Northeast Financial Corp. v. INA

Decision Date28 February 1991
Docket NumberCiv. A. No. 86-89-LON.
PartiesNORTHEAST FINANCIAL CORPORATION, Joyce Realty Corporation and Kirkwood Fitness and Racquetball Clubs, Inc., Plaintiffs, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant.
CourtU.S. District Court — District of Delaware

Melvyn I. Monzack and Rachel B. Mersky, of Walsh & Monzack, P.A., Wilmington, Del., for plaintiffs.

B. Wilson Redfearn and David E. Wilks, of Tybout, Redfearn & Pell, Wilmington, Del., for defendant.

OPINION

LONGOBARDI, Chief Judge.

This is a civil action based on diversity of citizenship brought by the Plaintiffs Northeast Financial Corporation, Joyce Realty Corporation and Kirkwood Fitness and Racquetball Clubs, Inc. ("Northeast") against Defendant Insurance Company of North America ("INA"). The Plaintiffs seek damages on Defendant's alleged breach of an insurance contract. Following an appraisal procedure that set the amount of damages, Plaintiffs filed the present motion to vacate the appraisal award.

I. FACTS

In 1984, Defendant issued a written insurance policy whereby Plaintiffs' health and fitness club located on Route 202 in Chadds Ford, Pennsylvania (the "Route 202 facility"), was insured for a period of one year commencing on June 1, 1984. The policy insured against several risks of loss or damage including coverage denominated Loss of Income ("LOI"). The LOI coverage provides that if the insured's business is temporarily interrupted as a result of a covered loss such as a fire, the insurance provider would compensate the insured for the gross income that the insured would have earned during the business interruption. The LOI coverage is designed to permit the insured to pay any normal expenses that would have accrued during the shutdown. If any amount remains above and beyond expenses, then the insured may retain it as the profit that the insured would have earned if the business had not been interrupted. The LOI limits for the Route 202 facility are set at $60,000 per month and $240,000 in the aggregate.

On April 30, 1985, a fire damaged the Route 202 facility and forced Plaintiffs to temporarily close the facility. Plaintiffs were able to reopen the facility in mid-July of 1985. Plaintiffs determined that gross income for the Route 202 facility was derived from health club membership sales, sales from their Pro shop and vending machines and interest and credit life insurance income from the health club membership sales. Based on these considerations, Plaintiffs determined that the total amount of income lost as a result of the business interruption was $184,131. After Plaintiffs made a claim based on their estimate of lost income, Defendant conducted its own estimate which differed in amount from the Plaintiffs. Defendant, however, paid an advance of $75,000 against the claim.

Following a series of failed negotiations between the parties, Plaintiffs instituted the present action for breach of contract. Defendant responded by invoking the appraisal procedures contained in Plaintiffs' insurance policy. The procedures provide that if the Defendant cannot agree with the insured on the amount of the loss, then either party by written request could demand an appraisal to settle the loss. Thereafter, Defendant filed a motion to stay the action pending resolution of appraisal proceedings.

This Court granted Defendant's motion and an award was entered on October 31, 1989. On November 27, 1989, Plaintiffs filed the instant motion to vacate the appraisal award, dissolve the stay and proceed with a judicial hearing. The parties stipulated, however, that they would forgo a judicial hearing on the issue of whether it was an insurance industry custom to pay pre-award interest and agreed that this issue would be resolved by the Court based upon submissions of the parties. Docket Item ("D.I.") 32. The parties further agreed that if there were any disputes of fact that the Court would resolve those disputes based on the affidavits and law presented to the Court. Id.

II. DISCUSSION
A. Legal Standard

A federal court sitting in a diversity action must apply the substantive law of the state in which it sits. Brown v. Caterpillar Tractor Co., 696 F.2d 246, 249 (3rd Cir.1982); Becker v. Interstate Properties, 569 F.2d 1203, 1204 (3rd Cir.1977), cert. denied, 436 U.S. 906, 98 S.Ct. 2237, 56 L.Ed.2d 404 (1978). If there is no ruling by the state's highest court, then the federal court must "apply what they find to be the state law after giving `proper regard' to the relevant rulings of other courts of the state." Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1783, 18 L.Ed.2d 886 (1967); First National State Bank v. Commonwealth Federal Savings & Loan Assoc., 610 F.2d 164, 172 (3rd Cir.1979). When state law is unclear, the District Court must predict how the state's highest court would resolve the issue. Rabatin v. Columbus Lines, Inc., 790 F.2d 22, 24 (3rd Cir.1986); McGowan v. University of Scranton, 759 F.2d 287, 291 (3rd Cir.1985).1

