Spring Glen Apartments LLP v. Arch Specialty Insurance Company

UNITED 	STATES 	DISTRICT 	COURT
DISTRICT 	OF NORTH 	DAKOTA
SPRING 	GLEN APARTMENTS 	LLP,
Plaintiff,
V.
ARCH 	SPECIALTY 	INSURANCE 	COMPANY,
Defendant.
CIVIL ACTION
No. 	3:17-00028-WGY-ARS
YOUNG, 	D.J.i 	April 	2, 	2018
MEMORANDUM AND ORDER
I. 	INTRODUCTION
Spring 	Glen Apartments 	LLP 	(''Spring 	Glen") 	brought 	this
action 	against 	Arch 	Specialty 	Insurance 	Company 	("Arch")
alleging 	breach 	of 	contract 	and 	bad 	faith 	in 	connection with
Arch's 	denial 	of 	Spring 	Glen's 	claim under 	an 	insurance 	policy
issued by Arch. 	The 	parties 	now 	cross-move 	for 	summary
judgment.
A. 	Procedural 	History
On February 	7, 	2017, 	Spring 	Glen 	filed 	a 	complaint 	in 	this
Court 	under 	its 	diversity 	jurisdiction 	alleging 	breach 	of
insurance 	contract 	and 	seeking 	insurance 	coverage 	for 	property
1 Of 	the 	District 	of Massachusetts, 	sitting 	by 	designation
See 	ECF 	No. 	19.
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damage 	and 	loss 	of 	business 	income. 	Compl. 	(^^Compl."), 	ECF No.
1, 	S[ 	1. 	Spring 	Glen 	also 	seeks 	consequential 	damages,
attorneys' 	fees, 	and 	other 	damages 	caused by Arch's 	alleged 	bad-
faith 	denial 	of 	coverage. 	Id. 	On 	April 	28, 	2017, 	Spring 	Glen
moved 	for 	partial 	summary 	judgment 	on 	its 	breach 	of 	contract
claim. 	See 	Pl.'s 	Mot. 	Partial 	Summ. 	J. 	{"Pl.'s 	Mot."), 	ECF 	No.
9; 	Pl.'s 	Mem. 	Supp. 	Pl.'s 	Mot. 	Partial 	Summ. 	J. 	(^^Pl.'s 	Mem."),
ECF No. 	10. 	Arch 	cross-moved 	for 	summary 	judgment 	on 	both
counts. 	See 	Def.'s 	Mot. 	Summ. 	J. 	(^^Def.'s 	Mot."), 	ECF No. 	12;
Def.'s 	Mem. 	Opp'n. 	Pl.'s 	Mot. 	Partial 	Summ. 	J. 	& Mem. 	Supp.
Def.'s 	Mot. 	Summ. 	J. 	(''Def.'s 	Mem."), 	ECF No. 	13. 	The 	parties
jointly 	filed 	a 	stipulation 	of 	facts. 	Stip. 	Facts 	("Stip.
Facts"), 	ECF No. 	8. 	This 	Court 	heard 	oral 	argument 	on 	the
motions 	on 	February 	20, 	2018, 	and 	it 	took 	the 	matter 	under
advisement. 	Min. 	Entry, 	ECF No. 	23.
B. 	Undisputed Facts
Spring 	Glen 	is 	a 	North 	Dakota 	limited 	liability partnership
that 	owns 	an 	apartment 	building 	(the 	"Building") 	in 	North
Dakota. 	Stip. 	Facts 	1. 	The 	Building was 	covered 	under 	a 	policy
(the 	"Policy") 	issued by Arch, 	an 	insurance 	company 	incorporated
in 	Missouri 	with 	a 	principal 	place 	of 	business 	in New 	Jersey.
Id. 	at 	1-3.
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1. 	Spring Glen's 	Claim
On 	March 	14, 	2016, 	while 	the 	Policy was 	in 	effect, 	seven 	to
ten 	inches 	of 	water 	flooded 	the 	^'lower 	floor 	of 	the 	Building."
Stip. 	Facts 	1-2. 	The 	flooding 	occurred 	when 	an 	underground
water main 	(the 	'^Pipe") 	cracked. 	Id. 	The 	Pipe, 	which 	serviced
the 	Building, 	was 	located 	roughly 	seven 	feet 	below 	the 	Building
and 	was 	over 	forty 	years 	old. 	Id. 	at 	1. 	The 	crack 	in 	the 	Pipe
was 	caused 	entirely by 	wear 	and 	tear. 	Id. 	at 	2. 	The 	water 	not
only 	caused 	damage 	to 	the 	"lower 	floor" 	but 	also 	caused 	cracking
in 	the 	walls 	and 	ceilings 	of 	upper 	floors 	that 	housed 	apartments
(together, 	the 	"Property 	Damage"). 	Id. 	The 	Property 	Damage
rendered 	the 	Building 	untenantable 	until 	repaired, 	causing
Spring 	Glen 	to 	sustain 	a 	loss 	of 	business 	income 	(the 	"Business
Losses"). 	Id.
Spring 	Glen 	filed 	an 	insurance 	claim with Arch 	for 	the
Property 	Damage 	and 	Business 	Losses. 	Id. 	at 	4. 	Arch 	denied
Spring 	Glen's 	claim 	in 	letters 	dated May 	17, 	2016, 	June 	3, 	2016,
and 	June 	8, 	2016. 	Id.
