Howard Industries, Inc. v. Ace American Insurance Company et al
Filing
52
OPINION AND ORDER granting 24 Motion to Dismiss for Failure to State a Claim; denying 28 Motion for Judgment on the Pleadings; granting in part and denying in part 31 Motion for Declaratory Judgment & granting in part and denying in part 38 Motion for Partial Summary Judgment. Signed by Judge Gregory L Frost on 3/12/2014. (kk2)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
HOWARD INDUSTRIES, INC.,
Plaintiff,
Case No. 2:13-cv-0677
JUDGE GREGORY L. FROST
Magistrate Judge E.A. Preston Deavers
v.
ACE AMERICAN INSURANCE
COMPANY, et al.,
Defendants.
OPINION & ORDER
This matter is before the Court for consideration of four pending motions. The Court
now considers the following filings: (1) Defendant Ace American Insurance Company’s
(“Ace”) motion for judgment on the pleadings (ECF No. 28), Plaintiff’s response in opposition
(ECF No. 34), and Ace’s reply (ECF No. 40); (2) Defendant Starr Technical Risks Agency,
Inc.’s (“Starr”) motion to dismiss (ECF No. 24), Plaintiff’s response in opposition (ECF
No.26), and Starr’s reply (ECF No. 33); (3) Plaintiff’s motion for declaratory judgment (ECF
No. 31), Ace’s response in opposition (ECF No. 37), and Plaintiff’s reply (ECF No. 42); and
(4) Ace’s cross-motion for partial summary judgment (ECF No. 38), Plaintiff’s response in
opposition (ECF No. 42), and Ace’s reply (ECF No. 45). For the reasons that follow, the Court
DENIES Ace’s motion for judgment on the pleadings (ECF No. 28), GRANTS Starr’s motion
to dismiss (ECF No. 24), GRANTS IN PART and DENIES IN PART Plaintiff’s motion for
declaratory judgment (ECF No. 31), and GRANTS IN PART and DENIES IN PART Ace’s
cross-motion for partial summary judgment (ECF No. 38).
1
I.
BACKGROUND
This case involves a dispute over the scope of coverage to which Plaintiff is entitled
under an insurance contract. The facts set forth below are summarized from Plaintiff’s Second
Amended Complaint.
Plaintiff, a chemical manufacturing company, occupied a building that was destroyed
by fire (the “Property”). At the time of the fire, Plaintiff was insured under policy number
EPRN05099663 (“the Policy”). It is undisputed that Ace is the insurer under the Policy;
however, the parties dispute whether Starr was also a party. The relationship between Plaintiff
and Starr is discussed in more detail below.
The parties do not dispute that the Policy was in effect at the time of the fire. The
parties similarly do not dispute that the Policy covers at least some damage caused by the fire.
The crux of this case is the extent of coverage to which Plaintiff is entitled under the Policy.
Plaintiff alleges that it complied with all terms and conditions of the Policy, yet was
denied full coverage thereunder. Plaintiff asserts claims of breach of fiduciary duty, breach of
contract, breach of the duty of good faith, and punitive damages, as well as two claims for
declaratory judgment, against both Defendants.
Plaintiff now moves for declaratory judgment on two relevant provisions of the Policy.
First, Plaintiff asserts that it is entitled to recovery under the Pollution Cleanup provision,
which provides coverage up to $50,000 (annual aggregate) to remove certain pollutants under
certain circumstances. (ECF No. 24-1, at 10, 19.) Second, Plaintiff asserts that the Court
should accept its interpretation of the Replacement Cost Endorsement. (ECF No. 24-1, at 28.)
Specifically, Plaintiff argues that it is entitled to a coinsurance calculation using the Property’s
actual cash value rather than its replacement cost value.
2
Also before the Court are Ace’s motion for judgment on the pleadings and Starr’s
motion to dismiss. The Court will consider those motions first.
II.
ANALYSIS
A. Ace’s Motion for Judgment on the Pleadings (ECF No. 28)
Ace moves for judgment on the pleadings pursuant to Federal Rule of Civil Procedure
12(c). Courts employ the same analysis in deciding a Rule 12(c) motion as they apply to
motions to dismiss under Rule 12(b)(6). Warrior Sports, Inc. v. Nat’l Collegiate Athletic
Ass’n, 623 F.3d 281, 284 (6th Cir. 2010). That is, a court must construe the pleading in the
opposing party’s favor, accept the factual allegations contained therein as true, and determine
whether those factual allegations present a plausible claim for relief. See Bell Atl. Corp. v.
Twombly, 550 U.S. 554, 570 (2007). In other words, “[f]or purposes of a motion for judgment
on the pleadings, all well-pleaded material allegations of the pleadings of the opposing party
must be taken as true, and the motion may be granted only if the moving party is nevertheless
clearly entitled to judgment.” JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 582 (6th
Cir. 2007) (internal citation and quotation marks omitted).
Ace asserts that it is entitled to judgment on the pleadings because Plaintiff failed to
meet a condition precedent to recovery under the Policy. Specifically, Ace argues that Plaintiff
failed to present its representatives for examinations under oath as the Policy requires. In
support of its argument, Ace attaches several emails and letters between the parties purportedly
proving that Plaintiff failed to make its representatives available. Ace posits that the Court can
consider those exhibits because they “are a part of the pleadings as they were referenced in
Defendant ACE’s Affirmative Defenses.” (ECF No. 28, at 6 n.1.)
3
Ace’s assertion that the Court may consider the emails and letters attached to its motion
is incorrect. Where, as here, a defendant files a Rule 12 motion, the court can consider the
complaint, public records, and documents central to the claim that are referenced in the
complaint. See, e.g., Basset v. Nat’l Collegiate Athletic Ass’n, 528 F.3d 426, 430 (6th Cir.
