Lead GHR Enterprises, Inc. v. American States Insurance, et al.

Filing 82

ORDER denying 44 Motion for Summary Judgment; granting in part and denying in part 53 Motion for Summary Judgment; adopting 70 Report and Recommendation; overruling 74 Objection to Report and Recommendation. Signed by Chief Judge Jeffrey L. Viken on 9/30/14. (SB)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
WESTERN DIVISION
LEAD GHR ENTERPRISES, INC.,
formerly d/b/a GOLDEN HILLS
RESORT, now d/b/a DAYS INN
LEAD, SOUTH DAKOTA,
Plaintiff,
vs.
AMERICAN STATES INSURANCE
COMPANY,
Defendant.

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CIV. 12-5056-JLV

ORDER

Pending before the court is defendant’s motion for summary judgment or
partial summary judgment and plaintiff’s cross-motion for partial summary
judgment.1 (Dockets 44, 53). The court referred the motions to Magistrate
Judge Veronica L. Duffy for a report and recommendation. (Docket 64). On May
15, 2014, Magistrate Judge Duffy filed a report recommending the court deny
defendant’s motion for summary judgment and grant in part and deny in part
plaintiff’s motion for partial summary judgment. (Docket 70). Defendant timely
filed objections. (Dockets 109, 110). Plaintiff filed a response to defendant’s
objections.2 (Docket 78).

1

When referring to the record the court cites to the electronic-filing page
number.
2

Fed. R. Civ. P. 72(b)(2) allows a party to respond to an opposing party’s
objections.

The court reviews de novo those portions of the report and
recommendation which are the subject of objections. Thompson v. Nix, 897
F.2d 356, 357-58 (8th Cir. 1990); 28 U.S.C. § 636(b)(1). The court may
then “accept, reject, or modify, in whole or in part, the findings or
recommendations made by the magistrate judge.” 28 U.S.C. § 636(b)(1).
For the reasons stated below, defendant’s objections are overruled. The
court adopts the report and recommendation of the magistrate judge.
A.

MAGISTRATE JUDGE’S CONCLUSIONS OF LAW
Defendant asserts the magistrate judge erred in finding:
1.

American States Insurance Company (“American States”) breached
its contract of insurance;

2.

An issue of fact exists with respect to the source and scope of the
damages;

3.

An issue of material fact exists related to defendant’s refusal to pay
for full roof replacement and its handling of the claim; and

4.

An issue of material fact exists related to whether plaintiff is entitled
to punitive damages.

(Docket 74 at pp. 1-2). Each objection will be addressed separately.
The recommendation contains a thorough discussion of the facts. (Docket
70 at pp. 2-16). Specific facts will be discussed only to the extent they relate to
defendant’s objections.

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B.

DEFENDANT’S OBJECTIONS
1.

Breach of Contract

Defendant contends the magistrate judge erred in finding American States
breached its contract of insurance by (1) “[m]aking unsupported conclusions and
failing to adequately consider the pre-existing condition of the roof when
assessing the hail’s effect on the roof’s overall ‘value’ ”; (2) “[m]isunderstanding
the methodology and process related to the Xactimate estimate”; (3) “[f]ailing to
consider industry practice”; (4) “[m]isconstruing the basis of American States’
coverage position”; and (5) “[f]ailing to adequately consider apposite legal
authority.” (Docket 74 at pp. 1-2).
a.

Pre-existing condition

The magistrate judge found defendant breached the insurance policy
contract because the August 3, 2010, hail storm caused damage to the hotel’s
roof and defendant denied coverage for the damage. (Docket 70 at pp. 20-25).
The magistrate judge concluded it is “axiomatic that a dented roof is worth
incrementally less than an undented roof.” Id. at p. 22.
Defendant first contends the magistrate judge made “unsupported
conclusions” and failed to “adequately consider the pre-existing condition of the
roof when assessing the hail’s effect on the roof’s overall ‘value’.” (Docket 74 at
p. 1). Defendant argues that “given the prior condition of the roof, at the very
least a genuine issue of material fact exists as to whether the hail impacts

