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Metro Hospitality Partners LTD. v. Lexington Insurance Co.

United States District Court, S.D. Texas, Houston Division

March 24, 2017



          Lee H. Rosenthal Chief United States District Judge.

         When a business sues its property insurer and the type of damage is clearly covered, the usual pattern is that the insurance company has failed to pay anything, has failed to pay anything close to what the insured claimed, or has taken too long to pay. This case is different. Here, the property insurer promptly adjusted the claim the insured presented and paid a large sum within the month after the hailstorm that damaged the insured's hotel. The insurer identified and paid what it concluded were the remaining amounts owed about two months after that. The insured claimed that more money was owed. The insurer asked for documents and information substantiating the demand for additional payment. The insured refused. The policy required the insured to “cooperate” with the insurer. What we have here, says the insurer, is a failure to cooperate.[1] What we have here, says the insured, is a breach of the insurance contract and of the duty of good faith and fair dealing.

         The insured, Metro Hospitality Partners, Ltd., owns a hotel in Houston, Texas. After a hailstorm damaged the hotel, Metro promptly notified its property insurer, Lexington Insurance Company. Lexington quickly responded, inspected, adjusted, paid part of the claim as an advance, and identified the amount of covered damage and the amount it owed. The total amount approved and paid before subtracting the deductible and depreciation was $820, 649.42. The parties disputed whether the hailstorm damage justified a insurer-paid new roof, or whether normal wear and tear made a new roof Metro's responsibility.

         Metro presented a $2, 664, 427.44 estimate of its added covered losses over five months later, including the cost of a new roof, again without substantiating documents or information. Lexington asked for substantiation. Without complying, and before Lexington issued a final decision, Metro sued. After filing this suit, Metro submitted an estimate for about $10 million in covered losses and damages. Before and after Metro filed this lawsuit, Lexington continued to ask for documents and information supporting the claims. Metro asserted and continues to assert that Lexington did not need most of the documents or information and therefore that Metro had no duty to provide them.

         After discovery, Lexington moved for summary judgment, Metro responded, and Lexington replied. (Docket Entry Nos. 21, 23, 25). Based on a careful review of the motion, response, and reply; the record; and the relevant law, this court grants Lexington's motion for summary judgment dismissing Metro's extracontractual claims for breach of the duties of good faith and fair dealing. The court denies Lexington's motion for summary judgment on the breach of contract claims, but without prejudice and with leave for Lexington to reurge its motion after Metro complies with the following Order:

The insured, Metro Hospitality, is ORDERED to produce the documents and information the insurer, Lexington Insurance, previously sought, updated as explained below, relating to Metro's claims that Lexington pay additional losses and damages. To avoid confusion, Lexington must give Metro a copy of the outstanding requests, updated as necessary to reflect information learned and events occurring since the requests were made, no later than April 7, 2017. Metro is ordered to fully respond no later than May 8, 2017.

         Counsel and a representative from each party are also ORDERED to appear for a hearing on May 16, 2017, at 5:00 p.m., in Courtroom 11-B. The court will review the documents and information produced with counsel and the parties, and will set a scheduling and docket control order to expeditiously and fairly resolve the remaining issues in the case.

         The reasons for these rulings are stated below.

         I. Background

         A. Factual Background[2]

         Metro owns and operates the Crowne Plaza Hotel in Houston, Texas. The hotel is made up of seven buildings built between 1965 and 1985. Lexington Insurance Company issued Policy Number 64203238-02, with effective dates of December 4, 2012 to December 4, 2013. (Docket Entry No. 21, Ex. G).

         On April 27, 2013, a hailstorm passed through Houston. Metro reported storm damage to the hotel to Lexington on April 29, 2013. The next day, Lexington assigned Byron Woodward of Vericlaim, Inc. to adjust the loss. Woodward met with Metro on May 1-less than a week after the hailstorm-and started inspecting the hotel on May 4-less than a week after Metro reported its claim. (Id., Ex. A at ¶ 4). Woodward quickly hired three experts to help adjust the claim: Joseph Kennedy from LWG Consulting, Inc., to assess the HVAC system; Howard Jones (and later Steve Hardgrave) from JS Held, to look at interior damage; and James R. Bailey, Ph.D., from Exponent, Inc., to assess the roof. (Id.).

