v. United States Automobile Association

The summaries of the Colorado Court of Appeals published opinions
constitute no part of the opinion of the division but have been prepared by
the division for the convenience of the reader. The summaries may not be
cited or relied upon as they are not the official language of the division.
Any discrepancy between the language in the summary and in the opinion
should be resolved in favor of the language in the opinion.
SUMMARY
November 14, 2019
2019COA169
No. 18CA1374, 18CA2005, Morley v. United States Automobile
Association — Insurance — Property and Casualty Insurance —
Homeowner’s Insurance — Exclusions — Surface Water
In this insurance coverage case, a division of the court of
appeals considers whether a “surface water” exclusion in an all-risk
insurance policy precludes the plaintiffs’ claims as a matter of law
when the plaintiffs allege that the interior of their home was
damaged when precipitation entered the home directly through
holes in the roof caused by hail damage. Applying the
unambiguous definition of “surface water” articulated in Heller v.
Fire Insurance Exchange, 800 P.2d 1006, 1008 (Colo. 1990), the
division concludes that when precipitation falls or leaks into the
insured’s dwelling through holes in a roof damaged by hail (or some
other covered peril) — rather than running off the roof and behaving
as one would expect water intercepted by a roof to behave — 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.”
In reaching its conclusion, the division distinguishes this case
from Martinez v. American Family Mutual Insurance Co., 2017 COA
15. While the division agrees with Martinez that man-made
surfaces can intercept precipitation and generate surface water, it
rejects the insurer’s contention that Martinez stands for the broad
proposition that the moment water falling from the sky touches a
roof or other man-made surface it becomes “surface water.”
Because the district court erred in concluding, as a matter of
law, that the plaintiffs’ claims are barred by the surface water
exclusion in their policy, the division reverses the district court’s
entry of summary judgment and its award of costs in favor of the
insurer.
Further, because there are genuine disputes of material fact,
the division declines to affirm the district court’s entry of summary
judgment on the insurer’s alternative argument that a fraud
exemption in the policy precludes the plaintiffs’ claims.
COLORADO COURT OF APPEALS 2019COA169
Court of Appeals Nos. 18CA1374 & 18CA2005
Pueblo County District Court No. 17CV30403
Honorable Deborah R. Eyler, Judge
Richard Morley and Connie Morley,
Plaintiffs-Appellants,
v.
United Services Automobile Association,
Defendant-Appellee.
JUDGMENT AND ORDER REVERSED
AND CASE REMANDED WITH DIRECTIONS
Division II
Opinion by JUDGE BROWN
Dailey and Richman, JJ., concur
Announced November 14, 2019
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
¶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
1
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
2
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
1 Having concluded that the surface water exclusion barred
coverage, the district court further concluded that “waiver . . . may
not be employed to bring within the policy risks not covered by its
terms or risks expressly excluded therefrom.” See Empire Cas. Co.
v. St. Paul Fire & Marine Ins. Co., 764 P.2d 1191, 1198 (Colo. 1988);
3
¶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
Hartford Live Stock Ins. Co. v. Phillips, 150 Colo. 349, 352, 372 P.2d
740, 742 (1962).
4
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.
5
¶ 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 the issue be
brought to the attention of the trial court and that the court be
given an opportunity to rule on it.”). 2
2. Standard of Review and Applicable Law
¶ 14 We review the entry of summary judgment de novo. Shelter
Mut. Ins. Co. v. Mid-Century Ins. Co., 246 P.3d 651, 657 (Colo.
2011). Summary judgment is appropriate where the pleadings and
supporting documents clearly demonstrate that no issues of
material fact exist and the moving party is entitled to judgment as a
matter of law. C.R.C.P. 56(c); Cotter Corp. v. Am. Empire Surplus
2 Because we resolve this appeal based on the plain, unambiguous
language of the Policy, whether the Morleys preserved their
alternative arguments is irrelevant.
6
Lines Ins. Co., 90 P.3d 814, 819 (Colo. 2004). For purposes of
summary judgment, a “material fact” is one that will affect the
outcome of the case. Olson v. State Farm Mut. Auto. Ins. Co., 174
P.3d 849, 853 (Colo. App. 2007). We afford all favorable inferences
that may be drawn from the undisputed facts to the nonmoving
party, and we resolve all doubts as to the existence of a triable issue
of fact against the moving party. Cotter Corp., 90 P.3d at 819.
¶ 15 An insurance policy is a contract and its meaning is a
question of law that we review de novo. Allstate Ins. Co. v. Huizar,
52 P.3d 816, 819 (Colo. 2002). We construe an insurance policy
according to well-settled principles of contract interpretation. Id.In interpreting a contract, we give effect to the intent and
reasonable expectations of the parties. Sachs v. Am. Family Mut.
