Argued: November 13, 2012.
Appeal and cross-appeal from a judgment of the United States District Court for the Southern District of New York, Deborah A. Batts, Judge, declaring defendant insurer liable for the full amount of loss coverage shown in a fire insurance policy, notwithstanding an apportionment-of-loss clause in the policy stating that the insurer would pay only 38 percent of any loss, and ruling that defendant is not liable for replacement costs in excess of the loss coverage shown in the policy. See 2011 WL 4343368 (Aug. 15, 2011).
DENNIS T. D'ANTONIO, New York, New York (Joshua L. Mallin, Weg & Myers, New York, New York, on the brief), for Plaintiff-Appellee-Cross-Appellant.
JOHN A. NOCERA, New York, New York (John P. Foudy, Rosner Nocera & Ragone, New York, New York), for Defendant-Appellant-Cross-Appellee.
Before: KEARSE, WINTER, and POOLER, Circuit Judges.
KEARSE, Circuit Judge:
Defendant Pacific Indemnity Co. ("Pacific"), which issued a $14, 388, 000 fire insurance policy to plaintiff Quaker Hills, LLC ("Quaker Hills"), on a custom-built home that was destroyed by fire during the policy period, appeals from so much of a final judgment of the United States District Court for the Southern District of New York, Deborah A. Batts, Judge, as granted summary judgment to Quaker Hills on its claim for a declaratory judgment that an apportionment-of-loss clause in the policy, purporting to reduce Pacific's total liability to 38 percent of any covered loss, is void as a matter of New York law, and that Pacific is liable to Quaker Hills for the entire amount of loss coverage shown in the fire insurance policy. Quaker Hills cross-appeals from so much of the judgment as ruled that it is not entitled to recover replacement costs in excess of the stated loss coverage amount on the house. For the reasons that follow, we reject Quaker Hills's arguments on the cross-appeal; on the appeal, we certify to the Court of Appeals for the State of New York questions as to whether the apportionment-of-loss clause in the fire insurance policy is enforceable under New York law.
At all pertinent times, Quaker Hills, a limited liability company incorporated in New York, owned real property in Pawling, New York, on which its principal, Trevor Davis, a Manhattan-based real estate developer, built a home in or about 2005. In March 2009, the home was destroyed by fire, a loss covered by a homeowner's insurance policy (the "Applicable Policy" or "Policy") issued to Quaker Hills by Pacific. The following description of the Policy, together with its several antecedent policies and its history, is taken largely from the Memorandum and Order of the district court, reported at 2011 WL 4343368 (Aug. 15, 2011). The court's description, which unless otherwise noted below is not substantially in dispute, was based on statements by the parties filed pursuant to Rule 56.1 of the Local Rules for the Southern District in connection with each side's motion for summary judgment.
A. The Insurance Policies
Quaker Hills first obtained homeowner's insurance from Pacific on the home and its contents for a one-year period beginning in December 2005. The coverage limits were $10, 000, 000 for the dwelling and $4, 000, 000 for the contents. See 2011 WL 4343368, at *1. The premium charge for this first policy was $50, 273. See id.
In August 2006, Pacific obtained an insurance replacement cost appraisal that indicated that the home's replacement value was $13, 302, 000. See id. Intermediaries in the various dealings between Quaker Hills and Pacific prior to 2008 with regard to the subsequent policies covering the home included insurance broker Haskell Brokerage Corp. ("Haskell") and a company called C & S
Planning, to which Davis's father-in-law Irwin Cohen was a consultant. In early October 2006, Haskell informed Cohen that the existing policy would be canceled on October 14. (Pacific contends that the reason was nonpayment of premium then due; Quaker Hills does not dispute that Haskell so informed Cohen, but does dispute the reason.) The record does not indicate that the first policy was in fact canceled. Indeed, Quaker Hills shortly received valuation questions with respect to a renewed policy:
On October 13, 2006, Janice Collins of C & S Planning emailed Davis' assistant Delia [sic] Mitchell seven questions to answer concerning the "rewrite" of the [existing p]olicy. . . . On October 18, 2006, Collins forwarded to Haskell's Ed Redbord a fax cover note enclosing the email with Davis' handwriting on it, and stated in her cover memo: "Ed, as per our conversation--This is what Trevor wrote on it. Janice". . . . In this email, Davis answered the first five questions regarding the value of various contents of the house by placing zeros next to them. . . . For the final question, reading "desired amount of replacement coverage you want for dwelling? (appraised @ $13, 000, 000 at August appraisal), " Davis wrote "5, 000, 000." . . . . Davis does not dispute that he made these notations; however, he claims these were not answers to the questions since he had no way of knowing what the estimated value of the items was.
