Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-14-02748/USCOURTS-ca7-14-02748-0/pdf.json

Parties Involved:
Advance Cable Company, LLC
Appellant
Cincinnati Insurance Company
Appellee
Pinehurst Commercial Investments, LLC
Appellant

Document Text:

In the 

United States Court of Appeals 

For the Seventh Circuit ____________________

Nos. 14‐2620 & 14‐2748

ADVANCE CABLE COMPANY, LLC, and PINEHURST

COMMERCIAL INVESTMENTS, LLC,

Plaintiffs‐Appellees, Cross‐Appellants,

v.

CINCINNATI INSURANCE COMPANY,

Defendant‐Appellant, Cross‐Appellee.

____________________

Appeals from the United States District Court for the

Western District of Wisconsin.

No. 13‐cv‐229‐wmc — William M. Conley, Chief Judge.

____________________

ARGUED DECEMBER 11, 2014 — DECIDED JUNE 11, 2015

____________________

Before WOOD, Chief Judge, and FLAUM and MANION, Cir‐

cuit Judges.

WOOD, Chief Judge. On April 3, 2011, Middleton, Wiscon‐

sin, was pelted with hail. Predictably, some structures were

damaged, including the metal roof of a building located at

2113 Eagle Drive. The owners, Advance Cable Company and

Pinehurst Commercial Investments (to which we refer collec‐

tively as Advance), submitted a claim to their insurance

Case: 14-2748 Document: 27 Filed: 06/11/2015 Pages: 12
2 Nos. 14‐2620 & 14‐2748

company, Cincinnati Insurance, but they were not satisfied

with its response. Cincinnati took the position that the dam‐

age was cosmetic and thus excluded from the policy, while

Advance thought the damage was more extensive and cov‐

ered by the policy; indeed, Advance believed it was entitled

to reimbursement for a new roof. It brought this diversity

action in federal court to resolve the matter. The district

court granted summary judgment for Advance on the cover‐

age question, but it rejected Advance‘s argument that Cin‐

cinnati acted in bad faith when it refused to pay for the new

roof. We affirm.

I

In 2010, Advance obtained an insurance policy from Cin‐

cinnati on two properties in Middleton, one of them at 2113

Eagle Drive. (Pinehurst entered the picture because it owned

the building and was added to the policy as a named in‐

sured in 2011. Its presence has no effect on our analysis.) On‐

ly a few of the policy’s provisions concern us. Under the

heading “Coverage,” the policy says, “We will pay for direct

physical ‘loss’ to Covered Property at the ‘premises’ caused

by or resulting from any Covered Cause of Loss.” The policy

defines “Covered Causes of Loss” as “risks of direct physical

loss,” and then defines “loss” as “accidental loss or dam‐

age.” It does not define “direct” or “physical.” The parties

do not dispute that the “Covered Property” includes the

building at 2113 Eagle Drive; that building is specifically

listed in the “Schedule of Locations” in the policy.

After the hailstorm rolled through Middleton in April

2011, Mike Larson, Advance’s president, filled out a form re‐

porting damage to the Eagle Drive property and another

building. That same month, Larson inspected the roof at

Case: 14-2748 Document: 27 Filed: 06/11/2015 Pages: 12
Nos. 14‐2620 & 14‐2748 3

2113 Eagle Drive with Curt Jorgenson, a senior claims repre‐

sentative for Cincinnati. Jorgenson spotted some dents, but

he saw little other evidence of damage. In June 2011, Jorgen‐

son sent Larson an “estimate for hail damage to your build‐

ing,” in which he “note[d] some dents to soft metal roof

vents and AC fins” but stated that he “did not observe any

damage to roofing.” Jorgenson estimated that the building

required $1,894.74 in repairs. The next month, Jorgenson

sent Larson a check representing the estimated damages to

both of Advance’s buildings, minus a $1,000 deductible, for a

total of $1,512.70.

