Carley Capital Group, et al., Appellants v. Fireman's Fund Insurance Company, 877 F.2d 78 (D.C. Cir. 1989)

This litigation summons judicial construction of a coinsurance clause relating to builder's risk insurance afforded by a policy issued to appellants, the constituents of Harrison Court Associates (HCA),¹  by Fireman's Fund Insurance Company.²  The District Court, adopting as the unambiguous meaning of the clause the reading advanced by the insurer, entered summary judgment in its favor.³  We find, however, that the policy language is susceptible to another interpretation. Accordingly, we reverse the summary judgment and remand the case to the District Court for further proceedings.

* HCA purchased land situated in Philadelphia, Pennsylvania, upon which was a building erected in the late nineteenth century that was eventually certified as an historical landmark.⁴  HCA planned to renovate the structure and, to protect its investment during the course thereof, obtained builder's risk insurance from Fireman's Fund.⁵  Unfortunately, the building was totally destroyed by fire before the renovation could be completed.⁶ 

The policy specifies that in the event of a loss Fireman's Fund becomes "liable for the full replacement cost of the property at the time of loss," but not exceeding the maximum amount of insurance,⁷  which is $20 million.⁸  The coinsurance clause, however, restricts that liability to "no greater proportion [of the loss] than the [$20 million] bears to the projected value of the described property at the date of completion."⁹  This clause, of course, compelled HCA to maintain the insurance at that level or risk reduction of the amount payable in the event of a loss.¹⁰ 

After the fire, the parties agreed that the expense of replacing the building, as it was at the time of loss, was $13,200,155.¹¹  They agreed, too, that had the renovation been fully accomplished, it would have cost $22,303,381 to replace the structure.¹²  They parted company, however, when the coinsurance clause and its "projected value ... at the date of completion" came into play. Fireman's Fund argues that the reference was to the $22-odd million cost of replacing the building had it burned down after renovation was achieved.¹³  By this interpretation, HCA, with but $20 million of coverage, was underinsured, and Fireman's Fund was entitled to invoke the coinsurance clause. Accordingly, Fireman's Fund has remitted to appellants only $11,836,909 of the approximately $13 million it would have cost to rebuild after the fire.¹⁴ 

HCA, on the other hand, contends that "projected value ... at the date of completion" refers to market value at that time,¹⁵  which HCA believes would have been $20 million.¹⁶  Therefore, HCA says, the building was fully insured in accordance with the terms of the policy and the coinsurance clause was never activated. The District Court, however, entered summary judgment for Fireman's Fund,¹⁷  holding that in the context of the builder's risk insurance afforded, "value" in the coinsurance clause meant replacement cost of the structure upon completion of the renovation.¹⁸  Carley then took this appeal.

II

The centerpiece of the policy in suit is a "builder's risk form" which contains a schedule identifying the covered property and designating the maximum amount of insurance and the sum deductible therefrom,¹⁹  together with a number of provisions setting forth the insuring agreement,²⁰  defining the nature and limits of the insurer's liability,²¹  and specifying various other terms and conditions shaping the rights and responsibilities of the parties.²²  "This policy," the form states, "insures against all risks of direct physical loss of or damage to the property covered hereunder from any external cause ... except as provided elsewhere in this policy."²³  Other stipulations make it clear that coverage extended to appellants' building²⁴  at the time of the fire.²⁵ 

The policy also provides that

[t]his Company shall be liable for the full replacement cost of the property at the time of loss, including labor and other charges and expenses accrued thereto but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss; and in no event shall this Company be liable in any one loss for more than the limits stated in the Schedule.²⁶ 

The policy explains that " [t]he Limit of Liability at the Construction Site stated in the Schedule is a provisional amount,"²⁷  and that "the rate and premium are based on an average amount of liability during the period of construction."²⁸  It further provides that

[i]t is a condition of this insurance ... that on any date while this policy is in force, the actual Limit of Liability at the Construction Site is that proportion of the provisional amount that the replacement cost of the described property on that date bears to the projected value at the date of completion, but shall not in any case exceed the provisional amount.²⁹ 

And lastly, for purposes of this case, there is the coinsurance clause:

In consideration of the reduced rate at which this policy is written, it is a condition of this insurance that in the event of loss, this Company shall be liable for no greater proportion thereof than the provisional amount of insurance under this policy bears to the projected value of the described property at the date of completion....³⁰ 