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occurring on August 3, 2010, actually caused any significant effect at all on the
property’s overall aesthetics or valuation, as the record is replete with
information regarding the deficiencies in the overall condition of the roof well
before the hail event.”3 Id. at p. 8.
The insurance contract between plaintiff and defendant does not define
“damage.” As a result, the magistrate judge engaged in a lengthy analysis of
what constitutes damage, applying “the term’s ‘plain, ordinary and popular
meaning, which the ordinary and average person would understand.’ ” (Docket
70 at p. 21 (quoting Finck v. Northwest School Dist. No. 52-3, 417 N.W.2d 875,
877 (S.D. 1988)). The magistrate judge found damage meant “physical harm
caused to something in such a way as to impair its value, usefulness, or normal
function, commonly associated as causing unwelcome and detrimental effects.”
Id. at p. 21 (internal quotation marks and citations omitted).
Based on this definition of damage, the magistrate judge concluded the
hotel’s roof was damaged, even if the damage did not affect the overall
functionality of the roof. Id. The magistrate judge also concluded the preexisting condition of the roof was not the basis for defendant’s denial of the
claim. This conclusion was based on the fact defendant “ordered [Chris]
Shopshear to prepare a repair estimate for twenty-five percent of the left upper
3

The court notes “American States did not exclude coverage for the roof
because of pre-existing conditions when it issued its policy of insurance.”
(Docket 56-2 at 10; 9:9-12).
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slope of the roof, the gable and trim, and the air conditioning condenser unit
fins. . . .” Id. at p. 23. The magistrate judge found defendant failed to present
evidence showing “the condition of the roof was so bad prior to the hail storm
that it could not be further damaged as a result of the hail storm.” Id.
The court concludes the magistrate judge properly found the August 3,
2010, hail storm caused damage. Defendant’s argument that the hail damage
was barely visible and de minimus compared to the pre-existing condition of the
roof is disingenuous. Even accepting as true that the pre-existing condition of
the roof was not repaired as asserted by plaintiff,4 the court finds defendant has
not produced evidence showing no damage existed at all. Defendant’s position is
flatly contradicted by defendant’s own action in writing a repair estimate which
can only be interpreted as indicating defendant believed the roof was damaged
beyond its pre-existing condition. Defendant’s objection is overruled and the
court adopts the portion of the recommendation related to this objection.
b.

Xactimate Estimate

Defendant argues the magistrate judge erred by “misunderstanding the
methodology and process related to the Xactimate estimate.” (Docket 74 at p. 1).
The magistrate judge found the estimate given by defendant to repair the

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“[Rory[ Maynard testified that any inadequacies stemming from Mr.
Winter’s 2009 installation of the hotel’s roof had been sufficiently remedied
prior to the August 3, 2010 hail storm.” (Docket 70 at p. 23) (citing Docket 482, at pp. 9-15).
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damaged portions of the roof “was inaccurate and insufficient to cover the costs”
of the repairs. (Docket 70 at p. 26). Defendant asserts the magistrate judge
“determined that American States’ refusal to pay Lead GHR’s demand for full roof
replacement should be considered a breach, even in light of Lead GHR’s refusal
to settle for anything less than full roof replacement.” (Docket 74 at p. 10)
(emphasis in original). The court disagrees with defendant’s interpretation.
As discussed at length in the recommendation, Mr. Shopshear’s estimate
generated using the Xactimate software was not accurate. Mr. Shopshear
testified during his deposition he knew the estimate was low. (Docket 56-10 at
pp. 63-65, 67).
For example, Mr. Shopshear quoted a $17 additional
charge for the removal and replacement of a high roof
(roofs of two stories or greater) despite having knowledge
that such an amount was an insufficient sum to pay for
such work.
Mr. Shopshear further estimated an
equipment operator cost of $40 per hour, despite the fact
that it cost him $69.50 per hour for an operator when he
inspected the roof only two to three weeks earlier.
(Docket 70 at p 26) (internal citations omitted). “[Tim] Strasser, in the Haag
Report, also found damage on sections of the [hotel] roof’s east-facing slope,
which may not have been included in Mr. Shopshear’s estimate.” Id. at p. 27.

