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Rankin v. USAA Casualty Insurance Co.

United States District Court, D. Colorado

August 29, 2017

CELIA RANKIN, and R. TODD RANKIN, Plaintiffs,
v.
USAA CASUALTY INSURANCE COMPANY, Defendant.

          ORDER ON PENDING CROSS-MOTIONS FOR SUMMARY JUDGMENT

          WILLIAM J MARTINEZ UNITED STATES DISTRICT JUDGE

         This insurance dispute raises a surprisingly contentious question: If a homeowner's policy insures against a particular event (here, water leakage) and that event causes an aesthetic change in the home with no discernible effect on the home's value, is the aesthetic change nonetheless a “loss” entitling the homeowners to compensation? Plaintiffs Celia and R. Todd Rankin (the “Rankins”) argue that the answer is yes, while the issuer of their homeowner's policy, Defendant USAA Casualty Insurance Company, takes the opposite view.

         The question has now been fully framed in the parties' competing cross-motions for partial summary judgment. (ECF No. 54 (USAA's motion); ECF No. 55 (the Rankins' motion).) For the reasons explained below, the Court agrees with USAA that the aesthetic change was not a “loss” under the relevant homeowner's policy. The Court therefore grants USAA's motion and denies the Rankins' motion. The Court also orders the parties to show cause why they should not be ordered to go to mediation to resolve whatever remains of this dispute in the wake of this Order.

         I. LEGAL STANDARD

         Summary judgment is warranted under Federal Rule of Civil Procedure 56 “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50 (1986). A fact is “material” if, under the relevant substantive law, it is essential to proper disposition of the claim. Wright v. Abbott Labs., Inc., 259 F.3d 1226, 1231-32 (10th Cir. 2001). An issue is “genuine” if the evidence is such that it might lead a reasonable trier of fact to return a verdict for the nonmoving party. Allen v. Muskogee, 119 F.3d 837, 839 (10th Cir. 1997).

         In analyzing a motion for summary judgment, a court must view the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)). In addition, the Court must resolve factual ambiguities against the moving party, thus favoring the right to a trial. See Houston v. Nat'l Gen. Ins. Co., 817 F.2d 83, 85 (10th Cir. 1987).

         II. FACTS

         The following facts are undisputed unless attributed to a party or otherwise noted.

         The Rankins have owned a vacation home in Mountain Village, Colorado, near Telluride, since 1998. (ECF No. 65 at 9, ¶ 1.)[1] On February 25, 2014, the Rankins learned of water leakage in the home. (Id. at 10, ¶ 8.) Apparently the water leakage had been going on for some time prior to its discovery-the Rankins' water bills show that it amounted to about 148, 000 gallons. (ECF No. 59 at 22, ¶ 2.)[2] The Rankins promptly reported the event to USAA, the issuer of the homeowner's insurance policy for the Rankins' Mountain Village home (“Policy”). (ECF No. 65 at 9-10, ¶¶ 3, 8.)

         Among other things, the water leakage caused stains on the interior surface of some of the logs forming the outer wall of the home. (ECF No. 59 at 22, ¶ 3.) The Rankins also claim that the leakage caused new and increased “checking” (lengthwise cracking) in the logs. (Id. at 12, ¶ 8.) USAA disputes this latter assertion, but is willing to admit it for purposes of resolving the legal question presented in the parties' cross-motions. (ECF No. 54 at 8, ¶ 9 n.3.) In any event, the parties do not dispute that “[c]hecking is expected in large wood, including [in] the timbers used to construct [the Rankins' home].” (Id. ¶ 8.) Moreover, checking had existed in the logs before the water leak. (ECF No. 59 at 25, ¶ 19.) Todd Rankin claims that the leakage event caused some pre-existing checks to increase in length by up to eighteen inches, and in width by up to one fourth of an inch. (ECF No. 54-5 at 5.)

