Parks Real Estate v. St. Paul Fire

• Decision Date: 21 December 2006
• Docket Number: Docket No. 05-5890-CV.
• Citation: 472 F.3d 33
• Parties: PARKS REAL ESTATE PURCHASING GROUP, Parks Associates Real Estate, Inc., Parks & Associates Real Estate Ltd., Mazal Group, L.L.C., Parks Associates Real Estate, and Newmark & Company Real Estate, Plaintiffs-Appellants, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant-Appellee, and National Union Fire Insurance Company of Pittsburgh and Great Northern Insurance Company, Defendant.
• Court: U.S. Court of Appeals — Second Circuit

472 F.3d 33

PARKS REAL ESTATE PURCHASING GROUP, Parks Associates Real Estate, Inc., Parks & Associates Real Estate Ltd., Mazal Group, L.L.C., Parks Associates Real Estate, and Newmark & Company Real Estate, Plaintiffs-Appellants, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant-Appellee, and National Union Fire Insurance Company of Pittsburgh and Great Northern Insurance Company, Defendant.

Docket No. 05-5890-CV.

United States Court of Appeals, Second Circuit.

Argued: June 22, 2006.

Decided: December 21, 2006.

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Joshua L. Mallin (Lisa N. Wall, on the brief), Weg & Myers, PC, New York, NY, for Plaintiffs-Appellants.

Lon A. Berk (Syed S. Ahmad, on the brief), Hunton & Williams, LLP, McLean, VA, for Defendant-Appellee.

Before: MINER and CALABRESI, Circuit Judges, and RESTANI, Chief Judge, U.S. Court of Int'l Trade.^*

MINER, Circuit Judge:

Plaintiffs-appellants Parks Real Estate Purchasing Group, Parks Associates Real Estate, Inc., Parks & Associates Real Estate Ltd., Parks Associates Real Estate, Mazal Group, LLC, Newmark & Company Real Estate (collectively, "Parks") appeal from a summary judgment entered in the United States District Court for the Southern District of New York (Preska, J.). The action was brought to recover under a first-party property insurance contract (the "Policy") between Parks and defendant-appellee St. Paul Fire and Marine Insurance Company ("St.Paul"). Among the properties insured by the Policy was a building at 90-100 John Street in New York City (the "Building" or "Property"). On September 11, 2001, as a result of the World Trade Center collapse, a cloud of noxious particulate matter spread throughout the downtown New York City area where the insured Building is located. The particulate matter apparently penetrated the Building and settled in its mechanical and electrical systems. In this action, Parks also sought to recover on claims against defendants National Union Fire Insurance Company of Pittsburgh, Pennsylvania, and Great Northern Insurance Company under policies of insurance issued by those companies, but those claims were dismissed. Following discovery, St. Paul submitted a motion for summary judgment, arguing that Parks' claims for damage to the insured Building were foreclosed by the contamination exclusion in the Policy. Parks argued that the damage to the insured Building was not caused by contamination within the meaning of the contamination exclusion provision.

In granting summary judgment in favor of St. Paul, the District Court determined that the particulate matter from the World Trade Center collapse created a condition of impurity that rendered the building unfit for use by the introduction of unwholesome elements. The court determined this damage was properly considered contamination for purposes of the contamination exclusion clause in the Policy, and St. Paul was entitled to deny coverage for the loss claimed by Parks. The District Court also found that the dominant efficient cause of the loss was not the collapse of the World Trade Center but the infiltration of the building by the particulate matter created by the collapse. For the reasons that follow, we vacate the judgment of the District Court and remand for further proceedings consistent with this opinion.

BACKGROUND

The collapse of the World Trade Center Twin Towers occasioned by the terrorist attack of September 11, 2001 caused a cloud of particulate matter consisting of the pulverized contents of the fallen Towers to spread throughout downtown Manhattan. The pulverized contents included "hydroxyls (high pH), chlorides, sulfates, organics, asbestos, lead, mercury, cadmium, quartz, beryllium, and mineral wood." The insured Building was located a few blocks from the World Trade Center.

At the time of the September 11 attack, the Policy provided that St. Paul would "[p]rotect covered property against risks of direct physical loss or damage except as indicated in the Exclusions — Losses We Won't Cover section." Relevant to this appeal, the Policy went on to state in pertinent part that St. Paul would cover the Parks' "financial interest in the covered building or structure," and, specifically, "machinery and equipment that are a permanent part of a building and are used to provide building services such as elevators and heating equipment." Also covered were "fixtures or yard fixtures," property owned "to service or maintain" the insured building, and "construction materials, supplies, and equipment" intended to be used for repairing, modifying, or expanding the insured building.

