American Medical Imaging Corp. v. St. Paul Fire and Marine Ins. Co., 91-1128

• Decision Date: 26 November 1991
• Docket Number: No. 91-1128,91-1128
• Citation: 949 F.2d 690
• Parties: AMERICAN MEDICAL IMAGING CORP., Appellant, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY.
• Court: U.S. Court of Appeals — Third Circuit

Page 690

949 F.2d 690

21 Fed.R.Serv.3d 86

AMERICAN MEDICAL IMAGING CORP., Appellant, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY.

No. 91-1128.

United States Court of Appeals,

Third Circuit.

Argued July 10, 1991.

Decided Nov. 26, 1991.

Barry M. Klayman (argued), Wolf, Block, Schorr and Solis-Cohen, Philadelphia, Pa., for appellant.

Ronald B. Hamilton (argued), Jennifer Gallagher, Cozen and O'Connor, Philadelphia, Pa., for appellee.

Before STAPLETON, HUTCHINSON, and HIGGINBOTHAM, Circuit Judges.

OPINION OF THE COURT

STAPLETON, Circuit Judge:

This case involves the interpretation of a "business interruption" clause in an insurance contract. Appellant, American Medical Imaging Corporation ("AMIC"), brought suit against Appellee, St. Paul Fire and Marine Insurance Company ("St. Paul"), for lost earnings and extra expenses allegedly owed under the policy. The district court granted summary judgment in favor of St. Paul. AMIC in its appeal argues that the district court resolved disputed issues of material fact and misconstrued the policy, and that summary judgment was therefore improper. We agree and will reverse the district court decision.

I.

AMIC provides ultrasound testing services to physicians and health care institutions for the diagnosis of various diseases. The ultrasound procedures are performed at physicians' offices, joint venture sites, and other health care institutions. Scheduling, marketing, billing, and clerical functions are performed at AMIC's headquarters on Gibraltar Road in Horsham, Pennsylvania.

Early one morning in August of 1988, a fire at AMIC's headquarters resulted in smoke and water damage that allegedly made use of the facilities impossible. AMIC immediately rented space at an alternative site and relocated there the next day, securing telephone service by 1:00 o'clock in the afternoon. It did not return to its headquarters for approximately six weeks. During the period of relocation, AMIC had access to substantially fewer telephone lines than they had before the fire. In October of 1988, AMIC returned to its headquarters and resumed normal operations a few weeks later.

St. Paul had issued a commercial insurance policy to AMIC that was effective during the period of the fire and relocation. In addition to property damage coverage, the policy covered "lost earnings" and "extra expenses" incurred during a business interruption. The maximum amount recoverable for lost earnings and extra expenses under this provision was $500,000.

AMIC presented a claim for property damage that St. Paul has paid. AMIC also claimed $500,000 in lost earnings and extra expenses caused by the fire and relocation. The basis of this claim was an alleged substantial loss caused by the disruption of AMIC's telephone system. Because AMIC depended on that system for orders, scheduling, and preparation of written test reports, it claimed that the disruption of the system cost the company new and existing business. In a proof of loss statement sent to St. Paul, AMIC represented that its lost earnings amounted to nearly $1 million. The proof of loss also indicated that AMIC's extra expenses as a result of the relocation were $20,350.20. After St. Paul refused to honor the lost earnings and extra expenses claim, AMIC brought this action for $500,000 and for punitive damages under the Pennsylvania Unfair Insurance Practices Act.

St. Paul filed a motion for summary judgment. In that motion, St. Paul argued that the "cancellation of contracts" and "loss of market" exclusions in the policy barred AMIC's claim. In the alternative, St. Paul maintained that AMIC failed to submit a truthful proof of loss, which is a condition precedent to St. Paul's liability on the contract.

The district court granted summary judgment in favor of St. Paul. However, the court did not rule on the issues raised in St. Paul's motion. Instead, it held that the evidence that AMIC offered as proof of its lost earnings was "too speculative" and that AMIC could not establish damages with a reasonable degree of certainty. In addition, the district court concluded that AMIC's business operations had not been suspended within the meaning of the policy. As a result, the lost earnings and extra expenses claim failed, and St. Paul was entitled to judgment as a matter of law.

