Duane Reade, Inc. v. St. Paul Fire

• Decision Date: 22 June 2005
• Docket Number: Docket No. 03-9064.
• Citation: 411 F.3d 384
• Parties: DUANE READE INC., Plaintiff-Counter-Defendant-Appellee, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant-Counter-Claimant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

411 F.3d 384

DUANE READE INC., Plaintiff-Counter-Defendant-Appellee, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant-Counter-Claimant-Appellant.

Docket No. 03-9064.

United States Court of Appeals, Second Circuit.

Argued June 14, 2004.

Decided June 22, 2005.

COPYRIGHT MATERIAL OMITTED

Charles Fried (Shaw Pittman LLP, Lon A. Berk, Edward J. Grass, Charles A. Cowan, and Stephanie P. Manson, McLean, VA, on the brief), Cambridge, MA, for Appellant.

James W.B. Benkard, Davis Polk & Wardwell (Carolina C. De Onis, Michael Farbiarz, and Jeffrey Brown, on the brief), New York, NY, for Appellee.

Before: WALKER, Chief Judge, B.D. PARKER and WESLEY, Circuit Judges.

JOHN M. WALKER, JR., Chief Judge.

This case involves an insurance dispute arising from the destruction of the World Trade Center by terrorists on September 11, 2001 ("9/11"). Plaintiff-appellee Duane Reade, Inc. ("Duane Reade"), which up until that day had operated its most profitable drugstore in the main concourse of the World Trade Center ("WTC"), filed this action against its insurer defendant-appellant St. Paul Fire & Marine Insurance Co. ("St.Paul"), seeking, inter alia, a declaratory judgment that its recovery for business interruption losses caused by the store's destruction will continue until the entire WTC complex is rebuilt. St. Paul countered that Duane Reade's business interruption coverage terminated 21 months after 9/11, the time St. Paul claims was reasonably necessary for Duane Reade to relocate its store to a new location and resume operations.

The United States District Court for the Southern District of New York (Jed S. Rakoff, Judge), issued a decision declaring, in part, that Duane Reade's recovery of business interruption losses would continue for the hypothesized time it would take for Duane Reade to rebuild its store and that "[o]nce Duane Reade could resume functionally equivalent operations in the location where its WTC store once stood, the [recovery for business interruption losses] would be at an end." Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F.Supp.2d 235, 239 (S.D.N.Y.2003) ("Duane Reade II"). For the following reasons, we modify the district court's judgment to, inter alia, (1) eliminate any reference to "the location where [the] WTC store once stood," and (2) change "functionally equivalent operations" to "operations." Id. The judgment of the district court, as modified, is AFFIRMED.

BACKGROUND

The relevant facts are straightforward and undisputed. Duane Reade owns and operates more than 200 drugstores in and around New York City, including 124 in Manhattan. Prior to 9/11, its single most profitable store occupied leased premises on the main concourse of the WTC. On 9/11, Duane Reade was insured under a $150 million property insurance policy written by St. Paul that covered (1) losses caused by damage or destruction to "Real and Personal Property," defined as all of Duane Reade's own property as well as any other property in Duane Reade's "care, custody, or control" or for which Duane Reade was legally liable; (2) several specified coverages, referred to as "Time Element" coverages, that indemnify Duane Reade for losses that arise initially from damage or destruction to Real and Personal Property, but which increase with the passage of time; and (3) certain "Extensions of Coverage" and supplemental coverages.

At issue in this appeal is the Time Element coverage for business interruption ("BI"), which indemnifies Duane Reade for lost earnings and expenses if Duane Reade's business is partially or totally interrupted as a result of a covered property damage. The parties dispute the measure of time during which Duane Reade may recover for BI losses stemming from the destruction of the WTC store. The relevant valuation provision, entitled "PERIOD OF RESTORATION AND/OR INDEMNITY," provides that recovery of BI losses "shall not exceed such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace such property that has been destroyed or damaged" (the "Restoration Period").

St. Paul asserts that it began to adjust Duane Reade's claim soon after 9/11 and has already paid Duane Reade for all of its property damage and business interruption losses. As to the latter, it paid $9.8 million to cover 9 months of lost profits "to locate, furnish and open a new drug store," and an additional 12 months of profits to compensate for the lowered profits Duane Reade is likely to receive once its store reopens.

