Source: http://cabfinancial.com/articles/category/cases-from-bits/c35-volume-12-edition-3/page/2/
Timestamp: 2019-01-19 08:01:03
Document Index: 702591298

Matched Legal Cases: ['Art. 29', 'Art. 45', '§ 211', '§ 168', '§ 3', 'art, 124', '§ 99', '§ 2', '§ 3', '§ 11']

Volume 12, Edition 3 – Page 2 – Central Analysis Bureau
Eli Lilly and Co. v. Air Exp. Intern. USA, Inc.
ELI LILLY AND COMPANY, individually, and f/u/b/o Elgo Insurance Company, Ltd., individually, and f/u/b/o Certain London Market Reinsurance, Plaintiffs,
AIR EXPRESS INTERNATIONAL USA, INC. d/b/a Danzas Air & Ocean and d/b/a DHL Global Forwarding and Lufthansa Cargo AG, Defendants.
No. 06-23048-CV.
Michael Charles Black, William Edward Cassidy, Cassidy & Black, Miami, FL, for Plaintiffs.
THIS CAUSE came before the Court on Plaintiffs’ Motion for Summary Judgment (dkt # 93), Defendant Air Express International USA, Inc. d/b/a Danzas Air & Ocean and d/b/a DHL Global Forwarding’s Motion for Summary Judgment (dkt # 88); and Lufthansa Cargo AG’s Motion for Summary Judgment (dkt # 92).
This case involves the spoliation of a shipment of temperature sensitive insulin products en route from Fegersheim, France to Indianapolis, Indiana. Plaintiffs assert three claims in their Complaint: (1) breach of a Service Agreement between Defendant Air Express International USA, Inc., d/b/a Danzas Air & Ocean and d/b/a DHL Global Forwarding (“DHL”), and Plaintiff Eli Lilly and Company (“Lilly”); (2) breach of air waybills by DHL; and (3) breach of air waybills by Defendant Lufthansa Cargo AG (“Lufthansa”).
Lilly is a pharmaceuticals company. Lilly was the consignee of the spoiled cargo that is the subject of this case. Plaintiff Elgo Insurance Company (“Elgo”), a wholly-owned subsidiary of Lilly, provides “fronting insurance” for Lilly and its subsidiaries and assists Lilly in obtaining greater coverage through the reinsurance market. Plaintiff Certain London Market Reinsurance Underwriters (“London Reinsurers”) provided reinsurance coverage for Lilly and its subsidiaries.
Eli Lilly France, S.A. (“Lilly France”) is an affiliate of Lilly. Lilly France contributed to the manufacturing of the temperature-sensitive pharmaceuticals that are the subject of this lawsuit. The pharmaceuticals contained in the shipments in question were initially manufactured in the United States and the United Kingdom and then shipped to Lilly France for further manufacturing and finishing. Lilly France manufactures pharmaceuticals at its plant in Fegersheim, France (the “Fegersheim plant”).
DHL is a provider of logistics solutions, worldwide air and ocean freight, global project forwarding, and European overland transport. Pursuant to a Service Agreement between DHL and Lilly commencing January 1, 2003 (the “Service Agreement”), DHL was to provide logistical services to Lilly, “including air and ocean freight services, warehousing and distribution, ground transportation, traditional freight forwarding, customs brokering and clearance, and logistics management.”(Service Agreement, at 3.) The Service Agreement expired under its own terms on December 31, 2007. (Id. at 10.)
Lufthansa was Lilly France’s preferred carrier for shipments of pharmaceuticals from the Fegersheim plant to the United States. Since at least 2002, Lilly France instructed DHL to arrange bookings with Lufthansa for six to eight containers to be shipped per week. These six to eight containers booked for weekly shipment are known as Lilly France’s “allotment” shipments. Shipments of containers over Lilly France’s allotment shipments (i.e., shipments in excess of weekly allotment shipments), are referred to as “supplemental” shipments.
Lufthansa offers a shipping service called “Cool/td.” Under Cool/td, Lufthansa, via DHL, provides Lilly France with LD9 “cooltainers” in which to ship its pharmaceuticals. These LD9 containers are insulated containers designed to keep cargo cool during transit. They are not designed to protect cargo from exposure to freezing temperatures. As part of the Cool/td program, the LD9 containers were to be stored at an ambient temperature between 12°C-28°C during transport from the Fegersheim plant to Lilly’s plant in Indianapolis. The shipments that are the subject of this lawsuit were shipped pursuant to Lufthansa’s Cool/td program. Lilly France placed temperature recording devices known as “TempTales” inside and outside the LD9 containers in order to monitor the air temperature that the container and cargo would be exposed to in transit. Sensitech, the manufacturer of the TempTales, provided Lilly France with certificates attesting to the accuracy of the TempTales within one half of a degree Celsius.
Under the Cool/td shipping service, if there were at least three containers in each shipment, Lufthansa would provide the trucking from the Fegersheim plant to the designated airport. Lufthansa would provide the airport storage of the LD9 containers, loading of the containers onto airplanes, air transport from the designated airport to Chicago’s O’Hare airport, and the trucking service from O’Hare airport to Lilly’s pharmaceutical facility in Indianapolis.
At the time the shipments in question occurred, Lufthansa, in conjunction with Lilly and DHL, was drafting a Standard Operating Procedures manual. The Standard Operating Procedures manual was to break down each function in the transportation cycle and assign responsibility to the three parties for each function in the cycle. There was no finished draft at the time the shipments in question occurred.
At the time the shipments in question occurred, Frankfurt, Germany was the regular airport for the allotment shipments from the Fegersheim plant to Lilly’s plant in Indianapolis.When there was availability, DHL would also arrange for the supplemental shipments to go through Frankfurt. If Frankfurt was unavailable, Lufthansa would suggest alternative routes for shipping the supplemental containers. Lilly France’s logistics team would give the final approval regarding utilization of the alternative route suggested by Lufthansa. DHL would then arrange these alternative routes. One of Lufthansa’s suggested alternative routes that Lilly France occasionally utilized was through the Munich, Germany airport. Approximately 8 of 440 shipments in the two years prior to the shipments in question went through Munich. All supplemental shipments were still subject to Lufthansa’s Cool/td program.
On December 1, 2004, Lilly France requested that DHL arrange a supplemental shipment to Indianapolis of eight LD9 containers of cold-sensitive pharmaceuticals (insulin and growth hormone) for December 20 and December 21, 2004. The eight containers were broken down into two shipments of four containers each. Consistent with prior procedure, DHL contacted Lufthansa’s booking agent. Lufthansa proposed routing the supplemental shipments through Munich due to a lack of capacity out of Frankfurt. DHL’s “implant” at the Fegersheim plant-i.e., DHL’s dedicated customer service representative at the plant-advised Lilly France of Lufthansa’s proposal and Lilly France approved it.
DHL issued two house air waybills between Lilly and DHL for the subject shipments. DHL also issued two master air waybills between DHL and Lufthansa for the subject shipments. All of the waybills contained instructions to keep the cargo “REFRIGERATED AT +8 DEGREES CELSIUS” and to “AVOID FREEZING.” All of the air waybills contained a box titled “Declared Value for Carriage.” All of the air waybills for the shipments in question were marked “NVD”-“No Value Declared.” The master air waybills state, in the box titled “Nature and Quantity of Goods,” “CONSOLIDATED SHIPMENT PER ATTACHED MANIFEST.” DHL’s implant at the Fegersheim plant was responsible for filling out the waybills. Hartmut Flessa, Lufthansa’s Director of Handling Competence, testified at his deposition that the inclusion of the word “consolidated” on the master air waybill would have led the cargo handlers at Munich airport to assume that the shipments in question were of low value and required no special temperature-sensitive handling.
The subject shipments were picked up at the Fegersheim plant by heated trucks hired by Lufthansa, weighed at the Strasbourg, France airport, and transported by heated trucks hired by Lufthansa to the Munich airport. At the Munich airport, the subject shipments were left outside in freezing temperatures prior to being loaded in the airplane and shipped to Chicago.
After the supplemental shipments arrived in Indianapolis, the TempTales inside and outside the LD9 containers indicated that seven of the eight containers had been subjected to sub-freezing temperatures in violation of the Cool/td shipping protocols. The normal practice of Lilly is to release the cargo for sale if the TempTales demonstrate no impermissible temperature deviation during shipment. Defendants contend that for one of the seven containers, only one of the five TempTales in the container registered sub-freezing temperatures. Defendants contest the accuracy of the TempTales’ temperature measurements for all seven containers.
Lilly France issued notices of claim to DHL on December 23 and 24, 2004, for damage to the subject shipments. DHL then issued notices of claim to Lufthansa on December 24, 2004.
Article 3 of the Service Agreement, Performance Metrics, provides:
Exception Reporting: An “Exception Report” will be completed by the Supplier for each incident…. A root cause analysis will be performed. Responsibility will be assigned. Immediate action is to be documented. A corrective plan will be documented and discussed with Lilly affiliate[.] The exception report will [be] signed by Lilly and Supplier.
Graphs and data of the TempTales’ temperature measurements were emailed to the Fegersheim plant. Lilly France and DHL’s representatives then met pursuant to Article 3 of the Service Agreement to complete an Exception Report. The Exceptions Reports, dated December 24, 2004, both stated in relevant part: “Two cooltainers are frozen, because [Lufthansa] did not respect Cool/td procedures.”(Scheer Deposition, at Exs. 5-A and 5-B.)
In a letter dated January 3, 2008, J. Florian Pfaff, Lufthansa Cargo Vice-President Global Key Account Management, wrote to Renee Scheer apologizing for spoliation of the shipment. Pfaff wrote: “The shipment was forwarded to Munich and unfortunately there the cool containers were left outside the terminal due to human error. In order not to run into such a situation again I have advised our office in SXB to book and accept only routings via Frankfurt with immediate effect.”(See Scheer Deposition, at Ex. 7.) On January 13, 2005, Monica Houck, a Lufthansa Cargo Pharmaceuticals Global Industry Manager, wrote an email of apology to Lilly. Therein, Houck stated that the reason for the spoilation was “human error.” (See id., at Ex. 6.) She further stated that one of Lufthansa’s action items was that “[Munich airport] is closed for cool/td until further notice since beginning of January.”(See id.)
Two weeks after the shipments arrived in Indianapolis, Lilly destroyed the insulin products shipped in the seven containers which registered sub-freezing temperatures on their TempTales.Some of the growth hormone was salvaged. A DHL representative sent an email to Lilly’s insurance company representatives requesting that the spoiled cargo not be destroyed. Lilly contends that in order to properly test the insulin products to ensure that they were still viable, Lilly would have had to subject the insulin products to destructive testing. Lilly let the insurance underwriters and DHL representatives examine the spoiled shipment but did not allow them to take the product away from its facility.
Article 5 of the Service Agreement, Indemnification, provides in a subsection titled “Liability Limitations”:
Except for a party’s obligations of this Agreement, any damages either party is required to pay for any reason whatsoever and regardless of the form of action, in the aggregate, shall be limited to two times the amount of the total fees payable to Supplier hereunder. Neither Supplier nor Lilly shall be liable for any special, punitive or consequential damages, or loss of profits arising out of or in connection with the respective obligations under this Agreement.
Lilly made a claim to its insurance company Elgo in the amount of $10,251,432.50, which included the transfer price of the damaged cargo, freight costs, and salvage expenses. Elgo, in turn, made a claim to its reinsurers. The insurer/reinsurers paid a total of $9,000,000 on the claim.
The judgment sought should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.
Summary judgment may be entered only where there is no genuine issue of material fact. Twiss v. Kury, 25 F.3d 1551, 1554 (11th Cir.1994). The moving party has the burden of meeting this exacting standard. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). An issue of fact is “material” if it is a legal element of the claim under the applicable substantive law which might affect the outcome of the case. Allen v. Tyson Foods, Inc., 121 F.3d 642, 646 (11th Cir.1997). An issue of fact is “genuine” if the record taken as a whole could lead a rational trier of fact to find for the nonmoving party. Id.
