Opinion
Civil Action No. 04-2539.
February 25, 2006
MEMORANDUM OPINION
Presently before the Court are plaintiff's motion for summary judgment on Count I of the complaint (Doc. No. 62), defendant's motion for summary judgment on Count II of the complaint (Doc. No. 31), defendant's motion to strike the affidavit of Keith Kaplan ("Kaplan affidavit") (Doc. No. 71), and all responses and reply briefs thereto.
This motion was re-filed by letter after the close of discovery.
For the following reasons, this Court denies plaintiff's motion for summary judgment on Count I of the complaint, denies defendant's motion to strike the Kaplan affidavit, and grants defendant's motion for summary judgment on Count II of the complaint.
I. Factual and Procedural History
Plaintiff M. Diane Koken, insurance commissioner of the Commonwealth of Pennsylvania, brings suit on behalf of Reliance Insurance Company ("Reliance") against defendant Lexington Insurance Company ("defendant") for breach of an insurance policy covering business interruptions losses.
A. The Parties
Reliance is an insurance company organized under the laws of Pennsylvania with its principal place of business in Pennsylvania. (See Compl., at ¶ 1). Reliance is a subsidiary of Reliance Holdings Group Inc. ("RHG"), a New York corporation with its principal place of business in New York. (Id., at ¶ 9). Until June 2000, Reliance was a property and casualty insurer. In 2000, after suffering financial difficulties, Reliance started operating in "run-off mode," which means that Reliance starting winding up its affairs to satisfy its creditors. (See Kaplan Aff., at ¶ 15). This included the following practices: no selling of new insurance policies; downsizing its staff; continuing to collect premium receivables and reinsurance recoverables; and ensuring that claims are handled properly. (Id., at ¶¶ 15-17;see November 3, 2003 Status of Operations Update, attached as Ex. 1 to Policy Manuscript, attached as Ex. 1 to Kaplan Aff.).
Defendant is a property and casualty insurance company. (See Compl., at ¶ 2). Defendant is incorporated under the laws of Delaware, with its principal place of business in Boston, Massachusetts. (Id., at ¶ 3). Defendant is not licensed as an insurer in New York, but nonetheless does business in New York under the regulations applicable to excess line insurers. (See Declarations to Policy, attached as Ex. C to Pl. Br. For SJ on Count I; Transcript of December 13, 2005 Oral Argument, at 50-53).
B. The Policy
In February 2001, defendant issued to RHG an insurance policy (the "policy") providing indemnity for business interruption losses. (See Policy, attached as Ex. C to Pl. Br. For SJ on Count I). Under the terms of the policy, Reliance was an additional "insured" by virtue of its status as RGH's subsidiary. (Id., at 9).
Defendant did not draft the policy. Instead, AON Risk Services ("AON"), Reliance's broker, forwarded to defendant a submission to solicit insurance on Reliance's behalf. (See Kaplan Aff., at ¶¶ 18-22). This submission included a manuscript policy. (See AON Submission, attached as Ex. 1 to Kaplan Aff.). The submission also notified defendant of Reliance's transition into "run-off mode." (See Reliance's Status Update, attached as Ex. 1 to Kaplan Aff., at RIC-00291; Kaplan Aff., at ¶ 18).
The policy lasted for a one-year term, from February 1, 2001 until February 1, 2002. (See Policy Declarations, at 1). It provided coverage for business interruption losses, including "actual loss as covered hereunder during the period of time access to real or personal property is prohibited by order of civil authority." (See Policy, at 23). The policy required a business interruption claim to be adjusted according to "actual loss sustained," which consists of:
[t]he net profit which is thereby prevented from being earned and of all charges and other expenses (including ordinary payroll and payroll) only to the extent that these must necessarily continue during the interruption of business, and only to the extent to which such charges and expenses would have been incurred had no loss occurred.
(Id., at 16). The "actual loss sustained" therefore includes the sum of the "net profit that was prevented from being earned" and all other continuing expenses, such as payroll. (Id.).
C. Reliance's Liquidation
On May 29, 2001, after the issuance of the policy, the Commonwealth Court of Pennsylvania placed Reliance into rehabilitation pursuant to 40 Pa. Cons. Stat. Ann. § 221.15, and appointed the Commissioner Rehabilitator to oversee the process. (See Rehabilitation Order, attached as Ex. A to Compl.). On October 3, 2001, the Commonwealth Court terminated the rehabilitation of Reliance, declared the company to be insolvent, and placed it into liquidation. (See Liquidation Order, attached as Ex. B to Compl.).
D. Business Interruption
On September 11, 2001, Mayor Rudolph Guliani ordered the evaluation of lower Manhattan ("evacuation order"). (See Kaplan Aff., at ¶ 25). Reliance was denied access to two of its facilities for a period of three and one-half days. (See Documentation Related to September 11, 2001, attached as Ex. 3 to Pl. Mot.; Kaplan Aff., at ¶¶ 25-26). The facilities were located at 5 Hanover Square and 77 Water Street in lower Manhattan. (See Compl., at ¶ 13). Reliance contends that it continued to incur payroll expenses during the interruption period. (See Kaplan Aff., at ¶ 25). Reliance also claims that it was unable to collect various debts from its reinsurers, who were financially and physically devastated by the September 11, 2001 attack. (Id., at ¶ 29).
Reliance subsequently filed a timely claim for the losses it sustained from the evacuation order, including a claim of $448,874.71 for salaries and benefits. (See Kaplan Aff., at ¶ 33). By letter dated July 1, 2003, defendant's claim adjustor, GAB Robins North America Inc. ("GAB"), acknowledged Reliance's claim, but concluded that Reliance experienced "no loss of sales," and, thus, that "all fixed costs, including salaried labor, were earned." (See July 1, 2003 Letter, attached as Ex. D to Pl. Br.). Defendant reaffirmed the denial of plaintiff's claim in its January 13, 2004 and April 12, 2004 letters. (See January 13, 2004 and April 12, 2004 Letters, attached as Ex. E-F to Pl. Br.). In these letters, defendant again reasoned that Reliance sustained no actual loss within the meaning of the policy because the company experienced no reduction of net profit earned during the interruption period. (Id.).
