Robert Danganan v. American Family Mutual Insurance Company

[3] 4 UNITED STATES DISTRICT COURT 5 DISTRICT OF NEVADA 6 * * * 7 ROBERT and MYRNA DANGANAN Case No. 2:17-cv-02786-RFB-BNW 8 Plaintiffs, ORDER 9 v. 10 AMERICAN FAMILY MUTUAL INSURANCE COMPANY, a Wisconsin 11 Insurance Corporation 12 Defendant. [13] 14 I. INTRODUCTION 15 Before the Court are Plaintiffs Robert and Myrna Danganan’s (“the Danganans”) and 16 Defendant American Family Mutual Insurance Company’s (“American Family”) Motions for 17 Summary Judgment. ECF Nos. 42, 43. For the following reasons, the Court denies American 18 Family’s Motion in its entirety and grants the Danganans’ motion in part. 19 II. PROCEDURAL BACKGROUND 20 The Danganans sued American Family in the Eighth Judicial District Court of Clark 21 County on or around October 4, 2017. ECF No. 1. In their complaint, the Danganans brought 22 breach of contract and tortious bad faith claim-handling claims against American Family for its 23 failure to make payments for water damage allegedly covered by its policy. ECF No. 1-1. 24 American Family removed the case to this Court on November 3, 2017. ECF No. 1. American 25 Family answered on November 14, 2017. ECF No. 5. Both parties moved for summary judgment 26 in October 2018. ECF No. 42, 43. Both motions were fully briefed. ECF Nos. 44, 45, 46, 47. The 27 Court held a hearing on the motions for summary judgment on April 24, 2019. ECF No. 49. The 28 Court took both motions under submission for a written order to issue. ECF No. 49. 1 III. FACTUAL BACKGROUND 2 The Court makes the following findings of fact. These findings are limited to this order 3 and are not meant to usurp findings that a jury would have to make in a jury trial. 4 a. Undisputed Facts 5 The Danganans purchased a home located at 9610 Drayton Avenue, Las Vegas, Nevada 6 89148 (the “property”) in 2001. The home and its contents were insured by American Family under 7 an insurance policy that provided certain insurance coverage effective January 8, 2016 through 8 January 8, 2017 (the “Policy”). 9 The Policy generally provides insurance coverage for damage to structures, personal 10 property and loss of use of property. Under the main heading, “Coverage A—Dwelling and 11 Dwelling Extension”, and the subheading “Losses Not Covered,” the Policy proceeds to list eight 12 conditions under which losses are excluded. Number three under that subheading states that 13 American Family “do[es] not cover loss . . . resulting directly or indirectly from . . .Continuous or 14 Repeated Seepage or leakage of water or steam from within a plumbing . . . system . . . which 15 occurs over a period of weeks, months or years.” Number six under that same subheading is titled 16 “Other Causes of Loss.’’ Within that subheading of “Other Causes of Loss,” the Policy provides 17 that it “do[es] not cover loss to the property . . . resulting directly or indirectly from or caused by 18 one or more of the following . . .birds, vermin, rodents, insects or domestic animals.” However, 19 and importantly, within that same “Other Causes of Loss” subsection, the Policy also states that 20 “[i]f any of these cause water or steam to escape from a plumbing . . . system, we cover loss caused 21 by the water or steam.” (emphasis added). The finally sentence under the category “Losses Not 22 Covered” section states that the Policy “do[es] cover any resulting loss to property described in 23 Coverage A—Dwelling and Dwelling Extension from items 2 through 8 above, not excluded or 24 excepted in this policy.” The words “seepage” and “leakage” are not defined in the Policy. 25 On the evening of September 21, 2016, Pat Warczynski, the Danganans’ daughter’s future 26 mother -in-law, went to stay at the property for a few days with the Danganans’ permission. When 27 she arrived, the property appeared to be flooded. At that point, no one was living at the property 28 full-time, and it was unknown what had caused the failure of the water supply line. Warczynski 1 spoke with the Danganans via video chat, who observed that a “continuous flow” of water appeared 2 to be coming out of the water line to the toilet in the bathroom. 