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Five Star Hotels, LLC v. Insurance Company of Greater New York

March 24, 2011


The opinion of the court was delivered by: Paul G. Gardephe, U.S.D.J.:


This action involves an insurance coverage dispute arising out of water damage caused by a frozen and ruptured sprinkler system (the "Incident"). The Incident occurred on December 24, 2008, at Plaintiff Five Star Hotels's Holiday Inn franchise hotel in Pittsburgh. Five Star quickly gave notice to its carrier, Greater New York Insurance ("GNY"), and sought coverage for the damage under its GNY property insurance policy. GNY denied coverage, however, claiming that the loss was attributable to Five Star's failure to provide adequate heat to the stairwells housing the sprinkler system, and that two policy provisions exclude coverage under such circumstances. Five Star has moved for partial summary judgment on the coverage issue, arguing that even if it failed to heat the stairwells, neither exclusion applies. Five Star has also moved to strike certain expert evidence offered by GNY indicating that Five Star's failure to provide adequate heat in the stairwells violated certain fire and safety codes.

In addition to seeking a declaratory judgment as to coverage, and damages for breach of contract, Five Star's Complaint asserts a claim under Pa. Cons. Stat. Ann. § 8371 for interest, punitive damages, attorneys' fees and costs based on GNY's alleged bad faith in its handling and rejection of Five Star's insurance claim. (Cmplt., Fourth Cause of Action) GNY has moved for summary judgment on Five Star's bad faith claim.

Five Star's motion for partial summary judgment on the issue of coverage will be granted, because the endorsement and exclusion cited by GNY do not bar coverage here. Five Star's motion to strike certain expert testimony will be denied as moot, because this Court has made its summary judgment determination based on the language of the policy, and has not relied on any State fire and safety codes. GNY's motion for summary judgment concerning Five Star's bad faith claim will be denied, because Five Star is entitled to conduct discovery as to its assertion that GNY's handling and denial of its insurance claim constitute bad faith under Pennsylvania law.


Five Star, a Pennsylvania corporation with its principal place of business in Pittsburgh, Pennsylvania, owns -- and, until the December 2008 Incident, operated -- a Holiday Inn hotel in Pittsburgh. (Pltf. Rule 56.1 Stmt. ¶ 1)*fn1 GNY is an insurance company incorporated under the laws of New York, with its principal place of business in New York, New York. (Pltf. Rule 56.1 Stmt. ¶ 2)

At the time of the Incident, Five Star held a GNY insurance policy insuring it against, inter alia, property damage to its Holiday Inn hotel. (Pltf. Rule 56.1 Stmt. ¶ 4) GNY does not dispute that Five Star paid all premiums owing under the policy. (Pltf. Rule 56.1 Stmt. ¶ 5) The policy provides $9 million in coverage for damage to the building, $1.1 million for damage to personal property, and $2.5 million for business interruption and "extra expense."*fn2

(Pltf. Rule 56.1 Stmt. ¶ 31)

In or about December 2005, Five Star began installing an upgraded fire-preventive automatic sprinkler system in the hotel. The new system "extended sprinkler heads to each room of the Hotel by running various lengths of piping that tapped off of the existing standpipes in numerous locations." (Pltf. Rule 56.1 Stmt. ¶ 9) In addition, "[w]ater-flow switches and water shut-off valves were positioned at each connection point of the standpipes and were monitored at the main sprinkler control panel in the basement of the Hotel."*fn3 (Pltf. Rule 56.1 Stmt. ¶¶ 11-12)

In the early morning hours of December 24, 2008, two standpipe couplings in the sprinkler system on the tenth and eleventh floors of the hotel burst. (Pltf. Rule 56.1 Stmt. ¶ 12) Before the water flow was turned off, a large volume of water from the sprinkler system flowed down to the lower floors of the hotel, causing extensive property damage. (Pltf. Rule 56.1 Stmt. ¶ 13) Five Star notified GNY of the Incident on December 24, 2008, and requested coverage for property damage, business interruption, and "extra expense" resulting from the Incident. (Pltf. Rule 56.1 Stmt. ¶ 24) Because of the Incident, the hotel has been closed since December 24, 2008. (Pltf. Rule 56.1 Stmt. ¶ 23)

On or about January 2, 2009, GNY retained CEC Forensic Engineers to assist it in determining why the couplings failed. (Def. Rule 56.1 Stmt. ¶ 41) On January 9, 2009, CEC issued a Forensic Engineering Report detailing its findings. (Def. Rule 56.1 Stmt. ¶ 42) The Report states:

Many conditions can cause or initiate cracks or splits in piping. Mechanical damage, excessive internal pressure, internal water freezing, manufacturing defects, material defects, and chemical incompatibility are among the primary reasons for metal component failures. However, since six individual areas . . . experienced failure at the same time, all of the above causes can be eliminated except for excessive pressure and internal water freezing. (Rappel Decl., Ex. 5, at HOL 94) The Report went on to conclude that water pressure did not cause the Incident, and that instead "water freeze and its associated expansion was the cause of the piping failures." (Id. at HOL 95) Five Star does not dispute that the rupture was "the result of [the] freezing of water within the standpipes." (Pltf. R. 56.1 Stmt. ¶ 12)

On January 14, 2009, GNY sent Five Star a Reservation of Rights letter stating that it needed to complete its investigation before making a coverage determination. (Def. Rule 56.1 Stmt. ¶ 43; Rappel Decl., Ex. 6) The Reservation of Rights letter referenced a number of policy provisions that GNY claimed could justify a denial of coverage, including two provisions that are at issue here. GNY cited the policy's Protective Safeguards Endorsement, which provides, at Clause A, as follows:

1. As a condition of this insurance, you are required to maintain the protective devices or services listed in the Schedule above.