E. Complaint
On May 11, 2004, plaintiff filed a complaint in the Commonwealth Court of Pennsylvania against defendant on behalf of Reliance, asserting claims for breach of contract ("Count I") and for the bad faith denial of plaintiff's claim under the policy ("Count II"). (See Compl.). On June 10, 2004, defendant removed the case to the United States District Court for the Eastern District of Pennsylvania. (See Doc. No. 1). Defendant answered plaintiff's complaint on June 24, 2004. (See Doc. No. 2).
The parties filed motions for summary judgment at the outset of the litigation. (See Doc. No. 19, 31). The Court denied these motions without prejudice, and granted the parties leave to re-file their motions at the close of discovery. (See Doc. No. 42). Plaintiff filed an amended motion for summary judgment on Count I of the complaint on August 19, 2005 (Doc. No. 62), and defendant re-filed its original motion for summary judgment on Count II of the complaint. (Doc. No. 31). Furthermore, on September 19, 2005, defendant filed a motion to strike the affidavit of Keith E. Kaplan ("Kaplan affidavit"), which was submitted in support of plaintiff's motion for summary judgment. (Doc. No. 71).
II. Discussion
Both parties have filed motions for summary judgment; and defendant has filed a motion to strike the Kaplan affidavit. Because resolution of defendant's motion to strike the Kaplan affidavit determines what evidence may be considered in evaluating the parties' summary judgment motions, this Court first addresses defendant's motion to strike.
A. Motion to Strike Kaplan Affidavit
Defendant seeks to strike the Kaplan affidavit as inadmissible. Defendant first argues that the Kaplan affidavit offers improper expert opinions and conclusions, as Kaplan was never identified as an expert witness and lacks specialized knowledge within the meaning of Rule 702 of the Federal Rules of Evidence. (See Def. Br., at 5-10). Defendant further argues that because Kaplan lacks personal knowledge of the matters identified in his affidavit, it is also inadmissible under Rule 701 of the Federal Rules of Evidence. (Id., at 10-14).
It is well-established that "only evidence which is admissible at trial may be considered in ruling on a motion for summary judgment." Countryside Oil Co., Inc. v. Travelers Ins. Co., 928 F.Supp. 474, 482 (D.N.J. 1995); see also Fed.R.Civ.P. 56(e) (requiring affidavits in support of summary judgment motion to be made on personal knowledge, to set forth facts that would be admissible in evidence, and to show affirmatively that the affiant is competent to testify to such matters); Pamintuan v. Nanticoke Mem. Hosp., 192 F.3d 378, 388 (3d Cir. 1999). A motion to strike is the appropriate mechanism for precluding consideration of inadmissible evidence, including an affidavit, that does not satisfy the standards of Federal Rule of Civil Procedure 56(e) at the summary judgment stage. See Fed.R.Civ. 56(e). The party making the motion to strike must "specify the objectionable portions of the affidavit and the grounds for each objection." See Wright, Miller Kane, 10B Federal Practice Procedure § 2738, at 377 (3d ed. 1998) ("A motion asserting only a general challenge to an affidavit will be ineffective.").
Although plaintiff may not introduce Kaplan as an expert witness, as he was never identified as such pursuant to Rule 26(a)(2) of the Federal Rules of Civil Procedure, this Court nonetheless rejects defendant's arguments that Kaplan's affidavit offers improper lay person and expert testimony. It is clear that Kaplan's testimony concerning the underwriting, interpretation, and procurement of the policy is not based on scientific, technical, or other specialized knowledge within the scope of Rule 702, but, instead, upon his personal knowledge over the subject matter of his affidavit. See Fed.R.Evid. 701 (lay witness may give non-specialized testimony based upon rational perception). For instance, Kaplan is currently the Executive Vice-President of Reliance, and is responsible for overseeing all reinsurance collections and associated reinsurance issues. (See Kaplan Aff., at ¶¶ 1, 9). He spent seventeen years underwriting and interpreting insurance policies for Reliance, and was designated as plaintiff's Rule 30(b)(6) corporate designee to testify on the facts and circumstances alleged in the complaint, the actual loss experienced by plaintiff, the manner in which the three and one-half day interruption interfered with defendant's liquidation proceedings, the nature of plaintiff's business, and plaintiff's net profit and/or net loss. (See Def. Notice of Deposition, attached as Ex. 1 to Pl. In Opp'n to Def. Mot.; Kaplan Aff., at ¶¶ 6-8). Furthermore, Kaplan's affidavit demonstrates his personal familiarity with the pertinent facts of this litigation — he personally oversaw the activities of Reliance's Corporate Risk Department, the group within Reliance that procured the insurance policy at issue, helped structure Reliance's response to Mayor Gulliani's evacuation order, and directed Reliance's response to defendant's denial of Reliance's business interruption claim. (Id., at ¶¶ 8, 17); (Kaplan Dep., attached as Ex. 2 to Pl. Br. In Opp'n, at 4); see Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1175 (3d Cir. 1993) (holding that sole owner of defendant corporation may give testimony as to lost profits based upon participation in day-to-day affairs of corporation and knowledge of substance of accounting report). Finally, Kaplan avers in his affidavit that he reviewed Reliance's business records concerning this litigation, including Reliance's payroll and expense records from September 11, 2001 through September 14, 2001, thereby generating a foundation of knowledge for the facts and opinions expressed in his affidavit. (See Kaplan Aff., at ¶ 13).
Plaintiff provides the affidavit of Claudine Cutrone Rossman, the Reliance employee who worked with AON in preparing plaintiff's submission for business interruption insurance; Rossman testifies that she performed these tasks under the direct supervision of Kaplan. (See Rossman Aff., at ¶ 4).
Because the Kaplan affidavit has not exceeded the scope of permissible lay opinion testimony under Rule 701, this Court denies defendant's motion to strike.
B. Plaintiff's Motion for Summary Judgment
Plaintiff seeks summary judgment as to liability on its breach of contract claim. (See Pl. Br., at 12-30). Plaintiff argues that the insurance policy requires coverage of the various losses Reliance sustained during the three and one-half day period of evacuation, including the cost of payroll expenses that continued during this period. (Id.).
Defendant challenges plaintiff's motion for summary judgment on two independent grounds. (See Def. Br., at 12-29). First, defendant challenges plaintiff's interpretation of the policy, arguing that Reliance suffered no actual loss under the policy after consideration of Reliance's net losses prior to the evacuation period. (Id., at 14-19, 23-29). Second, defendant argues that even if plaintiff's interpretation of the policy governs, plaintiff has not demonstrated that plaintiff's payroll expenses necessarily continued during the interruption period, as required by the policy. (Id., at 19-22).