2008). The emails and letters attached to Defendant’s motion are neither referenced in the
Complaint nor central to Plaintiff’s claims. They are not public record. Those documents
therefore constitute matters outside the pleadings for purposes of this Rule 12 analysis.
Ace’s position that a Court deciding a Rule 12 motion can consider any exhibits a
defendant references or attaches to its answer borders on absurd. If that were the case, any
defendant could obtain judgment in its favor by attaching select evidence to its answer and then
moving for judgment on the pleadings. Ace attempts to support its argument by pointing out
that the term “pleadings” includes “both the complaint and answer,” but the Sixth Circuit has
made clear that the focus of a Rule 12(c) motion is on the pleadings “of the opposing party.”
JPMorgan Chase Bank, 510 F.3d at 582. Ace offers no authority to the contrary.
Because the exhibits attached to Ace’s motion fall outside the pleadings, the Court can
only consider them if it converts Ace’s motion to one for summary judgment. It declines to do
so. The Court therefore will consider Ace’s motion without reference to the exhibits it cites
and the information contained therein.
Ace argues that, even if the exhibits are excluded from the Court’s consideration, the
Court must still consider its allegations in its Answer and Affirmative Defenses in deciding
whether judgment on the pleadings is proper. Ace asserts that its allegations detailing
Plaintiff’s alleged noncompliance with the Policy trump Plaintiff’s conclusory allegation that it
complied with all terms and conditions under the Policy.
4
Ace’s position is directly at odds with the United States Supreme Court’s
pronouncement that a plaintiff need not plead facts negating an affirmative defense. Jones v.
Bock, 549 U.S. 199 (2007). Under Jones and established Sixth Circuit precedent, a court may
grant a Rule 12 motion on the basis of an affirmative defense only if that defense appears on
the face of the complaint. See id. at 215 (quoting Leveto v. Lapina, 258 F.3d 156, 161 (3d Cir.
2001)); Bishop v. Lucent Techs., Inc., 520 F.3d 516, 520 (6th Cir. 2008). Regardless of
whether Plaintiff’s allegation that it “complied with all terms and conditions of the Policy” is
conclusory, it certainly is not clear from the face of the Complaint that Plaintiff failed to meet a
condition precedent under the Policy that precludes it from recovery. Ace’s argument
therefore fails.
Consistent with Sixth Circuit authority that a Court considering a Rule 12(c) motion
must analyze the “pleadings of the opposing party,” the Court has examined Plaintiff’s
Complaint. Ace failed to demonstrate that the Complaint is deficient such that Ace is entitled
to judgment in its favor. Accordingly, the Court DENIES Ace’s motion for judgment on the
pleadings (ECF No. 28).
B. Starr’s Motion to Dismiss (ECF No. 24)
Starr filed a motion to dismiss pursuant to Rule 12(b)(6) for failure to state a claim
upon which the Court can grant relief. Starr argues that it is not a party to the Policy and
therefore cannot be liable for Plaintiff’s claims, all of which depend on a contractual
relationship between the insurer and its insured.
Plaintiff does not dispute that its claims are dependent on a contractual relationship. In
response to Starr’s motion, Plaintiff’s sole argument is that Starr is a party to the Policy.
5
Plaintiff does not cite any case law in its brief, choosing to rely instead on a common sense
interpretation of the Policy.
Because the Policy is referred to throughout and central to the Complaint, the Court can
consider it in analyzing this motion to dismiss. See Basset, 528 F.3d at 430. The Court
therefore must analyze the Policy to determine whether Starr is a party. See, e.g., Mengel Co.
v. Nashville Paper Prods. & Specialty Workers Union No. 513, 221 F.2d 644, 647 (6th Cir.
1955) (stating that, if a court considers an exhibit in deciding a motion to dismiss, the exhibit
itself, and not the party’s allegations about that exhibit, controls).
The Policy lists Ace—and Ace alone—as the “insurance company.” See ECF No. 241, at 11 (noting that Ace is hereinafter referred to as “This Company”). The Policy goes on to
state: “This Company agrees to insure (subject to all the terms conditions, limitations and
exclusions of this Policy)” the covered Property. (Id. at 23 (emphasis added).) At the end of
the document, the “Signature Page” lists Ace American Insurance Company and contains the
signatures of Ace’s Secretary and President. It is clear from the face of the Policy that Ace
agreed to insure Plaintiff’s Property.
Starr’s role in the Policy is much less direct. Starr is the underwriter of the Policy,
which was “issued at” Starr’s office in New York. (Id. at 1, 11.) The Policy appears to have
been drafted by Starr. See id. at 9–25 (the Declarations, General Conditions, and Property
pages are labeled “ST•AR 100 Declarations,” “ST•AR 200 General Conditions,” and “ST•AR
300 Property,” respectively). The Policy makes clear that all losses and notice must be
reported to Ace through Starr, and that only Starr can assign adjustors to process claims under
the Policy. (Id. at 17, 57.) Finally, the first page of the Policy is signed by one of Starr’s
managers with the signature block, “Signature of Authorized Agent.” (ECF No. 26-1, at 1.)
6
That page contains the header “ACE American Insurance Company” along with Ace’s address.
It is clear from the face of the Policy that Starr neither signed the document on its own behalf
nor made any promises to Plaintiff.
