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Nat'l Tea Co. v. Commerce & Ind. Ins. Co.

OPINION FILED OCTOBER 28, 1983.

NATIONAL TEA COMPANY ET AL., PLAINTIFFS-APPELLEES,

v.

COMMERCE AND INDUSTRY INSURANCE COMPANY, DEFENDANT-APPELLANT.



Appeal from the Circuit Court of Cook County; the Hon. Charles E. Freeman, Judge, presiding.

JUSTICE SULLIVAN DELIVERED THE OPINION OF THE COURT:

Rehearing denied November 30, 1983.

This appeal is from a judgment for plaintiffs in an action seeking a declaration of the rights and liabilities of the parties under a fire insurance policy providing coverage for property damage and loss of rents. Defendant contends that (1) the trial court erroneously interpreted the general change endorsement of the policy; (2) the trial court erred in (a) excluding evidence of depreciation and of payments tendered by defendant, (b) striking an affirmative defense based on plaintiffs' failure to preserve and protect the property, and (c) instructing the jury with regard to the elements to be considered in determining the amount of rental loss; and (3) the trial court abused its discretion in awarding attorney fees and a penalty pursuant to section 155 of the Illinois Insurance Code (Ill. Rev. Stat. 1981, ch. 73, par. 767).

On May 20, 1978, a commercial building owned by Central National Bank, as trustee (owners) and leased to National Tea Company (National), *fn1 was substantially damaged by fire. The property was the subject of a policy of fire insurance issued by defendant to National and naming the owners as additional insureds. It is undisputed that the loss in question is covered by the policy; however, the parties disagree as to the extent of defendant's liability thereunder. Two policy provisions are pertinent to this question. The first, a general change endorsement providing coverage for property damage, states in relevant part:

"(a) This Company's liability for loss hereunder shall not exceed the smallest of the following amounts: (1) The amount of this policy applicable to the damaged or destroyed property (2) the cost to repair; (3) the replacement cost, defined as the cost to rebuild or replace, all as of the date of loss, on the same site or within five miles thereof, with new materials of like size, kind and quality (4) the actual expenditure incurred in rebuilding, repairing or replacing on the same or another site. [Hereinafter referred to as section (a).]

(c) If the property damaged or destroyed * * * is not repaired, rebuilt or replaced on the same or another site within a reasonable time after the loss or damage, this Company shall not be liable for more than the actual cash value (ascertained with proper deduction for depreciation) of such property. [Hereinafter referred to as section (c).]"

The second provision, relating to rental loss, states:

"It is hereby provided that if said premises or any part thereof, whether rented at the time or not, shall be rendered untenantable by fire or lightning occurring during the continuance of this policy, this Company shall thereupon become liable for the rental value of such untenantable portions. Loss to be computed from the date of fire or damage by lightning, until such time as the building could, with reasonable diligence and dispatch, be rendered again tenantable, although the period may extend beyond the termination of this policy."

Testimony established that the property was inspected by an adjuster on behalf of defendant shortly after the fire occurred. On June 7, 1978, he indicated in a memo that the "preliminary replacement cost" of the structure was $600,000 to $650,000, and that the building was an 80-to-85% loss, resulting in a possible liability of approximately $500,000. The memo also contained a "preliminary estimate" of $100,000 in rental loss. Subsequently, M.L. Ensminger & Co. (Ensminger) prepared an estimate at defendant's request, submitted August 4, 1978, which stated that the "reconstruction value" of the building was $523,291.86, and the cost of repair was $321,571.43. The document purported to be a firm offer to perform the repairs at the latter price; however, the offer was not transmitted to plaintiffs.

The owners received several estimates on the cost of repairing the building, ranging from a low of $421,275 to a high of $732,200. After several extensions of the time for filing, a proof of loss was submitted on April 3, 1979, based on the highest bid received. This proof of loss was rejected as excessive on May 1, 1979, in a letter expressly reserving the right to assert any other rights or defenses "which may exist or later become known to exist." A partial proof of loss of rents in the amount of $45,000 was submitted by National on February 23, 1979, but similarly rejected by defendant as excessive, as was a subsequent proof of loss in the amount of $109,722.96, submitted March 13, 1980. The instant action was filed on May 17, 1979, and in its answer defendant admitted liability but denied the amount of damages alleged. Subsequently, a "sound value offer" of $239,261.33 was made, based on the estimated cost of repair received from Ensminger, $321,571.43, less defendant's calculation of depreciation. This sum was deposited with the court on April 7, 1980, without prejudice to the rights and claims of any party.

After hearing testimony with regard to the amount of loss, a jury found that the owners' damages for building loss were $500,000, and National's damages for rental loss were $100,000. In response to a special interrogatory, the jury found that 83% of the building was destroyed by the fire. On August 17, 1982, the trial court reduced the building loss verdict to $260,739.57 and the rental loss verdict to $63,133.88 to reflect adjustments previously agreed to by the parties. The trial court also assessed attorney fees in the amount of $99,139.55 and a $5,000 penalty against defendant based on a finding that its delay in settling the claims was vexatious and unreasonable. Defendant's post-trial motion was denied on December 6, 1982, and this appeal followed.

OPINION

Defendant first contends that the trial court erroneously interpreted the policy provision covering liability for property damage. As a result, it asserts, the jury was not properly instructed with regard to the measure of damages.

Throughout trial, defendant argued that the only applicable provision of the policy was section (c), since it was undisputed that the building had not been repaired or replaced. The owners, however, maintained that only section (a) was applicable, contending that it was sufficient that they intended to rebuild or repair but were prevented from doing so by defendant's rejection ...


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