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Morley v. United Services Automobile Association

Court of Appeals of Colorado, Second Division

November 14, 2019

Richard Morley and Connie Morley, Plaintiffs-Appellants,
v.
United Services Automobile Association, Defendant-Appellee.

          Pueblo County District Court No. 17CV30403 Honorable Deborah R. Eyler, Judge

          Lee N. Sternal, P.C., Lee N. Sternal, Pueblo, Colorado, for Plaintiffs-Appellants

          Morgan Rider Riter Tsai, P.C., Tory D. Riter, Denver, Colorado, for Defendant-Appellee

          OPINION

          BROWN, JUDGE

         ¶ 1 In this consolidated action, plaintiffs, Richard Morley and Connie Morley, appeal the district court's entry of summary judgment and its order awarding costs in favor of defendant, United Services Automobile Association (USAA).

         ¶ 2 Applying the unambiguous definition of "surface water" articulated in Heller v. Fire Insurance Exchange, 800 P.2d 1006, 1008 (Colo. 1990), we distinguish this case from Martinez v. American Family Mutual Insurance Co., 2017 COA 15, and conclude that when precipitation falls or leaks into the insured's dwelling through holes in a roof damaged by hail (or some other covered peril), it does not fall within the plain meaning of the term "surface water" because it was never water "lying or flowing naturally on the earth's surface." Therefore, we reverse the entry of summary judgment and award of costs and remand to the district court for further proceedings.

         I. Background

         ¶ 3 The Morleys purchased a home in Colorado that they used as a vacation property and visited, on average, four times a year. They allege that in early June 2015, a severe hailstorm damaged the flat roof of the home, which allowed rainwater to leak through the roof, causing damage to the interior.

         ¶ 4 At the time, USAA insured the home under an all-risk property insurance policy (the Policy). Upon being notified of the claim, USAA retained an independent insurance adjuster to inspect the Morleys' home and estimate the cost to repair the damage. Based on the estimate, USAA approved and paid for a full roof replacement. USAA also sent a settlement letter to the Morleys and authorized an additional payment to repair the interior water damage that had been identified by the adjuster.

         ¶ 5 However, in March 2016, the Morleys told USAA that, while performing repairs, their contractor had found additional water damage to the interior of the home. The contractor removed drywall, carpet, cabinets, and insulation, which significantly increased the scope and cost of the repairs. USAA denied the majority of the Morleys' claim for additional interior damage, but did not cite the surface water exclusion in the Policy as a reason for the denial.

         ¶ 6 The Morleys filed suit, asserting breach of contract and bad faith claims based on USAA's failure to pay the additional claim for interior water damage. USAA moved for summary judgment, arguing, in relevant part, that even if the damage to the interior of the home was caused by rainwater that had accumulated on and then penetrated the roof, under Martinez, the Morleys' claims were barred by a surface water exclusion in the Policy. The district court agreed and granted the motion. It also awarded USAA $23, 533.91 in costs as the prevailing party under C.R.C.P. 54(d). The Morleys appeal.

         II. Analysis

         ¶ 7 The Morleys contend that the district court erred by granting USAA's motion for summary judgment because (1) the surface water exclusion in the Policy does not apply and (2) USAA waived its right to rely on the surface water exclusion. Because we conclude that the district court erred by granting summary judgment based on the plain language of the surface water exclusion, we need not address waiver.[1]

          ¶ 8 USAA contends that, even if the surface water exclusion does not bar coverage, we may affirm on the alternative ground that the claims are precluded because the Morleys violated the Policy's fraud clause. Because we conclude that material disputes of fact exist as to whether the Morleys breached the fraud clause, we cannot affirm on this alternative ground.

         ¶ 9 For these reasons, we reverse the order entering summary judgment and the award of costs and remand to the district court for further proceedings.

         A. The District Court Erred by Entering Summary Judgment Based on the Surface Water Exclusion

         ¶ 10 We understand the Morleys to argue that the surface water exclusion in the Policy does not preclude their claims because (1) based on the Policy's plain language and Colorado case law, water seeping through a storm-damaged roof is not "surface water"; (2) even if the water on the roof was "surface water," it lost that character when it was diverted by the roof structure; and (3) the surface water exclusion is ambiguous and extrinsic evidence confirms that it does not apply in this case.

         1. Preservation

         ¶ 11 USAA contends that several of the Morleys' arguments are unpreserved and are being raised for the first time on appeal. Recall that USAA's primary argument in its motion for summary judgment was that the surface water exclusion precluded coverage because all of the interior damage to the Morleys' home was caused by surface water. In their response to the motion for summary judgment, the Morleys argued that "[m]aterial questions of fact do exist over whether the water which entered plaintiffs' home from the roof . . . really can be said to have been 'surface water.'"

         ¶ 12 The district court entered summary judgment based on its interpretation of the surface water exclusion in the Policy and its application of Colorado case law. In so doing, it said that "[t]he parties agree that the damage was caused by rainwater/hail penetrating the roof of the home." Based on that fact, the court concluded, as a matter of law, that the damage to the interior of the Morleys' home was caused by surface water and that the surface water exclusion in the Policy barred their recovery.

         ¶ 13 Thus, the dispositive issues before the district court were the meaning of the surface water exclusion in the Policy and whether the water that caused the damage to the interior of the Morleys' home was "surface water" such that the surface water exclusion applied. The Morleys' argument on appeal based on the plain language of the policy is preserved. See Berra v. Springer & Steinberg, P.C., 251 P.3d 567, 570 (Colo.App. 2010) ("[T]o preserve the issue for appeal all that was needed was that ...


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