1. Interpretation of the Policy
Both parties contend that the policy provision at issue, that portion of the policy explaining when business interruption losses are recoverable and how to calculate these losses, is unambiguous. This policy provision permits recovery for:
[t]he net profit which is thereby prevented from being earned and of all charges and other expenses (including ordinary payroll and payroll) only to the extent that these must necessarily continue during the interruption of business, and only to the extent to which such charges and expenses would have incurred had no loss occurred.
(See Policy, at 16).
Plaintiff argues that the first figure in this equation, Reliance's "net profit which is thereby prevented from being earned" was at least zero, as Reliance was operating in "run-off" mode during the time of the evacuation order and as Reliance suffered no reduction in its sales during this period. (See Pl. Br., at 18, 23-24; Kaplan Aff, at ¶¶ 41-42). Stated differently, plaintiff argues that Reliance's "net profit which is thereby prevented from being earned" requires a comparison between plaintiff's revenues (minus expenses) before September 11, 2001 and plaintiff's revenues (minus expenses) during the evaluation period, which results in a sum of zero. (Id.). Thus, because the net profit figure, which is zero, must be added to the "additional charges and expenses" figure, which includes Reliance's payroll expenses ($448,000), to reach Reliance's "actual loss sustained," plaintiff is entitled to summary judgment on the issue of liability as to the recovery of the cost of the additional charges and expenses. (Id.).
Defendant disagrees with this interpretation. According to defendant, Reliance's "net profit" was not zero, but, instead, a negative sum, reflected by Reliance's consistent loss of net income prior to the interruption period. (See Def. Br., at 8-11, 14-19; Magnan Aff., at ¶¶ 16-22). Specifically, defendant argues that Reliance's net profit — its revenue (zero) minus its operating expenses (at least $448,000 in payroll) — was negative $448,000. (Id.). Defendant then argues that adding Reliance's negative profit (-$448,000) and Reliance's "additional [continuing] charges and expenses" (+$448,000) yields an overall "actual loss" of (at the most) zero. (Id.). In other words, because Reliance's additional charges and expenses do not exceed plaintiff's net profit, defendant contends that Reliance did not suffer any "actual loss" within the meaning of the policy. (Id.).
a. Methodology
Under Pennsylvania law, the construction of an insurance policy is a matter of law for the court. See, e.g., Lexington Ins. Co. v. Western Pennsylvania Hosp., 423 F.3d 318, 323 (3d Cir. 2005); E.I. du Pont de Nemours Co. v. Allstate Ins. Co., 686 A.2d 152, 155 (Pa. 1996). In construing an insurance policy, courts must ascertain the parties' intent by interpreting the language of the insurance policy itself. See, e.g., E. I du Pont de Nemours, 686 A.2d at 155. Words of common usage in an insurance policy must be construed in their "natural, plain and ordinary sense." See, e.g., Madison Const. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100, 108 (Pa. 1999). To perform this task, courts frequently turn to the lexicon for guidance. Id. If the policy provision of the insurance policy is unambiguous, the court must give effect to that language. Gene Harvey Builders v. Pennsylvania Mfrs. Ass'n., 517 A.2d 910, 913 (1986). However, if the language of the insurance policy is ambiguous, the policy provision must be construed against the policy's drafter, typically the insurer. Id. Contractual language is ambiguous if "it is reasonably susceptible of different constructions and capable of being understood in more than one sense." Hutchison v. Sunbeam Coal Co., 519 A.2d 385, 390 (1986).
b. The phrase "net profit which is thereby prevented from being earned" in the policy is unambiguous.
The crux of the current interpretative dispute is whether the phrase "net profit which is thereby prevented from being earned" can include a negative sum, such as -$448,000, or whether this phrase must be interpreted as a positive sum, including zero. If the phrase can yield a negative number, then Reliance would seemingly be prohibited from recovering under the policy, as, during the course of the policy, Reliance was incurring the cost of operating expenses without earning revenue from the sale of insurance policies. On the other hand, if "net profit which is thereby prevented from being earned" must translate into a positive figure (i.e., zero or more), even when a company is operating at a net loss, Reliance will be permitted to recover at least the amount of its ordinary payroll expenses that necessarily continued during the interruption period.
The policy does not define the phrase "net profit which is thereby prevented from being earned." Nor does it define the two important components of this phrase: "net profit" and "prevented from being earned." As such, this Court construes the component terms of this language in their natural, plain, and ordinary sense. See Wagner v. Erie Ins. Co., 801 A.2d 1226, 1231 (Pa.Super.Ct. 2002). This construction is informed by the dictionary definitions of "net profit" and "earned." See, e.g., Madison Constr. Co., 735 A.2d at 108.
Black's Law Dictionary defines "net profit" as "total sales revenue less the cost of the goods sold and all additional expenses." (See Black's Law Dictionary, at 1227 (7th ed. 1999)). This definition suggests that "net profit" could be a negative number, so long as the cost of the goods sold and additional expenses exceed the total sales revenue. However, the phrase "thereby prevented from being earned" qualifies the calculation of net profit. Of particular importance in this phrase is the verb "earned," which refers to the acquisition of something by labor, service, or performance. (Id., at 525). In other words, "earned" refers to an event of accumulation. "Earned income," for instance, which is defined as "money derived from one's own labor or active participation," cannot be a negative number — it functions as surplus. (Id., at 767).
When "net profit" is read in conjunction with the qualifying phrase "prevented from being earned," the result is a positive number: that amount of net profit that Reliance was unable to positively accumulate or acquire during the business interruption period. In other words, this Court finds that the phrase "net profit which is thereby prevented from being earned" unambiguously refers to the amount of total sales revenue, minus the costs of goods sold and other operating expenses, that the insured is precluded from acquiring. This construction of "actual loss" omits from the prescribed calculus the exact amount of net loss that the insured was prevented from incurring. If the "net profit" is a positive number, that positive number functions as the "net profit which is thereby prevented from being earned." However, if the "net profit" is a negative number, meaning that the costs of goods sold and other operating expenses exceed sales revenue, the "net profit which is thereby prevented from being earned" is zero; while a company may incur negative revenues, a company is only prevented from "earn[ing]," or acquiring, positive revenue.