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Defendant argues Mr. Shopshear was not authorized to change the
estimate as quoted by the Xactimate software. Peter Hildebrand, American
States’ retained expert testified:
[Insurance Adjusters] are not allowed to adjust . . . the
amount of any estimate if justified. The custom and
practice is to prepare an initial estimate and then discuss
whether any adjustments are necessary based upon
something unique to the loss.
(Docket 74 at p. 11). However, this testimony is contradicted by the testimony of
Ron Erion, an independent contractor, who testified that he had never been told
by American States he could not independently adjust his price estimate to
correct known inaccuracies. (Docket 56-11 at p. 88).
Having reviewed the record, the court finds the magistrate judge did not
err in finding a breach of contract in part based on the inaccuracies of the
estimate using the Xactimate software. The record is clear both Mr. Shopshear
and defendant knew the estimate was low and failed to make corrections for
known inaccuracies. Defendant’s objection is overruled.
c.

Industry Practice

Defendant argues the magistrate judge failed to consider the industry
practice in determining “whether hail impacts should reasonably warrant repair
or replacement.” (Docket 74 at p. 12).
The magistrate judge was “not persuaded by the learned treatise
discussing the instances when replacement is warranted following either
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functional or cosmetic damage.” (Docket 70 at p. 25) (citing Docket 66 (Shaun E.
Gessler & Stephen E. Petty, Hail Damage and General Hail-Strike Damage
Assessment Methodology, in FORENSIC ENGINEERING: DAMAGE ASSESSMENTS FOR
RESIDENTIAL AND COMMERCIAL STRUCTURES (Stephen E. Petty ed., 2013)). The
magistrate judge found the excerpt provided by defendant “only identifie[d]
instances where there is likely sufficient damage to merit a replacement of the
covered property . . . [and did] not address what constitutes damage as a
threshold matter or even instances where covered property is cosmetically
damaged and only a ‘repair’ is required.” (Docket 70) (citing Docket 66 at pp. 78) (internal citations omitted). The magistrate found the treatise was “inapposite
at [the] stage where the inquiry is limited to whether the roof was in fact
damaged by the hail storm.” Id. at p. 25. As a result, the magistrate judge did
not consider repair or replacement in concluding the hotel roof sustained
damage and that defendant breached the contract.
In a diversity action, state law controls the interpretation of insurance
policies. Bell v. Allstate Life Ins. Co., 160 F.3d 452, 455 (8th Cir. 1998). The
South Dakota Supreme Court “has long held that custom and practice is
immaterial when a contract explicitly deals with the matter claimed to be the
subject of custom and practice.” Western States Land & Cattle Co., Inc. v.
Lexington Ins. Co., 459 N.W.2d 429, 434 (S.D. 1990). In this case, the policy
indicated defendant would indemnify plaintiff for “direct physical damage.” As

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discussed above, the August 3, 2010, hail storm caused direct physical damage
for which plaintiff was entitled to coverage. Because the insurance policy
specifically provides for compensation for direct physical damage, the court need
not consider industry practices. Furthermore, the court agrees with the
magistrate judge’s assessment of the excerpts from the treatise provided by
defendant. The treatise deals with specific instances where damage had already
been determined and the issue was whether repair or replacement was
necessary. In this case, the issue is whether the hotel’s roof sustained damage.
The court overrules defendant’s objection and finds the magistrate judge did not
err in distinguishing the treatise provided by defendant.
d.

