Scottsdale Ins. Co. v. Sally Grp., LLC, Civ. Action No. 4:11-cv-01184

SCOTTSDALE INSURANCE COMPANY, Plaintiff,

v.THE SALLY GROUP, LLC d/b/a RIO 24 CIGARS AND PREMIER BAR, Defendant.

Civ. Action No. 4:11-cv-01184

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

Dated: April 3, 2012

MEMORANDUM AND ORDER

Before the Court is Plaintiff Scottsdale Insurance Company's Motion for Summary Judgment ("Motion"). (Doc. No. 11.) After considering the Motion, all responses and replies thereto, and the applicable law, the Court concludes that the Motion

should be GRANTED.

I. FACTS

Invoking this Court's diversity jurisdiction, Scottsdale Insurance Company ("Scottsdale" or "Plaintiff") brought this lawsuit against The Sally Group LLC d/b/a Rio 24 Cigars and Premier Bar ("Rio 24" or "Defendant") seeking Declaratory Relief pursuant to § 2201 of the Federal Civil Judicial Procedure and Rules. Scottsdale issued Policy Number CPS1256190 (the "Policy"), effective July 27, 2010 to July 27, 2011, to the named insured, Rio 24. (Doc. No. 1, Complaint ¶ 5.) Rio 24 owned a cigar bar located at 24 Waterway, 110 The Woodlands, Texas. According to Rio 24, its humidor did not function as intended from the inception of its business on July 10, 2009. (Id.) This problem allegedly continued until the business closed on November 22, 2010. (Id.) Theimproper functioning of the humidor led to humidity levels outside of tolerance for the cigars stored at Rio 24's business. (Id.)

When Rio 24 employees observed mold in the humidor, the landlord ordered the destruction of Rio 24's inventory. (Id.) Scottsdale avers that the extreme fluctuations of humidity levels did not result from the breaking apart or mechanical breakdown of a component of the humidifier. (Id.) Rather, Scottsdale contends, the improper humidification was either the result of improper design of the humidifier, improper installation of the regulator to the humidifier, improper design and construction of the ductwork servicing the humidifier, or a combination of all of these factors. (Id.)

Furthermore, Scottsdale contends, Rio 24's insurance policy lapsed for approximately one month—from June 30 to July 27, 2010. (Id. ¶ 7.) Accordingly, Scottsdale argues, the loss to the property from the improper humidity began before the second policy incepted. (Id.) Therefore, Scottsdale insists, the loss did not "commence" within the Policy Period, a condition precedent to coverage, as included in the Commercial Property Conditions Form. (Ex. B, Scottsdale Insurance Policy CPS1256190, at Appx. 145.) Additionally, pursuant to the insuring agreement of the Building and Personal Property Coverage Form, Scottsdale agreed to "pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss." (Compl. ¶ 8.) According to the Policy, Covered Property, as used in the Coverage Part, includes tenant betterments and improvement made by Rio 24 to business personal property, but not to the structure. (Id. ¶ 9.) Scottsdale alleges that the Coverage Form also requires that the loss be caused by a Covered Cause of Loss, as shown in the Supplemental Declarations at Form CPS-SD-1(9-00). (Id. ¶ 10.) The Commercial Property Coverage Part Supplemental Declarations lists the Covered Causes of Loss to be in the "Special" form. (Id.) Form CP 10 30 (6-07) Causes of Loss—Special Form, states:

A. Covered Causes of Loss

When Special is shown In the Declarations, Covered Causes of Loss means Risks of Direct Physical Loss unless the loss is: 1. Excluded in Section B., Exclusions; or 2. Limited in Section C., Limitations; that follow.

(Scottsdale Insurance Policy CPS1256190, at Appx. 210.) Scottsdale contends that some of these exclusions preclude coverage for Rio 24's loss. (Compl. ¶ 11.) Specifically, Section B, Exclusions describes the following excluded causes of loss:

1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

....

h. "Fungus", Wet Rot, Dry Rot And Bacteria

Presence, growth, proliferation, spread or any activity of "fungus", wet for dry rot or bacteria.

....

E. Additional Coverage—Limited Coverage for "Fungus", Wet Rot, Dry Rot And Bacteria

1. The coverage described in E.2. and E.6. only applies when the "fungus", wet rot or dry rot or bacteria is the result of one or more of the following causes that occurs during the policy period and only if all reasonable means were used to save and preserve the property from further damage at the time of and after that occurrence.

a. A "specified cause of loss" other than fire or lightning; orb. Flood, if the Flood Coverage Endorsement applies to the affected premises.