Ins. Co., 251 P.3d 543, 546 (Colo. App. 2010). We read the
provisions of a policy as a whole, construing the policy so that all
provisions are harmonious and none are rendered meaningless.
Martinez, ¶ 8.
¶ 16 We enforce an insurance policy as written unless the relevant
policy language is ambiguous. Cary v. United of Omaha Life Ins.
Co., 108 P.3d 288, 290 (Colo. 2005). Policy language is ambiguous
7
if it is susceptible on its face to more than one reasonable
interpretation. Id. Mere disagreement between the parties about
the meaning of a term in a policy does not create an ambiguity.
Kane v. Royal Ins. Co. of Am., 768 P.2d 678, 680 (Colo. 1989).
¶ 17 An unambiguous limitation or exclusion in an insurance
policy must be enforced as written. Bolejack v. Travelers Ins. Co.,
64 P.3d 939, 940 (Colo. App. 2003). But the insurer bears the
burden of proving that a particular loss falls within an exclusion in
the contract. Colo. Intergovernmental Risk Sharing Agency v.
Northfield Ins. Co., 207 P.3d 839, 842 (Colo. App. 2008).
3. Relevant Policy Language
¶ 18 The Policy is an all-risk policy designed to cover a wide range
of damages to the Morleys’ property unless coverage for a particular
type of loss is expressly excluded. The policy provides the following
coverage: “We insure against ‘sudden and accidental’ direct physical
loss to [the dwelling] unless excluded in SECTION I – LOSSES WE
DO NOT COVER.” 3
3 It appears that the parties agree that the damage to the interior of
the Morleys’ home was damage to the “dwelling” rather than to
“personal property.” Accordingly, we address only the provisions of
the Policy that apply to coverage for the dwelling.
8
¶ 19 As relevant here, USAA relied on the surface water exclusion
as the basis for its motion for summary judgment. This exclusion
provides as follows:
We do not insure for loss or damage consisting
of, caused directly or indirectly by . . .
....
c. Water damage arising from, caused by or
resulting from human or animal forces, any
act of nature, or any other source. Water
damage means damage caused by or
consisting of:
(1) Flood, surface water, waves, tidal water,
storm surge, tsunami, any overflow of a body
of water, or spray from any of these, whether
or not driven by wind.
(Emphasis added.) 4
4. Discussion
¶ 20 This appeal requires us to interpret the term “surface water” in
the Policy. If the water that caused the damage to the interior of
the Morleys’ home was surface water, the surface water exclusion
4The Policy also contains an “anti-concurrent” clause, which
precludes coverage even if the loss is caused by a combination of a
covered cause, event, or peril and an excluded one. Although USAA
raised the anti-concurrent clause during oral argument as
additional grounds to affirm, it did not rely on it as a basis for
summary judgment, so we do not address it.
9
applies to bar coverage and the district court properly granted
summary judgment in favor of USAA. If the water was not surface
water, or if there remains a dispute of fact as to whether the water
was surface water, the district court’s entry of summary judgment
was erroneous.
¶ 21 The Colorado Supreme Court defined “surface water” in Heller,
800 P.2d at 1008. In Heller, the interior of the plaintiffs’ property
was damaged by runoff from melted snow that had been diverted
onto the plaintiffs’ property by man-made trenches that were fifteen
feet long, three feet wide, six inches deep, and lined. Id. at 1007.
The court interpreted a similar surface water exclusion in an all-
risk policy. Although the term “surface water” was not defined in
the policy, the court concluded that the term unambiguously means
water from melted snow, falling rain, or rising
springs, lying or flowing naturally on the
earth’s surface, not gathering into or forming
any more definite body of water than a mere
bog, swamp, slough, or marsh, and lost by
percolation, evaporation, or natural drainage.
Surface water is distinguished from the water
of a natural stream, lake, or pond, is not of a
substantial or permanent existence, has no
banks, and follows no defined course.
Id. at 1008-09 (footnotes omitted).
10
¶ 22 Applying this definition, the court reasoned that, although the
runoff from the melted snow was originally surface water, it lost
that character when it was diverted by the trenches because the
trenches were defined channels that prevented percolation,
evaporation, or natural drainage. Id. at 1009. Thus, the court
concluded that the surface water exclusion did not apply and the
plaintiffs’ loss was covered by their insurance policy. Id.
¶ 23 We are bound to apply the definition of “surface water”
articulated by the supreme court in Heller. See In re Estate of
Ramstetter, 2016 COA 81, ¶ 40. Thus, we conclude that the term
“surface water” is not ambiguous, and we reject the Morleys’
arguments to the contrary. Still, we must apply the unambiguous
term “surface water” to the facts of this case, which are significantly
different from those in Heller.
