The opinion of the court was delivered by: GESELL
Gerhard A. Gesell, U.S.D.J.
This case is before the Court on cross-motions for summary judgment and concerns the interpretation of a builder's risk insurance policy issued by defendant, covering renovation of a building owned by plaintiffs. During the renovation the building was destroyed by fire. Defendant, relying on its interpretation of the policy, has tendered only partial payment of plaintiffs' insured loss; plaintiff seeks full recovery. The parties have stipulated all material facts. Defendant's liability under the policy is thus an appropriate question for summary judgment.
On June 23, 1983 plaintiffs purchased the six-story Harrison Court Building ("Harrison Court"), located at 1001-23 Filbert Street in Philadelphia, along with the surrounding land, for $ 3.3 million. Plaintiffs intended to renovate Harrison Court to provide 252,000 square feet of office space around a seven-story brick and glass atrium. The building, built in 1984, was shortly thereafter certified as a historical landmark, thus qualifying its owners for valuable federal tax credits.
On December 28, 1983 plaintiffs, through an insurance broker, took out a builder's risk insurance policy on Harrison Court, with coverage of $ 20 million with a deductible of $ 1,000. See Complaint, Exhibit A. Paragraph 4 of the Builder's Risk Form ("Form") provided in relevant part that in the event of loss, defendant "shall be liable for the full replacement cost of the property at the time of loss" limited by the amount of coverage purchased by plaintiff. Paragraph 13, however, specified that this liability limit was a "provisional amount," and on any given date, "the actual Limit of Liability at the Construction Site is that proportion of the provisional amount that the replacement cost of the described property on that date bears to the projected value at the date of completion, but shall not in any case exceed the provisional amount." Paragraph 14 defined the "coinsurance"
obligations of plaintiffs in the event they failed to insure the building adequately for a total loss, stating that "in the event of loss [defendant] shall be liable for no greater proportion thereof than the provisional amount of insurance under this policy bears to the projected value of the described property at the date of completion."
On May 3, 1984, during the early stages of renovation, Harrison Court burned to the ground. Plaintiff subsequently filed for recovery of the replacement cost as of that date. After negotiations the parties agreed that the replacement cost of the property at the time of the fire was $ 13,200,155, and that the full replacement cost of the property, had the renovations been completed, would have been $ 22,303,381. Thereafter defendant, relying on these figures, calculated plaintiffs' coinsurance liability under the policy. It concluded plaintiffs were entitled to payment for only about 89.7% of their loss: the proportion that the provisional amount of insurance ($ 20,000,000) bore to the "projected value" of the building at time of completion ($ 22,303,381 -- the full replacement cost). It therefore reimbursed plaintiffs for $ 11,836,909 of the $ 13,200,155 replacement cost, leaving plaintiffs to absorb $ 1,362,347 of the loss.
Plaintiffs accepted the payment without waiving their right to seek complete recovery based on their own contrary reading of the policy. In this Court they argue that the "projected value" of the building at date of completion mentioned in Paragraphs 13 and 14 of the Form refers to the market value of the building rather than the admittedly higher replacement cost. They suggest that defendant would be justified in its position had it used the words "replacement cost at the date of completion" rather than "projected value" in Paragraphs 13 and 14 of the Form, but that in the absence of this precision the ambiguity should be resolved in their favor. Indicating that the market value was projected as $ 20,000,000 in an appraisal conducted for its lender, they argue that coinsurance is thus not allowable.
The parties agree that Pennsylvania law controls the interpretation of the policy. Under that law, the goal of insurance policy interpretation is "to ascertain the intent of the parties as manifested by the language of the written instrument." Standard Venetian Blind Co. v. American Empire Insurance Co., 503 Pa. 300, 469 A.2d 563, 566 (1983). In doing so, "where a provision of a policy is ambiguous, the policy provision is to be construed in favor of the insured and against the insurer, the drafter of the agreement." Id. See also, e.g., Collister v. Nationwide Life Insurance Co., 479 Pa. 579, 388 A.2d 1346, 1353 (1978); Mohn v. American Casualty Co., 458 Pa. 576, 326 A.2d 346 (1974); Blue Anchor Overall Co. v. Pennsylvania Lumbermens Mutual Insurance Co., 385 Pa. 394, 123 A.2d 413, 415 (1956).
However, this preference must not be overstated. The Pennsylvania Supreme Court has made clear that "courts do not enjoy a license to rewrite the terms of a policy or to bestow upon the words a construction which clearly conflicts with the accepted and plain meaning of the language used." Timbrook v. Foremost Insurance Co., 324 Pa. Super. 384, 471 A.2d 891, 893 (1984). "Language in a policy that is clear cannot be interpreted to mean other than what it plainly says." Guardian Life Insurance Co. v. Zerance, 505 Pa. 345, 479 A.2d 949, 953 (1984). Moreover, in interpreting a policy, it "'must be read in its entirety and the intent gathered from a consideration of the entire instrument.'" Patton v. Patton, 413 Pa. 566, 198 A.2d 578, 582 (1964) (citation omitted).
Based on this governing legal framework the Court rejects plaintiffs' reading of the term "projected value" in Paragraphs 13 and 14 of the Form. Viewed in the context of the policy as a whole, the term must be construed as referring to replacement cost; any other reading would render the policy incoherent.
That the term "projected value" unambiguously refers to the replacement cost is clear from an analysis of the coinsurance provision of the contract. The effect of such a clause
is to reduce the liability of an insurer in terms of the percentage of coverage which the clause requires the insured to maintain. That is to say, coinsurance clauses in substance require the insured to maintain insurance on the property covered by the policy in a certain amount, and stipulate that upon his failure to do so, the insured shall be a coinsurer and bear his proportionate part of the loss on the deficit.
16 Couch on Insurance § 62:125, at 598 (M. Rhodes rev. 2d ed. 1983) (footnotes omitted). Thus, only when a party has insured against the maximum possible loss may it receive full recovery for a lesser loss; any shortfall in maximum coverage is mirrored by a corresponding reduction in payment for the smaller loss.
Plaintiffs' interpretation of the term "projected value" completely destroys the operation of the coinsurance provision. plaintiffs' acknowledge that they took out a policy that would compensate them on the basis of replacement cost for any loss. See Plaintiffs' Memorandum at 14. They admit that the coverage obtained was inadequate to pay for the full replacement cost that had Harrison Court been "completely destroyed immediately after completion of construction," defendant would have properly paid "only $ 20 million because that was the limit of liability." Plaintiffs' Memorandum at 15-16. They do not challenge the framework of the coinsurance provision, which links payout for partial destruction to adequacy of coverage for total loss. They simply present a ...