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United States District Court, S.D. New York

August 24, 2005.


The opinion of the court was delivered by: DEBORAH BATTS, District Judge


The Court has before it Defendant Royal Insurance Company of America's ("Royal Insurance" or "Defendant") Motion for Summary Judgment in favor of Defendant on the grounds that Defendant has already fulfilled its obligations to Plaintiff Hit Factory, Inc. ("Hit Factory") under the terms and conditions of an insurance policy issued by Defendant. Plaintiff argues that the insurance policy and the claim for coverage by Plaintiff raises genuine issues of material fact which preclude summary judgment.

For the reasons that follow, Defendant's Motion for Summary Judgment is DENIED.


  This diversity action stems from a dispute concerning the extent of coverage provided by an insurance policy issued by Defendant Royal Insurance to Plaintiff Hit Factory. Plaintiff is a corporation organized under the laws of Florida, with its principal place of business in New York, New York. Defendant Royal Insurance is incorporated and maintains its principal place of business in Illinois. Defendant is licensed and authorized to issue policies of insurance in New York State. (Compl. ¶¶ 1-3.)

  Plaintiff rented the premises located at 1755 Northeast 149th Street, Miami, Florida from an entity known as 327 Holding.*fn1 Prior to October 3, 2000, Defendant issued an insurance policy to Plaintiff ("Policy") with effective dates of coverage from February 1, 2000 to February 1, 2001. This Policy insured the premises at 1755 N.E. 149th Street, which is the subject matter of this litigation ("Insured Property"). The Policy contains a $1,000,000 sub-limit for "loss or damage by `flood'" and a $1,000,000 sub-limit for "loss or damage caused by water that backs up from sewer(s) or drain(s)." (Silverberg Aff. Ex. 5 at R-00414.) The Policy also contains a $25,000 per occurrence deductible for flood and a $25,000 per occurrence deductible for backup of sewers and drains. (Id. at R-00415.)

  The Policy defines "flood" as including: "Surface water, waves, or tidal water and the rising (including the overflow or breaking of boundaries) of lakes, ponds, reservoirs, rivers, harbors, streams, or similar bodies of water, whether driven by wind or not; . . . Mud slide or mud flow." (Id. at R-0047.) The Policy does not provide a definition for loss or damage caused by backup of sewers or drains.

  In addition, the Policy contains a provision entitled "Insurance Under Two or More Coverages" which provides that "If two or more of this policy's coverages apply to the same loss or damage, we will not pay more than the actual amount of the loss or damages." (Id. at R-00016.)

  On October 3, 2000, the Miami area was hit by heavy rains, which caused a buildup of surface water to enter the Insured Property; as a result, a portion of the building and other business and personal property were damaged. Water also backed up through the bathroom drains located in one or more of the first-floor bathrooms of the Insured Property. Defendant characterizes this water as "rainwater" which Plaintiff disputes. (Def.'s 56.1 Stmt. ¶ 4; Pl.'s Resp. to Def.'s 56.1 Stmt. ¶ 4.)

  No investigation was conducted to determine the reason for the backup of the bathroom drains. Stanton Miller, Chief Technician for Plaintiff, testified that "he had no reason to believe that the backup water in the bathroom drains was caused by anything other than excessive rainwater." (Def.'s 56.1 Stmt. ¶ 6.) No repairs were made to the bathroom drains after October 3, 2003.

  Sometime after October 3, 2003, Plaintiff submitted a claim to Defendant, seeking indemnification for the damages it sustained. By April 10, 2001, Defendant paid $1,000,000 to Plaintiff in accordance with the flood sub-limit contained in the Policy. On February 21, 2002, Plaintiff submitted to Defendant another Sworn Statement in Proof of Loss, signed and dated by Robert Lanier, Vice President and Chief Operating Officer of Hit Factory which stated that Hit Factory sustained the following monetary losses: physical damage to the building in the amount of $1,005,150; loss of business income and loss rents in the amount of $262,809; and loss of business income — extra expense in the amount of $220,460. In that Sworn Statement, Plaintiff acknowledges the receipt of the $1,000,000 from Defendant and that its loss was subject to a $25,000 deductible. Annexed to the Sworn Statement were invoices supporting Plaintiff's insurance claim. Defendant and Plaintiff disagree on the actual amount supported by the provided documentation.

