Tracy Holdings LLC v. West Bend Mutual Insurance Company
Filing
42
OPINION: Defendant West Bend Mutual Insurance Company's Motion for Summary Judgment (d/e 35 ) is GRANTED, and Plaintiff Tracy Holdings LLC's Motion for Summary Judgment (d/e 24 ) is DENIED. The Clerk is directed to enter judgment. This case is closed. (SEE WRITTEN OPINION.) Entered by Judge Sue E. Myerscough on 9/24/2018. (GL, ilcd)
E-FILED
Monday, 24 September, 2018 09:42:22 AM
Clerk, U.S. District Court, ILCD
IN THE UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
TRACY HOLDINGS LLC,
)
)
Plaintiff,
)
)
v.
)
)
WEST BEND MUTUAL INSURANCE )
COMPANY,
)
)
Defendant.
)
No. 3:16-CV-03100
OPINION
SUE E. MYERSCOUGH, U.S. District Judge.
This cause is before the Court on Plaintiff Tracy Holdings
LLC’s Motion for Summary Judgment (d/e 24) and Defendant West
Bend Mutual Insurance Company’s Motion for Summary Judgment
(d/e 35). The mend the hold and waiver doctrines do not preclude
Defendant from relying on the Continuous or Repeated Seepage or
Leakage of Water exclusion. Because the undisputed facts show
that the exclusion applies, the damage to Plaintiff’s property is not
covered under the insurance policy. Therefore, Defendant’s Motion
Page 1 of 19
for Summary Judgment is GRANTED, and Plaintiff’s Motion for
Summary Judgment is DENIED.
I. JURISDICTION
The parties are completely diverse. Plaintiff is an Illinois
limited liability corporation. “For diversity jurisdiction purposes, the
citizenship of an LLC is the citizenship of each of its members.”
Thomas v. Guardsmark, LLC, 487 F.3d 531, 534 (7th Cir. 2007).
Joseph P. Tracy and Jill A. Tracy are the sole owners and members
of Plaintiff, and they are both citizens of Illinois. See Aff. of Joseph
P. Tracy (d/e 20-1). Defendant is incorporated in Wisconsin and
maintains its principle place of business in West Bend, Wisconsin.
See Notice of Removal ¶ 6 (d/e 1). The amount in controversy
exceeds $75,000. Based on these facts, subject-matter jurisdiction
exists pursuant to the Court’s diversity jurisdiction. 28 U.S.C.
§ 1332.
Venue is proper in the Central District of Illinois, Springfield
Division, because a substantial part of the events or omissions
giving rise the claim occurred in this judicial district. 28 U.S.C.
§ 1391(b)(2).
Page 2 of 19
II. LEGAL STANDARD
Summary judgment is proper if the movant shows that no
genuine dispute exists as to any material fact and that the movant
is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a).
The movant bears the initial responsibility of informing the court of
the basis for the motion and identifying the evidence the movant
believes demonstrates the absence of a genuine issue of material
fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). No
genuine issue of material fact exists if a reasonable jury could not
find in favor of the nonmoving party. Brewer v. Bd. of Trs. of the
Univ. of Ill., 479 F.3d 908, 915 (7th Cir. 2007). When ruling on a
motion for summary judgment, the court must consider the facts in
the light most favorable to the nonmoving party, drawing all
reasonable inferences in the nonmoving party's favor. Blasius v.
Angel Auto., Inc., 839 F.3d 639, 644 (7th Cir. 2016).
In this case, the parties filed cross-motions for summary
judgment. Therefore, the Court must view all facts and draw all
reasonable inferences in the light most favorable to the Plaintiff
when reviewing Defendant=s Motion and in the light most favorable
to the Defendant when reviewing Plaintiff=s Motion. See
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Gazarkiewicz v. Town of Kingsford Heights, Ind., 359 F.3d 933, 939
(7th Cir. 2004).
III. FACTS AND BACKGROUND
The property that is the subject of this lawsuit is a 64-room
Hampton Inn hotel located at 225 South 4th Street, Quincy, Illinois,
(the Property) owned by Plaintiff. The Property was built in 1999.
Stanley Seibert is the Operations Manager for Plaintiff and the
General Manager of the Property.
On December 4, 2014, Defendant issued an insurance policy
to Plaintiff effective January 1, 2015 to January 1, 2016, Policy No.
