Duane Reade, Inc. v. St. Paul Fire & Marine Ins.

• Decision Date: 20 August 2003
• Docket Number: No. 02 CIV. 7676(JSR).,02 CIV. 7676(JSR).
• Citation: 279 F.Supp.2d 235
• Parties: DUANE READE, INC., Plaintiff, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

279 F.Supp.2d 235

DUANE READE, INC., Plaintiff, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, Defendant.

No. 02 CIV. 7676(JSR).

United States District Court, S.D. New York.

August 20, 2003.

James W.B. Benkard, Esq., Carolina C. De Onis, Esq., Michael Farbiarz, Esq., Davis Polk & Wardwell, New York City, for Plaintiff.

Michael S. Levine, Esq., Lon A. Berk, Esq., Erik Matthew Figlio, Esq., John P. Malloy, Esq., Charles A. Cowan, Esq., Edward J. Grass, Esq., Shaw Pittman, LLP, McLean, VA, for Defendant.

MEMORANDUM ORDER

RAKOFF, District Judge.

Confirming the Court's telephonic rulings of June 13, 2003 and letter to counsel dated July 8, 2003, defendant's motion for summary judgment is denied in its entirety and plaintiff's motion for summary judgment is granted in part and denied in part, as set forth below. Additionally, defendant's motion to submit the "number of years" calculation to an appraiser is granted.

By way of background, this case concerns insurance coverage for a drugstore (the "WTC store") that plaintiff Duane Reade, Inc. ("Duane Reade") operated in the retail concourse of the World Trade Center prior to September 11, 2001. After the World Trade Center was destroyed, Duane Reade sought to recover under an insurance policy (the "Policy") issued by defendant St. Paul Fire & Marine Insurance Company ("St. Paul"). When the parties were unable to resolve a dispute concerning the scope of the Policy's coverage for "business interruption losses," Duane Reade brought this action, seeking both declaratory relief as to the scope of coverage and damages for breach of contract. St. Paul responded by moving to dismiss all the claims, but while the Court dismissed the contract claims as premature (because no proof of loss had been filed), it allowed the declaratory judgment claims to proceed. See Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 261 F.Supp.2d 293 (S.D.N.Y.2003).¹

Following discovery, the parties each moved for summary judgment. Their submissions show that St. Paul does not dispute that the destruction of the WTC store was caused by a covered peril. Indeed, St. Paul has already satisfied Duane Reade's property loss claims. Moreover, although St. Paul now disputes that any monies are due for business interruption losses, previously, in May of 2002, St. Paul paid Duane Reade $9,863,853 to cover what it then perceived to be Duane Reade's business interruption losses.²

Nonetheless, genuine disputes remain over the scope of the business interruption coverage, some of them resolvable as a matter of law. The Policy as a whole covers losses at all Duane Reade stores for the period between October 1, 2000 and October 1, 2001 and has a coverage limit of $150 million. The provision dealing with business interruption losses extends coverage to:

[t]he interest of the Assured in loss of earning (Business Interruption), including ordinary payroll, continuing expenses, loss of royalties and bonus programs as a result of an interruption of the Assured's business (either partial or total) if such interruption is a result of peril, not excluded under this policy, causing direct physical loss or damage to any Real or Personal Property whether insured or not ... including but not limited to loss or damage to ... property of the Assured, ... and property of customers, property of customers of customers.

Declaration of Erik M. Figlio, dated April 11, 2003 ("Figlio Decl."), Ex. A (Policy), at 4. Such coverage, however, does not extend into the indefinite future but is limited by "Restoration Period" clauses, which provide in relevant part as follows:

PERIOD OF RESTORATION AND/OR INDEMNITY

The measure of recovery or period of indemnity 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, and shall commence with the date of such destruction or damage and shall not be limited by the date of expiration of this policy.

* * * * * *

Resumption of Operations: As soon as practicable after any loss, the Assured shall resume complete or partial business operations and reduce or dispense with such additional charges and expense as are being incurred.

* * * * * *

Extended Recovery Period

This policy is extended to cover the Actual Loss Sustained by the Assured resulting from interruption of business for such additional length of time as would be required with the exercise of due diligence and dispatch to restore the Assured's business to the condition that would have existed had no loss occurred commencing with the latter [sic] of the following dates:

a) the date on which liability of the Company of loss resulting from interruption of business would terminate if the clause had not been attached to this policy or

b) the date on which repair, replacement, or rebuilding of such part of the property as has been damaged is actually replaced, but in no event for more than twelve months from said later commencement date.