In applying this standard, the district court must view the evidence and all factual inferences therefrom in the light most favorable to the party opposing the motion. Id. However, the nonmoving party “may not rest upon the mere allegations or denials of the adverse party’s pleading, but the adverse party’s response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial.”Fed.R.Civ.P. 56(e).“The mere existence of a scintilla of evidence in support of the [nonmovant’s] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmovant].” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
A. Plaintiffs’ Claims are Governed by the Montreal Convention
1. Plaintiffs’ state law claims are preempted
The Montreal Convention entered into force on November 4, 2003. Convention for the Unification of Certain Rules for International Carriage by Air, May 28, 1999, ICAO Doc. 9740, reprinted in S. TREATY DOC. NO. 106-45, 1999 WL 33292734 (2000). It succeeded the Warsaw Convention as the treaty exclusively governing the rights and liabilities of passengers and carriers in international air transportation. Convention for the Unification of Certain Rules Relating to International Transportation by Air, Oct. 12, 1929, 49 Stat. 3000, T.S. No. 876 (1934), (“Warsaw Convention”).“The new treaty unifies and replaces the system of liability that derives from the Warsaw Convention, explicitly recognizing the importance of ensuring protection of the interests of consumers in international carriage by air and the need for equitable compensation based on the principle of restitution.” Sompo Japan Ins., Inc. v. Nippon Cargo Airlines Co., 522 F.3d 776, 780-81 (7th Cir.2008). The convention applies to all actions for damages to cargo shipped between member states. Montreal Convention, Art. 29. The United States, France, and Germany have signed and ratified the Montreal Convention.
Article 24(1) of the Warsaw Convention provides: “In the cases covered by Articles 18 and 19 [which include the provision governing damage to cargo] any action for damages, however founded, can only be brought subject to the conditions and limits set out in this Convention.”Courts construe Article 24(1) as preempting all state law claims falling within the scope of the Warsaw Convention. See Fishman by Fishman v. Delta Air Lines, 132 F.3d 138, 141 (2d Cir.1998). Article 29 of the Montreal Convention, in turn, states: “In the carriage of … cargo, any action for damages, however founded, whether under this Convention or in contract or in tort or otherwise, can only be brought subject to the conditions and such limits of liability as are set out in this Convention.”Courts have construed Article 29 of the Montreal Convention as similarly preempting state law actions falling within its scope. See Paradis v. Ghana Airways Ltd., 348 F.Supp.2d 106, 111 (S.D.N.Y.2004) (“Article 29 of the Montreal Convention simply clarified the language of the Montreal Protocol’s amendment to Article 24(1) of the Warsaw Convention.”).
Plaintiffs’ state law causes of action for breach of contract fall within the scope of the Montreal Convention. Article 18(1) of the Montreal Convention provides that: “The carrier is liable for damage sustained in the event of the destruction or loss of or damage to, cargo upon condition only that the event which caused the damage so sustained took place during the carriage by air.”Pursuant to Article 18(3), “carriage by air … comprises the period during which the cargo is in the charge of the carrier.”It is undisputed by the parties that any damage to the cargo in this case occurred while the containers were in the charge of Lufthansa. Accordingly, Plaintiffs’ breach of contract claims is preempted, and Plaintiffs may only recover against Defendants subject to the conditions and limits of liability as set forth in the Convention.To avoid further unnecessary motion practice, the Court will construe Claims Two and Three as being plead under the Montreal Convention. Count One is dismissed.
2. DHL and Lufthansa are subject to liability as contracting and actual carriers, respectively
Article 39 of the Montreal Convention provides:
Article 40, respective liability of contracting and actual carriers, provides in turn:
Accordingly, DHL is subject to liability as a contracting carrier. Lufthansa is subject to liability as an actual carrier.
3. Lilly provided timely notice of its claim
Article 31 of the Convention governs the timely notice of claims:
(2) In the case of damage, the person entitled to delivery must complain to the carrier forthwith after the discovery of the damage, and, at the latest, within seven days from the date of receipt in the case of checked baggage and fourteen days from the date of receipt in the case of cargo. In the case of delay, the complaint must be made at the latest within twenty-one days from the date on which the baggage or cargo have been placed at his or her disposal.
Defendants attempt to argue that Plaintiffs’ claims are precluded because Lilly France, not Lilly filed the notice of claim. Defendants also argue that Plaintiffs’ claims are precluded because the notice filed by Lilly France was “contingent and preliminary” in nature. Both arguments are without merit.
The purpose of the requirement of written notice is to adequately inform the carrier of the nature of damages claimed against it. See Highlands Insurance Co. v. Trinidad & Tobago (BWIA International) Airways Corp., 739 F.2d 536, 540 (11th Cir.1984). As stated by the court in Pesquera Navimar, S.A. v. Ecuatoriana de Aviacion, 680 F.Supp. 1526, 1527 (S.D.Fla.1988), “the purpose of the notice requirement is just that, to give notice.”Here, Lilly France’s notices to DHL, dated December 23 and 24, 2004, satisfy the notice requirement of Article 31. In both notices, a Lilly France Business Logistics employee wrote to the DHL implant at the Fegersheim plant: “Our branch in the United States just notified us that a change in temperature occurred while the shipment was in transit between Fegersheim and Indianapolis.”(dkt # 120-2, at 3, 7.) The notices then list damage amounts for both shipments. The letter concludes, “You are hereby informed that we hold you liable for those losses.”(Id. at 4, 8.) On December 24, 2004, DHL forwarded the notices of claim to Lufthansa. These notices contain a definite claim for damages made by the party entitled to delivery. The notices were sufficient on behalf of Lilly to put Defendants on notice of damage to the cargo because Lilly France was relaying information provided by Lilly concerning damage to the cargo, which is the functional equivalent of Lilly having provided notice directly. Moreover, even if construed as notice on behalf of Lilly France, fulfillment of the notice requirement passes to Lilly by virtue of Lilly France’s assignment of rights and ratification to Lilly. (See dkt # 120-4.) As such, both Defendants received adequate notice of the damage within fourteen days from Lilly’s receipt of the shipments.
Article 14 of the Convention provides that both consignors and consignees can enforce their rights under the contract of carriage: “The consignor and the consignee can respectively enforce all the rights given to them by Articles 12 and 13, each in its own name, whether it is acting in its own interest or in the interest of another, provided that it carries out the obligations imposed by the contract of carriage.”Article 13 provides that the consignee, absent an exercise of the consignor’s conflicting rights, has the right to delivery of the shipment. A consignee may sue both the contractual and actual carrier for any damages that occurred during shipping. See Convention, at Art. 45 (“In relation to the carriage performed by the actual carrier, an action for damages may be brought, at the option of the plaintiff, against that carrier or the contracting carrier, or against both together or separately.”). Accordingly, Plaintiffs have standing to sue Defendants under the Convention.
Additionally, Lilly France has assigned all of its rights pursuant to the shipments to Plaintiffs in the instant case and has ratified this action. (See dkt # 120-4.) Fed.R.Civ.P. 17(a) provides in relevant part:
“The function of this ratification rule ‘is simply to protect the defendant against a subsequent action by the party actually entitled to recover, and to insure generally that the judgment will have its proper effect as res judicata.’” Arabian American Oil Co. v. Scarfone, 939 F.2d 1472, 1477(11th Cir.1991) (citingFed.R.Civ.P. 17(a), notes of advisory committee on 1966 amendment). The Court finds that, even if Plaintiffs lacked standing to bring this suit pursuant to Articles 14 and 45 of the Convention, Lilly France’s assignment and ratification is valid under Fed.R.Civ.P. 17(a) and resolves any remaining doubts as to Plaintiffs’ standing. Under these circumstances, any ratification prior to final judgment is effective because it furthers Rule 17(a)’s purpose of protecting Defendants against subsequent litigation, ensures that the final judgment will have its proper res judicata effect, and works no prejudice upon Defendants.
B. Defendants are Liable under the Montreal Convention
Montreal Convention, Article 18, provides that: “The carrier is liable for damage sustained in the event of the destruction or loss of or damage to, cargo upon condition only that the event which caused the damage so sustained took place during the carriage by air .”A prima facie case of carrier liability under the Montreal Convention is established upon a showing that the goods were delivered to the carrier in good condition, were delivered to the consignee at destination in damaged condition, and resulted in a specified amount of damage. Wea Farms v. American Airlines, Inc., 2007 WL 1173077,(S.D.Fla., April 18, 2007) (citing Offshore Aviation v. Transcon Lines, Inc., 831 F.2d 1013, 1014 (11th Cir.1987)).
1. The cargo was delivered to Defendants in good condition
If the shipment at issue is a sealed container, then the carrier has no independent ability to ascertain the contents of the shipment, and the shipper is held to a higher standard of proof. A.1. G. Uruguay Compania de Seeuros, S.A. v. AAA Cooper Transp., 334 F.3d 997, 1004 (11th Cir.2003). When a sealed shipment was damaged en route, and, consequently, the question is only the original condition of the shipment, then reliable, substantial circumstantial evidence of condition will suffice to prove a prima facie case. Id. at 1004.On the other hand, when the shipment was lost, destroyed, or damaged to such extent that it is impossible to tell what was contained in the shipment, direct evidence of the original contents and condition of the shipment is required to prove a prima facie case. Id. As explained by the Eleventh Circuit in A.I.G.:“The heightened proof required of shippers for sealed containers turns on whether the carrier can reasonably be expected to determine the nature of the shipment through independent confirmation.”Id. at 1006.In other words, “[w]hen original condition of the contents is at issue … reliable and substantial circumstantial evidence will suffice, but when the contents themselves are in question … direct evidence must be presented.”Id. at 1007.
Here, Plaintiffs need only present circumstantial evidence that the goods were delivered to Defendants in good condition as it is the original condition of the cargo that is at issue, not the contents themselves. Plaintiffs have presented sufficient circumstantial evidence to satisfy their prima facie burden that the cargo was delivered to Defendants in good condition. Renee Scheer, Logistics Manager for Lilly France, submitted an affidavit with extensive documentation of business records attesting to the contents of the containers attached thereto. Specifically, the following business records are attached to the affidavit: (1) packing lists for the subject cargo that are generated by Lilly France when the cargo is placed in the containers that verify that the proper product and quantity were shipped; (2) protocols of manufacture, analysis, and release which certify that proper procedures of manufacture and packaging were followed for the subject cargos and the cargos can be released for export; (3) certificates of analysis that were generated by Lilly France immediately prior to shipment to certify that the cargo meets the required quality standards and are fit for human use; and (4) checklists for the containers that were prepared by warehouse personnel at Lilly France as the subject cargo was being loaded into the containers to confirm that the cargo was, in fact, loaded. (See dkt # 120-6.) Further, Plaintiffs have demonstrated that one of the containers carrying growth hormone and insulin arrived at Indianapolis in good condition, thus providing circumstantial evidence that all of the cargo was delivered to Defendants in good condition and would have arrived at Indianapolis in good condition had the remaining seven containers not been exposed to sub-freezing temperatures. This evidence is sufficient to satisfy Plaintiffs’ prima facie burden to demonstrate delivery of the cargo to Defendants in good condition.
2. The cargo was received in damaged condition
Plaintiffs have produced evidence demonstrating that they received the cargo in damaged condition. First, Plaintiffs have presented credible evidence, through Lilly France’s “deviation reports,” that seven of the eight containers were exposed to sub-freezing temperatures. Defendants attempt to establish that not all of the containers were subjected to subfreezing temperatures because one of the containers only recorded temperatures of .1°C below 0°C and therefore this was insufficient to establish that the container was exposed to subfreezing temperatures. However, the TempTales have a margin of error of +/. 5°C. Therefore, the cargo could have been exposed to temperatures ranging from-.6°C to .4°C. A recorded temperature of-.1°C was sufficient to have put the cargo in a range of unacceptable temperatures. While Defendants also attempt to attack the accuracy of the TempTales temperature recording devices, Plaintiffs have provided an affidavit from David Ray, Senior Director of Quality Assurance for Sensitech, Inc., supplier of the TempTales. Mr. Ray states therein that all TempTales were thoroughly tested and certified for accuracy before being provided to Lilly France for use. Further, the TempTales, when returned to Sensitech (the devices are single-use and must be returned to the supplier for retesting before they can be reused), showed no deficiencies and were subsequently resold.
