Sierra Pacific Power Co. v. Hartford Steam Boiler Inspection & Insurance ( 2012 )

FILED
NOT FOR PUBLICATION JUL 27 2012
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U .S. C O U R T OF APPE ALS
FOR THE NINTH CIRCUIT
SIERRA PACIFIC POWER COMPANY, No. 09-16662
Plaintiff - Appellant, D.C. No. 3:04-cv-00034-LRH-
RAM
v.
HARTFORD STEAM BOILER MEMORANDUM *
INSPECTION & INSURANCE CO.;
ZURICH AMERICAN INSURANCE
COMPANY,
Defendants - Appellees.
SIERRA PACIFIC POWER COMPANY, No. 09-16802
Plaintiff - Appellee, D.C. No. 3:04-cv-00034-LRH-
RAM
v.
HARTFORD STEAM BOILER
INSPECTION & INSURANCE CO.;
ZURICH AMERICAN INSURANCE
COMPANY,
Defendants - Appellants.
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
Appeal from the United States District Court
for the District of Nevada
Larry R. Hicks, District Judge, Presiding
Argued and Submitted November 2, 2010
Submission Withdrawn, November 19, 2010
Resubmitted July 25, 2012
San Francisco, California
Before: GOULD and CALLAHAN, Circuit Judges, and KORMAN, Senior District
Judge.**
Sierra Pacific Power Co. (“Sierra”) operates power generation stations in
Nevada and California. Insurers Hartford Steam Boiler Inspection & Insurance
Co. (“Hartford”) and Zurich American Insurance Co. (“Zurich”) (together
“Insurers”) insured Sierra’s facilities, including the Farad Dam on the Truckee
River in California, with $200 million in total coverage. The Farad Dam was
completely destroyed by a flood in 1997, and Sierra filed a claim for the damage
with the Insurers. A dispute arose over the value of the dam, and whether Sierra
could recover replacement cost of the dam or only actual cash value since the dam
had not yet been rebuilt. Following bench trial, the district court concluded that
Sierra was entitled to the dam’s actual cash value of $1,261,200, but that Sierra
could recover replacement cost if the dam was actually rebuilt within three years
**
The Honorable Edward R. Korman, Senior District Judge for the U.S.
District Court for Eastern New York, sitting by designation.
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from the court’s ruling. The court determined that the replacement cost of the dam
was $19,800,000. Sierra appeals the trial court’s ruling that the actual cash value
(“ACV”) of the dam is $1,261,200. The Insurers appeal the rulings that (1) Sierra
can recover $4 million it spent so far in preparation for replacing the dam, (2) the
replacement cost available to Sierra includes costs for building ordinance changes,
and (3) Sierra has three years to replace the dam and still recover the replacement
cost of the dam.
1. Choice of Laws
The district court held that Nevada law applies to this appeal, but in a later
ruling indicated it may have reason to reconsider its decision. Ultimately, the
district court found no difference between California and Nevada law on the issues
in dispute, and did not disturb its holding that Nevada law applies. Sierra argues
that California law applies, and the Insurers argue that Nevada law applies.1
We review a district court’s choice of law de novo. Jorgensen v. Cassiday,
320 F.3d 906, 913 (9th Cir. 2003). “A federal court sitting in diversity must apply
the forum state’s choice of law rules.” Id. (citing Klaxon Co. v. Stentor Elec. Mfg.
Co., 313 U.S. 487 (1941)). Nevada “has adopted the substantial relationship test to
resolve conflict-of-law questions.” Williams v. United Servs. Auto. Ass’n, 849 P.2d
1We note that the Insurers argued below that California law applied.
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265, 266 (Nev. 1993). The state whose law the court applies “must have a
substantial relationship with the transaction; and the transaction must not violate a
strong public policy of Nevada.” Id. The factors Nevada courts use to evaluate the
substantial relationship include, 1) where the contract was formed, 2) where the
negotiations for the contract took place, 3) the place of performance, 4) the
location of the subject matter of the contract, and 5) the residence and place of
business of the parties. Sotirakis v. United Servs. Auto. Ass’n, 787 P.2d 788, 790
(Nev. 1990). The most significant of these factors in an insurance contract is the
location of the insured risk. Williams v. United Servs. Auto. Ass’n, 849 P.2d at
266-67.
The most significant factor favors application of California law because the
Farad Dam, the insured risk in question, was located in California. The remaining
factors do not clearly favor one state or another. Therefore, we conclude
California law should apply to this dispute.