This interpretation comports with the purpose behind business insurance policies, particularly in the factual context of this action. See, e.g., Pennbarr Corp. v. Ins. Co. Of North Am., 976 F.2d 145, 154-155 (3d Cir. 1992) (finding business interruption policy unambiguous in part because interpretation comports with purpose of business interruption insurance);Continental Ins. Co. v. DNE Corp., 834 S.W.2d 930, 934 (Tenn. 1992) (purpose of business interruption insurance is "to protect the insured against losses that occur when its operations are unexpectedly interrupted, and to place it in the position it would have occupied if the interruption had not occurred"; however, policy may not be used "to place the insured in a better position than it would have occupied in the absence of the catastrophe"). For instance, any interpretation of the phrase "net profit which is thereby prevented from being earned" as potentially yielding a negative figure would fail to restore Reliance to the same position it occupied prior to the evacuation order. For instance, if plaintiff was prevented from recovering ordinary payroll by virtue of Reliance's negative net profit (i.e., its zero sales revenue minus its operating expenses), Reliance would be in a worse position than it was in prior to the business interruption period. Prior to the evacuation period, Reliance was incurring losses, which included payroll expenses, but was nonetheless receiving the reasonable value of its employees' services. During the evacuation period, Reliance not only was forced to pay its payroll expenses, but also lost the reasonable value of the services of its employees, who were unable to access Reliance's New York facilities. (See Kaplan Aff., at ¶ 33). If the policy was construed to not provide coverage for Reliance's claim for payroll expenses because of Reliance's insolvency, then Reliance therefore would be forced to pay its ordinary payroll expenses during the business interruption period without receiving the accompanying benefit of the reasonable value of its employees services. Unlike other situations, where the business interruption actually enables an unprofitable company to save money by avoiding the fixed losses associated with operational continuity, Reliance would be "out" the reasonable value of its employees' services, although forced to incur the expenses associated with such salaries. See, e.g., Goetz v. Hartford Fire Ins. Co., 215 N.W. 440, 441 (Wis. 1927) (precluding insured from recovering on policy that provides business interruption insurance for "net profits of the business which is thereby prevented, and such fixed charges and expenses . . . as must necessarily continue" because insured avoided loss in net profits by virtue of not operating during interruption period and the amount of that avoidance loss exceeded fixed charges and expenses).
Although the Third Circuit has defined the purpose of business interruption insurance in terms of indemnification for loss of "profit," the terms of the instant policy clearly reveal that its purpose is to indemnify Reliance for all "losses" caused by the interruption period, including payroll losses that necessary continued during the interruption period. See Pennbarr Corp. v. Ins. Co. Of North Am., 976 F.2d 145, 154-155 (3d Cir 1992). Furthermore, defendant concedes that the purpose of this policy was to "protect the insured against losses that occur when its operations are unexpectedly interrupted, and to place it in the position it would have occupied if the interruption had not occurred." (See Def. Br. In Opp'n, at 17).
None of the cases cited by defendant mandates a different interpretation of the insurance policy at issue, let alone a finding of ambiguity. See, e.g., United Land Investors, Inc. v. Northern Ins. Co. Of Am., 476 So.2d 432, 436 (La.Ct.App. 1985) (company losing money to the extent of $48,023 prior to business interruption period incurs no "net profit"). Indeed, although defendant provides cases in which courts have construed business interruption policies providing indemnification for an actual loss both of "net income" or "net profit" and of continuing operation expenses as precluding recovery when an insured's net loss prior to the interruption period exceeds the amount of its continuing operation expenses during the interruption period, these decisions are clearly distinguishable: they interpret policy language different from that at issue in this litigation. In particular, none of the policies at issue in such cases permitted recovery for "net profit which is thereby prevented from being earned," but, instead, took a much broader definition of actual loss, providing indemnification for losses of "net profit" without limiting language, or for "net income that would have been earned or incurred." See, e.g., Liberty Mutual Ins. Co. v. Sexton Foods Co., Inc., 854 S.W.2d 365, 367-368 (Ark. 1993) (interpreting provision that permits recovery for "loss of earnings," which is defined as the sum of "net profit" and "payroll expense, taxes, interest, rents and all other operating expenses earned by the business," as requiring recovery when sum of net profit, including losses, and continuing expenses exceed non-continuing expenses); DNE Corp., 834 S.W.2d at 932-933 (permitting recovery when continuing expenses exceed net losses in policy that covers "net income (net profit or loss before income taxes) that would have been earned or incurred and continuing normal operating expenses incurred"). Furthermore, these cases expressly rejected the principle that "recovery is completely barred in the event that business is not operating at a profit," highlighting the policy-specific nature of such a calculation. Sexton Foods Co., Inc., 854 S.W.2d at 367.
c. Application
Application of this Court's construction of the business interruption provision of the policy requires granting plaintiff's motion for summary judgment on its breach of contract claim as to liability only, so long as plaintiff can show that it incurred charges and expenses within the meaning of the policy. For instance, the policy does not permit the recovery of all charges and expenses; instead, it permits the recovery of charges, including payroll and ordinary payroll, "only to the extent that these must necessarily continue during the interruption of business, and only to the extent to which such charges and expenses would have been incurred had no loss occurred." (See Policy, at 16). These conditions adhere to the definition of recoverable "charges" and "expenses," functioning as prerequisites to recovery. Thus, although plaintiff need not demonstrate the amount of these charges and expenses to succeed on its current summary judgment motion as to liability only, plaintiff must nonetheless demonstrate, as a matter of law, that any charges and expenses, including payroll and ordinary payroll, both "necessarily continue[d] during the interruption of business" and "would have been incurred had no loss occurred." (Id.).
Plaintiff concedes that its "net profit which is thereby prevented from being earned" is zero. (See Pl. Br., at 18) ("The same result necessarily holds true if the net income amount is — as here — zero").
2. Genuine issues of material fact exist as to whether Reliance necessarily incurred payroll expenses.
The insurance policy permits the recovery of ordinary payroll expenses "to the extent that these must necessarily continue during the interruption of business." (See Policy, at 16). In other words, the policy requires proof that it was essential, or "necessary," for the expenses to continue during this period.