Second, Plaintiffs have also presented undisputed evidence, through the expert report of William C. Harris, that insulin products that are exposed to sub-freezing temperatures are not suitable for release for public use. Mr. Harris stated in his report that insulin that has been exposed to sub-freezing temperatures may undergo subtle changes that are not detectable by physical inspection. In order to adequately test the exposed insulin to determine its integrity, the insulin must be destructively tested. The necessary conclusion from Mr. Harris’ report is that no insulin that has been exposed to freezing temperature may be released for public consumption because the only way to determine the insulin’s integrity is through destructive testing which would render the insulin unusable. That is, once the insulin products have been subjected to sub-freezing temperatures, they become unsaleable, regardless of whether actual damage occurs.Even with the Temptales’ margin of error of +/-.5°C, the mere possibility that the insulin had been exposed to sub-freezing temperature, combined with the necessity of destructive testing, is sufficient to conclude that the insulin could not safely be released for public consumption.
Third, Plaintiffs point to 21 C.F.R. § 211.208, drug product salvaging, which provides in relevant part:
Drug products that have been subjected to improper storage conditions including extremes in temperature, humidity, smoke, fumes, pressure, age, or radiation due to natural disasters, fires, accidents, or equipment failures shall not be salvaged and returned to the marketplace. Whenever there is a question whether drug products have been subjected to these conditions, salvaging operations may be conducted only if there is (a) evidence from laboratory tests and assays (including animal feeding studies where applicable) that the drug products meet all applicable standards of identity, strength, quality, and purity and (b) evidence from inspection of the premises that the drug products and their associated packaging were not subjected to improper storage conditions as a result of the disaster or accident.
As there was evidence affirmatively establishing that the insulin was subjected to improper storage conditions and there was no viable testing that would have conclusively demonstrated the presence of damage while preserving the integrity of the insulin, salvaging the cargo would have been in violation of federal regulations.
Thus, reliable reports that the insulin products were subjected to sub-freezing temperatures, the conclusion that insulin products subjected to sub-freezing temperatures may not be safely released to the public, and the federal regulation prohibiting salvage of pharmaceuticals subjected to improper storage conditions-taken in conjunction, conclusively demonstrate that the cargo was received by Lilly in damaged, unsaleable, and useless condition. Finally. Defendants have offered no explanation, such as fraud, as to why Plaintiffs, having had an ongoing successful shipping relationship with Plaintiffs, would now for the first time falsely claim damage, in the absence of actual damage, of products whose very business it is for Plaintiff to resell for profit.
3. Defendants have no defenses under the Montreal Convention
Article 18(2) of the Montreal Convention provides that
the carrier is not liable if and to the extent it proves that the destruction, or loss of, or damage to, the cargo resulted from one or more of the following:
Defendants have failed to proffer evidence that any of the four enumerated defenses set forth in Article 18(2) apply in this case.
Article 20 of the Montreal Convention provides Defendants an additional defense for exoneration. Article 20 provides that:
If the carrier proves that the damage was caused or contributed to by the negligence or other wrongful act or omission of the person claiming compensation, or the person from whom he or she derives his or her rights, the carrier shall be wholly or partly exonerated from its liability to the claimant to the extent that such negligence or wrongful act or omission caused or contributed to the damage.
Lufthansa suggests that Lilly France was negligent in approving the routing of the shipment in violation of the Standard Operating Procedures. The Court rejects this argument. There is no evidence on the record that Lilly France acted negligently. Lilly France agreed to route the shipment through the Munich Airport at the suggestion of Lufthansa. If there was an embargo for temperature-sensitive products at the Munich Airport at the time of the shipments, there is no evidence that Lilly France was aware of it. In fact, the evidence indicates that the embargo was not imposed until January 2005, after the shipments occurred. Further, the shipments in question were to be shipped pursuant to the “Cool/td” program which was specifically designed to prevent against exposure to freezing temperatures. A number of shipments (at least eight) had gone through the Munich Airport in the two years prior to the shipments in question without mishap. Even if Lilly had been aware of an embargo that was in effect, as long as Lufthansa represented that it could transport the cargo through Munich Airport without compromising the cargo, Lilly would not have been negligent. Finally, documents and correspondence exchanged at the time of the incident demonstrate that the damage was the result of human error at the Munich Airport, and not due to any negligence by Lilly France.
Lufthansa also suggests that it should be wholly or partially exonerated because of DHL’s allegedly negligent designation of the cargo as “consolidated” on the master air waybill. The “consolidated” designation might be of some significance in a case where a shipper had no knowledge concerning the nature of the cargo and could reasonably infer from the “consolidated” designation that the cargo was of low value and required no special handling. However, given the circumstances here, the “consolidated” designation is insufficient to establish exoneration. The LD9 containers were shipped via Lufthansa’s Cool/td shipping service. The purpose of using Cool/td and the “cooltainers” was to regulate the temperature of cargo during shipping. Lufthansa was aware of Lilly’s shipping needs concerning temperature sensitive cargo and was aware that Lilly used to Cool/td shipping service. Therefore, in light of Lufthansa’s knowledge concerning the temperature-sensitive handling that Lilly required, Lufthansa could not have reasonably drawn an inference to the contrary based on the “consolidated” designation. Moreover, even in the absence of knowledge concerning the cargo and usage of the Cool/td shipping service, all of the waybills contained instructions to keep the cargo “REFRIGERATED AT +8 DEGREES CELSIUS” and to “AVOID FREEZING .” Accordingly, Lufthansa is not entitled to an exoneration defense.
The parties do not dispute that if Defendants are found liable, Plaintiffs are entitled to damages. However, the parties dispute the amount of Plaintiffs’ damages and the Defendants’ limitation of liability for those damages.
a. Lufthansa’s liability is capped at 17 Special Drawing Rights per kilo
Article 22(3) of the Montreal Convention states:
In the carriage of cargo, the liability of the carrier in the case of destruction, loss, damage or delay is limited to a sum of 17 Special Drawing Rights per kilogram, unless the consignor has made, at the time when the package was handed over to the carrier, a special declaration of interest in delivery at destination and has paid a supplementary sum if the case so requires.
Plaintiffs concede that, under the Montreal Convention, Lufthansa’s damages are capped at 17 SDRs per kilo. The parties also concede that Plaintiffs can only recover for the weight of the damaged cargo.
b. DHL’s liability is capped at two times the total fees payable to DHL under the Service Agreement
Article 25 of the Montreal Convention states that: “A carrier may stipulate that the contract of carriage shall be subject to higher limits of liability than those provided for in this Convention or to no limits of liability whatsoever.”The parties did not stipulate in any of the air waybills that the shipments in question would be subject to higher limits of liability than those provided for in the Montreal Convention. However, Lilly argues that Article 5 of the Service Agreement contains a higher limit of liability for DHL than that provided for in the Montreal Convention. Lilly seeks to have the Court apply this higher liability limitation to its damages against DHL.
Article 5 of the Service Agreement between DHL and Lilly provides under “Liability Limitations”: “Except for a party’s obligations of this Agreement, any damages either party is required to pay for any reason whatsoever and regardless of the form of action, in the aggregate, shall be limited to two times the amount of the total fees payable to Supplier hereunder.”This provision does not specify whether the reference to “total fees payable” refers to total fees payable for a particular shipment that is damaged or lost, or to total fees payable for the duration of the Service Agreement.
Plaintiffs and DHL dispute the meaning of this contractual provision. DHL contends that it is illogical to read the provision “two times the amount of the total fees payable to Supplier hereunder” to mean two times the total fees payable to DHL under the entire term of the Service Agreement. DHL argues that if the damages occurred in the first week of the contract, this reading of the provision would require the parties to wait five years (the length of the Service Agreement) to determine whether the liability limitation applies. DHL contends that a more sensible interpretation would be to read the provision as limiting liability to double the amount of fees for each particular shipment governed by the Service Agreement. DHL estimates that the cost of shipment in this case was less than 3000 euros.
Plaintiffs contend that DHL’s interpretation of the liability limitation provision is erroneous because the Montreal Convention prohibits carriers from setting a limitation of liability lower than that provided for in the Montreal Convention (i.e. 17 SDR’s per kilogram). Plaintiffs contend that the only reasonable interpretation of the provision is to read the limitation of liability as totaling two times the total amount of fees under the contract. Plaintiffs estimate that Lilly paid DHL $250,000,000 for services over the course of the five year term of the Service Agreement, and that it is not unreasonable for the Parties to wait until the end of the contract to determine the limitation of liability. Additionally, Plaintiffs assert that there would be no reason to wait until the expiration of the contract to determine the liability limitations because the Parties could determine whether the damages in a lawsuit exceeded the amount of fees paid at any time during the course of the contract.
This Court finds that the Liability Limitation clearly and unambiguously establishes that DHL’s liability is limited to two times the total fees payable to DHL for the duration of the Service Agreement. Article 5 states that “any damages either party is required to pay for any reason whatsoever and regardless of the form of action, in the aggregate, shall be limited to two times the amount of the total fees payable to Supplier hereunder.”The Service Agreement’s reference to “any damages … in the aggregate” is an unambiguous reference to total damages recoverable for the duration of the Service Agreement. The Service Agreement’s reference to damages “in the aggregate” supports the conclusions that “total fees payable” refers to the aggregate of all fees payable for the duration of the Service Agreement. This is so because the Service Agreement’s attempt to limit total damages recoverable for the duration of the contract is followed by language that compares such damages with the total fees payable. The juxtaposition of “aggregate damages” with “total fees payable” indicates that both are made in reference to the duration of the Service Agreement, resulting in temporal parity between damages and fees that facilitates easy comparison. To find otherwise would result in the absurd interpretation that total aggregate damages recoverable for the duration of the contract would be limited to twice the fees associated with any particular shipment that was damaged. Thus, once a loss occurred resulting in damages, the amount of damages paid for that incident would constitute the total aggregate damages recoverable for the life of the Service Agreement. Such an interpretation is both insensible and unsupported by the language of Article 5. Moreover, the use of “hereunder” in Article 5 further supports the conclusion that “total fees payable” refers to total fees payable for the duration of the Service Agreement because “hereunder” refers to the Service Agreement in its entirety.
Finally, under DHL’s interpretation, there are circumstances in which a damages limit of twice the shipping cost of a particular shipment would violate the Montreal Convention’s minimum damages threshold of 17 SDR’s per kilo. In such cases, the above-referenced provision in Article 5 would become surplusage because Article 26 of the Montreal Convention renders null and void any provision that limits damages to less than 17 SDR’s per kilo. See Fla. Polk County v. Prison Health Servs., Inc., 170 F.3d 1431, 1439 (11th Cir.1999) (stating that the provisions of a contract should be construed to give every provision meaning); Maccaferri Gabions, Inc. v. Dynateria Inc., 91 F.3d 1431, 1439 (11th Cir.1999) (stating that an interpretation that gives meaning to all parts of a contract is preferable to one which leaves portions meaningless). Therefore, the damages limit under Article 5 is two times the total fees DHL is entitled to for the duration of the Service Agreement.
Even if the liability limitation provision of Article 5 of the Service Agreement was ambiguous, parol evidence supplied by Lilly would still support the Court’s interpretation. “Extrinsic evidence is admissible to explain a latent ambiguity, but is not admissible in the case of a patent ambiguity.” Ace Electric Supply Co. v. Terra Nova Electric, Inc., 288 So.2d 544, 547 (Fla. 1st DCA 1973) (internal citations omitted). Here, if there is any ambiguity as to the liability limitation provision, the ambiguity is latent, as the language is clear and intelligible but the parties disagree as to whether the limitation applies to fees paid to DHL for each shipment or fees paid over the entire course of the contract. See Johnson Enters., of Jacksonville v. FPL Group, 162 F.3d 1290, 1310 (11th Cir.1998) (“A latent ambiguity … is said to exist where a contract fails to specify the rights or duties of the parties in certain situations and extrinsic evidence is necessary for interpretation or a choice between two possible meanings.”) (quoting Crown Management Corp. v. Goodman, 452 So.2d 49, 52 (Fla. 2d DCA 1984).
David Bernard, the Lilly lawyer that drafted the liability limitation provision in Article 5, testified at his deposition that his intent in drafting the provision was to set the liability limitation at two times the total fees paid by Lilly to DHL over the course of the five-year Service Agreement. (Bernard Deposition at 25.) Bernard also testified that the clause was intended to shift risk to DHL over the course of the Service Agreement: “The intent was that as a supplier collects fees that they would also accept greater risk of their activities.”(Id. at 26.)