The Court agrees with Starr that it is not a party to the Policy. Under black-letter Ohio
law,1 a contract requires mutual assent and consideration. “Mutual assent means that both
parties to the contract must consent to its terms.” Fenix Enters., Inc. v. M&M Mort. Corp.,
Inc., 624 F. Supp. 2d 834, 841 (S.D. Ohio 2009). To be enforceable, each party’s duties under
the contract must be definite and certain. Rayess v. Educ. Comm’n for Foreign Med.
Graduates, 134 Ohio St. 3d 509, 2012-Ohio-5676, 983 N.E.2d 1267, at ¶19 (quoting Episcopal
Retirement Homes, Inc. v. Ohio Dept. of Indus. Relations, 61 Ohio St. 3d 366, 369, 575 N.E.2d
134 (1991)).
Starr did not assent or agree to anything under the Policy. Tellingly, although Plaintiff
references Starr’s “binding contractual duties,” (ECF No. 26, at 3), it does not point to any
provision in the Policy in which Starr promised anything. Instead, Plaintiff relies on the
circular argument that because it agreed to report claims to Ace’s agent, Starr, rather than to
Ace itself, Starr must have agreed to be a party to the Policy. But Starr made no such promise
to Plaintiff. Moreover, one cannot discern from the face of the Policy whether Starr is to
receive any benefit therefrom. Without being either a promisor or a promisee, and without
assenting to any clear and definite obligations, Starr cannot be considered a party to the Policy.
Starr’s role as the adjustor to whom claims must be reported under the Policy is
analogous to an individual adjustor that an insurance company assigns to its claims. The
individual adjustor is not a party to the insurance contract and therefore cannot be individually
liable for a breach of that contract. See Baker v. Nationwide Mut. Ins. Co., 9th Dist. No.
1
The parties agree that Ohio law governs the Court’s interpretation of the Policy.
7
12CA010236, 2013-Ohio-1856, at ¶¶13–16 (May 6, 2013) (affirming the trial court’s dismissal
of an individual adjustor’s motion to dismiss). The individual adjustor owes no duties, in his
or her individual capacity, to the insured. See id.; Johnson v. State Farm Ins. Co., 8th Dist. No.
75497, 1999 WL 1206603, at *3 (Ohio Ct. App. Dec. 16, 1999). Like the individual adjustor
in Baker, here, Starr is not a party to the Policy and has no contractual relationship with
Plaintiff.
Similarly, the fact that Starr acted as Ace’s agent in drafting and issuing the Policy does
not subject it to liability thereunder. See, e.g., Eaton v. Continental Gen. Ins. Co., 147 F. Supp.
2d 829, 837 (N.D. Ohio 2001) (“The well-settled rule in Ohio is that an agent who contracts
with a third party on behalf of a disclosed principal, and as the authorized agent of that
principal, is not personally liable on the contract.”). Plaintiff’s argument that Starr “is a
signing party,” (ECF No. 26, at 3), ignores the fact that Starr signed the Policy only in its
capacity as an “Authorized Agent” of Ace. (ECF No. 24-1.)
In short, it is Ace—and Ace alone—that “agree[d] to insure” Plaintiff’s Property. (ECF
No. 24-1, at 23.) Starr cannot be liable to Plaintiff for the alleged breach of contract, breach of
fiduciary duty, or breach of the duty of good faith. Because Starr is not a party to the Policy,
the remaining claims for punitive damages and declaratory judgment against Starr must also be
dismissed. The Court therefore GRANTS Starr’s motion to dismiss (ECF No. 24).
8
C. Plaintiff’s motion for declaratory judgment and Ace’s cross-motion for summary
judgment (ECF Nos. 31 & 38)
Plaintiff moves for declaratory judgment pursuant to 28 U.S.C. § 2201 and asks the
Court to interpret two provisions in the Policy.2 Courts in the Sixth Circuit consider five
factors in determining whether declaratory relief is appropriate:
(1) whether the declaratory action would settle the controversy; (2) whether
the declaratory action would serve a useful purpose in clarifying the legal
relations in issue; (3) whether the declaratory remedy is being used merely for
the purpose of “procedural fencing” or “to provide an arena for a race for res
judicata;” (4) whether the use of a declaratory action would increase friction
between our federal and state courts and improperly encroach upon state
jurisdiction; and (5) whether there is an alternative remedy which is better or
more effective.
Grand Trunk W. R. Co. v. Consolidated Rail Corp., 746 F.2d 323, 326 (6th Cir. 1984).
Specifically in the insurance context, the Sixth Circuit has stated that declaratory judgment is
proper where the question before the court “involves only the extent of the coverage of an
insurance policy and not the liability of the insured to the persons injured in the accident.” Am.
States Ins. Co. v. D’Atri, 375 F.2d 761, 763 (6th Cir. 1967) (quoting Md. Cas. Co. v. Faulkner,
126 F.2d 175, 178 (6th Cir. 1942)). In such a case, “the insurer is entitled to have the extent of
the coverage of its policy declared.” Id.
Ace does not argue that a declaratory judgment is inappropriate in this case. In fact,
although Ace styles its motion as one for “partial summary judgment,” it simply asks the Court
to adopt its (Ace’s) interpretations of the two contractual provisions at issue.
Because both parties essentially seek a declaratory judgment, and because such a
judgment will serve a useful purpose in clarifying the legal issues in this case and will
2
Ace argues that Plaintiff’s motion for declaratory judgment is procedurally defective because Plaintiff did not
ask for declaratory relief in its Complaint; however, because Plaintiff subsequently filed a Second Amended
Complaint including two counts for declaratory judgment, the Court will disregard Ace’s arguments regarding
procedural deficiencies.