         In April 2014, Celia Rankin consulted with two contractors and “the impression [she] was left with after talking to [them]” was that the house might need to be entirely rebuilt because the contractors were “concerned about whether there was structural damage to the logs.” (ECF No. 54-2 at 4-5.) But all parties agree now that the logs remain structurally sound. (ECF No. 59 at 11-12, ¶ 7.) Apparently this was agreed on fairly quickly because by June 2014 the Rankins' insurance claim, as it related to the log walls, became focused on the walls' “aesthetic condition, ” meaning the purely visual consequences of the staining and the checking. (ECF No. 54 at 8, ¶ 9; ECF No. 59 at 14.)[3]

         Around this time, the Rankins began communicating with USAA through one of its adjusters, Sabra Johnson (“Johnson”). Johnson's claim notes for July 11, 2014 show that she reviewed the report of an engineer who had recently inspected the home, and that the report prompted her to approve coverage to some extent: “[E]ngineer notes areas w/water stains[;] confirms water can cause dmgs as shown. [N]otes indicate the cracking is throughout home . . . . [A]s engineer confirms water staining and that water can cause cracks, will allow coverage for areas that were in direct contact w/water[.]” (ECF No. 54-9 at 5.) Johnson's notes for that day also state that she called Celia Rankin and left a message, the content of which Johnson summarized as “coverage for water dmgs, need her ctr [contractor] to provide estimate[.]” (Id.) According to Celia Rankin, Johnson specifically said on the telephone, “[Y]es, we'll replace the logs that have been damaged by the water.” (ECF No. 59-7 at 18-19.) Moreover, in a July 22, 2014 e-mail to Joe Pace, an independent adjuster assisting USAA on the claim, Johnson announced, “We have agreed to remove and replace the logs in the areas that had direct water damage. Mrs. Rankin told me that her contractor discussed what work would be required in order to remove and replace the logs. We need to update the estimate to include these repairs . . . .” (ECF No. 59-20 at 1.) Finally, in a letter to the Rankins also dated July 22, 2014, Johnson wrote that she had “sent an email to Joe Pace requesting his assistance in updating the estimate. I have requested that he add [to the estimate] ‘remov[al] and replacement of the logs in areas where they were damaged by water.'” (ECF No. 59-11 at 1 (internal quotation marks inserted for clarity).)

         “Given the interlocking method of construction, the only way” to actually replace damaged logs in a home such as the Rankins' is “to take off the roof and remove every layer of logs above the lowest damaged log-essentially requiring a tear down.” (ECF No. 59 at 12-13, ¶ 9.) It is not clear whether Johnson was aware of this at the time she informed the Rankins that the logs would be replaced.[4] USAA claims that a phone call took place on August 6, 2014, in which it became clear that removal and replacement involved, in essence, a complete re-build. (ECF No. 61 at 10, ¶ 12.)

         Not long after Johnson's communications with the Rankins in late July 2014, a new USAA adjuster named Mike Buettner (“Buettner”) took over the claim from Johnson. (ECF No. 59 at 24, ¶ 12.) The Rankins claim that Buettner agreed to abide by all of Johnson's commitments. (Id.) Buettner, at his deposition in this case, did not recall ever making such a commitment. (ECF No. 61 at 10, ¶ 12.)

         From August through November 2014, Buettner and the Rankins went back and forth regarding an apparently new aspect of their claim relating to the home's in-floor radiant heating system, and when a test of that system would be conducted. (See generally id. ¶¶ 13-15; ECF No. 61 at 10-11, ¶¶ 13-15.) The particulars of whether this test was truly necessary, and if so, why it took so long to perform, are highly disputed, but not presently relevant.

         In December 2014, Buettner approved an estimate for the Rankins' claim as a whole. (ECF No. 54-7.) Through that estimate, “USAA agreed to pay for sanding, staining, and refinishing the log walls, as well as removing and replacing the chinking of the log walls [i.e., the mortar between the logs].” (ECF No. 54 at 9, ¶ 13.) These methods would address water staining, but not checking. (ECF No. 54-8 at 3.)

