Tenth Circuit (Applying Colorado Law) Upholds Summary Judgment In Favor Of Insurer On Earth Movement And Water Damage Exclusions

Wagner v. Am. Family Mut. Ins. Co., No.: 13-1438, 2014 U.S. App. LEXIS 11526 (10th Cir. June 19, 2014) arose from a claim by a property owner under a homeowner’s insurance policy issued to her by American Family Mutual Insurance Company.  A leaking water pipe underneath the slab foundation of the owner’s home eroded the soil beneath the home.  The soil erosion caused settlement and cracking of the slab and, in turn, the drywall and flooring panels in the home to crack.  Neither the owner nor American Family disputed the cause of the property damage.

American Family denied coverage primarily pursuant to two exclusions: (1) an earth movement exclusion barring coverage for losses caused by, resulting from, contributed to, or aggravated by subsidence, erosion, earth sinking, expanding, or contracting; and (2) a water damage exclusion barring coverage for water damage, including water below the surface of the ground, regardless of its source.  Both exclusions were subject to the following exception: “[h]owever, we do not cover any resulting loss to property described in Coverage A – Dwelling and Dwelling Exclusion not excluded or excepted in this policy.”

The owner sued American Family in the U.S. District Court for the District of Colorado asserting breach of contract, common law bad faith, and statutory bad faith.  The owner took the position that the “any resulting loss” language in the exclusion restores coverage where it would otherwise be excluded by other provisions.  The District Court of Colorado dismissed the owner’s argument on the basis that the earth movement and water damage exclusions do not cover any loss “caused directly or directly” by the specifically outlined events, and that the “any resulting loss” exception only restores coverage where the damage results from a separate and independent covered peril following the excluded peril, such as a gas-fed fire (covered peril) occurring after an earthquake (excluded peril).

On appeal to the Tenth Circuit, the owner argued, in part, that the earth movement exclusion is ambiguous as to whether the “any resulting loss” exception restores coverage, requiring the court to construe the ambiguity in her favor.  The court rejected the owner’s argument, reasoning that the damage comes squarely under the earth movement exclusion.  The court went on to conclude that even if it were to find an ambiguity in the “any resulting loss” exception, the owner failed to show that the loss was subject to another policy exception that would restore coverage.  On this reasoning, the Tenth Circuit affirmed the District Court’s grant of summary judgment in favor of American Family as to the breach of contract claim asserted against it.

The owner also argued on appeal that her bad faith claims should remain pending regardless of the court’s conclusion as to the breach of contract claim based on American Family’s alleged unreasonable delay and denial of her claim.  The court reasoned that bad faith claims based on an insurer’s delay or denial are only unreasonable if the insurer had no reasonable basis for its actions (statutory bad faith standard), or if the insurer was unreasonable and knew that its conduct was unreasonable or recklessly disregarded that fact (common law standard).  The court concluded that judgment was properly granted in favor of the insurer on these claims, pointing out that the court had already determined American Family fairly and reasonably applied exclusions to deny the owner’s claim.

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Wagner v. Am. Family Mut. Ins. Co., No.: 13-1438, 2014 U.S. App. LEXIS 11526 (10th Cir. June 19, 2014) arose from a claim by a property owner under a homeowner’s insurance policy issued to her by American Family Mutual Insurance Company.  A leaking water pipe underneath the slab foundation of the owner’s home eroded the soil beneath the home.  The soil erosion caused settlement and cracking of the slab and, in turn, the drywall and flooring panels in the home to crack.  Neither the owner nor American Family disputed the cause of the property damage.

American Family denied coverage primarily pursuant to two exclusions: (1) an earth movement exclusion barring coverage for losses caused by, resulting from, contributed to, or aggravated by subsidence, erosion, earth sinking, expanding, or contracting; and (2) a water damage exclusion barring coverage for water damage, including water below the surface of the ground, regardless of its source.  Both exclusions were subject to the following exception: “[h]owever, we do not cover any resulting loss to property described in Coverage A – Dwelling and Dwelling Exclusion not excluded or excepted in this policy.”

The owner sued American Family in the U.S. District Court for the District of Colorado asserting breach of contract, common law bad faith, and statutory bad faith.  The owner took the position that the “any resulting loss” language in the exclusion restores coverage where it would otherwise be excluded by other provisions.  The District Court of Colorado dismissed the owner’s argument on the basis that the earth movement and water damage exclusions do not cover any loss “caused directly or directly” by the specifically outlined events, and that the “any resulting loss” exception only restores coverage where the damage results from a separate and independent covered peril following the excluded peril, such as a gas-fed fire (covered peril) occurring after an earthquake (excluded peril).

On appeal to the Tenth Circuit, the owner argued, in part, that the earth movement exclusion is ambiguous as to whether the “any resulting loss” exception restores coverage, requiring the court to construe the ambiguity in her favor.  The court rejected the owner’s argument, reasoning that the damage comes squarely under the earth movement exclusion.  The court went on to conclude that even if it were to find an ambiguity in the “any resulting loss” exception, the owner failed to show that the loss was subject to another policy exception that would restore coverage.  On this reasoning, the Tenth Circuit affirmed the District Court’s grant of summary judgment in favor of American Family as to the breach of contract claim asserted against it.

The owner also argued on appeal that her bad faith claims should remain pending regardless of the court’s conclusion as to the breach of contract claim based on American Family’s alleged unreasonable delay and denial of her claim.  The court reasoned that bad faith claims based on an insurer’s delay or denial are only unreasonable if the insurer had no reasonable basis for its actions (statutory bad faith standard), or if the insurer was unreasonable and knew that its conduct was unreasonable or recklessly disregarded that fact (common law standard).  The court concluded that judgment was properly granted in favor of the insurer on these claims, pointing out that the court had already determined American Family fairly and reasonably applied exclusions to deny the owner’s claim.

 

Topics:  Policy Exclusions, Property Damage, Property Insurance

Published In: Business Torts Updates, Civil Procedure Updates, General Business Updates, Insurance Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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