Court Opinion

ID: 803052
Source: CourtListenerOpinion
Date Created: 2012-06-26 01:48:51+00
Date Added: 2024-06-11T18:00:06.456002
License: Public Domain

In the

United States Court of Appeals
              For the Seventh Circuit

No. 11-1232

C RAIG M ILLER and N ANCY M ILLER,
                                              Plaintiffs-Appellees,
                                v.

S AFECO INSURANCE C OMPANY OF A MERICA,

                                            Defendant-Appellant.

           Appeal from the United States District Court
               for the Eastern District of Wisconsin.
     No. 06-C-1021—William E. Callahan, Jr., Magistrate Judge.

    A RGUED S EPTEMBER 21, 2011—D ECIDED JUNE 25, 2012

 Before EASTERBROOK, Chief Judge, and                 TINDER and
HAMILTON, Circuit Judges.
  T INDER, Circuit Judge. Safeco Insurance Company of
America issued an insurance policy on a home pur-
chased by Craig and Nancy Miller. After the Millers
discovered extensive water and mold damage on the
property, they filed a claim for the loss. Safeco denied
the claim and the Millers sued. The district court found
that the policy covered the loss, that the exclusions
didn’t apply, and Safeco acted in bad faith. We affirm.
2                                               No. 11-1232

                      I. Background
  The Millers first saw the property as potential buyers
in 2003. Photographs from this time depict staining on
the exterior stucco walls. A 2004 inspection for other
potential buyers revealed serious defects with the roof
flashings and stucco sidings and recommended a mold
inspection. When the home didn’t sell, the owner made
cosmetic changes to the property and put it back on the
market. The Millers revisited in 2005 and made an offer.
In a real estate condition report, the seller indicated
that she was aware of various defects but did not
disclose faulty roof flashings or a stucco veneer system
or the possible presence of mold or water problems
indicated in the 2004 inspection report. In fact, the seller
expressly stated that she wasn’t aware of any mold or
water issues.
  A home inspection report performed for the Millers
identified various defects including a “soft spot” on the
roof and recommended follow-up by a specialist. The
report also said that the stucco’s finish color was
uneven and stained, that the wood siding could be re-
stained, that paint on the wood fascia board under the
gutters was peeling and experienced some water
damage, that water had damaged a wood sill, and that
there was possible water damage to a wood window
frame. The report recommended repairing a torn mem-
brane on the roof and replacing foggy skylights above
the living room and kitchen sink because they had lost
their vacuum seal. The inspector also found some water
damage in the upper study and at the skylights above
No. 11-1232                                               3

the kitchen sink and suggested it was “possibly from
flat roof leaks.” But the report advised that the exterior
walls, chimney, grass roof, flashings, floor joists/beams
and columns, and garage walls and floor appeared
“serviceable.” The Millers retained a specialist for the
soft spot and amended their offer to reflect the defects.
The specialist didn’t indicate that the soft spot was a
significant concern and advised that repairing it would
cost no more than $1,500.
  Safeco issued the Millers a homeowner’s policy on the
property on June 30, 2005. The policy went into effect the
next day when the Millers closed on the property. The
policy covered all “accidental direct physical loss to
property,” unless limited or excluded, “occurring during
the policy period.” But the Millers didn’t see the
policy’s terms until Safeco mailed them a copy of the
policy at the end of July.
  Before receiving the policy and sometime after
beginning renovation of the home on July 5, the Millers
discovered severe inner wall water leaks and significant
water infiltration on three of the home’s exterior walls.
A mold specialist found that the home had “numerous
construction deficiencies that existed long before” the
Millers purchased the home that “resulted in chronic
water intrusion” damaging the interior finished walls,
insulation, external plywood sheathing, and other
aspects of the structure. The Millers filed a claim with
Safeco for the water damage, mold, and lost use of the
home. Safeco assigned a claim representative to investi-
gate, sent a field inspector to the property to inspect, and
solicited a legal opinion on coverage from an attorney.
4                                              No. 11-1232

