McCORMACK, J.
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.
D & S Realty, Inc. (D & S), owned a building known as the North Tower, in Omaha, Nebraska. D & S purchased the 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.
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
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.
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
Further provisions of the replacement cost clause stated:
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 election between cash value and replacement cost. Believing Markel's denial of liability was wrongful, D & S brought a breach of contract action against Markel.
In its complaint, D & S sought replacement cost damages. D & S acknowledged that it had not yet repaired or replaced the damaged property. However, D & S pled that it was Markel's denial of coverage, in breach of its policy obligations, which caused D & S to be unable to repair or replace the property.
In its answer, Markel generally denied D & S' claims. In its affirmative defenses, Markel pled the vacancy clause, but did not plead as a defense D & S' failure to actually repair or replace as a condition to replacement cost coverage.
Thus far, D & S' complaint has resulted in two trials. The first trial occurred in 2008. The first trial principally concerned the parties' dispute over the vacancy clause of the policy. D & S attempted to show that the North Tower was not "vacant" because it was "under construction." Alternatively, D & S attempted to show that Markel had waived the vacancy clause or was estopped from asserting it because Markel was aware of the vacancy and continued to accept premiums with that knowledge. Finally, D & S asserted that Neb.Rev.Stat. § 44-358 (Reissue 2010) was applicable to the vacancy clause. Therefore, in the event D & S had breached the vacancy provision, such vacancy would not preclude recovery under the policy unless it contributed to the loss. D & S also relied on the Nebraska endorsement to the policy, which endorsement mirrored § 44-358.
At the close of D & S' case in the first trial, Markel moved for a directed verdict and raised for the first time the issue of D & S' nonperformance of the repair/replace condition to replacement cost coverage. Markel renewed the motion at the close of all the evidence. Markel also asked the court to find (1) the evidence was undisputed that the North Tower was more than 70-percent vacant for more than 60 days immediately prior to the loss, (2) the building was not under construction or renovation, and (3) Markel had not waived the loss conditions regarding vacancy.
The court found as a matter of law that the building was more than 70-percent vacant, but left the question of whether it was under construction or renovation for the jury. The court found, as a matter of law, that Markel had not waived the vacancy clause and was not estopped from relying on the vacancy clause. The court determined that § 44-358 and the Nebraska endorsement did not apply to the vacancy clause.
But the district court overruled Markel's motion for a directed verdict as to replacement cost damages. The court explained that Markel had failed to raise the issue of the repair/replace condition "in anything up until [its] motion for a directed
Consistent with its rulings on the motion for a directed verdict, during the instructional conference at the first trial, the court refused D & S' request to instruct the jury on § 44-358. It also refused D & S' request to allow an instruction on waiver or estoppel based on the fact that Markel had accepted premiums after learning the building was vacant.
Consistent with its denial of Markel's motion for a directed verdict, the court denied Markel's request for an instruction that D & S could recover replacement costs for only those items D & S had actually replaced prior to trial. At the instructional conference, D & S argued that pursuant to Bailey v. Farmers Union Co-op Ins. Co.,
The instruction given on damages stated in part:
The jury returned a verdict for Markel, presumably determining that the North Tower was "vacant" and that Markel was therefore not liable under the policy.
D & S appealed the judgment to our court. Markel did not file a cross-appeal. D & S asserted on appeal that the district court erred in refusing to submit to the jury the issues of § 44-358, waiver, and estoppel. D & S did not contest the jury's implicit finding that the building was not under construction or renovation or the district court's conclusion that the building was more than 70-percent vacant for more than 60 days preceding the loss.
In D & S Realty v. Markel Ins. Co.,
On remand, during the pretrial conference, it was discussed that the issues to be tried were whether the breach of the vacancy provision contributed to the loss and, if not, the measure of D & S' damages for Markel's breach of the insurance contract. In accordance with the jury instruction given at the first trial, the court appeared to believe replacement cost was the proper measure of damages. Markel filed a motion in limine asking that the court prevent D & S from offering any evidence of repair or replacement costs and that it prohibit D & S from addressing repair or replacement costs in voir dire, its opening statement, and its closing argument. Markel asserted, similarly to the first trial, that D & S failed to satisfy the repair/replace condition to replacement cost coverage. Indeed, Markel noted that D & S had sold the North Tower at the end of the first trial in December 2008. Markel asserted that in the event it was liable under the policy, the proper measure of damages should instead be the difference in actual cash value of the North Tower immediately before and after the water damage.
