Wagner v. American Family Mutual Insurance

FILED
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS June 19, 2014
TENTH CIRCUIT Elisabeth A. Shumaker
Clerk of Court
SHANNON WAGNER,
Plaintiff - Appellant,
No. 13-1438
v. (D.C. No. 1:12-CV-1420-MSK-MJW)
(D. Colo.)
AMERICAN FAMILY MUTUAL
INSURANCE COMPANY,
Defendant - Appellee.
ORDER AND JUDGMENT *
Before KELLY, TYMKOVICH, and McHUGH, Circuit Judges.
In this diversity case, Plaintiff-Appellant Shannon Wagner appeals the
district court’s grant of summary judgment to American Family Mutual Insurance
Company (“American Family”) dismissing her breach of contract claim. Wagner
v. Am. Family Mut. Ins. Co., No. 12-CV-01420-MSK-MJW (D. Colo. Sept. 22,
2013). Ms. Wagner also appeals the district court’s dismissal of her statutory and
common law bad faith claims. Our jurisdiction arises under 28 U.S.C. § 1291,
and we affirm.
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
Background
The facts of this case are not in dispute. Ms. Wagner insured her Aurora,
Colorado home through American Family under a homeowner’s policy. Aplt.
App. 334. In April 2011, suspecting a water leak in her home, Ms. Wagner had
her property inspected. Aplt. App. 334. She was informed that a water pipe
underneath the slab foundation near an exterior wall was the source of the leak.
Aplt. App. 334. The parties agree that water from the leaking pipe eroded the soil
underneath her home, causing settlement and cracking of the slab, which, in turn,
caused drywall and flooring panels to crack. Aplt. App. 334.
On May 31, 2011, Ms. Wagner filed a damage claim with American
Family. Aplt. App. 334. On June 2, 2011, an American Family adjuster
inspected Ms. Wagner’s home and agreed there was damage. Aplt. App. 334.
However, on June 15, 2011, American Family denied Ms. Wagner’s claim, citing
several policy provisions including losses not covered and the earth movement
and water damage exclusions. Aplt. App. 85-86. As did the parties, we set out
the pertinent portions of the policy.
PERILS INSURED AGAINST – SECTION 1
COVERAGE A – DWELLING AND DWELLING EXTENSION
We cover risks of accidental direct physical loss to property described in
Coverage A – Dwelling and Dwelling Extension, unless the loss is excluded in
this policy.
(HO-5 (CO) Ed. 6/94, at pg. 5, Aplt. App. 42).
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LOSSES NOT COVERED
We do not cover loss to the property described in Coverage A resulting directly
or indirectly from, or consisting of, or caused by one or more of the following.
Such loss is excluded regardless of any other cause or event contributing
concurrently or in any sequence to the loss.
1. Losses excluded under EXCLUSIONS – SECTION I.
....
3. Continuous or Repeated Seepage or leakage of water or steam from
within a plumbing, heating, air-conditioning or automatic fire protection
sprinkler system or from within a household appliance which occurs over a
period of weeks, months or years.
....
6. Other causes of loss:
a. wear and tear, marring, scratching, deterioration;
b. inherent vice, latent or inherent defect, mechanical breakdown;
c. smog, rust, corrosion, frost, condensation, wet or dry rot;
d. smoke from agricultural smudging or industrial operations;
e. settling, cracking, shrinking, bulging, or expansion of pavements,
patios, foundations, walls, floors, roofs or ceilings;
f. birds, vermin, rodents, insects or domestic animals.
If any of these cause water or steam to escape from a plumbing, heating,
air-conditioning or automatic fire protection sprinkler system or household
appliance, we cover loss caused by the water or steam. We also cover the
cost of tearing out and replacing any part of a building necessary to repair
the system or appliance.
We do not cover loss to the system or appliance from which this water or
steam escaped.
For the purposes of this provision, a plumbing system or household
appliance does not include a roof drain, sump, sump pump, gutter,
downspout, drain tile or attached equipment.
....
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However, we do cover any resulting loss to property described in Coverage A
from items 2 through 8 above, not excluded or excepted in this policy.