2. 	The 	Policy
The 	Policy 	contains 	three 	forms 	relevant 	to 	this 	action:
Policy 	Declarations 	(the 	"Declarations"), 	a 	Building 	and
Personal 	Property Coverage 	Form 	(the 	"Property Coverage 	Form"),
and 	a 	Causes 	of 	Loss 	— 	Special 	Form 	(the 	"Causes 	of 	Loss
Form"). 	Ins. 	Policy 	("Ins. 	Policy") 	16, 	18, 	34, 	43, 	ECF No. 	8-
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1. 	The 	Declarations 	indicate 	that 	the 	Policy 	covers 	both 	the
Building 	itself 	and 	business 	income 	from 	the 	Building. 	Id. 	at
16-17. 	In 	the 	'''Covered Causes 	of 	Loss" 	section 	of 	the
Declarations, 	the 	Policy 	states 	"Special." 	Id.
The 	Property Coverage 	Form 	states 	that 	the 	Policy 	covers
"direct 	physical 	loss 	of or 	damage 	to 	Covered 	Property 	at 	the
premises 	described 	in 	the 	Declarations 	caused by 	or 	resulting
from 	any 	Covered Cause 	of 	Loss." 	Id. 	at 	18. 	The 	Policy 	defines
"Covered 	Property" 	as 	including 	"the 	building 	or 	structure
described 	in 	the 	Declarations," 	which, 	as 	described 	above, 	is
the 	Building. 	Id. 	The 	Policy 	defines 	"Covered 	Cause 	of 	Loss"
as 	"direct 	physical 	loss 	unless 	the 	loss 	is 	excluded 	or 	limited
in 	[the] 	policy." 	Id. 	at 	43.
The 	Causes 	of 	Loss 	Form, 	which 	pertains 	to 	"Special" 	causes
of 	loss, 	contains 	various 	lists 	of 	causes 	that 	are 	excluded 	from
coverage. 	Id. 	Section 	B(l) 	of 	the 	Causes 	of 	Loss 	Form 	sets
forth 	one 	such 	list, 	stating: 	"We 	will 	not 	pay 	for 	loss 	or
damage 	caused 	directly 	or 	indirectly by 	any 	of 	the 	following.
Such 	loss 	or 	damage 	is 	excluded 	regardless 	of 	any 	other 	cause 	or
event 	that 	contributes 	concurrently 	or 	in 	any 	sequence 	to 	the
loss." 	Id. 	(emphasis 	added). 	One of 	the 	excluded 	causes 	listed
is 	water 	(the 	"Water 	Exclusion"). 	I^ at 	44. 	The 	Water
Exclusion 	excludes 	coverage, 	in 	pertinent 	part, 	for:
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Id.
(3) 	Water 	that 	backs 	up 	or 	overflows 	or 	is 	otherwise
discharged 	from 	a 	sewer, 	drain, 	sump, 	sump pump 	or
related 	equipment; 	(4) 	Water 	under 	the 	ground 	surface
pressing 	on, 	or 	flowing 	or 	seeping 	through: 	(a)
Foundations, 	walls, 	floors 	or 	paved 	surfaces; 	(b)
Basements, 	whether 	paved 	or 	not; 	or 	(c) 	Doors, 	windows
or 	other 	openings.
The 	Water 	Exclusion 	''applies 	regardless 	of 	whether 	any" 	of
the 	listed 	causes 	"is 	caused by 	an 	act 	of 	nature 	or 	otherwise
caused." 	Id. 	The 	Water 	Exclusion 	also 	includes 	an 	"ensuing
loss 	provision," 	which 	states 	that 	"if 	any 	of 	the 	above 	[causes]
results 	in 	fire, 	explosion 	or 	sprinkler 	leakage, 	we 	will 	pay 	for
the 	loss 	or 	damage 	caused by 	that 	fire, 	explosion 	or 	sprinkler
leakage." 	Id.
Section 	3(2) 	of 	the 	Causes 	of 	Loss 	Form 	lists 	additional
exclusions, 	including 	"loss 	or 	damage 	caused 	by 	or 	resulting
from. 	. 	. 	[w]ear 	and 	tear" 	(the 	"Wear 	and 	Tear 	Exclusion"). 	Id.
at 	45. 	Later, 	it 	states, 	"[b]ut 	if 	an 	excluded 	cause 	of 	loss
[listed 	in 	this 	subsection] 	results 	in 	a 	'specified 	cause 	of
loss*' 	... 	we 	will 	pay 	for 	the 	loss 	or 	damage 	caused by 	that
'specified 	cause 	of 	loss.'" 	Id. 	(emphasis 	added).
In 	the 	Definitions 	section 	of 	the 	Causes 	of 	Loss 	Form,
"specified 	causes 	of 	loss" 	is 	defined, 	in 	part, 	as 	"water
damage." 	Id. 	at 	52. 	"Water 	damage" 	is 	defined 	as:
(1) 	Accidental 	discharge 	or 	leakage 	of 	water 	... 	as
the 	direct 	result 	of 	the 	breaking 	apart 	or 	cracking 	of
a 	plumbing, 	heating, 	air 	conditioning 	or 	other 	system
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or 	appliance 	(other 	than 	a 	sump 	system including 	its
related 	equipment 	and 	parts), 	that 	is 	located on 	the
described premises 	. 	. 	. 	and 	(2) 	Accidental 	discharge
or 	leakage 	of 	water 	... 	as 	the 	direct 	result 	of 	the
breaking 	apart 	or 	cracking 	of 	a 	water 	or 	sewer 	pipe
that 	is 	located 	off 	the 	described 	premises 	and 	is 	part
of 	a 	municipal 	potable 	water 	supply 	system 	. 	. 	. 	if
the 	breakage 	or 	cracking 	is 	caused 	by 	wear 	and 	tear.
Id. 	(emphasis 	added). 	The 	Definitions 	section 	then 	explains:
But 	water 	damage 	does 	not 	include 	loss 	or 	damage
otherwise 	excluded 	under 	the 	terms 	of 	the 	Water
Exclusion. 	... 	To 	the 	extent 	that 	accidental
discharge 	or 	leakage 	of 	water 	falls 	within 	the
criteria 	set 	forth 	[above]. 	. 	such 	water 	is 	not
subject 	to 	the 	provisions 	of 	the 	Water 	Exclusion 	which
preclude 	coverage 	for 	surface 	water 	or 	water 	under 	the
surface 	of 	the 	ground.