The district court took the matter under advisement and did not expressly rule on it at that time. But when Markel renewed the motion in limine at trial and objected to D & S' evidence of replacement costs, the court overruled the objections and received the evidence. D & S' expert was allowed to present a detailed document listing, as of July 25, 2003, a total replacement cost of $2,309,721.97 for the damages incurred in January and March 2003. A revised estimate as of August 29, 2008, which took into account inflation, listed the total replacement cost as $3,138,516.45.
David Abboud, the president of D & S, testified that other than removing certain water-logged items, D & S had not actually conducted the repairs or replacements listed in the document presented by D & S' expert. When asked why, Abboud responded, "Lack of money[,] primarily." Markel did not cross-examine Abboud on that point.
The court granted D & S' motion to preclude Markel from eliciting testimony concerning the sale of the North Tower, on the ground that it would confuse the issues. Markel made an offer of proof that D & S sold the North Tower for $437,000 after the water incidents.
At the close of D & S' case, Markel moved for a directed verdict on the grounds that (1) the vacancy did contribute to the loss and (2) D & S presented evidence of only replacement costs, which it could not recover because it had not actually repaired or replaced the damaged property. The court overruled the motion.
Markel entered into evidence an estimate by its insurance adjuster stating that the total repair and replacement costs for the damaged property were only $59,208. Markel renewed its motion for a directed verdict at the close of all the evidence, based again on D & S' failure to actually conduct any repairs or replace any damaged items. The motion was overruled.
The court rejected Markel's proposed instruction on the measure of damages, which read in part as follows:
On a special verdict form, the jury first found that the vacancy did not contribute to the subject loss. The jury then determined the amount of replacement cost damages to be $784,421.89.
Subsequently, D & S filed a motion to tax costs and fees pursuant to Neb.Rev. Stat. §§ 25-1708 (Cum.Supp.2010) and 44-359 (Reissue 2010). On May 19, 2011, Markel filed a motion for judgment notwithstanding the verdict or, in the alternative, for a new trial. Markel asserted that the district court erred in failing to sustain its motion for a directed verdict because D & S failed to show it had repaired or replaced any of the damaged property and that furthermore, D & S had failed to offer any evidence of the actual cash value of the North Tower immediately before and immediately after the damage occurred. Thus, according to Markel, D & S had failed to present any evidence of recoverable damages.
Markel also averred that the district court erred in permitting D & S to present evidence of the cost to repair or replace the damage to the North Tower, because D & S did not repair or replace the damaged property. Finally, Markel alleged that the district court erred in failing to instruct the jury that D & S was entitled to the lesser of three items, one of which was "the amount actually spent that is necessary to repair and replace the damaged property," as set forth in Markel's proposed instruction.
On July 1, 2011, the court overruled Markel's motion for judgment notwithstanding the verdict or, in the alternative, for a new trial. On August 12, the court entered an order granting attorney fees in the amount of $385,471.50 and costs in the amount of $3,598.49. Markel timely appealed the final judgment.
Markel assigns that the district court (1) erred in overruling Markel's motions for a directed verdict because D & S did not repair or replace the water-damaged portions of the North Tower; (2) erred in refusing Markel's requested jury instruction on the measure of damages; (3) abused its discretion in overruling Markel's motion for judgment notwithstanding the verdict or, in the alternative, for a new trial; and (4) erred in awarding attorney fees and costs to D & S, because D & S would not have recovered a verdict for damages had the proper jury instructions been given.
On questions of law, an appellate court is obligated to reach a conclusion
Markel argues that the district court erred in several rulings below because Markel's duty to pay replacement costs under the policy never became due. Performance of a duty subject to a condition cannot become due unless the condition occurs or its nonoccurrence is excused.
Markel argues in the alternative that any theory which might excuse performance based on a good faith denial of coverage would involve specific factual showings which D & S failed to make. Markel acknowledges that under the jury's verdict, D & S would have been entitled to actual cash value. However, Markel argues that D & S failed to prove actual cash value. Therefore, Markel asks that we reverse and that we remand with directions to dismiss the case with prejudice.
D & S, in contrast, argues that Markel's denial of liability for the loss excused the repair/replace condition as a matter of law. D & S alternatively asserts that even if excusal is a matter of fact, there was sufficient uncontroverted evidence that the denial of liability actually prevented D & S' performance of the repair/replace condition.
