Murphy v. State Farm Fire & Casualty , 978 N.E.2d 649 ( 2012 )

ILLINOIS OFFICIAL REPORTS
Appellate Court
Murphy v. State Farm Fire & Casualty Co., 2012 IL App (1st) 112143Appellate Court ERIC MURPHY AND SEAN MURPHY, Plaintiffs-Appellants, v.
Caption STATE FARM FIRE AND CASUALTY COMPANY, Defendant-
Appellee.
District & No. First District, First Division
Docket No. 1-11-2143
Filed September 28, 2012
Held The existence of a contract for the demolition of plaintiffs’ building did
(Note: This syllabus not control the issue of whether plaintiffs had an insurable interest in the
constitutes no part of uninhabited and mostly vacant structure, especially when plaintiffs
the opinion of the court reasonably believed defendant insurer would reimburse them for any fire
but has been prepared damage and demolition had not started; therefore, the entry of summary
by the Reporter of judgment for defendant was reversed and the trial court was directed to
Decisions for the enter a summary determination that plaintiffs had an insurable interest.
convenience of the
reader.)
Decision Under Appeal from the Circuit Court of Cook County, No. 07-L-014481; the
Review Hon. Ronald F. Bartkowicz, Judge, presiding.
Judgment Reversed and remanded with directions.
Counsel on Bert Zaczek and Amy Pikarsky, both of Law Office of Bert Zaczek, of
Appeal Chicago, for appellants.
Johnson & Bell, Ltd., of Chicago (Rick L. Hammond, Garrett L. Boehm,
Jr., and Isaac R. Milton, of counsel), for appellee.
Panel PRESIDING JUSTICE HOFFMAN delivered the opinion of the court,
with opinion.
Justices Karnezis and Rochford concurred in the judgment and opinion.
OPINION
¶1 The plaintiffs, Sean and Eric Murphy, brought suit seeking recovery for fire damage to
their property, which was insured by the defendant, State Farm Fire and Casualty Company
(State Farm). The circuit court of Cook County granted summary judgment in favor of State
Farm and denied the plaintiffs’ cross-motion for partial summary judgment, holding that the
plaintiffs had no insurable interest in the property. For the reasons that follow, we reverse the
judgment of the circuit court and remand for further proceedings.
¶2 The pleadings, affidavits, depositions, and supporting evidentiary materials establish the
following undisputed facts. In 2004, the plaintiffs bought a parcel of property improved with
a multi-unit residential building at 2128 N. Winchester, Chicago, Illinois (the Building).
State Farm insured the Building. Initially, tenants occupied three of the four units in the
Building. However, the plaintiffs did not renew any of the tenants’ leases as they began to
consider demolishing the existing structure and constructing a new residential luxury home
on the property. The last tenant left the Building in the fall of 2004. After the Building was
left vacant, the plaintiffs canceled all utilities and had the gas meters removed.
¶3 In the front of the existing Building, the plaintiffs had posted a sign advertising the sale
of a new single-family luxury home that they were considering constructing on the site. The
sign contained pictures of the planned home with the caption, “Coming soon.” Additionally,
the plaintiffs had consulted an architect for the purpose of drawing up plans for this new
home. The plaintiffs obtained a construction loan in the amount of approximately $1 million
to build the new luxury home. They also had acquired permits from the City of Chicago
allowing them to demolish the existing Building and construct the new home. The plaintiffs
testified in their depositions that, although they had entered into the demolition contract, they
were still considering whether to sell the Building “as-is,” knock it down and build the new
luxury home, or to renovate the existing Building.
¶4 On September 24, 2004, the plaintiffs signed a contract with Dunleavy Construction to
demolish the Building and paid a nonrefundable deposit of $500. In the event that the
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plaintiffs were to cancel their contract, Dunleavy Construction would only keep the
nonrefundable $500 deposit, and the plaintiffs would suffer no further damages from the
cancellation. Though the Building was vacant, it did contain some of the plaintiffs’ personal
belongings such as cabinetry, stoves and furnaces, which they had inquired about possibly
selling.
¶5 On March 17, 2005, six months after the plaintiffs had signed the demolition contract,
a fire took place, causing extensive smoke and water damage to the Building. A State Farm
representative surveyed the property and estimated the damage at slightly more than $60,000.
State Farm denied liability claiming that the plaintiffs had intentionally concealed or
misrepresented facts, and also contended that the Building had no actual value.
¶6 The plaintiffs filed the instant action in 2006, seeking recovery for the fire damage and
asserting claims for breach of contract and a statutory violation, pursuant to section 155 of
the Illinois Insurance Code (215 ILCS 5/155 (West 2006)), based on the unreasonable and
vexatious delay in settling their claim. State Farm filed affirmative defenses and a motion for
summary judgment, asserting, inter alia, that the plaintiffs had no insurable interest at the
time of the fire. The plaintiffs filed a cross-motion for partial summary judgment claiming
that they did have an insurable interest. The circuit court granted summary judgment in State
Farm’s favor and denied plaintiffs’ cross-motion for partial summary judgment, concluding
that the plaintiffs had no insurable interest because they had contracted with Dunleavy
Construction to demolish the existing structure. The plaintiffs have appealed that order.