BOC069121310 (the Policy), for the Property. In the Policy,
Defendant agreed to insure Plaintiff against damage to the Property
and any resulting loss of Plaintiff’s business income. The Policy
provides that Defendant “will pay for direct physical loss or damage
to Covered Property . . . caused by or resulting from any Covered
Cause of Loss.” The Policy defines Covered Causes of Loss as:
Risks of direct physical loss unless the loss is:
a.
Excluded in Paragraph B. Exclusions in
Section I; or
b.
Limited in Paragraph 4. Limitations in Section
I.
Page 4 of 19
On April 7, 2015, Plaintiff was having room 123 of the
Property renovated. After removing drywall around the window,
Plaintiff discovered severe darkening and cracking of the wood
framing around the window of room 123. Seibert testified that the
damage to room 123 was not caused by a recent storm event and
the damaged wood appeared to have been exposed to water on more
than one occasion. He also testified that the damage to room 123
would have taken a long stretch of time to occur. All disclosed
experts in this case testified that improper design, installation,
construction and/or maintenance of the roof system and/or the
EIFS (exterior insulation and finishing system) was the primary or
secondary cause of the damage at the Property.
Plaintiff hired Blackline Construction to perform remediation
repairs to the Property for the water damage. The total amount for
the contracted remediation work was $917,370.29. In addition,
because of the water damage to the Property, the guest rooms could
not be rented until all necessary repairs were completed. Plaintiff’s
claim for lost business income totaled $183,971.
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Approximately two to three years prior to April 7, 2015,
Plaintiff first noticed wallpaper curling around the windows of
several rooms, including room 123. Plaintiff also noted that the
area around the windows was cool to the touch, almost moist.
Around this time, Plaintiff had the windows re-caulked because
they were giving off dampness. Plaintiff suspected moisture was
causing the wallpaper to curl around the windows.
Plaintiff first noticed a leak in the ceiling of room 123 starting
around 2013. The leak in the ceiling of room 123 was recurring
and would resurface every two or three months up until the
discovery of the condition in room 123 on April 7, 2015.1 Plaintiff
undertook an investigation as to the source of the leak in room 123
but was unable to identify the source prior to the discovery of the
In response to Defendant’s Statement of Undisputed Fact No. 5, Plaintiff only
admitted that the leak would resurface every two to three months. Plaintiff
denied the remainder of Defendant’s Statement of Undisputed Fact No. 5.
However, Plaintiff did not support its denial with “evidentiary documentation
referenced by specific page” as required by Local Rule. See CDIL-LR
7.1(D)(2)(b)(2). Moreover, Seibert did, in fact, testify that the ceiling leak was a
recurring problem and resurfaced every two to three months. See Seibert Dep.
at 64 (d/e 27-1, p. 17 of 35) (“Q. So it was a recurring problem? A. Yes.”); at 65
(“Q. How frequently did it-- did the fact that there was a leak become apparent
to you in Room 123? A. You know, it might – it might surface every two to
three months.”). Therefore, the Court considers the fact undisputed.
1
Page 6 of 19
condition in room 123 on April 7, 2015. Plaintiff asserts it only
learned of the interior room damage on April 7, 2015.
On April 7 or April 8, 2015, Seibert reported the claim to his
agent at Winters Insurance Agency, who notified Defendant of the
property loss claim. On July 6, 2015, senior claim representative
Jason Toft sent Seibert a letter stating that Defendant had
determined that the claim for damages at the Property was not
covered. According to Defendant, the water damage did not enter
the building from a Covered Cause of Loss. In addition, Defendant
communicated that the exclusions and limitations contained within
the Policy were additional reasons for denial and listed certain
exclusions and limitations. The letter also contained the following
statement:
Nothing in this letter is intended to be, nor should be
construed as, a waiver of any of the terms or conditions
of your policy of insurance. West Bend Mutual Insurance
expressly reserves all rights, conditions, and defenses it
may have now or those that may become apparent
through additional investigation.
Plaintiff hired Engineering Evaluations, Inc., to perform an
inspection of the property after receiving the July 6, 2015 denial
letter. Plaintiff forwarded the report to Defendant for review.
