Alley Theatre v. Hanover Ins. Co.
| Citation | 436 F.Supp.3d 938 |
| Decision Date | 31 January 2020 |
| Docket Number | Civil Action No. H-19-1987 |
| Parties | ALLEY THEATRE, Plaintiff, v. HANOVER INSURANCE CO., Defendant. |
| Court | U.S. District Court — Southern District of Texas |
Neal S. Manne, William RH Merrill, Chanler Ashton Langham, Susman Godfrey LLP, Houston, TX, for Plaintiff.
Chad William Schreiber, Christopher Alan Langston, Peri Hayriye Alkas, Phelps Dunbar LLP, Houston, TX, for Defendant.
Lee H. Rosenthal, Chief United States District Judge This is a post-Hurricane Harvey first-party property-damage insurance dispute over policy coverage and amounts for flood damage to Houston's downtown repertory theater, the Alley Theatre. Insurance disputes are rarely connected to the stuff of drama. The most famous1 drama is probably "Double Indemnity." That film did not deal with property damage, the more mundane side of the insurance business. But when, as here, the property-insurance dispute arises from a major hurricane that disrupted large parts of a huge city and destroyed much of its major repertory theater, the case acquires dramatic value.
The parties have cross-moved for partial summary judgment, presenting three issues: (1) whether the Alley's claim of lost-business income is subject to the Policy's $3 million Flood Endorsement Limit or to the $5 million Income Coverage Limit; (2) whether water damage caused by a sprinkler system that was broken when an interior wall collapsed due to the storm flood waters is subject to the Policy's $3 million Flood Endorsement Limit or to the almost $157 million Catastrophe Limit; and (3) whether the $3 million Flood Endorsement Limit applies if the damage was caused by a named storm, such as "Hurricane Harvey," or whether it is the Catastrophe Limit that applies.
Based on the complaint, the motions and responses, the summary judgment record, the applicable law, and oral arguments of counsel, the court grants the Alley's motion in part and denies it in part, and grants Hanover's motion in part and denies it in part. The court finds that, based on the facts taken as undisputed for this motion, as a matter of law:
(1) the Policy's $3 million Flood Endorsement Limit does not apply to the Income Coverage Part;
(2) flood was a proximate cause of the sprinkler-system leak and damage, making the Policy's $3 million Flood Endorsement Limit applicable to those damages; and
(3) the Named Storm Deductible Endorsement does not create a separate covered peril, making the Policy's Flood Endorsement Limit applicable to direct physical loss caused by flood, even if the loss resulted from a named storm.
As a result, the $5 million Income Coverage Limit applies to the lost-business income claim; the $3 million Flood Endorsement Limit applies to the sprinkler-system leak claim; and the fact that the storm had a name does not alter the Flood Endorsement's coverage.
The reasons for these rulings are set out below.
Hurricane Harvey hit the greater Houston area on August 25, 2017, causing extensive damage throughout the region. (Docket Entry No. 13 at 2). The Alley Theatre, located in downtown Houston, suffered severe flooding. (Id. at 3). The Alley alleges, that as flood water filled its basement, the water broke an interior concrete wall that, as it fell, hit and ruptured a fire-suppression sprinkler pipe, releasing nearly a million gallons of sprinkler-system water into the basement. (Id. ). The Alley had to stop its operations for several months and spend over $12 million to repair the theater. (Docket Entry No. 13 at 3–4). Hanover accepts these facts as true for the purposes of this motion. (Docket Entry No. 18-1 at 13).
The Alley was insured under an all-risk commercial-property insurance Policy, No. RHD 7499912 13, issued through the Hanover Insurance Company. (Docket Entry No. 13-2). The Policy's Schedule of Coverages has a $156,890,000 Catastrophe Limit, defined as "[t]he most [Hanover] will pay for any combination of or total of losses arising under one or more coverages in any one occurrence." (Id. at 11). The Schedule lists five coverage parts: Property; Income; Flood; Earthquake; and Optional Coverages and Endorsements. (Id. at 11–16).
The Policy covers "risks of direct physical loss unless the loss is limited or caused by a peril that is excluded." (Id. at 59). The Policy excludes "loss or damage caused directly or indirectly by one or more of the following excluded causes or events." (Id. ). Flood is listed as an excluded peril, except that the Policy does "cover the resulting loss if fire, explosion, or sprinkler leakage results." (Id. at 61). The Policy also contains a separate Flood Endorsement that overrides the excluded peril language on flood. (Id. at 82). The Flood Endorsement provides blanket flood coverage, limited to $3 million per occurrence, for "direct physical loss to covered property at ‘covered locations’ caused by ‘flood.’ " (Id. at 15, 82). Flood is defined as (Id. at 45).