Id. 	(emphasis 	added).
II. 	ANALYSIS
The 	parties 	ask 	this 	Court 	to 	decide 	whether 	the 	damages
were 	caused 	by 	or 	resulted 	from 	a 	Covered Cause 	of 	Loss. 	Pl.'s
Mem. 	1; 	Def.'s 	Mem. 	2. 	The 	parties 	disagree 	as 	to: 	(1) 	whether
the 	cracked 	Pipe, 	which 	caused 	water 	to 	enter 	the 	Building, 	is 	a
Covered Cause 	of 	Loss 	under 	the 	Policy, 	and 	(2) 	whether 	the
question 	of 	Arch's 	acting 	in 	bad 	faith 	is 	proper 	for 	summary
judgment. 	Pl.'s 	Mem. 	1; 	Def.'s 	Mem. 	2, 	18. 	The 	Court 	concludes
that 	the 	cracked 	Pipe 	is 	a 	Covered Cause 	of 	Loss 	under 	the
Policy 	and 	that 	whether 	Arch 	acted 	in 	bad 	faith 	is 	a 	question 	of
fact. 	Therefore, 	the 	Court 	denies 	Arch's 	motion 	for 	summary
judgment 	on 	Counts 	One and 	Two, 	and 	grants 	Spring 	Glen's 	motion
for 	summary 	judgment 	on 	Count 	One.
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A. 	Standard of Review
A party 	is 	entitled 	to 	summary 	judgment 	when 	there 	exists
"no 	genuine 	dispute 	as 	to 	any material 	fact." 	Fed. 	R. 	Civ. 	P.
56(a); 	Anderson 	v. 	Liberty 	Lobby, 	Inc., 	477 	U.S. 	242, 	248
(1986); 	Matsushita 	Elec. 	Indus. 	Co. 	v. 	Zenith 	Radio 	Corp., 	475
U.S. 	574, 	585-86 	(1986). 	The moving 	party must 	demonstrate 	to
the 	court 	that 	due 	to 	the 	lack 	of 	disputed 	facts, 	the 	court
ought 	enter 	"judgment 	as 	a 	matter 	of 	law" 	in 	the 	moving 	party's
favor. 	Fed. 	R. 	Civ. 	P. 	56(a); 	Reeves 	v. 	Sanderson 	Plumbing
Products, 	Inc., 	530 	U.S. 	133, 	150-51 	(2000); 	Celotex 	Corp. 	v.
Catrett, 	477 	U.S. 	317, 	322-23 	(1986). 	"Where 	the 	unresolved
issues 	are 	primarily 	legal 	rather 	than 	factual, 	summary 	judgment
is 	particularly appropriate." 	Mansker 	v. 	TMG 	Life 	Ins. 	Co., 	54
F.3d 	1322, 	1326 	(8th 	Cir. 	1995).
B. 	Breach of 	Contracb
Insurance 	policy 	interpretation 	is 	matter 	of 	law. 	Fisher
V. 	American 	Family Mut. 	Ins. 	Co., 	579 	N.W.2d 	599, 	602 	(N.D.
1998). 	Since 	insurance 	policies 	are 	contracts, 	substantive 	law
applies. 	Centre 	Ins. 	Co. 	v. 	Blake, 	370 	F. 	Supp. 	2d 	951, 	954
(D.N.D. 	2005). 	Therefore, 	North 	Dakota 	law 	applies 	in 	this
case. 	National 	Union 	Fire 	Ins. 	Co. 	of 	Pittsburgh 	v. 	Terra
Indus., 	Inc., 	346 	F.3d 	1160, 	1164 	(8th 	Cir. 	2003) 	("State 	law
governs 	the 	interpretation 	of 	insurance 	policies.").
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In 	North 	Dakota, 	courts 	^'construe 	insurance 	contracts 	as 	a
whole 	to 	give 	meaning 	and 	effect 	to 	each 	clause, 	if 	possible."
Ziegelmann 	v. 	TMG 	Life 	Ins. 	Co., 	607 	N.W.2d 	898, 	900 	(N.D.
2000). 	Though 	courts 	"regard 	insurance 	policies 	as 	adhesion
contracts 	and 	resolve 	ambiguities 	in 	favor 	of 	the 	insured,
[courts] 	will 	not 	rewrite 	a 	contract 	... 	if 	the 	policy
unambiguously 	precludes 	coverage." 	Id. 	at 	900. 	Therefore,
courts 	"look 	first 	to 	the 	language 	of 	the 	insurance 	contract,
and 	if 	the 	policy 	language 	is 	clear 	on 	its 	face, 	there 	is 	no
room 	for 	construction." 	Id. 	{citing Martin 	v. 	Allianz 	Life 	Ins.
Co. 	of 	North America, 	573 	N.W.2d 	823 	(N.D. 	1998)).
A plaintiff 	bears 	the 	initial 	burden 	of 	proving 	that 	the
damages 	it 	sustained 	are 	covered by 	the 	insurance 	policy.
Kasper 	v. 	Provident 	Life 	Ins. 	Co., 	285 	N.W.2d 	548, 	554 	(N.D.
1979). 	The 	burden 	then 	shifts 	to 	the 	defendant 	to 	prove 	that
those 	damages 	fall 	within 	an 	exclusion 	to 	the 	policy. 	Id.