  Defendant claims that Plaintiff is seeking an additional $463,420; Plaintiff claims that it is seeking $303,800.55. (Def.'s 56.1 Stmt. ¶ 18; Pl.'s Resp. to Def.'s 56.1 Stmt. ¶ 18.) Plaintiff contends that it is entitled to this additional amount because both the $1,000,000 sub-limit for flood and the $1,000,000 sub-limit for backup of sewers and drains apply to Plaintiff's damages.

  Defendant has refused to indemnify Plaintiff under the $1,000,000 sub-limit for backup of sewers and drains and for the additional expenses.

  Plaintiff brought this lawsuit alleging breach of contract against Defendant Royal Insurance in the Southern District of New York on May 30, 2002 and seeks damages of $460,992.50.*fn2 Plaintiff also requests that the Policy be reformed to reflect Hit Factory Criteria, Inc. as named insured because Hit Factory Criteria, Inc. was the successor in interest to The Hit Factory of Florida, Inc.

  After discovery, Defendant has filed this Motion for Summary Judgment.


  Defendant moves for summary judgment on the grounds that: (1) the efficient proximate cause of the damage to the Insured Property was surface water/flood, and therefore Plaintiff is entitled to only recover the maximum of $1,000,000 pursuant to the Policy's flood sub-limit; (2) although Plaintiff submitted an extra expense claim of $220,460, the supporting documentation reveals that Plaintiff only sustained an extra expense loss of $5,460.55. Hence, according to Defendant, Plaintiff is unable to prove entitlement to extra expense coverage in the amount sought. (Def.'s Mem. of Law at 1-2.)

  The Parties agree that New York substantive law applies to the terms of the Policy. Their consent "concludes the choice of law inquiry." Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997).

  A. Summary Judgment Standard

  A district court should grant summary judgment when there is no "genuine issue as to any material fact," and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); see also Hermes Int'l v. Lederer de Paris Fifth Ave., Inc., 219 F.3d 104, 107 (2d Cir. 2000). Genuine issues of fact cannot be created by mere conclusory allegations; summary judgment is appropriate only when, "after drawing all reasonable inferences in favor of a non-movant, no reasonable trier of fact could find in favor of that party." Heublein v. United States, 996 F.2d 1455, 1461 (2d Cir. 1993) (citing Matsushita Elec. Industr. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S. Ct. 1348, 89 L.Ed.2d 538 (1986)).

  In assessing when summary judgment should be granted, "there must be more than a `scintilla of evidence' in the non-movant's favor; there must be evidence upon which a fact-finder could reasonably find for the non-movant." Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). A court must always "resolv[e] ambiguities and draw ? reasonable inferences against the moving party," Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986); however, the non-movant may not rely upon "mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Id. at 12. Instead, when the moving party has documented particular facts in the record, "the opposing party must, `set forth specific facts showing that there is a genuine issue for trial.'" Williams v. Smith, 781 F.2d 319, 323 (2d Cir. 1986) (quoting Fed.R.Civ.P. 56(e)). Establishing such facts requires going beyond the allegations of the pleadings, as the moment has arrived "`to put up or shut up.'" Weinstock v. Columbia University, 224 F.3d 33, 41 (2d Cir. 2000) (citation omitted). Unsupported allegations in the pleadings thus cannot create a material issue of fact. Id. When the summary judgment motion concerns the construction of an insurance policy, New York law dictates that "the initial interpretation of a contract `is a matter of law for the court to decide.'" Int'l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir. 2002) (citing K. Bell & Assocs, Inc. v. Lloyd's Underwriters, 97 F.3d 632, 637 (2d Cir. 1996). If an ambiguity exists in the interpretation of the contract, "the court may accept any available extrinsic evidence to ascertain the meaning intended by the parties during the formation of the contract," Morgan Stanley Group Inc. v. New Eng. Ins. Co., 225 F.3d 270, 275 (2d Cir. 2000); however, New York follows the "well established contra proferentem principle which requires that equivocal contract provisions are generally to be construed against the drafter." McCarthy v. Am. Int'l Group, 283 F.3d 121, 124 (2d Cir. 2002) (internal quotations and citations omitted).

  If no ambiguity is found, a court should "assign the plain meaning to each term and interpret the contract without the aid of extrinsic evidence and it may then award summary judgment." Int'l Multifoods, 309 F.3d at 83 (internal quotations and citations omitted). However, "[w]here the language used is susceptible to differing interpretations, each of which may be said to be as reasonable as another . . . the meaning of the words become an issue of fact and summary judgment is inappropriate." Id. (citations omitted).

