Whether or not the Minnesota court's reasoning is sound on the
facts of that case, it does not apply here. The Dri-Kleen court
found the phrase ambiguous only because the language did not
clearly communicate the date on which the period of limitations
began to run; the court did not find ambiguity as to what types
of loss or damage the policy covered. Furthermore, as Defendant
aptly observes, the Minnesota Court of Appeals has in another
case, this one published, Thane Hawkins Polar Chevrolet, Inc. v.
Truck Ins. Exch., No. C6-94-2068, 1995 WL 70152, at *2 (Minn.Ct.App. Feb. 21, 1995), held that "the phrase `physical
loss or damage' is susceptible to only one ordinary and natural
meaning which does not encompass a claim" for economic damage.
Plaintiff's reference to a Massachusetts case, Matzner v.
Seaco Insurance Company, No. CIV.A.96-0498-B, 1998 WL 566658
(Mass.Super.Ct. Aug. 12, 1998), also does not help its
position. In that case, the Superior Court of Massachusetts held
that it was unclear whether the phrase "direct physical loss or
damage" meant "only tangible damage to the structure of insured
property" or "a wider array of losses." The court adopted a
broader interpretation of the phrase which included carbon
monoxide contamination of property that was arguably not
"physical." Id. at *3. Several of the cases cited in Matzner
apply a similarly expansive interpretation of the word "physical"
to allow recovery for damage resulting from contamination of the
covered premises. See, e.g., W. Fire Ins. Co. v. First
Presbyterian Church, 437 P.2d 52 (Colo. 1968) (gasoline
contamination); Sentinel Mgt. Co. v. N.H. Ins. Co.,
563 N.W.2d 296 (Minn.Ct.App. 1997) (asbestos contamination).
The Court agrees with Defendant that the Massachusetts case may
be bad law as it does not refer to or acknowledge a Massachusetts
Court of Appeals case that held that "in the absence of physical damage" there is no coverage under the phrase
"physical loss or damage." HRG Dev. Corp. v. Graphic Arts Mut.
Ins. Co., 527 N.E.2d 1179, 1180 (Mass.App.Ct. 1988) (emphasis
omitted). However, even if Matzner is considered good law, the
"arguably physical" damage of carbon monoxide contamination at
issue in Matzner is very different from the purely economic
damages for which Plaintiff seeks recovery.
The Court finds that the phrase "physical loss or damage" is
not ambiguous since "reasonably intelligent [people] on
considering it in the context of the entire policy would [not]
honestly differ as to its meaning." United Servs. Auto Ass'n v.
Elitzky, 517 A.2d 982, 985 (Pa.Super. 1986) (internal citation
omitted). As stated above, the phrase "direct physical loss or
damage," when considered in the context of the Insurance Policy
at issue in the present case, requires that claimed loss or
damage must be physical in nature.
2. Civil Authority Provision
Plaintiff claims coverage under the Civil Authority Provision
because a civil authority, the Federal Aviation Administration,
issued an order, the NOTAM of September 11, 2001 (reprinted
above), which Plaintiff alleges "effectively prevented ingress
and egress of passengers into terminal areas of the Philadelphia International Airport and [Plaintiff's] Airport
Parking Facilities." (Compl. ¶¶ 41, 49.) Plaintiff claims that
"subsequent to and as a direct consequence of the closure of the
Airport and Airport Parking facilities, there was a severe
reduction in [Plaintiff's] business." (Id. ¶ 50.)
Defendant asserts that Plaintiff' claim is not covered because
Plaintiff failed to plead three elements necessary to invoke the
policy's Civil Authority coverage: 1) that the NOTAM
"prohibit[ed] access to" Plaintiff's garages; 2) that the NOTAM
was ordered "because of direct physical loss or damage"; and 3)
that such loss or damage occurred to property "in the vicinity
of" Plaintiff's garages. (Def.'s Mem. of Law at 13.)
The plain language of the NOTAM shows it did not "prohibit?
access to" Plaintiff's garages as the policy requires. The NOTAM
was issued to the attention of "all aircraft operators," and
deals only with the grounding of airplanes. While this
unprecedented order may have temporarily obviated the need for
Plaintiff's parking services, it did not prohibit access to
Plaintiff's garages and therefore cannot be used to invoke
coverage under Plaintiff's policy.