Id. at 17-21. Also, the Policy specifically excludes coverage for "loss or damage caused by ... loss of market[.]" Id. at 9.

The principal coverage issue presented by the instant motions concerns how these clauses should be interpreted in determining the length of the Restoration Period applicable to the WTC store.³ Specifically, Duane Reade argues that the Policy should be read to provide 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.

Complaint at ¶ 39. St. Paul, by contrast, argues that the Restoration Period terminated when, at a time already past, Duane Reade could have "restored operations" at locations other than the World Trade Center. See St. Paul Fire & Marine Ins. Co.'s Memorandum in Support of its Motion for Summary Judgment, dated April 11, 2003, at 11.

The Court concludes, however, that neither side's interpretation accords with the plain language of the Policy, which governs as a matter of law. The "property" referred to is, unambiguously, the specific premises at which Duane Reade operated its WTC store. St. Paul's competing interpretation, viz, that the word "property" refers not to a store in any particular location, but to the "business" of the entire Duane Reade chain,⁴ finds no support in the text of the Policy and, indeed, is manifestly unreasonable. As St. Paul would have it, either Duane Reade never suffered any business interruption at all because the chain was able to "stay open for business," St. Paul Fire & Marine Ins. Co.'s Memorandum in Opposition to Duane Reade, Inc.'s Motion for Summary Judgment, dated April 25, 2003, at 12, or the period of restoration ended when Duane Reade's chain-wide sales attained pre-peril levels, see St. Paul Fire & Marine Ins. Co.'s Memorandum in Support of its Motion for Summary Judgment, dated April 11, 2003, at 12-13. But this would mean that Duane Reade purchased coverage that either (1) only applies when every last one of its stores is destroyed, or (2) unlike all other business interruption insurance, see Couch on Insurance, 3d Ed., § 167:9, does not protect against lost profits. Neither alternative makes sense.

Likewise, Duane Reade's contention that the Restoration Period must be coterminous with the time actually required to rebuild the entire complex that will replace the World Trade Center is untenable. On their face, the Restoration Period clauses envision a hypothetical or constructive (as opposed to actual) time frame for rebuilding, as evidenced, for example, by their use of the subjunctive "would." See the Court's letter dated July 8, 2003, at 1. Moreover, what is to be hypothesized is the time it would take to rebuild, repair, or replace the WTC store itself, not the entire complex that once surrounded it. Id. at 2. Once Duane Reade could resume functionally equivalent operations in the location where its WTC store once stood, the Restoration Period would be at an end. Id. Any losses continuing beyond that point would be addressed by the "Extended Recovery Period" provision in the Policy, see Policy (Figlio Decl., Ex. A), at 21, not by the Restoration Period clause.

A further limitation to the hypothesized period of reconstruction results from the provision in the Policy mandating that losses be calculated with "due consideration" both to the experience of the WTC store prior to the loss as well as the "probable experience thereafter had no loss occurred." Id. at 19; see Hawkinson Tread Tire Serv. Co. v. Indiana Lumbermens Mut. Ins. Co., 362 Mo. 823, 245 S.W.2d 24, 28-29 (1951) (construing a similar provision). "Probable experience" includes, inter alia, the likelihood vel non that Duane Reade's lease for the WTC store would have been renewed. Thus, if Duane Reade is unable to prove at trial that its lease of the WTC store would likely have been renewed absent the events of September 11, 2001, then the period of restoration cannot extend beyond December 31, 2007—the date on which Duane Reade's present lease term ends.

The parties' cross-motions raise two other issues: (1) whether coverage is barred in any event by the "loss of market" exclusion in the Policy; and (2) whether St. Paul's first counterclaim and sixth affirmative defense, both of which allege that Duane Reade misrepresented and/or concealed material facts, can be survive summary judgment. Both questions must be answered in the negative.

As to the first issue, St. Paul— relying exclusively on supposed "admissions" by Duane Reade representatives (e.g., "the 9-11 attack deprived us of a marketplace," Figlio Decl., Ex. C (Transcript of Deposition of Anthony Cuti, taken April 3, 2003), at 412)—contends that the...