Globe Imports Limited, Inc. v. Allied Property and Casualty Insurance Co.

          FINDINGS OF FACT AND CONCLUSIONS OF LAW AFTER BENCH TRIAL

          CLAUDIA WILKEN UNITED STATES DISTRICT JUDGE

         A fire damaged two buildings and destroyed a third. All three buildings are owned by Plaintiff Globe Imports Limited, a division of which is Plaintiff Globe Properties. Docket No. 63, Joint Pretrial Conference Statement (JPCS) at 1.^[1] At the time, Plaintiffs held a commercial property insurance policy with Defendant Nationwide Mutual Insurance Company.^[2] The parties dispute coverage for many of the costs related to repair and replacement of these buildings.

         For the bench trial in this matter, the Court instructed the parties to offer their direct testimony through the designation of declarations and deposition transcripts. The parties have filed trial briefs with these declarations, deposition transcripts and documentary evidence and also include citations to the material that they submitted previously with the earlier motions. The parties were given the opportunity to cross-examine witnesses during the bench trial. The parties also filed post-trial briefs and written closing arguments.

         Nationwide objects to some of the evidence submitted by Globe. The Court has reviewed these evidentiary objections and has not relied on any inadmissible evidence. The Court will not discuss each objection individually. To the extent that the Court has relied on evidence to which one side has objected, such evidence has been found admissible and the objections are overruled.

         The Court now enters its findings of fact and conclusions of law.

         BACKGROUND FINDINGS OF FACT

         On December 8, 2006, a fire in Eureka, California damaged two buildings and destroyed a third building owned by Globe. JPCS at 1. One of the damaged buildings, Building 1, was located at 527, 531 and 535 Third Street. Id. at 2. The other damaged building, Building 3, was located at 526 Opera Alley. Id. Building 2, the destroyed building, was located at 224, 226 and 236 G. Street. Id.

         I. Buildings

         Building 2 comprised a first floor used as a meat market, a second floor originally used as a dance hall with a sprung dance floor and a mezzanine area above the second floor. Docket No. 68, Maxon Dec. in Opp. ¶ 6; Transcript at 27:17-28:4. The stairway leading to the second floor had two landings. Maxon Dec. in Opp. ¶ 7. It was lined with ornate wainscot and heavy trims and finishes. Id. Heavy trim and wainscot were also prevalent at the top of the stairway, in the foyer and in adjacent dressing rooms with showers and bathrooms. Id. ¶¶ 7-8. The foyer opened into the dance hall, which was 3, 516 square feet. Id. ¶ 9. The dance hall was surrounded by ornate framed plaster arches, wainscot, heavy trim and ornate plaster walls with large double hung windows. Id.; see also Ex. 56 at 7, 11. Three staircases led up to the mezzanine level, which comprised a balcony to observe the dance floor. Maxon Dec. in Opp. ¶ 10; see also Ex. 56 at 6. Building 2 was constructed using substantial amounts of old growth redwood. Docket No. 59, Penfold Dec. ¶ 9.

         Repairs have been performed on Buildings 1 and 3, but Building 2's reconstruction has not yet begun. A "different building" is going to take the place of Building 2. Transcript at 27:12-14. Instead of two stories and a mezzanine, there will be three stories. Id. at 27:15-28:16. The new building will differ from the old in other ways. It will use drywall instead of lath and plaster. Id. at 29:1-3. Further, it will use a concrete mat slab, which means there will not be any redwood base beneath it, id. at 29:4-16, and there will be no redwood sheathing on the inside of the exterior or interior walls, Depo. Desig., Ex. A at 113:15-20. The new building will also have steel framing, which Building 2 did not have. Id. at 112:23-25, 113:22-25. Using the steel will "deliver the same sense of quality, the esthetics, sound deadening, all those things." Id. at 114:5-7.