It is common ground that Pennsylvania law governs this case,³¹  and in the law of that state several highly relevant propositions are prominent. The "goal is ... to ascertain the intent of the parties as manifested by the language of the written instrument."³²  The policy "must be read in its entirety and the intent gathered from a consideration of the entire instrument."³³  Policy language must be given its plain meaning,³⁴  and while "court [s] should read policy provisions to avoid ambiguities if possible ... [they] should not torture the language to create them."³⁵  A clause is deemed ambiguous " 'if reasonably intelligent men on considering it in the context of the entire policy would honestly differ as to its meaning.' "³⁶  Any ambiguity must be resolved against the insurer, the drafter of the policy.³⁷ 

If the phrase "projected value ... at the time of completion" refers unequivocally to either replacement value or market value, it must be honored accordingly. If, on the other hand, that language leaves its meaning doubtful, the search must continue. Fully mindful of the controlling effect of Pennsylvania law and of the constructional canons it embodies, we turn once again to the policy provisions.

III

The insuring agreement in the builder's risk form extends protection "against all risks of direct physical loss or damage to the property covered ... except as provided elsewhere in [the] policy."³⁸  We perceive nothing in this provision, in those specifying property coverage,³⁹  or in the risk⁴⁰  and property⁴¹  exclusions, that contributes to the solution of the problem at hand.

When we proceed to the next stage of our examination, the insurer's undertaking becomes more apparent, but nothing beyond that is actually accomplished. Putting aside for the moment the coinsurance clause and the ceiling fixed in the policy schedule, the liability assumed by Fireman's Fund is gauged by "the full replacement cost of the property at the time of loss,"⁴²  and is not to "exceed [ ] the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss."⁴³  These provisions do not, however, stake out the interpretation properly to be placed upon the phrase "projected value ... at the time of completion," as used in the coinsurance clause. That clause does not undertake to define the nature of the insurer's liability; its role, instead, is simply to decrease that liability if the demand specified in the clause is not met. This functional difference points up the independence of the two provisions. We are not aware of any consideration, legal or logical, calling inexorably for formulation of both on the same criteria.⁴⁴  Like other components of the policy contract, liability and coinsurance stipulations are whatever the parties choose to make them. The mere fact that the insurer's liability is to be measured by replacement cost does not preclude a coinsurance clause operative on the basis of market value. That the insurer's liability may be measured one way and the coinsurance requirement another way does not create any disharmony within the policy contract.

We are unable to detect in the remaining provisions of the policy any support for the District Court's conclusion that "projected value" in the coinsurance clause unambiguously connotes replacement cost. Indeed, one feature of those provisions demonstrates quite the contrary. "The rate and premium," the policy informs us, "are based on an average amount of liability during the period of construction."⁴⁵  The insurer's liability increases steadily, of course, as the construction project progresses from zero to full completion, and " [t]he Limit of Liability at the Construction Site stated in the Schedule," the policy states, "is a provisional amount."⁴⁶  " [T]he actual Limit of Liability at the Construction Site," the policy continues, "is that proportion of the provisional amount that the replacement cost of the described property on that date bears to the projected value at the time of completion, but shall not in any case exceed the provisional amount."⁴⁷  What is striking about this explanation is that both "replacement cost" and "projected value" are used in the very same sentence. This juxtaposition of "cost" and "value"--which are entirely different concepts in the business world--suggests strongly that they have different meanings in the builder's risk form that would match common usage of "replacement cost" and "value" perfectly. Webster defines "replacement cost" as "current cost of replacing a fixed asset with a new one of equal effectiveness,"⁴⁸  and "value" as "the amount of a commodity, service, or medium of exchange that is the equivalent of something else: a fair return in goods, services, or money," and as "the monetary worth of something."⁴⁹  It would, too, maintain consistency with the identical distinction recognized in Pennsylvania law.⁵⁰  At the very least, the insurer's failure to use "replacement cost" at both places in the same sentence in the "provisional amount" clause generates grave doubt as to the meaning of "projected value" in the coinsurance clause--the provision next following in the builder's risk form.

We thus cannot share the District Court's view that the phrase "projected value ... at the time of completion" in the coinsurance clause is unambiguous. Rather, it seems to us that "reasonably intelligent men on considering it in the context of the entire policy [c]ould honestly differ as to its meaning."⁵¹  We accordingly reverse the summary judgment awarded to Fireman's Fund and remand the case to the District Court for further proceedings consistent with this opinion.

So ordered.