EXCLUSIONS – SECTION I
....
PART A
The following exclusions apply to Coverage A – Dwelling and Dwelling
Extension, Coverage B – Personal Property, Coverage C – Loss of Use and the
Supplementary Coverages – Section I. We do not insure for loss consisting of, or
caused directly or indirectly by any of the following. Such loss is excluded
regardless of any other cause or event contributing concurrently or in any
sequence to the loss.
(Endorsement 584C (CO) Ed 11/09, at p. 2-3, Aplt. App. 60-61) (bold in original,
italics added).
1. Earth Movement, meaning any loss caused by, resulting from, contributed
to or aggravated by earthquake; landslide; subsidence; sinkhole; erosion;
mudflow; earth sinking, rising, shifting, expanding or contracting; volcanic
eruption, meaning the eruption, explosion or effusion of a volcano. This
exclusion applies whether or not the earth movement is combined with
water or rain.
We do cover only direct resulting loss when caused by:
a. fire;
b. explosion other than the explosion of a volcano; or
c. if an insured peril, breakage of glass or safety glazing material which
is a part of a building.
....
9. Water Damage, meaning:
a. flood, surface water, waves, tidal water or overflow of a body of
water, from any cause. We do not cover spray from any of these,
whether or not driven by wind;
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b. water from any source which backs up through sewers or drains, or
water which enters into and overflows or accidentally discharges
from within a sump pump, sump pump well, sump pump well
discharge system or other type system designed to remove subsurface
water which is drained from the foundation area; or
c. regardless of its source, water below the surface of the ground. This
includes water which exerts pressure on or flows, seeps or leaks
through any part of a building or other structure, sidewalk, driveway
or swimming pool.
We do cover direct loss that follows, caused by Fire or Explosion.
....
However, we do cover any resulting loss to property described in Coverage A –
Dwelling and Dwelling Extension not excluded or excepted in this policy.
(HO-5 (CO) Ed. 6/94, at pg 7, Aplt. App. 44 (bold in original, italics added)).
Although the parties subsequently discussed Ms. Wagner’s claim and
American Family’s reason for denying it, American Family continuously
maintained that the damage was not a covered loss. Aplt. App. 334; see also
Aplt. App. 84-95, 251-90. In a February 22, 2012 letter, American Family
reiterated that the pipe beneath Ms. Wagner’s home had been leaking for months,
and its “policy excludes damage caused by continuous or repeated leakage.”
Aplt. App. 91.
Ms. Wagner filed suit in district court seeking declaratory relief and claims
for breach of the insurance contract, statutory bad faith under Colo. Rev. Stat. §
10-3-1116, and common law bad faith. American Family moved for summary
judgment, arguing that no breach occurred because it properly denied the claim
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and acted reasonably in doing so. Aplt. App. 29, 31-32.
Ms. Wagner contended that the “any resulting loss” exception at the end of
EXCLUSIONS – SECTION 1 restored coverage where it would otherwise be
excluded by other provisions. The district court disagreed, noting that Ms.
Wagner conceded that at least two exclusions applied: earth movement and water
damage. Aplt. App. 338; see also Aplt. App. 105-06. The district court rejected
Ms. Wagner’s argument that the “any resulting loss” exception at the end of
EXCLUSIONS – SECTION 1 restored coverage that would otherwise be
excluded. Aplt. App. 339-40. Rather, the district court read the policy’s plain
language as excluding coverage because (1) the earth movement and water
damage exclusions do not cover any loss “caused directly or indirectly” by these
events, which applied to Ms. Wagner’s claim; and (2) for the “any resulting loss”
exception to restore coverage, the damage must result from a separate and
independent covered peril. Aplt. App. 341. The court gave the example of gas-
fed fires (covered peril) occurring after an earthquake (excluded peril). Aplt.
App. 341.
The district court also rejected Ms. Wagner’s reliance on Kesling v. Am.
