D & S Realty, Inc. v. Markel Ins. Co.

• Decision Date: 22 June 2012
• Docket Number: S–11–764.,Nos. S–11–664,s. S–11–664
• Citation: 816 N.W.2d 1,284 Neb. 1
• Court: Nebraska Supreme Court
• Parties: D & S REALTY, INC., appellee, v. MARKEL INSURANCE COMPANY, a corporation, appellant.

284 Neb. 1
816 N.W.2d 1

D & S REALTY, INC., appellee,
v.
MARKEL INSURANCE COMPANY, a corporation, appellant.

Nos. S–11–664, S–11–764.

Supreme Court of Nebraska.

June 22, 2012.

[816 N.W.2d 3]

Syllabus by the Court

[284 Neb. 1]1. Judgments: Appeal and Error. On questions of law, an appellate court is obligated to reach a conclusion independent of the determination reached by the court below.

2. Contracts. Performance of a duty subject to a condition cannot become due unless the condition occurs or its nonoccurrence is excused.

3. Contracts. A condition is excused if the occurrence of the condition is prevented by the party whose performance is dependent upon the condition.

4. Property: Valuation: Words and Phrases. Actual cash value is the value of the property in its depreciated condition.

5. Insurance: Real Estate: Words and Phrases. Replacement cost insurance is optional additional coverage that may be purchased to insure against the hazard that the improvements will cost more than the actual cash value and that the insured cannot afford to pay the difference.

6. Insurance. A repair/replace condition to replacement cost coverage is neither ambiguous nor unconscionable.

7. Contracts. The doctrine of prevention states that where a promisor prevents, hinders, or renders impossible the occurrence of a condition precedent to his or her promise to perform, the promisor is not relieved of the obligation to perform and may not invoke the other party's nonperformance as a defense when sued upon the contract.

8. Breach of Contract. Pursuant to the doctrine of prevention, where the impeding act is the denial of liability in breach of the insurer's obligations under a policy with the insured, the breach may excuse the insured's performance of a repair/ replace condition even if made because of a “good faith” misunderstanding of the rights and liabilities of the parties.

9. Contracts. The law does not require the doing of a useless act.

10. Judgments: Contracts. Whether interference by one party to a contract amounts to prevention so as to excuse performance by the other party is a question of fact to be decided under all of the proven facts and circumstances.

[284 Neb. 2]11. Contracts. The doctrine of prevention does not require proof that the condition would have occurred “but for” the wrongful conduct of the promisor, but requires only that the promisor's conduct contributed materially to the nonoccurrence of the condition.

12. Insurance. The respective interests of parties acting in good faith can, in most cases, be adequately protected by excusing the performance of the repair/replace condition only for such time as it appears the insurer will not honor its obligations under the policy.

[816 N.W.2d 4]

13. Insurance: Liability. If the delay in determining the insurer's liability materially contributed to a situation where the insured can no longer perform the condition after the coverage dispute is resolved, then the condition will be absolutely excused.

14. Judgments: Testimony: Attorneys at Law. It is unreasonable to expect counsel to attempt to present testimony in anticipation that a judge's favorable rulings will be reversed.

Richard J. Gilloon and Heather B. Veik, of Erickson & Sederstrom, P.C., Omaha, and Tory M. Bishop and Angela Probasco, of Kutak Rock, L.L.P., Omaha, for appellant.

David A. Blagg, Charles F. Gotch, and James D. Garriott, of Cassem, Tierney, Adams, Gotch & Douglas, Omaha, for appellee.

HEAVICAN, C.J., WRIGHT, CONNOLLY, STEPHAN, and McCORMACK, JJ.

McCORMACK, J.
I. NATURE OF CASE

This is an appeal after a retrial on remand in a breach of contract claim by the insured against the insurer. At issue in this appeal is the optional replacement cost coverage that the insured contracted. The question is whether the insurer's general denial of liability excused the insured from complying with a policy condition requiring that the insured actually repair or replace the damaged property before replacement costs will be paid.

II. BACKGROUND

D & S Realty, Inc. (D & S), owned a building known as the North Tower, in Omaha, Nebraska. D & S purchased the [284 Neb. 3]property in 1999 for $1.75 million. At the time, it was approximately 40 years old. At some point prior to the loss in question, the building was appraised at $4 million. The first six floors of the building were for commercial use, and the top floors were residential. Markel Insurance Company (Markel) insured the North Tower through a standard indemnity policy with additional coverage for repair and replacement cost payments in the event of a covered loss.