Should 	a 	court 	uncover 	any 	ambiguous 	terms 	within 	the 	policy,
the 	meaning 	of 	those 	terms 	ought 	be 	interpreted 	in 	favor 	of 	the
insured. 	Dundee 	Mut. 	Ins. 	Co. 	v. 	Marifjeren, 	587 	N.W.2d 	191,
194 	(N.D. 	1998)(citing 	Fisher 	v. 	American 	Family Mut. 	Ins., 	579
N.W.2d 	599, 	602 	(N.D. 	1998)). 	An ambiguous 	policy term 	is
interpreted 	"to mean what 	a 	reasonable 	person 	in 	the 	position 	of
the 	insured would 	think 	it 	meant." 	Id. 	(quoting 	Sellie 	v. 	North
Dakota 	Ins. 	Guar. 	Ass^n, 	494 	N.W.2d 	151, 	157 	(N.D. 	1992)).
8
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Therefore, 	if 	an 	ambiguous 	^^term 	supports 	an 	interpretation
imposing 	liability 	on 	the 	insurer 	and 	one 	that 	does 	not,
[courts] 	will 	adopt 	the 	interpretation 	imposing 	liability."
Dundee, 	587 	N.W.2d 	at 	194.
Here, 	in 	order 	for 	the 	Policy 	to 	provide 	coverage, 	there
must 	be 	damage 	to 	Covered 	Property 	and 	that 	damage 	must 	have
been 	caused 	by a 	Covered 	Cause 	of 	Loss. 	Ins. 	Policy 	18. 	The
first 	point—damage 	to 	Covered 	Property 	(the 	Building 	and 	the
Business 	Losses)—is 	stipulated. 	Stip. 	Facts 	2-3. 	The 	parties
dispute 	whether 	the 	Property 	Damage 	and 	Business 	Losses 	were 	due
to 	a 	Covered 	Cause 	of 	Loss. 	Pl.'s 	Mem. 	1; 	Def.'s 	Mem. 	2. 	Arch
argues 	the 	Water 	Exclusion 	applies, 	thus 	negating 	coverage 	for
any 	of 	the 	damages 	sustained 	from 	water 	leaking 	out 	of 	the
cracked 	Pipe. 	Def.'s 	Mem. 	6. 	Spring 	Glen 	argues 	the 	Water
Exclusion 	does 	not 	apply 	in 	this 	case 	and, 	in 	any 	event, 	is
immaterial 	because 	the 	Wear 	and 	Tear 	Exclusion's 	specified
causes 	of 	loss 	exception 	for 	water 	damage 	applies 	to 	impose
liability 	on Arch. 	Pl.'s 	Mem. 	8; 	Pl.'s 	Reply 	Mem. 	Supp. 	Pl.'s
Mot. 	Partial 	Summ. 	J. 	and Mem. 	Opp'n. 	Def.'s 	Mot. 	Summ. 	J.
(^^Pl.'s 	Reply"), 	ECF No. 	15 	at 	3.
1. 	Water Exclusion
Arch 	argues 	that 	the 	Water 	Exclusion 	applies 	to 	Spring
Glen's 	claim and 	thus 	the 	damages 	in 	this 	case 	are 	not 	covered
by 	the 	Policy. 	Def.'s 	Mem. 	6. 	Arch 	reasons 	that 	the 	Water
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Exclusion 	applies 	here 	because 	the 	Policy 	states 	that 	it
^'applies 	regardless 	of 	whether 	any 	of 	the 	above. 	. 	. 	is 	caused
by 	an 	act 	of 	nature 	or 	is 	otherwise 	caused," 	and 	that 	''loss 	or
damage 	is 	excluded 	regardless 	of 	any 	other 	cause.Ins. 	Policy
43, 	44; 	Def.'s 	Reply Mem. 	Supp. 	Def.'s 	Mot. 	Summ. 	J. 	("Def.'s
Reply"), 	ECF 	17 	at 	2. 	According 	to 	Arch, 	the 	"otherwise 	caused"
language 	ought 	be 	interpreted 	to 	mean 	that 	any 	other 	cause 	is
immaterial. 	Def.'s 	Mem. 	8, 	10; 	Def.'s 	Reply 	2. 	Since 	this
exclusion 	applies. 	Arch 	argues, 	the 	inquiry 	ends. 	Id.
Arch 	relies 	on 	four 	out-of-circuit 	cases 	to 	demonstrate
that 	if 	a 	policy 	excludes 	a 	cause 	of 	loss, 	coverage 	is 	precluded
even 	if 	another 	cause 	of 	loss 	is 	covered. 	See 	Texas 	Renegade
Const. 	Co. 	V. 	Hartford 	Lloyd's 	Ins. 	Co., 	546 	F. 	App'x 	400 	{5th
Cir. 	2013); 	Bilotto 	v. 	Allied 	Prop. 	& Cas. 	Ins. 	Co., 	79
F.Supp.3d 	660, 	673-74 	(W.D. 	Tex. 	2015); 	Ruffin 	Rd. 	Venture 	Lot
IV 	V. 	Travelers 	Prop 	Cas. 	Co. 	of Am., 	No. 	10-cv-ll-JM(WVG), 	2011
WL 	2463291, 	at 	*4 	(S.D. 	Cal. 	June 	20, 	2011); 	Harleysville 	Ins.
Co. 	of 	N.Y. 	V. 	Potamianos 	Props., 	LLC, 	108 	A.D.3d 	1110, 	1112
2 This 	type 	of 	phrase 	is 	known 	as 	"anti-concurrent 	cause"
language, 	which 	commonly precludes 	coverage 	when 	one 	cause 	of
loss 	is 	excluded 	under 	a 	policy, 	regardless 	of 	whether 	any 	other
causes 	of 	loss 	are 	covered. 	N.D. 	Cent. 	Code. 	Ann. 	§ 	26.1-32-03;
Policy 	language 	addressing multiple 	causation, 	7 Couch 	on 	Ins. 	§
101:57. 	Arch 	does 	not 	invoke 	this 	doctrine, 	but 	through 	its
citation 	to 	other 	precedent 	supporting 	its 	argument, 	it 	appears
to 	argue 	that 	the 	"otherwise 	caused" 	language 	is 	anti-concurrent
cause 	language 	and 	thus 	precludes 	coverage. 	Def.'s 	Reply 	2.