Family Mut. Ins. Co., 861 F. Supp. 2d 1274 (D. Colo. 2012), because the damage
in Kesling involved both an excluded and a covered peril and invoked a different
policy exclusion. Aplt. App. 342-43. Accordingly, the district court determined
that American Family did not breach the contract by excluding coverage, and
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because breach was an essential element of all Ms. Wagner’s claims, her
remaining claims also failed. Aplt. App. 343-44.
Discussion
Ms. Wagner argues that the district court erred because (1) any ambiguity
as to covered losses should be construed in her favor; and (2) her statutory and
common law bad faith claims remain, regardless of the district court’s conclusion
on breach. Aplt. Br. 9. For the following reasons, we disagree.
We review an order granting summary judgment de novo. Helm v. Kansas,
656 F.3d 1277, 1284 (10th Cir. 2011). Summary judgment is appropriate if “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). Given a material issue, we
view the evidence and reasonable inferences in the light most favorable to the
nonmoving party. Ricci v. DeStefano, 557 U.S. 557, 586 (2009). However,
when the relevant facts are undisputed, we review the district court’s
interpretation of an insurance contract de novo. Houston Gen. Ins. Co. v. Am.
Fence Co., Inc., 115 F.3d 805, 806 (10th Cir. 1997). Contract interpretation is a
matter of state law; thus, when sitting in diversity, we look to the law of the
forum state. Id.
A. Breach of Contract
Under Colorado law, Ms. Wagner is correct that ambiguous insurance
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contracts are construed against the insurer and in favor of providing coverage.
See, e.g., Compass Ins. Co. v. City of Littleton, 984 P.2d 606, 613 (Colo. 1999).
However, in the absence of ambiguity, an insurance policy must be given effect
according to the plain and ordinary meaning of its terms. Nat’l Cas. Co. v. Great
Sw. Fire Ins. Co., 833 P.2d 741, 744 (Colo. 1992). That is the case here.
Ms. Wagner’s primary argument is that an “inherent conflict” exists
between the earth movement exclusion, which excludes coverage of her claim,
and the “settling exclusion” found under LOSSES NOT COVERED, 6(e), which
covers losses caused by water when settling causes “water or steam to escape
from a plumbing . . . system.” Aplt. Br. 17. In support, she contends that (1) the
exception to the settling exclusion provides a clear grant of coverage without
referencing any other policy exclusions or limitations, and that her interpretation
of coverage under this provision was confirmed by an American Family sales
agent; and (2) American Family presented no evidence to rebut that the damage to
her house comes under the exception to the settling exclusion due to either wear-
and-tear, deterioration, defect, or a mechanical breakdown of the leaking pipe.
Aplt. Br. 18, 21-23. Alternatively, Ms. Wagner argues that (3) under the earth
movement exclusion, any ambiguity as to whether the “any resulting loss”
provision restores coverage should have been interpreted in her favor, based on
(a) Kesling, 861 F. Supp. 2d at 1274, and (b) the clear grant of coverage under the
exception to the settling exclusion. Aplt. Br. 19-21.
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American Family argues that this court should not address Ms. Wagner’s
arguments relating to the settling exclusion because they were not raised before
the district court and therefore were not preserved. Aplee. Br. 14. Ms. Wagner
argues that the preservation rule is more relaxed when the arguments are legal and
a fundamental miscarriage of justice would occur. Aplt. Reply Br. 8. We decline
to exercise our discretion in addressing Ms. Wagner’s settling-exclusion
arguments, particularly where the district court noted that Ms. Wagner did not
argue that restoration of coverage occurred notwithstanding the earth movement
exclusion. Aplt. App. 344. In sum, plain error did not occur, see Somerlott v.
Cherokee Nation Distributors, Inc., 686 F.3d 1144, 1148 (10th Cir. 2012), and our
declining to address these newly raised arguments will not result in a miscarriage
of justice given the clarity of the policy. See In re C.W. Mining Co., 625 F.3d
1240, 1246 (10th Cir. 2010).