American States’ Coverage Position

Defendant argues the magistrate judge relied “too heavily upon Plaintiff’s
contention that American States based its coverage position solely upon the lack
of ‘functional’ damage to the roof.” (Docket 74 at p. 13). The plaintiff argued,
and the magistrate judge agreed, the basis for defendant’s denial of plaintiff’s
claim was the apparent lack of “functional damage” – damage which impairs the
functionality of the hotel’s roof. (Docket 70 at p. 47).
Defendant asserts a lack of functional damage was not the sole basis for
its position and argues coverage was denied because there was neither
“functional damage” nor “perceivable damage.” (Docket 74 at pp. 13-16).
Defendant’s argument is tenuous at best. First, defendant’s own expert opined

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there was damage to the roof. Mr. Strasser, in the Haag Report, repeatedly
referenced the lack of functional damage to the hotel’s roof despite identifying
hail dents on the roof. (Docket 47-1). It is apparent Mr. Strasser believed the
roof had sustained damage, just not functional damage. Id. Defendant relied on
Mr. Strasser’s report in concluding the roof sustained no damage. Second,
although defendant contends there was no functional or cosmetic damage, it
nevertheless knowingly provided plaintiff with a low bid to cover the damaged
portions of roof and air conditioners. Finally and importantly, the term “damage”
is not defined in the policy. For the court to adopt defendant’s position would
require the court to ignore completely the plain and ordinary meaning of the
term. See Finck, 417 N.W.2d at 877.
The court finds the magistrate judge did not err in concluding defendant
denied coverage for the damage to the hotel’s roof because defendant took the
position there was no functional damage. Defendant’s objection is overruled.
e.

Legal Authority

Defendant argues the magistrate judge erred in distinguishing the cases
which it relied upon to support its argument that no breach of contract occurred.
(Docket 74 at p. 16). Defendant relied upon Mohr v. Am. Auto Ins. Co., No. 01C-3229, 2004 WL 533475 (N.D. Ill. 2004) and Eledge v. Farmers Mut. Home Ins.
Co., 571 N.W.2d 105 (Neb. Ct. App. 1997).

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The magistrate judge’s recommendation contained an analysis of both
cases. In Mohr, the plaintiff sued the insurer seeking the full replacement value
of his home’s roof after it suffered damage in a hail storm. Mohr, 2004 WL
533475 at * 2. Because of the uniqueness of the roof’s thatch-style and cedar
shingles, the replacement cost exceeded $400,000. Id. at *1. The issue in
Mohr was not whether the roof had sustained damage during the hail storm – “it
unquestionably had sustained damage” – but whether the insurer was obligated
to pay the $400,000 replacement cost. Id. at p. 12.
The issue in this case is whether the hotel’s roof sustained damage as a
result of the hail storm. Mohr does not stand for the principle that damage
caused by a hail storm does not constitute damage. Rather, Mohr stands for the
proposition that there was insufficient reduction in aesthetic value to merit a
complete roof replacement. Mohr goes to the scope of the damage, not whether
damage occurred.
The magistrate judge also discussed Eledge. The issue is Eledge was not
whether a roof sustained damage but whether the roof sustained sufficient
damage that “the only workmanlike way to repair the hail damage would be to
replace the entire roof.” Eledge, 571 N.W.2d at 112. Eledge is distinguishable
from the facts of this case because it was implicit in Eledge that the roof had
sustained damage. Here, the issue is whether in fact the hotel’s roof sustained
damage.

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The court finds the magistrate judge did not err in distinguishing Mohr
and Eledge. Defendant’s objection is overruled. The court adopts the report and
recommendation as it relates to the breach of contract issue.
2.

Source and Scope of Damages

The magistrate judge concluded “a genuine issue of material fact exists as
to whether the hotel’s roof can be partially repaired or replaced or whether it
must be fully replaced.” (Docket 70 at p. 35). The magistrate judge found Ron
Erion and Chris Shopshear, both insurance adjusters, provided conflicting
testimony regarding whether the hotel’s roof could be repaired or replaced
partially or whether the entire roof needed to be replaced. Id. at p. 31.
Mr. Erion testified at his deposition that a metal roof with hail damage
cannot be repaired and must be replaced. (Docket 56-11 at pp. 84-86, 92-94).
Mr. Erion stated his opinion that it was not acceptable to do patchwork jobs on
metal roofs and he was not aware of any repair options for “hail damage to a
metal roof.” Id. at p. 91. The basis for Mr. Erion’s testimony was that “you have
to tear the metal off” to get to the dent and there is “no other way to get under
[the roof] and take the dents out.” Id. at p. 92. Contrary to Mr. Erion’s opinions,
Mr. Shopshear testified in his deposition that a damaged metal roof can be
restored by a partial replacement of the damaged sections. (Docket 56-10 at pp.
54-55, 68-69).