3 On September 21, 2016, at around 9:30pm, the Danganans submitted a claim with 4 American Family. On September 22, 2016, the Danganans’ claim was assigned to Denise 5 Newman, who completed an initial review and phone conversation with the Danganans on that 6 same day. Also on that same day, September 22, 2016, American Family completed review of 7 photos of the property that it had received through a company hired to inspect the leak called 8 Service Master. American Family determined that “the cause of loss [was] the supply line of the 9 toilet on [the] first floor.” American Family noted that it was “unknown if the line broke or was 10 chewed by the rats/mice seeking water.” Notes entered by American Family into its claim activity 11 log at around that time indicated that it appeared that the leak had been “occurring for an extended 12 time . . . a month or longer.” Based on this information, a note was entered into American Family’s 13 claim activity log that there was “compelling evidence due to the extent of water, mold, 14 deterioration and rodent damages[sic] to indicate that this toilet supply line leak has been 15 continuing for at least 2 weeks or more.” 16 On Friday September 23, 2016, the Danganans travelled to Nevada and inspected the 17 property with Newman. Vermin droppings and mold were present throughout the property on the 18 date of inspection. Sometime between September 23 and September 26, 2016, American Family 19 reviewed water bill statements. Water usage in the billing statement for July 8 through August 8, 20 2016 showed an increase in water usage from 55 gallons to 218 gallons in average daily use. 21 Another billing statement from between August 9, 2016 through September 7, 2016 showed an 22 increase in water usage from 218 gallons to 466 gallons in average daily use. After reviewing this 23 information, American Family determined that the water damage was caused by a continuous or 24 repeated leakage of water or steam from within a plumbing system which occurred over a period 25 of at least several weeks if not months, and denied the claim on September 26, 2019. American 26 Family sent a denial of coverage letter to the Danganans on September 26, 2016. 27 The Danganans hired Hudson Public Adjusters to assist them with their appeal of American 28 Family’s denial of their claim. The Danganans also hired an expert, M. Chris Gusik, a Senior Field 1 Consult and Managing Partner with Adaptive Environmental Consulting, who evaluated the 2 evidence concerning the water damage. The expert noted that “[s]ubject property water damage 3 would have occurred immediately at line rupture provided water pressure. Water escape occurred 4 over a period of 57 to 70 days provided calculated cycle flow rates and billings.” The expert also 5 stated that “[t]he water line condition and Property conditions support the water line observed, as 6 well as other in-property water lines pictured attached to appliances, failed likely from “vermin” 7 chew damage.” 8 American Family’s corporate representative testified in his deposition that, under the 9 Policy, if a rodent, like a mouse/rat chewed through the water supply line causing it to fail, 10 American Family would cover the loss caused by the water if the “the water damage occurred right 11 away.” American Family’s representative also agreed that gnaw marks would be indicative that 12 rodents or vermin had chewed through the line. 13 Neither the Danganans nor American Family dispute the fact that the cause of the supply 14 line leak in the toilet was due to rodents or vermin chewing the water supply lines. 15 b. Disputed Facts 16 The parties largely dispute the legal effect of the circumstances. [17] 18 IV. LEGAL STANDARD Summary judgment is appropriate when the pleadings, depositions, answers to [19] 20 interrogatories, and admissions on file, together with the affidavits, if any, show “that there is no 21 genuine dispute as to any material fact and the movant is entitled to judgment as a matter of [22] law.” Fed. R. Civ. P. 56(a); accord Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). [23] When considering the propriety of summary judgment, the court views all facts and draws all [24] inferences in the light most favorable to the nonmoving party. Gonzalez v. City of Anaheim, [26] 747 F.3d 789, 793 (9th Cir. 2014). If the movant has carried its burden, the nonmoving party 27 “must do more than simply show that there is some metaphysical doubt as to the material facts [28] …. Where the record taken as a whole could not lead a rational trier of fact to find for the 1 nonmoving party, there is no genuine issue for trial.” Scott v. Harris, 550 U.S. 372, 380 (2007) [2] (alteration in original) (internal quotation marks omitted).It is improper for the Court to resolve [3] genuine factual disputes or make credibility determinations at the summary judgment stage. [4] Zetwick v. Cty. of Yolo, 850 F.3d 436, 441 (9th Cir. 2017) (citations omitted). [5] 6 V. DISCUSSION 7 An insurance policy is a contract, and questions of contract interpretation are questions of 8 law. Fed. Ins. Co. v. Coast Converters, 339 P.3d 1281 , 1284 (Nev. 2014). When construing an 9 insurance policy under Nevada law, the Court must read the policy “as a whole,” and “its language 10 should be analyzed from the perspective of one untrained in law or in the insurance business. 