The lawyer opined that the policy may not cover
the damage because of the known loss doctrine and
the policy’s exclusions and limitations. Safeco decided
to deny the claim. Safeco wrote the Millers that their pre-
purchase inspection “report confirmed multiple areas
of water damage that were in need of attention” and
that the loss thus qualified as a preexisting condition
“that occurred outside of the policy period.”
  The Millers sued Safeco in federal court on diversity
jurisdiction for breach of the insurance contract and bad
faith. On the Millers’ motion for summary judgment,
the court held that Safeco was precluded from raising
the policy’s exclusions because it didn’t notify the
Millers of the exclusions until after they discovered the
damage. The court however found questions of fact on
whether the policy covered the loss. After holding a
bench trial, the court found that the policy covered the
loss and awarded $485,100.64 in damages. The court
found after another bench trial, this time on the bad
faith claim, that Safeco lacked a reasonable basis
for denial and that Safeco demonstrated a reckless dis-
regard for its lack of a reasonable basis thus entitling
the Millers to damages resulting from Safeco’s bad
faith, but the court denied the Millers’ request for
punitive damages. The court later granted the Millers’
motion to amend the judgment to reflect additional
prejudgment interest.

                       II. Analysis
  Because Safeco’s appeal does not contest the district
court’s factual findings, and challenges only its legal
No. 11-1232                                               5

conclusions, our review is de novo. E.g., Johnson v.
West, 218 F.3d 725, 729 (7th Cir. 2000). The parties agree
Wisconsin law applies so we use Wisconsin’s three-
step process to determine coverage: (1) the policy must
first make an initial grant of coverage; and (2) if so, we
look at whether an exclusion precludes coverage; and
(3) if an exclusion applies, we look to see whether an
exception reinstates coverage. Am. Family Mut. Ins. Co. v.
Am. Girl, Inc., 673 N.W.2d 65, 73 (Wis. 2004). We construe
the policy as it “would be understood by a reasonable
person in the” Millers’ position but we will not interpret
the policy to provide coverage for risks Safeco did not
contemplate or underwrite and for which it did not
receive premiums. Id.

A. Coverage
  The Safeco policy covers any “accidental direct
physical loss” to the Millers’ home. Sep. Appx. at 36. The
policy does not define “accidental,” but Wisconsin’s
Supreme Court, when faced with the undefined term
“accident” in a policy, turned to various dictionaries
to interpret “accident” as “an event or condition
occurring by chance or arising from unknown or
remote causes” or “an event which takes place without
one’s foresight or expectation.” Am. Girl, 673 N.W.2d at 76.
An unexpected “result” is not an accident unless “the
means or cause” is “accidental.” Id. Thus, the court held,
a loss is accidental when neither “the cause nor the
harm was intended, anticipated, or expected.” Id. By
this definition, the district court did not err in finding
6                                                No. 11-1232

that the loss was accidental because the parties to the
insurance contract did not intend, anticipate, or expect
the means or the cause of the direct physical loss to
the property.
   Safeco argues that the policy did not cover the loss
because of the lack of a fortuitous extraneous happening
during the policy period. See Glassner v. Detroit Fire &
Marine Ins. Co., 127 N.W.2d 761, 764 (Wis. 1964) (“An ‘all-
risk’ policy is a promise to pay for loss caused by a for-
tuitous and extraneous happening, but it is not a
promise to pay for loss or damage which is almost
certain to happen because of the nature and inherent
qualities of the property.”); Kraemer Bros., Inc. v. U.S. Fire
Ins. Co., 278 N.W.2d 857, 861 (Wis. 1979) (noting that “a
defect in the design and construction of insured
property is inherent in that property, rather than an
‘external cause,’ and therefore” not included within the
policy). Safeco believes that because the home’s inherent
nature (a bad construction) caused the damage, the loss
wasn’t fortuitous. We noted in Lucterhand v. Granite
Microsystems, Inc., that the term “accident” reflects the
fortuity principle, 564 F.3d 809, 812 (7th Cir. 2009), but
this just means that when a damage’s cause is unex-
pected, and therefore accidental, it is also fortuitous, id.
at 812-13. And as the district court found, neither
party knew about or contemplated the damage’s cause
before the policy’s issuance. See Am. Girl, 673 N.W.2d at 76
(finding coverage because “[n]either the cause nor the
harm was intended, anticipated, or expected”); Wis.
Elec. Power Co. v. Cal. Union Ins. Co., 419 N.W.2d 255, 258
(Wis. Ct. App. 1987) (a “latent injury, unknown and
No. 11-1232                                                 7