Accordingly, the Court finds that under the plain terms of Article 5, DHL’s liability is capped at two times the total amount of fees due under the Service Agreement. Additionally, even if the terms of Article 5 were ambiguous, the record evidence indicates that the Parties’ intent was to limit DHL’s liability to two times the total amount of fees due. Michael Mabe, Lilly’s Department Head of International Transportation and Services, stated in an affidavit that DHL’s fees under the Service Agreement have exceeded $250,000,000.(See Mabe Affidavit at 3.) As Plaintiffs are seeking damages in the range of $10,000,000, DHL’s liability limitation under the Service Agreement is not triggered here.
c. Damages calculated based on the transfer price
The traditional measure of damages in a cargo case is the difference between the fair market value of the cargo in good condition at the port of destination, and the fair market value of the cargo in its damaged condition at the port of destination. See Terman Foods, Inc. v. Omega Lines, 707 F.2d 1225 (11th Cir.1983). The theory is that, generally, merely awarding replacement costs deprives a manufacturer of expected profit which he is on the verge of earning and does not compensate him for what he would have had if the contract had been performed. See Polaroid Corp. v. Schuster’s Express, Inc., 484 F.2d 349, 351 (1st Cir.1973)
In this case, there is nothing on the record to indicate the fair market value of the damaged insulin. Cf. Project Hope v. M/V Ibn Sina, 250 F.3d 67, 77 (2d Cir.2001) (finding that there was no open market from which to derive the fair market value of humulin, Lilly’s insulin product). However, there is evidence on the record as to the “transfer” price of the damaged insulin, which represents the price at which Lilly could sell the insulin products to the next affiliate or third-party in the supply chain. Lilly urges the Court to follow Terman Foods and award damages based on the transfer price of the insulin products.
Defendants, on the other hand, ask the Court to limit damages to Lilly’s manufacturing costs. Defendants point to an exception to the traditional rule of damages in cargo cases set forth in Illinois Cent. R.R. Co. v. Crail, 281 U.S. 57, 64-65, 50 S.Ct. 180, 74 L.Ed. 699 (1930), in which the Supreme Court held that “[the market value measure] may be discarded and other more accurate means resorted to if, for special reasons, it is not exact or otherwise not applicable.”In that case, the plaintiff, a coal dealer, purchased a carload of coal, the shipment of which was delivered with 5,500 pounds less than the agreed upon amount. At the time of delivery, the plaintiff had not resold any of the coal and the shortage did not interfere with the maintenance of his usual stock. He was able to purchase coal of like quality at a wholesale price of $5.50 per ton. The retail market price was $13 per ton. The Supreme Court held that the retail market price was not the appropriate measure of damages because, “in the actual circumstances the cost of replacing the exact shortage at retail price was not the measure of the loss, since it was capable of replacement, and was, in fact, replaced in the course of respondent’s business from purchases made in carload lots at wholesale market price without added expense.” Id. at 63.Defendants argue that, under Crail, manufacturing costs are the most appropriate measure of damages, because the insulin products that were destroyed were replaced from existing inventory and this inventory was then replaced through Lilly France’s normal manufacturing process.
The Court finds that the transfer price is the best measure of damages here. Marty Clemens, a manager in tax for Lilly, testified regarding the nature of pricing within Lilly and amongst its affiliates. Lilly and its affiliates transact with each other at arm’s length. (Clemens Deposition, at 17.) From initial manufacture to final sale, pharmaceuticals within the Lilly supply chain are subject to a number of inter-affiliate transactions. For example, one Lilly affiliate commits resources to research and development for a chemical and manufactures the chemical in bulk. (Id. at 29.)The bulk manufacturer Lilly affiliate then sells the chemical to another Lilly affiliate for further processing at a price which reflects the bulk manufacturing costs and costs for research and development and service along with a profit allocation to the bulk manufacturer Lilly affiliate. (Id. at 14, 47.)At the next level, the processing Lilly affiliate performs further manufacturing for which it incurs costs. The price to the next Lilly affiliate (the third in the chain in this example) must account for this cost and the appropriate level of profit earned by the processing Lilly affiliate. That is, as the product moves along the supply chain to the end customer, all costs and profit as to each Lilly affiliate in the supply chain must be accounted for in the price of the product.
The transfer price represents the price at which a Lilly affiliate in the supply chain, that is in possession of a product at a certain point in time, sells the product to another Lilly affiliate or a third-party. The transfer price encompasses all the costs incurred throughout the Lilly supply chain up to a given point and all the profit that is earned in each step of the supply chain up to that point. The “manufacturing costs” that Defendants seek to set as damages fail to account for all the other costs incurred as the product moves through the supply chain Awarding damages based on “manufacturing costs” also fails to account for the profit that the various Lilly affiliates have already built into the transfer price. Thus, in order to make Lilly whole, it is not simply a matter of purchasing more of a commodity from a wholesaler like a coal dealer. The correct measure of damages is the transfer price which represents the real “economic value” that Lilly lost when the insulin was damaged in transit. (Id. at 30.)Pursuant to Articles 40, 41 and 45 of the Montreal Convention, both DHL and Lufthansa are liable for damages to which Plaintiffs are entitled up to the aforementioned limits as specified in subsection (B)(4) of this Order.
C. Plaintiffs Have Not Committed Spoilation of Evidence Warranting an Adverse Inference Instruction or Dismissal of Their Case
Defendants seek sanctions against Plaintiffs for Lilly’s destruction of the insulin without physical inspection and without allowing DHL’s representatives to examine the insulin. A party seeking an adverse inference instruction (or other sanctions) based on the spoliation of evidence must establish the following three elements: (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed, (2) that the records were destroyed with a “culpable state of mind” and (3) that the destroyed evidence was “relevant” to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense. Posely v. Eckerd Corp., 433 F.Supp.2d 1287, 1315 (S.D.Fla.2006) (quoting Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 430 (S.D.N.Y.2004)).
Here, two of the factors militate against imposing any kind of sanctions against Plaintiffs. First, Defendants have not shown that Lilly acted with a “culpable state of mind” in destroying the insulin products. There is no evidence in the record to suggest that Lilly destroyed the insulin products in a bad faith attempt to impede or hinder Defendants’ case. Second, as discussed above, Lilly’s destruction of the insulin products did not affect Defendants ability to make a claim or a defense. The exposure to sub-freezing temperatures rendered the insulin products unsaleable and thus useless, regardless of whether actual observable damage occurred. The only way to conclusively determine that damage had not occurred would be to destructively test each vial of insulin. Moreover, despite the possibility of testing random samples within the cargo, the health and safety concern surrounding the possibility that some vials were compromised while others were not warranted destruction of the entire lot. Thus, even if DHL had been allowed access to the insulin products, the insulin would have still been destroyed, irrespective of the results of any testing. Thus, the relief sought by Defendants is inappropriate here.
D. Motions to Strike
The parties have also filed a number of Motions to Strike. Those motions are denied for the reasons stated below.
1. Motion to Strike Affidavit of Rene Scheer (dkt # ‘s 145, 150)
The Court has only relied on that portion of Scheer’s affidavit that sets forth and attaches the business records relating to the shipments in question: i.e., packing lists for the subject cargo generated by Lilly France, protocols of manufacture, analysis, and release; certificates of analysis; and checklists for the containers. (See supra Section II.B.1; dkt # 120-6 at 2-3.) DHL argues that these documents are inadmissible hearsay.
The business records exception to the hearsay rule, set forth in Fed.R.Evid. 803(6):
Records of regularly conducted activity. A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record or data compilation, all as shown by the testimony of the custodian or other qualified witness, or by certification that complies with Rule 902(11), Rule 902(12), or a statute permitting certification, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness.
The documents attached to Scheer’s affidavit fall within the business records exception to the hearsay rule. Scheer is a qualified witness. He is the logistics manager for Lilly France. He is responsible for managing the entire logistics chain for shipments moving in and out of the Fegersheim plant. (See Scheer Deposition at 9.) Therefore, Scheer is qualified to testify concerning the documentation that accompanies shipments of pharmaceuticals from the Fegersheim plant. Additionally, Scheer states in his affidavit that these documents were created and maintained in the ordinary course of business as part of Lilly France’s regular business practice for every shipment that leaves their facility. (See dkt # 120-6 at 2.) Finally, the Court disagrees with DHL that the French-language check-lists and Scheer’s translation into English are inadmissible. Scheer states in his affidavit that the checklist is a regularly-kept business record and as a French and English speaker, Scheer can offer testimony that the documents are what he purports them to be. As such, the Motion to Strike Scheer’s affidavit is DENIED.
2. Motion to Strike Affidavits of Michael Mabe (dkt # 114, 117), Motion to Strike Affidavit of Monika Houck (dkt # 146), Motion to Strike Portions of Affidavit J. Florian Pfaff (dkt # 147); Motion to Strike Supplement Affidavit of Rene Scheer (dkt # 158)
The Court has not relied on the challenged portions of these affidavits or the documents attached thereto in making its rulings in this Order. Accordingly, these Motions to Strike are denied.
Based on the foregoing, it is:
ORDERED AND ADJUDGED that Plaintiffs’ Motion for Summary Judgment (dkt # 93) is GRANTED IN PART AND DENIED IN PART, consistent with terms of this Order. It is further
ORDERED AND ADJUDGED that DHL’s Motion for Summary Judgment (dkt # 88) is GRANTED IN PART AND DENIED IN PART, consistent with the terms of this Order. It is further
ORDERED AND ADJUDGED that Lufthansa’s Motion for Summary Judgment (dkt # 92) is GRANTED IN PART AND DENIED IN PART, consistent with the terms of this Order. Given that liability has been established, damages is the only remaining issue to be resolved at trial. It is further
ORDERED AND ADJUDGED that the Parties’ Motions to Strike (dkt # ‘s 114, 117, 146, 147, 158) are DENIED.
The draft Standard Operation Procedures manual, dated March 2004, indicated that shipments were to go through the Frankfurt, Germany airport.
Defendants contest whether Lilly actually destroyed the insulin products because Lilly did not issues Certificates of Destruction pursuant to their normal procedures.
The United States Senate ratified the Montreal Conve ntion on July 31, 2003. The Montreal Convention became effective for the Fourteen European Contracting States of the International Civil Aviation Organization (ICAO), including France and Germany, on June 28, 2004. ICAO PIO 05/04.
Plaintiffs attempt to circumvent applicability of the Convention by arguing that “[t]he act of routing the cargo through Munich caused and/or contributed to the damage and therefore may take the claims outside of the Montreal Convention.”(dkt # 122, at 2.) This argument is without merit. First, it is undisputed that the damage occurred at the Munich airport when the containers were in the charge of Lufthansa and thus Plaintiffs’ claims fall within the plain language of Article 18(1) and (3). Second, Plaintiffs’ suggested interpretation of Article 18(1) would totally circumvent the intended purpose of the Montreal Convention to create a uniform and predicable system of liability for commercial parties engaged in international air transport. Under Plaintiffs’ argument, a plaintiff could push back the “cause” of the damage prior to the time of air carriage simply by alleging some anterior superseding event.
The Defendants argue extensively th at Plaintiffs have not established that the cargo was damaged when it was delivered because Defendants were unable to test the insulin products themselves to determine damage and Plaintiffs have failed to produce evidence of actual physical damage to the insulin products. Defendants arguments miss the fundamental point regarding the damage to the insulin products: the exposure or likelihood of exposure to sub-freezing temperatures rendered the insulin products unsaleable and thus useless, regardless of whether actual observable damage occurred. Moreover, even given the possibility of testing random samples, the health and safety concern, and corresponding potential liability, surrounding distribution of a pharmaceutical product that may have been improperly exposed to sub-freezing temperatures warranted the destruction of the entire lot.
The Special Drawing Right (“SDR”) is a fluctuating international reserve asset created by the International Monetary Fund. See http:// www.imf.org/external/np/exr/facts/sdr.htm.
Article 26 of the Montreal Convention states that “Any provision tending to relieve the carrier of liability or to fix a lower limit than that which is laid down in this Convention shall be null and void.”
While Defendants have moved to strike Mabe’s affidavit, they do not challenge his testimony regarding DHL’s total fees under the Service Agreement.
Demers Bros. Trucking, Inc. v. Certain Underwriters at Lloyd’s, London
DEMERS BROS. TRUCKING, INC. and Mossberg Realty Corporation, Plaintiffs,
CERTAIN UNDERWRITERS AT LLOYD’S, LONDON, SUBSCRIBING TO CERTIFICATE NUMBER SRS IM MA 04-124, Defendant.