         USAA's December 2014 estimate totaled more than $114, 000, inclusive of the steps to address water staining. (ECF No. 54 at 9, ¶ 14.) USAA in fact issued a series of checks to the Rankins totaling the amount of the estimate. (Id. ¶ 15.)[5]

         By March 2015, the Rankins had retained an attorney to dispute USAA's resolution of their claim. (See ECF No. 54-10.) Two months later, the Rankins hired a Telluride contractor, Bill de Alva (“de Alva”), who evaluated the Rankins' expectations for the home and then wrote to them as follows (in pertinent part) in a May 20, 2015 e-mail:

I understand your expectation is that the completed restoration or reconstruction will have equal or better aesthetics, function and appraised value. I also understand that the natural log finish may be a very important aspect of the aesthetics to you personally. I believe it will be difficult if not impossible to restore that appearance with the existing water damaged logs. That said, I also believe the existing logs and timber window and door bucks could be restored to an aesthetic condition that would also restore the asset value of the home.
Assuming the ground floor slab can be replaced without demolition of the log structure, it is probable the cost to restore the existing log structure will be less than reconstruction. Restoration of the existing logs and timber window and door bucks would likely involve some milling of surfaces that are out of plane, bleaching to remove water stains and application of a stain/finish. New chinking and caulking would be necessary to restore the thermal performance of the structure. A darker stain will be more effective in masking any trace water stains that remain after bleaching. A darker stain also reduces the visibility of checking by reducing contrast .....
Convincing your insurance company that the log portion [of the] house must be rebuilt may largely hinge on their acceptance [that] there is no way to return the existing logs to similar condition and (unstained) appearance which existed prior to the damage. Nothing can be done to eliminate the aggravated log checking that resulted from the extreme moisture and temperature fluctuations. I am happy to emphasize above limitations to any restoration scenario in my report.
I understand that you may believe there are additional reasons the only acceptable solution is a demolition and reconstruction of the entire structure. It is possible I may discover additional evidence in that regard during my investigation. I also understand if you believe my initial take is too far astray from the path you believe is required for an acceptable outcome. . . .

(ECF No. 54-4 at 2.)

         It is now undisputed that de Alva's analysis is correct to the extent that milling out-of-plane surfaces, bleaching the water-stained areas, and applying a new stain or finish would result in “an aesthetic condition that would restore the asset value of the home.”[6] With the possible exception of milling out-of-plane surfaces, de Alva's recommendations were already included in the repair estimate USAA's Buettner approved in December 2014, and for which USAA paid. (ECF No. 54 at 9, ¶ 12.)[7]

         The Rankins have never tried to repair the water staining, using de Alva's proposed methods or otherwise, “since only replacing the logs will fix the checking.” (ECF No. 59 at 18, ¶ 17.) “[The Rankins'] objection to the repair method identified by Mr. de Alva and proposed by USAA is that, after repair, the log walls would look aesthetically different, in [their] subjective opinion, then they had prior to the loss.” (ECF No. 54 at 10, ¶ 18.)[8] As USAA describes it, “[b]ecause checking is a natural phenomenon and cannot be reversed or repaired, [the Rankins] insist that USAA . . . must pay to tear down and rebuild the house with logs that have smaller checks.” (ECF No. 58 at 8.) USAA says this would likely cost $1.3 million (ECF No. 54 at 15), although it is not clear which party developed this estimate.

         At an impasse, the Rankins filed this lawsuit in San Miguel County District Court in January 2016, asserting claims for breach of contract, common law bad faith, and statutory unreasonable delay or denial (Colo. Rev. Stat. §§ 10-3-1115 & -1116). (ECF No. 6.) The following month, USAA removed to this court because the parties are diverse and the amount in controversy exceeds $75, 000. See 28 U.S.C. § 1332(a).

         III. ANALYSIS

         A. Framing the Dispute

         Viewing the facts in the light most favorable to the Rankins, their frustration is understandable. Knowing that the Rankins' claim involved both the water staining and increased checking, USAA (through Johnson) apparently made a coverage decision encompassing replacement of the logs. Then USAA learned that replacing the logs would mean rebuilding most of the home, further learned that such a rebuild would likely be very expensive, and (through Buettner) backed off Johnson's coverage decision. A jury could easily accept this story.

