Zurich American Ins. Co. v. Keating Bldg. Corp.

513 F.Supp.2d 55

ZURICH AMERICAN INSURANCE COMPANY, Plaintiff, v. KEATING BUILDING CORPORATION, et al., Defendants.

Civil Action No. 04-1490.

United States District Court, D. New Jersey.

March 22, 2007.

COPYRIGHT MATERIAL OMITTED

Philip C; Silverberg, Esq., William D. Wilson, Esq., Mark S. Katz, Mound, Cotton, Wollan & Greengrass, Newark, NJ, for Plaintiffs Zurich American Insurance Company.

David Goodwin, Esq., Stephen Goldberg, Esq., Monika Lee, Esq., Heller Ehrman, LLP, San Francisco, CA, John T. Wolak, Esq., Michael R. Griffinger, Esq., Gibbons, P.C., Newark, NJ, for Defendants Aztar Corporation and Adamar of New Jersey, Inc. d/b/a Tropicana Casino and Resort.

OPINION

SIMANDLE, District Judge.

This matter is before the Court upon cross-motions for partial summary judgment by Plaintiff Zurich American Insurance Company ("Zurich") and Defendants Aztar Corporation and Adamar of New Jersey, Inc. d/b/a Tropicana Casino and Resort (collectively, "Aztar"). This declaratory judgment action arises from a dispute over the payment of insurance proceeds for losses suffered by Aztar after a serious construction accident at the Tropicana Hotel and Casino (the "Tropicana") in Atlantic City, New Jersey in which a large portion of a garage collapsed. Zurich filed this action as a way to assist the parties in resolving certain disputes that developed during the course of the claims adjustment process.

The parties raise four issues in these cross-motions. First, the Court is asked to resolve whether the costs associated with removing the damaged remains of the collapsed portion of the garage constitutes "costs to- remove debris" — such that it would be subject to the insurance policy's debris removal sublimit — or "demolition," which would not be subject to the insurance policy's debris removal sublimit (discussed in Section III.A, infra). Second, the Court is asked to resolve the proper method to calculate the debris removal sublimit. Third, the Court is asked to determine whether the policy covers additional costs Aztar paid related to the so-called "forensic debris removal" (discussed in Section III.B, infra). Finally, the parties seek clarification regarding whether the delay-driven increases in construction costs incurred by Aztar in completing the expansion project are covered under the insurance policy (discussed in Section III.C, infra).

For the reasons discussed below, the Court will grant in part and deny in part Zurich's motion for partial summary judgment and grant in part and deny in part Aztar's motion for partial summary judgment. Specifically, on the issue of the scope of the "Debris Removal" clause, the Court finds in favor of Aztar and holds that the only costs that are subject to the "Debris Removal" sublimit in the builders risk policy are the, costs of removing debris from the property and transporting it away from the site. Because the Court grants Aztar's motion regarding the scope of the Debris Removal clause, this Court need not address the issue of the calculation of the Debris Removal sublimit. The Court will grant Zurich's motion for partial summary judgment on the issue of whether Zurich must pay the extra costs associated with the "forensic debris removal," finding these costs are not covered. Finally, the Court grants Aztar's motion for partial summary judgment on the issue of whether Zurich must pay the extra costs that Aztar paid to complete the project and holds that Zurich cannot escape paying the extra costs that Aztar paid to complete the project solely on the ground that the costs involve work at the project away from the immediate- area of the collapse.¹

I. BACKGROUND

A. The Collapse of the Tropicana Expansion

Aztar contracted with Keating Building Corporation ("Keating") for Keating to serve as the general contractor on a major expansion project at Aztar's Tropicana Hotel and Resort in Atlantic City, New Jersey (the "Project"). Specifically, Aztar contracted for Keating to build a twenty seven-floor expansion which would include retail, dining and entertainment space on the first three floors, followed by a seven-level parking garage, followed by seventeen floors of hotel rooms. Aztar and Keating expected to complete the project by the end of the first fiscal quarter of 2004.²