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Based on this conflicting testimony, the magistrate judge concluded an
issue of material fact exists regarding whether the roof could be partially repaired
or replaced or whether the entire roof needed to be replaced. (Docket 70 at p.
35).
Defendant argues Mr. Erion’s testimony “did not preclude the possibility of
partial roof replacement—and in fact, actually states that partial replacement is
indeed appropriate ‘depending on the directional and the wind and everything.’ ”
(Docket 74 at p. 22). In making this argument, defendant relies on Mr. Erion’s
testimony that partial replacement of a roof was feasible when the entire roof was
not damaged. Mr. Erion testified:
Typically if I have -- you know, you’re going to have two
slopes. You’re going to have a south-facing slope and in
this case a north-facing slope on the upper roof. There’s
a chance that only one slope up there would have damage
from hail, depending on the directional and the wind and
everything. The lower level, now since it’s all facing the
same direction, if -- if they -- most insurance companies
have us test a 10-by-10 -- a 10 foot by 10 foot area for hail
damage. We get so many hits within that 10-by-10 test
pattern area and we do everything facing that direction, we
replace. Very typically if we get over 50 to 60 percent of
the total roof surface, then those areas that are not
possibly damaged gets replaced as well. That’s not 100
percent the case, but that’s pretty common.
(Docket 56-11 at 92-93).
The court does not believe this testimony changes Mr. Erion’s opinion that
partial roof replacement is not acceptable. Mr. Erion was referring to replacing
an entire slope of a roof, not merely patching small portions of a metal roof. The
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court finds the conflicting opinions of Mr. Erion and Mr. Shopshear create a
genuine issue of material fact regarding whether full replacement of the hotel’s
roof is necessary or whether partial replacement or repair is sufficient.
Defendant’s objection is overruled.
3.

Bad-Faith

As discussed above, Mr. Strasser’s report indicates the hotel’s roof
sustained hail damage but that its ability to function properly was not impaired.
Defendant relied on Mr. Strasser’s report in reaching its determination that the
hotel’s roof did not sustain any type of damage. This position is supported by
American States’ chosen representative Jon Clone, who stated “[i]f there’s no
functional damage to the roof, we do not pay for the replacement or repairs to
the roof.” (Docket 56-2 at p. 30). However, the insurance policy does not
distinguish between types of damage. The term “damage” is not defined
anywhere in the insurance contract and must be interpreted using its plain and
ordinary meaning. See Finck, 417 N.W.2d at 877.
As a result, the magistrate judge concluded “a reasonable jury could find
that American States’ denial of coverage based on a purposed lack of functional
damage to be an unreasonable basis on which to deny coverage under the
insurance policy.” (Docket 70 at p. 48). The magistrate judge also found
“American States’ representation that Mr. Strasser’s report indicated a lack of
any damage is unsupported by the contents of his report, and for American

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States to re-characterize it as such could cause a reasonable jury to find that
American States exhibited a reckless disregard for its obligations under the
insurance policy.” Id. at pp. 48-49 (emphasis in original).
In addition to defendant’s reliance of Mr. Strasser’s report and its
interpretation of what constitutes “damage,” the magistrate judge also found the
“circumstances surrounding Mr. Shopshear’s examination of the hotel also [gave]
rise to concerns for his independence and, by extension, the reasonableness of
America States’ investigation of Lead GHR’s hail claim.” Id. at p. 49. This
conclusion was based in part on Mr. Shopshear admitting he does what the
insurer wants him to do and that “the insurance company calls the shots on
repair.” (Docket 56-10 at pp. 42, 60).
The magistrate judge concluded a genuine issue of material fact exists
regarding the reasonableness of the process by which defendant investigated
plaintiff’s hail claim. (Docket 70 at pp. 45-51).
Defendant contends the magistrate judge erred by concluding defendant
denied coverage based on the lack of functional damage to the hotel’s roof. The
court already resolved this objection, finding the magistrate judge did not err in
finding defendant denied coverage because of a lack of functional damage.
Defendant also objects to the magistrate judge finding an issue of material
fact regarding the level of control American States’ may have exerted over Mr.
Shopshear and his investigation of the hail claim. Defendant asserts Mr.