         II. Contract

         Nationwide and Globe entered into a commercial property insurance contract for the period January 1, 2006 to January 1, 2007. JPCS at 2. Under the Commercial Property Statement of Values, the contract contains a blanketed $4, 501, 700 limit. Id. Buildings 1 and 2 together are assigned a $1, 775, 300 value. Building 3 is assigned a $98, 200 value. Id. The general coverage provisions are as follows:

A. Coverage We [Nationwide] will 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.

1. Covered Property

Covered Property, as used in this Coverage Part, means the type of property described in this Section A.1., and limited in A.2., Property Not Covered, if a Limit of Insurance is shown in the declarations for that type of property.

a. Building, meaning the building or structure described in the Declarations . . . . . .

2. Property Not Covered Covered Property does not include: . . .

d. [W]alks, patios or other paved surfaces; . . .

f. The cost of excavations, grading, backfilling or filling;

g. Foundations of buildings, structures, machinery or boilers if their foundations are below:

1) The lowest basement floor; or

2) The surface of the ground, if there is no basement; h. Land (including the land on which the property is located) . . .

m. Underground pipes, flues or drains; . . .

Id. at 2-3. The contract provides that Nationwide "will determine the value of the Covered Property in the event of loss or damage" at "actual cash value." JPCS at 3. "Actual Cash Value" is defined as follows:

Actual cash value is calculated as the amount it would cost to repair or replace Covered Property, at the time of loss or damage, with material of the like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence. Actual cash value applies to valuation of Covered Property regardless of whether the property has sustained partial or total loss or damage.

         Globe purchased optional replacement cost coverage under the insurance contract. Id. at 2. The contract states:

G. Optional Coverages

If shown as applicable in the Declarations, the following Optional Coverages apply separately to each item. . . .

3. Replacement Cost

a. Replacement Cost (without deduction for depreciation) replaces Actual Cash Value in the Loss Condition, Valuation, of this Coverage Form. . . .

d. We will not pay on a replacement cost basis for any loss or damage:

(1) Until the lost or damaged property is actually repaired or replaced; and

(2) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.

With respect to tenants' improvements and betterments, the following also apply:

. . .

(4) We will not pay for loss or damage to tenants' improvements and betterments if others pay for repairs or replacement.

e. We will not pay more for loss or damage on a replacement cost basis than the least of (1), (2) or (3), subject to f. below:

(1) The Limit of Insurance Applicable to the lost or damaged property;

(2) The cost to replace the lost or damaged property with other property:

a. Of comparable material and quality; and b. Used for the same purpose; or

(3) The amount actually spent that is necessary to repair or replace the lost or damaged property.

f. The cost to repair or replacement does not include the increased cost attributable to enforcement of any ordinance or law regulating the construction, use or repair of any property.

Id. at 3-4.

         The contract includes coverage for increased costs of construction in the Additional Coverages provisions:

         e. Increased Cost of Construction

(1) This Additional Coverage applies only to buildings to which the Replacement Cost Optional Coverage applies.

(2) In the event of damage by a Covered Cause of Loss to a building that is Covered Property, we will pay the increased cost incurred to comply with enforcement of an ordinance or law in the course of repair, rebuilding or replacement of damaged parts of that property, subject to the limitations stated in e. (3) through e. (9) of this Additional Coverage.

(3) The ordinance or law referred to in e. (2) of this Additional Coverage is an ordinance or law that regulates the construction or repair of buildings or establishes zoning or land use requirements at the described premises, and is in force at the time of loss.

. . .

(6) . . . If a damaged building is covered under a blanket Limit of Insurance which applies to more than one building or item of property, . . . the most we will pay under this Additional Coverage, for the damaged building, is the lesser of $10, 000 or 5% times the value of the damaged building as of the time of loss times the applicable coinsurance percentage.

This amount payable under this Additional Coverage is additional insurance.

(7) With respect to this additional coverage;

(a) We will not pay for the Increased Cost of Construction:

i. Until the property is actually repaired or replaced, at the same or another premises; and ii. Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage, not to exceed two years. We may extend this period in writing during the two years. . . .

(8) This Additional Coverage is not subject to the terms of the Ordinance or Law Exclusion, to the extent that such Exclusion would conflict with the ...