Patton v. Mut. of Enumclaw Ins. Co.

• Decision Date: 20 October 2010
• Docket Number: 03-11-12054; A134159.
• Citation: 242 P.3d 624,238 Or.App. 101
• Parties: Lowell E. PATTON, Plaintiff-Respondent, Cross-Appellant, v. MUTUAL OF ENUMCLAW INSURANCE COMPANY, a Washington corporation, Defendant-Appellant, Cross-Respondent, and Hopp Insurance Agency, Inc., an Oregon corporation; and Randy W. Hopp, Defendants-Cross-Respondents.
• Court: Oregon Court of Appeals

242 P.3d 624

238 Or.App. 101

Lowell E. PATTON, Plaintiff-Respondent, Cross-Appellant,

v. MUTUAL OF ENUMCLAW INSURANCE COMPANY, a Washington corporation, Defendant-Appellant, Cross-Respondent,andHopp Insurance Agency, Inc., an Oregon corporation; and Randy W. Hopp, Defendants-Cross-Respondents.

03-11-12054; A134159.

Court of Appeals of Oregon.

Argued and Submitted Sept. 18, 2009.

Decided Oct. 20, 2010.

Thomas M. Christ, Portland, argued the cause for appellant-cross-respondent. With him on the briefs were Julie A. Smith and Cosgrave Vergeer Kester LLP.

Robert K. Udziela, Portland, argued the cause and filed the briefs for respondent-cross-appellant.

George S. Pitcher, Portland, argued the cause for defendants-cross-respondents. With him on the brief was Rachel A. Robinson.

Before LANDAU, Presiding Judge, and SCHUMAN, Judge, and ORTEGA, Judge.

ORTEGA, J.

Plaintiff's house was insured against fire under a policy issued by defendant Mutual of Enumclaw Insurance Company (MOE). The house burned down, and plaintiff filed a claim under the policy. He later brought this action against MOE and its agent, Hopp Insurance Agency,¹ seeking declaratory relief and damages for breach of contract and negligence. The trial court directed a verdict for plaintiff on the breach of contract claim and directed verdicts for MOE and Hopp on the negligence claims. MOE appeals, seekingreversal of the judgment for plaintiff on the breach of contract claim. Plaintiff cross-appeals, challenging the trial court's judgment for Hopp on the negligence claim. On MOE's appeal, we reverse and remand for a new trial on the breach of contract claim; we affirm on the cross-appeal.

For purposes of the issues raised on appeal, the relevant facts are largely undisputed. We recount them in some detail, including the relevant policy provisions and defendants' communications to plaintiff regarding those provisions, because the detail of those communications is necessary to evaluate the contract and negligence claims at issue in this appeal.

Plaintiff purchased a MOE homeowner insurance policy through Hopp. When plaintiff began an extensive remodel and addition to his home, he called Hopp and requested an increase in his basic coverage. Hopp increased plaintiff's basic coverage to $600,000, which was the maximum dwelling coverage that MOE could offer on homes. The declarations page showed a limit of $600,000 for the dwelling.

Plaintiff's policy also provided coverage for loss of use and for damage to personal property. The policy defined "loss of use" as "fair rental value" of the destroyed premises. The loss of use benefit was limited to a percentage of the amount of insurance on the structure as shown on the declarations page. In light of the $600,000 limit on the dwelling asshown on the declarations page, plaintiff's maximum "loss of use" benefit was $120,000. The policy limit for loss of personal property was $420,000.

Plaintiff's policy also included an endorsement for "guaranteed replacement cost." Under that endorsement, in the event of loss, as an alternative to payment of the liability limit of $600,000 stated on the declarations page, MOE agreed to pay

"not more than the lesser of:

"1. The replacement cost of that part of the building damaged for like construction and use on the same premises; or

"2. The necessary amount required to repair or replace the damaged building."

Among the conditions for receiving the replacement cost coverage, the policy required plaintiff to "[i]nsure the dwelling and other structures to 100% of replacement cost as of the date this endorsement becomes effective," and to "[n]otify [MOE] within 90 days of the start of any additions or physical changes that increase the value of the dwelling or other structures on the resident premises by $5,000 or more[.]"

The policy explained how covered losses were to be settled:

"(4) We will pay no more than the actual cash value of the damage unless:

"(a) actual repair or replacement is complete; or

"(b) the cost to repair or replace the damage is both:

"(i) less than 5% of the amount of insurance in this policy on the building; and

"(ii) less than $2,500.