On October 30, 2003, as the Project was well underway, portions of six floors of the structure collapsed. The collapsed section came to rest on top of the three-level retail, dining and entertainment complex. The -accident resulted in the death of four construction workers (and the injury of numerous others), significant property damage and delay losses. According to Aztar, the accident brought construction of the entire project to a halt and, for nearly three months, work on the Project was limited to emergency measures. Keating then devised a demolition plan that attempted to minimize further damage and maximize preservation of the usable portions of the building. To this end, Keating contracted with Bradenburg Industrial Services Company to assist in the engineering task of planning to demolish and dismantle the damaged floors and preserve, where appropriate, the undamaged portions of the structure. Next, Keating substantially revised the schedule for completion of the Project, meaning that all synchronized work needed to be rescheduled and re-ordered. Because of the accident, Aztar experienced a nearly eight-month delay, with construction of the building not being completed until the end of November 2004. Aztar claims that, due to the dismantlement, demolition, debris removal and reconstruction required after the accident and the delay caused by the accident, the cost of the Project ballooned from $225 million to over $300 million.

B. The Insurance Policy

Before beginning construction on the Project, Zurich and Aztar entered into an insurance agreement in which Zurich issued a "builders' risk" insurance policy to Aztar covering Aztar, its operating entity Adamar of New Jersey, Keating and Keating's subcontractors for losses arising out of the accident.³ (Ex. C to the Certification of Louis Chiafullo (the "Policy")). The Policy provides "all risks" insurance in two parts.

1. Property Coverage

First, the policy contains "property" coverage, insuring Aztar, Keating and Keating's subcontractors. The Policy states:

This policy, subject to the terms, exclusions, limitations and conditions contained herein or endorsed hereto, insures against all risk of direct physical loss or damages to Insured Project....

(Policy at AZINS 00539.) Under the Policy, the "Valuation" of the "direct physical loss or damages" to property under construction shall be:

Costs to repair or replace the property lost or damaged at the time and place of loss with material of like kind and quality less betterment including contractor's reasonable profit and overhead ...

(Id. at AZINS 000548). The Policy expressly excludes, however, any damage or expense "caused directly or indirectly and/or contributed to, in whole or in part" by "consequential loss, damage or expense of any kind or description including but not limited to ... penalties for non-completion, delay in completion, or non compliance with contract conditions...." (Id. at AZINS 000541).

The Property Coverage also contains a provision with respect to "Debris Removal." Specifically, this provision states:

Debris Removal: ... in the event of direct physical loss or damage insured hereunder and occurring during the policy period, the Company will pay the following necessary and reasonable costs:

(1) costs to remove debris being an insured part of the property from the project location of the insured; and/or

(2) costs of cleanup, at the project location of the insured, made necessary as a result of such direct physical loss or damage.

(Id. at AZINS 00540.) Debris Removal costs, however, are subject to a Debris Removal sublimit. (Id. at AZINS 00537.) Specifically, the Debris Removal sublimit is "25% of the amount of insured physical loss or damage." (Id.)

2. Delay in Completion Endorsement

Second, the policy contains a "Delay in Completion'' endorsement. (Policy at AZINS 000551.) This endorsement insured Aztar (but not Keating or its subcontractors) against the loss of gross earnings, rental income and "soft costs/additional expenses" associated with a delay in the building's construction schedule. (Id.)

The Policy also has a "blanket" limit of liability of $200 million per occurrence as well as various "sublimits" of liability that apply to specific losses (besides the ."Debris Removal" sublimit). (Id. at AZINS 00537.) The Policy is Zurich's standard proprietary form, which it sold to Aztar on a take-it-or-leave-it basis.

C. The Claims Adjustment Process

Aztar notified Zurich about the accident immediately. Representatives and consultants from Zurich arrived at the Project site the day after the accident. At the request of and with the assistance of Zurich, Keating instituted a system of classification for the work performed on site and instructed its foremen and supervisors about the classification system. Specifically, Keating assigned "insurance" job numbers to costs that were not within the scope of the original construction contract but resulted directly from the collapse and submitted these expenses (referred to by the parties as "Requests for Compensation" or "RCs") to Zurich for payment.

According to Zurich, the RCs included the costs incurred by Keating to remove the debris and repair the collapsed section of the garage, as well as increased construction costs incurred by Keating — apart from the debris removal and repair costs — because the entire Project took longer to complete. Aztar separately submitted a claim under the Delay in Completion endorsement for various economic losses it sustained because of the delay in completing the overall project (e.g., lost rent, lost hotel revenue and additional interest costs attributed to the delay in...