Defendant argues that summary judgment on plaintiff's breach of contract claim is inappropriate because plaintiff has not demonstrated that paying Reliance employees during the interruption period was "necessary." (See Def. Br., at 19-22; Def. Sur-reply Br., at 9-11). In response, plaintiff contends both that Reliance's management made a reasonable and sound business decision to pay the salaries of Reliance's employees during the interruption period and that, regardless of the reasonableness of this decision, defendant's argument is irrelevant to the issue of liability under the insurance policy. (See Pl. Reply, at 14-16).
This Court finds that genuine issues of material fact preclude a finding as to whether Reliance's payroll expenses for its New York facilities "necessarily continued" during the interruption period. For instance, plaintiff provides no evidence to suggest how the continuation of the salaries of Reliance's employees aided plaintiff's business operations or why it was in Reliance's best interest to provide such payments. Although plaintiff cites Kaplan's deposition and affidavit, which state that "it would not have been good business to not continue those salaries," this statement fails to demonstrate with clarity the reasoning behind this conclusion, let alone to establish that it was "necessary" for these expenses to continue. (See Kaplan Aff., at ¶ 27; Kaplan Dep., at 16-17). Nor does plaintiff provide additional affidavits or documentation from Reliance's management personnel demonstrating the specific objectives behind Reliance's policy to pay its employees' salaries during the evacuation period. Finally, plaintiff seems to concede that this issue is a question of fact for resolution by a jury. (See Pl. Reply Br., at 16) ("When Lexington asserts that some of the expenses may not have been necessary, Lexington is simply raising an issue of fact that is irrelevant to this motion. When and if this Court determines that Reliance's Claims was covered by the terms of the Policy, Lexington will have its day in Court.").
C. Defendant's Motion for Summary Judgment
Defendant seeks summary judgment on Count II of plaintiff's complaint. Defendant asserts that Pennsylvania's choice of law analysis requires application of New York law, which fails to recognize an independent cause of action for bad faith claims and which limits recovery of punitive damages to egregious tortious conduct directed at plaintiff and at the public in general. (See Def. Br., at 6-9). Applying New York law, defendant argues that plaintiff's bad faith claim, including plaintiff's request for punitive damages, fails as a matter of law. (Id., at 10-17).
Plaintiff, on the other hand, asserts that Pennsylvania law applies to this dispute. (See Pl. Br., at 9-14). Applying Pennsylvania law, plaintiff contends that genuine issues of material fact exist as to whether defendant violated Pennsylvania's bad faith statute, 42 Pa. Cons. Stat. Ann. § 8371. (Id., at 15-20). Specifically, plaintiff argues, inter alia, that defendant failed to consider Reliance's financial situation, including Reliance's run-off status, in determining the type and scope of Reliance's insurance coverage, that defendant failed to conduct a reasonable investigation into Reliance's claim, that defendant failed to follow its own procedures in making the coverage determination, and that the reasons for denying coverage were pretextual. (Id., at 15-20).
1. Pennsylvania's Choice of Law Methodology
The resolution of defendants' summary judgment motion requires a determination of which law applies to plaintiff's bad faith claim. In determining the applicable law, a court must apply the choice-of-law principles of the state in which the district court sits. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941). Under Pennsylvania's choice of law rules, a court must first determine whether a conflict exists. See, e.g., Ghallagher v. Medical Research Consultants, 2004 WL 2223312, at *11 n. 15 (E.D. Pa. Oct. 1, 2004). If a conflict exists, the court must then characterize the "conflict" between the proposed competing bodies of law. See, e.g., Garcia v. Plaza Oldsmobile Ltd., 421 F.3d 216, 220 (3d Cir. 2005). Finally, if the conflict is characterized as a true conflict, the court must analyze which state has the greater interest in the application of its law. See, e.g., Cipolla v. Shaposka, 267 A.2d 854, 855 (Pa 1970).
a. Existence of Conflict
As a threshold question, a conflict exists if the application of the proposed laws would lead to different results. See, e.g., Pilot Air Freight Corp. v. Sandair, Inc., 118 F. Supp. 2d 557, 561 n. 3 (E.D. Pa. 2000). If the application of the proposed laws would not lead to different results, the court need only apply forum law. Id. ("Where the different laws do not product different results, courts presume that the law of the forum state shall apply."). If it would lead to different results, the court must characterize the type of conflict.
b. Characterization
In order to determine what type of "conflict" exists, the court must perform an "interest analysis" of the policies of the interested states and then characterize the relationship between the policies and the factual predicate of the action as a true conflict, a false conflict, or an unprovided-for case. See, e.g., Budget Rent-A-Cary System, Inc. v. Chappell, 407 F.3d 166, 170 (3d Cir. 2005).
A true conflict exists "when the government interests of multiple jurisdictions would be impaired if their law were not applied." Lacey v. Cessna Aircraft Co., 932 F.2d 170, 187 n. 15 (3d Cir. 1991). If a true conflict exists, Pennsylvania's choice of law rules requires the "application of the law of the state having the most significant contacts or relationships with the particular issue." See Chappell, 407 F.3d at 170 (internal quotations omitted).
A false conflict exists "if only one jurisdiction's governmental interests would be impaired by the application of the other jurisdiction's law." Lacey, 932 F.2d at 187. In the event of a false conflict, Pennsylvania's choice of law rules require the application of the law of the only interested state.See Chappell, 407 F.3d at 170.
Finally, an "unprovided for" situation arises when "no jurisdiction's interests would be impaired if its laws were not applied." Id. An unprovided-for case triggers the law of the place of the wrong. Id.
c. Most Significant Contacts Analysis
If a true conflict exists, a court must apply the law of the state with the greatest interest, based upon an analysis of which state has the most significant contacts with the particular issue. See, e.g., Garcia, 421 F.3d at 220. In making this determination, courts look to the contacts outlined in the Restatement (Second) of Conflicts, depending on the type of issue generating the conflict of law. See Griffith v. United Air Lines, Inc., 203 A.2d 796, 802-806 (1964) (adopting modified version of Restatement (Second) of Conflicts approach); see also Celebre v. Windsor-Mount Joy Mutual Ins. Co., 1994 WL 13840, at *3 (E.D. Pa. Jan. 14, 1994) (Pennsylvania courts performing choice of law analysis "rely heavily on the rules found in the Restatement (Second) of Conflicts"). These contacts should be analyzed qualitatively, rather than quantitatively, in light of the "policies and interests underlying the particular issue before the court." See, e.g., Norman v. Johns-Manville Corp., 593 A.2d 890, 893 (Pa.Super.Ct. 1991).