2. Actual Cash Value of the Farad Dam
The district court’s interpretation of an insurance contract, including whether
a contract term is ambiguous, is reviewed de novo. Conrad v. Ace Prop. & Cas.
Ins. Co., 532 F.3d 1000, 1004 (9th Cir. 2008). The question of what definition of
actual cash value (“ACV”) should be used requires interpretation of the contract,
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and therefore is reviewed de novo. The district court’s factual findings after
examining extrinsic evidence and a bench trial, including the court’s finding
regarding the calculation of the ACV of the dam, are reviewed under the clearly
erroneous standard. DP Aviation v. Smiths Indus. Aerospace and Def. Sys., Ltd.,
268 F.3d 829, 836 (9th Cir. 2001).
A. Method of Calculating ACV
Under California law, ACV means fair market value (“FMV”). Jefferson
Ins. Co. v. Super. Ct. (May), 3 Cal. 3d 398, 402 (1970). FMV is most commonly
determined “by way of market data on sales of comparable property.”
Redevelopment Agency of Long Beach v. First Christian Church of Long Beach,
189 Cal. Rptr. 749, 753 (Cal. Ct. App. 1983) (disapproved of on other grounds by
Los Angeles County Metro. Transp. Auth. v. Continental Dev. Corp., 16 Cal. 4th
694, 720 (1997)). In cases where there is no relevant market, however, the FMV
may be “determined by any method of valuation that is just and equitable.” Id.(quoting Cal. Code Civ. Proc. § 1263.320(b)). Specifically, “[r]ecognized
alternatives to the market data approach to valuation are reproduction or
replacement costs less depreciation or obsolescence.” Id. (citing Cal. Evid. Code §
820).
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Moreover, California courts establish that “[i]f [Insurers] want to determine
‘actual cash value’ on the basis of replacement cost less depreciation all [they]
ha[ve] to do is say so in the policy . . . . This can be accomplished by using words
such as ‘actual cash value, with proper deduction for depreciation.’” Cheeks v.
Cal. Fair Plan Ass’n, 71 Cal. Rptr. 2d 568, 572 n.5 (Cal. Ct. App. 1998) (quoting
Hughes v. Potomac Ins. Co., 18 Cal. Rptr. 650, 658 (Cal. Ct. App. 1962))
(emphasis added). The policy provision at issue here, the valuation clause,
contains exactly that language: “actual cash value (with proper deduction for
depreciation) of the property destroyed.”
Sierra contends that the dam’s ACV should be calculated as the full
replacement cost without any depreciation. None of the cases it cites supports that
proposition, however, as they all included deductions for depreciation. See Leslie
Salt Co. v. St. Paul Mercury Ins. Co., 637 F.2d 657, 660 (9th Cir. 1981) (“the
actual cash value of the property damaged . . . shall be . . . ascertained according to
such actual cash value with proper deduction for depreciation”); Redevelopment
Agency of Long Beach v. First Christian Church of Long Beach, 189 Cal. Rptr. at
753 (“[r]ecognized alternatives to the market data approach to valuation are
reproduction or replacement costs less depreciation or obsolescence.”) (emphasis
added). Accordingly, the ACV for the Farad Dam, a structure without a sales
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market, is determined using replacement cost reduced by the appropriate
depreciation.
Although the district court did not explain in its final ruling the method by
which it calculated the ACV of the dam, its reasoning may be gleaned from the
record. In its ruling on Sierra’s motion for reconsideration, the court explained
“the most persuasive evidence” it considered “concerning the dam’s actual cash
value is a letter in which Sierra’s insurance broker stated to Sierra’s claims
manager, ‘We are only agreeing that the [actual cash value] is $1,261,200 and
nothing else.’” The court also stated “[o]ther evidence pertinent to the court’s
decision includes an email from Sierra’s broker [ ] agreeing to apply Hartford and
Zurich’s depreciation factors to the dam to reach an actual cash value of
$1,261,200, subject to Sierra’s claim’s manager’s review.” But neither of these
documents reflects Sierra’s agreement to the ACV. Rather, they represent Sierra’s
insurance broker’s recommendation to Sierra as to the ACV.
Although the district court correctly announced that it would base ACV on
replacement cost of the dam less depreciation, it arrived at an amount for the dam’s
ACV, $1,261,200, which is not related to the figure it found as the replacement
cost. The district court relied on its view that Sierra and the Insurers had agreed on
the value of $1,261,200 as the ACV, but the court explicitly found that the parties
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did not agree on that number, or any other number, as the ACV for the dam. As
such, the district court’s determination of ACV was clearly erroneous and must be
vacated.
