Witcher Const. Co. v. Saint Paul Fire and Marine Ins. Co.

• Decision Date: 11 June 1996
• Docket Number: No. C1-96-71,C1-96-71
• Parties: WITCHER CONSTRUCTION COMPANY, Appellant, v. SAINT PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota capital stock company, Respondent.
• Court: Minnesota Court of Appeals

Page 1

550 N.W.2d 1

WITCHER CONSTRUCTION COMPANY, Appellant, v. SAINT PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota capital stock company, Respondent.

No. C1-96-71.

Court of Appeals of Minnesota.

June 11, 1996.

Review Denied Aug. 20, 1996.

Syllabus by the Court

First-person property insurance, including the Minnesota standard fire policy, does not protect against business interruption absent language to the contrary. However, an insurer has a common law duty to reimburse the policyholder for the underwriter's share of reasonable costs necessarily incurred in removing insured property from the immediate threat of a covered loss.

Dean B. Thompson, Steven C. Cox, Fabyanske, Svoboda, Westra & Hart, P.A., Minneapolis, for Appellant.

Joseph L. Lulic, Michael M. Carter, Hanson Lulic & Krall, Minneapolis, for Respondent.

Considered and decided by LANSING, P.J., and SHORT and WILLIS, JJ.

OPINION

SHORT, Judge.

A natural gas explosion occurred several blocks from a construction site, prompting Witcher Construction Company to suspend operations for nearly a month while experts tested the structure for harm. Although the building sustained no physical damage, Witcher filed a claim under its all-risk property insurance policy for the costs associated with the temporary interruption of construction. Citing the absence of physical loss to the insured property and an exclusion for delay and loss of use, Saint Paul Fire and Marine Insurance Company (insurer) denied Witcher's request for coverage. Witcher brought this action to establish its right to coverage, and both parties moved for summary judgment. The trial court concluded the policy generally requires indemnification of Witcher's mitigation costs, but the exclusion bars recovery of those expenses related to the consequences of delay. The court determined Witcher could recover out-of-pocket contributions for examination of the site, but not the lost construction opportunities. On appeal, Witcher argues the trial court erred as a matter of law by not finding business interruption coverage under (1) the main insuring clause, (2) the Minnesota fire endorsement, and (3) its contractual and common law mitigation duties.

FACTS

On July 22, 1993, Witcher was working on a construction project in St. Paul. Early that morning, a natural gas explosion occurred three blocks south and one block east of the project. Although Witcher perceived no obvious damage and continued operations throughout that day, it decided to suspend work the following day until experts could determine whether the structure had sustained nonobvious harm. Because Witcher lacked the skills necessary to undertake a proper investigation, its client arranged for consultants to examine the structure. After the experts conclusively established the absence of physical damage, Witcher resumed operations on August 19.

The suspension of work caused Witcher significant economic loss, because of idle equipment and workers and the subsequent extension of the project into winter. Seeking compensation for these losses, Witcher filed a claim under three clauses of an insurance contract, which provides (1) "protect[ion of the] insured property against risks of direct physical loss or damage except as excluded," (2) "insur[ance of the] covered property against all loss or damage caused by fire," and (3) reimbursement for the insurer's share of reasonable and necessary expenses incurred "to protect the property from further damage" when a covered loss occurs.

ISSUES

I. Is Witcher entitled to coverage under the main insuring clause?

II. Is Witcher entitled to coverage under the Minnesota fire endorsement?

III. Is Witcher entitled to indemnification for mitigation efforts either under the policy or pursuant to general principles of law and equity?

ANALYSIS

In reviewing an order for summary judgment that construes the text of an insurance policy, we determine whether the trial court erred in its interpretation of the document's language. See State by Cooper v. French, 460 N.W.2d 2, 4 (Minn.1990) (reviewing a summary judgment order for genuine issues of fact and errors of law). In construing Witcher's policy, we apply three principles of insurance law. First, coverage is determined by the interaction of clauses relating to the policy's subject matter, the insured causes of loss, and limitations on the insurer's liability for the consequences of an otherwise insured event. See Robert E. Keeton, Basic Insurance Law 292 (1960) (identifying seven coverage provisions).