11 Policy terms should be viewed in their plain, ordinary and popular connotations.” Fourth St. Place 12 v. Travelers Indem. Co., 270 P.3d 1235, 1239 (Nev. 2011) (citing Am. Excess Ins. Co. v. MGM, [13] 729 P.2d 1352, 1354 (Nev. 1986)). If a term in an insurance policy is ambiguous, it will be 14 construed against the insurer, because the insurer drafted the policy. Powell v. Liberty Mut. Fire 15 Ins. Co., 252 P.3d 668, 672 (Nev. 2011). “The question of whether an insurance policy is 16 ambiguous turns on whether it creates reasonable expectations of coverage as drafted.” Id. (citing 17 United Nat’l Ins. Co. v. Frontier Ins. Co., 99 P.3d 1153, 1157 (Nev. 2004)). “[A]lthough an 18 individual clause standing alone might appear to contain no ambiguity, the policy must be read as 19 a whole in order to give a reasonable and harmonious meaning and effect to all its provisions.” 20 Nat’l Union Fire Ins. v. Reno’s Exec. Air, 682 P.2d 1380, 1383 (Nev. 1984). “A court must look 21 to the entire contract of insurance for a true understanding of what risks are assumed by the insurer 22 and what risks are excluded.” Id. “While clauses providing coverage are interpreted broadly so as 23 to afford the greatest possible coverage to the insured, clauses excluding coverage are interpreted 24 narrowly against the insurer.” Id. However, the Court must be careful not to “rewrite contract 25 provisions that are otherwise ambiguous . . . [or] increase an obligation to the insured where such 26 was intentionally and unambiguously limited by the parties.” Fed. Ins. Co., 339 P.3d at 1285 (citing 27 Farmers Ins. Grp. V. Stonik ex rel. Stonik, 867 P.2d 389, 391 (1994)). [28] 1 When an insurer wishes to exclude coverage, the insurer “must (1) write the exclusion in 2 obvious and unambiguous language in the policy, (2) establish that the interpretation excluding 3 covering under the exclusion is the only interpretation of the exclusion that could be fairly made, 4 and (3) establish that the exclusion clearly applies to this particular case.” Powell, 252 P.3d at 674 . 5 The Court first addresses the Danganans’ breach of contract claim. A failure to cover an 6 event that is covered under the Policy constitutes a breach of contract under Nevada law. See 7 Fourth St. Place, 270 P.3d 1235, at 1239 . Thus the Court begins where it must, with contract 8 interpretation. The Danganans argue that the “leakage and seepage” provision of the Policy is 9 ambiguous. Specifically, they claim that the plain, ordinary meaning of the word “leakage” refers 10 to a “gradual or low volume water event,” borrowing a definition adopted by a Michigan state 11 court in an unpublished case. The Danganans argue that the water damage that occurred on the 12 property was not a “gradual or low volume water event” and thus should not be subject to the 13 leakage and seepage exception. The Danganans further argue that since the policy unmistakably 14 communicates that a continuous leakage over a period of “weeks, months, or years” is excluded, 15 that damages not caused by “weeks, months, or years” would be covered. “Weeks” would have to 16 mean a minimum of 14 days. The Danganans point to their expert’s report that the damage 17 sustained to the property from the spraying water line would have occurred within the first week. 18 On this basis, they assert, the Danganans should be entitled to the interpretation that affords the 19 greatest possible coverage to them. 20 American Family argues that the “leakage and seepage” provision is not ambiguous. It 21 points out that to read both “leakage” and “seepage” to mean “gradual or low volume water event” 22 would render one term superfluous to the other. American Family points to language in the Policy 23 that states that continuous water leaks for a period of