Advance Cable: The Seventh Circuit Court of Appeals Holds that Looks Do Matter
In Advance Cable Co., LLC v. Cincinnati Ins. Co.,1 the Seventh Circuit Court of Appeals provided a lesson in insurance policy drafting and the importance of supporting policy interpretation arguments. One hailstorm produced two companion federal court cases that addressed the issue of whether cosmetic damage fell within the coverage for "direct physical loss" as used in insurance policies issued by Cincinnati Insurance Company ("Cincinnati").
One case reached the Seventh Circuit while the other was subsequently decided in federal district court. The result was the same in both cases. The courts determined, under the facts presented, that the phrase "direct physical loss," as used in Cincinnati's policies, encompassed cosmetic damage. Both courts pointed out that Cincinnati could not explain why its policies included certain policy language. Cincinnati's failure to offer an explanation for this language was important to both courts. At the same time, although Cincinnati's coverage position was ultimately rejected, both courts also determined that Cincinnati had not acted in bad faith by initially denying coverage for cosmetic damage.
These decisions may not be the final word on this issue. Different policy language or different policy interpretation arguments may result in a different outcome once this issue is addressed in Wisconsin state courts. In the meantime, defense counsel and their insurance company clients must be cognizant of these decisions, which serve as another example of the importance of carefully drafting policy language and being fully prepared to support a policy interpretation argument in litigation.
Advance Cable Co., LLC v. Cincinnati Ins. Co.
On April 3, 2011, a hailstorm occurred in Middleton, Wisconsin.2 The hail dented the metal roof of a building owned by Advance Cable Company, LLC, and Pinehurst Commercial Investments, LLC (collectively, "Advance"). Advance submitted a claim to Cincinnati.3 Cincinnati inspected the roof and found dents in the soft metal roof vents and air conditioning fins, but its claims representative did not observe any damage to the roofing.4 Cincinnati issued payment for the damage to the roof vents and air conditioning fins only.5
Advance later considered selling the property. In January 2012, a potential buyer inspected the property and determined that the roof suffered hail damage.6 Advance asked Cincinnati to re-open the claim based on this information. Cincinnati obliged and completed another inspection of the property. A report was issued with the results of the second inspection.7 The report identified hail dents to the metal roof but stated that the denting was relatively minor and could not be seen from ground level. The report also stated that the denting would not affect the performance or detract from the life expectancy of the roof.8
Advance later sold the building.9 In April 2013, Advance sued Cincinnati in the United States District Court for the Western District of Wisconsin asserting claims of breach of contract and bad faith. The parties moved for summary judgment.10 The district court held that the policy covered the hail damage, but that Cincinnati did not act in bad faith.11 The parties then stipulated that it would cost $175,500 to replace the roof, and the district court entered final judgment in favor of Advance in that amount.12 Cincinnati appealed the decision relating to coverage and Advance cross-appealed the decision relating to bad faith.13
Since the matter was up on summary judgment, the Seventh Circuit reviewed the case de novo.14 The policy at issue contained several relevant provisions and several important terms without definitions. The policy stated that Cincinnati would "pay for direct physical 'loss' to Covered Property" "caused by or resulting from any Covered Cause of Loss."15 The policy defined "Covered Cause of Loss" as "risks of direct physical loss." The policy defined "loss" as "accidental loss or damage." The policy did not define "direct" or "physical."16
The core of the parties' dispute concerned the meaning of the term "direct physical loss." The parties agreed on the meaning of "direct."17 However, they disagreed on the meaning of "physical."18 Cincinnati argued that "physical" meant "material," but Cincinnati "unhelpfully" did not provide the court with a definition of "material."19 Rather, Cincinnati relied upon a district court decision20 involving physical damage to a famous tree on the 13th hole of a golf course; the loss of the tree resulted in intangible damage to the hole's character. The court rejected Cincinnati's position.21 The court stated that Advance was not seeking coverage for intangible damage but instead was "claiming that hail caused visible indentations to the surface of the roof."22 Because the denting changed the physical characteristics of the roof, the court held that the denting was "physical" as that term was used in the policy.23