¶7 Summary judgment may be granted if, “the pleadings, depositions, and admissions on
file, together with the affidavits, if any, show that there is no genuine issue as to any material
fact and that the moving party is entitled to judgment as a matter of law.” 735 ILCS 5/2-
1005(c) (West 2010). Because the parties here have filed cross-motions for summary
judgment, they agree that there is no material question of fact. Harwood v. McDonough, 344
Ill. App. 3d 242, 245, 799 N.E.2d 859, 862 (2003). Consequently, the issue presented is one
of law, and our standard of review from the entry of summary judgment is de novo. Forsythe
v. Clark USA, Inc., 224 Ill. 2d 274, 280, 864 N.E.2d 227, 233 (2007).
¶8 The plaintiffs argue that the trial court erred by finding that they had no insurable interest
at the time of the fire. State Farm responds by contending that the plaintiffs lacked an
insurable interest because the plaintiffs had entered into a demolition contract prior to the
fire, and therefore, the fire damage to the Building did not cause them to suffer any economic
loss. Thus, we are called upon to determine whether a property owner has an insurable
interest when the building is under contract to be demolished but the demolition has not yet
begun. This is a matter of first impression for Illinois courts. However, other states have
considered the question and have held that a property owner has an insurable interest in
property despite the existence of a demolition contract as long as demolition has not yet
started. We find the reasoning of these cases to be persuasive here.
¶9 In Illinois, there is no statutory definition for “insurable interest.” Reznick v. Home
Insurance Co., 45 Ill. App. 3d 1058, 1061, 360 N.E.2d 461, 463 (1977). Most Illinois courts
have adhered to the definition providing that a “ ‘person has an insurable interest in the
property whenever he would profit by or gain some advantage by its continued existence and
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suffer loss or disadvantage by its destruction.’ ” Reznick, 45 Ill. App. 3d at 1061, 360 N.E.2d
at 363 (quoting 3 Ronald A. Anderson, Couch Cyclopedia of Insurance Law § 24:13 (2d ed.
1960)); Beddow v. Hicks, 303 Ill. App. 247, 258, 25 N.E.2d 93, 98 (1940). A party may have
an insurable interest in property, even if he or she does not possess the property or even own
it. Hawkeye-Security Insurance Co. v. Reeg, 128 Ill. App. 3d 352, 470 N.E.2d 1103 (1984).
¶ 10 In Cigna Property & Casualty Insurance Co. v. Verzi, 684 A.2d 486 (Md. Ct. Spec. App.
1996), a building owner entered into an agreement to have the building demolished and a
new one built in its place. Cigna Property & Casualty Insurance Co., 684 A.2d at 488. The
demolition contract was contingent on the purchaser obtaining the necessary permits to
demolish the building and build anew. Id. Before the permits were obtained, the building was
destroyed by fire, and the owner sought to recover. Id. In ruling that the property owner had
an insurable interest, the Maryland appellate court noted, “[a] majority of state and federal
courts have held that, when a building is destroyed by fire or other disaster, the insured may
recover from its insurer despite the building being subject to removal, provided it is
destroyed before removal.” Id. at 489. The Cigna court further stated that, unless the
demolition has begun and there is some physical damage to the property, the potential
demolition of the property should not be considered when determining whether the property
owner possessed an insurable interest in the property. Id. at 489-90.
¶ 11 Additionally, a New Jersey trial court examined a similar issue in Tublitz v. Glens Falls
Insurance Co., 431 A.2d 201 (N.J. Super. Ct. Law Div. 1981), when the insured entered into
a contract to demolish the insured buildings within 10 days and a fire destroyed the buildings
before demolition had begun. Tublitz, 431 A.2d at 201. The Tublitz court held that, because
demolition was still pending and had not yet begun, the property owner maintained an
insurable interest in the property. The court reached this conclusion despite the fact that the
insured actually had a date set for the destruction of the property. Id. at 202.
¶ 12 In American Home Fire Assur. Co. of New York v. Mid-West Enterprise Co., 189 F.2d
528, 534 (10th Cir. 1951), the insured entered into a contract with a third party requiring the
owner to destroy certain parts of the building. However, at the time of the subsequent fire,
the building had not yet been destroyed. Id. The court held that the owner’s insurable interest
had not been diminished because, despite the existence of the contract, there had not been
any physical destruction of the property at the time of the fire. Id.¶ 13 In urging us to affirm the decision of the trial court, State Farm relies on Lieberman v.
