Branch v. Farmers Insurance

McKAY, Circuit Judge. Appellant Branch owned rental property insured against various hazards including hail by Appellee Farmers Insurance Company, Inc. Appellant’s roof suffered hail damage during the Fall of 1998. Appellant, unsatisfied with the method Appellees employed in determining the amount of payment due Appellant, brought suit in the United States District Court for the Western District of Oklahoma. The district court granted summary judgment to Appellees. Appellant contests the method of calculating losses under the Actual Cash Value — 1243 — provision of his dwelling policy. The policy defines “Actual Cash Value” to mean “replacement cost of the property at the time of loss less depreciation.” Aplt.App. at 165. The district court held that the cost to tear off damaged shingles and the labor cost to install new shingles were both subject to depreciation. Finding that Appel-lees had correctly adjusted Appellant’s damages within the policy’s provisions, the district court granted summary judgment to Appellees on Appellant’s fraud and bad faith claims. Appellant Branch appealed the district court’s decision. The issues on appeal are whether the cost to tear off damaged shingles is subject to depreciation, whether the labor cost of installing shingles is subject to depreciation, and whether the district court erred in granting summary judgment on Appellant’s fraud and bad faith claim. At the time of appeal, a conflict existed in the Western District of Oklahoma regarding the proper application of depreciation to roof replacement claims under an actual cash value policy provision. Furthermore, there was no relevant state case law to assist us in determining these issues consistent with Oklahoma state law. Accordingly, we certified three questions to the Oklahoma Supreme Court and held this case in abatement pending a response. On March 12, 2002, the Oklahoma Supreme Court issued its response. On September 10, 2002, the Oklahoma Supreme Court denied Appellant’s Petition for Rehearing. We now issue this opinion consistent with the direction given to us. The Oklahoma Supreme Court opinion is attached hereto and by reference made a part of this opinion. We reverse the district court’s holding that the labor cost to remove damaged shingles is depreciable. We affirm the district court’s holding that the labor to install new shingles is subject to depreciation. Because Farmer’s interpretation of the actual cash value provision was a reasonable position taken in litigation of a legitimate coverage dispute, we affirm the district court’s grant of summary judgment against Appellant’s fraud and bad faith claims. See Thompson v. Shelter Mut. Ins., 875 F.2d 1460, 1462 (10th Cir.1989) (holding no breach of good faith duty occurs when insurer litigates a legitimate coverage dispute based on a reasonable interpretation of an insurance policy provision). We AFFIRM in part, REVERSE in part, and REMAND this proceeding to the district court for entry of judgment consistent with this opinion. — 1244 — [[Image here]] — 1245 — [[Image here]] — 1246 — [[Image here]] — 1247 — [[Image here]] — 1248 — [[Image here]] — 1249 — 55 PACIFIC REPORTER, 3d SERIES ATTACHMENT — Continued 1028 OKL two layers of old roof surfacing. A depreciation factor of thirty-five percent was applied, based on the adjuster’s estimate of the age and condition of the old roof and the average life of a similar composition shingle roof. The plaintiffs in the two cases assert that the labor involved in tearing off the old roof surface should not have been depreciated. ¶ 15 The federal district courts in the two cases reach different conclusions. In Davis, the court listed as an undisputed fact that the roof surfacing had become debris. The court found that the parties’ respective arguments regarding depreciation of expenses for debris removal presented a close question. The court observed that the policy appeared to set out debris removal as a separate item of coverage, not subject to depreciation, but also found merit in the insurer’s explanation of its adjustment practices regarding including debris removal as one of the costs associated with replacement. The court concluded that the policy should be construed to give effect to the language of the endorsement providing coverage for debris removal without deduction for depreciation. ¶ 16 In Branch, the insurer asserted that the plaintiff’s existing roof surfacing was not debris, and therefore the tear off was an integral part of the total replacement cost. The court defined “debris” as "Scattered remains: RUINS,” and “Discarded waste.” Webster’s II New Riverside University Dictionary 351 (1984). The court found no evidence to indicate that the plaintiff’s old roof surfacing constituted debris. The court observed that the undisputed facts showed that the plaintiffs roof remained useful and was repaired a full year after the storm that caused the damage. There was no evidence that he had to remove any scattered or fallen shingles after the storm. The court further stated as undisputed that tearing off the plaintiffs old roof surfacing was necessary to the proper installation of a new roof. [5,6] ¶ 17 An insurance policy is a contract. The same principles generally apply to the construction of a policy of insurance as apply to any adhesion contract. Dodson v. St. Paul Ins. Co., 1991 OK 24, ¶ 10, 812 P.2d 372, 376. In Johnny F. Smith Truck & Dragline Service v. United States, 49 Fed.Cl. 443 (2001), the Court of Federal Claims resolved a contract dispute between the plaintiff and the United States regarding debris removal in a flood damaged area. The dispute involved the definition of “debris.” That court used a similar definition as the Branch court: “1. a. The scattered remains of something broken or destroyed; rubble or wreckage, b. Carelessly discarded refuse; litter.” American Heritage Dictionary of the English Language (4th ed.2000). ¶ 18 If a roof has been damaged by wind or hail to the degree that it must be replaced, then the damaged portion is rubble or wreckage. If the whole roof must then be tom off to repair or replace the damaged portion, then those materials also must be considered wreckage. Farmers Union Mutual Ins. Co. v. Oakland, 251 Mont. 352, 825 P.2d 554 (1992). See also, Manduca Datswn, Inc. v. Universal Underwriters Ins. Co., 106 Idaho, 163, 168, 676 P.2d 1274, 1279 (Idaho CtApp. 1984). Replacement costs include the cost of the labor to install the new materials forming the new roof. Removing damaged materials, and materials that have to be removed as a result of storm damage to the roof in order to install the new roof, must all be treated as rubble, or in the contract language, debris. If the insurer intended to exclude debris removal of damaged roofing products, it could have done so. To answer the question of the 10th Circuit, labor costs to tear off an old roof are not included as a necessary part of the replacement costs of installing a new roof. II. IF TEAR-OFF COSTS ARE PROPERLY INCLUDED AS NECESSARY REPLACEMENT COSTS AND LABOR COSTS ARE DEPRECIABLE GENERALLY, MAY THE LABOR COSTS INCURRED DURING TEAR-OFF ALSO BE DEPRECIATED? ¶ 19 We have answered that tear off of the old roof is not included as a necessary part of the replacement costs of installing a new roof. The debris removal clauses in the insurance policies before this Court are identical, and do not mention depreciation. Therefore, the labor costs in debris removal may not be depreciated. — 1250 — [[Image here]]