The story did not end there. Approximately six months

later, in January 2012, Advance was considering selling the

Eagle Drive building. The potential buyer, Welton Enterpris‐

es, decided to have the roof inspected. Unlike Jorgenson,

Welton’s inspector reported that there was “definitely hail

damage.” (Cincinnati disputed at summary judgment that

the Welton inspector was referring to the Eagle Drive prop‐

erty, but the district court properly found no genuine dis‐

pute of fact on this question given the cover email’s reference

to “the Eagle Drive roof.”) This opinion prompted Advance

to ask Jorgenson to reopen Advance’s claim. He did so and

arranged for a new inspection of the roof. The resulting re‐

port covered both of Advance’s buildings in Middleton. It

noted that “[m]etal roof panel denting characteristic of hail

impact was found on several buildings. Dents related to hail

impact varied in size from barely discernable to approxi‐

mately 1” in 1 [sic] diameter.” Under the heading “Discus‐

sion,” the report opined that the denting “will not affect the

performance of the panels (roofs) or detract from the pan‐

els[’] (roofs[’]) life expectancy. ... The denting that occurred

as a result of hail impact was relatively minor and cannot be

Case: 14-2748 Document: 27 Filed: 06/11/2015 Pages: 12
4 Nos. 14‐2620 & 14‐2748

view [sic] from ground level.”

A few months after receiving this report, Advance sold

the 2113 Eagle Drive building to Welton, without any further

developments relating to its claim with Cincinnati for hail

damage to the roof. Believing that Cincinnati had breached

its contract with Advance to cover damage to the Eagle

Drive building and that its denial of coverage was in bad

faith, Advance sued Cincinnati in April 2013. Both Advance

and Cincinnati moved for summary judgment. Advance

asked the district court to rule that the insurance policy cov‐

ered the hail damage; Cincinnati asked the court to find that

coverage was excluded and also to grant summary judgment

against Advance on its bad faith claim. As we mentioned

above, the district court held that the policy did cover the

hail damage, but that Cincinnati’s refusal to acknowledge

this was not done in bad faith. Following the court’s sum‐

mary judgment decision, the parties stipulated that the sole

issue remaining for trial was the amount of money necessary

to replace the damaged roof. They then stipulated that this

amount was $175,500, and the court entered a final judgment

in that amount in favor of Advance.

II

We review de novo a district court’s decision to grant

summary judgment. Doe v. Archdiocese of Milwaukee, 772 F.3d

437, 440 (7th Cir. 2014). In reviewing cross‐motions for

summary judgment, we take the motions one at a time and

then, as usual, construe all facts and draw all reasonable in‐

ferences in favor of the non‐moving party. See United States

v. P.H. Glatfelter Co., 768 F.3d 662, 668 (7th Cir. 2014). Sum‐

mary judgment is appropriate only “if the movant shows

that there is no genuine dispute as to any material fact and

Case: 14-2748 Document: 27 Filed: 06/11/2015 Pages: 12
Nos. 14‐2620 & 14‐2748 5

the movant is entitled to judgment as a matter of law.” FED.

R. CIV. P. 56(a).

We turn first to Advance’s claim that its policy with Cin‐

cinnati covered hail damage to the roof. The law of Wiscon‐

sin furnishes the applicable rule of decision. 28 U.S.C. § 1652.

Wisconsin courts construe insurance policies in the same

manner as they would any contract. Strauss v. Chubb Indem.

Ins. Co., 771 F.3d 1026, 1030 (7th Cir. 2014). We must ascertain

what a reasonable person in the position of the insured—

here, Advance—would understand the policy to mean. Blum

v. 1st Auto & Cas. Ins. Co., 786 N.W.2d 78, 83 (Wis. 2010).

Ambiguous language (that is, language that is “susceptible

to more than one reasonable interpretation”) is to be con‐

strued against the insurer and in favor of the insured. State

Farm Mut. Auto. Ins. Co. v. Langridge, 683 N.W.2d 75, 81 (Wis.