         However, the Rankins disavow any theory of contractual breach based on USAA's apparent choice to renege on Johnson's alleged promises. More specifically, USAA's summary judgment motion attacks “any theory predicated on purported promises by USAA during the claims process, ” including any sort of oral contract amendment or promissory estoppel (ECF No. 54 at 25-26 (formatting normalized)); and the Rankins respond that they assert no such theories (ECF No. 59 at 40-47). Rather, the Rankins say, Johnson's promises simply reflected what the Policy already required. (See, e.g., id. at 44 (“the promises were entirely consistent with the policy purchased by the Rankins from USAA”).) Thus, the parties' cross-motions reduce to a dispute solely regarding the proper construction of the Policy. Colorado law governs this analysis.[9]

         In Colorado,

[a]n insurance policy is merely a contract that courts should interpret in line with well-settled principles of contract interpretation. In undertaking the interpretation of an insurance contract, courts should be wary of rewriting provisions, and should give the words contained in the contract their plain and ordinary meaning, unless contrary intent is evidenced in the policy. Courts should read the provisions of the policy as a whole, rather than reading them in isolation. Courts may neither add provisions to extend coverage beyond that contracted for, nor delete them to limit coverage. However, because of the unique nature of insurance contracts and the relationship between the insurer and insured, courts do construe ambiguous provisions against the insurer and in favor of providing coverage to the insured.

Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299 (Colo. 2003) (citations omitted). “In order for a policy provision to be ambiguous, it must be reasonably susceptible to different interpretations.” Pub. Serv. Co. of Colo. v. Wallis & Cos., 986 P.2d 924, 939 (Colo. 1999). Whether an ambiguity exists, and the proper construction of the insurance agreement generally, are both questions of law. Cyprus, 74 P.3d at 299; Dorman v. Petrol Aspen, Inc., 914 P.2d 909, 912 (Colo. 1996).

         B. “Direct, Physical Loss”

         The parties agree that the portion of the Policy establishing the coverage relevant to the Rankins' claim reads as follows: “We insure against ‘sudden and accidental' direct, physical loss to tangible property . . . .” (ECF No. 55-1 at 39 (boldface in original).) No party raises any issue regarding the phrase “sudden and accidental.” Rather, the parties dispute the meaning of “direct, physical loss.”

         USAA argues that “direct, ” “physical, ” and “loss” must be interpreted separately. USAA has no dispute that the increase in checking, if in fact caused by the water leakage event, was “direct” and “physical” within the Policy's meaning. (ECF No. 61 at 14.) USAA only disputes that it would be a “loss.” USAA defines “loss” as “financial detriment.” (ECF No. 54 at 16.) USAA draws this definition from Black's Law Dictionary: “The amount of financial detriment caused by . . . an insured property's damage, for which the insurer becomes liable.” Black's Law Dictionary, s.v. “loss” (definition 3) (10th ed. 2014).

         According to USAA, this does not raise a question of whether the Policy covers aesthetic losses (as the Rankins sometimes frame the dispute). Rather, USAA contends that it

has consistently agreed to coverage only for claimed damage that resulted in a financial detriment to Plaintiffs, regardless of whether the claimed damage was merely aesthetic. There is no dispute that the water staining constituted aesthetic damage that was a “direct, physical loss, ” because it had an impact on value even though it had no impact on function. Further, there is no genuine dispute that the full function and economic value of the log walls can be restored by addressing only the water stains and thermal performance of the chinking, without the need to address the purportedly increased checking. Pursuant to the plain language of the Policy, USAA . . . therefore paid Plaintiffs for the damage that resulted in a financial detriment (including aesthetic damage from water staining), while denying coverage for claimed aesthetic damage that undisputedly resulted in no financial detriment to Plaintiffs (the supposedly increased checking).

(ECF No. 61 at 16 (emphasis removed; citation omitted).)[10]

         The Rankins argue, by contrast, that “direct, physical loss” (and “physical loss” in particular) is generally construed as a compound phrase that has nothing necessarily to do with financial detriment. (See ECF No. 60 at 14-21.) The Rankins' argument is largely based on case law, including some case law that consults less insurance-specific dictionary definitions. (Id. at 15.) The Rankins also argue from secondary authorities, and from a Policy exclusion regarding diminution in value. The Court will address all of these potential authorities in turn, ...


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