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Granite Penn Square, LLC v. United States Fire Insurance Co.


July 31, 2008


On appeal from Superior Court of New Jersey, Law Division, Morris County, No. L-1880-03.

Per curiam.


Argued April 30, 2008

Before Judges Wefing, Parker and Koblitz.

Plaintiff Granite Penn Square, LLC ("Granite Penn") appeals from an order entered by the trial court in favor of defendant United States Fire Insurance Company ("United States Fire"). After reviewing the record in light of the contentions advanced on appeal, we affirm.

Granite Penn is the owner of a twenty-five story building located on Market Street in Philadelphia which it proposed to renovate and convert to a Residence Inn operated through Marriott. It retained RC Dolner to serve as the general contractor for the project. It also obtained a builders risk insurance policy issued by United States Fire. The policy contained an Extra Expenses and Rental Income Extension Endorsement, referred to by the parties as an "ERIE" endorsement. The endorsement had a coverage limit of one million dollars for extra expenses, and five million, one hundred thousand dollars for rental income.

The endorsement identified the extra expenses as construction loan interest, real estate and property taxes, architect, engineering and consultant fees, legal and accounting fees, advertising and promotional expenses and premiums for the builders' risk coverage form. The endorsement defined its coverage for such extra expenses in the following manner:

We will pay such necessary extra expenses you incur as the result of the project being delayed beyond the "scheduled date of completion." The delay must be directly caused by a Covered Cause of Loss under the Builders' Risk Coverage Form. Coverage is for those extra expenses incurred:

(1) During the period of time between the "scheduled date of completion" and the actual date the project is completed with reasonable speed and similar quality; and

(2) That are over and above what would have been incurred had there been no "loss."

The endorsement contained a similar definition of coverage for loss of rental income:

When a Limit of Insurance is shown above for "rental income," we will pay the actual loss of "rental income" sustained by you as the result of the project being delayed beyond the "scheduled date of completion." The delay must be directly caused by a Covered Cause of Loss under the Builders' Risk Coverage Form.

Coverage is for your actual loss of "rental income" incurred during the period of time between the "scheduled date of completion" and the actual date the project is completed with reasonable speed and similar quality. If you decide not to rebuild or repair the Covered Property, we will not pay you for loss of "rental income."

Demolition and abatement work commenced in May or June 2000; final completion was expected by September 1, 2001. That goal, however, was not attained. In fact, a temporary certificate of occupancy was not issued until July 2002, and the final certificate of occupancy was not issued until October 10, 2002.

It is clear that a number of factors played a role in this delay. This litigation revolves around one of those factors.

On December 25, 2000, water pipes in the building's basement froze and burst. The water flooded the building's electrical switchgear, which exploded, shutting down all power to the building. Subcontractors who were working on the building had to be told not to report to the site because of the loss of power. Temporary generators were delivered to the site a few days later, but they were initially sufficient to permit only the construction office to re-open. The electrical subcontractor immediately commenced repair work but it developed that the entire building had to be re-wired. By January 16, 2001, the electricians had progressed to the point that there was temporary lighting in the stair towers, the sub-basement floors and floors five through eight. By early February 2001, temporary switchgear was providing power, rather than the generators. The electrical work required as a result of the incident of December 25, 2001, was not completed until March 23, 2001.

Granite Penn submitted several claims under its policy with United States Fire, including one for property damage incurred in connection with the incident of December 25, 2000. United States Fire acknowledged that was a covered claim and paid almost six hundred thousand dollars on that claim, which is not involved in this litigation. Granite Penn also submitted claims under the ERIE endorsement for the additional expense it had incurred and the rental income it had lost after the December 25 incident. When United States Fire rejected these claims, Granite Penn filed suit.

During the course of the litigation, both parties submitted expert reports. Granite Penn's expert noted that the project had experienced a delay of at least three hundred and twenty-one calendar days beyond the originally scheduled completion date of September 1, 2001. He calculated that of those days, eighty-eight were attributable to the loss of power on December 25, 2001. Based upon that report, Granite Penn contended that it was entitled to eighty-eight days of extra expense and lost rental income under the ERIE endorsement. Granite Penn's expert explained the impact of this incident in the following manner.