D & S argues that when the insurer has unequivocally stated it will not reimburse any replacement costs, it is unreasonable to require the insured to procure the money for repairs and incur the financial risk of repairing or replacing the damaged property. D & S argues that it paid for replacement cost coverage and that Markel should not be allowed to benefit from its wrongful denial of coverage, which forced D & S to bring the current breach of contract action.
D & S relies on the Nebraska Court of Appeals' opinion in Bailey v. Farmers Union Co-op. Ins. Co.
Markel, however, argues that the facts of Bailey are distinguishable from those of the case at bar. The insurer in Bailey acted in bad faith in delaying acknowledgment of liability for the accidental loss of the insured's home. While the insurer delayed, the remains of the house were condemned and the insured incurred additional demolition costs and other damages.
Neither our court nor the Court of Appeals has had occasion to consider whether a good faith denial of coverage which is ultimately determined to be in breach of contract excuses performance of a repair/replace condition. And our courts have never been squarely presented with the question of whether the prevention of a repair/replace condition by virtue of the insurer's denial of coverage may be determined as a matter of law or must instead be determined by the trier of fact. In order to answer these questions, we turn first to the nature of replacement cost coverage as an optional rider to standard indemnity policies and the reason for the repair/replace condition.
Standard casualty protection for residential and commercial property insures the property only to the extent of its actual cash value.
Most standard indemnity policies allow the insurer to choose to pay the lesser of actual cash value or the cost of repairing or replacing the damaged property. Thus, where the cost to repair or replace is greater than the actual cash value, the insured, not the insurer, is responsible for the cash difference necessary to replace the old property with new property.
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.
But because replacement cost coverage places the insured in a better position than before the loss, there is a moral hazard that the insured will intentionally destroy the insured property in order to gain from the loss.
If the insured has contracted for replacement cost coverage, the insured will normally be entitled under the policy to an immediate payment representing the actual cash value of the loss, which can be used as seed money to start the repairs.
When the insurer has not breached its obligations under the policy, provisions which mandate actual repair or replacement as a condition to recovery of replacement cost damages are almost universally found enforceable.
When the insurer, in breach of the insurance contract, denies liability for the insured's loss, most courts conclude that such denial may excuse the insured's duty under the repair/replace condition to replacement cost coverage.
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.
But, at least where the conduct is in breach of the promisor's obligations under the contract, "prevention" is not necessarily limited to "bad faith" acts.
Courts have explained that not allowing claims of prevention based on the erroneous denial of coverage would trap the insured "in a no win situation."
In Ward v. Merrimack Mut. Fire Ins.,
We agree, and we reject Markel's assertion that a good faith denial of liability
However, Markel is correct that most courts view prevention as a question of fact under the particular circumstances presented and that the insured has the burden to prove those circumstances.
In contrast, the court in Rockford Mut. Ins. Co. v. Pirtle
There was no determination that the insurer in Rockford Mut. Ins. Co. had acted in bad faith. The insurer had offered to "`cash out'" the insurance policy at an amount which would not be enough to repair the insured's damaged building.
It is true that some courts have held that the insurer's good faith denial of liability excuses the insured from performing the repair/replace condition as a matter of law.
Markel is also correct that at least when a good faith denial of liability is the cause of the nonperformance, many courts hold that the duty to perform the condition is merely suspended while the issue of liability is undetermined.
In Smith v. Michigan Basic Prop. Ins.,
The insurer in Smith had, in good faith, denied the insureds' claim after fire destroyed their home, believing that the insureds deliberately set the fire.
The Michigan Supreme Court agreed that "`a bank would be chary to lend money on the basis of an unlitigated law suit in which the defendant and its vast resources intend to present several defenses to payment.'"
Although the insured's house in Smith had been demolished by the time the policy dispute was decided, the policy allowed the insured to rebuild in a different location from the site of the loss. Accordingly, the Michigan Supreme Court concluded that the insureds' "interest in obtaining payment of replacement cost can be protected without estopping the insurer from requiring actual repair, rebuilding, or replacement."
In other cases, courts have similarly denied an award of replacement costs, while at the same time expressly allowing the insured additional time to repair or replace the property after the judgment which determined that the insurer was liable under the policy.
There are courts which hold that the good faith denial of liability under the policy absolutely and permanently excuses or waives the insured's obligation to perform the repair/replace condition.
