Goldstein v. Fidelity And Guaranty Insurance Underwriters, Inc.

86 F.3d 749 (7th Cir. 1996)

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Nature of the Case

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Facts

P insured his buildings with D. P's agent asked D to charge a lower premium rather than a higher 'non-sprinklered' rate for the property in question because the sprinkler system in the buildings was being restored. D agreed. The premium thus set, on all ten properties, was $55,497 for the one-year policy. The coverage kicked in on September 1, 1992, the policy itself was not actually issued to P until October 29, 1992. Between September 1 and October 29, Goldstein's properties were covered under the terms of a binder issued by the agent. Also between those dates, on October 5, a fire broke out at the West Diversey property, destroying two buildings and damaging one other. The binder issued by the agent contained a waiver of D's standard policy provision regarding sprinklers called, in insurance lingo, a 'protective safeguards endorsement.' If not waived, the endorsement would have required P to maintain, as a condition of coverage, an automatic sprinkler system to protect the property against fires. The actual policy, when issued at the end of October, did contain the endorsement, which said, 'As a condition of this insurance, you are required to maintain the protective devices or services listed in the Schedule.' The protective safeguard listed in the schedule was an automatic sprinkler system. The endorsement further provided that Fidelity will not pay for loss or damage caused by or resulting from fire if, prior to the fire, you . . . knew of any suspension or impairment in any protective safeguard listed in the Schedule above and failed to notify us of that fact; or . . . failed to maintain any protective safeguard listed in the Schedule above, and over which you had control, in complete working order. After the fire, D suspected arson and was also unaware that the binder contained the protective safeguard endorsement waiver. P presented a proof of loss to D on December 18, 1992, for the October 5 fire which claimed: the replacement cost of the entire complex was $4,171,349; the replacement cost of the building damage was $1,955,645; the depreciation applicable to the damage was $713,776; and the actual cash value loss (before a $5,000 deductible) was $1,241,869. P had a sales contract dated August 19, 1992, signed by the potential buyer, for $750,000. D eventually sent checks for $593,314 to P for the October 5 fire. The sum reflected the agreed actual cash value building loss of $723,314 less reductions for the advances ($20,000 and $100,000) and two $5,000 deductibles. Added together, a total of $713,314 was paid by D for the loss stemming from the October 5 fire. The depreciation 'holdback' of $391,175 for the October 5 fire was not paid as it was subject to a provision of the policy which required that the property actually be repaired or replaced as a precondition to payment. On April 25, 1993, a second fire ignited, destroying the remaining structures on the Diversey Street property. It is undisputed, as to this fire, that the sprinkler system was not in operation and that the policy, with the protective safeguard endorsement, replaced the Mesirow binder as of October 29, 1992. P submitted a proof of loss for the second fire which claimed: replacement cost damages of $4,002,662; depreciation of $1,601,065; and an actual cash value loss of $2,623,873.86. Fidelity denied the claim based on the by now well-known protective safeguards endorsement as well as other potential defenses not relevant here. The property (which now was vacant land) was sold for $1,065,000. P sued D in Illinois state court. Count I sought a declaration that the second fire was covered by D. P argued that D was estopped from enforcing the protective safeguards endorsement with regard to the second fire because it failed to advance enough money on the first claim to enable P to comply with the endorsement. Count II alleged breach of contract based on D's denial of the second claim. Count III alleged breach of contract due to D's refusal to pay the full replacement cost on the first fire. Count IV sought attorney's fees and costs under the Illinois Insurance Code due to D's 'vexatious and unreasonable delay' in settling the claim for the first fire. The case was removed to federal court, invoking the court's diversity jurisdiction. After a year's worth of discovery, P filed a motion for summary judgment. It was at that time that the district court, as we noted, entered summary judgment, sua sponte, in favor of D on all counts.