unknowable” when coverage began “must, at least, be
covered by an insurer on the risk at the time it mani-
fests” because that satisfies insureds’ “very reasonable
expectations” (quoting Keene Corp. v. Ins. Co. of N. Am., 667
F.2d 1034, 1044 (D.C. Cir. 1981))).
  Safeco next argues that the district court wrongly used
the continuous trigger theory to determine the date of
harm based on the policy’s language limiting coverage
to “losses occurring during the policy period.” Wisconsin
applies, along with the majority of courts, the continuous
trigger theory to determine the date of injury in
cases where the exact date of harm is uncertain and
potentially occurring over several policy periods. See
Soc’y Ins. v. Town of Franklin, 607 N.W.2d 342, 346 (Wis. Ct.
App. 2000) (adopting the continuous trigger theory to
find that an injury “occurs continuously from exposure
until manifestation” (quoting Michael G. Doherty, Al-
locating Progressive Injury Liability Among Successive In-
surance Policies, 64 U. Chi. L. Rev. 257, 261 (1997))). Safeco
asks us to carve out an exception and hold, despite a
dearth of Wisconsin caselaw, that the continuous trigger
theory should only apply in third-party coverage
cases because the questions presented in third-party
cases (e.g., which policy should defend and indemnify
against environmental contamination claims spanning
multiple policy periods?) aren’t present in first-party
property damage claims. We aren’t inclined to adopt an
approach that lacks support from Wisconsin’s caselaw,
but even if we did, Safeco’s cases in support of its
position adopted a manifestation theory for deter-
mining liability when a latent progressive condition
8                                               No. 11-1232

causes property damage. See Winding Hills Condo. Ass’n
v. N. Am. Specialty Ins. Co., 752 A.2d 837, 840 (N.J. Super.
Ct. App. Div. 2000); Prudential-LMI Com. Ins. v. Superior
Court, 798 P.2d 1230, 1246-47 (Cal. 1990). Given the
finding that the loss manifested during the policy
period, the result would be the same.
  Safeco maintains that because the district court found
that the property was a total loss when the Millers dis-
covered the problem, the water leakage and mold
growth couldn’t have caused any direct physical loss to
the property during the policy period. But the point at
which the property became a total loss mattered for
determining whether the Millers took appropriate steps
to mitigate the damages, not whether the “accidental
direct physical loss to” the home occurred “during the
policy period.” That the degree of damage put the home
beyond repair doesn’t mean water leakage wasn’t still
causing further direct physical loss to the property
during the policy period.
   Safeco asks us to adopt the approach in Leafland Group-
II, Montgomery Towers Ltd. Partnership v. Insurance Co. of
North America to determine coverage. 881 P.2d 26, 28-29
(N.M. 1994) (no coverage for a property’s diminished
value caused by asbestos because property’s value dimin-
ished before the policy went into effect). Given that
Wisconsin law provides a straightforward path for in-
terpreting this policy, we won’t clutter the matter by dis-
cussing another jurisdiction’s approach to different
policies and claims.
No. 11-1232                                                 9

B. Exclusions
   Safeco argues that the district court erred in finding that
its failure to inform the Millers of the exclusions before
they discovered the damage precluded Safeco from
raising the exclusions. Wisconsin law provides that an
insurer cannot rely on a policy’s exclusions when it fails
to inform the insured of those terms. Kozlik v. Gulf Ins.
Co., 673 N.W.2d 343, 348 (Wis. Ct. App. 2003). If an
insurer does “not provide the insured with a copy of the
policy or some other documentation of its terms,” the
“insurer may not deny coverage based on an exclusion
in the policy.” Id. Allowing an insurer to take premiums
“and then deny liability based on an exclusion of which
the insured was not aware because the insurance
company had not informed him or her of the exclusion
or given him or her the means to ascertain its exis-
tence” would be unjust. Id. at 349.
   Safeco argues that Wisconsin’s prohibition against
creating coverage through estoppel implicitly overrides
this principle. See Shannon v. Shannon, 442 N.W.2d 25, 33-34
(Wis. 1989) (insurer cannot waive coverage clauses via
litigation conduct). But Wisconsin’s rule that an
insurer cannot preclude coverage based on exclusions
unknown to the insured doesn’t rest on estoppel. Safeco’s
failure to provide the Millers with the exclusions goes
to the legal question of whether the exclusions were
part of the agreement in the first place. Safeco failed
to tell the Millers about the exclusions—whether by
delivering the policy or by any other means—until after
the Millers discovered the damage. And just as an
10                                              No. 11-1232

