Depending on the jurisdiction, one element of an insured’s damages in a first-party property insurance claim may include consequential damages. Consequential damages are an indirect result of a direct loss.1 Lost profit, lost rents, and lost business opportunities are examples of consequential damages that could be incurred as a result of a direct physical loss to property.2
In Shawnee Tabernacle Church v. GuideOne Insurance,3 a federal court recently addressed the issue of whether an insured may seek consequential damages associated with the loss of the property due to foreclosure.
The plaintiffs, Shawnee Tabernacle Church and AZ Learning Daycare, were insured under a property insurance policy with GuideOne Insurance (“Guide One”). PrinsBank held a mortgage on the property. The plaintiffs rented out a significant portion of the building as a source of income. In the fall of 2014, a school that rented the property had vacated the premises after failing to pay rent. The plaintiffs were in default of the mortgage at the time. In November 2014, the bank filed a foreclosure complaint.
In January 2015, just when things could not get much worse, water damage occurred to the property, and the insureds filed a claim with GuideOne. Just two days before the new tenant was to occupy the property, the water damage made the occupancy untenable until repairs could be completed. The plaintiffs were working with the bank to make the payments, but GuideOne didn’t agree to coverage until December 2015. The foreclosure sale occurred on February 25, 2016. The lease agreement fell through when the plaintiffs did not have the funds to make the necessary repairs and the plaintiffs also lost another offer to rent before the date of the foreclosure sale.
On a motion for summary judgment, one issue before the court was the recovery of consequential damages. The court explained “the parties largely agree on the controlling law. Consequential damages are available in a breach of contract action where such damages are foreseeable and were contemplated at the time of contracting.”4 Further, “[t]he parties agree that foreseeability is central to this analysis but disagree as to whether, in this case, damages due to foreclosure were foreseeable or contemplated at the time of contracting.”5
Like many insurance policies, the policy here contained provisions contemplating rental agreements and the rights of mortgage holders in the event of foreclosure, and it expressly noted Plaintiffs’ mortgage situation. In allowing the recovery of consequential damages, the Eastern District of Pennsylvania federal district court did not buy the carrier’s argument that it could not have possibly foreseen any damages related to foreclosure:
[A]t the time of contracting, it was well within the contemplation of GuideOne that the insured property could be rented, that it was encumbered by a mortgage, and that foreclosure could coincide with a property damage claim. . . . Specifically, GuideOne’s policy included provisions about the rights of mortgage holders in the event of foreclosure as well as the coverage of rented properties. . . . The consideration of these circumstances, coupled with the specific knowledge of Plaintiffs’ mortgage, . . . . at a minimum put GuideOne on notice that a foreclosure on the insured property could follow if Plaintiffs’ use of the property was interrupted—with any consequences stemming from the foreclosure significantly affected by GuideOne’s performance of its obligations. This supports Plaintiffs’ contention that the consequential damages associated with foreclosure were foreseeable and contemplated at the time of contracting.
This is a nice opinion for Pennsylvania policyholders. It is important to know whether your state allows recovery of consequential damages in a first-party property insurance claim. The degree of proof as to the amount of damages is higher for consequential damages than for direct damages, and consequential damages must typically be pled with greater specificity.
3 Shawnee Tabernacle Church v. GuideOne Ins., No. 16-5728, 2019 WL 1779829 (E.D. Pa. Apr. 23, 2019).
4 Id. at *2, citing Condo. Ass’n Court of Old Swedes v. Stein-O’Brien, 973 A.2d 475, 483 (Pa. Commw. Ct. 2009) (citing Ferrer v. Trustees of Univ. of Pa., 825 A.2d 591, 610 (Pa. 2002)).