Ryan, Klimek, Ryan Partnership v. Royal Ins.

• Decision Date: 24 January 1990
• Docket Number: Civ. A. No. 88-0255 L.
• Citation: 728 F. Supp. 862
• Parties: RYAN, KLIMEK, RYAN PARTNERSHIP, Maury A. Ryan, James Hillary Ryan and Stanley Klimek, Plaintiffs, v. ROYAL INSURANCE COMPANY OF AMERICA, a/k/a Royal Globe Insurance Company, Safeguard Insurance Company, Defendant.
• Court: U.S. District Court — District of Rhode Island

728 F. Supp. 862

RYAN, KLIMEK, RYAN PARTNERSHIP, Maury A. Ryan, James Hillary Ryan and Stanley Klimek, Plaintiffs, v. ROYAL INSURANCE COMPANY OF AMERICA, a/k/a Royal Globe Insurance Company, Safeguard Insurance Company, Defendant.

Civ. A. No. 88-0255 L.

United States District Court, D. Rhode Island.

January 24, 1990.

Maury A. Ryan, Providence, R.I., Hugh N. Fryer, Fryer, Ross & Gowen, New York City, for plaintiffs.

Kenneth P. Borden, Providence, R.I., for defendant.

MEMORANDUM AND ORDER

LAGUEUX, District Judge.

This case is presently before the Court on the motion of defendant, Royal Insurance Company of America (Royal), for summary judgment. This suit raises questions concerning the duties owed to the Ryan, Klimek, Ryan (Ryan, Klimek) partnership under insurance policies issued by Royal over a number of years.

Two events underlie this case: A fire which caused damage to plaintiffs' property in 1974 and letters from the New York Department of Environmental Conservation (NYDEC) to Stanley Oliver Holtz, Inc. (SOH) in 1987 discussing the cleanup of hazardous waste at Ryan, Klimek's facility. Three issues require decision. First, whether the NYDEC contacts amounted to a "suit" which obligated Royal to defend and indemnify Ryan, Klimek. Second, whether plaintiffs have established a sufficient question of fraud or mutual mistake to authorize rescission of the insurance settlement entered into after the 1974 fire. Third, whether Royal is liable for the diminution in value of plaintiffs' real estate for its alleged wrongful termination of Ryan, Klimek's insurance policy in 1987.

Background

Sometime prior to 1974, Maury Ryan, Stanley Klimek, and James Hillary Ryan entered into a partnership, d/b/a Ryan, Klimek, Ryan which owned industrial/commercial real estate located at 39 Commerce Drive in Rochester, New York. The three partners, were also the sole stockholders of SOH, which leased Ryan, Klimek's property for the operation of a metal finishing business. SOH contracted with its customers to do electro-plating, spray painting, metal finishing and paint stripping. In its business SOH used many chemicals including acids, cyanides, trichlorethylene (TCE), paints, and paint thinners. Stanley Klimek acted as president and general manager of SOH as well as a representative of the Ryan, Klimek partnership which owned the real estate.

At all times pertinent hereto, Royal insured Ryan, Klimek and SOH. The property coverage "insured against all risks of direct physical loss to ... the Building." This provision included within the coverage a debris removal clause which stated:

This policy covers expense incurred in the removal of debris of the property covered hereunder which may be occasioned by loss by a peril not otherwise excluded.

The comprehensive general liability provision of Ryan Klimek's policy read:

The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient ... (emphasis added)

On or about December 20, 1974, a fire destroyed approximately one-half of Ryan, Klimek's building. Following the fire, representatives of Royal and Ryan, Klimek met to discuss procedures and coverage amounts for reconstruction and repair. Plaintiffs were well represented at the initial meeting with Maury Ryan (an attorney), Stanley Klimek, Martin Lowenstein, comptroller and chief financial officer of SOH, an architect, and a structural engineer in attendance. Although plaintiffs had flown an independent adjuster to the meeting, they decided not to utilize the adjuster's expertise after Robert Flynn, of the General Adjustment Bureau, indicated that an independent adjuster was not needed since he could fairly represent Ryan, Klimek's, as well as Royal's, interests. Subsequent negotiations predominantly occurred between Lowenstein and Klimek for the insured and Robert Flynn and George Kerr for Royal. SOH's proof of loss included a claim in the amount of $258,477.40 for the contents of the building and loss of machinery and equipment/inventory. The list of lost materials included two drums of TCE. Plaintiffs also filed a supplemental claim in the amount of $118,732.29. None of the supplemental costs included the cost for hazardous waste cleanup. Although Stanley Klimek knew that TCE presented a hazard to the environment and although Royal had previously handled cleanup negotiations, neither party raised the issue of potential groundwater contamination during the negotiations, and no claim for pollution cleanup costs was ever made under the insurance policy. Royal's total payments to Ryan, Klimek and SOH amounted to $474,929.00 of an available $553,000.00 of coverage for damage to the building, loss of the contents and debris removal under the policy. Following this settlement in 1975, the building was repaired, machinery and inventory was replaced and SOH resumed full operation.