9
potentially settle this controversy, the Court finds that declaratory judgment is proper. The
issue before this Court becomes one of contractual interpretation. Several well-settled rules of
contract construction are relevant to the Court’s analysis.
First, contract interpretation is a matter of law for the Court. Savedoff v. Access Grp.,
Inc., 524 F.3d 754, 763 (6th Cir. 2008). The purpose of contract interpretation is to ascertain
and effectuate the intent of the parties. Id. “The intent of the parties is presumed to reside in
the language they chose to use in their agreement.” Id. (citing Graham v. Drydock Coal Co.,
76 Ohio St. 3d 311, 313, 667 N.E.2d 949 (1996)). “Where the terms in a contract are not
ambiguous, courts are constrained to apply the plain language of the contract.” Id. (citing City
of St. Marys v. Auglaize Cty. Bd. of Commr’s, 115 Ohio St. 3d 387, 2007-Ohio-5026, 875
N.E.2d 561, at ¶ 18). “A court ‘is not permitted to alter a lawful contract by imputing an intent
contrary to that expressed by the parties’ in the terms of their written contract.” Id. (quoting
Westfield Ins. Co. v. Galatis, 100 Ohio St.3d 216, 2003-Ohio-5849, 797 N.E.2d 1256, at ¶ 12).
If a contract contains unclear or ambiguous language, a court should interpret that
language in accordance with Ohio’s rules of contract construction. See id. Under those rules, a
court must “ ‘attempt to reconcile contract terms and give effect to each term.’ ” ExportImport Bank of U.S. v. Advanced Polymer Sciences, Inc., 604 F.3d 242, 248 (6th Cir. 2010)
(quoting In re Graham Square, Inc., 126 F.3d 823, 830 (6th Cir. 1997)). Courts “should
attempt to harmonize all provisions in a contract rather than produce conflict in them.” Ottery
v. Bland, 42 Ohio App. 3d 85, 87, 536 N.E.2d 651 (10th Dist. 1987). Finally, “[i]f the
language in the contract is ambiguous, the court should generally construe it against the
drafter.” Savedoff, 524 F.3d at 764.
10
Special rules apply to the interpretation of insurance contracts. Clear and unambiguous
insurance contracts are to be interpreted in accordance with the rules stated above—that is, a
court must apply the clear and unambiguous terms to the facts without engaging in any
construction. Toledo-Lucas Cty. Port Auth. v. Axa Marine & Aviation Ins. (UK), Ltd., 368
F.3d 524, 530 (6th Cir. 2004). When an insurance contract is subject to more than one
interpretation, however, a court must “construe the terms strictly against the insurer and in
favor of the insured.” Id. (quoting King v. Nationwide Ins. Co., 35 Ohio St. 3d 208, 519
N.E.2d 1380, 1383 (1988)). In other words, “any reasonable construction which results in
coverage of the insured must be adopted.” Nationwide Mut. Ins. Co. v. Wright, 70 Ohio App.
3d 431, 434, 591 N.E.2d 362 (3d Dist. 1990) (quoting Sterling Merchandise Co. v. Hartford
Ins. Co., 30 Ohio App. 3d 131, 137, 506 N.E.2d 1192 (9th Dist. 1986)).
With those tenets in mind, the Court turns to the two provisions at issue.
1. Pollution Cleanup provision
The Court first addresses the Pollution Cleanup provision. That provision must be read
in conjunction with the Pollution Exclusion Clause, which states:
This Policy does not insure against loss caused by or resulting from the
release, discharge or dispersal of Pollutants on the Insured’s premises during
the term of this Policy unless the release, discharge or dispersal is caused by
fire, lightning, windstorm, hail, leakage from fire protective equipment,
explosion, aircraft, vehicles, smoke, sonic shock wave, riot, civil commotion
or vandalism. This Policy does not insure off-premises cleanup costs from
any cause and the coverage afforded by this clause shall not be construed
otherwise.
(ECF No. 24-1, at 19 (Conditions (e)), hereinafter referred to as “Exclusion Clause.”)
The Pollution Cleanup provision then clarifies the scope of coverage when the release,
discharge, or dispersal or Pollutants is caused by certain perils (including fire). The
Pollution Cleanup provision states, in its entirety:
11
This Policy is extended to cover the expenses actually incurred by the Insured
to cleanup and remove debris defined as a Pollutant and other Pollutants
from land or water on covered premises if the release, discharge, dispersal,
migration, or seepage of these substances results from any loss or damage
occurring during the term of this Policy caused by perils specified in the
“Pollution Exclusion Clause” herein subject to an annual aggregate sublimit
[of $50,000].
(Id. (Conditions (f)), hereinafter referred to as “Cleanup Provision” (emphasis added).)
The issue before this Court involves the Cleanup Provision’s use of the term “from land
or water.” The question is whether “from land or water” modifies the term “debris defined as a
Pollutant and other Pollutants” or just the term “and other Pollutants.” Stated differently, the
parties dispute whether the Cleanup Provision covers (1) expenses incurred to “remove debris
defined as a Pollutant” from a building or (2) whether it only covers expenses incurred to
“remove debris defined as a Pollutant . . . from land or water on covered premises.”
Plaintiff asserts that the fire caused “debris defined as a Pollutant” to be released/
discharged/ dispersed into its building. Plaintiff further asserts that it incurred costs to clean up
and/or remove that debris. Plaintiff posits that the Cleanup Provision should be interpreted as
follows: “This Policy is extended to cover the expenses actually incurred by the Insured to
cleanup and remove debris defined as a Pollutant [and other Pollutants from land or water] on
covered premises . . . .” Plaintiff’s proposed construction would read like this: “This Policy is
extended to cover the expenses actually incurred by the Insured to cleanup and remove debris
defined as a Pollutant . . . on covered premises.”