Civil Action No. 07-10902-JLT.
Plaintiffs Demers Bros. Trucking, Inc. (“Demers”) and Mossberg Realty Corporation (“Mossberg”) bring this action against Defendant Certain Underwriters at Lloyd’s, London, Subscribing to Certificate Number SRS IM MA 04-124 (“the Insurer”) to enforce an inland marine insurance policy. This action arose out of an insurance coverage dispute resulting from a March 2005 fire at Plaintiffs’ Dodgeville Mill. Plaintiffs assert claims for (1) breach of contract; (2) declaratory judgment; and (3) violation of the Massachusetts Consumer Protection law. Presently at issue are Parties’ cross-motions for summary judgment.For the following reasons, Defendant’s Motion for Summary Judgment is ALLOWED IN PART and DENIED IN PART, and Plaintiffs’ Motion for Partial Summary Judgment is ALLOWED IN PART and DENIED IN PART.
At all times relevant to this action, Demers operated a rigging and heavy-hauling business at the historic Dodgeville Mill (“the Building”) in Attleboro, Massachusetts. Demers leased space at the Building from Mossberg, a realty corporation and owner of the Building. The Insurer issued insurance policy Certificate Number SRS IM MA 04-124 (“the Policy”), effective October 31, 2004 through October 31, 2005, to Demers and Mossberg (collectively “the Insured”).
During the Policy period, two separate fires broke out at the Building: one on March 24, 2005 and the other in July 2005. The cause and origin of both fires were categorized as “suspicious,” and a Demers employee was arrested for starting the second fire. The Insured informed the Insurer of the March fire and the loss that it had caused. Because the Insured did not claim any damages for the July fire, this dispute focuses on the March fire (“the Fire”).
The Fire occurred in an upper floor of the Building and caused significant damage, including: (1) a one-hundred-by-forty-two-foot hole through the roof; (2) destruction of over eighty windows; (3) damage to the timber framing, roof, walls, and first-wing floor decking; and (4) smoke damage to the third floor. In addition, the Fire activated approximately eighty automatic sprinkler heads. Finally, the Attleboro Fire Department spent approximately four hours applying water to the Fire and various “hot spots” throughout the Building, and punctured additional holes through the roof.
The Insured enlisted Professional Loss Adjusters (“PLA”), a public adjusting firm, to present insurance claims arising from the Fire to the Insurer. Brian Payne, a PLA employee, served as the primary adjuster on the Insured’s behalf. Leonard Theran, also a PLA employee, oversaw Mr. Payne’s work. Christopher Attles, Demers’s vice president, served as the primary contact between PLA and the Insured. Paul Dowling, of McLarens Young International (“McLarens”), served as the Insurer’s independent insurance adjuster.
On February 22, 2006, Mr. Payne (for the Insured) sent Mr. Dowling (for the Insurer) a letter that enclosed two Sworn Statements in Proof of Loss. The first was for $518,915.05 in property damage, and the second was for $200,000 in claims related to (1) cargo and transportation and (2) loss of income, rents, and extra expenses. On March 14, 2006, Mr. Dowling informed Mr. Payne that the Insurer approved the $518,915.05 payment but rejected the $200,000 payment. By approximately March 24, 2006, the Insured had received the $518,915.05 from the Insurer.
On July 17, 2006, the Insured submitted a claim package to Mr. Dowling. This package included a Sworn Statement in Proof of Loss of $242,171.84 to reimburse Insurance Reconstruction Services (“IRS”) for its efforts in repairing, drying, and protecting the Building. Sometime after July 17, 2006, the Insurer paid the Insured the $242,171.84. On August 17, 2006, Mr. Dowling sent Mr. Payne a letter inviting him to discuss the July 17 claim package, and in October 2006, Mr. Dowling and Messrs. Payne and Theran met to discuss the Insured’s claim.
On December 29, 2006, the Insured submitted a “final submission … to settle the subject claim.”The Insured’s December 29 submission sought coverage for the following: (1) eight line-items under the Real and Personal Property provision; (2) eleven line-items under the heading “Loss of Income/Rents/Extra Expense”; (3) one line-item under the Cargo and Transportation provision; and (4) one line-item under the Riggers Liability provision. On January 16, 2007, Mr. Dowling corresponded with Mr. Payne regarding the December 29 submission and requested that Mr. Attles undergo an Examination Under Oath (“EUO”).
Mr. Attles underwent an EUO on March 7, 2007. Approximately two months later, the Insurer received additional documentation that it had requested from the Insured. After receiving this information, the Insurer paid the Insured an additional $253,913.16. To this date, the Insurer has paid the Insured $1,017,500 under the Real and Personal Property provision.
The Insured brought this action in Massachusetts Superior Court on April 11, 2007. The Insurer removed to this court on May 14, 2007. The Insured seek actual, along with double or treble, damages; interest and costs; and a declaration of Parties’ rights and obligations under the Policy. On May 2, 2008, the Insurer moved for summary judgment on all counts of the Insured’s Second Amended Complaint. On June 2, 2008, the Insured moved for full summary judgment on liability and partial summary judgment on damages that are readily ascertainable or not subject to genuine dispute.
A court may grant summary judgment when the moving party has shown “that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.”The opposing party has the burden of production to “set forth specific facts showing that there is a genuine issue for trial .”Neither party, however, “may rely on conclusory allegations or unsubstantiated denials, but must identify specific facts derived from the pleadings, depositions, answers to interrogatories, admissions, and affidavits to demonstrate either the existence or absence of an issue of fact.”
B. Counts I and II: Breach of Insurance Contract and Declaratory Judgment
1. Legal Standard for Insurance Coverage Claims
According to Massachusetts law, “insurance-contract interpretations pose legal issues for resolution by the court.”The initial burden of proof rests with the insured to prove “that the loss is within the description of the risks covered.”After the insured establishes that a claim falls within the coverage terms, the burden shifts to the insurer to demonstrate whether any exclusion applies.0Insurance coverage exclusions are strictly construed.1
Courts must enforce insurance contracts according to their plain language, unless that language is ambiguous.2A contract term is ambiguous if “its language is ‘reasonably prone to different interpretations’ or ‘susceptible to differing, but nonetheless plausible, constructions.’ “ 3 The court is to interpret an insurance contract “according to the fair and reasonable meaning of the words in which the agreement of the parties is expressed,” 4 construing the insurance contract terms “in their usual and ordinary sense” and “in the context of the Policy as a whole.” 5The court must resolve any contract ambiguity against the insurer.6
In this case, for the Insured’s claims that do not present a genuine issue of material fact, the relevant inquiry solely involves the terms of the Policy and is therefore a question of law for this court to resolve.7
2. Plaintiffs’ Insurance Coverage Claims
The Insurer has already paid the Insured $1,017,500 under the Real and Personal Property provision of the Policy, which the Insurer claims exhausts the Real and Personal Property sublimit.8Consequently, the Insured argue that (1) certain claims that the Insurer allocated under the Real and Personal Property provision could have been allocated under Policy provisions whose sublimits have not been exceeded, and (2) they have additional claims that fall under Policy provisions whose sublimits have not been exceeded.
At issue in this case are the Insured’s insurance claims, listed in their December 29 submission, seeking coverage for the following items: (1) spools of superconductive cables belonging to the Massachusetts Institute of Technology (“MIT cables”); (2) switchgears belonging to Stern-Leach (“switchgears”); (3) IRS’s invoiced work (“IRS invoice”); (4) security guard service and security system; (5) various repair expenses; (6) lost rental space and labor to relocate; and (7) loss of rent.9Also at issue is are the Insured’s claims for (1) contractors’ equipment and (2) supplemental personal property, rigging equipment, and Mossberg personal property. Finally, the Insured seek (1) reimbursement of the $2,500 deductible, (2) statutory interest, and (3) consequential damages.0
The Insured’s claims implicate the Real and Personal Property, Contractors Equipment, Riggers Liability, and Cargo and Transportation Policy provisions. These provisions provide the following coverage:
1. REAL AND PERSONAL PROPERTY-All real and personal property (including improvements and betterments) of this Insured, against risks of direct physical “loss” or damage occurring during the period of this policy per the schedule(s) of values on file with Underwriters, or attached to this policy. Coverage is extended to Newly Acquired Property to the extent of the limit shown on the Individual Lines Sub-Limits of Liability Declarations Page provided that Underwriters is [sic] are notified within 60 days of acquisition.
2. CONTRACTORS EQUIPMENT-Contractors Equipment or Mobile Equipment of the Insured, or similar equipment of Others in the Insured’s care, custody and control, for which the Insured may be held liable, per Schedule on file with Underwriters, against risk of direct physical “loss” or damage from an external cause. Coverage is further extended to cover newly acquired owned equipment, provided that Underwriters are notified within 60 days of acquisition, and to non-scheduled equipment leased, rented or borrowed from others, where the Insured may be held liable.
3. RIGGERS LIABILITY-The liability of the Insured as a bailee for direct physical “loss” or damage to the property of others in the care, custody and control of the Insured for rigging and/or hoisting, loading and unloading, dismantling or erection, moving, or storage away from the work location (no storage receipt).
5. CARGO AND TRANSPORTATION-The liability of the Insured for direct physical “loss” or damage, either legally or contractually, to the property of others while being moved under bills of lading, work orders, shipping receipts, delivery receipts, or other contractual documents, while in the possession of the Insured or connecting carrier, and while stored in transit, not to exceed thirty (30) days.1
The Policy does not provide coverage for warehousmen liability.2
The Insured’s claims also involve the Extra Expense provision of the Time Element Endorsement. The Extra Expense provision provides the following coverage:
This policy will pay necessary “Extra Expense” that is incurred due to direct physical “loss” to Real and Personal Property to which coverage applies under this policy, as a result of a covered “Cause of Loss.” This policy will also pay “Extra Expense” that will serve to minimize the suspension of business and to continue operations, or to minimize the suspension of business if operations cannot be continued.
“Extra Expense” means the necessary expenses that are incurred during the “period of restoration” that would not have been incurred if there had been no direct physical “loss” to the Insured’s Real and Personal Property which is covered under this policy.3
a. MIT Cables
Prior to the Fire, Demers contracted with MIT to transport twenty-nine spools of superconductive cables from California to Massachusetts. The MIT cables arrived at the Building on March 18, 2005, and shortly thereafter Demers transported two of the twenty-nine spools to MIT’s facilities. The remaining twenty-seven spools were inside the Building at the time of the Fire. As a result of the Fire, the MIT cables suffered “cosmetic,” “superficial” damage.4 MIT has not made a claim against Demers. The Insured seek coverage in the amount of $30,132 for the “inspection and testing” of the MIT cables. 5
[10] Though the Insured assert that both the Cargo and Transportation and the Riggers Liability provisions provide coverage for their claim, these provisions cover “direct physical ‘loss’ or damage” to property in the Insured’s care. The MIT cables would likely not satisfy this language because they only suffered “cosmetic” damage. Instead, the Insured’s right to recover would lie at common law. The common law imposes a duty on insured parties to mitigate insured loss.6Absent an insurance policy provision to the contrary, the common law also recognizes the right of the insured to seek compensation from the insurer for the costs of mitigation.7To be entitled to compensation, the insured must show that the mitigation expenses relate to an existing or imminent covered loss.8
Here, the Insured’s costs in transporting, relocating, unwrapping, and inspecting the MIT cables are recoverable from the Insurer as mitigation expenses. The Insured had a duty to mitigate damage to the MIT cables that could have resulted from the Fire suppression efforts and the excessive moisture in the Building. The Insured’s expenses, such as “uncrat[ing], unwrap [ping,] photograph[ing], re-wrap[ping] and re-crat[ing]”; “temporarily relocat [ing]”; “prepar[ing] a more appropriate location”; “relocat[ing] to an entirely different facility”“after the next heavy rain storm”; and “unwinding, inspect [ing] and rewind[ing],”9 were all reasonably related to mitigating damage to the MIT cables. That the MIT cables only suffered “cosmetic” damage is evidence of the success of the Insured’s mitigation efforts, not an indictment of their validity.