Page 7 of 19
On September 24, 2015, Mark Johnston, who was at that time
a regional claims representative with Defendant, sent another
denial letter to Seibert indicating that Defendant’s position was still
that the damages were not covered under the Policy. Defendant
again stated that the water entering the building was not a Covered
Cause of Loss. Defendant relied on policy exclusions and
limitations to further preclude coverage and listed certain
exclusions and limitations. The letter also provided:
Please understand that by making specific reference to
certain language and sections contained within your
policy, West Bend Mutual Insurance Company neither
waives, nor shall it be estopped from, raising other
exclusions, conditions, limitations, or provisions of your
policy or the facts of this specific claim. Further, nothing
in this letter is intended to be, nor should be construed
as, a waiver of any of the terms or Conditions of your
policy of insurance. West Bend Mutual Insurance
expressly reserves all rights, Conditions, and defenses it
may have now or those that may become apparent
through additional investigation or claim handling.
Neither denial letter specifically referenced the exclusion for
Continuous or Repeated Seepage or Leakage of Water.
In March 2016, Plaintiff filed a Complaint in the Circuit
Court of the Eighth Judicial Circuit, Adams County, Illinois,
alleging breach of an insurance policy and a violation of 215
Page 8 of 19
ILCS 5/155 (providing for attorney’s fees, costs, and an
additional penalty for unreasonable and vexatious delay in
settling or paying a claim). Plaintiff seeks damages for
replacement costs, repairs, and loss of business. Plaintiff also
seeks attorney’s fees and penalties under Section 155.
On April 12, 2016, Defendant removed the cause of action to
this Court. Defendant filed an Answer and raised several
affirmative defenses based on Policy exclusions and limitations,
including the exclusion for Continuous or Repeated Seepage or
Leakage of Water, which provides as follows:
B.
Exclusions
***
2.
We will not pay for loss or damage caused by
or resulting from any of the following:
***
p.
Continuous Or Repeated Seepage Or
Leakage Of Water
Continuous or repeated seepage or
leakage of water, or the presence or
condensation of humidity, moisture or
vapor, that occurs over a period of 14
days or more.
Page 9 of 19
(Continuous or Repeated Leakage exclusion). In addition,
Defendant identified in its Initial Rule 26((A)(1) disclosures the
identities of certain witnesses who may have information regarding
the history of water infiltration and damages and identified David
Ellermann as having information regarding “his findings as
documented in his June 11, 2015 written report.” Rule 26
Disclosures (d/e 40-1). Ellermann’s report noted that the “extent of
deterioration is indicative of long-term, intermittent exposure to
moisture.” Report (d/e 28, p. 45 of 45).
On June 2, 2017, Plaintiff took the deposition of Matt
Johnston, who was, at the time of his deposition, a regional claims
manager with Defendant. Defendant’s own counsel asked Johnston
whether all of the bases for Defendant’s decision to deny coverage
were fully set forth in the denial letters, and Johnston testified that
they were:
Q. And, to the best of your knowledge, all the bases
for West Bend’s decision to deny coverage are fully set
forth in the correspondence that has been issued to Mr.
Seibert, correct? And that being your letter of September
24, 2015, and Mr. Toft’s letter of July 6, 2015, correct?
A. Correct, to Mr. Seibert, who is a representative of
Hampton Inn and Irish House, Tracy Holdings, LLC,
d/b/a/.
Page 10 of 19
Q. And the basis for denying the coverage is a
result of the policy exclusions cited in your letters
contained in the policy of insurance that was purchased
by the insured. Correct?
A. Correct.
Johnston Dep. at 80 (d/e 34-2, p. 20 of 21).
In June 2018, the parties filed cross-motions for summary
judgment.
IV. ANALYSIS
Although the parties raise numerous issues in their motions
for summary judgment, the Court finds that this case is resolved by
analyzing the Continuous or Repeated Leakage exclusion.
Plaintiff argues that Defendant is precluded from relying on
the Continuous or Repeated Leakage exclusion under the mend the
hold2 and waiver doctrines. Specifically, Plaintiff argues that
Defendant did not claim the Continuous or Repeated Leakage
exclusion in any pre-suit letters and “buried” the exclusion in its
affirmative defenses. Plaintiff asserts that it will be prejudiced if
“[T]he phrase is a nineteenth-century wrestling term, meaning to get a better
grip (hold) on your opponent.” Harbor Ins. Co. v. Continental Bank Corp., 922
F.2d 357, 362 (1990).