Ace interprets the Cleanup Provision to apply only to Pollutants removed “from land or
water.” Ace’s proposed construction would read like this: “This Policy is extended to cover
the expenses actually incurred by the Insured to cleanup and remove [debris defined as a
Pollutant and other Pollutants] from land or water on covered premises . . . .” Because Plaintiff
12
removed debris from its building, and not from land or water, Ace argues that Plaintiff is not
entitled to recovery under the Cleanup Provision.
In response to Ace’s argument, Plaintiff argues that there is no “land or water” on the
covered premises such that Ace’s proposed construction conflicts with the Policy’s definition
of the covered Property. Indeed, the “covered premises” under the Policy includes “all
buildings, tanks and structures of every description” located at “1795 Moler Road & 1840
Progress Avenue, Columbus OH 43207,” consisting of a “building,” “contents,” and
“combined [business income/extra expenses].” (Id. at 23, 44.) The Policy expressly excludes
from coverage all “[l]and, land values, landscaping, roads, lawns, trees, plants, shrubs,
standing timber, crops, atmosphere, any water course or body of water whether above or
below ground, or the restoration or replacement of any of the above.” (Id. at 13 (Property
Excluded(d)) (emphasis added).) The Exclusion Clause adds that the Policy “does not insure
off-premises cleanup costs from any cause and the coverage afforded by this clause shall not be
construed otherwise.”
Ace acknowledges that the Policy excludes “land” and “water” from coverage. Ace
asserts, however, that the Cleanup Provision “extends” coverage to “the cleanup and removal
of pollutants that had leached into the nearby soil or were discharged into a naturally occurring
body of water.” (ECF No. 38, at 18.)
Ace’s argument is unpersuasive. If pollutants “leached into nearby soil or were
discharged into a naturally occurring body of water” and Plaintiff attempted to invoke the
Policy, Ace could easily deny such a claim because “nearby soil” and “naturally occurring
bodies of water” are expressly excluded from coverage. See, e.g., ECF No. 24-1, at 13
(Property Excluded(d)).) Similarly, although Ace argues that the Cleanup Provision “extends”
13
coverage if the pollution results from certain causes, the Policy states that it “does not insure
off-premises cleanup costs from any cause.” (Exclusion Clause, ECF No. 24-1, at 19
(Conditions (e)).) Ace’s proposed construction therefore creates an inherent contradiction in
the scope of covered premises and the scope of coverage under the Cleanup Provision. Ace’s
proposed construction also creates a contradiction within the Cleanup Provision itself: it would
construe the provision to extend coverage to “cleanup and remove [pollutants] from [naturally
occurring] land or water on covered premises,” but there is no naturally occurring “land or
water” on the covered premises. Ace’s proposed construction simply makes no sense.
Plaintiff’s proposed construction, which would provide coverage for the removal of
“debris defined as a pollutant . . . on covered premises,” is the only construction that accounts
for the Policy’s definition of the property it covers. See Ottery, 42 Ohio App. 3d at 87 (stating
that a court is tasked with “attempt[ing] to harmonize all provisions in a contract rather than
produce conflict in them”). Although the Court acknowledges that Plaintiff’s proposed
construction creates a somewhat awkward reading of the Cleanup Provision, it is Ace—which
drafted the Policy through its agent, Starr—that could have clarified that language. The
Cleanup Provision therefore must be strictly construed against Ace. See Savedoff, 524 F.3d at
764.
Moreover, because Ace’s proposed construction would create a contradiction and
therefore an ambiguity, the Court must “construe the terms strictly against the insurer and in
favor of the insured.” Toledo-Lucas Cty Port Auth., 368 F.3d at 530. Plaintiff’s reading of the
Cleanup Provision, albeit awkward, is not unreasonable. Plaintiff’s proposed construction
therefore must be adopted. See Nationwide Mut. Ins. Co., 70 Ohio App. 3d at 434.
14
Finding that Plaintiff’s proposed construction must be adopted, the Court GRANTS
Plaintiff’s motion for declaratory judgment on this issue (ECF No. 31) and DENIES Ace’s
cross-motion for partial summary judgment on this issue (ECF No. 38).
2. Replacement Cost Endorsement
The parties dispute the meaning of the Replacement Cost Endorsement (“RCE”), which
is an optional benefit under the Policy that Plaintiff purchased. The RCE modifies the original
language in the Policy. To put the RCE in context, a brief description of the unmodified Policy
is necessary.
Both the Valuation clause and Coinsurance provision from the unmodified Policy are
relevant to this dispute. Under the Valuation clause, an insured’s loss of a building and other
structures was to be calculated at “Actual Cash Value” (“ACV”), which is defined as
“replacement cost less depreciation,” “unless otherwise endorsed hereon.” (ECF No. 24-1, at
15–16.) That means that, in the event Plaintiff’s building was lost, Ace would be responsible
for the building’s ACV (subject to other conditions in the Policy).
The Valuation clause must be read in conjunction with the Coinsurance provision,
which states:
It is expressly stipulated and made a condition of this Policy that the Insured
shall at all times maintain contributing insurance on each item of property
covered by this Policy to the extent of at least [90%] of the value required per
the terms and conditions of the Valuation Clause in this Policy at the time of
loss, and that failing to do so, the Insured shall to the extent of such deficit
bear his, or their proportion of any loss.
15
(Id. at 12.)3 Thus, under the unmodified Policy, Plaintiff was required to maintain coverage of
at least 90% of the Property’s ACV. If Plaintiff insured its Property at a number below 90% of
the Property’s ACV, Plaintiff would be penalized on its claims in proportion to the shortfall.