[11] The Insured’s mitigation expenses were related to an imminent covered loss under the Cargo and Transportation provision. The Insurer argues that the Cargo and Transportation provision would not cover damage to items in the Insured’s possession for more than “thirty (30) days.” 0Though the Insured retained possession of the MIT cables for more than thirty days after the Fire, the MIT cables had been in the Insured’s possession for fewer than thirty days at the time of the Fire. The Policy is ambiguous as to whether the Cargo and Transportation provision would cover loss to property that had been in the Insured’s possession for fewer than thirty days at the time of loss but for more than thirty days after the loss. Construing this ambiguity against the Insurer,1 this court finds that the Cargo and Transportation provision would have covered any material damage that the Fire and related suppression efforts caused the MIT cables. The Insured, therefore, are entitled to recover the $30,132 in costs they incurred in mitigating damage to the MIT cables because they related to an imminent loss that the Cargo and Transportation provision would have covered.
Accordingly, Defendant’s Motion is DENIED and Plaintiffs’ Motion is ALLOWED with respect to Plaintiffs’ MIT cables claim.
b. Switchgears
At the time of the Fire, switchgears owned by a Demers customer, Stern-Leach, were inside the Building allegedly as “part of a rigging operation that [Demers was] hired to do.”2The Fire suppression efforts damaged a number of the switchgears. Consequently, the Insured seek coverage in the amount of $77,369.71 for repairs to the switchgears.
[12] The Insured contend that the Riggers Liability provision covers the switchgears. Though the switchgears were not literally being rigged when they suffered damage, the Riggers Liability provision could apply in this situation because it covers property in the “control of the Insured for … storage away from the work location (no storage receipt).”3 The Insurer argues that the Riggers Liability provision excludes coverage in this case because there is evidence of storage receipts for the switchgears. First, Ronald Dubuc, a Stern-Leach employee, agreed that “Demers Brothers does not insure Stern-Leach’s equipment … for long-term storage” and testified that Stern-Leach receives “a monthly invoice and occasionally … a list of what material is stored [at the Building].”4 Second, the document entitled “Stern-Leach # 11” lists two switchgears that were present at the Building as of November 8, 2004 and includes a monthly billing amount of $554.5
[13] Because the Policy does not define “storage receipts,” this court must interpret the term in its “usual and ordinary sense” and “in the context of the Policy as a whole.”6Here, the Insured ask this court to construe the term “storage receipts” as a “warehouse receipt.” Black’s Law Dictionary defines “warehouse receipt” as “[a] document evidencing title to goods stored with someone else; esp., a receipt issued by a person engaged in the business of storing goods for a fee.”7The Stern-Leach # 11 document satisfies this definition. It lists (1) the fee that Demers charged Stern-Leach; (2) a description of each Stern-Leach property item located in the Building; (3) the date on which each item arrived; (4) an invoice number for each item; (5) the number of square feet that each item occupied; and (6) the location of each item within the Building.8In addition, Stern-Leach’s own employee corroborated the presence of “storage receipts,” stating that Stern-Leach occasionally would receive “a list of what material is stored.”9Finally, construing the Stern-Leach # 11 document as a “storage receipt” is consistent with the Policy as a whole, which excludes coverage for warehousemen liability 0 and, in the Cargo and Transportation provision, excludes coverage for items in the Insured’s possession for more than thirty days.1The Stern-Leach # 11 document indicates that the two listed switchgears were present at the Building as of November 8, 2004, more than thirty days before the March 24, 2005 Fire.2This court finds, therefore, that the Stern-Leach # 11 document is a “storage receipt” for purposes of the Riggers Liability provision.
[14] The Insured assert, though, that there is no evidence demonstrating that any of the damaged switchgears were the two switchgears listed in the Stern-Leach # 11 document. According to the Insured, “at least twelve (12) separate Stern-Leach switchgears” were “involved in [the] rigging operation.” 3The Insured have also produced an invoice purporting to list all the switchgears that were in the Building at the time of the Fire and those switchgears that sustained damaged.4The invoice appears to list twelve total switchgears, of which five sustained “Cost Material” damage.5 The invoice does not indicate, however, whether any of the damaged switchgears were the switchgears listed in the Stern-Leach # 11 document.6 As the evidence demonstrates, there is a genuine issue of material fact as to whether any of the damaged switchgears were the switchgears listed in the Stern-Leach # 11 document and therefore excluded from coverage.
Accordingly, Defendant’s Motion is DENIED and Plaintiffs’ Motion is DENIED with respect to Plaintiffs’ switchgears claim.
c. IRS Invoice
[15] IRS, Demers’s emergency repair and remediation contractor, removed standing water from the Building, dried the Building, enclosed the roof, boarded windows, and provided other emergency repairs.7The Insurer has reimbursed the Insured for the $242,171.84 IRS invoice under the Real and Personal Property provision. The Insured now claim that the $242,171.84 IRS invoice can be divided under five different provisions: (1) Real and Personal Property; (2) Contractors Equipment; (3) Riggers Liability; (4) Cargo and Transportation; and (5) the Time Element Endorsement.8The Insured raise this argument because splitting the IRS invoice between other Policy provisions would create room for additional coverage under the already-exhausted Real and Personal Property sublimit.
The IRS invoice is broadly divided into two parts: (1) “Water Out” services to remove standing water and dry the Building; and (2) emergency electrical work and services to protect the Building from further water inundation and damage.9The water removal and drying services amounted to a total cost of $153,436.50.0The emergency electrical work and services to protect the Building from further water inundation amounted to a total cost of $88,735.34 .1
[16] Here, the $153,436.50 in water removal and drying costs falls under the Real and Personal Property provision. The Extra Expense provision of the Time Element Endorsement covers “the necessary expenses that are incurred during the ‘period of restoration’ that would not have been incurred if there had been no direct physical ‘loss’ to the Insured’s Real and Personal Property which is covered under this policy.”2IRS’s water removal and drying services were a direct response to the damage that the Fire and the resultant suppression efforts caused to the Building. These services were directed toward protecting the Insured’s property “against risks of direct physical ‘loss’ or damage” and clearly falls under the Real and Personal Property provision.3 Water removal and drying services were a necessary element of the reconstruction process, and emergency reconstruction services generally fall under the primary insurance provision (here, the Real and Personal Property provision), not any extra expense provision.4In drafting the Extra Expense provision in this case, the Insured and Insurer may have contemplated such costs as those necessary to rent extra space or hire extra security in the event of a fire at the Building.5But it would be unreasonable to assume that the Insured and Insurer contemplated that the Extra Expense provision would cover services to remove and dry water that resulted from fire suppression efforts, costs directly related to the restoration itself. 6
[17] Moreover, the Insured have not met their burden of proving that the $153,436.50 in water removal and drying costs falls under the Contractors Equipment, Riggers Liability, or Cargo and Transportation provisions. The Insured have made only conclusory allegations as to the applicability of these provisions. The Insured have not alleged any particularized facts demonstrating which property was damaged, which property was at risk of being damaged, or the Policy provisions under which that property would be covered.7
[18][19][20] Finally, applying the $153,436.50 in water removal and drying costs to any provision other than the Real and Personal Property provision would lead to the forbidden, absurd result of rendering the Real and Personal Property provision superfluous. When scrutinizing a contract, a court should interpret broad contract language so as to avoid absurd results.8 Massachusetts law disfavors “contract interpretations that make some provision of the contract ‘useless or inexplicable.’ “ 9 In the context of an insurance contract, reconstruction expenditures generally are related to the primary coverage of an insurance policy, not any extra expense provisions.0
Allocating the water removal and drying costs under the Contractors Equipment, Riggers Liability, Cargo and Transportation, and Extra Expense provisions, without a particularized showing of their applicability, would provide an end-run around the Real and Personal Property sublimit. If the Insured could bypass the Real and Personal Property sublimit by generally claiming that unspecified property is covered by another provision, the Real and Personal Property sublimit would be rendered useless.1Adopting the Insured’s argument would allow future similarly situated insured parties to get out from underneath the sublimit of the primary insurance provision by arguing, without specific factual support, that any large-scale damage to a building simply must have affected the property located therein.
[21] The $88,735.34 in expenses related to protecting the Building from further water inundation and damage, however, does fall under the Extra Expense provision. These expenses included (1) “[c]over[ing] roof over holiday weekend”; (2) “[b]oard[ing]-up windows with plastic sheathing”; (3) “[p]arachut [ing] ceiling with plastic”; (4)[b]uild[ing] retaining pool to catch rain water”; and (5) “[e]mergency/temporary electric services.” 2Though these expenses would fall under the Real and Personal Property provision, they were also necessary to mitigate further damage to the Building and would fall within the Extra Expense provision. Protecting the Building from further water inundation through the roof, windows, and floor, and providing emergency electrical services were all necessary “ ‘Extra Expense’ that … serve[d] to minimize the suspension of business and to continue operations.”3
Accordingly, with respect to Plaintiffs’ IRS invoice claim, Defendant’s Motion is ALLOWED IN PART and DENIED IN PART, and Plaintiffs’ Motion is ALLOWED IN PART and DENIED IN PART.
d. Time Element Endorsement Claims
[22] In their December 29 submission, the Insured brought several particularized claims under the Time Element Endorsement. Most of the claims pertain to the Extra Expense provision, which covers “the necessary expenses that are incurred during the ‘period of restoration’ that would not have been incurred if there had been no direct physical ‘loss’ to the Insured’s Real and Personal Property which is covered under this policy.”4The Insured seek coverage for (1) security guard service and security system (items A and B); (2) various repair expenses (items C-H); (3) lost rental space and labor to relocate (items I and J); and (4) loss of rent (item K).5
i. Items A and B: Security Guard Service and Security System
The Insured seek coverage in the amount of $77,395.58 for security guard service (item A) and a security system (item B) under the Extra Expense provision. The Insured argue that the security guard service and security system were necessary extra expenses because the exposed condition of the Building required security guards and, eventually, an upgraded security system. The Insurer responds that the security guard service and security system were unnecessary extra expenses because there is no evidence of damage to the old security system, the new security system is an upgrade, and security guards were absent for a period of time after the Fire but prior to the installation of the new security system. As the conflicting evidence demonstrates, there is a genuine issue of material fact as to whether the security guard service and security system were actually “necessary.”
Accordingly, Defendant’s Motion is DENIED and Plaintiffs’ Motion is DENIED with respect to Plaintiffs’ security guard service and security system claim.
ii. Items C-H: Various Repair Expenses
[23] The Insured seek coverage in the amount of $42,335.58 for various repair expenses under the Extra Expense provision. The expenses included (1) crane service “to tarp the roof” (item C); (2) “crane, materials, and labor needed to complete the tarping of the building, the blocking of the windows and the tarping of the windows” (items D and E); (3) expenses to “pump out water, divert water and construct a temporary parachute system on the third floor” (item F); (4) “dumpster service as well as labor to remove debris from first, second and third floors” (item G); and (5) “[o]ngoing water services … for the 18 months that the roof went unrepaired” (item H).6 Though these expenses would fall under the Real and Personal Property provision, they were also necessary to mitigate further damage to the Building and would fall within the Extra Expense provision. Protecting the Building from further water inundation through the roof and windows, pumping out water as it did make its way into the Building during the period of restoration, and clearing debris were all necessary “ ‘Extra Expense’ that … serve[d] to minimize the suspension of business and to continue operations.”7The Insured, therefore, are entitled to recover $42,335.58 in various repair expenses.
Accordingly, Defendant’s Motion is DENIED and Plaintiffs’ Motion is ALLOWED with respect to Plaintiffs’ various repair expenses claim.
iii. Items I and J: Lost Rental Space and Labor to Relocate
[24] The Insured seek coverage in the amount of $487,840 for lost rental space (item I) and labor to relocate (item J) under the Extra Expense provision. The Insured argue that the lost rental space and labor to relocate were necessary extra expenses because large areas of the Building were not waterproof until all repairs were completed. The Insurer responds that the lost rental space and labor to relocate were not necessary extra expenses because, before the Fire, Demers had contemplated leasing new storage space and transforming the Building into a museum. The Insured reply that the expenses did not exist prior to the Fire because the lease for the additional space was not signed until after the Fire. As the conflicting evidence demonstrates, there is a genuine issue of material fact as to whether the lost rental space and labor to relocate expenses were actually “necessary.”