2
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Defendant is allowed to rely on the exclusion because Plaintiff had
no notice of Defendant’s reliance on the Continuous or Repeated
Leakage exclusion before the lawsuit. Plaintiff also argues prejudice
because Johnston testified during the litigation that Defendant was
relying on what was previously stated in the denial letters.
The mend the hold doctrine does not apply here. In Illinois,3
the mend the hold doctrine “preclude[s] insurers from denying a
claim on one basis and then changing [the] basis for denial during
litigation if there is evidence of unfair surprise or arbitrariness.”
Title Ind. Assurance Co., R.R.G. v. First Am. Title Ins. Co., 853 F.3d
876, 885 (7th Cir. 2017) (internal quotation marks and citations
omitted). However, the doctrine does not bar an insurance
company from adding a defense after being sued. Ryerson Inc. v.
Fed. Ins. Co., 676 F.3d 610, 614 (7th Cir. 2012) (“To require a
potential defendant to commit irrevocably to defenses before he is
sued would be unreasonable to the point of absurdity.”). Moreover,
a change of defense does not harm a party if, when denying
coverage, the insurance company reserved the right to add
3
The parties agree that Illinois law applies in this diversity action.
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supplemental grounds for the denial. Id. (“When there is no
prejudice to the opposing party, invoking the doctrine of mend the
hold to bar a valid defense is overkill.”); see also Tobi Eng’g, Inc., v.
Nationwide Mut. Ins. Co., 214 Ill. App. 3d 692, 696 (1991) (stating
that “an insurer is not required to assert all of its defenses to
liability in a letter to its insured”).
Here, although Defendant did not identify the Continuous or
Repeated Leakage exclusion in the denial letters, the letters
specifically reserved the right to raise other defenses or exclusions.
Defendant identified the Continuous or Repeated Leakage exclusion
as one of its affirmative defenses, and that affirmative defense was
listed with no less prominence than any other affirmative defense.
Moreover, Johnston’s testimony did not change the bases for denial
during the lawsuit, as he merely testified that the bases for the
denial were contained in the denial letters. In addition, Defendant’s
discovery disclosures evidenced an intent by Defendant to rely on
the exclusion. Because Plaintiff had ample notice of the defense,
Plaintiff cannot show unfair surprise, arbitrariness, or prejudice.
The case cited by Plaintiff, Title Ind. Assurance Co., R.R.G., 853
F.3d at 885, is distinguishable because the insurance company in
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that case did not raise the prior notice provision until it filed its
motion for summary judgment and only alluded to the provision in
its answer to the counterclaim.
Plaintiff also argues that Defendant waived reliance on the
Continuous or Repeated Leakage exclusion. Waiver is the voluntary
relinquishment of a known right. See Home Ins. Co. v. Cincinnati
Ins. Co., 213 Ill. 2d 307, 326 (2004). In the denial letters,
Defendant specifically reserved the right to raise additional defenses
and specifically raised the exclusion in its Affirmative Defenses.
Those actions do not constitute waiver.
Plaintiff has not shown that Johnston’s testimony regarding
his personal belief about the bases for the denial of coverage
constitutes an intentional relinquishment by Defendant of its
affirmative defense that the Continuous or Repeated Leakage
exclusion applied. Johnston testified as to his personal belief of the
bases for denial. He did not testify under Federal Rule of Civil
Procedure 30(b)(6) as to the insurance company’s position. See,
e.g., PPM Fin., Inc. v. Norandal USA, Inc., 297 F. Supp. 2d 1072,
1085–86 (N.D. Ill.), aff'd, 392 F.3d 889 (7th Cir. 2004) (a Rule
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30(b)(6) witness “testifies as to the corporation’s position on the
matters set forth in the Rule 30(b)(6), not his personal opinion”).
Turning to the merits, Plaintiff argues that, even if Defendant
is allowed to rely on the Continuous or Repeated Leakage exclusion,
the ensuing loss suffered by Plaintiff is still covered. As stated
above, the Continuous or Repeated Leakage exclusion provides that
Defendant will not for loss or damage caused by or resulting from:
Continuous or repeated seepage or leakage of water, or
the presence or condensation of humidity, moisture or
vapor, that occurs over a period of 14 days or more.