2. New York law applies to plaintiff's bad faith claim.
Defendant contends that a true conflict exists between New York and Pennsylvania law, reasoning that both jurisdictions have an interest in the outcome of this litigation and that this each jurisdiction's interest would be impaired by the application of the law of the other jurisdiction. (See Def. Br., at 6-10; Def. Reply Br., at 4-6). Defendant further contends that New York has a greater interest in applying its law to plaintiff's bad faith claim based upon the quality of contacts between New York and the factual predicate of plaintiff's bad faith claim. (Id.).
In response, plaintiff suggests that no true conflict exists between New York and Pennsylvania law because New York's interest in applying its law is not implicated by the facts of the case, which pertain to an out-of-state insurer and an out-of-state insured. (See Pl. Surreply Br., at 7). Furthermore, plaintiff argues that even if New York has an interest in applying its law, the significance of the contacts between the Commonwealth of Pennsylvania and plaintiff's bad faith claim requires the application of Pennsylvania law. (See Pl. Br. In Opp'n, at 9-15).
a. A conflict exists between New York and Pennsylvania law.
Both parties acknowledge a conflict between the law of Pennsylvania and the law of New York concerning first-party bad faith claims against an insurer. (See Def. Reply Br., at 3; Pl. Br., at 8); see also Kilmer v. Connecticut Indemnity Co., 189 F. Supp. 2d 237, 244 (M.D. Pa. 2002) ("Because New York and Pennsylvania have different standards for evaluating claims of an insurer's bad faith, it is clear that no false conflict exists"). For instance, Pennsylvania's bad faith statute permits a party to recover punitive damages, attorneys fees, and interest against an insurer for the denial of a claim in bad faith. See 42 Pa. C.S.A. § 8371. The statute requires an insured to show, by clear and convincing evidence, that the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of a reasonable basis in denying the claim. See, e.g., Northwestern Mut. Life Ins. v. Babayan, 430 F.2d 121, 137 (3d Cir. 2005). The purpose of Pennsylvania's bad faith statute is to protect insured parties who reside in Pennsylvania by regulating the conduct of insurers who do business in Pennsylvania. See, e.g., General Star Nat'l Ins. Co. v. Liberty Mutual Ins. Co., 960 F.2d 377, 379 (3d Cir. 1992) (noting that "protection of insured parties is the primary public policy behind laws governing duties owed by an insurer to an insured").
New York law, on the other hand, fails to recognize a separate cause of action for bad faith claim-handling in first-party insurance disputes. Continental Information Systems Corp. v. Fed. Ins. Co., 2003 WL 145561, at *2-4 (S.D.N.Y. Jan. 17, 2003) (holding that "New York does not recognize a claim for bad faith denial of insurance coverage, whether based in tort or contract"); Wiener v. Unumprovident Corp., 2002 F. Supp. 2d 116, 125 (S.D.N.Y. 2002) ("New York does not recognize bad faith denial of coverage as an independent tort"). Indeed, the New York Court of Appeals has expressly concluded that allegations pertaining to an insurer's bad faith handling and denial of an insurance claim merely duplicate the essential elements of a breach of contract claim, and, therefore, do not state an independent cause of action. See New York Univ. v. Cont'l Ins. Co., 662 N.E.2d 763, 769-770 (N.Y. 1995) (dismissing bad faith claim alleging that insurer failed to adequately investigate claim prior to baseless denial because this cause of action is "duplicative" of insured's breach of contract claim); Rocanova v. Equitable Int'l Ass. Society of United States, 83 N.Y. 2d 603, 613 (N.Y. 1994) ("complaint does not state a claim for compensatory or punitive damages by alleging merely that the insurer engaged in a patter of bad-faith conduct," but instead, must "state a claim of egregious tortious conduct"). This refusal to recognize first-party bad faith claims against insurers achieves several purposes, including the following: (1) preventing insureds from obtaining extra-contractual damages against insurers for allegations that mirror a breach of contract claim; (2) minimizing the cost of insurance for New York residents by eliminating the "passing-on" of the costs of bad fath insurance judgments, including the assessment of punitive damages, in the form of potentially unaffordable insurance premiums; and (3) encouraging insurers to do business in New York by eliminating the fear of punitive damage awards for claim-handling that falls short of independently tortious and morally reprehensible conduct aimed both at plaintiff and at the general public. See, e.g., Northwestern Mutual Life Ins. Co. v. Wender, 940 F. Supp. 62, 66 (S.D.N.Y. 1996) (New York's laws governing bad faith claims are primarily meant to regulate the conduct of insurance companies doing business in New York); see, c.f., LeJeune v. Bliss-Salem, Inc., 85 F.3d 1069, 1072 (3d Cir. 1996) (state could have a host of reasons for not recognizing strict products liability, including encouraging economic activity in state by out-of-state corporations, lowering costs to consumers, and prescribing rules governing torts nonfortuitously within its borders).
New York law, however, does permit a plaintiff to seek punitive damages for a breach of an insurance contract when a party demonstrates that the insurer engaged in egregious tortious conduct against plaintiff and that this conduct was part of a pattern of similar conduct directed at the public generally. See, e.g., Rocanova v. Equitable Int'l Ass. Society of United States, 83 N.Y. 2d 603, 613 (N.Y. 1994); In re Payroll Express Corp., 921 F. Supp. 1121, 1126 (S.D.N.Y. 1996) (noting that plaintiff's claim for bad faith under New York law is "best characterized as seeking an exemplary remedy for breach of contract" that plaintiff may recover punitive damages by meeting the standards set forth in Rocanova).
b. A true conflict exists between New York and Pennsylvania law.
