When it comes to the state law barring insurance companies from providing fire insurance when delinquent taxes are owed on the property, the term "named insured" does not narrowly apply only to the property owners who owe the taxes, the U.S. Court of Appeals for the Third Circuit has ruled in a precedential decision.
The ruling, which was issued May 2, means a management company that operates a historic site in Crawford County will not be able to fully recover what it was seeking after a venue on the site burned down. The decision reversed a ruling from the U.S. District Court for the Western District of Pennsylvania, which had held that the term "named insured" applies only to the property owners.
The case In re The Trustees of Conneaut Lake Park involved a claim that the management company, Park Restoration, made regarding the venue, which was owned by the Trustees of Conneaut Lake Park. The management company had insured the venue, known as the Beach Club, through Erie Insurance.
The circuit court's ruling waded into an open question in Pennsylvania law, and required the court to interpret how the state Supreme Court might rule on the issue.
According to Third Circuit Judge Thomas Hardiman, the question came down to whether 40 Pa. Stat. Section 638, which says that fire insurance proceeds cannot be paid to "named insureds" that owe taxes, clearly encompasses named insureds who do not own the property.
"Section 638 required Erie to transfer funds from Park Restoration's insurance claim to the taxing authorities irrespective of Park Restoration's property interest in the Beach Club," Hardiman said. "Though Park Restoration's public policy and equitable arguments are not without force, they cannot vitiate the statutory language."
According to Hardiman, after the Beach Club burned down, Park Restoration sought to recover $611,000 on its policy. Erie did not contest the coverage, but required Park Restoration to obtain a certificate from the local municipal treasurer saying whether taxes were owed. That's when Park Restoration was told more than $478,250 was owed in taxes.
Hardiman noted that the delinquent taxes went back to 1996, which was years before Park Restoration signed its management agreement with the trustees, and was related to the entire 55-acre parcel the trustees owned and not just the one-acre parcel where the Beach Club was located.
After Erie indicated it would pay the owed taxes to the municipality out of the insurance proceeds, Park Restoration objected. The dispute started with Erie filing an interpleader action in state court, but that was later transferred to the U.S. Bankruptcy Court for the Western District.
The bankruptcy court, Hardiman said, found the law to be clear, and determined that Erie should pay the balance of the owed taxes out of the policy proceeds. On appeal, U.S. District Judge Barbara Jacobs Rothstein reversed, finding that the law was ambiguous because of how a related statute used the terms "named insured" and "insured property owner."
Hardiman, however, said the section the district court relied on did not apply to the situation, and ultimately determined the law to be clear.
Park Restoration had raised policy issues as well, including the argument that the trustees may receive a windfall if the property is later sold, and that the public policy behind the law was aimed at preventing property owners from simply burning down their properties to collect on insurance after they racked up large delinquent tax bills.
Hardiman said the windfall issue would better be dealt with during bankruptcy proceedings, and that the public policy aimed at curbing arson applied just as forcefully to those who have insured property they don't own.
"Park Restoration's interpretation could incentivize an end run around Section 638 by permitting unscrupulous owners to use the corporate form to collect insurance proceeds without satisfying their delinquent taxes," Hardiman said.
Quinn, Buseck, Leemhuis, Toohey & Kroto attorney Lawrence Bolla, who represented the taxing authorities, noted that the district court judge who previously ruled in the case was from the Western District of Washington, and had been assigned to handle the case. Her ruling, he said, misinterpreted the statute, but the Third Circuit's opinion should clarify the law.
"It certainly clarifies in the future that's for sure, and sets precedent for the next fire loss case," Bolla said.
Attorney John Mizner of the Mizner Law Firm, who represented Park Restoration, did not return a call for comment.
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