2004) (internal quotation marks omitted).

The heart of the dispute between the parties concerns the

meaning of the term “direct physical loss” in the policy. In

the end, however, we find the coverage question to be fairly

straightforward. Neither Advance nor Cincinnati disputes

the meaning of the term “direct” in the policy. Although the

policy does not elaborate on that word, common sense sug‐

gests that it is meant to exclude situations in which an inter‐

vening force plays some role in the damage. No such force

was present here: to the extent the roof was damaged at all,

everyone agrees that the hailstorm was the culprit.

The parties devote more discussion to the word “physi‐

cal,” which like “direct” is not defined in the policy. Cincin‐

nati contends that “physical” for purposes of the policy

means “material,” although it unhelpfully does not suggest a

definition of “material.” We can think of several possibilities:

Case: 14-2748 Document: 27 Filed: 06/11/2015 Pages: 12
6 Nos. 14‐2620 & 14‐2748

it might be a synonym for “physical,” as in “formed or con‐

sisting of matter”; or it might connote “pertinent,” or “cen‐

tral,” or “essential.” Cincinnati advocates the latter meaning

and supports its position with a single district court deci‐

sion, Crestview Country Club, Inc. v. St. Paul Guardian Ins. Co.,

321 F. Supp. 2d 260 (D. Mass. 2004). We do not find Crestview

to be especially helpful. It concerned whether an insurance

policy covered damage from a severe wind storm to a golf

course. The storm destroyed a notable ash known as the

“Poltergeist Tree,” which loomed above the thirteenth hole.

No one disputed that the policy covered replacement of the

tree. But the plaintiff wanted more: it argued that the insur‐

ance company also had to pay for the redesign of the thir‐

teenth hole, because the loss of the Poltergeist Tree had inef‐

fably altered the hole’s character, even though the hole itself

was not damaged. The district court held that intangible

changes to the hole’s character did not count as “direct phys‐

ical loss or damage to the golf course grounds” and thus did

not trigger coverage of changes to the hole. Id. at 264. We fail

to see the resemblance between Crestview and this case. Ad‐

vance is not asking for coverage of intangible damage. Ra‐

ther, it is claiming that hail caused visible indentations to the

surface of its roof. This denting changes the physical charac‐

teristics of the roof and thus satisfies that language of the

policy.

The next question is what the term “loss” means here.

The policy (at last) offers an answer: it defines “loss” as “ac‐

cidental loss or damage.” The district court, in deciding that

this concept encompasses all hail denting—both dents that

diminish the functionality of the roof and dents that may be

only cosmetic—emphasized the disjunctive nature of the

definition. The policy covers loss or damage. This indicated

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Nos. 14‐2620 & 14‐2748 7

to the district court that even without a measurable “loss” in

value or in function, “the policy expressly contemplates the

possibility that there may still be ‘damage,’ presumably giv‐

ing it a different meaning than the word ‘loss.’” This was a

sensible conclusion, and Cincinnati has given us no reason to

believe that inclusion of the phrase “or damage” in the defi‐

nition of loss was superfluous. In fact, it has offered no ex‐

planation for the inclusion of both words, despite, we as‐

sume, having written the policy.

Instead, Cincinnati urges us to define “loss or damage”

to mean “harm.” It then makes the assumption that the

dents caused by the hail did not harm the roof enough to

diminish its function or value. No harm, no foul, it says: if

this is the case, then it believes that the policy does not re‐

quire it to pay to replace the roof. The problem with this

analysis is that it bears no relation to the language of the pol‐

icy. There is no exception to the definition of “loss” for cos‐

metic damage, or any other kind of particular damage. Had

Cincinnati wished to exclude cosmetic damage from cover‐

age, it should have written the policy that way. As Advance

points out, Cincinnati contemplated instituting just such an

exclusion in other policies after the events of this case. Even

if it is unclear whether the policy intended “loss” to be lim‐

ited to harm from diminution of value or functionality, Wis‐

consin law requires us to construe the language in favor of

Advance, not Cincinnati. The district court cases on which

Cincinnati relies are either distinguishable or unpersuasive.  