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Shopshear inspected the roof on two separate occasions without any supervision
or instruction by American States and denies Mr. Shopshear was influenced by
American States. (Docket 74 at p. 24).
Having reviewed the record, the court finds there are issues of material
fact related to whether American States’ denial of plaintiff’s claim was reasonable
or reckless, and whether the process American States’ used in investigating
plaintiff’s claim was reasonable.
As discussed above, it is for a jury to decide whether American States’
interpretation of the term “damage” was reasonable given Mr. Strasser’s report
indicating hail damage existed but the damage did not affect the functionality of
the roof. This is particularly true when one considers the term “damage” is not
defined in the insurance policy. Whether American States’ refusal to pay based
on a finding of no functional damage is reasonable or was done in reckless
disregard of its obligation under the insurance policy is a question for the jury.
Similarly, the court finds an issue of material fact exists regarding whether
the process used by American States to investigate the plaintiff’s hail claim was
reasonable. Mr. Shopshear testified he does whatever his client wants him to do.
In this case, Mr. Shopshear readily accepted American States recommended
suggestions for repair and then wrote an estimate for that repair. There is a
question of fact as to the level of Mr. Shopshear’s independence. The court
agrees with the magistrate judge that “[a] reasonable jury could find that

16

America States acted without a reasonable basis in denying [plaintiff’s] claim on
the basis of Mr. Shopshear’s examination and price estimate.” (Docket 70 at p.
50).
The court finds the report and recommendation is an accurate and
thorough recitation of the facts and applicable case law. Defendant’s objection is
overruled.
4.

Punitive Damages

“Because American States denied coverage on the basis that hail damage
must also impair the roof’s functionality before it was required to pay a claim
under the insurance policy and because the accuracy and independence of Mr.
Shopshear’s estimates are questionable,” the magistrate judge concluded
plaintiff’s request for punitive damages should be placed before a jury. (Docket
70 at p. 52) (internal citations omitted).
Punitive damages are available “[i]n any action for the breach of an
obligation not arising from contract, where the defendant has been guilty of
oppression, fraud, or malice, actual or presumed.” SDCL § 21-3-2 (2014). “An
insurer’s clear breach of contract or denial of a claim that is not fairly debatable
may indicate malice.” Bertelsen v. Allstate Ins. Co., 796 N.W.2d 685, 699 (S.D.
2011) (citations omitted).
For the same reasons as discussed above in relation to the bad-faith claim,
the court finds a genuine issue of material fact exists regarding whether

17

American States’ interpretation of the insurance policy and its denial of the claim
was reasonable or reckless. The court finds an issue of material fact also exists
regarding whether American States’ investigation of the hail claim through Mr.
Shopshear was reasonable. Defendant’s objection is overruled.
ORDER
Based on the above analysis, it is hereby
ORDERED that defendant’s objections (Docket 74) to the report and
recommendation are overruled.
IT IS FURTHER ORDERED that the report and recommendation
(Docket 70) is adopted in full in accordance with the analysis above.
IT IS FURTHER ORDERED that plaintiff’s motion for partial summary
judgement (Docket 53) is granted in part and denied in part. The court grants
the motion on the breach of contract claim by holding that American States
Insurance Company breached the insurance contract. The court denies the
motion on the breach of contract claim as to damages.
IT IS FURTHER ORDERED that defendant’s motion for summary judgment
or partial summary judgment (Docket 44) is denied.
Dated September 30, 2014.
BY THE COURT:
/s/ Jeffrey L. Viken
JEFFREY L. VIKEN
CHIEF JUDGE

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