Since the FAA's NOTAM did not prohibit access to Plaintiff's
garages, it is unnecessary for the Court to decide whether the FAA issued the NOTAM "because of" the damage caused by the plane
crashes in New York, Washington D.C., and Pennsylvania or, as
Defendant argues, only to prevent additional terrorist attacks.
While Rule 15(a) of the Federal Rules of Civil Procedure
requires that courts freely grant leave to amend "when justice so
requires," courts deny such leave where amendment would be
futile. See Oneida Indian Nation of N.Y. v. City of Sherrill,
337 F.3d 139, 168 (2d Cir. 2003) (citing Foman v. Davis,
371 U.S. 178, 182 (1962)). "A proposed amendment to a pleading would
be futile if it could not withstand a motion to dismiss pursuant
to Rule 12(b) (6)." Id. (citing Ricciuti v. N.Y.C. Transit
Auth., 941 F.2d 119, 123 (2d Cir. 1991)). Since Plaintiff has
not, and cannot, allege any physical damage to its garages or the
Philadelphia International Airport, or that any civil authority
acted in a manner to invoke the Civil Authority Provision, leave
to amend would be futile. The Court therefore denies Plaintiff
leave to amend the Complaint with respect to the Business Income
and Extra Expense, Contingent Business Premises and the Civil
D. Bad Faith Claim
Lastly, Plaintiff claims that Defendant processed and denied
Plaintiff's request for coverage in bad faith. (Compl. ¶ 77.) Bad faith conduct by an insurer is actionable pursuant to Title
42, § 8371 of Pennsylvania Consolidated Statutes Annotated, which
In an action arising under an insurance policy, if
the court finds that the insurer has acted in bad
faith toward the insured, the court may take all of
the following actions: (1) Award interest on the
amount of the claim from the date the claim was made
by the insured in an amount equal to the prime rate
of interest plus 3%. (2) Award punitive damages
against the insurer. (3) Assess court costs and
attorney fees against the insurer.
42 Pa. Cons. Stat. Ann. § 8371 (2004). "Though left undefined by
the statute, `bad faith toward the insured' consists of: (1) a
frivolous or unfounded refusal to pay, (2) a failure to
investigate into the facts, or (3) a failure to communicate with
the insured." Livornese v. Med. Protective Co.,
219 F.Supp. 2d 645, 647 (E.D. Pa. 2002) (citing Frog, Switch Mfg. Co.,
Inc. v. Travelers Ins. Co., 193 F.3d 742
, 751 n. 9 (3d Cir.
1999). Plaintiff alleges all three categories of bad faith conduct.
(Compl. ¶ 77.)
With regard to the first category, "frivolous or unfounded
refusal to pay," Plaintiff alleges that Defendant denied coverage
to coerce litigation, gave meritless reasons for denial,
wrongfully interpreted the policy in its own favor, wrongfully deprived Plaintiff of benefits, and used funds that should have
been paid to Plaintiff. (Compl. ¶ 77.)
"To establish liability for bad faith refusal to pay, an
insured must demonstrate both of the following: (1) the insurer
lacked a reasonable basis for denying benefits, and (2) the
insurer knew or recklessly disregarded its lack of such
reasonable basis." Livornese, 219 F.Supp. 2d at 647 (citing
Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 233
(3d Cir. 1997)). With regard to the first prong, the court
explained that "a court need consider only whether any reasonable
basis existed for the insurer's conduct and not whether the
insurance company itself relied on a reasonable foundation."
Id. at 648. "As a matter of law, if some reasonable basis did
exist, that insurer cannot have acted in bad faith, under Section
8371." Id. The Court finds that Defendant was reasonable in
denying coverage of Plaintiff's claim; thus, Plaintiff has not
met the elements of a claim of bad faith refusal to pay.
Under the second category of bad faith conduct listed above,
Plaintiff alleges that Defendant failed to investigate adequately
Plaintiff's claim before denying coverage. (Compl. ¶ 77.)
Defendant denied coverage because the facts as stated by the
Plaintiff simply did not invoke coverage under the plain language of the policy. (Compl. at Ex. C.) Defendant did not question any
facts asserted by Plaintiff, but rather accepted Plaintiff's
claims as true for the purpose of analyzing coverage. (Id.) In
addition, Defendant in its letter denying coverage, informed
Plaintiff: "if you believe we have overlooked any pertinent
facts, or if there is any additional information you wish us to
consider in connection with this claim, we ask that you kindly
bring it to our attention as soon as possible." (Id.)