B. Calculation of Replacement Cost—Effect of Building Ordinances
A primary issue in this case is whether increased costs of repair are
effectively excluded by the policy’s Building Ordinance or Law Exclusion. The
district court ruled that “replacement cost coverage of the dam includes design
fees, permitting fees and other regulatory costs necessary to rebuild the dam.” The
court also ruled that “[t]he coverage available to Sierra included the increased costs
of construction based on intervening changes in the law.”
The relevant exclusion in the policy states, in pertinent part, “[t]his policy
does not insure loss or damage caused by or resulting from . . . any increase in the
loss due to any ordinance, law or regulation, rule or ruling restricting or affecting
repair, alteration, use, operation, construction or installation . . . .” The Ninth
Circuit has not addressed whether such a building ordinance or law exclusion is
effective to limit the coverage for an insured structure to rebuilding the structure
without costs for complying with any intervening building codes.
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Case law from California appears to be split on the issue.2 Compare Fire
Ins. Exch. v. Super. Ct. (Altman), 10 Cal. Rptr. 3d 617, 632-36 (Cal. Ct. App.
2004) (finding the exclusion only excludes damage caused by a building
ordinance, but not the increased replacement costs due to a building ordinance
where loss itself was caused by a covered peril) with Bischel v. Fire Ins. Exch., 2
Cal. Rptr. 2d 575 (Cal. Ct. App. 1991) (finding the exclusion excludes increased
replacement costs). We certified the question whether such an exclusion is
effective to exclude the increased costs of construction due to building ordinances
to the California Supreme Court, Sierra Pac. Power Co. v. Hartford Steam Boiler
Inspection & Ins. Co., 665 F.3d 1166 (9th Cir. 2012), however, that court declined
to provide guidance on the issue. Forced to determine the state law, we choose to
apply the most recent California Court of Appeal decision, Altman.
2
Other jurisdictions that have addressed this question have also reached
differing conclusions. Compare Dupre v. Allstate Ins. Co., 62 P.3d 1024, 1029-30
(Colo. App. 2002), Bering Strait School Dist. v. RLI Ins., 873 P.2d 1292, 1296
(Alaska 1994), Farmers Union Mut. Ins. Co. v. Oakland, 825 P.2d 554 (Mont.
1992) and Garnett v. Transamerica Ins. Servs., 800 P.2d 656 (Idaho 1990)
(interpreting similar language and holding perils exclusions do not operate to
exclude increased costs to replace due to intervening changes in building
ordinances) with Spears v. Shelter Mut. Ins. Co., 73 P.3d 865, 867-69 (Okla. 2003)
and Dombrowsky v. Farmers Ins. Co. Of Wash., 928 P.2d 1127 (Wash. Ct. App.
1996) (finding exclusion does limit coverage).
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The policy and exclusion at issue in Altman were substantially similar to the
policy and exclusion in this case. In Altman, the court gave great weight to the fact
that the exclusion for losses caused by enforcement of building codes or
ordinances was in a section containing only perils exclusions. 10 Cal. Rptr. at.
632. There was no limiting language in the valuation section of the policy or in the
insuring clause. Id. However, there is such limiting language in the standard form
policy in California Insurance Code Section 2071. The Altman court stated, “[t]he
exclusion’s location in a long list of excluded perils, combined with the words
‘caused directly or indirectly by,’ indicate that its intended function is to exclude a
peril, not to place a limit on replacement costs.” 10 Cal. Rptr. at. 634 (citing Bank
of the West v. Super. Ct., 2 Cal. 4th 1254, 1265 (1992)).
Similarly, here the exclusion at issue is in the section of the policy labeled
“PERILS EXCLUDED” and, unlike the standard form policy of California
Insurance Code Section 2071, there is no reference or limitation for increased costs
due to changes in building codes in either the valuation section or the insuring
clause of the policy. We hold, following Altman, that the exclusion at issue here
excludes damage caused by the peril of building ordinances, but not the increased
construction costs caused by intervening building ordinances when the loss itself is
caused by a covered peril.