insurer couldn’t amend a policy’s terms to exclude a
loss after the insured discovers that loss, an insurer
cannot refuse coverage by pointing to an exclusion that
the insured didn’t know about until after the insured
discovered the loss. Gross v. Lloyds of London Ins. Co.,
358 N.W.2d 266, 271 (Wis. 1984) (insurer’s failure to
provide insured with “exclusionary language until
after the accident” meant insurer couldn’t rely on it);
Roeske v. Diefenbach, 249 N.W.2d 555, 559-60 (Wis. 1977)
(insurance contract limited to terms “expressed and
agreed upon by” the parties; if insurer wants “to incorpo-
rate the provisions of their usual policies . . . such provi-
sions must be specifically brought to” insured’s atten-
tion). Safeco cannot deny coverage based on exclusions
it failed to tell the Millers about until after they dis-
covered the damage.

C. Bad Faith
  For their bad faith claim, the Millers had to show an
“absence of a reasonable basis for denying benefits” and
“the defendant’s knowledge or reckless disregard of the
lack of a reasonable basis.” Anderson v. Cont’l Ins. Co., 271
N.W.2d 368, 376 (Wis. 1978). Showing an absence of a
reasonable basis is an objective test (that is “a reason-
able insurer could not have denied” the claim), whereas
showing reckless disregard is a subjective test. Weiss v.
United Fire & Cas. Co., 541 N.W.2d 753, 757, 762 (Wis. 1995).
  Safeco doesn’t ask us to revisit the district court’s
specific factual findings leading to its conclusion that
the company’s review of the Millers’ claim was cursory
No. 11-1232                                                 11

at best, that it lacked a reasonable basis for denying
the Millers’ claim, and that it demonstrated a reckless
disregard for its lack of a reasonable basis, see Short
Appx. at 53, and the Millers do not appeal the denial of
their request for punitive damages, id. at 60-61. Rather,
Safeco argues that had it been allowed to rely on the
exclusions, there wouldn’t have been coverage and
without a finding of coverage, Wisconsin law holds
that there can be no bad faith. See Brethorst v. Allstate Prop.
& Cas. Ins. Co., 798 N.W.2d 467, 482 (Wis. 2011). But as
stated above, Safeco’s failure to provide the policy’s
terms to the Millers before they discovered the
damage meant the exclusions were not part of the
policy when the Millers discovered the damage. See Part
II.B. Safeco cannot now avoid a bad faith finding based
on exclusions that were not part of the policy when
the Millers discovered the damage.
  Safeco maintains that a bad faith finding was improper
because the coverage issue was at least “fairly debatable.”
See Mowry v. Badger State Mut. Cas. Co., 385 N.W.2d 171,
181-82 (Wis. 1986) (reversing on bad faith because
insurer properly investigated and didn’t recklessly
ignore or disregard important facts). But Safeco’s basis
for denial rested, as the district court found after a three-
day trial, on rather dubious justifications. Short Appx.
at 53. First, Safeco asserted that the damage was a preex-
isting condition the Millers knew about, precluding
coverage under the known loss doctrine. No one contests
the finding that the damage was in existence before
closing. Yet, as found below, there was no evidence the
Millers knew about it until after closing. The Millers’
12                                              No. 11-1232