weeks, months, or year are excluded 24 regardless of whether there may have been a contributing, concurrent or even subsequent cause of 25 the loss. 26 The Court finds that the Policy, when read as a whole, is ambiguous as to how the “leakage 27 and seepage” provision applies to the provision allowing for coverage of water loss caused by 28 rodents or vermin. As a preliminary matter the Court rejects the Danganans’ proffered common 1 usage of “leakage” to mean “gradual or low volume water event.” Dictionary definitions of the 2 term refer to fluid being released but not necessarily to the volume of the release. See, e.g., 3 Leakage, Oxford English Dictionary (online edition) (defining leakage as “[t]he action of leaking; 4 admission or escape of water or other fluid through a hole in a vessel, etc.’ loss of fluid by this 5 means.”). Thus, the Court does not find that the terms “leakage” and “seepage” are themselves 6 ambiguous—but that the “leakage and seepage” provision is ambiguous when read in conjunction 7 with the rodent exception. 8 The Court finds that the policy is ambiguous in terms of the limitation on coverage for 9 water damage caused by vermin or rodents. The policy clearly indicates that “we cover loss caused 10 by water or steam” when the cause of the “escape” of this water is rodents or vermin. This section 11 creates a clear expectation of coverage for water damage arising from vermin or rodents damaging 12 the internal plumbing of the dwelling. Yet the policy also appears to exclude certain types of 13 “continuous or repeated seepage or leakage of water” damage that occurs over “a period of weeks, 14 months or years.” This ambiguity is unresolved in the policy. 15 For example, the Court notes that the rodent exception uses the term “escape,” in relation 16 to the accidental release of water rather than “leakage or seepage.” One basic principle of contract 17 interpretation is that “every word must be given effect if at all possible.” Bielar v. Washoe Health 18 Sys., Inc., 306 P.3d 360, 364 (Nev. 2013). The Court thus finds the Policy is also unclear as to 19 when water “escape” becomes “leakage or seepage” or vice versa. These terms are not explicitly 20 defined and there is no explanation in the contract of what these terms may be separately or 21 commonly describing. There is therefore no clear or unambiguous mechanism or explanation in 22 the policy to describe how the coverage for water damage by vermin interacts with the exclusion 23 under the policy for “continuous” water “seepage” or “leakage” that occurs over “a period of 24 weeks, months or years.” Such ambiguity is critical here because the policy undisputedly covers 25 some types of water damage. 26 Under American Family’s suggested unambiguous reading of the “weeks” portion of the 27 “leakage and seepage” provision, an insured would be covered by its policy if he or she suffered 28 water loss due to rodent chew only up until thirteen days after the water loss occurred. Any leaking 1 or seeping in excess of thirteen days would not be covered as this would then be excluded by the 2 “weeks” provision. The Court finds nothing on the face of the Policy that says anything about the 3 number of days required for coverage—the thirteen days is merely an inference extrapolated from 4 the “weeks” provision. Such an important inferred limitation is not obvious or even reasonable to 5 the Court, let alone to one “untrained in law and the insurance business.” Fourth St. Place v. 6 Travelers Indem. Co., 270 P.3d at 1239 . The impact and effect of the “weeks” period exclusion is 7 thus a further source of ambiguity in the contract. 8 The Court is further unpersuaded by the alleged unambiguous reading of the policy by 9 American Family, because it leaves no room for when an insured first becomes aware of the 10 damage. In this case, the expert report revealed that there had been continuous water leakage over 11 a period of at least fifty-seven days, but that the precipitating event was rodent chew. The 12 Danganans did not become aware of the damage until at least several weeks after it occurred. The 13 Court thus does not find that it is a reasonable reading of the Policy that an insured be required to 14 report a loss to an insurance company when the insured was completely unaware of the loss and 15 the loss would have been covered had the insured been aware of it. 16 Construing the ambiguity against the insurer and considering