2. The protective safeguards to which this endorsement applies are identified by the following symbols:

"P-1" Automatic Sprinkler System, including related supervisory services. . . . (Id.; see also Pltf. Rule 56.1 Stmt. ¶ 39; Dhupar Decl., Ex. A at FSH 69) (emphasis in original)

GNY also cited the policy's exclusion for faulty design or maintenance, which provides:

3. We will not pay for loss or damage caused by or resulting from any of the following 3.a through 3.c. But if an excluded cause of loss that is listed in 3.a. through 3.c. results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss.

* * * * c. Faulty, inadequate or defective:

(2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;

(3) Maintenance; of part or all of any property on or off the described premises. (Rappel Decl., Ex. 6; Pltf. Rule 56.1 Stmt. ¶ 38; Dhupar Decl., Ex. A at FSH 62-63)

The record reflects significant delays in the processing of Five Star's claim, some of which appear to be associated with GNY's request for documents and desire to conduct destructive testing of the burst pipes. On January 28, 2009, GNY requested that Five Star "immediately provide all installation and maintenance documents relative to the fire suppression system installed on the Property." (Def. Rule 56.1 Stmt. ¶¶ 46-47; Rappel Decl., Ex. 10) GNY repeated that request on March 24, 2009. (Def. Rule 56.1 Stmt. ¶ 52)

On February 20, 2009, GNY made arrangements to have Rimkus Consulting Group schedule destructive testing of the portions of the pipes that had burst. (Def. Rule 56.1 Stmt. ¶ 48)

On February 23, 2009, Five Star submitted to GNY a partial proof of loss in the amount of $750,000. (Pltf. R. 56.1. Stmt. ¶ 25)

On March 24, 2009, GNY wrote to Five Star advising that Rimkus would conduct destructive testing at the hotel on March 30, 2009. (Def. Rule 56.1 Stmt. ¶ 51) On March 26, 2009, Five Star's counsel objected to such testing, however, stating that Five Star "[could] not permit destructive testing of what may be important evidence in the event of a denial of coverage." (Def. Rule 56.1 Stmt. ¶ 53; Rappel Decl., Ex. 16)

On April 7, 2009, Five Star restated its position that destructive testing was not necessary given the conclusion of GNY's expert that the Incident had been caused by frozen sprinkler pipes. Five Star advised GNY, however, that "[i]f, despite its consultant's determination that freezing caused the loss at issue, [GNY] insists that the destructive testing take place before it can make a coverage determination, then [Five Star] will cooperate with GNY to develop a plan to allow the destructive testing to go forward without prejudice to [Five Star] in the event of a coverage denial." (Def. Rule 56.1 Stmt. ¶ 54; Rappel Decl., Ex. 17) In its April 7, 2009 letter, Five Star also asserted that a frozen sprinkler system is a covered cause of loss under the policy. (Pltf. Rule 56.1 Resp. ¶ 79)

On May 8, 2009, Five Star again wrote to GNY to advise that it was in danger of losing its Holiday Inn franchise license and to request a coverage decision by May 25, 2009. (Pltf. Rule 56.1 Resp. ¶¶ 80-81; Artese Opp. Decl., Ex. 15) On May 20, 2009, GNY responded that it could not yet render a coverage decision because it had not been able to conduct destructive testing of the pipes. (Def. Rule 56.1 Stmt. ¶ 57) Five Star surrendered its franchise license in June 2009, allegedly because of its inability to assure the franchisor that it would commence reconstruction and reopen the hotel. (Pltf. R. 56.1 Resp. ¶ 87; Artese Opp. Decl., Ex. 16)

Destructive testing of the standpipes ultimately took place on July 8-9, 2009. (Def. Rule 56.1 Stmt. ¶ 65) On July 20, 2009, plaintiff's counsel reiterated Five Star's demand for a speedy coverage determination, and GNY responded on July 21, 2009, stating that it was awaiting a report from the expert who had performed the destructive testing. (Def. Rule 56.1 Stmt. ¶¶ 66, 67; Rappel Decl., Exs. 29, 30) GNY received that report on August 14, 2009. The report indicated that the failure of the couplings had been caused by the "freezing expansion of the water inside the pipe system." (Def. R. 56.1 Stat. ¶ 69; Rappel Decl., Ex. 32) On September 17, 2009, GNY advised Five Star of its determination that the loss was not covered. (Pltf. Rule 56.1 Stmt. ¶ 26; Artese Decl., Ex. D) In its September 17, 2009 letter, GNY relied on, inter alia, the Protective Safeguards Endorsement and the faulty design or maintenance exclusion discussed above. (Artese Decl., Ex. D)

On October 15, 2009, Five Star filed this action, seeking (1) a declaratory judgment that GNY wrongfully denied coverage; (2) damages for breach of the insurance policy; (3) damages for breach of GNY's contractual obligation to pay ServiceMaster, a third party that performed ameliorative work at the hotel; and (4) interest, punitive damages, attorneys' fees and costs under 42 Pa. Cons. Stat. Ann. § 8371, which provides for such relief where an insurer has acted in bad faith in denying a claim. (Cmplt. ¶¶ 32-55)


Five Star has moved for partial summary judgment on the issue of coverage and seeks a ruling (1) that the Incident constitutes a covered loss; (2) that GNY has breached the policy; and (3) striking GNY's first and second affirmative defenses, which are based on the Protective Safeguards Endorsement and the faulty design or maintenance exclusion.

Five Star has also moved to strike Paragraphs 16 through 24 of the declaration of GNY's expert witness Timothy McGreal, along with McGreal's Report of Findings. (See McGreal Decl., Ex. 2) In those paragraphs and in his report, McGreal opines that Five Star did not comply with certain sprinkler system ...

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