The parties also disputed the meaning of the term "loss," which was defined as "accidental loss or damage."24 The Seventh Circuit approved of the district court's analysis, that the policy encompassed both dents that diminished the functionality of the roof and dents that were only cosmetic. The policy language covered "loss or damage." Therefore, "even without a measureable 'loss' in value or in function, the policy expressly contemplate[d] the possibility that there may still be 'damage,' presumably giving it a different meaning than loss."25 The court pointed out that Cincinnati had provided no explanation as to why both words were used.26
Instead of providing an explanation, Cincinnati simply argued that "loss or damage" meant "harm." The court rejected this argument because it bore "no relation to the language of the policy."27 The court stated that Cincinnati, as drafter of the policy, should have included an exception for cosmetic damage from the meaning of "loss" if it intended to exclude such damage from coverage. Even if the policy language was unclear, the court concluded that it would have to apply the well-established rule of construing ambiguous policy language against Cincinnati and in favor of Advance.28
Additionally, the court rejected Cincinnati's argument that it should not have to pay for the hail dents because of the concept of economic waste. The court scolded Cincinnati, stating that it was "attempting to board a ship that has already sailed. The issue before us is not damages; it is coverage," and economic waste is a damages concept.29 The court reiterated that the policy required Cincinnati to compensate Advance for "direct physical loss." Because the hail dents physically and directly damaged the roof, the Seventh Circuit affirmed the district court's grant of summary judgment on the coverage issues.30
However, the court also upheld the district court's dismissal of the bad faith claim against Cincinnati.31 The court concluded that Cincinnati did not act unreasonably. Cincinnati's reading of the policy, "while wrong, was not beyond the pale."32 The court held that an insurer cannot be found to have acted in bad faith simply because it does not prevail on its reading of the policy.33 The court also rejected Advance's argument that Cincinnati acted in bad faith by retaining an attorney who apparently was not hired to assess coverage. The court held that "[c]ompanies are permitted to hire attorneys to assess their legal positions without being suspected of bad faith."34
In sum, the court concluded that, as applied to the facts of the case, the language of Cincinnati's policy required coverage for the cosmetic hail damage. It also concluded that the district court properly granted summary judgment to Cincinnati on the bad faith claim. Accordingly, the Seventh Circuit affirmed the district court's decision in all respects.35
The Companion Case
In Welton Enterprises, Inc. v. Cincinnati Ins. Co.,36 a companion case to Advance Cable, the Western District of Wisconsin addressed similar coverage and bad faith issues. The same April 3, 2011, hailstorm in Middleton, Wisconsin, had caused hail dents to property owned by Welton Enterprises, Inc., Welton Family Limited Partnerships, and 3PP Plus Limited Partnership (collectively, "Welton").37 Welton submitted a claim to Cincinnati. The Cincinnati policy contained the same relevant provisions and definitions as the policy in Advance Cable.38 The district court pointed out that Cincinnati once again failed to explain why the policy defined "loss" as "accidental loss or damage" if both possibilities meant a reduction in usefulness, value, or lifespan.39 Relying on Advance Cable, the district court concluded that the policy language required a finding of coverage for the hail dents.40
The district court then addressed Welton's argument that Cincinnati acted in bad faith by interpreting the policy to exclude coverage for the hail dents.41 The district court rejected this argument and found that Cincinnati did not act in bad faith. Cincinnati offered plausible readings of the policy language and relied on federal cases that provided some support for its position. The district court stated, "[a]s in Advance Cable, this court again rejects Welton's 'draconian' attempt to premise bad faith liability on an incorrect reading of its Policy language."42
However, the district court included an apparent cautionary statement: "Of course, now that Cincinnati Insurance's construction argument has seemingly run its course under Wisconsin law, a similar position in the future might well move beyond wrong to wrongheaded."43
Would Things Have Been Different?