Accordingly, Defendant’s Motion is DENIED and Plaintiffs’ Motion is DENIED with respect to Plaintiffs’ lost rental space and labor to relocate claim.
iv. Item K: Loss of Rent
[25] The Insured seek coverage in the amount of $101,712 for loss of rent under the Time Element Endorsement. The Policy covers “ ‘loss’ sustained due to slowdown or suspension of business made necessary due to direct physical ‘loss’ to Real and Personal Property,”8 but it excludes coverage for “any increase of loss which may be occasioned by the suspension, lapse, or cancellation of any lease, license, contract, or order.”9
The loss of rent in this case resulted from two former tenants, Mechanology and Creative Sewing, leaving the Building. Mechanology elected not to renew its lease after the Fire,0 so the resulting loss clearly falls under the “occasioned by the … lapse … of any lease” exclusion.1 That Mechanology decided not to exercise its option to renew is immaterial. Any loss associated with Mechanology leaving the Building was occasioned, in fact, by the lapse of Mechanology’s lease. Creative Sewing’s lease expired on March 1, 2005,2 so that loss also falls under the exclusion. Even if the Insured are correct that Creative Sewing entered into a tenancy-at-will following the lapse of its lease, the tenancy-at-will lapsed, too. Given that a tenancy-at-will is a contractual relationship,3 the lapse of a Creative Sewing tenancy-at-will would clearly fall under the “occasioned by the … lapse … of any … contract” exclusion.4
Accordingly, Defendant’s Motion is ALLOWED and Plaintiffs’ Motion is DENIED with respect to Plaintiffs’ loss of rent claim.
e. Contractors’ Equipment
[26] In their Motion, Plaintiffs seek, for the first time, coverage under the Contractors Equipment provision for (1) “Demers Bros. Equipment clean and service”; (2) “Equipment Inspection & Inventory”; and (3) “Mossberg Realty Personal Property, Clean/Service.”5The Contractors Equipment provision covers (1) “Contractors Equipment or Mobile Equipment of the Insured, or similar equipment of Others in the Insured’s care, custody and control, for which the Insured may be held liable, per Schedule on file with Underwriters ”; (2) “newly acquired owned equipment, provided that Underwriters are notified within 60 days of acquisition”; and (3) “nonscheduled equipment leased, rented or borrowed from others, where the Insured may be held liable.”6
[27][28][29] The Insured have not met their burden of proving that the claimed costs fall under any of the three coverages that the Contractors Equipment provision lists. Specifically, the Insured have failed to demonstrate that the damaged equipment was “scheduled equipment” pursuant to the Schedule on file with the Insurer.7The Insured argue that the Schedule was not a part of the Policy because it was unattached, but the Insured do not cite any law for this proposition and ignore the explicit reference in the Policy to the “Schedule on file with Underwriters.” 8The Insured’s promissory estoppel argument also fails. Even assuming “Dowling instructed Demers to clean and oil its contracting equipment,”9 such an instruction would not have constituted an unambiguous promise on behalf of the Insurer to provide coverage for the equipment.0
Accordingly, Defendant’s Motion is ALLOWED and Plaintiffs’ Motion is DENIED with respect to Plaintiffs’ contractors’ equipment claim.
f. Supplemental Personal Property, Rigging Equipment, and Mossberg Personal Property
In their Motion, the Insured bring “Supplemental Personal Property Claims” and claims for “Rigging Equipment” and “Mossberg Personal Property” under the Real and Personal Property and Contractors Equipment provisions. This court has already held that the Insured have not met their burden of proving coverage under the Contractors Equipment provision.1As to the IRS invoice, this court has held that $88,735.34 is recoverable under the Extra Expense provision,2 which creates additional room for the Insured to seek compensation under the Real and Personal Property sublimit. The Insured have produced reliable evidence in support of their claims for “Mossberg Realty Personal Property, Clean/Service,” two “Player Pianos,” one “Step-Down Transformer,” one-hundred “Bundle[s] of Clothing,” and one “Clean Room, Complete & Disassembled” totaling $430,150.3Though the Insurer and Insured disagree over the outer boundaries of these claims, it is not necessary for this court to arrive at a precise dollar amount. Any disagreement between the Insurer and Insured is insufficient to preclude a finding that the Insured have proven at least $88,735.34 in additional claims under the Real and Personal Property sublimit. The Insured are entitled, therefore, to $88,735.34.
Accordingly, with respect to Plaintiffs’ personal property, rigging equipment, and Mossberg personal property claims, Defendant’s Motion is ALLOWED IN PART and DENIED IN PART, and Plaintiffs’ Motion is ALLOWED IN PART and DENIED IN PART.
g. $2,500 Deductible
[30] In their Motion, the Insured assert that the Insurer improperly reduced the Real and Personal Property sublimit by the $2,500 Policy deductible. The Policy states that the $2,500 deductible applies “per ‘Occurrence,’ “ 4 and the Policy defines “Occurrence” as “any one ‘loss’, disaster, casualty or series of losses, disasters, or casualties, arising out of one event.” 5This means that the deductible applies to the top of the Insured’s aggregate claims rather than the top of the Real and Personal Property sublimit. Given that the Insurer has not opposed this portion of the Insured’s Motion and it is reasonably apparent that the Insured’s aggregate claims exceed $1,022,500 (the $1,020,000 Real and Personal Property sublimit plus the $2,500 deductible),6 the Insured are entitled to recover the $2,500 deductible.
Accordingly, Defendant’s Motion is DENIED and Plaintiffs’ Motion is ALLOWED with respect to Plaintiffs’ $2,500 deductible claim.
h. Statutory Interest
In their Motion, the Insured seek statutory interest pursuant to chapter 175, sections 99 and 102 of the Massachusetts General Laws. Section 99 provides that
[i]n case of any loss or damage, the [insurance] company, within thirty days after the insured shall have submitted a [signed, sworn statement in proof of loss,] … shall either pay the amount for which it shall be liable, which amount if not agreed upon shall be ascertained by award of referees as hereinafter provided, or replace the property with other of the same kind and goodness.7
Section 99 states further that the insurer “shall be liable for the payment of interest … on the agreed figure commencing thirty days after the date an executed proof of loss for such figure is received by the company.”8
The Insurer argues that it rendered payment for the Building claim and the IRS invoice within thirty days of receiving the Insured’s proof of loss for each claim, and otherwise complied with its statutory duties. Under Massachusetts law, “[a]n insurer is not required to pay a loss before its amount has been established by agreement or arbitration.”9Given that the Insurer has timely reimbursed the Insured for all agreed-to amounts of loss, the Insurer has satisfied the requirements of section 99.
The Insured contend that both section 99 and section 102 apply in this case, and that a jury could find that the date of agreed-to loss was in May 2005. First, section 102 does not include a provision on statutory interest. The Ben Elfman court disagreed with the trial court’s application of section 102 to provide interest to the insured and repeated the section 99 requirements that the insured “would not have been entitled to payment or the commencement of interest thirty days later” because “[t]here was no agreement as to the extent of that loss.”0Second, the Insured’s contention that a jury could find the date of agreed-to loss was in May 2005 is immaterial under section 102, which provides that the thirty-day clock does not begin until the insured submits a “signed, sworn statement in proof of loss” that is “established by agreement or arbitration.” 1The Insured have not demonstrated that the Insurer ever failed to pay the Insured within thirty days of the submission of an agreed-to, signed, sworn statement in proof of loss.
Accordingly, Defendant’s Motion is ALLOWED and Plaintiffs’ Motion is DENIED with respect to Plaintiffs’ statutory interest claim.
i. Consequential Damages
[31] There being a genuine issue of material fact as to whether the Insured suffered consequential damages as a result of any of the Insurer’s Policy breaches and, if so, the amount of those damages, Defendant’s Motion is DENIED and Plaintiffs’ Motion is DENIED with respect to Plaintiffs’ consequential damages claim.
C. Count III: Violation of the Massachusetts Consumer Protection Law
[32][33][34] Under chapter 93A, section 2 of the Massachusetts General Laws, “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are … unlawful.”2Evidence of unfair business practices under 93A includes “[u]nfair claim settlement practices.” 3To bring an unfair claim settlement practices action under section 11, there must have been a “commercial transaction” 4 between two parties “acting in a business context.” 5Here, the Insured’s purchase of insurance constituted a commercial transaction between the Insurer and the Insured,6 and both Parties were clearly acting in a business context.7
[35] The Insured argue that the Insurer engaged in unfair claim settlement practices by requesting documentation that was irrelevant or readily available, unnecessarily delaying payments, failing to investigate the Insured’s claims, and blatantly misinterpreting the Policy. The Insurer responds that its claim settlement practices were fair because it considered all the relevant documentation in investigating the Insured’s claims, received deficient and delinquent information from the Insured, and acted in good faith by timely paying the Insured the entirety of the Real and Personal Property sublimit. As the conflicting evidence demonstrates, there is a genuine issue of material fact as to whether the Insurer’s claim settlement practices were “unfair.”
Accordingly, Defendant’s Motion is DENIED and Plaintiffs’ Motion is DENIED with respect to Plaintiffs’ consumer protection claim.8
For the reasons stated above, Defendant’s Motion for Summary Judgment is ALLOWED IN PART and DENIED IN PART, and Plaintiffs’ Motion for Partial Summary Judgment is ALLOWED IN PART and DENIED IN PART. Plaintiffs are entitled to recover $30,132 for expenses related to the MIT cables, $42,335.58 for various repair expenses, $88,735.34 in real and personal property damage, and $2,500 for the deductible.
There are genuine issues of material fact as to whether: (1) any of the damaged switchgears were the switchgears listed in the Stern-Leach # 11 document and therefore excluded from coverage; (2) the security guard service and security system were “necessary” extra expenses; (3) the loss of rental space and labor to relocate were “necessary” extra expenses; (4) the Insured suffered consequential damages as a result of any of the Insurer’s Policy breaches and, if so, the amount of those damages; and (5) the Insurer’s claim settlement practices were “unfair.” AN ORDER HAS ISSUED.
1. Defendant’s Motion for Summary Judgment [# 33] is ALLOWED IN PART and DENIED IN PART:
a. Defendant’s Motion is ALLOWED with respect to Plaintiffs’ (1) loss of rent, (2) contractors’ equipment, and (3) statutory interest claims.
b. Defendant’s Motion is DENIED with respect to Plaintiffs’ (1) MIT cables, (2) switchgears, (3) security guard service and security system, (4) various repair expenses, (5) lost rental space and labor to relocate, (6) $2,500 deductible, (7) consequential damages, and (8) consumer protection claims.
c. With respect to Plaintiffs’ IRS invoice claim, Defendant’s Motion is DENIED as to the $88,735.34 in expenses related to protecting the Building from further water inundation and damages and ALLOWED in all 2 other respects.
d. With respect to Plaintiffs’ supplemental personal property, rigging equipment, and Mossberg personal property claim, Defendant’s Motion is DENIED as to the $88,735.34 split from the IRS invoice and ALLOWED in all other respects.
2. Plaintiffs’ Motion for Partial Summary Judgment [# 38] is ALLOWED IN PART and DENIED IN PART:
a. Plaintiffs’ Motion is ALLOWED with respect to their (1) MIT cables, (2) various repair expenses, and (3) $2,500 deductible claims.
b. Plaintiffs’ Motion is DENIED with respect to their (1) switchgears, (2) security guard service and security system, (3) lost rental space and labor to relocate, (4) loss of rent, (5) contractors’ equipment, (6) statutory interest, (7) consequential damages, and (8) consumer protection claims.
c. With respect to their IRS invoice claim, Plaintiffs’ Motion is ALLOWED as to the $88,735.34 in expenses related to protecting the Building from further water inundation and damages and DENIED in all other respects.
d. With respect to their supplemental personal property, rigging equipment, and Mossberg personal property claim, Plaintiffs’ Motion is ALLOWED as to the $88,735.34 split from the IRS invoice and DENIED in all other respects.
3. Plaintiffs are entitled to recover $30,132 for expenses related to the MIT cables, $42,335.58 for various repair expenses, $88,735.34 in real and personal property 3 damage, and $2,500 for the deductible.
4. Defendant’s Motion to Strike Portions of Christopher Attles’ Affidavit and the Attendant Additional Material Facts [# 50] is DENIED AS MOOT.
