Royal Indem. Ins. Co. v. Mikob Properties, Inc.

• Decision Date: 24 April 1996
• Docket Number: Civil Action No. H-95-1245.
• Citation: 940 F.Supp. 155
• Parties: ROYAL INDEMNITY INSURANCE CO., Plaintiff, v. MIKOB PROPERTIES, INC. d/b/a Balboa Apartments, Defendant.
• Court: U.S. District Court — Southern District of Texas

Page 155

940 F.Supp. 155

ROYAL INDEMNITY INSURANCE CO., Plaintiff, v. MIKOB PROPERTIES, INC. d/b/a Balboa Apartments, Defendant.

Civil Action No. H-95-1245.

United States District Court, S.D. Texas, Houston Division.

April 24, 1996.

Jay W. Brown, Beirne Maynard & Parsons, Houston, TX, for plaintiff.

Heather A. Campbell, Coastal Corporation, Houston, TX, Arthur Thomas Kajander, Sharpe & Kajander, Houston, TX, Mark A. Huvard, Harberg & Huvard, Houston, TX, for Mikob Properties Inc.

Mark A. Huvard, Harberg & Huvard, Houston, TX, for Balboa Apartments.

MEMORANDUM AND OPINION

ROSENTHAL, District Judge.

Pending before this court in this insurance coverage dispute are cross-motions for partial summary judgment filed by plaintiff Royal Indemnity Insurance Co. (Docket Entry No. 30) and defendant Mikob Properties, Inc. D/B/A Balboa Apartments (Docket Entry No. 27). Based on the pleadings, motions, submissions, and applicable law, this court DENIES defendant's motion and GRANTS plaintiff's motion, for the reasons stated below.

I. Background

Defendant Mikob Properties, Inc. D/B/A Balboa Apartments ("Mikob") owns and manages an apartment complex containing three separate apartment buildings. The complex is located in Nassau Bay, Harris County, Texas. On February 19, 1995, a fire completely destroyed one of the three apartment buildings, Building C. The two other apartment buildings, Buildings A and B, had only minor damage.

After the fire, Mikob erected a fence around what remained of Building C and the surrounding area. When asbestos was discovered in the soot from the fire, the Texas Health Department insisted that Building C remain fenced off until the building could be demolished and the area around it cleaned. Since the fire, tenants have been unable to use amenities located near Building C, including a lighted boardwalk, a lighted fishing pier, a boat ramp, a picnic area, and a parking area previously used by Building B tenants. (Docket Entry No. 29, Affidavit of Allan Klein, vice president of Mikob, Exhibit B). Mikob asserts that these amenities contributed to the overall appeal of the complex as a waterfront community.

Before the fire, the apartment complex was 94.29 percent occupied. Since the fire, no unit in Building C has been habitable and the building has been vacant. It is undisputed that every unit in Buildings A and B remained habitable. However, the occupancy rates of Buildings A and B have decreased. The occupancy rate for Building A was 96.92 percent in the month before the fire; after the fire, the rate ranged from 64.23 percent to 73.08 percent over a seven-month period. The occupancy rate of Building B was 88.14 percent in the month before the fire; after the fire, the rate ranged from 38.14 percent to 61.02 percent.

The parties have stipulated that the occupancy rates declined because many tenants voluntarily vacated Buildings A and B after the fire.¹ After Mikob "dramatically reduced" rental rates, the occupancy rate rose to nearly 90 percent by October 1995 for Building A, but the occupancy rate for Building B has remained "low." (Docket Entry No. 28, pp. 3-4; Docket Entry No. 29, Klein Affidavit).

At the time of the fire, Mikob had a commercial property insurance policy, No. RTN43662-21 (the "Policy"), issued by Royal Indemnity Insurance Co. ("Royal"). The Policy contains a business interruption, or business income, provision, which states as follows:

[Royal] will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" or of tenancy during the "period of restoration". The suspension must be caused by direct physical loss of or damage to property at or within 500 feet of insured premises. The loss or damage must be caused by or result from a Covered Cause of Loss.

"Business Income" is defined as net income, including "rents" that would have been earned or incurred and continuing normal operating expenses, such as payroll.

The Policy also provides that:

[Royal] will pay any "Extra Expense" to avoid or minimize the suspension of business and to continue "operations."

After the fire, Royal paid Mikob the rental income lost because Building C closed. Mikob demands that Royal also pay the decrease in rental income from Buildings A and B. Royal asserts that the Policy does not cover loss of rental income resulting from a reduction in tenant occupancy in buildings not physically damaged by or closed after the fire. (Docket Entry No. 29, Exhibit E). Royal asserts that although some tenants voluntarily left Buildings A and B, this does not amount to a "necessary suspension of operations or tenancy" in those buildings required for coverage under the Policy.

