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A partnership (“Franklin Mills”) began developing the Franklin Mills Mall in 1988.  Franklin Mills entered into a Master Declaration and Agreement that governed all stores in the mall, under which occupants could not use or permit the use of their property for anything detrimental to the operation of the mall (for example, uses which emitted obnoxious odors or noises, uses that physically damage any part of the mall property, or and creating a nightclub on the premises).

Around two months after the Master Declaration was signed, a company named PMI Associates purchased a parcel of the Mall from Franklin Mills.  The parties signed a Declaration of Restrictions, which included an Operating Covenant that required the property to be operated as a general merchandise retail store/pharmacy for three years after opening the business on the property.  After three years, the buyer could use the property for more general retail uses, as long as the use was permitted under the Master Declaration.  Another provision in the Declaration of Restrictions gave Franklin Mills the option to repurchase the property if, after the three-year covenant expired, the buyer  “desire[d] to cease conducting business to the public in its building.”

In 2001, PMI took out a $3.5 million loan from Nationwide Life Insurance Company (“Plaintiff”), using the property at the mall as security.  In connection with the mortgage, Plaintiff purchased a title insurance policy from Commonwealth Land Title Insurance Company (“Defendant”).  The policy covered Plaintiff against various losses and damages, but it contained an exception for damages caused by breaching the Master Declaration or Declaration of Restrictions.

PMI eventually defaulted on its loan, and in 2003, it conveyed the property to Plaintiff.  Plaintiff then attempted to recoup its losses by selling the property to another entity for $3.8 million.  The new buyer had planned to lease the property to a tenant that would open a technical school.  Franklin Mills, however, did not consent to the sale of the property because the prospective buyer’s plans would violate the Declaration of Restrictions.  After unsuccessfully attempting to sell the property to other buyers and attempts to sell the property back to Franklin Mills, Plaintiff submitted a claim to Defendant, alleging that Franklin Mills’ rights of refusal were covered restrictions that made the property unusable and unsalable.

After Defendant denied its claim, Plaintiff filed a lawsuit seeking declaratory judgment and damages.  The District Court dismissed the litigation, holding that the policy expressly excepted any loss or damage arising from the Declaration of Restrictions.  The Third Circuit reversed the decision, reinterpreting the policy to consider its purpose and industry custom/practice.  Plaintiff then filed an Amended Complaint to the District Court, alleging claims for breach of contract and bad faith, and both parties filed motions for summary judgment.

The court’s lengthy opinion discussed many issues, but it ultimately reached to a few important conclusions.  It determined that the policy issued to Plaintiff “covers- without exclusion- the loss suffered . . . as a result of its inability to sell the subject Property.”  Therefore, it granted Plaintiff summary judgment on its breach of contract claim and entered a declaratory judgment in favor of Plaintiff.  It was unable to precisely determine the amount of damages available at this stage, however, as there were still many issues of material fact.

With respect to the bad faith claim, Plaintiff had alleged that Defendant deviated from its standard practices when it denied Plaintiff’s claim based on its interpretation of the policy’s exceptions.  Defendant responded by asserting that the Third Circuit only held that its interpretation of the policy was incorrect, and it did not mention that it was unreasonable.

The court first recognized the “clear and convincing standard” under Pennsylvania’s Bad Faith Statute, 42 Pa.C.S. § 8371.  The statute requires an insured to show clear and convincing evidence that the insurer (1) lacked a reasonable basis for denying coverage, and (2) knew or recklessly disregarded its lack of a reasonable basis.

Applying the bad faith standard to this case, the court held that neither party could prevail as a matter of law at the present stage.  The fact that the district court agreed with Defendant’s interpretation of the policy and the Third Circuit agreed with Plaintiff’s showed that this case presented a “novel issue of law,” and no party was unreasonable in its interpretation of the contract.  Because it could not find any evidence of bad faith or any evidence of an absence of bad faith by Defendant, the court decided to forgo a summary judgment ruling with respect to the bad faith claim.

Date of Decision:  February 17, 2011

Nationwide Life Ins. Co. v. Commonwealth Land Title Ins. Co., Civil Action No. 05-281, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 16446, (Feb. 17, 2011) (Buckwalter, S.J.)

Judge Buckwalter denied a Motion for reconsideration on March 23, 2011 (2011 U.S. Dist. LEXIS 29692).