Sinatra & Co. Real Estate v. N. Sec. Ins. Co.

• Docket Number: 20-cv-00041
• Decision Date: 26 August 2022
• Parties: SINATRA & COMPANY REAL ESTATE LLC, Plaintiff, v. NORTHERN SECURITY INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Western District of New York

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SINATRA & COMPANY REAL ESTATE LLC, Plaintiff, v. NORTHERN SECURITY INSURANCE COMPANY, Defendant.

No. 20-cv-00041

United States District Court, W.D. New York

August 26, 2022

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT (DOCS. 29 &amp 30)

Christina Reiss, District Judge.

Plaintiff Sinatra & Company Real Estate LLC brings this breach of contract action against Defendant Northern Security Insurance Company. Plaintiff alleges Defendant wrongfully denied payment under an insurance policy for certain covered losses stemming from a fire at Plaintiffs property. It asserts three claims: breach of contract/damage to the building (Count I) breach of contract/loss of business income (Count II), and breach of contract/extra-contractual consequential damages (Count III). On February 18, 2022, Plaintiff and Defendant cross-moved for summary judgment. (Docs. 29 & 30.) Pursuant to a stipulated briefing schedule, the parties filed their responses in opposition on March 25, 2022 and replies on April 15, 2022, at which time the court took the pending motions under advisement.

Plaintiff is represented by Christopher M. Berloth, Esq. Defendant is represented by Marco Cercone, Esq.

I. The Undisputed Facts.

A. Damage to the Building Claim.

Plaintiff is a limited liability company which, at all relevant times, owned and operated an apartment complex at 363 Breckenridge Street, Buffalo, New York (the “Breckenridge Street Property”). The Breckenridge Street Property was a two-and-a-half-story, 5,528-square-foot residential apartment building with eleven units, each consisting of a one-bedroom, one-bathroom apartment. Defendant, a Vermont insurance company authorized to do business in New York, issued an insurance policy to Plaintiff, policy number BP28014923 (the “Policy”), which provided coverage for various properties owned by Plaintiff, including the Breckenridge Street Property, for the November 4, 2016 to November 4, 2017 policy period.

On or about September 23, 2017, a fire caused significant damage to the Breckenridge Street Property. Plaintiff submitted a claim to Defendant, who agreed the damage was covered under the Policy.

Under the Policy, Plaintiff may elect to “make a claim for loss or damage covered by this insurance on an actual cash value basis” or “a replacement cost basis.” (Doc. 29-2 at 21.) If a claim is “settled on an actual cash value basis,” Plaintiff “may still make a claim on a replacement cost basis” if it provides notice of its intent to do so. Id. While an actual cash basis claim may be paid out at any time after a covered loss, the Policy provides that Defendant “will not pay on a replacement cost basis for any loss or damage: (i) Until the lost or damaged property is actually repaired or replaced; and (ii) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.” Id.

Plaintiff sought coverage on an actual cash value basis and replacement cost basis, pending repair or replacement of the Breckenridge Street Property. The undisputed actual cash value of the Breckenridge Street Property was $493,737.82. In a series of payments, the last of which was made on May 21, 2018, Defendant paid Plaintiff $488,737.82 to settle Plaintiffs actual cash value basis claim. This reflected the $493,737.82 actual cash value less Plaintiffs $5,000 deductible. Plaintiff now seeks the replacement cost holdback, or the difference between the replacement cost and the actual cash value, plus interest.

The Policy defines replacement cost as

[T]he cost to repair or replace, after application of the deductible and without deduction for depreciation, but not more than the least of the following amounts:

(i) The Limit of Insurance under this policy that applies to the lost or damaged property;

(ii) The cost to replace, on the same premises, the lost or damaged property with other property:

i. Of comparable material and quality; and

ii. Used for the same purpose; or

(iii) The amount that you actually spend that is necessary to repair or replace the lost or damaged property.

Id. at 20.