inspector identified water issues but nothing alerting to
problems with the “water infiltration” that caused the
damage; a closer look would have revealed this “impor-
tant” distinction. Id. at 45-46. Second, Safeco pointed to
the four months between discovery and the Millers’
filing of their claim as justifying denial. But the
Millers didn’t sit on their claim; rather, they took this
time to prepare their claim by contacting an attorney
and having professionals assess the damage. Critically,
Safeco couldn’t explain how the delay caused it preju-
dice. Id. at 49-50. Third, Safeco believed that the
Millers failed to protect the home after discovery. But
the Millers did what they could to mitigate the
damages and even if they could have done more, the
home was already a total loss. Safeco also never
explained, either in its claims file or at trial, what the
Millers could have done differently. Id. at 50. Safeco
also pointed to the policy’s exclusions as a basis for
denial. But Safeco never showed where it ever actually
relied on the exclusions. Safeco “cluttered” the claim
file with language from the exclusions but that didn’t
mean it reasonably investigated or considered their
applicability. Indeed, the court considered it “rather
iniquitous for Safeco . . . to rely upon bases that were not
fairly considered or reasonably asserted as reasons for
denying the” claim. Id. at 51-52. Given that Safeco does
not show where the district court erred in debunking
its reasons for denying the Millers’ claim, we have no
basis for finding the coverage issue fairly debatable.
No. 11-1232                                              13

D. Reconsideration
  Safeco argues that the district court abused its discre-
tion in allowing the Millers to use a Rule 59(e) motion
to advance a new argument about when the interest
calculation should begin. Courts may grant Rule 59(e)
motions “to alter or amend the judgment if the movant
presents newly discovered evidence that was not
available at the time of trial or if the movant points to
evidence in the record that clearly establishes a manifest
error of law or fact.” In re Prince, 85 F.3d 314, 324 (7th
Cir. 1996). This rule “enables the court to correct its
own errors and thus avoid unnecessary appellate pro-
cedures.” Moro v. Shell Oil Co., 91 F.3d 872, 876 (7th Cir.
1996). But such motions are “not appropriately used
to advance arguments or theories that could and should
have been made before the district court rendered
a judgment, or to present evidence that was available
earlier.” LB Credit Corp. v. Resolution Trust Corp., 49 F.3d
1263, 1267 (7th Cir. 1995) (internal citations omitted).
We entrust Rule 59(e) decisions to the district court’s
sound judgment and will only reverse for an abuse of
discretion. Id.
  The district court’s use of its discretion in granting
the Millers’ Rule 59(e) motion fixed an error that, similar
to the water that seeped into the Millers’ home, slipped
into the case. With the Millers waiting for the $485,100.64
Safeco owed them under the policy nearly twenty
months after the district court found coverage, and more
than four years after first filing their claim, the Millers
asked for a finding that Safeco owed them interest
14                                                  No. 11-1232

under a state law that requires insurers to pay interest
on overdue claims. R. 116 at 2-3. The law, Wis. Stat.
§ 628.46(1), entitles insureds to interest 30 days after the
insurer receives notice of the claim but exempts claims
“when the insurer has reasonable proof to establish that
the insurer is not responsible for the payment.” 1 With
the bad faith trial pending, the Millers argued that the
coverage finding (on May 30, 2008) eliminated any pos-
sibility that Safeco could argue that it had reasonable
proof after that date that it wasn’t responsible on the
claim but they maintained the bad faith trial could “estab-
lish that Safeco lacked reasonable proof to deny their
claim even well before” the coverage determination. R.
116 at 3. This meant, according to the Millers, that Safeco
owed them interest on the $485,100.64 starting at least
as early as 30 days after the coverage finding. At the end

1
   Wis. Stat. § 628.46(1) provides in relevant part: “Unless
otherwise provided by law, an insurer shall promptly pay every
insurance claim. A claim shall be overdue if not paid within
30 days after the insurer is furnished written notice of the fact
of a covered loss and of the amount of the loss. If such written
notice is not furnished to the insurer as to the entire claim,
any partial amount supported by written notice is overdue if
not paid within 30 days after such written notice is furnished
to the insurer. Any part or all of the remainder of the claim
that is subsequently supported by written notice is overdue
if not paid within 30 days after written notice is furnished to
the insurer. Any payment shall not be deemed overdue when
the insurer has reasonable proof to establish that the insurer
is not responsible for the payment, notwithstanding that
written notice has been furnished to the insurer.”
No. 11-1232                                              15

