Tenant store can’t claim total loss for improvements made before fire

A cellphone repair business that leased retail and basement storage space in a commercial building claimed millions in covered losses after a fire tore through the building in May 2018. While the business claimed $445,000 in tenant improvements, the Minnesota Court of Appeals upheld a ruling that it was not entitled to total-loss coverage on claimed tenant-improvement losses.

Galaxy Wireless, a business that sold and repaired cellphones, operated in the street level of the former Roberts Shoes building at Lake Street and Chicago Avenue in Minneapolis. After the shoe store closed, the building was subdivided for tenants. Galaxy’s lease began in January 2015.

In May 2018, a three-alarm fire of unknown origin broke out in the building. The building was destroyed, and it was demolished because of public-safety risk. When the fire broke out, Galaxy was insured by Western National Mutual Insurance Company.

Subsequently, Galaxy submitted a sworn proof of loss to Western. It claimed over $2 million in covered losses. This included alleged tenant improvements. Galaxy stated that it installed, removed, or repaired bathroom fixtures, ceiling, doors, walls, and windows, as well as electrical and HVAC.

Galaxy maintained that it paid for substantial improvements to the leased premises, asserting that it spent about $445,000. However, there were no receipts or invoices to back this up. The owner stated that the $445,000 was what he thought he must have spent, as all the receipts and invoices were allegedly destroyed in the fire. He was able to produce photographs that apparently showed the improvements.

Western denied Galaxy’s claim in full, citing “material misrepresentations” in Galaxy’s tenant improvements and business personal property claims, as well as statements made by the co-managers during examinations under oath. For instance, Galaxy claimed that it lost over 4,000 cellphones, a quarter of which were supposedly in the basement. When a certified fire inspector hired by Western attended the building’s excavation, a filing cabinet with around 100 cellphones was found.

Galaxy sued Western, claiming breach of the insurance contract. It went to a jury trial in January 2023. The jury awarded a total of $2,479,000 to Galaxy. This included $1.2 million for business income and extra expenses, $1.1 million for business personal property, $10,000 for personal property of others, $20,000 for outdoor signs, and $10,000 for money and security inside the premises. It also awarded $100,000 for tenant improvements.

The amounts that the jury awarded were exactly what Galaxy sought except for the tenant improvements. Galaxy sought about $350,000 more than what it was ultimately awarded.

Western moved for reversal of the judgment or a new trial. It appealed after the district court denied those motions. Galaxy then challenged the denial of its claim to seek the policy limit for tenant improvement losses.

Under the policy with Western, tenant improvements were explicitly listed as a form of business personal property. Those were valued at a replacement cost or proportion of original cost. Nevertheless, Galaxy claimed that it was entitled to recover the policy limits for tenant improvements because Minnesota law required it.

According to Minn. Stat. § 65A.08, subd. 2, “the insurer shall pay the whole amount mentioned in the policy or renewal upon which it receives a premium, in case of total loss, and in case of partial loss, the full amount thereof.” Galaxy argued that because the fire caused the total loss of the building, then it was entitled to $500,000 and it did not need to prove actual damages. This was the policy limit for tenant improvements.

“It doesn’t say there needs to be demolition of a complete building, it doesn’t say the insurance must cover an entire building or a complete building. It reads something into the statute not there,” argued Edward Beckmann, of Beckmann Law Firm, who represented Galaxy.

The Minnesota Court of Appeals concluded that Galaxy was not entitled to recover $500,000 under the statute. “When section 65A.08 is read in the context of chapter 65A as a whole, it is clear that total-loss coverage unambiguously applies to the amount due for a total loss of a building,” Chief Judge Susan Segal wrote.

“[U]nless otherwise provided for in a fire-insurance policy, total-loss coverage under section 65A.08 applies only to total loss of a building, not loss of an insured-lessee’s tenant improvements to leased premises in a building,” Segal wrote.

Galaxy also argued that it was entitled to recovery under the provisions of its insurance policy with Western. However, the court agreed with Western that the policy’s references to total loss were in the context of “total loss of an entire building.”

“[T]he plain language of the insurance policy, which conforms with the Minnesota standard fire-insurance policy, provides that losses for tenant improvements are to be calculated using replacement cost or a proportion of the cost of those improvements borne by the insured,” Segal concluded.

However, the court rejected Western’s argument that the award of $100,000 was based on mere speculation and needed to be reversed. “They say, and were adamant, that they incurred $445,000 in tenant improvement losses. That claim was mainly made up of work that turned out to have been performed by the landlord, not by the tenant, and for which the tenant paid nothing,” stated Charles Spevacek, partner at Meagher & Geer, who represented Western. “There was zero evidence that there was $445,000 paid by the tenant.”

The court cited testimony from the building owner that Galaxy did perform many of the improvements it claimed. “Given the largely undisputed evidence that at least some tenant improvements were made by Galaxy, it was not outside the jury’s authority to award damages that the jury determined were proportionate based on the evidence presented,” Segal affirmed.