         It did not take long for disputes to arise. Hardgrave from JS Held reported in a May 4 email that the claims-adjustment process “might get ugly” because Metro's principal and owner, Shabrahram Yazdani-Beioky, told Hardgrave in a meeting that “if this doesn't go my way my PA and his team are ready.” (Id., Ex. B-3). Woodward sent Vericlaim's First Report to Lexington within a month after the notice of loss. The report noted that Metro reported its roof contractor's finding that the entire roof needed replacing. Metro did not, however, identify the roof contractor. Metro also reported that it had cancelled large events and rented damaged rooms at discounted rates. Metro did not respond to requests for information about the claimed income loss. (Id., Ex. A at ¶¶ 8-9).

         By May 23, 2013, Lexington had advanced Metro $249, 000 on its claims. (Id. a t ¶ 6) . B a s e d on the initial inspections, Lexington, through Kennedy at LWG Consulting, identified an additional $272, 738.04 in compensable actual-cash-value losses to the HVAC system. Through Jones at JS Held, Lexington identified an added $412, 961.56 in compensable actual-cash-value losses to the hotel building interiors. (Id. at ¶ 5). Dr. Bailey-who has a Ph.D. in engineering-found no covered roof damage because the problems resulted from age and poor maintenance, not from the recent hailstorm damage, and reported his findings to Lexington. (Id.).

         On July 2, 2013, Woodward asked Metro for documents and information supporting its claimed losses. Woodward asked Metro for quotes or bids on the cost and work needed to replace the roof, the HVAC, and skylights, and to make interior repairs. (Id. at ¶ 9; id., Ex. A-5). Dan Parra responded for Metro on July 16, 2013. Parra stated that he was collecting the information and would send it as received. (Id. at ¶ 9). But on July 17, 2013, Yazdani sent Woodward at Vericlaim a letter complaining that Lexington had “asked for several categories of documents . . . not necessary . . . to adjust this claim, ” which was “unreasonably delaying the [claims-adjusting] process.” (Id. a t ¶ 9; id., Ex. A-6; id., Ex. C-16).

         Nonetheless on July 25, 2013, Yazdani signed a statement of loss agreeing that $820, 649.42 was the total covered damage amount. The signed statement noted Metro's failure to substantiate “Emergency Remediation/Extraction, ” “Business Personal Property, ” or “Business Income” losses. (Id., Ex. A at ¶ 7; id., Ex. A-1). Yazdani also signed sworn proofs of loss in early August, one for the advance payment of $249, 000 and one for the added $336, 649.42 payment-the total undisputed losses that JS Held identified, less depreciation and deductible. (Id., Exs. A-2, A-3). After Lexington's last payment, Vericlaim issued another report noting that the file “remains open pending insured providing the information regarding the emergency services, carpet pricing and financial information needed to continue with the settlement of this claim.” (Id., Ex. A at ¶ 10; id., Ex. A-8).

         On January 28, 2014, Metro submitted a “Xactimate” damage estimate for an additional $2, 664, 427.44 from its public adjuster. Metro submitted no underlying documents or added information. (Docket Entry No. 23, Ex. C at ¶ 12; id., Ex. N at 4). Vericlaim's sixteenth report, dated March 16, 2015, stated that it had not received “anything from the CPAs” on Metro's claimed business-interruption losses, extra expenses, or revenue losses. (Docket Entry No. 21, Ex. A at ¶ 11). Metro instead filed this suit. Metro subsequently submitted a second “Xactimate” damage estimate from another public adjuster, this time claiming close to $10 million in added damages, again without supporting documents and information.[3] (Docket Entry No. 23, Ex. A at ¶ 25; id., Ex. A-6).

         B. Procedural Background

         Metro sued Lexington on April 14, 2014 in Texas state court, before Lexington had made or issued its final claim determination. (Docket Entry No. 1-5). Metro asserted a breach of contract claim for Lexington's alleged failure to pay the total Metro claimed was due under the insurance policy. (Id. at ¶ 12). Metro also alleged that Lexington breached both common-law and Texas statutory duties of good faith and fair dealing. (Id. at ¶¶ 13-15). Lexington timely removed on the basis of federal diversity jurisdiction. (Docket Entry No. 1). Discovery and this dispositive motion followed.

         II. The ...

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