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South Fifth Towers, LLC v. Aspen Insurance UK, Ltd.

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

March 27, 2018




         This matter is before the court on motion of the defendants, Aspen Insurance UK. Ltd. and Tenco Services, Inc. (collectively “Aspen” herein), for summary judgment in this action for breach of contract and unfair claims settlement practices in Aspen's denial of coverage under a commercial property insurance policy for Kentucky Towers, a residential apartment building in Louisville, Kentucky. DN 109. The plaintiff, South Fifth Towers, LLC (“South Fifth”), the insured and owner of Kentucky Towers, has responded, and has also moved for leave to file a sur-reply. DN 120.

         The mythical creature, the Sur-Reply, has surfaced in this case.[1] The proposed additional brief seeks to address “new-found argument and factual misstatement” in Aspen's reply brief. South Fifth does not identify any “misstatements” in Aspen's reply, but, in any event, “the desire to correct statements made in a reply does not warrant a sur-reply.” Jones, 185 F.Supp.3d at 966. Further, South Fifth's concern is with certain evidence submitted in support of Apsen's summary judgment motion. South Fifth questions the admissibility of certain photographs which were appended as an exhibit to its motion for summary judgment (DN 109-15).

         South Fifth contends the photographs were not produced during discovery. Apparently copies of such photographs were requested by South Fifth in its Request for Production of Documents, to which Aspen replied that it would produce non-privileged photos at an agreed upon time and place. DN 120-3. The sur-reply does not, however, seek to strike the photographs, but rather states that the defendants did not provide the photographs in discovery and must supplement their disclosures if they seek to use them. DN 120-2, p. 2.

         South Fifth's motion for leave to file a sur-reply is improper and will be denied. We note, however, that Aspen admits that the photographs are unnecessary, as the sworn statements which the photographs accompany “suffice as evidence on this point.” DN 121, p. 4.

         On June 26, 2013, there were heavy thunderstorms lasting most of the day in Louisville, Kentucky. At approximately 5:15 p.m., the maintenance manager for Kentucky Towers, Kevin Landrum, was notified that water was coming in through the ceiling in the beauty shop on the first floor. Landrum Evidence Under Oath (“Landrum EUO”), p. 40-41. Landrum then went up to the second floor where he was able to determine that it was coming through the ceiling from within a closet. Landrum EUO, p. 41. Due to the amount of water coming in and the fact that it was dark, [2] all he could tell at the time was that water was coming through a drain pipe. Landrum EUO, p. 42. Landrum contacted Coit Cleaning who arrived within an hour. Landrum EUO., p. 48. Coit Cleaning and Landrum removed the water from the affected carpeted areas that evening using extractors and shop vacs. Coit left a circulating fan running overnight. Landrum EUO, pp. 52-53. Landrum stated that, at its deepest, the water was approximately one inch deep nearest the point of ingress, ie. the closet, and that it ran down the hallways to the left and right and into a number of apartment spaces, becoming progressively shallower the further it traveled from the source. Landrum EUO, pp. 54-58; Ex. E6-A. Landrum notified one of the principals of South Fifth, Aaron Parnes, in New York about the incident on the 26th. Landrum depo., pp.52.

         The following day, Landrum was able to determine that the water was coming from a separation between two sections of pipe up near the roof. There is apparently a flat roof above the second floor on which there is a roof drain. Landrum explained that the separation occurred where the roof drain meets the vertical pipe which carries the rainwater through the building interior to the basement and into the sewer. Landrum EUO, pp. 43-45. Upon discovering the separation, Landrum “filled the pipe and filled it with cement” and “stuffed some rags down there so that way the cement would have something to bond to…” Landrum EUO, pp. 43; 46. The separation described by Landrum is the asserted cause of loss which forms the basis for South Fifth's claim for coverage under the policy.[3]