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The Insurers also contend that any coverage for increased costs due to
intervening changes in building codes or ordinances is limited to the $10 million in
additional coverage offered in the Demolition and Increased Cost of Construction
(“DICC”) coverage extension. However, the DICC is a coverage extension that
provides additional coverage for the extra expense incurred as a result of
complying with intervening changes in building ordinances. It does not limit
coverage otherwise available under the policy. As described above, the policy
itself provides coverage for replacing structures destroyed by covered perils, even
if the cost to do so is higher due to intervening changes in building codes. This
coverage extension provides additional coverage not available elsewhere under the
policy for demolishing undamaged portions of the building or structure if required
by new building ordinances and rebuilding those demolished portions in
accordance with the new building ordinances.
Here, the Farad Dam was completely destroyed by a flood; the loss was not
caused by building codes. It is undisputed that flood is a covered peril under the
policy. Coverage is not limited by the DICC coverage extension. The district
court did not err in concluding that the replacement cost of the Farad Dam includes
any increased costs due to intervening changes in building ordinances.
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The district court found “[t]he evidence established that the actual estimated
cost to replace Farad is $19,800,000.” Insurers have not shown that this finding
was clearly erroneous. We affirm the district court’s finding of replacement cost.
However, because the district court did not apply appropriate depreciation to this
replacement cost to determine the ACV of the dam, we remand to the district court
to determine the proper depreciation and to apply that depreciation to the
replacement cost to determine the ACV.
3. $4 Million Sierra Spent In Preparation to Rebuild the Dam
Insurers contend that the court erred in ruling that Sierra is entitled to
recover approximately $4 million it has spent to date in preparation work prior to
starting construction. Insurers argue that, because the policy does not pay
replacement cost if the dam is not rebuilt within two years, they are not obligated
to pay anything more than ACV (which they contend they have already done) until
the dam is actually rebuilt.
The cases Insurers rely on involve policies that contain specific wording that
the policy here does not. For example, the policy at issue in Maryland Casualty
Co. v. Knight, 96 F.3d 1284 (9th Cir. 1996), contained a provision that said: “We
will not pay on a replacement cost basis for any loss or damage: (1) Until the lost
or damaged property is actually repaired or replaced; and, (2) Unless the repairs or
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replacement are made as soon as reasonably possible after the loss or damage.” Id.
at 1292 (emphasis added). Each of the other cases Insurers cite have similar
provisions, and all expressly state that replacement cost will not be paid until the
property is actually replaced.3
The policy here has no such express timing provision. The policy limits
only the amount of the Insurer’s liability, but says nothing about when the Insurers
will pay replacement cost. The valuation provision of the policy states, “in the
event of loss or damage to property which is not repaired, rebuilt or replaced
within two years from the date of loss or damage, this company shall not be liable
for more than the actual cash value (with proper deduction for depreciation) of the
property destroyed.” This provision does not state that the Insurers will not pay
more than ACV until the property is actually replaced. Rather, it merely limits the
Insurers’ ultimate liability if the property is not replaced within the allotted time.
3
Ghoman v. New. Hampshire Ins. Co., 159 F. Supp. 2d 928, 934, n.6
(N.D. Tex. 2001) (“replacement costs will not be paid ‘[u]ntil the lost or damaged
property is actually repaired or replaced’”); Kolls v. Aetna Cas. & Sur. Co., 378 F.
Supp. 392, 395 (S.D. Iowa 1974) aff’d, 503 F.2d 569 (8th Cir. 1974) (no
replacement cost recoverable “[u]nless and until the damaged property is actually
repaired or replaced with due diligence and dispatch”); Truesdell v. State Farm
Fire and Cas. Co., 960 F. Supp. 1511, 1513 (N.D. Okla. 1997) (“until actual repair
or replacement is completed, we will pay the actual cash value of the damage to the
buildings”). But see Lerer Realty Corp v. MFB Mut. Ins. Co., 474 F.2d 410 (5th
Cir. 1973)
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Because “[i]nsurance coverage is interpreted broadly so as to afford the greatest
possible protection to the insured[,]” MacKinnon v. Truck Ins. Exch., Inc., 31 Cal.
4th 635, 648 (Cal. 2003), the district court was not wrong to find that the expenses
already incurred by Sierra and necessary in preparation to replace the dam are
recoverable before replacement is actually completed.