As to Ms. Wagner’s third argument, no ambiguity exists in the earth
movement exclusion that should be read in her favor. While Ms. Wagner is
correct that the Kesling court interpreted “any resulting loss” against the insurer
to mean any resulting damage to the home, Kesling, 861 F. Supp. 2d at 1284, we
need not reach the “any resulting damage” provision. The damage here comes
squarely under the earth movement exclusion. We also note that under Kesling,
the ambiguity in “any resulting loss” would not end the inquiry. The next step is
to determine whether the loss is subject to some other policy exclusion or
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exception. Id. Ms. Wagner presents no other policy exception that would restore
coverage to her claim.
B. Unreasonable Delay
Ms. Wagner argues that regardless of whether her claim is covered by her
policy, American Family remains liable for its unreasonable delay and denial of
her claims in violation of Colo. Rev. Stat. §§ 10-3-1115, 1116 and common law.
Aplt. Br. 23. We disagree.
In Colorado, the statutory and common law bad faith claims relating to
insurance are similar. By statute, “[a] person engaged in the business of
insurance shall not unreasonably delay or deny payment of a claim for benefits
owed to or on behalf of any first-party claimant.” Colo. Rev. Stat.
§ 10-3-1115(1)(a). An insurer’s delay or denial is unreasonable “if the insurer
delayed or denied authorizing payment of a covered benefit without a reasonable
basis for that action.” Colo. Rev. Stat. § 10-3-1115(2). Similarly, to support a
common law bad faith claim, a claimant must show that an “insurer’s conduct is
unreasonable and the insurer knows that the conduct is unreasonable or recklessly
disregards the fact that the conduct is unreasonable.” Travelers Ins. Co. v. Savio,
706 P.2d 1258, 1275 (Colo. 1985). The legal standard between the two is
slightly different: In the statutory claim, the only element at issue is whether the
insurer denied benefits without a reasonable basis; whereas, a common law claim
must show both unreasonableness and that the insurer knew that its conduct was
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unreasonable or recklessly disregarded that fact. Vaccaro v. Am. Family Ins.
Grp., 275 P.3d 750, 760 (Colo. App. 2012) (as modified on denial of reh’g (Mar.
15, 2012)).
Although Ms. Wagner is correct that in Colorado “the tort of bad faith
depends on the conduct of the insurer regardless of the ultimate resolution of the
underlying compensation claim,” Brodeur v. Am. Home Assurance Co., 169 P.3d
139, 147 (Colo. 2007), Ms. Wagner’s bad faith claims nonetheless fail based on
the element of reasonableness. In essence, Ms. Wagner argues that American
Family failed to investigate her claim in good faith, failed to explain the basis for
its denial, and improperly denied coverage of her claim. Aplt. Reply Br. 20-21.
We have already determined that Ms. Wagner’s claim was properly denied based
upon exclusions in the policy which were fairly applied. An American Family
adjuster inspected Ms. Wagner’s home on June 2, 2011, just days after she made
her May 31, 2011 claim, and then issued a denial letter on June 15, 2011, citing
several policy exclusions—even if Ms. Wagner disagreed with those exclusions
during subsequent discussions. We find nothing unreasonable about American
Family’s denial of her claim because it had a reasonable basis for its action. See
Vaccaro, 275 P.3d at 759 (reasonableness may be decided as a matter of law when
there are no genuine issues of material fact); see also Zolman v. Pinnacol
Assurance, 261 P.3d 490, 497 (Colo. App. 2011) (“[A]n insurer will be found to
have acted in bad faith only if it has intentionally denied, failed to process, or
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failed to pay a claim without a reasonable basis.”).
Although the district court summarily stated that breach was an element of
all of Ms. Wagner’s claims, we may affirm on any ground supported by the
record. Thigpen v. Roberts, 468 U.S. 27, 29-30 (1984). Ms. Wagner failed to
meet a required element of both her bad faith claims because American Family
acted reasonably in denying coverage under her homeowner’s policy. See
MarkWest Hydrocarbon, Inc. v. Liberty Mut. Ins. Co., 558 F.3d 1184, 1192-93
(10th Cir. 2009).
AFFIRMED.
Entered for the Court
Paul J. Kelly, Jr.
Circuit Judge
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