Advance Cable and Welton are just the latest in a line of cases that demonstrate how clear definitions and policy provisions are essential to a successful coverage defense. In light of these decisions, particularly the cautionary language in Welton, insurers and their defense counsel will want to review their coverage positions in claims involving cosmetic damage to metal roofs caused by hail, especially if the policies contain definitions of "loss" that are the same or similar to what was contained in the Cincinnati policies. That said, it is also important to note that the courts in those cases concluded that coverage existed, at least in part, because Cincinnati could not explain why its definition of "loss" included a disjunctive: "loss or damage."
There are several potential explanations for this policy language. One explanation is that the language is consistent with the perils insured against. For example, a policy may cover loss in the form of a theft of a wedding ring. The ring is not damaged but the insured suffered a loss from the peril of theft. This is compared to the peril of fire, which causes damage to property. Thus, one explanation is that the policy defines "loss" as "loss or damage" in order to maintain consistency with the perils insured against. Such an explanation, which was not offered in the two cases discussed, might have assisted Cincinnati's policy interpretation argument.
Similarly, Cincinnati might also have had more success supporting its position if it had produced evidence that the hail dents did not affect the value of the property––that is, that the insured did not suffer a "loss" because the hail denting was cosmetic only. At the end of the day, however, it is difficult to say whether such evidence would have changed the outcome in either case.
The Insurance Industry's Response
The insurance industry has responded to Advance Cable, Welton, and similar cosmetic damage claims in various ways. Insurers are now utilizing different definitions of "loss" that do not extend to hail dents or other cosmetic damage. Similarly, some insurers have issued endorsements for buildings with metal roofs that specifically exclude coverage for hail dents or cosmetic damage. Others are affording coverage for cosmetic damage, but limiting the coverage to a certain percentage of the property's value. Similarly, some insurers are increasing the deductible for storm damage claims. Finally, some insurers are issuing policies that provide actual cash value only coverage for metal roofs.
Although Advance Cable and Welton are federal court cases that are not binding on Wisconsin state courts, and although the parties in those cases may not have presented all of the relevant issues, arguments, or evidence regarding coverage, it would seem most prudent from a defense perspective to attempt to address these decisions head-on. The insurance industry has already begun this process. However, it remains to be seen how the new definitions, endorsements, and other industry responses will affect this issue. Defense counsel should remain apprised of the situation as the new definitions and industry responses are analyzed in Wisconsin courts.
Forrest G. Hopper is a Shareholder with Borgelt, Powell, Peterson & Frauen S.C. in the firm's Minnesota office. He focuses his practice on property insurance coverage issues, liability defense, and subrogation in Wisconsin, Minnesota, and South Dakota. He can be reached at fhopper@ borgelt.com.
Taylor C. Gumbleton is an Associate with Borgelt, Powell, Peterson & Frauen S.C. in the firm's Milwaukee office. She focuses her practice on property insurance coverage issues, bad faith counseling and litigation, and liability defense. She can be reached at email@example.com.
1 Advance Cable Co., LLC v. Cincinnati Ins. Co., 788 F.3d 743, 744 (7th Cir. 2015).
2 Id. at 744.
4 Id. at 745.
11 Id. at 746.
15 Id. at 745.
17 Id. at 746.
20 Crestview Country Club, Inc. v. St. Paul Guardian Ins. Co., 321 F. Supp. 2d 260 (D. Mass. 2004).
21 Advance Cable, 788 F.3d at 746-47.
22 Id. at 747.
30 Id. at 748.
34 Id. at 749.
36 Welton Enterprises, Inc. v. Cincinnati Ins. Co., __ F. Supp. 3d __, 2015 WL 5474667 (W.D. Wis. 2015).
37 Id. at *1.
39 Id. at *6.
40 Id. at *7.