  B. Coverage Under the Policy

  Defendant moves for summary judgement as a matter of law on Plaintiff's first claim. Defendant argues that the efficient proximate cause theory, applied by New York courts, applies to this case. (Def.'s Mem. of Law at 7.) The efficient proximate cause theory has been applied by New York courts for the purposes of determining whether insurance coverage is appropriate when more than one peril may be the cause of the loss or damage sustained by the insured. See Album Realty Corp. v. American Home Assurance Co., 592 N.Y.S.2d 657, 658 (1992) (court determined that plaintiff's loss was caused by water damage and not "freezing," stating that "loss caused by freezing could not be found to incorporate a loss visibly occasioned by water damage by virtue of the mere fact that the presence of water can best be explained by the rupturing of a sprinkler head which had frozen.").

  Defendant states that because the flood was the proximate cause of the October 3, 2003 loss to Plaintiff, Plaintiff is only entitled to the $1,000,000 sub-limit for damages or loss caused by flood, which has already been remitted to it, and hence, Defendant has no further obligations to Plaintiff.

  Plaintiff counters by stating that the efficient proximate cause theory does not apply here because the issue is whether Plaintiff should be covered under both flood and backup of sewer and drains coverages, and not whether one of the alleged causes is a cause or peril excluded by the Policy.

  Defendant acknowledges that "Generally, the cases discussing efficient proximate cause involve situations in which the loss involves two or more separate causes, one of which is a covered peril and one of which is not." (Def.'s Mem. of Law at 7.) Defendant acknowledges that this is a case where both flood and backup of sewers and drains are covered, and not just one or the other. "Nonetheless," Defendant states, "in order to determine the appropriate sub-limit to apply, an efficient proximate cause analysis is appropriate." (Id.)

  However, other than providing the Court with detailed explanations of these cases involving insurance policy disputes where more than one peril caused loss or damage and one of the perils was covered under the policy and the other was not, Defendant does not provide the Court with any other support for its argument that the Court should apply the efficient proximate cause theory here. Defendant offers only conclusory statements that this theory should apply, without providing any persuasive legal precedent.

  Accordingly, the Court will not apply the efficient proximate cause theory to this case. A situation where a plaintiff is suing for coverage under a policy for damages caused by two perils, one which is covered under the policy and the other is not, and where the insurance company is denying coverage, is patently distinct from the case here.

  A review of the submissions and the Policy itself reveals that the Policy provided coverage for both "flood" and "backup of sewers and drains" coverage, and did not provide any limitations or exclusions with regards to these coverages. The Policy did not include any language concerning either of these coverages in the list of causes or perils excluded from coverage. Moreover, the provision which provides for instances where two or more coverages apply, indicates to the Court that Defendant knew of the possibility that two coverages might apply to one damage, and yet did not outline any limitations, aside from limiting damages to the actual loss or damages sustained by the insured.

  Defendant has offered no other extrinsic evidence concerning the intent of the parties when the contract was made which would support its argument that only the coverage for damages caused by flood applies. The Court finds that the terms of the Policy create genuine issues of material facts of whether the events creating the loss to Plaintiff are covered by both the flood and the sewer drains sub-limits of the Policy. C. Damages

  Defendant also moves for summary judgment on the ground that Plaintiff is unable to prove its entitlement to extra expense coverage under the "Insurance Under Two or More Coverages" provision of the Policy. Defendant states that Plaintiff has only supplied documentation to support extra expenses of $5,460.55, and that the January 17, 2001 letter outlining expenses of $55,380 should not be considered as part of Plaintiff's extra expense claim because it was not produced to Defendant. (Def.'s Reply at 2.)

  Plaintiff does not address this claim, other than producing the January 17, 2001 letter as part of its Opposition to Defendant's Motion for Summary Judgment. Based on the limited facts before the Court, and only Defendant's self-serving statement that it did not receive this letter detailing additional extra expenses, summary judgment in favor of Defendant on the basis that Plaintiff is unable to substantiate extra expenses exceeding the $1,000,000 already provided to Plaintiff is inappropriate at this time.


  For the foregoing reasons, Defendant's Motion for Summary Judgment is DENIED. The Joint Pre-trial Statement ("JPTS"), Requests to Charge and Proposed Voir Dire are to be filed no later than November 4, 2005; Memoranda of Law addressing those issues raised in the JPTS are also to be filed no later than November 4, 2005; Responses to the Memoranda are to be filed no later than December 2, 2005.

  All submissions shall be in accordance with the Individual Practices of Judge Deborah A. Batts, available at: Practices/Batts.pdf



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