¶ 24 USAA contends that the precipitation that leaked through the
Morleys’ storm-damaged roof constitutes surface water. In support
of this argument, USAA relies heavily on Martinez, where a division
of this court evaluated a similar surface water exclusion in an all-
risk insurance policy.
11
¶ 25 In Martinez, the plaintiff alleged that his basement was
damaged when rainwater collected on top of a large amount of hail
at the base of basement window wells and then overflowed into the
basement windows, causing substantial damage to the interior of
the plaintiff’s property. Martinez, ¶ 3. The insurer denied the
plaintiff’s claims because it concluded the damage was caused by
surface water and, therefore, was expressly excluded from coverage
under the surface water exclusion. Id. at ¶ 4. The trial court
agreed and granted the insurer’s motion for summary judgment.
Id. at ¶ 6.
¶ 26 On appeal, the plaintiff argued, in relevant part, that the
surface water exclusion did not apply because the precipitation that
caused the damage first landed on the roof, then flowed directly into
the window wells. According to the plaintiff, because the water was
never lying or flowing naturally on the earth’s surface, it was not
surface water. Id. at ¶ 31.
¶ 27 The division rejected this argument, concluding that even if
the precipitation first fell on the roof and then flowed directly into
the window wells, it fit “well within Heller’s definition of surface
water.” Id. at ¶¶ 32, 35. The division reasoned that the term
12
“earth’s surface” was not as narrow as the plaintiff argued, but
instead that “the rooftop of [the plaintiff’s] home [was] a mere
continuation of ‘the earth’s surface.’” Id. at ¶¶ 33-35. Because the
roof could be considered part of the “earth’s surface,” the division
concluded that the precipitation that fell on that roof and then
flowed directly into the window wells was surface water. Id. at ¶ 35.
Thus, the surface water exclusion in the insurance policy barred
coverage for the plaintiff’s damage. Id. at ¶ 52.
¶ 28 In reaching its conclusion, the Martinez division surveyed
other jurisdictions and found that “the overwhelming majority of
jurisdictions that have addressed this issue . . . view precipitation
collecting on a roof or other man-made structures as ‘surface
water.’” Id. at ¶ 34. But the cases cited in Martinez are factually
distinguishable. Most involved paved or man-made surfaces at or
just inches above ground level. See Cameron v. USAA Prop. & Cas.
Ins. Co., 733 A.2d 965 (D.C. 1999) (relying on Heller and finding
surface water included water that first landed on a patio and then
flowed into a basement); Fenmode, Inc. v. Aetna Cas. & Sur. Co. of
Hartford, 6 N.W.2d 479, 480-81 (Mich. 1942) (concluding that water
overflowing from a paved surface was surface water); Crocker v. Am.
13
Nat’l Gen. Ins. Co., 211 S.W.3d 928, 936 (Tex. App. 2007) (finding
that surface water is not limited to rain falling on dirt, and that
water draining off of a raised patio was surface water). And none
involved water penetrating through the paved or man-made surface
to cause damage; rather, all involved water flowing off the man-
made surface and ultimately causing damage some other way.
Importantly, none involved precipitation accumulating on and
penetrating an (allegedly) hail-damaged roof to cause interior
damage.
¶ 29 Indeed, the only case cited in Martinez that involved water
falling on a roof is Bringhurst v. O’Donnell, 124 A. 795 (Del. Ch.
1924), which interpreted the term “surface water” in a “reservation
of use . . . ‘for the purpose of carrying off the surface water and
cleaning the cesspools on said lots and for no other purpose.’” Id.
at 797. Bringhurst did not involve a surface water exclusion in an
insurance policy. Still, the water at issue there flowed off the roof
and into the alley that was the subject of the easement.
¶ 30 USAA also relies on Oak Hill Investment IV LLC v. State Farm
Fire & Casualty Co., No. 15-CV-1996, 2017 WL 4286779 (N.D. Ohio
Sept. 27, 2017), aff’d, 737 F. App’x 722 (6th Cir. 2018), in arguing
14
that the surface water exclusion precludes the Morleys’ claims. Not
only is that case not binding on us, but it is also factually
distinguishable. In Oak Hill, precipitation pooled on a roof until it
overflowed an air conditioner unit and entered the insured’s
building; the water did not penetrate the roof through holes created
by a covered event, such as is alleged here. Further, the court
applied Ohio’s definition of “surface water,” which is markedly
different from the definition articulated in Heller and has been
interpreted broadly by Ohio courts. Accordingly, we do not find
Oak Hill persuasive here.