The parties agree that the value of prong one is $868,498.00 and the value of prong two is $747,368.59. As a result, the maximum potential replacement cost holdback is $253,630.77. The parties dispute whether Plaintiff has “actually repaired or replaced” the Breckenridge Street Property and is thus entitled to payment on a replacement cost basis. The parties also dispute the value of prong three, the amount “actually spen[t] that is necessary to repair or replace” the Breckenridge Street Property. Id.

On April 9, 2019, Plaintiff identified an apartment complex located at 101 Lafayette Road, Syracuse, New York (the “Lafayette Road Property”) as a proposed replacement for the Breckenridge Street Property. Plaintiff purchased the Lafayette Road Property, which contained over seven hundred residential units, for over fifty-seven million dollars. The closing date on the purchase and sale was on or about July 30, 2018. Defendant's adjuster questioned whether “the purchase of an apartment complex [the Lafayette Road Property] is of similar occupancy to a stand alone building containing 10 residential apartments without any additional amenities[,]” (Doc. 30-17 at 3), and requested the purchase and sale contract for the Lafayette Road Property. Instead of submitting the contract, in May 2019 Plaintiff submitted a purchase and sale contract for an alternative replacement property located at 197 Summer Street, Buffalo, New York (the “Summer Street Property”), which it purchased in 2018 for approximately $825,000. The closing date for the Summer Street Property was on or about October 31, 2018. The Summer Street Property is three stories, 11,848 square feet, and was previously used by the American Cancer Society as a housing facility for medical patients. Plaintiff plans to use the Summer Street Property for one commercial unit, the use of which has not yet been determined; seven one-bedroom apartments; and two two-bedroom apartments.

On October 8, 2019, Defendant denied Plaintiffs replacement cost claim because the Summer Street Property was not a “bona fide replacement” under the Policy. (Doc. 30-3 at 4.) It explained its rejection as follows:

The proposed replacement property is not a bona fide replacement of like kind and quality because it possesses additional square footage over and above the insured premises. The proposed replacement property also is not a bona fide replacement of like kind and quality because it is for a different use, a medical building, as opposed to the insured premises which were a residential apartment building. In other words, the property located at 197 Summer Street, Buffalo, New York is not equivalent to the insured premises and the proposed replacement property would be a new, improved building by virtue of the fact that it possesses more square feet of space and would be used for a different purpose over and above what the insured premises possessed and was used for. In short, you have not presented a bona fide replacement-cost claim because the proposed medical building is a fundamental change, representing a betterment over the former 11-unit residential apartment building. Based on the foregoing, your replacementcost claim as it relates to a purchase of 197 Summer Street, Buffalo, New York is denied in its entirety.

Id.

B. Loss of Business Income Claim.

The monthly rental payments Plaintiff received from the Breckenridge Street Property totaled $6,570.00. Plaintiff received no rental payments for the Breckenridge Street Property for the twelve months following the fire.

The Policy provides:

(1) Business Income

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration”. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of the site at which the described premises are located.

With respect to the requirements set forth in the preceding paragraph, if you occupy only part of the site at which the described premises are located, your premises means:

(a) The portion of the building which you rent, lease or occupy; and

(b) Any area within the building or on the site at which the described premises are located, if that area services, or is used to gain access to, the described premises.

We will only pay for loss of Business Income that you sustain during the “period of restoration” and that occurs within 12 consecutive months after the date of direct physical loss or damage. We will only pay for ordinary payroll expenses for 60 days following the date of direct physical loss or damage.

Business Income means the:

(i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred, but not including any Net Income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the Covered Cause of Loss on customers or on other businesses; and

(ii) Continuing normal operating expenses incurred, including payroll.

Ordinary payroll expenses mean payroll expenses for all your employees except:

(a) Officers;

(b) Executives;

(c) Department Managers;

(d) Employees under contract; and

(e) Additional Exemptions shown in the Declarations as:

(i) Job

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