The RCE modifies the Valuation clause and Coinsurance provision. The RCE states, in
relevant part:
A. In consideration of the premium of the policy to which this endorsement is
attached and the following Coinsurance Clause being made a part of this
policy to apply to the above named coverage, which Coinsurance Clause
supersedes and replaces the Coinsurance Clause otherwise applicable
to such coverage, the provisions of this policy applicable only to such
coverage is amended to substitute the term “replacement cost” for the
term “actual cash value” wherever it appears in the policy, thereby
eliminating any deduction for depreciation, subject however, in all other
respects to the stipulations, limitations and conditions stated herein and in
the policy to which this endorsement is attached.
B. COINSURANCE CLAUSE
In consideration of the rate and/or form under which this policy is written,
it is expressly stipulated and made a condition of this contract that the
Insured shall at all times maintain contributing insurance on each
item of property, the replacement cost of which is covered by this
policy, to the extent of at least [90%] of the replacement cost (without
deduction for depreciation) at the time of the loss, and that failing to do
so, the Insured shall to the extent of such deficit bear his, her or their
proportion of any loss.
(ECF No. 24-1, at 28 (emphasis added).) Accordingly, under the RCE’s modification to the
Valuation clause, Ace was responsible for the building’s replacement cost value (“RCV”) in
the event of loss. Under the RCE’s Coinsurance Clause, which “supersedes and replaces” the
3
The term “coinsurance” means a relative division of the risk between the insurer and the insured. 15 Couch on
Ins. § 220:3 (3d ed. 2005). Specifically, “[c]oinsurance clauses are provisions in insurance policies that require
the insured to maintain coverage to a specified value of the property, and stipulate that, upon his or her failure to
do so, he or she becomes a coinsurer and must bear his or her proportionate part of the loss.” Id. “The intent of
coinsurance is to reward those who insure at close to full value and penalize those who insure at less than full
value.” Wetmore v. Unigard Ins. Co., 107 P.3d 123, 942 (Wash. Ct. App. 2005).
16
Policy’s original Coinsurance provision, Plaintiff was required to maintain coverage of at least
90% of the Property’s RCV in order to avoid a coinsurance penalty.
Complicating the issue is the RCE’s “Insured’s Election Clause.” That clause states:
D. INSURED’S ELECTION
The Insured may elect first to make claim under this policy in
accordance with its terms and conditions, disregarding this
endorsement, except that the Coinsurance Clause contained in this
endorsement and constituting part of the consideration therefore
applies to all claims under the above named item(s) and the Insured
may make further claim for any additional liability brought about by this
endorsement in accordance with its terms, conditions and limitations,
provides this Company is notified in writing within 180 days after loss of
the Insured’s intent to make such further claim.
(Id. (emphasis added).) The Insured’s Election Clause is the source of dispute in this case.
At the time of the fire, the Property’s ACV was $2,000,000. The Property’s RCV was
$3,500,000. Plaintiff insured the Property at $1,695,000. As such, it is undisputed that
Plaintiff underinsured the Property and would be subject to a coinsurance penalty under either
an ACV or RCV calculation. Logically, a coinsurance penalty calculated using RCV would be
substantially higher than a penalty calculated using ACV.
Because of that difference, Plaintiff elected to invoke the “Insured’s Election Clause,”
disregard the RCE, and file an ACV claim under the Policy. Plaintiff was of the belief that
filing an ACV claim would cause the coinsurance penalty to be calculated at ACV, thereby
subjecting Plaintiff to a lower coinsurance penalty. Plaintiff did not make any further claims
for additional liability brought about by the RCE.
Despite the fact that Plaintiff filed an ACV claim, however, Ace refused to calculate the
coinsurance penalty at ACV. Ace’s position is that, pursuant to the RCE’s plain language, the
coinsurance penalty is always calculated at RCV regardless of the type of claim the insured
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chooses to submit. Ace explains that, because Plaintiff purchased the RCE, the Policy was
underwritten (and the premium was calculated) at RCV. See ECF No. 38-1 (Aff. of Tim Drag).
The Coinsurance Clause (requiring the insured to coinsure its property at 90% of RCV) serves
to ensure the accuracy of the value on which the Policy was underwritten and the premium was
calculated. See id. Presumably, the Coinsurance Clause also requires the insured to coinsure
90% of the RCV of its Property because, even if the insured elects to submit an ACV claim
under the Insured’s Election Clause, it can still “make further claim for any additional liability”
brought about under the RCE. (ECF No. 24-1, at 28.)
Plaintiff makes three arguments in support of its position that the coinsurance penalty
should be calculated using ACV. First, Plaintiff argues that the RCE is ambiguous and
therefore must be strictly construed against Ace. Second, Plaintiff argues that the RCE is
illusory because, if the coinsurance penalty is always calculated at RCV, then the insured is
always incentivized to submit an RCV claim such that the Insured’s Election Clause serves no
purpose. Finally, Plaintiff argues that a contract that calculates an insurance company’s
liability at ACV but coinsurance at RCV is against public policy.