Due to the loss event . . . the subcontractors were forced to focus their attention on other projects and had to complete those commitments before returning to the Residence Inn Project. The plan had been to increase the manpower quickly after January 1, 2001, and the Project was ready for influx of labor. Instead the Project momentum was shattered by the loss event. For example, the framing crew resumed layout and framing work on February 6, 2001 but did not reach their pre-outage manpower levels until March 7, 2001. Further, when the crews re-mobilized in February 2001, crews had lost their momentum and encountered a re-learning curve.

The report also noted that loss of power removed some sense of urgency, leading to a delay in the execution of subcontracts, the procurement of material requiring a long lead time and the coordination of the mechanical, electrical and plumbing work.

United States Fire's expert, on the other hand, noted that delays had been encountered almost from the outset. The original demolition and abatement contractor had to be replaced in the fall of 2000, and the target date for completion of the demolition and abatement was continually revised from the original date of August 31, 2000, to November 17, 2000, to December 12, 2000, and then to January 22, 2001. The report, for instance, noted a letter dated July 16, 2001, from Granite Penn to RC Dolner in which Granite Penn complained that the project had been delayed because the demolition took more than six months longer than had been anticipated. The report also noted an exchange of correspondence in November 2001 between RC Dolner and the electrical subcontractor with respect to Dolner's assertion that the electrical subcontractor was delaying completion of the project. In addition, after the work commenced, a decision was made to re-design certain of the model rooms, which required re-framing. The report also noted that a review of the project documents showed continued delay in the submission of architectural drawings. According to this report, "the project was mismanaged, poorly planned, and improperly executed."

Granite Penn's expert submitted a responding report, repeating the conclusion that the shut-down had led to an eighty-eight day loss in terms of framing work.

The parties submitted to the trial court the question whether Granite Penn had established a loss under the ERIE endorsement. We are satisfied the trial court correctly concluded that it had not.

The principles we must apply in construing this insurance policy are well-known. "[A]n insurance policy is a 'contract of adhesion between parties who are not equally situated.'" President v. Jenkins, 180 N.J. 550, 562 (2004) (quoting Doto v. Russo, 140 N.J. 544, 555 (1995)). If the language of the policy is ambiguous and fairly may support two interpretations, one favoring the insurer and one favoring the insured, we should select the interpretation favoring coverage. Id. at 563. "[A] genuine ambiguity . . . arise[s] where the phrasing of the policy is so confusing that the average policyholder cannot make out the boundaries of coverage." Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 247 (1979). However, if the terms of the policy are clear, we "should interpret the policy as written and avoid writing a better insurance policy than the one purchased." President, supra, at 562.

We perceive no ambiguity in the language used in the ERIE endorsement, that the extra expense and loss of rental income must be "directly caused" by a covered event to trigger coverage. The insurer was entitled to select this limiting language, rather than broader terms such as "arising out of." Pep Boys v. Cigna Indem. Ins. Co., 300 N.J. Super. 245, 250 (App. Div. 1997) (noting that the phrase "arising out of" has been construed to mean a substantial nexus, causally connected but not proximately caused by).

Granite Penn's expert concluded its initial report with the statement that absent the event of December 25, 2001, the project would have opened eighty-eight days earlier. That, however, is not the equivalent of delaying the project eighty-eight days from September 1, 2001, the originally scheduled target date. The policy language is clear: United States Fire agreed under the ERIE endorsement to pay for extra expenses and rental losses incurred that were "directly caused" by a covered cause. If those extra expenses and loss of rental income were not "directly caused" by the incident of December 25, United States Fire owed no obligation to Granite Penn under the ERIE endorsement. Because Granite Penn did not establish that the delay from the scheduled date of completion and extra expenses were "directly caused" by the incident of December 25, it did not experience a loss covered by the ERIE endorsement.

The order under review is affirmed.


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