Since Defendant accepted all of Plaintiff's claims as true and
correctly denied coverage based on the language of the policy,
investigation into the facts was unnecessary. It is unclear what
Plaintiff believes Defendant should have investigated before
denying Plaintiff's claim. Unless Plaintiff omitted from its
initial request information that would have brought its claims
within the policy's coverage (in which case Plaintiff should have
included such information in Plaintiff's request for
reconsideration), no investigation would have changed the fact
that Plaintiff's property insurance policy did not cover the
losses Plaintiff sustained on September 11, 2001. Thus,
Defendant's failure to investigate Plaintiff's claim before
denying coverage was not in bad faith.
Under the third category of bad faith conduct, failure to communicate with the insured, Plaintiff claims that Defendant
failed to advise Plaintiff of its rights under the policy.
(Compl. ¶ 77.) However, Defendant promptly responded to
Plaintiff's request for coverage with a letter analyzing the
policy language and detailing Defendant's reasons for denying
coverage. (Compl. at Ex. C.) Defendant also made clear that
Plaintiff should notify Defendant if other facts exist which
would make the claim fall within the policy's parameters. (Id.)
Thus Defendant clearly advised Plaintiff of its rights under the
Plaintiff also alleges generally that Defendant failed to treat
Plaintiff openly and honestly, misrepresented the terms of policy
coverage, placed its own interests above the insured's, employed
an attorney to perform a claim analysis in order to obviate
Defendant's responsibility under the policy and prevent
discovery, and "engag[ed] in such other acts and omissions
violative of Federal's duty of good faith and fair dealing."
(Compl. ¶ 77.)
Plaintiff included in its Complaint that Defendant changed its
reasons for denying coverage. (Compl. ¶ 59.) Plaintiff claims
that the common law "mend the hold" doctrine prevents Defendant
from altering its reasons for denying coverage from those stated in its initial denial. (Pl.'s Mem. Law at 32-35.)
Defendant's letters to Plaintiff denying coverage (attached to
Plaintiff's Complaint as Exhibits C and F) reveal that Defendant
did not change its reasons, but merely added an additional
reason, for denying coverage. Defendant's letter of March 11,
2002 denied coverage under the Business Income and Contingent
Business provisions because the covered properties sustained no
"direct physical" damage, and under the Civil Authority provision
because no civil authority prohibited access to Plaintiff's
property and Defendant asserted that the NOTAM was not issued
"because of" the loss or damage. (Compl. at Ex. C.) In its May
24, 2002 letter to Plaintiff, Defendant's counsel reiterated
these same reasons and added that the damage caused by the plane
crashes was not "in the vicinity of" Plaintiff's garages. (Compl.
at Ex. F.)
The "mend the hold" doctrine does not save Plaintiff's bad
faith claim. In Motorists Mutual Insurance Company v.
Hardinger, the plaintiff sought to apply the "mend the hold"
doctrine to prevent its insurer from raising defenses not
asserted in its initial denial. No. CIV.A.02-8310, 2004 WL
384999, at *4 (E.D. Pa. Feb. 27, 2004). The Eastern District of
Pennsylvania held that the "mend the hold" doctrine did not
apply. Id. Even if the doctrine did apply, the court stated, the insurer would not
be precluded from raising its additional defense because it
expressly reserved the right to do so.
Defendant, in its initial denial letter of March 11, expressly
neither this letter nor any conduct related to this
matter shall be construed as a waiver of, nor shall
Federal Insurance Company be estopped from asserting
in the future, and rights or defenses it may have
under its policy, regulation or law, and all such
rights and defenses are hereby expressly reserved.
(Compl. at Ex. C.) Thus, Defendant did not act in bad faith by
adding an additional ground for denial to its May 24 letter.
Since Plaintiff has not, and cannot, allege any bad faith by
Defendant, leave to amend the bad faith claim would be futile.
The Court therefore denies Plaintiff leave to amend the Complaint
with regard to the bad faith claim. III. CONCLUSION
Accordingly, Defendant's Motion to Dismiss the Complaint is
GRANTED. The Clerk of the Court is DIRECTED to close this case
and remove it from the docket.