Second, consequential loss embraces both principles of attenuated causation of harm to the insured subject matter, which an underwriter must exclude from coverage to avoid liability, and the broader consequences of property damage, such as business interruption and lost profits, ¹ which first-person property insurance does not generally cover. ² Compare 2 Warren Freedman, Richards on the Law of Insurance § 210, at 718-19 (5th ed. 1952) (examining both indirectly-caused property damage and business losses in a discussion of consequential loss and noting that first-person property insurance does not usually cover indirect loss, but recognizing that many courts treat indirectly caused loss as nonconsequential loss) and Lipshultz v. General Ins. Co. of Am., 256 Minn. 7, 13-15, 96 N.W.2d 880, 884-86 (1959) (concluding the causation element of consequential loss is presumptively covered absent a specific exclusion) with 15 Mark S. Rhodes, Couch on Insurance 2d §§ 54:1, 54:177, 54:179, 54:181, at 414, 563, 565, 567 (rev. ed. 1983) (noting that fire insurance establishes the paradigm for recovery on first-person property insurance and explaining that lost profits, business interruption, and loss of use are not available unless the insurance policy expressly covers these items).

And third, while all-risk insurance represents a modified procedure for identifying and proving the occurrence of insured events, the holder of such a policy must still demonstrate a loss to the insured subject matter. See Keeton, supra, at 270-72 (describing the difference between all-risk and named-peril insurance as "a contrast in tendency" and explaining the two differ mainly in the procedures for designating and proving the occurrence of insured events); see also Nevers v. Aetna Ins. Co., 14 Wash.App. 906, 546 P.2d 1240, 1241 n. 1 (1976) (requiring proof of loss to the insured property); John P. Gorman, All Risks of Loss v. All Loss: An Examination of Broad Form Insurance Coverages, 34 Notre Dame Law. 346, 346-47 (1959) (noting the temptation to equate all-risk with all-loss, but suggesting this represents an uninformed understanding). But see Stanley v. Onetta Boat Works, Inc., 303 F.Supp. 99, 106 (D.Or.1969) (finding coverage for lost profits and loss of use under an all-risk builder's policy), aff'd, 431 F.2d 241 (9th Cir.1970).

I.

Witcher argues the contractual obligation to "protect the insured property" indemnifies it for all expenses incurred "with respect to the property." Cf. Marshall Produce Co. v. St. Paul Fire & Marine Ins. Co., 256 Minn. 404, 413-14, 98 N.W.2d 280, 288 (1959) (explaining that fire insurance policies are personal indemnity contracts). A purpose of insurance is to indemnify policyholders, but insurance contracts qualify this obligation by defining the insured subject matter. See Keeton, supra, at 292 (noting the policy's subject matter is a coverage provision).

Witcher's policy describes its property as the insured subject matter. Contrary to Witcher's assumption, this clause does not mean that Witcher enjoys the right to indemnification for all expenses incurred "with respect to" the property. Rather, in the absence of specific language covering business interruption, loss of use, or lost profits, the designation of Witcher's property as the insured subject matter limits coverage to the physical and economic damage done to that property. See 15 Rhodes, supra, §§ 54:1, 54:177, 54:179, 54:181, at 414, 563, 565, 567 (describing fire insurance as the model for recovery on first-person property insurance and explaining that coverage of such losses is not available unless the policy expressly includes them); see also Keeton, supra, at 138 (noting that property insurance covers economic damage to the insured property, but not business interruption and similar phenomena, which are separately-insurable interests).

Based on the policy's subject matter, we conclude that coverage does not extend to indemnification of Witcher's business interruption losses. Our decision is supported by the policy's rules for loss adjustment, which set coverage at the replacement value of new construction and the actual cash value of old construction. See Teeples v. Tolson, 207 F.Supp. 212, 215 (D.Or.1962) (noting that an all-risk policy's "actual value" clause demonstrated the parties' intent to cover only the cost of restoring a building to its original state and not the added cost of redesigning it following its collapse); Kingsley v. Spofford, 298 Mass. 469, 11 N.E.2d 487, 491 (1937) (quoting Hewins v. London Assurance Corp., 184 Mass. 177, 68 N.E. 62, 63 (1903), and concluding that a fire policy's limitation to actual cash value prevented coverage for interruption of business and lost profits).

Witcher also argues the phrase "risks of direct physical loss or damage" is ambiguous and can be read to cover either the chance (risk) of direct physical loss or any kind of damage. This argument is contrary to the weight of authority. See Teeples, 207 F.Supp. at 213 n. 2, 215 (finding similar language "clear and unambiguous"); Glens Falls Ins. Co. v. Covert, 526 S.W.2d 222, 223 (Tex.Civ.App.1975) (describing similar language as "clear"), error refused (Tex. Oct. 29, 1975); Nevers, 546 P.2d at 1241 (finding no ambiguity in similar language); see also Boyd Motors, Inc. v. Employers Ins., 880 F.2d 270, 271, 274 (10th Cir.1989) (stating the express purpose of a similar...