Mikob argues that the fire damaged the quality of life at the complex as a whole and that tenants vacated Buildings A and B as a result. Mikob argues that its inability to rent the apartments at the pre-fire rental rates and occupancy levels constitutes a "necessary suspension of operations or tenancy" covered by the business interruption provision.

Mikob bases its argument on the theory of "mutual dependency." Royal argues that Texas has not adopted the theory of mutual dependency, and that even if this theory were applied, it would not lead to coverage for Mikob's decrease in rental income in Buildings A and B.

The parties have agreed to resolve the coverage issue by cross-motions for summary judgment and have stipulated to the facts necessary to resolve the motions.

II. Discussion

A. The Legal Standard

Under Texas law, insurance policies are contracts and are controlled by the rules of construction applicable to contracts generally. Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex.1987). If the policy is worded so that it can be given only one reasonable construction, it will be enforced as written. Id.; U.S. Fire Ins. Co. v. Confederate Air Force, 16 F.3d 88 (5th Cir.1994); Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (Tex.1984).

B. The Theory of Mutual Dependency

The purpose of a business interruption clause is to preserve the continuity of the insured's earnings. Cora Pub, Inc. v. Continental Cas. Co., 619 F.2d 482, 487 (5th Cir.1980), Keetch v. Mutual of Enumclaw Ins. Co., 66 Wash.App. 208, 831 P.2d 784 (1992); Liberty Mut. Ins. Co. v. Sexton Foods Co., Inc., 42 Ark.App. 102, 854 S.W.2d 365 (1993); Continental Ins. Co. v. DNE Corp., 834 S.W.2d 930 (Tenn.1992); Howard Stores Corp. v. Foremost Ins. Co., 82 A.D.2d 398, 441 N.Y.S.2d 674, 676 (1981). Mikob asserts that because the Policy insured the entire premises, which include the three apartment buildings and the amenities necessary for a "waterfront community lifestyle," the Policy covers the rental income lost by the complex as a whole. Mikob argues that the complex as a whole is dependent on the amenities, creating "mutual dependency."

Mikob relies primarily on Studley Box & Lumber Co. v. National Fire Ins. Co., 85 N.H. 96, 154 A. 337 (1931) to support its theory of mutual dependency. In Studley Box, the insured sued under a business interruption policy after fire destroyed a stable and several horses used in operating the insured's saw mill business. The New Hampshire Supreme Court found that the business-interruption insurance covered the business as a whole. Because the stable, the equipment in the stable, and the horses were all necessary to the business operation, the court found that the units of the business were "mutually dependent" and held that the insured's claims for partial business losses were covered.

Royal argues that Mikob's reliance on Studley Box is misplaced. First, the law is different. Texas, unlike New Hampshire, has not adopted the "mutual dependency" theory. Second, the facts are different. Studley Box involved assets that were in fact mutually dependent (a saw mill and the horses necessary for its operation). The fire in Studley Box caused an actual cessation of operations in the saw mill, although it was otherwise undamaged by the fire. The three separate apartment buildings at issue here are not mutually dependent; Buildings A and B could and did continue to operate after the fire destroyed Building C. Third, the policy language in Studley Box differed from the language at issue here. In Studley Box, the policy expressly provided coverage for a "partial suspension" of business operations; no such language is present in the Policy.

This court finds Mikob's argument unpersuasive. Mikob bases its argument on the reduced appeal of the entire complex due to the loss of amenities resulting from the fire. It is undisputed that the fire did not cause a "necessary suspension of operations" in Buildings A and B, as required by the Policy. Each apartment remained available for rent in Buildings A and B after the fire.

Ramada Inn Ramogreen, Inc. v. Travelers Indemnity Co. of America, 835 F.2d 812 (11th Cir.1988), supports Royal's argument that when a fire occurs in one building on an insured's premises, business interruption coverage does not extend to other buildings that do not experience an actual suspension of operations. In Ramogreen, a fire destroyed a restaurant in a hotel. The hotel sued the insurer to recover for a decline in occupancy resulting from the closing of the restaurant. The policy provided coverage for "loss of earnings resulting directly from the necessary interruption of the insured's business...." The insurer paid the claim for loss of earnings resulting from a necessary interruption of the restaurant's business, but denied coverage for loss of earnings related to the other four hotel buildings. The insured alleged that the restaurant was a "vital part of the hotel operation, each operation being mutually dependent upon each other," and that a loss of income from a decrease in occupancy of the four hotel buildings constituted a business interruption under the policy. The trial court disagreed and granted the insurer's motion for summary judgment.

The...