For the reasons set forth below, the Court rejects Plaintiff’s arguments and adopts
Ace’s interpretation of the RCE.
a. Ambiguity
Regarding Plaintiff’s first argument, the Court agrees with Ace that the RCE is not
ambiguous. The RCE’s Coinsurance Clause clearly and unequivocally states that the insured
must insure its property to at least 90% of the property’s RCV. (Id. (“[T]he Insured shall at all
times maintain contributing insurance . . . to the extent of at least [90%] of the replacement
cost . . . and that failing to do so, the Insured shall to the extent of such deficit bear his, her or
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their proportion of any loss.”).) This wording parallels the ACV Coinsurance provision in the
unmodified Policy, which Plaintiff agrees would have subjected it to a coinsurance penalty
calculated at ACV. Applying that same logic, the RCE’s Coinsurance Clause clearly subjects
Plaintiff to a coinsurance penalty calculated at RCV.
The RCE’s Coinsurance Clause “supersedes and replaces” the Coinsurance provision in
the unmodified Policy. (Id.) The RCE’s Insured’s Election provision then gives the insured an
option to “first” submit an ACV claim, subject to the RCE’s Coinsurance Clause, then make a
further claim for additional liability under the RCE. (ECF No. 24-1, at 28 (“The Insured may
elect first to make claim under this policy in accordance with its terms and conditions,
disregarding this endorsement, except that the Coinsurance Clause contained in this
endorsement and constituting part of the consideration therefore applies to all claims
under the above named item(s) . . . .”) (emphasis added).) Regardless of whether Plaintiff
elects to submit an RCV claim or proceed “first” with an ACV claim, it is clear that the RCE’s
Coinsurance Clause applies. Plaintiff cannot overcome the clear and unambiguous language
compelling the conclusion that, once the RCE is purchased, the coinsurance penalty is to be
calculated at RCV.
Plaintiff attempts to manufacture an ambiguity where none exists by highlighting the
phrase, “the Insured shall at all times maintain contributing insurance on each item of property,
the replacement cost of which is covered by this policy, to the extent of at least [90%] of the
replacement cost . . .”. (Id. (emphasis added).) But that phrase does not create an ambiguity.
Rather, the italicized phrase simply references the covered Property. Because the Insured’s
Election clause always allows the insured to seek RCV, even if it “first” submits an ACV
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claim, the RCE always “covers” the Property’s RCV. The italicized phrase does not, as
Plaintiff suggests, limit the Coinsurance Clause to only RCV claims.
The Court has reviewed the cases Plaintiff cites in support of its position; however,
none of those cases address the same contractual provisions at issue here. Those cases
therefore do not support Plaintiff’s contention that the RCE is ambiguous.
Finding that no ambiguity exists, the Court must apply the clear and unambiguous
terms of the RCE to the facts of this case without engaging in any construction. Toledo-Lucas
Cty Port Auth., 368 F.3d at 530; see also Florists’ Mut. Ins. Co. v. Ludi Greenhouse Mfg.
Corp., 521 F. Supp. 2d 661, 671 (S.D. Ohio 2007) (“[T]he general rule of liberal construction
cannot be used to create an ambiguity where one does not exist. If the terms of a policy are
clear and unambiguous, a court must enforce the contract as written, giving words used in the
contract their plain and ordinary meaning.” (quoting Monticello Ins. Co. v. Hale, 284 F. Supp.
2d 898, 901 (S.D. Ohio 2003))). Plaintiff’s arguments regarding special rules of construction
in the insurance context therefore do not apply.
b. Illusory Contract
The next issue is whether the Insured’s Election clause is illusory. Plaintiff argues that,
if coinsurance is always calculated at RCV, then the insured would never be incentivized to
submit an ACV claim. Plaintiff concludes that the benefit provided by the Insured’s Election
clause—the right to choose which type of claim to submit—is illusory.
“An insurance provision is illusory when it appears to grant a benefit to the insured,
though in reality it does not.” Beaverdam Contracting, Inc. v. Erie Ins. Co., 3d Dist. No. 1-0817, 2008-Ohio-4953, ¶ 49 (citing Coleman v. Progressive Preferred Ins. Co., 1st Dist. No. C070779, ¶ 13). “Courts are not inclined to give insurance provisions a meaning that would
20
render them illusory.” Id. (citing GNFH, Inc. v. W. Am. Ins. Co., 172 Ohio App. 3d 127, 873
N.E.2d 345, 2007-Ohio-2722, ¶ 133).
That does not mean, however, that an insurance contract will be disregarded whenever
it does not produce one party’s desired result. To the contrary, as stated above, a court must
construe an unambiguous insurance contract consistently with its plain language. ToledoLucas Cty Port Auth., 368 F.3d at 530. The Court may not rewrite the parties’ contract because
one party later decides it entered into a bad deal.
Applying those principles to this case, the Court agrees with Ace that, although Plaintiff
may not have gotten the benefit of the RCE in this instance, the RCE and its Insured’s Election
clause are not illusory. The Insured’s Election Clause clearly provides that Plaintiff could have
made a “further claim for any additional liability brought about by this endorsement” after it
submitted its ACV claim. (ECF No. 24-1, at 28.) Plaintiff therefore could have submitted an
ACV claim and then received an additional benefit under the RCE that it would not have
received under the unmodified Policy. The fact that Plaintiff “chose not to make any
additional claim for the RCV of any loss,” (ECF No. 31, at 2), does not mean that the
additional benefit does not exist.
Moreover, as Ace points out, this situation only arose because Plaintiff underinsured its
Property. Had Plaintiff insured its Property at 90% of the Property’s RCV, it would have
received the full benefit of the RCE, including the right to either submit an RCV claim or first
file an ACV claim plus a “further claim for any additional liability brought about by [the
RCE],” without suffering a coinsurance penalty. The fact that the coinsurance penalty reduced
or negated that benefit in this instance does not render the RCE illusory.
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Finally, the Court notes that the benefit provided to Plaintiff under the Insured’s
Election clause is not necessarily the right to choose whether to submit an ACV or RCV claim.