5. There are genuine issues of material fact as to whether: (1) any of the damaged switchgears were the switchgears listed in the Stern-Leach # 11 document and therefore excluded from coverage; (2) the security guard service and security system were “necessary” extra expenses; (3) the loss of rental space and labor to relocate were “necessary” extra expenses; (4) the Insured suffered consequential damages as a result of any of the Insurer’s Policy breaches and, if so, the amount of those damages; and (5) the Insurer’s claim settlement practices were “unfair.”
In addition, Defendant has filed a Motion to Strike Portions of Christopher Attles’ Affidavit and the Attendant Additional Material Facts.Because this court reaches its decision without relying on the challenged portions of Mr. Attles’s affidavit, this Motion is DENIED AS MOOT.
The premium allocation under the Policy was approximately 87% for Demers and 13% for Mossberg. Though certain claims under the Policy may pertain to one of the Insured and not the other, referring to Demers and Mossberg collectively as “the Insured” will aid in convenience and suffice for summary judgment purposes.
The Insurer ultimately relinquished its arson defense to the Fire.
Def.’s Mem. Supp. Summ. J. Ex. 21, Dec. 29 Submission 1.
Id. 56(e).
Magee v. United States, 121 F.3d 1, 3 (1st Cir.1997).
Utica Mut. Ins. Co. v. Weathermark Invs., Inc., 292 F.3d 77, 80 (1st Cir.2002).
John Beaudette, Inc. v. Sentry Ins. A Mut. Co., 94 F.Supp.2d 77, 134 (D.Mass.1999) (quotations and citations omitted).
0.Id.
2. Utica Mut. Ins. Co., 292 F.3d at 80.
3. Lanier Prof’l Servs., Inc. v. Ricci, 192 F.3d 1, 4 (1st Cir.1999) (quoting Alison H. v. Byard, 163 F.3d 2, 6 (1st Cir.1998)).
4. Allmerica Fin. Corp. v. Certain Underwriters, 449 Mass. 621, 871 N.E.2d 418, 425 (Mass.2007) (quotation and citations omitted).
5. Strange v. Genesis Ins. Co., 536 F.Supp.2d 71, 74 (D.Mass.2008) (quotation and citation omitted).
6. Utica Mut. Ins. Co., 292 F.3d at 80.
7.See id.
8. The Real and Personal Property sublimit is $1,020,000, and the Policy includes a $2,500 “per ‘Occurrence’ “ deductible. See Def.’s Mem. Supp. Summ. J. Ex. 1, Policy 16-17. The Insured argue that the Insurer improperly deducted $2,500 from the $1,020,000 Real and Personal Property sublimit. See infra subsection III.B.2.g. (discussing the Insured’s $2,500 deductible claim).
9. See Dec. 29 Submission 13-20.
0. The Insured also seek a finding that the Insurer engaged in unfair claim settlement practices.
1. Policy 7.
2.See id. at 16.
3.Id. at 29-30.
4. Def.’s Mem. Supp. Summ. J. Ex. 2, Attles EUO 57:16-58:3, Mar. 7, 2007.
5.Id. at 59:8-59:10.
6.11 Lee R. Russ, Couch on Insurance § 168:11 (3d ed.2008).
7.Id. (citing Am. Home Assurance Co. v. J.F. Shea Co., Inc. ., 445 F.Supp. 365 (D.D.C.1978); Witcher Constr. Co. v. Saint Paul Fire & Marine Ins. Co., 550 N.W.2d 1 (Minn.Ct.App.1996); Metalmasters of Minneapolis, Inc. v. Liberty Mut. Ins. Co., 461 N.W.2d 496 (Minn.Ct.App.1990); City Coal & Supply Co. v. Am. Auto. Ins. Co., 99 Ohio App. 368, 133 N.E.2d 415 (Ohio Ct.App.1954); Travelers Indem. Co. v. Pollard Friendly Ford Co., 512 S.W.2d 375 (Tex.Civ.App.1974)).
9. Dec. 29 Submission 19.
0. Policy 6 (“The liability of the Insured for direct physical ‘loss’ or damage, either legally or contractually, to the property of others while being moved under bills of lading, work orders, shipping receipts, delivery receipts, or other contractual documents, while in the possession of the Insured or connecting carrier, and while stored in transit, not to exceed thirty (30) days.” (emphasis added)).
1.See Utica Mut. Ins. Co., 292 F.3d at 80.
2. Attles EUO 93:7-93:8.
3. Policy 6.
4. Def.’s Mem. Supp. Summ. J. Ex. 27, Dubuc Dep. 10:12-10:21, Oct. 15, 2007.
5.See id.Ex. 30, Stern-Leach # 11 at 1.
6. Strange, 536 F.Supp.2d at 74.
7.Black’s Law Dictionary 1615 (8th ed.2004); see also In re Equity Funding Corp. of Am. Sec. Litig., 375 F.Supp. 1378, 1390-91 (J.P.M.L.1974) (defining “warehouse receipts” as “receipts from … a warehouse showing that specified goods have been delivered to it”).
8. Stern-Leach # 11 at 1.
9. Dubuc Dep. 10:20-10:21.
0.See Policy 6 (“WAREHOUSEMAN LIABILITY-The liability of the Insured as a bailee for direct physical ‘loss’ or damage to the property of others in the care, custody and control of the Insured for which a storage receipt has been issued while the Insured is acting as a Warehouseman.” (second emphasis added)).
2. Stern-Leach # 11 at 1.
3. Pls.’ Mem. Resp. Feb. 13, 2009 Order 4; see also Attles Aff. 4, June 2, 2008 (“Among the property damaged in the Fire were two (2) of the approximately twelve (12) switchgear units, which Demers had received as part of a rigging operation for a long-time customer, Stern-Leach Corporation….“[T]he first of the switchgears arrived in November 2004 and the last arrived in late February or early March 2005.”).
4.See Grumbach Aff. Ex. G, Square D Invoice 2-3, Apr. 18, 2005; cf. Dubuc Dep. 22:17-22:19 (testifying that the “switch gear type equipment” “was itemized” on the Square D invoice).
5. Square D Invoice 2-3.
7.See Def.’s Mem. Supp. Summ. J. Ex. 33, IRS Invoice 2. 14
8.See Pls.’ Mem. Supp. Summ. J. 12.
9.See Dec. 29 Submission 29 (enclosing the IRS “STATEMENT”).
0.Id. at 30.
2. Policy 29.
3.Id. at 6.
4.See Thompson v. Threshermen’s Mut. Ins. Co., 172 Wis.2d 275, 493 N.W.2d 734, 737 (Wis.Ct.App.1992).
5.Cf. infra subsections III.B.2.d.i. and III.B.2.d.iii. (discussing the Insured’s (1) security guard service and security system and (2) lost rental space and labor to relocate claims).
6.See Thompson, 493 N.W.2d at 737.
7.See Magee, 121 F.3d at 3 (“Neither party may rely on conclusory allegations or unsubstantiated denials, but must identify specific facts derived from the pleadings, depositions, answers to interrogatories, admissions and affidavits to demonstrate either the existence or absence of an issue of fact.”).
8. In re Babcock Borsig AG, 583 F.Supp.2d 233, 237 (D.Mass.2008).
9. Spence v. Berkshire Life Ins. Co., 561 F.Supp.2d 126, 129 (D.Mass.2008) (quoting Worcester Mut. Ins. Co. v. Marnell, 398 Mass. 240, 496 N.E.2d 158, 161 (Mass.1986)).
0.See, e.g., Thompson, 493 N.W.2d at 737 (holding that a lessee could not use an extra expense insurance provision to cover the costs to rebuild a rented store because neither party contemplated this use when signing the policy).
1.See Spence, 561 F.Supp.2d at 129; Nassau Gallery, Inc. v. Nationwide Mut. Fire Ins. Co., No. Civ.A. 00C-05-034, 2003 WL 21223843, at(Del.Super.Ct. Apr.17, 2003) (“[Defendant] is not responsible for [Plaintiff’s] failure to obtain adequate insurance coverage nor for those losses exceeding the Policy’s primary coverage limit, including reconstruction expenses related to carpet, lighting, paint, and drywall. Thus, [Plaintiff’s] reconstruction expenditures are not compensable Extra Expenditures…. A contrary finding would lead to the forbidden absurd result.”).
2. Dec. 29 Submission 29.
3. Policy 29.
5.See Dec. 29 Submission 13-14 (listing items A-K).
6.Id. at 14-16.
7. Policy 29; see also Charles Dowd Box Co. v. Fireman’s Fund Ins. Co., 351 Mass. 113, 218 N.E.2d 64, 71 (Mass.1966) (upholding damages for business interruption for “temporary electrical services and wiring and temporary roof repairs”); Travelers Indem. Co., 512 S.W.2d at 379-80 (“Cleaning up the debris, preserving the remains of the operation, and making preparations for reopening business would appear to be acts ‘in order to continue as nearly as practicable the normal conduct of insured’s business.’ ”).See supra subsection III.B.2.c. (discussing the Insured’s IRS invoice claim).
8. Policy 28.
9.Id. at 29.
0. Def.’s Mem. Supp. Summ. J. Ex. 25, Chomyszak Dep. 28:20-29:4, Oct. 15, 2007.
1. Policy 29.
2. Attles EUO 90:23-91:3.
3. 33 E. George Daher & Harvey Chopp, Massachusetts Practice Landlord and Tenant Law § 3:8 (3d ed.2009) (citing Cent. Mills Co. v. Hart, 124 Mass. 123 (1878)).
4. Policy 29.
5. The Insured originally asserted this claim under the Real and Personal property provision. See Dec. 29 Submission 10.
6. Policy 6 (emphasis added).
7.See Def.’s Mem. Opp’n Pls.’ Mot. Summ. J. Ex. 1, Contractors Equipment Schedule 1.
8. Policy 6.
9. Pls.’ Reply Mem. Supp. Pls.’ Mot. Summ. J. 2.
0. Under Massachusetts law, “promissory estoppel permits recovery when (1) a promisor makes a promise which he should reasonably expect to induce reliance by the promissee; (2) the promise induces such reliance; and (3) injustice can be avoided only be enforcing the promise.” Day v. Staples, Inc., 573 F.Supp.2d 336, 348 (D.Mass.2008) (citing Hinchey v. NYNEX Corp., 144 F.3d 134, 143 (1st Cir.1998)). A party seeking promissory estoppel must show that he “reasonably relied on the alleged promise to his detriment,” Coll v. PB Diagnostic Systems, Inc., 50 F.3d 1115, 1124 (1st Cir.1995) (quotation and citation omitted), and that the promise was “unambiguous,” Upton v. JWP Businessland, 425 Mass. 756, 682 N.E.2d 1357, 1360 (Mass.1997).
1.See supra subsection III.B.2.e. (discussing the Insured’s contractors’ equipment claim).
2.See supra subsection III.B.2.c. (discussing the Insured’s IRS invoice claim).
3. Dec. 29 Submission 10.
4. Policy 16.
5. Id. at 14, 682 N.E.2d 1357.
6.See supra subsection III.B.2.f. (discussing the Insured’s personal property, rigging equipment, and Mossberg personal property claim).
7.Mass. Gen. Laws Ann. ch. 175, § 99 (West 2009).
9. Ben Elfman & Sons, Inc. v. Home Indem. Co., 411 Mass. 13, 576 N.E.2d 670, 674 (Mass.1991). 26
0. Id. at 675.
1. Id. at 674.
2.Ch. 93A, § 2.
3.Id. ch. 176D, § 3(9).
4. Szalla v. Locke, 421 Mass. 448, 657 N.E.2d 1267, 1269 (Mass.1995).
5. Begelfer v. Najarian, 381 Mass. 177, 409 N.E.2d 167, 176 (Mass.1980) (quotation and citations omitted).
6.See Szalla, 657 N.E.2d at 1270.
7. In addition, the Insured have satisfied the requirement that the “actions and transactions constituting the alleged unfair method of competition or the unfair or deceptive act or practice” have occurred “primarily and substantially within the commonwealth.”Ch. 93A, § 11. Here, the Insured are Massachusetts companies, and the loss-the damage to the Building-occurred in Massachusetts.
8. In their Motion, the Insured reraise the discovery issue of documents that the Insurer withheld as work product. In its March 4, 2008 Order, this court considered “Defendant’s position to be a valid assertion of privilege, with the exception of Document # 91.”Because Parties have not fully briefed the discovery issue, this court declines to revisit its ruling.