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(N.Y. 	2013). 	In 	one 	case, 	however, 	the 	policy 	provided 	coverage
for 	a 	^'specified 	cause 	of 	loss" 	only 	if 	it 	was 	''otherwise 	a
Covered Cause 	of 	Loss." 	Ruffin 	Rd. 	Venture 	Lot 	IV, 	2011 	WL
2463291 	at 	*4. 	That 	requirement 	is 	not 	present 	in 	the 	Policy
here. 	Additionally, 	the 	other 	three 	cases 	did 	not 	involve
policies 	that 	contained 	exceptions 	imposing 	liability 	on 	the
insurance 	company. 	Texas 	Renegade 	Const. 	Co., 	546 	F. 	App'x 	at
400; 	Bilotto, 	79 	F.Supp.3d 	at 	673-74; 	Harleysville 	Ins. 	Co. 	of
N.Y., 	108 	A.D.3d 	at 	1111-12. 	Instead, 	each 	case 	relied 	on 	an
exclusion 	which 	contained 	anti-concurrent 	cause 	language, 	thus
precluding 	any 	other 	causes 	of 	loss 	that 	may have 	contributed 	to
the 	damage. 	Id.
Arch's 	argument 	that 	the 	anti-concurrent 	cause 	language 	in
the 	Water 	Exclusion 	precludes 	coverage 	in 	this 	case 	fails. 	If
Arch 	was 	correct, 	it 	would 	follow 	that 	the 	Policy's 	exception
for 	specified 	causes 	of 	loss 	under 	the 	Wear 	and 	Tear 	Exclusion
would 	always 	be 	trumped 	by 	the 	Water 	Exclusion, 	thus 	rendering
the 	entire 	exception meaningless.
2. 	Wear and Tear Exclusion
The 	parties 	agree 	that 	the 	cracked 	Pipe 	"was 	not 	caused by
freezing 	or 	by anything 	striking 	the 	Pipe; 	the 	crack was 	due 	to
wear 	and 	tear." 	Stip. 	Facts 	2 	(emphasis 	added). 	Spring 	Glen
argues 	that 	this 	fact 	compels 	the 	conclusion 	that 	the 	Wear and
Tear 	Exclusion 	is 	applicable 	and, 	as 	a 	result, 	that 	the 	Wear 	and
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Tear 	Exclusion's 	exception 	for 	specified 	causes 	of 	loss 	applies
to 	impose 	liability 	on Arch. 	Ins. 	Policy 	45, 	52; 	Pl.'s 	Reply 	3.
The 	Court 	agrees.
"Wear 	and 	tear" 	is 	one 	of 	the 	causes 	of 	loss 	that 	is
excluded 	from 	coverage 	under 	the 	Policy. 	Ins. 	Policy 	45. 	The
exclusion, 	however, 	states 	that 	if 	wear 	and 	tear 	"results 	in 	a
^specified 	cause 	of 	loss'. 	. 	. 	[Arch 	will 	cover] 	the 	loss 	or
damage 	caused by 	that 	^specified 	cause 	of 	loss.'" 	Id. 	The
Policy 	defines 	"specified 	causes 	of 	loss," 	in 	part, 	as 	"water
damage." 	Id. 	at 	52. 	Water 	damage 	is 	then 	defined, 	in 	part, 	as
"[a]ccidental 	discharge 	or 	leakage 	of 	water. 	. 	. 	as 	the 	direct
result 	of 	the. 	. 	. 	cracking 	of 	a 	water 	or 	sewer 	pipe 	that 	is
located 	off 	the 	described 	premises. 	. 	. 	if 	the 	breakage 	or
cracking 	is 	caused by 	wear 	and 	tear." 	Id. 	The 	leaking 	water
leading 	to 	the 	damage 	in 	this 	case 	was due 	to 	the 	circumstances
explicitly provided 	for 	in 	the 	water 	damage definition.
Therefore, 	the 	water 	is 	"not 	subject 	to 	the 	provisions 	of 	the
Water 	Exclusion." 	Id. 	The 	Court 	thus 	concludes 	that 	the 	Policy
unambiguously 	provides 	coverage 	for 	damage 	caused 	in 	a 	situation
such 	as 	this 	one 	and 	imposes 	liability 	on Arch.
Arch 	provides 	three 	main 	counterarguments 	to 	this 	position.
First, 	Arch 	argues 	that 	the 	Water 	Exclusion 	only 	provides
coverage 	when 	there 	is 	an 	"ensuing 	loss" 	(specifically, 	a 	fire,
explosion, 	or 	sprinkler 	leakage). 	Def.'s 	Mem. 	7-9. 	Since 	the
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Water 	Exclusion 	does 	not 	provide 	a 	similar 	exception 	for
^'specified 	causes 	of 	loss," 	Arch 	asserts, 	the 	definition 	of
^^specified 	causes 	of 	loss," 	which 	in 	turn 	contains 	the
definition 	of 	^'water 	damage," 	cannot 	impose 	liability. 	Def.'s
Mem. 	8-9; 	Ins. 	Policy 	44. 	This 	assertion 	is, 	in 	part, 	true.