2011 WL 4343368, at *1 (emphases added).
In November 2006, Pacific issued a renewal policy ("Second Policy") for the period December 15, 2006 to December 15, 2007, which provided coverage for the dwelling in the amount of $13, 302, 000--reflecting the recent appraisal--and no coverage for the home's contents. See id. at *2. The stated premium for the Second Policy was $50, 273. However, Pacific "also added a 38% apportionment of loss clause, " to this policy, id., which stated as follows:
IN THE EVENT OF A COVERED LOSS TO YOUR HOUSE, OTHER PERMANENT STRUCTURE(S) OR CONTENTS, INCLUDING ALL RELATED COVERAGES FOR YOUR HOUSE AND CONTENTS, THE AMOUNT OF THE COVERED LOSS WILL BE APPORTIONED BETWEEN YOU AND U.S. AS FOLLOWS. FIRST, WE WILL APPLY THE BASE OR ANY APPLICABLE SPECIAL DEDUCTIBLE TO THE AMOUNT OF THE COVERED LOSS. SECOND, WE WILL PAY 38% OF THE AMOUNT OF THE COVERED LOSS REMAINING AFTER THE APPLICATION OF THE BASE OR SPECIAL DEDUCTIBLE. . . . THE REMAINING 62% OF A COVERED LOSS TO YOUR HOUSE . . . IS THE AMOUNT APPORTIONED TO YOU.
(Second Policy, Coverage Update, at 2-3 (emphasis added).) This "mean[t] that [Pacific's] alleged maximum liability for a covered loss would be $5, 054, 720 (38% of the stated coverage amount of $13, 302, 000), " 2011 WL 4343368, at *2; and Quaker Hills's premium was reduced from $50, 273 to $20, 777, see id. The district court noted that Pacific "claim[ed] it added the apportionment of loss clause to provide approximately the requested $5, 000, 000 in coverage, " and that Quaker Hills "denie[d] ever requesting less than full coverage under the policy." Id.
On January 14, 2007, that Second Policy was canceled for nonpayment of premium. Coverage was not restored until June 20, 2007. At Plaintiff's request, a new policy ("Third Policy") was issued, effective June 20, 2007, through June 20, 2008. The Third Policy "also contained a 38% apportionment of loss clause and the total premium was $22, 633." Id.
Before the end of the period covered by the Third Policy, a fourth policy was issued, "effective January 17, 2008 through January 17, 2009, . . . . contain[ing] the same 38% apportionment of loss clause as the [third p]olicy." Id. The fourth policy "had a policy limit of $14, 388, 000." Id. It also contained an "Extended Replacement Cost" coverage provision (versions of which had also been included in the Second and Third policies) pursuant to which, under certain conditions, Pacific would pay all reconstruction costs, "even if this amount is greater than the amount of coverage for your house shown in your Coverage Summary, " id. at *6 (internal quotation marks omitted). However, Pacific's obligation under that provision was limited, in part, as follows:
If you cannot repair, replace or rebuild your house because your primary mortgagee or its assignees has recalled your mortgage, we will pay the reconstruction cost up to the amount of coverage shown in the Coverage Summary for your house, minus what is due to the mortgagee.