On December 2, 1986, SOH filed for bankruptcy under Chapter XI. SOH's ongoing business and Ryan, Klimek's Commerce Drive real estate were placed on the market. Plaintiffs hired Lozier Architects/Engineers to perform on-site environmental pollution tests, after prospective buyers expressed concern over possible chemical contamination. Although plaintiffs had discontinued the use of TCE after the 1974 fire, the Lozier report disclosed high levels of TCE in the groundwater below the plant. Plaintiffs forwarded copies of the report to the EPA, NYDEC, and to Royal.

Following the Lozier report, plaintiffs met with and began a series of communications with the NYDEC. The communications in brief concerned Ryan, Klimek's potential responsibility for the environmental cleanup. NYDEC requested that plaintiffs submit a workplan and remedial cleanup plan. Ryan, Klimek kept Royal abreast of all NYDEC communications. On June 22, 1987, Maury Ryan wrote to Royal explaining the difficulty Ryan, Klimek was having selling the contaminated property. The letter requested that Royal investigate the pollution and provide the money necessary for Ryan, Klimek to clean the property. Seven days later, Royal issued a 10 day cancellation notice (effective July 13, 1987) of the insurance policy which had most recently been issued to Ryan Klimek and SOH. Plaintiffs were unable thereafter to obtain further insurance for the property.

Finally, as part of liquidation proceedings approved by the Bankruptcy Court, SOH, Ryan, Klimek, and SOH Acquiring, Inc. (Buyer) entered into a purchase-lease agreement for the real estate. The Buyer agreed to purchase the real estate on or before September 30, 1992, for $987,900.00. Other provisions of the agreement limited the Buyer's cleanup responsibility to $225,000.00. The estimated appraisal value of the real estate, absent the pollution, as of the date of the agreement, was $2,100,000.00.

To date, none of the parties involved have expended any sums for the cleanup of the Commerce Drive property. Further, no demands for reimbursement of cleanup costs have been made by the EPA or the NYDEC.

Plaintiffs, as a partnership and as individuals, filed this diversity suit in the United States District Court for the District of Rhode Island on April 25, 1988. The complaint and the amended complaint allege four main causes of action. First, plaintiffs contend that Royal willfully, maliciously, and in bad faith refused to defend the NYDEC's cleanup order and refused to offer to reimburse Ryan, Klimek for cleanup costs. Second, plaintiffs claim that Royal, knowing of the potential for TCE contamination, intentionally and fraudulently failed to reveal the possibility of groundwater contamination during the fire settlement negotiations. Third, plaintiffs claim that despite Royal's knowledge that chemicals were lost during the fire, neither Royal nor Ryan, Klimek believed at the time of the fire settlement negotiations that the fire had caused groundwater contamination. Fourth, Ryan, Klimek argues that Royal wrongfully cancelled its insurance coverage in 1987 and that such cancellation resulted in the sale of Ryan, Klimek's real estate for a drastically reduced price. Plaintiffs seek compensatory and punitive damages, and rescission of the 1975 fire settlement agreement.

Defendant subsequently filed a motion for summary judgment, pursuant to Federal Rules of Civil Procedure 56(c), on each of plaintiffs' claims. After having heard oral arguments, this Court took the matter under advisement. The matter is now in order for decision.

Discussion

I. Rule 56, summary judgment standard.

The well settled standard for summary judgment analysis requires that courts examine the pleadings, affidavits, and extra-pleading material filed by both parties to determine whether any genuine issue of material fact exists. General Office Products Corp. v. A.M. Capen's Sons, Inc., 780 F.2d 1077, 1078 (1st Cir.1986); see also Fed.R.Civ.P. 56(c). A genuine issue involves a real dispute, substantiated by evidence beyond the allegations of the complaint, which a judge or jury must resolve. Taylor v. Hercules, Inc., 780 F.2d 171, 174 (1st Cir.1986); Hahn v. Sargent, 523 F.2d 461, 464 (1st Cir.1975), cert. denied, 425 U.S. 904, 96 S.Ct. 1495, 47 L.Ed.2d 754 (1976). Any fact which could affect the outcome of the suit is deemed material. See Finn v. Consolidated Rail Corp., 782 F.2d 13, 15 (1st Cir.1986). The court must look at the record in the light most favorable to the non-moving party, Poller v. Columbia Broadcasting Sys., Inc., 368 U.S. 464, 473, 82 S.Ct. 486, 491, 7 L.Ed.2d 458 (1962), and must indulge...