The last argument that warrants discussion relates to the

concept of economic waste. Cincinnati contends that it

should not have to pay for an entirely new roof for Advance

simply because the roof sustained denting. In making this

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8 Nos. 14‐2620 & 14‐2748

argument, Cincinnati is attempting to board a ship that has

already sailed. The issue before us is not damages; it is cov‐

erage. As Cincinnati acknowledges, economic waste is a

damages concept. So it is cause for head‐scratching when

Cincinnati argues, without much further explanation, that

“the economic waste doctrine provides support for the con‐

clusion that cosmetic denting does not constitute ‘direct

physical loss.’” Perhaps this is simply a variation on Cincin‐

nati’s argument that damage must be substantial or “struc‐

tural” in order to qualify as “physical,” but that is not what

the policy says. The policy requires Cincinnati to compen‐

sate Advance for “direct physical loss” to its Eagle Drive

building, and it defines “loss” as “loss or damage”; the hail,

in denting the building’s rooftop, physically and directly

damaged it. Thus the district court’s decision to grant Ad‐

vance summary judgment on this question was correct.

Cincinnati finally argues that if we were to reverse the

district court’s grant of summary judgment to Advance on its

breach of contract claim, we should also find that Advance

breached its duty of good faith and fair dealing in delaying

its disclosure of an expert report about injury to the Eagle

Drive rooftop. Because we affirm the district court’s grant of

summary judgment to Advance on the issue of coverage, we

need not reach this argument.

III

We now turn to Advance’s cross‐appeal, in which it ar‐

gues that the district court erred by granting summary

judgment in Cincinnati’s favor on its claim that Cincinnati’s

decision to deny coverage for the hail denting was undertak‐

en in bad faith. The court found that the undisputed material

facts showed that it was reasonable, even if incorrect, for

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Nos. 14‐2620 & 14‐2748 9

Cincinnati to refuse to pay Advance’s claim because it did

not believe Advance suffered “loss or damage” from the hail

damage.

The courts of Wisconsin permit insured parties to bring

bad faith claims against their insurance providers. A plaintiff

bringing such a claim must show two things: “‘the absence

of a reasonable basis for denying benefits of the policy and

the defendant’s knowledge or reckless disregard of the lack

of a reasonable basis for denying the claim.’” Brethorst v. All‐

state Prop. & Cas. Ins. Co., 798 N.W.2d 467, 474 (Wis. 2011)

(quoting Anderson v. Cont’l Ins. Co., 271 N.W.2d 368, 376

(Wis. 1978)). The Supreme Court of Wisconsin has character‐

ized the first of these elements as objective, and the second

as subjective. Weiss v. United Fire & Cas. Co., 541 N.W.2d 753,

757 (Wis. 1995). The objective element tests “whether the in‐

surer properly investigated the claim and whether the re‐

sults of the investigation were subject to a reasonable evalua‐

tion and review.” Brown v. Labor & Indus. Review Comm’n,

671 N.W.2d 279, 287–88 (Wis. 2003). The subjective element

asks whether the insurer was aware that there was no rea‐

sonable basis for denial, or that it displayed “reckless disre‐

gard of a lack of a reasonable basis for denial or a reckless

indifference to facts or to proofs submitted by the insured.”

Anderson, 271 N.W.2d at 377.