         After being notified of the incident, Parnes notified his insurance broker, Judah Perlstein, on June 26 or 27, 2013. Perlstein recommended to Parnes that South Fifth engage a public adjuster, Richard Michelson of Risco, Inc. which Parnes did on South Fifth's behalf. Perlstein stated that he “got a PA because insurance companies are always looking for a reason not to pay.” Perlstein depo., p. 47. He stated that “This was in Kentucky. I knew I have a client that I have to protect.” Id. Michelson, in turn, recommended that Parnes engage a remediation company, The Drying Team. Parnes hired The Drying Team to perform remediation work for South Fifth. Parnes depo., pp. 21-25. Beginning on July 8, 2013, The Drying Team, with its subcontractor, Case Cleaning & Restoration Co., brought in eighteen employees and performed extensive demolition of the second floor. Baldrick/Eyle July 12, 2013 Tenco Preliminary Report, DN 109-4.

         Perlstein was kept up-to-date on the developments at the Kentucky Towers by the public adjuster, and he was made aware by July 5, 2013 that The Drying Team had been engaged by South Fifth to perform remediation work. Perlstein did not notify Aspen of the loss until July 8, 2013, 12 days after Parnes called him. The Property Loss Notice sent by Perlstein's firm stated that the date of loss was July 5, 2013, and described the loss as follows:

Loss was caused by a broken pipe/2 areas burst. A pipe leading from the roof drain through the building burst as did an ancillary pipe on the 2nd floor (per email)

         Perlstein depo. Ex. 10, DN 109-7, PageID #2151. This information was taken from an email sent by Tanya Michelson, for Risco, indicating that two pipes “burst.” Perlstein depo., pp. 62-63. When Perlstein was asked why it took twelve days to notify Aspen of the loss and why the notice stated that it occurred on July 5, 2013, he stated “[W]hen we found out about the loss, we made calls, sent out some e-mails, waited until we got the actual report, and then we reported to the carrier.” Perlstein depo., p. 54. He stated that his secretary put the notice of loss together and that she “could have made a mistake” as to the date. Perlstein depo., p. 58. There was also some suggestion that there was delay due to the 4th of July holiday and the office being closed.

         Two days after receiving notice of the loss, Aspen had adjusters on site at Kentucky Towers, but by that time most of the second floor had been demolished, the purported source of the intrusion had been altered and obscured, and there was virtually nothing left for Aspen's representatives to inspect to assess the cause of the water intrusion or to evaluate the extent of the damage and extent of remediation needed. The demolition on the second floor was “98% done.” Eyle depo., p. 90.

         Samuel Eyle was one of the adjusters with Tenco Services, Inc. (“Tenco”), an independent firm engaged by U.S. Adjustment Corp. ((USAC”), Aspen's claims administrator, to investigate, consult, and assist with the claim. Eyle and another adjuster, Eugene Boldrick, arrived on the scene on July 10, 2013. Eyle was asked in his deposition whether he believed that some demolition was justified based on what he observed. He responded “Well, you got to remember, I didn't observe any damage, uh, to the areas where the pipes were located, so I can't say for certain that that's -- that's the case or not.” Eyle depo., p. 47.

         The Tenco adjusters authored a preliminary report on July 12, 2013 to USAC which indicated that Landrum had “discovered that a 4” gray water pipe on the north side of the building had developed an approximate 25” crack. At the same time on the south side of the building, also above the second floor, a 10” diameter storm water pipe failed causing rain water to enter the building.” Eyle depo. Ex. 7, DN 109-4, PageID #2096. South Fifth states that Landrum never reported that a second water intrusion occurred. Landrum did, however, show the adjusters a pipe with a 25” breach located on the other side of the second floor from the place of the water intrusion from the roof drain. The report noted that there was a question as to how many losses were actually involved. The adjusters' preliminary report confirmed that “the Louisville, KY area sustained thunderstorms and rain, sometimes heavy, throughout the course of the day with rainfall amounts recorded of 2.69 inches for the day.” Id. The report stated:

We have inspected the first two floors of the building and have taken the attached photographs documenting our findings. We have found multiple areas of old mold growth and evidence of dozens of plumbing repairs in the ceilings above both floors. We also noted many areas on the ceilings showing heavy rust stains from metal lath in the plaster, which is obviously old damage. The gray water pipe on the north side of the second floor that ruptured was obviously damaged due to age and rust. We also found the same situation with the storm water pipe on the south side of the building on the second floor… Our concerns are as follows:
How many losses are actually involved?
Is this a sudden event or an ongoing continual problem?
How did both events occur at the same time?