This Court finds that both New York and Pennsylvania have an interest in applying their laws to the instant dispute. On one hand, New York has an interest in applying its law to a bad faith claim against a foreign insurer who does business in New York as an excess line insurer. This interest is particularly strong when the bad faith claim concerns the handling of a business interruption claim on an insurance policy procured by a New York excess line insurance broker for a New York resident for losses connected with New York facilities. See, e.g., Melville v. American Home Assur. Co., 584 F.2d 1306, 1313-1314 ("state has a significant interest in prescribing the standards that will govern the insurance contracts purchased by its residents"). Nor has plaintiff provided any case law indicating that New York's failure to recognize an independent tort for bad faith claim-handling is not meant for the protection of insurers who do business in New York as excess line insurers, subject to New York's excess line regulations, rather than as authorized insurers subject to all of the regulations promulgated pursuant to New York's Insurance Law. See 28 N.Y. Insurance Law § 2105(a) (permitting excess line brokers in New York to procure insurance from excess line insurers); 11 N.Y. Comp. Codes. R. Regs. tit. 11, §§ 27.1, et seq. (2005) (excess line insurance regulations). Consequently, this Court finds that permitting plaintiff to assert a bad faith claim and potentially recover punitive damages against defendant under Pennsylvania law would impair New York's interest in choosing not to regulate certain types of bad faith conduct by insurers who do business in New York, presumably in an effort both to encourage insurers to offer coverage to New York insureds, like RHG, at a reasonable rate and to promote flexibility in coverage determinations without fear of punitive damage judgments.
Pennsylvania's interest in protecting insureds and in regulating the bad faith conduct of insurance companies is also implicated by the facts of this litigation: Reliance is a Pennsylvania corporation who is currently in liquidation under the supervision of the Commonwealth Court of Pennsylvania. (See Kaplan Aff., at ¶¶ 15-17; Liquidation Order, attached as Ex. B to Pl. Br.). The application of New York law, and its failure to recognize bad faith claims as an independent tort, therefore would violate the policies of Pennsylvania's bad faith insurance statute — protecting Pennsylvania insureds from suffering the harms attendant to the reckless and unreasonable denial of insurance coverage and deterring this type of conduct by insurance companies which do business in Pennsylvania.
c. New York has the most significant interest in applying its law to the factual predicate of plaintiff's bad faith claim.
Once a true conflict exists, Pennsylvania choice of law principles require the "application of the law of the state having the most significant contacts or relationships with the particular issue." See Chappell, 407 F.3d at 170 (internal quotations omitted).
In making this determination as to which state has the greatest interest in applying its law to a bad faith claim, a hybrid of tort and contract principles, Pennsylvania choice-of-law methodology requires an analysis of the factors outlined in § 145, § 188, and § 193 of the Restatement (Second) of Conflicts.See, e.g., Kilmer v. Connecticut Indemnity Co., 189 F. Supp. 2d 237, 244-245 (M.D. Pa. 2002) (looking to § 193 of the Restatement (Second) of Conflicts in determining what law to apply to plaintiff's bad faith claim); Williams Crane Rigging, Inc. v. Northbrook Property Casualty Ins. Co., 1996 WL 134800, at *4 (E.D. Pa. March 26, 1996) (evaluating contacts identified in § 145 of Restatement (Second) of Conflicts in determining what law to apply to plaintiff's bad faith claim); Celebre, 1994 WL 13840, at *3 (evaluating contacts identified in § 188 and § 193 of Restatement (Second) of Conflicts in determining what law to apply to plaintiff's bad faith claim). These factors include, inter alia: the principal location of the insured risk during the term of the policy; the place of contracting; the place of negotiation of the contract; the place of performance; the location of the subject matter of the contract; the place where the injury occurred; the place where the conduct causing the injury occurred; and the domicile, residence, nationality, place of incorporation, and place of business of the parties. See Restatement (Second) of Conflict of Laws § 145(2) (listing factors to be considered in determining law governing issue in tort), § 188(2) (listing five factors to be considered in contract dispute in absence of effective choice of law by parties), § 193 (rights created by fires, surety, or casualty insurance are determined by "local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship"). These contacts should be analyzed qualitatively, rather than quantitatively, with respect to the policies underlying plaintiff's claim. See, e.g., Norman v. Johns-Manville Corp., 593 A.2d 890, 893 (Pa.Super.Ct. 1991).
This Court finds that New York has a slightly greater interest in applying its law to the instant dispute, based upon an qualitative analysis of the relationship between New York's contacts with plaintiff's bad faith claim. The policy was negotiated, signed, and executed in New York. (See Kaplan Aff., attached as Ex. 4 to Def. Reply Br., at ¶ 18). While the policy provided coverage for various properties across the United States, the current dispute involves defendant's response to a claim for business interruption losses that Reliance allegedly sustained at two New York properties. (See Compl., at ¶ 13). The employees who were displaced by the evacuation order worked in New York. (Id.). The insurance contract was purchased by RHG, the named insured, a New York corporation with its principal place of business in New York. (See Policy Declaration Page, attached as Ex. 3 to Def. Reply Br.). The adjustment of Reliance's claim, which included meetings, discussions, and the review of documentation, took place in New York, the home of defendant's claim adjuster. (See Schaetzle Aff., attached as Ex. F to Def. Br., at ¶¶ 2-4). Communicational exchanges over the denial of Reliance's claim took place between defendant's New York adjustor and Reliance's broker, a Massachusetts company, including the July 1, 2003 letter explaining defendant's reasoning for refusing to cover Reliance's losses for salaries and benefits. (See July 1, 2003 Letter, attached as Ex. 5 to Def. Reply Br.; October 1, 2003 E-mail, attached as Ex. 4 to Kaplan Aff.). Finally, although defendant is not organized under the laws of New York, does not operate its principal place of business in New York, and is not a licensed insurer under New York law, it is clear that defendant conducts business in New York, as evidenced by its transaction with RHG, its decision to insure RHG's New York property, and its required compliance with New York regulations governing excess line insurers. See, e.g., USAlliance Fed. Credit Union v. Cumis Ins. Society, Inc., 346 F. Supp. 2d 468, 470 (S.D.N.Y. 2004) (finding that tort of bad faith is a "conduct-regulating" rule and holding that "New York certainly has an interest in determining the rules regulating all insurance companies — whether foreign or domestic — that operate in the state and serve New York consumers");Northwestern Mutual Life Ins. Co. v. Wender, 940 F. Supp. 62, 66 (S.D.N.Y. 1996) (New York law applies to insured's counterclaim of bad faith when insurer's allegedly tortious conduct occurs in New York, although insurer was foreign corporation).