The exclusions listed in the Policy included the contamination exclusion, which stated that "[St. Paul would not] cover loss or damage caused by or made worse by any kind of contamination of . . . products or property covered by this insuring agreement. If a loss not otherwise excluded results, [St. Paul will] pay for that resulting loss." Further, the Policy contained an exclusion entitled "Wear — tear — deterioration — animals" (the "Wear and Tear Exclusion"), which provided, in material part, that: "[St. Paul will not] cover loss caused or made worse by . . . corrosion." Also listed in the Policy was a mechanical breakdown exclusion (the "Mechanical Breakdown Exclusion"), providing that St. Paul would not cover loss of "covered property caused or made worse by mechanical breakdown or failure."

On September 18, 2001, Parks provided St. Paul with a Proof of Loss, notifying St. Paul that the insured Building had sustained damage in the amount of $16,594,118.00 and a business interruption loss in the amount of $1,791,002.34. Parks claimed that the insured Building had sustained severe and extensive damage resulting from the collapse of the World Trade Center. Specifically, Parks claimed that the cloud of particulate matter and dust infiltrated the interior and exterior of the Property. This damage, according to Parks, was in the form of "corrosion, destruction, excessive wear, increased maintenance and repair of the architectural façade, mechanical, electrical, structural and Heat Ventilation and Air Conditioning (`HVAC') systems and other equipment and machinery including computers and related hardware pertaining to and comprising the . . . Property and its surrounding environs."

Shortly after receipt of the notice of proof of loss, St. Paul investigated the claim and eventually advanced a payment of $1,915,914 to Parks. Parks contended that this payment did not fully cover its losses and that St. Paul had breached the Policy. Accordingly, Parks filed its Complaint in the Supreme Court of the State of New York, County of New York, on January 15, 2004, seeking to recover the balance of its loss — more than sixteen-million dollars. After interposing its Answer to the Complaint, St. Paul filed a Notice of Removal, by which it succeeded in removing the case to the United States District Court for the Southern District of New York.

In its Complaint, Parks alleged that the "particulate matter from the [World Trade Center] infiltrated much of the . . . Property causing damage in the form of erosion, corrosion, destruction, excessive wear, increased maintenance and repair of the architectural façade, mechanical, electrical, structural and Heat Ventilation and Air Conditioning (`HVAC') systems and other equipment and machinery including computers and related hardware pertaining to and comprising the . . . Property and its surrounding environs." Parks alleged that "the elevators, electrical and mechanical systems of its property . . . have been damaged and will continue to be damaged."

On December 15, 2004, following discovery, St. Paul moved for summary judgment, arguing inter alia that the alleged damage was "contamination," and, therefore, that the damage Parks suffered was excluded from coverage under the Policy, pursuant to the Contamination Exclusion. In St. Paul's motion for summary judgment, it also argued that the Policy's "Mechanical Breakdown" and "Wear and Tear" exclusions also barred coverage of Parks' losses.

Parks argued to the District Court in its memorandum of law in opposition to St. Paul's motion for summary judgment that two independent reasons required denial of summary judgment: (1) the Contamination Exclusion is ambiguous, and the damage sustained was not properly considered caused by contamination in any event; and (2) the efficient cause of the damage was the collapse of the World Trade Center, a covered peril under the Policy.

In opposition to St. Paul's motion for summary judgment, Parks referred to the report (the "Report") prepared by Parks' expert, the RJ Lee Group ("RJ Lee"), describing the causes of damage to the insured Building. RJ Lee was retained by Parks to investigate the physical and environmental condition of the Property. In the Report, RJ Lee concluded that the particulate matter from the World Trade Center collapse has an "unprecedented complexity and is pervasively found in all building systems and components, and presents an ongoing source of re-entrainment and thus damage to cleaned or newly installed mechanical systems." The Report included the following findings:

The corrosive, abrasive, and hazardous material includes[,] but is not limited to, hydroxyls (high pH), chlorides, sulfates, organics, abestos, lead, mercury, cadmium, quartz, beryllium, and mineral wool, and was found on all floors and in all building systems sampled, in concentrations substantially in excess of those found in non-impacted buildings. Many of these substances are known toxins or carcinogens individually: little is known about the magnitude of the collective threat to human health, except that it will be greater than the threat from the individual substances. In the Building's current condition, accelerated cleaning programs will need to be employed to ensure that long-term risk to occupants is minimized.

RJ Lee also noted in its Report...