Duane Reade, not surprisingly, takes a different position: it rejects the premise underlying St. Paul's calculations that coverage for business interruption losses extended only until Duane Reade could relocate its WTC store to an alternative location. Duane Reade therefore filed an action for breach of contract and a declaratory judgment in which it asserted that

the Restoration Period consists of the actual time period that would, or will, be required to restore Duane Reade's operations to the kind, quality, and level which existed at the WTC Store prior to the terrorist attacks and that such Restoration Period is coterminous with the time necessary to rebuild the complex which will replace the World Trade Center.

As an initial matter, the district court dismissed Duane Reade's breach of contract claim as premature and denied St. Paul's motion to either dismiss the action or compel appraisal in accordance with the policy. Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 261 F.Supp.2d 293 (S.D.N.Y.2003) ("Duane Reade I"). It then issued a declaratory judgment construing the policy's business interruption coverage. Duane Reade II, 279 F.Supp.2d at 235. The district court rejected as overly restrictive St. Paul's position that the "the period of restoration should last only so long as it would take Duane Reade to build a `replacement' store somewhere in the vicinity of the former World Trade Center." Id. at 238 n. 4. In the district court's view, "such an interpretation would ... be unreasonable, [because] it finds no support in the plain language of the Policy and... it would render superfluous the other clauses requiring mitigation of damages." Id.

But the district court also rejected as "untenable" Duane Reade's expansive reading "that the Restoration Period must be coterminous with the time actually required to rebuild the entire complex that will replace the World Trade Center." Id. at 239. Instead, the district court held, the proper reading of the policy fell somewhere in between the parties' views, such that the Restoration Period was to be measured by the "hypothetical or constructive (as opposed to actual) time frame for rebuilding ... the WTC store itself, not the entire complex that once surrounded it," and that the Restoration Period would end "[o]nce Duane Reade could resume functionally equivalent operations in the location where its WTC store once stood." Id. (internal citation omitted).

Following a bench trial to resolve other issues and the entry of final judgment, St. Paul filed this appeal challenging the district court's declaration.

DISCUSSION

St. Paul's primary contentions on appeal are that (1) the district court erred in tying the "hypothesized time" of the Restoration Period to the time required to rebuild Duane Reade's store "at the location where its WTC store stood"; and (2) the Restoration Period continues until Duane Reade resumes "functionally equivalent" operations. We agree and modify the district court's declaration accordingly.

St. Paul also argues that (3) the district court lacked jurisdiction over this declaratory judgment action; (4) Duane Reade's action was barred because it failed to submit a proof-of-loss statement or submit to an appraisal; (5) the district court erred in denying St. Paul's motion to compel appraisal; (5) the district court's declaration was internally inconsistent because it tied the duration of the BI coverage to both the rebuilding of Duane Reade's store and Duane Reade's resumption of operations; and (6) Duane Reade's asserted BI losses are barred in any event because they result from the elimination of a consumer market in the area of the World Trade Center, a peril expressly excluded under the policy. Each of these arguments is meritless.

I. Standards of Review

We review a district court's decision of whether to exercise jurisdiction over a declaratory judgment action deferentially, for abuse of discretion. See Wilton v. Seven Falls Co., 515 U.S. 277, 289, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995); see also Dow Jones & Co. v. Harrods Ltd., 346 F.3d 357, 359 (2d Cir.2003) (per curiam) (district courts have "a broad grant of discretion to ... refuse to exercise jurisdiction over a declaratory action that they would otherwise be empowered to hear"). Such abuse will be found only if the district court" `bases its ruling on a mistaken application of the law or a clearly erroneous finding of fact.'" United States v. Couto, 311 F.3d 179, 185 (2d Cir.2002) (quoting Milanese v. Rust-Oleum Corp., 244 F.3d 104, 110 (2d Cir.2001)). The standard for ripeness in a declaratory judgment action is that "there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Maryland Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273, 61 S.Ct. 510, 85 L.Ed. 826 (1941).

The district court's decision on the merits of the parties' insurance dispute presents pure questions of law — construction of the St. Paul policy to determine the contractual rights and responsibilities of the parties — that we review de novo. See Comm'l Union Ins. Co. v. Flagship. Marine Servs., Inc., 190 F.3d 26, 30 (2d Cir.1999).

II. Case or Controversy

As an initial matter, St. Paul asserts that the district court lacked jurisdiction to issue any ruling because there was no certainty that the case presented an...