The Income Coverage Part has a coverage limit of approximately $5 million for coverage "during the ‘restoration period’ when ‘your’ ‘business’ is necessarily wholly or partially interrupted by direct physical loss of or damage to property at a ‘covered location.’ " (Id. at 14, 74). The Income Coverage Part provides that its coverage "is also subject to the ‘terms’ and conditions in the Commercial Output Program – Property Coverage Part under the sections titled Agreement, Definitions, Property Not Covered, Perils Covered, Perils Excluded, What Must Be Done In Case of Loss, Loss Payment, and Other Conditions." (Id. at 74).
The Policy contains a Named Storm Deductible Endorsement as part of the Commercial Output Program. The Endorsement creates a one percent deductible and imposes a 96-hour waiting period for business income and extra-expense recovery when the damage results from a named storm. (Id. at 23).
After Hurricane Harvey hit, the Alley notified Hanover of the damage and worked closely with Hanover throughout the repair process. (Docket Entry No. 13 at 3). Hanover paid almost $7 million for the Alley's claim, including the $3 million required under the Flood Endorsement. (Docket Entry No. 14-2). Hanover denied its obligation to pay additional sums for business-interruption losses or for "property damage covered as sprinkler leakage and named storm in the property coverage part." (Docket Entry No. 13 at 3).
The Alley sued Hanover in Texas state court, asserting claims for breach of contract, breach of the Texas Insurance Code, and bad faith. (Docket Entry No. 1-A). Hanover timely removed, and the Alley filed its first amended complaint, which added a request for declaratory judgment. (Docket Entry No. 1; Docket Entry No. 4). The parties cross-moved for summary judgment on the legal issues of contract interpretation governing which limits apply. (Docket Entry No. 9).
The summary judgment record includes the Alley's insurance policy; the National Hurricane Center report on Hurricane Harvey; a National Public Radio story on Hurricane Harvey; an American Theatre report on Hurricane Harvey damage in Houston; the Alley's "Update on Harvey Recovery"; information on the sprinkler leak; photos of the Alley's damage; correspondence between the Alley's counsel and Hanover's counsel about the Alley's lost-business income; and the declaration of Andrew Norris, Hanover's Major Case Unit Manager of Marine Claims. (See Docket Entry No. 13-1; see Docket Entry No. 14-1).
The parties' arguments are described in detail below.
"Summary judgment is appropriate only when ‘the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’ " Shepherd on Behalf of Estate of Shepherd v. City of Shreveport , 920 F.3d 278, 282–83 (5th Cir. 2019) (quoting FED. R. CIV. P. 56(a) ). "A material fact is one that might affect the outcome of the suit under governing law," and "a fact issue is genuine if the evidence is such that a reasonable jury could return a verdict for the non-moving party." Renwick v. PNK Lake Charles, L.L.C. , 901 F.3d 605, 610 (5th Cir. 2018) (quotations omitted). The moving party "always bears the initial responsibility of informing the district court of the basis for its motion," and identifying the record evidence "which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
"Where the non-movant bears the burden of proof at trial, ‘the movant may merely point to the absence of evidence and thereby shift to the non-movant the burden of demonstrating’ " that "there is an issue of material fact warranting trial.’ " Kim v. Hospira, Inc. , 709 F. App'x 287, 288 (5th Cir. 2018) (quoting Nola Spice Designs, LLC v. Haydel Enters., Inc. , 783 F.3d 527, 536 (5th Cir. 2015) ). The moving party must demonstrate the absence of a genuine issue of material fact, but it need not need to negate the elements of the nonmovant's case. Austin v. Kroger Tex., L.P. , 864 F.3d 326, 335 (5th Cir. 2017). "If the moving party fails to meet [its] initial burden, [the summary judgment motion] must be denied, regardless of the nonmovant's response." Pioneer Expl., LLC v. Steadfast Ins. Co. , 767 F.3d 503, 511 (5th Cir. 2014) (quoting Kee v. City of Rowlett , 247 F.3d 206, 210 (5th Cir. 2001) ).
"When the moving party has met its Rule 56(c) burden, the nonmoving party cannot survive a summary judgment motion by resting on the mere allegations of its pleadings." Duffie v. United States , 600 F.3d 362, 371 (5th Cir. 2010). The nonmovant must identify specific evidence in the record and articulate how that evidence supports that party's claim. Willis v. Cleco Corp. , 749 F.3d 314, 317 (5th...
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...a similar contest over business-income coverage arising out of flooding from Hurricane Harvey. See Alley Theatre v. Hanover Ins. Co. , 436 F. Supp. 3d 938 (S.D. Tex. 2020) (Rosenthal, J.). Seven Acres argues Alley Theatre is particularly persuasive because it involved the same insurance com......