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Arla v. Peerless Insurance Co.

United States District Court, W.D. Kentucky, Louisville Division

September 22, 2017

RAMA ARLA and MOHANA ARLA PLAINTIFFS
v.
PEERLESS INSURANCE COMPANY DEFENDANT

          MEMORANDUM OPINION AND ORDER

          Greg N. Stivers, Judge United States District Court

         This matter comes before the Court on Defendant Peerless Insurance Company's Motion for Summary Judgment (DN 33). For the following reasons, the motion is GRANTED.

         I. BACKGROUND

         Rama Arla and Mohana Arla (“Plaintiffs”) acquired an insurance policy from Defendant Peerless Insurance Company (“Peerless”) covering their home under construction at 8700 Rama Road, Prospect, Kentucky. (Notice Removal Ex. A, ¶ 2, DN 1-2 [hereinafter Verified Compl.]). The property suffered a complete loss as the result of a fire that occurred when construction of the house was substantially, but not entirely, completed. (Verified Compl. ¶ 2). On July 1, 2015, Plaintiffs filed suit against Peerless in Jefferson Circuit Court alleging breach of contract and violation of Kentucky's Unfair Claims Settlement Practices Act (“KUCSPA”), KRS 304.12-230, including bad faith. (Verified Compl. ¶¶ 3-4). Plaintiffs acknowledged a payment by Peerless of $1, 961, 672.25, yet claimed they were owed the full $3-million policy limit. (Verified Compl. ¶ 15). Peerless removed the case to this Court. (Notice of Removal, DN 1). The Court bifurcated the claims and stayed Plaintiffs' KUCSPA claim pending the resolution of the underlying breach of contract claim. (Order, DN 10).

         Subsequently, Plaintiffs exercised their right to an appraisal proceeding under the policy and a dispute arose as to which calculation method was to be used in the appraisal proceedings. (Def.'s Mot. Summ. J. Ex. A, at 44, DN 32-4 [hereinafter Policy]). Plaintiffs moved for declaratory judgment in this Court and Peerless moved for summary judgment. The parties put forth conflicting methods for determining the amount owed for Plaintiffs' loss under the policy. Plaintiffs argued that the “estimated value” of the home should be measured by the expected value at completion based upon the market price of the home, less any depreciation. (Pls.' Mem. Supp. Mot. Dec. J. 5-9, DN 15-1). Peerless, citing the explicit valuation definition contained in the policy, insisted that the home should be valued using replacement cost value determined as the cost to construct the home without deduction for depreciation. (Def.'s Mem. Supp. Mot. Partial Summ. J. 7-10, DN 16-1). By Memorandum Opinion and Order entered April 13, 2016, the Court determined that the policy dictated that the value to be used in the coinsurance formula was the replacement cost as advocated by Peerless, not fair market value. (Mem. Op. & Order 6, DN 21).

         The parties then resumed appraisal proceedings per the policy, which required their respective appraisers to select an independent umpire to determine the amount of the loss and the replacement cost value of the completed home had the fire not occurred.[1] (Policy 44). The parties' appraisers selected retired U.S. Magistrate Judge C. Cleveland Gambill to act as their umpire. (Def.'s Mot. Summ. J. Ex. D, DN 32-8). Judge Gambill met with the counsel and their appraisers and set a schedule for an exchange of briefs. (Def.'s Mot. Summ. J. Ex. C, DN 32-5). With the agreement of the parties, Judge Gambill then heard from Plaintiffs, the builder, and the appraisers and discussed the differences in the appraisers' differing valuations of the property.

         Plaintiffs' appraiser, Glenn Katz (“Katz”), opined that the amount of the loss was “approximately $6, 500, 000” and also found that the estimated replacement cost value at completion was $7, 430, 000. (Def.'s Mot. Summ. J. Ex. C, at 1-2; Def.'s Mot. Summ. J. Ex. B, at 3, DN 32-3). Peerless' independent appraiser, Dan Grecco (“Grecco”), opined that the amount of the loss was $7, 304, 470 and the estimated value of the home at the time of completion would have been $11, 212, 955.68. (Def.'s Mot. Summ. J. Ex. C, at 5). Both Katz and Grecco participated with Judge Gambill in the appraisal process. (Def.'s Mot. Summ. J. Ex. D). On the day of the appraisal hearing, Plaintiffs claim that Grecco opined that the replacement cost was actually $13, 150, 000. (Katz Aff. ¶ 2(g), DN 33-1).

         In estimating the replacement cost at completion, Katz claims that Grecco did not alter his estimate to reflect changes Plaintiffs made from the original plans. (Katz Aff. ¶ 2(a)-(c)). Plaintiffs had apparently altered the original plans after becoming frustrated with four years of construction and omitted many of the amenities planned for the basement, including a bowling alley, wet bar, a full bath and a half bath, sauna, steam rooms, recreation room, theater room, and a dance hall with dance floor and stage, which was acknowledged by the builder, RTS Builders, LLC (“RTS”). (Katz Aff. ¶ 2(a)-(b)). Grecco did not include these changes in his appraisal estimates. (Katz Aff. ¶ 2(c)). Additionally, Plaintiffs allege that Grecco overstated the above-grade finished square footage of the house by approximately 4, 000 square feet, which Peerless acknowledged at the appraisal hearing. (Katz Aff. ¶ 2(d)-(g)).

         For the calculation of the amount of loss, Judge Gambill determined $7, 303, 740 as the amount of loss, adopting Grecco's figure. (Def.'s Mot. Summ. J. Ex. D). For the calculation of the replacement cost at the time of completion, Judge Gambill did not accept either appraisers' estimate, and found the amount to be $9, 667, 500. (Def.'s Mot. Summ. J. Ex. D). Under Judge Gambill's verdict, Peerless was required to pay an additional loss amount of $305, 000, which was timely paid. (Def.'s Mot. Summ. J. Ex. D; Def.'s Mot. Summ. J. Ex. E, DN 32-9).

         Peerless has moved for summary judgment on Plaintiffs' bad faith claim. In its motion, Peerless asserts that it is entitled to summary judgment because: (i) there is no bad faith when the policy was not breached; (ii) Peerless paid Plaintiffs pursuant to the terms of the policy; (iii) Peerless did not lack a reasonable basis in law or fact in denying Plaintiffs' claim because the claim was never denied; and (iv) there is a lack of evidence of malice or reckless disregard of Plaintiffs' right to recovery. (Def.'s Mem. Supp. Mot. Summ. J. 7-14, DN 32-1 [hereinafter Def.'s Mot. Summ. J.]).

         II. JURISDICTION

         This Court has “original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331.

         III. STANDARD OF REVIEW

         In ruling on a motion for summary judgment, the Court must determine whether there is any genuine issue of material fact that would preclude entry of judgment for the moving party as a matter of law. See Fed. R. Civ. P. 56(a). The moving party bears the initial burden stating the basis for the motion and identifying evidence in the record that demonstrates an absence of any material factual dispute. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). If the moving party satisfies its burden, the non-moving party must then produce ...


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