1. Vacancy

D & S embarked on a plan to renovate the building, floor by floor, in small increments. In order to conduct the renovations, D & S began vacating the areas occupied by its tenants. By November 2002, less than 30 percent of the building was occupied. By January 2003, less than 5 percent of the building was occupied. D & S put on a new roof, started demolition of the second floor, and painted and replaced the carpet on most of the residential floors. Markel was aware of the vacancy and the renovations.

As part of the renovation project, in January 2003, D & S decided to drain all the waterlines, put antifreeze into the system so the pipes would not freeze, and shut down the boiler system. However, without D & S' knowledge, the maintenance engineer turned off the boiler on a Friday night and did not flush the lines or inject antifreeze.

The following day, a D & S employee discovered that pipes throughout the building had burst. Massive amounts of water flooded the building and froze into ice. According to witnesses on behalf of D & S, there was extensive damage on every floor of the building. D & S immediately attempted to mitigate the damage and remove debris. In March 2003, when the weather became warmer, the firelines thawed and burst, and again, significant

[816 N.W.2d 5]

amounts of water flooded the building. Passersby observed water gushing down three exterior sides of the North Tower like a waterfall.

2. Policy

D & S timely filed a claim with Markel for the losses incurred as a result of the water damage in January and March 2003. The policy with Markel explicitly included water damage.

[284 Neb. 4]However, the “Loss Conditions” section of the policy contained a “Vacancy” clause stating that Markel would not pay for water damage if the building had been vacant for more than 60 consecutive days before the loss or damage. The vacancy clause defined a building as “vacant” when 70 percent or more of its square footage was neither rented nor used to conduct customary operations. The clause further stated that “[b]uildings under construction or renovation are not considered vacant.” “Construction” and “renovation” were not defined in the policy. A Nebraska endorsement to the policy provided that “[a] breach of warranty or condition will void the policy if such breach exists at the time of loss and contributes to the loss.”

In the event of a covered loss under the policy, the standard “loss payment” clause of the policy stated that at Markel's option, it would either (1) pay the value of lost or damaged property, (2) pay the cost of repairing or replacing the lost or damaged property, (3) take all or any part of the property at an agreed or appraised value, or (4) repair, rebuild, or replace the property with other property of like kind and quality. The loss payment clause also stated that Markel would not “pay [the insured] more than [its] financial interest in the Covered Property.” A “valuation” clause stated that Markel would determine the value of the loss or damage at actual cash value as of the time of loss or damage, subject to certain exceptions for specified items. The policy provided limited coverage for debris removal.

D & S had purchased optional additional coverage for “replacement cost.” Under the terms of the policy, “Replacement Cost (without deduction for depreciation) replaces Actual Cash Value in the Loss Condition, Valuation, of [the policy's] Coverage Form.” The replacement cost clause provided that the insured had the option of making a claim for loss or damage on an actual cash value basis instead of on a replacement cost basis. And it provided that

[i]n the event [the insured] elect[s] to have loss or damage settled on an actual cash value basis, [the insured] may still make a claim for the additional coverage this Optional Coverage provides if [the insured] notif[ies [284 Neb. 5]Markel] of [its] intent to do so within 180 days after the loss or damage.

Further provisions of the replacement cost clause stated:

d. [Markel] will not pay on a replacement cost basis for any loss or damage:

(1) Until the lost or damaged property is actually repaired or replaced; and

(2) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.

e. [Markel] will not pay more for loss or damage on a replacement cost basis than the least of (1), (2) or (3) ...:

(1) The Limit of Insurance applicable to the lost or damaged property;

(2) The cost to replace, on the same premises, the lost or damaged property with other property:

(a) Of comparable material and quality; and

(b) Used for the same purpose; or

[816 N.W.2d 6]

(3) The amount [the insured] actually spend[s] that is necessary to repair or replace the lost or damaged property.

The policy limit of the insurance policy issued by Markel to D & S was $4.5 million, subject to a deductible of $50,000.

Markel generally denied coverage for the claimed water damage loss. Markel informed D & S that its investigation had revealed the North Tower was more than 70–percent vacant at the time of the loss. Markel told D & S that under the vacancy clause of the policy, Markel does not pay for water damage if the property is vacant. Because Markel generally denied liability under the vacancy clause of the contract, the parties did not discuss cash value versus replacement costs and neither specifically made any...