Miller v. Safeco Ins. Co. of Am.

Citation683 F.3d 805
Decision Date25 June 2012
Docket NumberNos. 11–1232,11–1738.,s. 11–1232
PartiesCraig MILLER and Nancy Miller, Plaintiffs–Appellees, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant–Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)


Scott R. Halloin (argued), Andrea L. Murdock and Anthony K. Murdock, Halloin & Murdock, S.C., Milwaukee, WI, for PlaintiffsAppellees.

Alyssa M. Reiter (argued), Williams, Montgomery & John, Ltd., Chicago, IL; William J. Katt and Mark D. Malloy, Leib & Katt, L.L.C., Milwaukee, WI, for DefendantAppellant.

Before EASTERBROOK, Chief Judge, and TINDER and HAMILTON, Circuit Judges.

TINDER, Circuit Judge.

Safeco Insurance Company of America issued an insurance policy on a home purchased 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.

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 restained, 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 membrane 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 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 investigate, sent a field inspector to the property to inspect, and solicited a legal opinion on coverage from an attorney. 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 disregard 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 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., 268 Wis.2d 16, 673 N.W.2d 65, 73 (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 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., 23 Wis.2d 532, 127 N.W.2d 761, 764 (1964) (“An ‘all-risk’ policy is a promise to pay for loss caused by a fortuitous 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., 89 Wis.2d 555, 278 N.W.2d 857, 861 (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 unexpected, 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., 142 Wis.2d 673, 419 N.W.2d 255, 258 (Wis.Ct.App.1987) (a “latent injury, unknown and unknowable” when coverage began “must, at least, be covered by an insurer on the risk at the time it manifests” 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, 233 Wis.2d 207, 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, Allocating Progressive Injury Liability Among...

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