of the bad faith trial, the Millers asked that the interest
calculation begin 30 days after the day Safeco denied
coverage (April 17, 2006) because Safeco employee testi-
mony established that Safeco did not have the “rea-
sonable proof” required by § 628.46(1) at that time. R. 158
at 17-18. The court found that the Millers didn’t have
evidence that they gave Safeco notice of the entire
$485,100.64 figure before the coverage finding, but
noted that the Millers gave Safeco notice in their initial
claims letter of $315,840 in repairs and $3,030 in
monthly housing costs. The court, as it explained later,
understood the Millers to be asking for interest on the
entire $485,100.64 starting 30 days after the denial of
their claim. The court thus found that the Millers were
entitled to interest on the $485,100.64 beginning 30 days
after the coverage finding. Short Appx. at 59-60.
  The Millers filed a Rule 59(e) motion to respond to
the court’s order to supplement their claim for mortgage
interest damages, Doc. 168 at 2-4, but also used it to
address the court’s findings on when interest began
accruing and on what amount. The Millers conceded
they couldn’t recover interest on the $485,100.64 until
the coverage finding, id. at 5, but noted that the court
recognized they gave Safeco notice of a claim for
$315,840 plus $3,030 in monthly housing costs in their
initial claims letter. Id. at 4-5 & n.4 (emphasizing portion
of Wis. Stat. § 628.46(1) deeming overdue “any partial
amount supported by written notice” not paid within
30 days). The Millers acknowledged that they didn’t
appreciate the “rigidity” of the 30-day period but
believed that a proper interpretation of the Wisconsin
16                                              No. 11-1232

law required Safeco pay interest on their initial claim
for $315,840 plus $3,030 in monthly housing costs
starting 30 days after their initial claim. Id. at 6-7.
  The court granted the motion, finding that the
Millers weren’t presenting “entirely new arguments,” or
“a new legal theory,” but an argument they “could have
previously made.” Short Appx. at 69-70. Yet, as the
district court acknowledged, the Millers weren’t
required to make this argument earlier because prejudg-
ment interest is “encompassed within the merits of the
underlying action,” making it a matter appropriately
within the district court’s discretion on a Rule 59(e)
motion. Id. at 70-71 (quoting Osterneck v. Ernst & Whinney,
489 U.S. 169, 176 (1989)). The Millers could have been
clearer, id. at 69, but the court didn’t believe they
should “be penalized for wrongly computing prejudg-
ment interest before judgment was entered,” id. at 71.
   Safeco argues that the district court erred in allowing
the Millers to use the Rule 59(e) motion to present a
new argument “to complete presenting” their case. First
State Bank of Monticello v. Ohio Cas. Ins. Co., 555 F.3d 564,
572 (7th Cir. 2009) (district court “entitled to conclude
that raising the issue of prejudgment interest for the
first time in a Rule 59(e) motion” improper). But unlike
First State Bank, the Millers weren’t completing their
case’s presentation; they were simply correcting an
error that “crept into the proceeding.” Short Appx. at 66
(quoting Sosebee v. Astrue, 494 F.3d 583, 589 (7th Cir.
2007)). Safeco also argues that the district court abused
its discretion because its grant of the motion along with
No. 11-1232                                              17

its finding that the Millers “could have previously made”
the argument, Short Appx. at 70, conflicted with the rule
that Rule 59(e) motions may not be used to make argu-
ments “that could and should have been made before
the district court rendered a judgment.” LB Credit Corp.,
49 F.3d at 1267 (emphasis added). But in its focus on
the finding that the Millers could have made the argu-
ment earlier, Safeco ignores that the district court found
that this was not an argument the Millers had to make
earlier. Short Appx. at 70-71 (citing Osterneck, 489 U.S. at
175-76 & n.3). Given the deference we entrust district
courts on Rule 59(e) motions, and that such motions
are appropriately used to fix errors, Moro, 91 F.3d at
876, we are not going to find efforts to arrive at the
right answer on the interest calculation an abuse of dis-
cretion merely because the Millers took the court on
a circuitous route to get there.

                     III. Conclusion
  We A FFIRM the district court’s judgment.

                           6-25-12