An ensuing loss clause creates an exception to a policy
exclusion and thereby limits the scope of what is excluded under
the policy. Moda Furniture LLC v. Chicago Title Land Trust Co.,
2015 IL App (1st) 140501 (2015). For example, in Moda, the
exclusion for faulty workmanship contained an ensuing loss clause
that provided that “[if] an excluded cause of loss * * * results in a
Covered Cause of Loss, we will pay for the resulting loss or damage
caused by that Covered Cause of Loss.” Moda, 2015 IL App (1st)
140501, ¶ 8. The court ultimately concluded that the ensuing loss
clause was ambiguous and construed the provision in favor of
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coverage. Id. ¶ 12 (involving damage to inventory during a roof
repair when the roofer failed to protect the premises).
Here, however, the Continuous or Repeated Leakage exclusion
does not contain an ensuing loss clause, although another
provision of the Policy does. Compare Policy Section I, B. 2(p)
(Continuous or Repeated Leakage exclusion) with Section I, B. 3
(the Negligent Work exclusion in Section I, B. 3 (providing that “if an
excluded cause of loss listed in paragraphs a. through c. results in
a Covered Cause of Loss, we will pay for the loss or damage caused
by that Covered Cause of Loss” where paragraphs a. through c.
pertained to weather conditions, acts or decisions, and negligent
work). Nothing in the Policy suggests that the ensuing loss clause
contained in the Negligent Work exclusion applies to the
Continuous or Repeated Leakage exclusion.
Under Illinois law, when construing an insurance policy, the
court must ascertain and give effect to the intentions of the parties
as expressed in their agreement. Hobbs v. Hartford Ins. Co. of the
Midwest, 214 Ill. 2d 17 (2005). Illinois courts construe the policy as
a whole, taking into account the type of insurance purchased, the
nature of the risks involved, and the overall purpose of the contract.
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Rich v. Principal Life Ins. Co., 226 Ill.2d 359, 371 (2007). If the
terms of the policy are clear and unambiguous, then Illinois courts
give the terms their plain and ordinary meaning. Nicor, Inc. v.
Associated Elec. & Gas Ins. Servs. Ltd., 223 Ill.2d 407, 416 (2006).
Here, construing the Policy as a whole and giving the terms
their plain and ordinary meaning, the Court finds that the
Continuous or Repeated Leakage exclusion does not contain an
ensuing loss clause. The ensuring loss clause pertaining to
Negligent Work is contained in an entirely separate subsection of
the Exclusions section of the Policy. The Policy contains no
language suggesting that the ensuing loss clause in the Negligent
Work exclusion is incorporated into the Continuous or Repeated
Leakage exclusion.
Plaintiff does not raise any other arguments to Defendant’s
claim that the Continuous or Repeated Leakage exclusion applies.
The undisputed facts show years of leaks and dampness in room
123. Seibert testified that the damaged wood appeared to have
been exposed to water on more than one occasion and that the
damage to room 123 would have taken a long time to occur. In
addition, other evidence in the summary judgment record also
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supports this conclusion. See Ellermann Dep. at 136 (d/e 28, p. 34
of 45) (testifying that the deterioration of the wall framing in room
123 would have taken several years of water infiltration); at 143
(d/e 28, p. 36 of 45) (testifying that the damage to the five rooms he
inspected was an accumulation of several years of exposure to
water); Report (d/e 28, p. 45 of 45) (“The extent of deterioration is
indicative of long-term, intermittent exposure to moisture.”).
Plaintiff points to no evidence that would create a genuine issue of
material fact on whether the water damage was the result of
repeated and ongoing water leaks and/or the presence of moisture
over a period of 14 days or more. Therefore, Defendant is entitled to
summary judgment. See Johnson Press of Am., Inc. v. N. Ins. Co.
of New York, 339 Ill. App.3d 864, 873 (2003) (finding that fungal
growth on wood indicated that “plaintiff had allowed water
infiltration to occur for more than 14 days” as specified under the
exclusion for continuous or repeated seepage or leakage of water
that occurred over a period of 14 days).
V. CONCLUSION
For the reasons stated, Defendant West Bend Mutual
Insurance Company’s Motion for Summary Judgment (d/e 35) is
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GRANTED and Plaintiff Tracy Holdings LLC’s Motion for Summary
Judgment (d/e 24) is DENIED. The Clerk is directed to enter
judgment. This case is closed.
ENTERED: September 24, 2018
FOR THE COURT:
s/Sue E. Myerscough
SUE E. MYERSCOUGH
UNITED STATES DISTRICT JUDGE
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