"(5) You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss or damage to buildings on an actual cash value basis. You may then make claim within 180 days after loss for additional liability on a replacement cost basis."

An additional endorsement provided that "[n]o action can be brought unless the policy provisions have been complied with and the action is started within two years after the date of loss."

On November 8, 2001, shortly before completion of the addition, the house was destroyed by fire, and plaintiff made a claim under the policy. Plaintiff notified MOE that he intended to take advantage of the policy's replacement-cost endorsement and that he was considering rebuilding. The addition to the home had been quite extensive and had included antique woods that were no longer available. Plaintiff obtained an estimate from Custer Construction indicating that the cost to replace the home would be between $3.6 and $4 million. Plaintiff obtained a second estimate of $3.858 million.

Plaintiff had trouble obtaining the necessary approval for reconstruction from the City of Lake Oswego. Plaintiff notifiedMOE of those problems, and its adjuster, Gene Chandlee, reminded plaintiff that, under the terms of the policy, reconstruction would have to be completed before MOE would pay the full replacement cost. Chandlee also asked plaintiff to seek a more detailed bid from Custer. He also obtained a much lower bid from Oregon Home Improvement Company (OHI) to rebuild for $1.544 million. Plaintiff expressed doubt that the house could be rebuilt for that amount using the same quality of materials and construction.

In September 2002, 10 months after the fire, MOE's attorney, Smith, wrote to plaintiff explaining that OHI's bid was not necessarily the limit of what MOE would pay. Smith explained to plaintiff that, as construction continued, "the amount to replace your home may have to be adjusted upwards or downwards." Smith encouraged plaintiff to provide MOE with more information about the house that had burned, including construction documents for the remodel, explaining that "[t]his will go a long way toward assuring that [the OHI] bid is accurate." Smith told plaintiff that OHI was a well-regarded firm and that it could rebuild the home with like construction and use, as required by the policy. Smith advised that plaintiff was free to choose a differentbuilder, but that, if the costs to rebuild exceeded OHI's bid, "the difference will have to be reconciled or you may be responsible for those additional costs." Smith also advised plaintiff that, under the policy, the limit of MOE's responsibility was "the necessary amount required to repair or replace the damaged building," and that currently the OHI bid was MOE's best estimate of that amount.

In the September letter, Smith also expressed concern that the rebuilding had not yet begun and reminded plaintiff that, under the policy, plaintiff was entitled to replacement cost benefits only on completion of the actual repair or replacement. Smith called "special attention" to provisions of the policy requiring that, in order to recover replacement costs, plaintiff had to complete replacement. Smith further reminded plaintiff of the policy's requirement that plaintiff had until two years from the date of loss-that is, until November 8, 2003-within which to resolve any claims against MOE or to bring an action in court. Smith closed the letter with the statement, "All rights under your policy of insurance with [MOE] are reserved. No waiver or estoppel of any kind is intended and none should be implied."

After Smith and plaintiff met in person, Smith wrote to plaintiff again on October 15, memorializing their discussion. Smith encouraged plaintiff to hire "whichever architect you plan to use to rebuild your home. You can build whatever kind of home you want, whether it be bigger and fancier than what you had or smaller and less fancy." Smith also reminded plaintiff that the policy contained conditions for coverage. Smith quoted portions of the policy, including the requirement that MOE would pay

" * * * not more than the lesser of:

" 1. the replacement cost of that part of the building damaged for like construction and use on the same premises;

"or

"2. the necessary amount required to repair or replace the damaged building."

(Emphasis in Smith letter.) Smith also quoted the policy's requirement that MOE would not pay more than actual cashvalue of the destroyed property until completion of replacement or repair, and reminded plaintiff that the replacement cost benefit was only available with the completion of replacement or repairs:

"In other words, you actually have to make the repair or replacement to obtain the benefit of the replacement cost portion of your policy and [MOE] is not obligated to pay you until after repair or replacement is complete. [MOE] realizes that this places a practical problem in your path and the company will make an agreement with you and your builder to make progress payments as construction progresses. Your * * * mortgage companies have already been paid the actual cash value limit of $600,000 and you will need to make arrangements to finance that amount for the reconstruction project. After those fundsare committed and paid during the reconstruction, [MOE] will make arrangements to finance the remainder of the reconstruction."

The October letter also stated:

"[MOE] is concerned that you are running out of time if you choose to rebuild your house. In addition to the rental value time limitation, there is also a two-year limitation in your policy for you to bring suit against [MOE] if you feel that the company has breached the policy in any way. As stated in my [September letter], we are concerned that you may lose some of the benefits

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