We take it as a given that the policy at issue required cov‐

erage of hail damage to Advance’s roof. But that does not

mean Cincinnati’s investigation and subsequent evaluation

that coverage was lacking were unreasonable. Cincinnati’s

reading of the policy, while wrong, was not beyond the pale;

we already have noted that there are several plausible read‐

ings of, for example, the term “physical,” and that Cincinnati

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10 Nos. 14‐2620 & 14‐2748

was able to find federal cases that provided some support

for its position. Advance’s argument amounts to a proposed

rule that would require a finding of bad faith any time an

insurer does not prevail in its reading of a policy. This strikes

us as draconian. It is also worth noting that Cincinnati

worked with Advance on the claim for a time, making mul‐

tiple visits to the Eagle Drive property to inspect the roof

and extending an offer of compensation, albeit one that was

far lower than Advance believed was proper.  

Advance nonetheless argues that Cincinnati should have

known its position contradicted that of the American Associ‐

ation of Insurance Services (AAIS), which made its thoughts

on cosmetic damage known in a 2013 article in Viewpoint

magazine, an AAIS publication. There, Advance contends,

AAIS noted that its standard property insurance forms do

not distinguish between “physical damage that affects only

the property’s appearance” and damage affecting the prop‐

erty’s function. But Advance does not contend that Cincin‐

nati knew of these forms or this article, let alone used them

or understood them to be an industry standard. Advance al‐

so points to Cincinnati’s 2013 filing with the Wisconsin in‐

surance commissioner. In that filing, it sought approval of “a

new optional endorsement” permitting it to exclude cosmet‐

ic damage from its policies. Advance sees in this filing an

implicit acknowledgment from Cincinnati that its position

that cosmetic damage was excluded from its coverage was

“baseless” back in 2011 and 2012, when the events of this

case occurred. This is pure speculation. A 2013 filing says

nothing about what Cincinnati knew or did not know in

2011. Regardless, even if the filing had occurred in 2011, it

would fail to show that Cincinnati’s contrary position in the

current case is not reasonable or that Cincinnati was reckless

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Nos. 14‐2620 & 14‐2748 11

in denying coverage here. Sometimes policies are amended

for purposes of clarification; sometimes for purposes of

change. The district court was correct not to place any

weight on this after‐the‐fact development.

As for Cincinnati’s investigation, Advance contended at

oral argument that there is no evidence Cincinnati looked at

Advance’s policy before denying coverage—that it failed to

“show its work,” to use Advance’s phrase. Advance observes

that Cincinnati at one point retained an attorney, but not to

analyze coverage. Advance believes that this suggests that

Cincinnati was anticipating litigation over its predetermined

denial of coverage. This argument is also speculative and

does not “suggest” one thing or another about whether Cin‐

cinnati intended to deny coverage before evaluating Ad‐

vance’s claim. Companies are permitted to hire attorneys to

assess their legal positions without being suspected of bad

faith. Advance’s argument would require us to hunt for a

sharper line of demarcation between an insurance compa‐

ny’s various stages of legal analysis than we have any busi‐

ness drawing. In any event, the evidence in the record is in‐

consistent with these musings: Cincinnati twice investigated

the rooftop, calculated an estimate for coverage, reopened

the claim when Advance asked it to, and has relied on cases

in support of its arguments. Advance’s argument that Cin‐

cinnati should have “shown its work,” right down to reveal‐

ing the dictionary definitions the company reviewed inter‐

nally when evaluating coverage, goes well beyond anything

that the law requires to defeat an allegation of bad faith.  

IV

The insurance policy that Cincinnati sold to Advance

covered any direct physical loss or damage to Advance’s Ea‐

Case: 14-2748 Document: 27 Filed: 06/11/2015 Pages: 12
12 Nos. 14‐2620 & 14‐2748

gle Drive property in Middleton, Wisconsin. We agree with

the district court that, as applied here, the policy covered the

hail damage Advance’s building suffered in April 2011. We

therefore AFFIRM the district court’s decision granting Ad‐

vance’s motion for partial summary judgment on the reach

of the insurance policy. We also agree with the district court’s

decision to grant Cincinnati summary judgment on Ad‐

vance’s bad faith claim, and AFFIRM that decision as well.

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