Id. (internal quotation marks omitted). This fourth policy "was renewed for another year running from January 18, 2009 through January 18, 2010, " id. at *2, and contained the terms of the Policy in effect at the time of the fire that destroyed the home.
After the fire, Quaker Hills submitted a timely claim to Pacific, seeking more than $26.5 million in losses and extended replacement costs. Pacific refused to pay extended replacement costs and refused to pay more than 38 percent of the $14, 388, 000 stated loss coverage. The home was never rebuilt.
In September 2009, Bank of America (the "Bank"), which held the mortgage to the property, commenced a foreclosure action with respect to the home. Thereafter, Quaker Hills and the Bank entered into a Standstill and Forbearance Agreement, in which Quaker Hills acknowledged that it was in default and the Bank agreed to delay demanding full payment of the outstanding mortgage. Pacific agreed to pay directly to the Bank the amount that Pacific conceded was owed under the policy, i.e., approximately $5.5 million, or 38 percent of the stated coverage amount. See 2011 WL 4343368, at *2-*3.
B. The Present Action
Quaker Hills commenced the present action in the district court, with jurisdiction premised on diversity of citizenship, alleging that Pacific breached the insurance contract by refusing to pay the full stated amount of loss coverage in the Policy, i.e., $14, 388, 000, and to pay replacement costs. Quaker Hills sought a declaratory judgment to that effect, along with damages totaling approximately $26.5 million including the replacement costs. In support of its claim for payment of the full amount of loss coverage, Quaker Hills asserted, inter alia, that the Policy's apportionment-of-loss clause is unenforceable in New York State (the "State") because it does not conform to the minimum requirements imposed by New York law as reflected in the State's Standard Fire Insurance Policy.
Pacific opposed Quaker Hills's challenge to the apportionment-of-loss clause, contending, inter alia, that such clauses are analogous to enforceable co-insurance clauses, and that, in any event, Davis had specifically insisted on the apportionment-of-loss clause in order to reduce the premiums payable on the policies. Pacific opposed Quaker Hills's claim for replacement costs on the ground that Quaker Hills had not been able to rebuild the house because its mortgage on the property had been recalled. Following discovery, each side moved for summary judgment.
In its Memorandum and Order dated August 15, 2011, the district court, after describing the events as set forth in Part I.A. above, granted the motion of Quaker Hills in so far as it sought a declaration that the Policy's apportionment-of-loss clause was void under New York law and that Quaker Hills was entitled to $14, 388, 000. See 2011 WL 4343368, at *6. The court denied the motion of Pacific to dismiss the complaint or limit Quaker Hills's recovery to 38 percent of that amount. The court also rejected Quaker Hills's claim for replacement costs. See id.
1. The District Court's Ruling as to the Stated Amount of Loss Coverage
As to the apportionment-of-loss clause, the district court stated that "[a]lthough the parties dispute whether Davis consented to the apportionment of loss clause, " and although "the factual record is clear that he at worst initiated, and at best was aware of and assented to its inclusion in the policy, " his "initiation or consent to the clause [wa]s irrelevant" "because the clause is void as a matter of law under New York law." 2011 WL 4343368, at *2 n.1. The district court noted that New York law has codified a Standard Fire Insurance Policy that sets minimum coverage standards for such policies, see N.Y. Ins. Law § 3404 (McKinney 2011), and that "a fire insurance policy must include 'terms and provisions no less favorable to the insured than those contained in the standard fire policy, '" 2011 WL 4343368, at *4 (quoting § 3404(f)(1)(A)). Although an insurance company is free to offer the insured terms that are more favorable than the mandated minima,
a policy [that] contains a less favorable term[ than the minimum provided in the State's standard fire policy] "is enforceable as if it conformed to the statutory standard." 1303 Webster Ave. Realty Corp. v. Great Am. Surplus Lines Ins. Co., 63 N.Y.2d 227, 231, 481 N.Y.S.2d 322, 323, 471 N.E.2d 135 (1984); see also SR Int'l Bus. Ins. ...