The Insured’s Election clause provides: “[t]he Insured may elect first to make [an ACV claim]
. . . and the Insured may make further claim for any additional liability brought about by this
endorsement . . . .” (ECF No. 24-1, at 28 (emphasis added).) The word “first” suggests that
the benefit under the Insured’s Election clause is not the right to choose between ACV and
RCV—it is the right to “first” submit and receive payment on an ACV claim before purchasing
replacement property and then submit a “further claim” for the difference. In other words, the
Insured’s Election clause contemplates that an insured will always seek to recover the
property’s RCV. It does not contemplate that an insured will only seek ACV and stop there.
Viewed under that lens, Plaintiff’s argument that it did not get the benefit of being able to
choose between ACV and RCV simply misconstrues the benefit that the Insured’s Election
clause provides.
c. Public Policy
Having found that the RCE is unambiguous and provides a benefit to Plaintiff, even if
that benefit was not recognized in this case, the Court can only disregard the RCE upon some
showing that it is illegal or against public policy. Plaintiff has made no such showing.
First, the Court notes that coinsurance clauses generally are valid under Ohio law. See,
e.g., Fry v. Walters & Peck Agency, Inc., 141 Ohio App. 3d 303, 313, 750 N.E.2d 1194 (6th
Dist. 2001). Indeed, in Fry, an Ohio court of appeals noted that coinsurance clauses “are
generally held enforceable in the absence of statutory prohibitions against them . . . [t]here is
no such statutory prohibition in Ohio, where coinsurance clauses are commonly included in
commercial insurance policies.” Id.
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Second, none of the cases Plaintiff cites stand for the proposition that a contract that
calculates coinsurance at RCV, even if the claim is calculated at ACV, is per se invalid. In
Buddy Bean Lumber Co. v. Axis Surplus Insurance Co., for example, the Eight Circuit Court of
Appeals interpreted a replacement cost endorsement that stated: “[Y]ou may make a claim for
loss or damage covered by this insurance on an actual cash value basis instead of a replacement
cost basis.” 715 F.3d 695, 698 (8th Cir. 2013). The court concluded that the coinsurance
provision in the original policy should be read in light of the type of claim (ACV or RCV) the
insured elected to submit. See id. at 699–700. But, importantly, the court found that “this
interpretation gives effect to the general object of the policy and the parties’ intent.” Id. at
700.4 That would not be true in this case, where the Policy expressly states that coinsurance is
calculated at RCV regardless of the type of claim the insured elects to submit.
This case is more analogous to Royal Property Group, LLC v. Prime Insurance
Syndicate, Inc., 706 N.W.2d 426 (Mich. Ct. App. 2005). In that case, the insurance contract
clearly stated that coinsurance would be calculated at RCV while the insurer’s liability would
be calculated using ACV. See id. at 711. The court first held that the language was clear and
unambiguous. See id. at 719. The court then held that such a provision was neither illusory
nor against public policy. See id. In upholding the policy as written, the court noted:
[The insured] essentially argues that the insurance policy should be reformed
because it is unfair to base coinsurance liability on the RCV of the property
while allowing [the insurer] to limit its liability to the ACV of the loss.
However, this Court cannot rely on litigants’ subjective views of fairness to
establish the public policy of this state.
Id. The Court agrees with the Royal Property Group court’s reasoning that an unfair result in
one instance does not invalidate a contract on public policy grounds.
4
The additional cases Plaintiff cites in its briefs address similar provisions as the one in Buddy Bean.
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As a final matter, the Court notes that Plaintiff’s public policy argument ignores the
public policy considerations on the other side of the equation. “[I]t has been stated that in
addressing public policy arguments, courts must be mindful that freedom to contract is
fundamental. An agreement freely entered into between the parties should not be lightly
disregarded unless it clearly contravenes an established public interest.” Core Funding Grp.,
L.L.C. v. McDonald, 6th Dist. No. L-05-1291, 2006-Ohio-1625, at ¶ 59 (internal citations
omitted).
Here, Plaintiff is a sophisticated commercial entity. Plaintiff was represented by
another sophisticated commercial entity, Partners Specialty Group, LLC, in negotiating the
Policy. (Aff. of Tim Drag, ECF No. 38-1.) Plaintiff agreed under the RCE to coinsure its
property at 90% of the Property’s RCV or risk suffering a coinsurance penalty. As such,
although policy considerations may support ignoring the RCE in this case, public policy also
supports upholding the contract to which Plaintiff agreed.
As a result of the foregoing, the Court concludes that Ace’s proposed construction of
the RCE must be adopted. The Court therefore GRANTS Ace’s cross-motion for partial
summary judgment on this issue and DENIES Plaintiff’s motion for declaratory judgment on
this issue.
III.
CONCLUSION
For the foregoing reasons, the Court takes the following action with respect to the four
pending motions in this case:
DENIES Ace’s motion for judgment on the pleadings (ECF No. 28);
GRANTS Starr’s motion to dismiss (ECF No. 24);
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GRANTS Plaintiff’s motion for declaratory judgment with respect to the
Pollution Cleanup Provision; DENIES Plaintiff’s motion for declaratory
judgment with respect to the Replacement Cost Endorsement (ECF No. 31);
DENIES Ace’s cross-motion for partial summary judgment with respect to the
Pollution Cleanup Provision; GRANTS Ace’s cross-motion for partial
summary judgment with respect to the Replacement Cost Endorsement (ECF
No. 38).
IT IS SO ORDERED.
/s/ Gregory L. Frost
GREGORY L. FROST
UNITED STATES DISTRICT JUDGE
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