The district court had subject matter jurisdiction in this case under 28 U.S.C. § 1332, as the parties are of diverse citizenship and the amount in controversy exceeds $50,000. We review the final judgments of the district courts pursuant to 28 U.S.C. § 1291. In cases where the district court has granted summary judgment, our review is plenary.

II.

Initially, we address the question of whether AMIC suffered a "necessary or potential suspension" of operations within the meaning of the insurance policy. The policy states:

We'll pay your actual loss of earnings as well as extra expenses that result from the necessary or potential suspension of your operation during the period of restoration caused by direct physical loss or damage to property at a covered location. The loss or damage must occur while this coverage is in effect and must be due to a covered cause of loss.

We'll pay your earnings and extra expense loss from the date the property is damaged until the earliest of the following:

. the date you resume normal business operations;

. as long as it should reasonably take to repair, rebuild or replace the damaged property, plus 30 consecutive days; or

. 12 months, regardless of your policy's expiration date.

App. at 15A.

Although the policy does not define "necessary or potential suspension," it does define "operation" to mean "the kind of business activities that occur at the covered location." Because AMIC conducted the same kind of business activities at its replacement facility, the district court concluded that these two provisions of the policy, read together, indicate that AMIC's alleged loss is not a covered one. American Medical Imaging Corp. v. St. Paul Fire and Marine Insurance Co., No. 90-3677, slip op. at 8, 1991 WL 8885 (E.D.Pa. Jan. 24, 1991).

In response to St. Paul's summary judgment motion, AMIC established that it had evidence tending to show the following: (1) at the normal opening of business on the day following the fire, damage to the property made it impossible for AMIC to continue its business at its Gibraltar Road office; (2) faced with its inability to function at its fire-damaged location, AMIC promptly made temporary arrangements for alternative space and secured telephone service, albeit unsatisfactory service, at 1:00 p.m. on the afternoon after the fire; (3) in the course of making these alternative arrangements, AMIC incurred extra expenses; and (4) primarily because of the reduced telephone capacity at the temporary location, AMIC earned less from its activities than it would have doing business as usual in its Gibraltar Road location.

If a trier of fact believes AMIC's evidence, we conclude that the alleged loss would be a covered one. According to its version of the facts, AMIC experienced a "necessary suspension" of its business operations briefly on the morning following the fire. Moreover, on that morning, it faced a "potential suspension" of a much longer duration. Fortunately for AMIC and St. Paul, AMIC acted promptly to mitigate its loss and managed to make arrangements to conduct its business on a scaled-down basis at an alternative site. As a result of that "necessary suspension" and that "potential suspension," St. Paul was required to indemnify AMIC for any lost earnings or extra expenses arising from such suspensions during the period up to the date upon which AMIC was able to resume its normal business operations at the Gibraltar Road site, i.e., the covered location.

Under the district court's construction of the policy, the insured would have no motivation to mitigate its losses. Continuing in business at any level would bar recovery because the insured would be carrying on the same kind of activities that occurred at the covered location. We decline to accept the suggestion that this was the intent of the parties. Indeed, other provisions of the policy bear witness to a contrary intent. For example, the policy imposes on the insured an affirmative duty to mitigate its losses:

If you can reduce your loss by resuming operations at the covered location or elsewhere by using damaged or undamaged property ... you agree to do so.

App. at 16. Under the district court's reading, this provision would have imposed upon AMIC a duty, the performance of which would have forfeited its right to recover under the policy. We are confident that such an anomalous result was not intended and choose to read the policy terms regarding St. Paul's duty to indemnify as consistent with AMIC's duty to mitigate. Moreover, as appears from the earlier quoted portion of the policy, St. Paul's obligation to indemnify continues until the resumption of "normal business operations." This necessarily implies that the obligation to indemnify can arise while business continues, albeit at a less than normal level. App. at 15A.

III.

The district court's alternative basis for its summary judgment favoring St. Paul was its conclusion that AMIC's evidence of "lost earnings" and "extra expenses" was too speculative to support a recovery. We again disagree.

We note at the outset that the existence in the record of any evidence on AMIC's loss or the extent thereof is purely fortuitous. Because St. Paul's summary judgment motion did not point to proof of loss as an area in which AMIC's evidence was fatally deficient, there was no reason for AMIC to put any evidence of loss in the summary judgment record. Because...