Whereas 	other 	exclusions, 	such 	as 	the 	^'Tungus', 	Wet 	Rot, 	Dry
Rot 	And 	Bacteria" 	Exclusion, 	state 	that 	such 	damage 	is 	excluded
unless 	it 	results 	in 	a 	'^specified 	cause 	of 	loss," 	Ins. 	Policy
44-45, 	the 	Water 	Exclusion 	does 	not 	provide 	an 	exception 	for
^^specified 	causes 	of 	loss." 	Ins. 	Policy 	44. 	Arch's 	continued
focus 	on 	the 	Water 	Exclusion, 	however, 	ignores 	that 	the 	Wear 	and
Tear 	Exclusion's 	ensuing 	loss 	provision 	does 	provide 	coverage
for 	specified 	causes 	of 	loss. 	Ins. 	Policy 	45, 	52.
Second, 	Arch 	argues 	that 	the 	Wear 	and 	Tear 	Exclusion 	does
not 	apply because 	it 	did 	not 	deny 	coverage 	under 	that 	exclusion;
it 	denied 	coverage 	under 	the 	Water 	Exclusion, 	and 	according 	to
Arch, 	the 	anti-concurrent 	cause 	language 	prevents 	Spring 	Glen
from 	recovering 	under 	any 	other 	exclusion. 	Def.'s 	Mem. 	10.
Arch 	argues 	that 	''the 	Pipe 	is 	not 	Covered 	Property" 	and 	thus
"the 	Policy's 	coverage 	grants 	and 	exclusions 	do 	not 	apply 	to 	the
Pipe." 	Id. 	Spring 	Glen may not 	be 	able 	to 	claim coverage 	for
the 	repair 	of 	the 	actual 	Pipe, 	but 	it 	does 	not 	appear 	that 	the
Policy 	requires 	that 	the 	Pipe 	be 	Covered 	Property 	in 	order 	for
the 	Wear 	and 	Tear 	Exclusion 	to 	apply. 	Even 	if 	it 	did, 	however.
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Arch 	fails 	to 	explain why 	the 	Policy would 	specifically provide
coverage 	for 	water 	damage 	caused by 	''the 	breaking 	apart 	or
cracking 	of 	a 	water 	or 	sewer 	pipe 	that 	is 	located 	off 	the
described 	premises 	... 	if 	the 	breakage 	or 	cracking 	is 	caused
by 	wear 	and 	tear." 	Ins. 	Policy 	52.
Spring 	Glen 	uses 	an 	analogy 	to 	explain 	its 	position: 	"[T]he
fact 	that 	semi-trucks 	are 	generally 	not 	Covered 	Property 	. 	. 	.
does 	not 	mean 	that 	the 	Policy does 	not 	pay 	for 	the 	direct
physical 	loss 	to 	the 	Building when 	a 	semi-truck 	crashes 	into
it." 	Pl.'s 	Mem. 	11. 	Arch 	responds 	that, 	in 	that 	case, 	the
Building 	is 	the 	Covered 	Property 	and 	the 	semi-truck 	is 	a 	Covered
Cause 	of 	Loss, 	whereas 	here, 	the 	Building 	is 	Covered 	Property
but 	underground 	water 	is 	not 	a 	Covered 	Cause 	of 	Loss. 	Def.'s
Mem. 	11. 	This 	argument, 	while 	seemingly 	accurate, 	misses 	the
point 	of 	Spring 	Glen's 	hypothetical. 	Spring 	Glen 	uses 	this
hypothetical 	to 	argue 	that 	if 	tangible 	property 	(i.e., 	a 	semi-
truck 	or 	a 	municipal 	pipe, 	as 	opposed 	to 	fire 	or 	wind) 	leads 	to
a 	Covered 	Cause 	of 	Loss 	(i.e., 	a 	building's 	collapse 	due 	to 	the
semi-truck's 	crash 	or 	water 	damage 	due 	to 	a 	cracked municipal
pipe), 	that 	tangible 	property 	need 	not 	be 	Covered 	Property 	under
the 	Policy 	in 	order 	for 	the 	Policy 	to 	provide 	coverage 	for 	the
damage 	it 	may 	cause. 	Pl.'s 	Mem. 	11. 	Spring 	Glen 	is 	right; 	the
Policy 	does 	not 	impose 	such 	a 	requirement.
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Arch 	relies 	on 	two 	out-of-circuit 	cases, 	General 	Acc. 	Ins.
Co. 	V. 	Unity/Waterford-Fair Oaks 	Ltd., 	288 	F.3d 	651 	(5th 	Cir.
2002), 	and 	Praetorian 	Ins. 	Co. 	v. 	Arabia 	Shrine 	Ctr, 	Houston,
Civil 	Action 	No. 	4:14-cv-3281, 	2016 	WL 	687564 	(S.D. 	Tex. 	Feb.
19, 	2016), 	appeal 	dismissed 	(Sept. 	27, 	2016), 	to 	support 	its
position 	that 	the 	Wear 	and 	Tear 	Exclusion 	cannot 	apply 	since 	the
Pipe 	is 	not 	Covered 	Property. 	Def.'s 	Mem. 	11-16. 	These 	cases
are 	not 	relevant, 	however, 	because 	they 	do 	not 	involve 	policies
that 	provide 	coverage 	specifically 	for 	municipal 	pipes 	that
crack 	due 	to 	wear 	and 	tear 	and 	lead 	to 	water 	damage.
In General 	Accident 	Ins. 	Co., 	the 	plaintiffs 	relied 	on
similar 	clauses 	in 	the 	insurance 	policy 	to 	recover 	for 	damages
caused by 	water 	seeping 	out 	of 	a 	pipe 	for 	one 	to 	six months 	due
to 	corrosion 	or 	rust. 	288 	F.3d 	at 	655. 	The 	court 	denied
coverage 	primarily based 	on 	the 	clear 	exclusion 	for 	''loss 	or
damage 	caused by 	or 	resulting 	from 	. 	. 	. 	[c]ontinuous 	or
repeated 	seepage 	or 	leakage 	of 	water 	that 	occurs 	over 	a 	period
of 	14 	days 	or more." 	Id. 	at 	655-56. 	The 	court 	also 	held 	that 	a
corrosion 	exclusion, 	which 	had 	a 	specified 	causes 	of 	loss
exception 	for 	water 	damage, 	did 	not 	apply 	because 	the 	leaking
pipe 	was 	not 	Covered 	Property. 	Id.