The first issue before the Court is what standard of review to apply when assessing the appraiser's award on Plaintiffs' motion to vacate. In making this analysis, the Court is aware of the procedural distinctions that Delaware courts have long recognized exist between arbitration and appraisal. Hanby v. Maryland Casualty Company, Del.Supr., 265 A.2d 28, 31 (1970). One distinction commonly drawn is that arbitration is typically conducted in a quasi-judicial proceeding with hearings, notice of hearings, oaths of witnesses and constitutes a final settlement of the dispute between the parties. Collison v. Deisem, Del.Ch., 265 A.2d 57, 59 (1970). Appraisal, on the other hand, is generally more informal in that the appraisers are not under oath, are not obliged to hear evidence and may proceed by ex parte investigation. Id. In addition, appraisal extends only to a determination of actual cash value, all other issues being reserved for decision by a court. Pullman, Incorporated v. Pheonix Steel Corporation, Del.Super., 304 A.2d 334, 339 (1973). Based on these procedural distinctions, the Delaware Court of Chancery has held that "an appraisal procedure is not the equivalent of arbitration and this Court is not limited in its review of an appraisal as it would be in the case of arbitration." Morris, Nichols, Arsht & Tunnell v. R H International, Del.Ch., Berger, V.C., 1987 WL 33980 (Dec. 29, 1987). Seizing upon this language, Plaintiffs advance the argument that in the instant case, the majority's appraisal award is not binding upon them and that they are entitled to a judicial determination of their claim. The Court observes, however, that contrary to the Morris, Nichols decision and Plaintiffs' assertions, the Delaware Supreme Court has already definitively ruled on this matter.

In Closser v. Penn. Mut. Fire Ins. Co., Del.Supr., 457 A.2d 1081 (1983), the Delaware Supreme Court reviewed an appraisal provision similar to the one currently at issue and held that:

... since the policy states that "an award in writing, so itemized, of any two when filed with this Company shall determine the amount of actual cash value and loss", we construe the appraisal provisions of the policy, if invoked, to provide a mandatory form of arbitration, precluding recourse to the courts.

Id. at 1087 (emphasis supplied).

Recognizing the dispositive nature of the Closser decision, Plaintiffs attempt to factually distinguish their case on the ground that the language in their insurance policy is different from that of the Closser provision. Plaintiffs also contend that a reservation of rights clause at the end of the disputed appraisal provision indicates that Defendant never intended the appraisal process to be binding. The first ground can be easily disposed of. The disputed appraisal clause in Plaintiffs' insurance contract states "an agreement in writing by any two of these three will determine the amount of the loss." The fact that the disputed appraisal language uses the words "will" instead of "shall" and "agreement" instead of "award" is immaterial. The intent is the same.

Plaintiffs' second distinguishing ground may also be disposed of summarily. The reservation of rights clause in the disputed appraisal provision reads: "We will not surrender our rights by any act we take relating to an appraisal." Plaintiffs argue that the above reservation of rights precludes the appraisal from becoming binding and, therefore, Plaintiffs' claim is subject to a complete review by the Court.

The Court finds Plaintiffs' second argument unpersuasive, particularly when the appraisal provisions are read together. The introductory sentence of the appraisal procedure states: "If we cannot agree with you on the amount of the loss, either of us can demand that the following procedure be used to settle the amount." Clearly, the use of the word "settle" indicates that Defendant contemplated that the appraisal procedures would be binding on the parties. Similarly, the language that an agreement in writing by any two of the three appraisers "will determine the amount of the loss" also indicates that Defendant intended the appraisal procedure would be final. The Court believes that the reservation of rights clause merely indicates that the appraisal procedure is intended only to fix the amount of the loss and the parties are then free to litigate any other issues in a subsequent judicial proceeding. Accordingly, this Court finds that the Closser decision is controlling and that the instant appraisal provision is the equivalent of arbitration on the issue of the amount of damages. The Court will now turn to Plaintiffs' motion to vacate the appraisal award.

B. Motion to Vacate

As Plaintiffs' insurance contract was entered into after 1972, Delaware's Uniform Arbitration Act, 10 Del.C. § 5701, et seq., applies to Plaintiffs' motion to vacate the appraisal award. Section 5714 of the Act provides that:

(a) Upon complaint or
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