(Scottsdale Insurance Policy CPS1256190, at Appx. 210.)

According to Scottsdale, "fungus" includes mold. (Compl. ¶ 13.) Scottsdale insists that the Additional Limited Coverage for mold does not apply here because the mold was not caused by a "specified cause of loss." (Id.) The Policy defines "specified causes of loss" as follows:

G. Definitions

1. "Fungus" means any type or form of fungus, including mold or mildew, and any mycotoxins, spores, scents or by-products produced or released by fungi.

2. "Specified causes of loss" means the following: fire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire-extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage.

....

c. Water damage means accidental discharge or leakage of water or stream as the direct result of the breaking apart or cracking of a plumbing, heating, air condition or other system or appliance (other than a sump system including its related equipment and parts), that is located on the described premises and contains water or steam.

(Scottsdale Insurance Policy CPS1256190, at Appx. 223.) Scottsdale insists that the problems with the humidification system were not the result of a breaking apart or cracking of the air conditioning system or humidifier. (Compl. ¶ 14.) Thus, Scottsdale concludes, the mold was not caused by and did not result in a specified cause of loss asdefined by the Policy. (Id.) Additionally, Scottsdale observes that Form CP 10 30 (6-07) reflects as follows:

2. We will not pay for loss or damage caused by or resulting from any of the following:

d. (1) Wear and tear;

....

(7) The following causes of loss to personal property: (a) Dampness or dryness of atmosphere; (b) Changes in or extremes of temperature; or (c) Marring or scratching.

f. Continuous or repeated seepage or leakage of water, or the presence or condensation of humidity, moisture or vapor, that occurs over a period of 14 days or more.

....

m. Neglect of an insured to use all reasonable means to save and preserve property from further damage at and after the time of loss.

3. We will not pay for loss or damage caused by or resulting from any of the following, 3.a. through 3.c. But if an excluded cause of loss that is listed In 3.a. through 3.c. results in a Covered Cause of Loss, we will pay or the loss or damage caused by that Covered Cause of Loss.

....

b. Acts or decisions, including the failure to act or decide, of any person, group, organization or governmental body.

c. Faulty, inadequate or defective:

(2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;

(3) Materials used in repair, construction, renovation or remodeling; or

(4) Maintenance;of part or all of any property on or off the described premises.

(Scottsdale Insurance Policy CPS1256190, at Appx. 211.) Scottsdale insists that the loss in this case resulted from dampness or dryness of atmosphere; continuous seepage of water or the presence of humidity for more than 14 days; acts or decisions of an individual; and faulty or inadequate design, specifications, workmanship, repair, or construction. (Mot. Summ. Jgmt at 14.)

The Policy also contains the Equipment Breakdown Coverage Endorsement at Form CFS-21s (1-09):

1. Section A. Coverage, paragraph 4. Additional Coverage of the BUILDING AND PERSONAL PROPERTY COVERAGE FORM or BUILDERS RISK COVERAGE FORM, whichever applies, is amended to add the following:

Equipment Breakdown

(1) We will pay for direct physical damage to Covered Property that is a direct result of an "accident." The event must be one of the following:

(a) Mechanical breakdown, including rupture or bursting caused by centrifugal force;

(b) Artificially generated electric current, including electric arcing that disturbs electrical devices, appliances or wires;

(c) Explosion of steam boilers, steam pipes, steam engines or steam turbines owned or leased by you or operated under your control;

(d) Loss or damage to steam boilers, steam pipes, steam engines or steam turbines caused by or resulting from any condition or event inside such equipment; or

(e) Loss or damage to hot water boilers or other water heating equipment caused by or resulting from any condition or event inside such boilers or equipment.

5. With respect to this endorsement, the following definitions apply:

(a) "Accident" means a fortuitous event that causes direct physical damage to "covered equipment."

(d) "Covered equipment" unless otherwise specified in the Schedule, means Covered Property:

(i) that generates, transmits or utilizes energy, including electronic communications and data processing equipment; or

(ii) which, during normal usage, operates under vacuum or pressure, other than weight of its own contents.

(Scottsdale Insurance Policy CPS1256190, at Appx. 225.) Scottsdale contends that, because the conditions that led to Rio 24's loss were not the result of an "accident" as that term is defined, this endorsement is not triggered to provide coverage. (Compl. ¶ 17.) As none of those events in Sections (1)(a) through (e) occurred here, Scottsdale avers, this endorsement...