Hartford Fire Insurance Co., 6 Ill. App. 3d 948, 287 N.E.2d 38 (1972), holding that the
insured did not possess an insurable interest when a fire destroyed the building while
demolition was in its early stages. Lieberman v. Hartford Insurance Co., 6 Ill. App. 3d 948,
949, 287 N.E.2d 38, 40 (1972). State Farm’s use of Lieberman is not persuasive because it
is factually distinguishable from the case at hand. In Lieberman, a portion of the roof had
already been removed and destruction had begun. Id. Because the demolition had begun, it
could no longer be considered uncertain or speculative. In contrast, Dunleavy Construction
had not begun any physical destruction of the plaintiffs’ Building in this case, and the
plaintiffs presented undisputed evidence that they were not certain about the future of the
property.
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¶ 14 Both parties discuss Garcy Corp. v. Home Insurance Co., 496 F.2d 479 (7th Cir. 1974),
which found in favor of the property owner. Garcy Corp., 496 F.2d at 481. State Farm argues
that Garcy is distinguishable on its facts because, at the time of the fire in that case, the
building contained $26,000 worth of inventory and the insured had listed the property for
sale with a real estate agent. However, we find the case to be applicable in its holding that,
despite the obvious value of the building, the dispositive fact was that the building was not
in the process of being demolished. Id. Thus, the insured still maintained an insurable
interest. The Garcy court repeatedly stated that the important inquiry is, “whether the insured
had abandoned the building pursuant to an irrevocable commitment to demolish it.” Id. This
“irrevocable commitment to demolish” is perhaps most evident by actual physical damage
to the building when demolition has actually begun. New Ponce Shopping Center, S.E. v.
Integrand Assurance Co., 86 F.3d 265, 268 (1st Cir. 1996).
¶ 15 In cases where a court has held that the insured lacked an insurable interest, the property
generally was in its early stages of demolition and had actual physical damage. See Aetna
State Bank v. Maryland Casualty Co., 345 F. Supp. 903 (N.D. Ill. 1972); Lieberman v.
Hartford Fire Insurance Co., 6 Ill. App. 3d 948, 287 N.E.2d 38 (1972). And, even in cases
like those just described, where a fire loss occurred after the process of demolition had
begun, some courts have held that the building owners still possessed an insurable interest.
See Eagle Square Manufacturing Co. v. Vermont Mutual Fire Insurance Co., 213 A.2d 201(Vt. 1965); Irwin v. Westchester Fire Insurance Co., 109 N.Y.S. 612 (N.Y. Sup Ct. 1908).
¶ 16 We believe that an insurable interest should be determined at the moment of loss and
should not be determined by speculating about future, uncertain events. Miller v. New Jersey
Insurance Underwriting Ass’n, 457 A.2d 23, 31 (N.J. Super. Ct. App. Div. 1983) (citing 4
John Alan Appleman & Jean Appleman Insurance Law and Practice § 2245, at 167 (1969)).
The mere existence of a demolition contract should not control whether the insured
possessed an insurable interest in the property prior to demolition beginning. Here, six
months had elapsed since the plaintiffs entered into the contract with Dunleavy Construction
to demolish the Building and no physical destruction had started. This lengthy passage of
time supports the plaintiffs’ testimony concerning their uncertainty as to whether they would
actually demolish the Building. Additionally, the plaintiffs presented undisputed evidence
that they were not certain about the future of the Building. Any number of possible future
events could have occurred causing the plaintiffs to decide not to demolish the Building.
¶ 17 Furthermore, our ruling is consistent with the principles of contract law governing
insurance policies. When interpreting a fire insurance policy, the contract must be liberally
construed to reflect the intent of the insured and the purpose of the contract. Hardesty v.
Forest City Insurance Co., 77 Ill. App. 413, 416 (1898), aff’d, 182 Ill. 39 (1899). The
purpose of fire insurance is to allow for indemnity of the insured in the event of a fire. “The
rule of construction to be adopted should be a liberal one and favorable to the insured, so as
not to defeat, without a plain necessity, his claim to the indemnity which, in making the
insurance, it was his object to secure.” Home Insurance Co. v. Peoria & P.U. Ry. Co., 78 Ill.
App. 137, 139 (1898), aff’d sub nom. Home Insurance Co. of New York v. Peoria & P.U.
Ry. Co., 178 Ill. 64 (1899). Here, the plaintiffs reasonably believed, because State Farm had
agreed to provide them with fire insurance, that they would be reimbursed for the damage
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done to the Building in the event of a fire.
¶ 18 In reviewing all of the evidence in accord with the standards set forth above, we find as
a matter of law that the plaintiffs had an insurable interest at the time of the fire.
Consequently, we reverse the grant of summary judgment for State Farm and remand the
cause with directions that the trial court enter a summary determination of a major issue in
favor of the plaintiffs, pursuant to section 2-1005(d) of the Code of Civil Procedure (735
ILCS 5/2-1005(d) (West 2010)), on the issue of insurable interest. Accordingly, we remand
the cause with directions that the trial court conduct further proceedings consistent with the
views expressed herein.
¶ 19 Reversed and remanded with directions.
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