A foreign insurer not licensed under New York law may issue insurance policies in New York through an excess line broker, an entity authorized within certain restrictions to procure specified types of insurance policies from insurance companies which are not authorized to do business in New York. As an excess line insurer, defendant is required, inter alia, to provide its most recent financial statements and prospective business plan to excess line brokers for inspection by insureds, to maintain a trust fund in a qualifying financial institution to pay judgments by policyholders, and to submit to the jurisdiction of the New York courts in any action instituted by an insured arising out of a policy issued to the unauthorized insurer. See NYCRR tit. 11, §§ 27.13-27.16; see, e.g., Anglo Am. Ins. Group v. Calfed, Inc., 899 F. Supp. 1070, 1074-1075 (S.D.N.Y. 1995) (excess line insurer "does business" in New York for purposes of personal jurisdiction analysis by virtue of insurer's compliance with New York's insurance regulations).
Pennsylvania's contacts with this litigation are more limited. These contacts consist of the following: Reliance is a resident of Pennsylvania currently undergoing liquidation under the supervision of the Commonwealth Court of Pennsylvania; and plaintiff arguably suffered the alleged injury, its dashed expectation of receiving the insurance proceeds, in Pennsylvania. (See Liquidation Order, attached as Ex. J to Pl. Br. In Opp'n). The importance of these contacts cannot be understated, particularly because the purpose of Pennsylvania's bad faith statute is to protect "its own residents/insured from overreaching insurance companies." Celebre v. Windsor-Mount Joy Mut. Ins. Co., 1994 WL 13840, at *2 (E.D. Pa. Jan. 14, 1994); see also Cont'l Cas. Co. v. Diversified Indus, Inc., 884 F. Supp. 937, 952 (E.D. Pa. 1995) (attaching great significance to location of injury in determining law applicable to defendant's counterclaim for bad faith denial of coverage). Nonetheless, the significance of these contacts is overshadowed by the myriad of other contacts that are related to the conduct giving rise to plaintiff's bad faith claim and that more cogently trigger the policies behind New York's treatment of bad faith claims, including minimizing the cost of insurance for New York insureds and encouraging insurers to do business in New York. See c.f. LeJeune, 85 F.3d at 1072 (applying Delaware, which does not recognize strict products liability, to dismiss claim by Pennsylvania resident against corporations with limited contacts with Delaware when tortious conduct occurs within Delaware).
Plaintiff also suggests that Reliance's insolvency generates a significant policy interest for the Commonwealth of Pennsylvania in the resolution of this litigation, as Pennsylvania insurers will be compelled to make up the difference between Reliance's debts to its creditors and the amount of Reliance's assets. (See Tr., at 26-27). Plaintiff provides no factual or legal support for this proposition.
As described above, this includes the place of the negotiation and execution of the policy, the locus of the insured property at issue, the principal place of business of the named insured, the events which caused plaintiff's business interruption losses, and, perhaps most importantly, the handling and adjustment of plaintiff's claim.
In summary, this Court finds both that the qualitative and quantitative weight of the contacts mandates the application of New York law to plaintiff's bad faith claim.
3. Application of New York law
The application of New York law results in the granting of summary judgment to defendant on plaintiff's bad faith claim. Under New York law, a plaintiff may not bring an independent cause of action for bad faith based upon an insured's handling of a particular claim. See, e.g., Core-Mark Int'l Corp. v. Commonwealth Ins. Co., 2005 WL 1676704, at *3 (S.D.N.Y. July 19, 2005) (noting that "New York does not recognize the tort of bad faith denial of insurance coverage" and dismissing plaintiff's first-party bad faith claim and demand for punitive damages and attorney's fees). Thus, plaintiff's bad faith claim, which alleges that defendant's denial of Reliance's claim was reckless, unfounded, and frivolous, must be dismissed. New York Univ., 662 N.E.2d at 768-769 (dismissing punitive damages claim for bad faith investigation and denial of coverage because allegations do not state a tort claim, but, instead, merely raise questions for fat finder in determining breach of contract claim); Rocanova, 634 N.E.2d at 615 (noting that complaint "does not state a claim for compensatory or punitive damages by alleging merely that the insurer engaged in a pattern of bad-faith conduct" and finding that insured was not entitled to punitive damages despite compilation of 124 vignettes of policyholder difficulties with insurer).
This Court must also grant summary judgment for defendant on plaintiff's request for punitive damages, as plaintiff has failed to allege, let alone provide at the summary judgment stage, facts that meet New York's high standard for punitive damages. See, e.g., Core-Mark Int'l Corp., 2005 WL 1676704, at *3 ("Dismissal of the bad faith claim also necessitates dismissal of the demand for punitive damages and attorneys' fees," as plaintiff fails to allege a tort independent of its breach of contract claim). For instance, plaintiff fails to allege that defendant engaged in tortious behavior, cognizable under New York law, involving a high degree of moral turpitude. See, e.g., Rocova, 634 N.E.2d at 613. Nor has plaintiff raised a genuine issue of material fact that defendant's denial of plaintiff's claim was part of a pattern of bad faith behavior directed to the public. Id. In fact, plaintiff's submissions to the Court fail to address defendant's argument that plaintiff's bad faith claim falls under the high standard imposed by New York law, perhaps because of the impossibility of making such a showing based upon the allegations in the complaint.
D. Conclusion
In conclusion, this Court denies defendant's motion to strike the affidavit of Keith Kaplan, denies plaintiff's motion for summary judgment as to liability on plaintiff's breach of contract claim, and grants defendant's motion for summary judgment as to plaintiff's bad faith claim. An appropriate Order follows.
ORDER
AND NOW, this 30th day of January 2006, upon consideration of plaintiff's motion for summary judgment on Count I of the complaint (Doc. No. 62), defendant's motion for summary judgment on Count II of the complaint (Doc. No. 31), defendant's motion to strike the affidavit of Keith Kaplan ("Kaplan affidavit") (Doc. No. 71), and all responses and reply briefs thereto, it is hereby ORDERED as follows:1. Defendant's motion to strike the affidavit of Keith Kaplan (Doc. No. 71) is DENIED.
2. Plaintiff's motion for summary judgment on Count I of the complaint (Doc. No. 62) is DENIED.
3. Defendant's motion for summary judgment on Count II of the complaint (Doc. No. 31) is GRANTED.