$8M Water Damage Reformation Claim Withstands Motion to Dismiss

The United States District Court for the Northern District of Illinois, applying Illinois law, in an opinion written by Judge John Z. Lee, held that Travelers Indemnity Company (“Travelers”) may be responsible for damage caused to eight floors of the Pittsfield Building (the “Building”) in downtown Chicago even though owner of the eight floors was mistakenly not included as an additional named insured under the policy.

The Building is divided into four subdivisions, three of which are owned by Pittsfield Development, LLC, Pittsfield Residential II, LLC, and Pittsfield Hotel Holdings, LLC (“Plaintiffs”).  The floors in question, floors 2-9, are owned and operated by Pittsfield Hotel.  Before the Building was subdivided, it was owned entirely by Pittsfield Development which purchased insurance for the building from Travelers.  The policy provided that any affiliated companies in which the Pittsfield Development maintained more than 50% ownership interest and has active management would be additional named insureds under the policy if Travelers was notified within 90 days from when the affiliated company was acquired or formed.  In 2015, floors 2-9 were conveyed to Pittsfield Hotel.  Plaintiffs contend that they timely notified the broker of this change.  In 2016, the broker mistakenly failed to list Pittsfield Hotel on the new application for insurance coverage to Travelers.  The building description, however, included “offices 2-8th flr’s” and “9-12th apts.” Travelers subsequently approved the application and issued the insurance policy in question.

In December 2016, two pipes burst in the Building causing damage to floors 1-10.  Plaintiffs timely notified Travelers of the damage.  Plaintiffs also informed Travelers that the estimated damage amounted to $8,592,961.40.  Travelers, however, estimated the damages to be $401,537.95, which it paid.  Plaintiffs blamed the discrepancy between the estimates on the fact that Travelers considered floors 2-9 to be vacant.  However, the floors were under construction, not vacant. In response, Plaintiffs filed a breach of contract claim against Travelers, and, in the alternative, a claim for reformation of contract based on mutual mistake.

In response, Travelers sought to dismiss both claims.  First, Travelers argued that Pittsfield Hotel lacked factual standing to enforce the policy.  Travelers pointed to the fact that neither the application nor the policy named Pittsfield Hotel as an insured.  Because Plaintiffs carry the burden of providing proof of standing, it was incumbent on Plaintiffs to provide proof that Pittsfield Hotel was an insured under the policy.  Plaintiffs argued that Travelers ratified Pittsfield Hotel as an insured party by accepting payments on behalf of Pittsfield Hotel, that Travelers waived its right to object by making payments on the claim, and the course of dealing between the two parties created an implied-in-fact contract.  The district court dismissed all three arguments because payments made under the policy did not mention Pittsfield Hotel, Travelers did not manifest an intention to waive its rights, and because of the concept of cooperate separateness, an implied-in-fact contract did not exist between Travelers and Pittsfield Hotel.  As a result, the district court granted Travelers’ motion to dismiss Plaintiffs’ breach of contract claim.

Additionally, Travelers also sought to dismiss Plaintiffs’ reformation claim, arguing that it failed to sufficiently allege that Travelers agreed to insure Pittsfield Hotel.  To properly plead a reformation claim, Plaintiffs had to allege that “there was a meeting of the minds resulting in an actual agreement between the parties, that the parties agreed to reduce their agreement to writing, and, at the time that the agreement was reduced to writing and executed, some agreed upon provision was omitted . . . .”  The district court disagreed with Travelers and found that Plaintiffs’ allegations were enough to satisfy the “who, what, when, where, and how” inquiry. Plaintiffs alleged that they timely notified the broker that floors 2-9 had been conveyed to Pittsfield Hotel and the application included floors 2-9 in the description of the Building.  According to the district court, “[t]he allegations support a reasonable inference that the parties intended that the entity who owned floors 2-9 was to be insured under the Policy, but Pittsfield Hotel was mistakenly omitted from the list of insured parties.”  Therefore, the district court denied Travelers’s motion to dismiss Plaintiffs’ reformation claim.  Pittsfield Dev., LLC v. Travelers Indem. Co., No. 18 C 06576 (N.D. Ill. July 22, 2019).