the totality of the policy 17 provisions, the Court construes the policy to include coverage for water damage from a continuous 18 flow of water that is caused by rodents but does not allow coverage for such damage when the 19 insured is aware of the leak and/or the damage but does not report it for weeks. The Court further 20 construes the policy to require prompt reporting of water damage. In other words, so long as the 21 insured reports the water loss due to rodent chew promptly upon learning of the chew, the insured 22 is covered up until that point for any damage caused by such water loss. This is the most reasonable 23 interpretation of the policy considering Nevada law. 24 The Court further finds as a matter of law that American Family breached the contract or 25 policy in this case. The policy, even without the Court’s construction, clearly provided for 26 coverage for water damage that arises from vermin or rodents. It is undisputed in this case that 27 rodents or vermin caused the initial damage to the plumbing which lead to the “escape” of water. 28 It is also undisputed that the Plaintiffs are seeking reimbursement for the water damage caused by 1 vermin damaging the internal plumbing of the home. It is also undisputed that the Danganans 2 submitted their claim on the day that they learned of the water loss. Thus, the Court will construe 3 the provisions in favor of the Danganans and finds that all water loss damage that occurred as of 4 September 21, 2016—the date on which the Danganans became aware of the loss and reported it 5 to American Family—is covered by the Policy. The Court consequently finds American Family’s 6 failure to find the event covered a breach of contract and grants summary judgment to the 7 Danganans on their breach of contract claim. 8 The Court next addresses the Danganans’ bad faith claim. Under Nevada law, to make out 9 a prima facie case of bad faith, the plaintiff must “establish that the insurer had no reasonable basis 10 for disputing coverage, and that the insurer knew or recklessly disregarded the fact that there was 11 no reasonable basis for disputing coverage.” Powers v. United Servs. Auto. Ass’n, 962 P.2d 596 , 12 604 (Nev. 1998). The Court finds that there are disputed questions of material fact as to whether 13 or not American Family acted in bad faith when processing the Danganans’ claim. While it is true 14 that the ambiguity of a coverage provision cannot serve as an absolute defense to a bad faith claim, 15 the mere denial of a covered claim, without more, does not per se support a finding of bad faith. 16 See Powers, 962 P.2d at 604 (finding that jury had substantial evidence to support bad faith claim 17 after experts testified that investigation was improper and in violation of procedures); Albert H. 18 Wohlers & Co. v. Bargis, 969 P.2d 949, 957 (Nev. 1998) (finding that jury had substantial evidence 19 to support bad faith claim after hearing evidence that insurance company concealed from insured 20 a clause indicating significant reduction in coverage). Nonetheless, the parties here dispute, inter 21 alia: a) whether American Family conducted an appropriate investigation, b) whether American 22 Family sought to fabricate unfounded reasons for denying coverage, c) whether American 23 understood and knew that the ambiguity in the policy supported coverage and d) whether American 24 Family contacted employers of the Plaintiffs and their daughter to intimidate them regarding their 25 pursuit of coverage. To make a finding of bad faith at this point thus requires credibility 26 assessments and factual findings that are best reserved for the triers of fact. The Court thus denies 27 summary judgment to either party on the bad faith claim. [28] 1 VI. CONCLUSION 2 IT IS THEREFORE ORDERED that Plaintiffs Robert and Myrna Danganan’s Motion 3 | for Summary Judgment (ECF No. 43) is granted as to the breach of contract claim and denied as to the bad faith claims handling claim. This case will proceed to trial on the amount of damages 5 | on the breach of contract claim and the bad faith claim. 6 IT IS FURTHER ORDERED that Defendant American Family Mutual Insurance 7 | Company’s Motion for Summary Judgment, (ECF No. 42) is denied in its entirety. 8 IT IS FURTHER ORDERED that a joint pretrial order shall be filed by October 21, 2019. [9] 10 DATED: September 30, 2019. 11 AK 12 RICHARD F. BOULWARE, II 13 UNITED STATES DISTRICT JUDGE [28] -10-