Id. The report then stated, “As a result of our investigation, we contacted you to express our concerns with this loss. You gave us permission to enlist the services of an engineer. We have contacted Donan Engineering who will conduct an inspection on July 12, 2013.” Id.

         At this point in the claims process a more in-depth investigation into the incident began. Two engineering firms were retained to evaluate the property. The only eye witness, Landrum, identified the pipe separation as the sole cause of the water intrusion, and the experts verified Landrum's statement to the extent possible without being able to independently view the separation due to the cementing over of the pipe. Based upon the testimony of Landrum as to the amount and location of the water on July 26, 2013 and low moisture readings obtained on July 16, 2013 in drywall marked for demolition but not yet removed, the necessity for the extensive demolition of the second floor was deemed highly questionable. Apparently, The Drying Team did not compile moisture readings or other evaluative data. They took moisture readings and redlined maps.[4] Landrum testified that various readings were taken at the time sheetrock was marked for demolition. Landrum EUO, p. 61; Tarpley[5] depo., pp. 38-39; 65. There is significant debate among the parties over the “science” of moisture detection and the processes of remediation. This dispute illustrates the disadvantage which Aspen faced in attempting to gauge the condition of the property prior to demolition when it was prevented from performing any sort of physical inspection and evaluation of its own to determine the extent of remediation required. Not only was there no physical structure for the adjusters or engineers to see, but there was no supporting numerical data offered by The Drying Team to support its conclusions, evidenced by the redlining on the maps, that the demolition was necessary. It appears that the only non-conclusory, information obtained with regard to the condition of the property was that of Landrum concerning the amount and location of the water at the time of the incident, and the moisture readings obtained by engineer Brent Easterwood on July 16th of the few areas not demolished. Aspen determined that this limited information could not be reconciled with the extensive remediation which was claimed to have been required. Aspen declined coverage for the claimed loss represented by South Fifth to be “at least the sum of $1, 312, 091.04.” March 24, 2014 Sworn Claim of Loss.

         On September 15, 2015, Aspen, through its administrator USAC, declined coverage to South Fifth by letter, invoking various provisions of the policy, including the prompt notice requirement and the rain damage limitation.

         South Fifth filed suit against Aspen and Tenco in the Jefferson County, Kentucky, Circuit Court alleging (1) breach of contract by Aspen and asserting a claim for indemnification; (2) violation of the Unfair Claims Settlement Practices Act, common law bad faith, and negligence against both defendants; and (3) a third-party beneficiary claim against Tenco. The action was removed to this court under our diversity jurisdiction. DN 1. Aspen has now moved for summary judgment, contending that there is no coverage under the policy and therefore summary judgment should be rendered in its favor on all claims.

         Before granting a motion for summary judgment, the Court must find that “there is no genuine issue of material fact such that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “[W]here the moving party has the burden-the plaintiff on a claim for relief or defendant on an affirmative defense-his showing must be sufficient for the court to hold that no reasonable trier of fact could find other than for the moving party.” Calderone v. United States, 799 F.2d 254, 259 (6th Cir. 1986) (internal quotations and emphasis omitted).

         The Court must view the evidence in a light most favorable to the non-moving party. Scott v. Harris, 550 U.S. 372, 378 (2007). However, the non-moving party “must do more than simply show that there is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The non-moving party must show that a genuine factual issue exists by “citing to particular parts of materials in the record” or by “showing that the materials cited do not establish the absence ... of a genuine dispute[.]” Fed.R.Civ.P. 56(c)(1). “The mere existence of a scintilla of evidence in support of the [non-moving ...

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