Standing 	alone, 	this 	case 	could 	support 	Arch's 	position.
The parties 	in General Accident 	Ins. 	Co., 	however, 	did 	not 	cite
any 	policy 	provisions 	which 	provided 	specific 	coverage 	for
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damage 	caused by 	corroded, 	off-premises, 	municipal 	water 	pipes.
Id. 	Here, 	the 	Policy 	specifically provides 	for 	damages 	from 	the
ccidental 	discharge 	... 	of 	water 	... 	as 	the 	direct
result 	of 	the 	breaking 	apart 	or 	cracking 	of 	a" 	plumbing, 	water,
or 	sewer 	pipe 	that 	is 	located 	on 	or 	off 	the 	premises 	''if 	the
breakage 	or 	cracking 	is 	caused by 	wear 	and 	tear.^' 	Ins. 	Policy
52 	(emphasis 	added). 	This 	provision 	appears 	to 	account 	for 	off-
premises 	property, 	which 	is 	presumably 	"Property Not 	Covered"
under 	the 	Policy 	(i.e. 	"bridges, 	roadways", 	"[r]etaining 	walls
that 	are 	not 	part 	of 	a 	building"). 	Id. 	at 	19.
Nor 	is 	Praetorian 	relevant 	to 	the 	decisions 	this 	Court 	must
make. 	The 	insurance 	company 	in 	Praetorian 	paid 	for 	water
damage, 	personal 	property damage, 	and 	to 	remove 	and 	replace 	a
cracked pipe. 	Praetorian, 	2016 	WL 	687564 	at 	*3. 	The 	insured
then 	filed 	a 	claim 	in 	court 	for 	additional 	damages, 	which 	was
denied. 	Id. 	The 	court 	in 	Praetorian 	denied 	the 	claim 	for 	two
reasons: 	(1) 	the 	water 	exclusion 	applied 	and 	thus 	excluded
further 	coverage 	of 	damages, 	and 	(2) 	the 	anti-concurrent
causation 	clause 	applied, 	thus 	making 	any 	other 	cause 	(i.e., 	a
specified 	cause 	of 	loss 	exemption 	for 	the 	corrosion 	of 	an
underground 	pipe) 	irrelevant. 	Id. 	at 	*8. 	Though 	similar 	to
this 	case, 	the 	parties 	in 	Praetorian 	did 	not 	stipulate 	to 	the
fact 	that 	the 	damage 	was 	due 	to 	a 	cause 	specifically 	accounted
for 	in 	the 	policy, 	as 	the 	parties 	did 	here. 	Id.
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In 	this 	case, 	the 	Policy 	does 	not 	clearly 	preclude 	coverage
when 	the 	Cause 	of 	Loss 	is 	not 	itself 	Covered 	Property. 	Rather,
it 	explicitly 	carves 	out 	an 	exception 	for 	damage 	caused by 	an
underground 	pipe 	which 	cracks 	due 	to 	wear 	and 	tear 	and 	is 	not
located 	on 	the 	premises. 	Ins. 	Policy 	52. 	Even 	if 	this 	creates
an 	ambiguity, 	a 	reasonable 	person 	in 	Spring 	Glen's 	position
could 	easily 	believe 	the 	Wear 	and 	Tear 	Exclusion's 	exception 	for
underground 	pipes 	that 	crack due 	to 	wear 	and 	tear 	provides
coverage 	in 	this 	case. 	Because 	that 	reasonable 	interpretation
of 	the 	ambiguity 	would 	impose 	liability 	on 	Arch, 	the 	Court 	would
resolve 	this 	ambiguity 	in 	favor 	of 	Spring 	Glen. 	See 	Dundee, 	587
N.W.2d 	at 	194.
Third, 	Arch 	argues 	that 	even 	if 	the 	Wear 	and 	Tear
Exclusion's 	specified causes 	of 	loss 	exception 	applies, 	the
definition 	of 	""Water 	Damage" 	states 	that 	it 	""does 	not 	include
loss 	or 	damage 	otherwise 	excluded 	under 	the 	terms 	of 	the 	Water
Exclusion," 	and 	therefore 	coverage 	is 	still 	precluded. 	Ins.
Policy 	52 	{emphasis 	added); 	Def.'s 	Mem. 	9-10. 	The 	examples 	that
follow, 	however, 	indicate 	that 	this 	exception 	refers 	to 	pipes
that 	break 	or 	crack 	due 	to 	causes 	other 	than, 	or 	in 	addition 	to,
wear 	and 	tear 	(citing 	""weather-induced 	flooding" 	as 	an 	example) .
Ins. 	Policy 	52. 	Arch 	also 	does 	not 	address 	the 	later 	sentence
in 	that 	definition, 	which 	states:
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To 	the 	extent 	that 	accidental 	discharge 	or 	leakage 	of
water 	falls 	within 	the 	criteria 	... 	of 	this
definition 	of 	^specified 	causes 	of 	loss,' 	such 	water
is 	not 	subject 	to 	the 	provisions 	of 	the 	Water
Exclusion which 	preclude 	coverage 	for 	surface 	water 	or
water 	under 	the 	surface 	of 	the 	ground.