The district court went one step further, ruling that Sierra was entitled to
recover this amount “even if replacement is not undertaken.” We agree that the
money Sierra has already spent in preparation for rebuilding should be included in
the estimate of replacement cost which is then used to determine the ACV, and we
assume it was included in the estimated replacement cost ($19,800,000) the district
court found reasonable. However, if the district court intended that Sierra is
entitled to recover expenses already incurred in addition to the ACV, there is no
support for such a ruling. We hold that the amount Sierra has already spent is
properly included in the calculation of replacement cost, which would then be
reduced by the appropriate depreciation to determine the ACV,4 but that Sierra is
4
Any amount Hartford has already paid Sierra Pacific would, of course,
be deducted from the any recovery so that Sierra Pacific recovers an amount equal
to, but not exceeding, the ACV.
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not entitled to recover any amount in addition to the ACV of the dam unless the
dam is actually rebuilt within the three-year limit imposed by the district court.5
4. Policy’s Two-Year Limit on Time to Rebuild
The district court found four separate reasons excusing Sierra from
complying with the policy’s two-year rebuilding requirement to recover
replacement cost rather than ACV. First, there is substantial evidence that
regulatory challenges made it impossible for Sierra to rebuild before filing its suit,
and the evidence details the years Sierra worked to obtain the necessary permits
and easements in order to begin work on the replacement. It was not clear error for
the district court to conclude that it was impossible to comply with the two-year
requirement.
Second, the court ruled that because the two-year condition was impossible
to satisfy, it would be contrary to public policy to enforce it. The Insurers cite no
case that casts doubt on the district court’s finding. They failed to meet their
burden to demonstrate that enforcing a condition that is impossible to satisfy would
not be contrary to public policy in California. Third, the district court found that
5
We leave it to the district court to determine whether the same
depreciation should be applied to the costs incurred in preparation to rebuild as to
the costs of construction of the dam itself, or whether the prerequisites to
rebuilding, such as environmental impact studies and building permits, should be
subject to a different depreciation rate.
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the Insurers’ conduct should prevent them from enforcing the two-year limit to
recover replacement cost. The court found that Insurers unreasonably denied
coverage and misled Sierra as to the amount of coverage ultimately available under
the policy. An insurer’s misrepresentations regarding available coverage, and its
delay in informing an insured as to coverage available, has been held sufficient to
base a finding of estoppel against enforcing time limits such as the two-year
provision here. City of Hollister v. Monterey Ins. Co., 81 Cal. Rptr. 3d 72, 98-99
(Cal. Ct. App. 2008).
Finally, the district court found that the two-year provision was not
enforceable because it was waived through repeated extensions and that, because
the Insurers granted each extension requested, the provision was not material. The
court also noted that because the policy set the time to calculate the value of the
dam as the time when, with diligence and dispatch the dam could be replaced, the
Insurers were not prejudiced by any extension. The Insurers have not established
that the court was clearly erroneous in so finding.
The district court further determined that a reasonable time to rebuild with
diligence and dispatch was three years from the date of its order. While the
Insurers argue the court was wrong in ruling the two-year period was
unenforceable, neither party specifically argues why the three-year figure is wrong.
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Therefore, we affirm the district court’s determination that the time limit to rebuild
the dam should be three years rather than two years.6 We also agree with the
district court that, should Sierra actually rebuild the dam within that time, it should
be entitled to recover the difference between ACV and the replacement cost.
5. Conclusion
We vacate the district court’s finding that the ACV of the Farad Dam was
$1,261,200, and remand for a determination of the ACV based on reducing the
replacement cost of $19,800,000 by the appropriate depreciation. We affirm the
district court’s finding that Sierra is entitled to the $4 million it has already spent in
replacement costs even though the dam has not actually been replaced yet, to the
extent that this amount is included in the estimated replacement cost used to
calculate the ACV. We affirm the district court’s finding that the coverage
available under the policy includes costs necessary to comply with current
regulatory requirements and building codes. Finally we affirm the district court’s
6
Sierra filed a motion to stay the trial court’s order so that the time
during this appeal would be tolled and not count toward the three-year limit.
Because we remand to the district court for further resolution, and the district court
has indicated it intended the three-year period to begin running only after the
litigation is final, including all periods of appeal, we are confident the district court
will be able to fashion its final ruling in this matter to clarify that the three-year
period granted for rebuilding Farad Dam should be tolled until the conclusion of
the litigation, including during the pendency of any appeal by the Insurers.
Therefore, we DENY Sierra’s motion as moot.
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finding that the two-year restriction for replacing the dam was impossible to
comply with, therefore contrary to public policy and unenforceable. In sum, we
VACATE in part, AFFIRM in part, and REMAND.
Each side to bear its own costs.
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