¶ 31 We agree that man-made surfaces, such as roofs or patios,
can intercept precipitation and generate surface water. Indeed, it
would be nonsensical to categorically exclude precipitation falling
on a roof from the definition of surface water simply because the
roof temporarily detours the water from its natural flow down grade
toward the earth’s surface and its eventual manifestation as surface
water. By contrast, when precipitation falls or leaks into the
insured’s dwelling through holes in a roof damaged by hail (or some
other covered peril) — rather than running off the roof and behaving
as one would expect water intercepted by a roof to behave — it does
15
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” (even if the roof is considered an extension of the “earth’s
surface”). Heller, 800 P.2d at 1008.
¶ 32 Here, the district court stated that the interior damage to the
Morleys’ home was caused by “rainwater/hail penetrating the roof
of the home.” Based on that characterization, we disagree with the
district court’s conclusion, as a matter of law, that the water
causing the damage to the interior of the Morleys’ home was
“surface water” triggering the surface water exclusion in the Policy.
¶ 33 In reaching this conclusion, we reject USAA’s contention that
Martinez stands for the proposition that the moment water falling
from the sky touches a roof or other man-made surface it becomes
“surface water,” such that any damage subsequently caused by that
water is excluded from coverage. We do not read Martinez to
declare such a broad and bright line.5 Nor would such a
5To the extent that the division in Martinez intended to declare
such a broad proposition, we are not bound to agree. See Roque v.
Allstate Ins. Co., 2012 COA 10, ¶ 20 (“[W]e are not bound to follow
decisions of other divisions of this court.”).
16
declaration be consistent with the parties’ reasonable expectations
or the binding definition of “surface water” articulated in Heller.
¶ 34 Instead, whether the water that caused damage to the interior
of the Morleys’ home was “surface water” is a more nuanced
question. And, notwithstanding the district court’s statement that
“[t]he parties agree that the damage was caused by rainwater/hail
penetrating the roof of the home,” precisely how the water entered
the home is unclear based on the record before us on appeal.
¶ 35 In their complaint, the Morleys allege that the interior damage
was caused by precipitation entering directly through holes in the
roof caused by the hail damage. If that allegation is true, the water
that caused the damage in this case was never “lying or flowing
naturally” on the roof and was not surface water. For purposes of
summary judgment, USAA acknowledged the Morleys’
characterization, but did not concede its accuracy. Instead, USAA
argued that it was entitled to summary judgment even if the cause
of the interior water damage was as the Morleys alleged. Thus, it
appears material facts are in dispute that preclude entry of
summary judgment.
17
¶ 36 Because we disagree with the district court’s conclusion that,
as a matter of law, the Morleys’ claims are barred by the surface
water exclusion in the Policy, we conclude that the court erred by
entering summary judgment in favor of USAA.
B. There are Disputes of Material Fact about Whether the Policy’s
Fraud Clause Precludes the Morleys’ Claims
¶ 37 USAA contends that, because the Morleys failed to disclose
material facts, their claims are also barred by the Policy’s fraud
clause. USAA raised this argument in its motion for summary
judgment as an alternative ground for judgment in its favor on the
Morleys’ claims, but the district court did not address it. Even so,
we may affirm a trial court’s ruling based on any grounds that are
supported by the record. See Rush Creek Sols., Inc. v. Ute Mountain
Ute Tribe, 107 P.3d 402, 406 (Colo. App. 2004).
¶ 38 The Policy provides, in relevant part, that USAA may
deny coverage as to the interest of all
“insureds” if you or any other “insured”,
whether before or after an “occurrence” or loss
under this policy has:
(a) concealed or misrepresented any material
fact or circumstance.
18
¶ 39 USAA contends that in October 2014, almost eight months
before the Morleys reported their claim to USAA, the Morleys had a
roofing company inspect and estimate the replacement cost for their
roof. According to USAA, the Morleys failed to disclose the
inspection report, which revealed that the roof had several rotten
areas and would need to be replaced. USAA contends this
information was material to the claim and the Morleys’ failure to
disclose it allows USAA to deny coverage.
¶ 40 The Morleys dispute that they concealed or misrepresented
material facts. Instead, the Morleys contend that the inspection did
not reveal that the roof needed immediate replacement or that water
was leaking into the home.
¶ 41 Although the interpretation of an insurance policy is a matter
of law we review de novo, Huizar, 52 P.3d at 819, genuine disputes
of fact exist regarding the content and materiality of the inspection
report and the Morleys’ intent in failing to disclose it. The district
court did not resolve these factual disputes, nor should it have,
when entering summary judgment. And, we may not resolve such
disputes for the first time on appeal. Thus, we cannot affirm the
district court’s entry of summary judgment based on USAA’s
19
alternative argument that the fraud exemption precludes the
Morleys’ claims.
III. Conclusion
¶ 42 We reverse the district court’s entry of summary judgment and
its award of costs in favor of USAA, and we remand to the district
court for further proceedings consistent with this opinion.
JUDGE DAILEY and JUDGE RICHMAN concur.
20