Id. 	(emphasis 	added). 	If 	this 	specific 	type 	of 	water 	damage 	is
not 	subject 	to 	the 	Water 	Exclusion, 	then 	it 	cannot 	also 	be
excluded by 	the 	Water 	Exclusion. 	Were 	the 	Court 	to 	follow
Arch's 	interpretation 	of 	the 	Policy, 	and 	let 	the 	first 	sentence
override 	the 	second, 	it 	would 	render 	the 	second 	sentence
meaningless. 	The 	Wear 	and 	Tear 	Exclusion's 	specified 	causes 	of
loss 	exception, 	which 	includes 	water 	damage, 	explicitly 	accounts
for 	situations 	like 	this 	one. 	Id. 	The 	anti-concurrent 	cause
language 	in 	the 	Water 	Exclusion 	cannot 	in 	turn 	preclude 	coverage
when 	the 	applicable 	specified 	causes 	of 	loss 	exception 	states
that 	the 	^^water 	is 	not 	subject 	to 	the 	provisions 	of 	the 	Water
Exclusion." 	Id.
Here, 	the 	plain 	language 	of 	the 	insurance 	contract
provides 	coverage 	for 	this 	specific 	scenario. 	Ins. 	Policy 	52.
The 	language 	is 	not 	ambiguous, 	as 	it 	explicitly 	rejects 	the
notion 	that 	coverage 	is 	precluded 	for 	water 	damage 	that 	results
in 	a 	situation 	like 	this 	one. 	Even 	if 	the 	language 	were
ambiguous, 	however, 	one 	interpretation 	of 	that 	ambiguity 	would
still 	impose 	liability on Arch. 	Dundee, 	587 	N.W.2d 	at 	194. 	For
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those 	reasons, 	the 	Court 	rules 	that 	there 	was 	a 	Covered 	Cause 	of
Loss 	under 	the 	Policy 	for 	which Arch 	is 	liable.
B. Bad Faith
^^An 	insurer 	has 	a 	duty 	to 	act 	fairly 	and 	in 	good 	faith 	in
dealing 	with 	its 	insured, 	including 	a 	duty 	of 	fair 	dealing 	in
paying 	claims, 	providing 	defenses 	to 	claims, 	negotiating
settlements, 	and 	fulfilling 	all 	other 	contractual 	obligations."
Grzeskowiak 	v. 	Geico 	Insurance, 	Case 	No. 	2:09-cv-31, 	2010 	WL
11537910, 	at 	*3 	(D.N.D. 	Sept. 	9, 	2010){quoting 	Hartman 	v. 	Estate
of 	Miller, 	656 	N.W.2d 	676, 	680 	(N.D. 	2003). 	Ordinarily, 	a 	bad
faith 	claim presents 	questions 	of 	fact. 	Id. 	A court may 	only
rule 	on 	a 	bad 	faith 	claim as 	matter 	of 	law 	if 	the 	insurer 	can
demonstrate 	that 	it 	reasonably 	denied 	a 	claim or 	that 	the 	claim
was 	^^fairly debatable." 	Id.
Arch 	argues 	that 	even 	if 	this 	Court 	rules 	there 	was 	a
Covered Cause 	of 	Loss, 	Arch 	still 	acted 	in 	good 	faith 	"because
reasonable 	minds 	could 	only 	draw 	the 	conclusion 	that 	Arch 	acted
reasonably 	in 	handling 	[the 	claim]." 	Def.'s 	Reply 	4. 	Spring
Glen 	reserves 	the 	bad 	faith 	claim 	for 	trial, 	arguing 	that 	it 	is
a 	question 	of 	fact. 	Pl.'s 	Mem. 	1, 	Pl.'s 	Reply 	11. 	Arch 	argues
that 	it 	acted 	"reasonabl[y], 	. 	. 	. 	fairly 	and 	in 	good 	faith" 	due
to 	the 	"fairly debatable" 	Policy 	language, 	and 	so 	the 	bad 	faith
claim is 	a 	question 	of 	law. 	Def.'s 	Mem. 	18 	(quoting 	Seifert 	v.
Farmers 	Union 	Mut. 	Ins. 	Co., 	497 	N.W.2d 	694, 	698 	(N.D. 	1993)
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(^^bad 	faith 	does 	not 	exist 	when 	an 	insurer 	denies 	coverage 	based
on 	a 	reasonable 	interpretation 	of 	policy 	language")); 	see
Hartman, 	656 	N.W.2d 	at 	681.
While 	there 	are 	many 	issues 	to 	be 	considered 	as 	they 	relate
to 	the 	Policy 	in 	this 	case, 	that 	does 	not 	necessarily make 	the
language 	^Mebatable." 	Hartman, 	656 	N.W.2d 	at 	681-3 	(denying
summary 	judgment 	on 	a 	bad 	faith 	claim, 	holding 	that 	even 	though
'^accident" 	was 	not 	defined by 	the 	policy, 	the 	insurance 	company
ought 	know 	the 	definition 	of 	'^accident" 	under 	North 	Dakota
insurance 	law). 	Some 	provisions 	of 	the 	Policy may 	appear 	to
contradict 	each 	other, 	but 	there 	is 	a 	clear 	provision 	providing
coverage 	in 	this 	case. 	Arch 	has 	not 	conclusively 	demonstrated
that 	the 	claim was 	debatable 	or 	reasonably 	denied. 	Therefore,
whether Arch 	acted 	in 	bad 	faith 	is 	a 	question 	of 	fact 	for 	trial.
III. 	CONCLUSION
For 	the 	foregoing 	reasons, 	the 	Court 	GRANTS 	Spring 	Glen's
motion 	for 	summary 	judgment 	on 	Count 	One 	and 	DENIES 	Arch's
motion 	for 	summary 	judgment 	on 	Counts 	One 	and Two.
SO ORDERED.
20
WILLIAM 	G. 	Y
DISTRICT 	JUDG
Case 3:17-cv-00028-WGY-ARS Document 24 Filed 04/03/18 Page 20 of 20