Neither, however, should the insurer be permitted to take advantage of the insured's failure to perform a condition precedent under the contract when the insurer has materially contributed to that failure. Thus, we conclude that 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.
In this case, the trier of fact did not determine whether Markel's conduct materially contributed to D & S' failure to repair or replace the property. Instead, the jury was improperly instructed as a matter of law that the measure of damages was replacement costs. Nevertheless, each of the parties in this case wishes to hold the other to its proofs, or lack thereof, on matters neither tried nor determined below.
Markel argues that Abboud's testimony that a "[l]ack of money[,] primarily," caused D & S not to repair or replace the property is insufficient to make even a prima facie case of prevention. D & S disagrees and argues that since Markel did not rebut D & S' evidence, we should determine prevention as a matter of law.
Markel argues that if D & S' evidence of prevention was insufficient, then D & S cannot recover anything at all. Markel points out that D & S presented no evidence of actual cash value — which Markel concedes was recoverable. Markel argues that D & S chose to focus on only one measure of recovery and that it took the risk of being wrong. While Markel made an offer of proof of the sale price of the North Tower after the loss and D & S presented evidence of the original purchase price and an appraisal after the loss, Markel argues that this evidence is inadequate.
We find neither party's arguments on these points persuasive. The district court conducted both trials under the theory that an insurer's erroneous denial of liability excuses performance of the repair/replace condition as a matter of law. From the time of the first trial, the judge stated, "I have an issue with making [D & S] go spend millions of dollars ... and then seek recovery...." In both the first and second trials, the district court did not give the jury the opportunity to determine actual prevention and it did not give the jury an opportunity to determine actual cash value.
As a result of the district court's rulings, D & S had no reason to believe evidence of actual cash value was relevant or even admissible. Under the terms of the policy, where replacement costs are recoverable, that measure "replaces Actual Cash Value in the Loss Condition, Valuation, of [the policy's] Coverage Form."
Likewise, D & S presented only Abboud's one-line statement about "[l]ack of money" on the matter of proving prevention, because the district court's rulings indicated it believed the good faith denial of coverage absolutely excused the repair/ replace condition as a matter of law. As mentioned, such a view is not unprecedented in other jurisdictions, and we had never before determined this issue. Because Markel was similarly unaware that actual prevention was a factual issue at trial, Markel did not question or rebut Abboud's testimony of causation.
The parties did not litigate the factual questions necessary to the determination of their respective rights and liabilities, and the jury below was not given an opportunity to determine those factual questions. We will not decide for the first time on appeal the factual question of whether D & S was actually prevented from performing the repair/replace condition. That question is for the trier of fact. We make no comment on whether the record before us could adequately support a finding that Markel prevented D & S from fulfilling the repair/replace condition. Likewise, we do not reach the issue of whether the record is sufficient to demonstrate actual cash value in the event that D & S was not excused from performing the repair/replace condition.
There is no longer any issue that Markel was liable under the policy for the water damage which occurred at the North Tower. The only question remaining is whether Markel must pay D & S actual cash value or replacement costs. In most cases involving good faith denial of coverage, the interests of the parties would be adequately protected by granting a judgment to the insured for actual cash value and, in addition, a declaratory judgment that the insured will be reimbursed for the difference between actual cash value and any repair/replacement costs actually conducted within the time stated in the policy, running from the time of the judgment.
But the North Tower has been sold. And the policy issued by Markel to D & S required that the replacement be "on the same premises." Thus, future repair or replacement by D & S is now impossible. Therefore, if D & S can demonstrate to the trier of fact on remand that Markel's general denial of liability and the resulting litigation materially contributed to this impossibility, D & S may recover replacement costs without ever actually repairing or replacing the damaged property.
If the jury finds that D & S was thus permanently prevented from repairing or replacing the property, then D & S would be entitled to replacement costs in the amount that the jury has already determined — an amount which D & S has not contested in this appeal. If D & S cannot prove that Markel's general denial of liability for the loss materially contributed to its permanent inability to repair or replace the property, then D & S can recover only actual cash value, which may be determined in a new trial on remand.
We find no merit to Markel's assignment of error on costs and attorney fees, since we find no merit to its argument that good faith denial of coverage can never operate to excuse the insured's performance of the repair/replace condition.
We reverse the judgment and remand the cause for a new trial on the limited issue of the extent to which Markel's conduct prevented D & S from complying with
REVERSED AND REMANDED FOR A NEW TRIAL.
MILLER-LERMAN, J., not participating.
