Auto-Owners Ins. Co. v. Excelsior Westbrook III, LLC

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AUTO-OWNERS INSURANCE COMPANY, Plaintiff, v. EXCELSIOR WESTBROOK III, LLC, Defendant.

EXCELSIOR WESTBROOK III, LLC, Counter Plaintiff, v. AUTO-OWNERS INSURANCE COMPANY, Counter Defendant.

No. 2:22-cv-02360-HLT

United States District Court, D. Kansas

July 29, 2024

MEMORANDUM AND ORDER

HOLLY L. TEETER UNITED STATES DISTRICT JUDGE

Excelsior Westbrook III, LLC (“Owner”) owns a building that was significantly damaged by water after a pipe under the building broke. The building was covered by an insurance policy issued by Auto-Owners Insurance Company (“Insurer”). Insurer denied coverage for the loss because the policy excluded losses caused by water under the ground surface that presses on, flows through, or seeps through the foundation, floors, basement, walls, doors, or windows of the building. Insurer filed this lawsuit seeking declaratory judgment on that point.

Owner counterclaimed for breach of contract based on Insurer's failure to pay under the policy and for violation of the Kansas Uniform Trade Practices Act (“KUTPA”). Owner contends that Insurer cannot meet its burden of proving the exclusion relied on applies because the pipe was not “under the ground surface,” because the exclusion is ambiguous, and because a different provision of the policy provides coverage.

Both parties move for summary judgment on their claims. The dueling claims for declaratory judgment and breach of contract both turn on whether Insurer can establish that the loss is excluded under the policy. Because the Court finds that Insurer has shown an exclusion applies based on the undisputed facts, it grants summary judgment in favor of Insurer on the issue of coverage. Because Owner does not challenge Insurer's motion on the KUTPA claim, the Court grants Insurer summary judgment on that claim as well.

I. BACKGROUND^[1]

A. Broken Pipe and Subsequent Water Damage

Insurer issued an insurance policy to Owner for a building located at 8050 Marshall Drive in Lenexa, Kansas. PSOF 1-2; DSOF 1. On July 21, 2022, Owner's building sustained damage when a water pipe ruptured. PSOF 3. The parties agree that the pipe supplied water to the building's fire suppression system but dispute whether it was “part” of the fire suppression system. See DSOF 1, 5 (including response); see also PSOF 8-9.^[2]

The break in the pipe was underneath the floor of a stairwell and was within the footprint of the building. DSOF 9 (including response). The parties disagree on whether the pipe can be characterized as “underground,” but this seems to be a dispute about the legal significance of that description. See PSOF 3. (including response stating: “[c]ontroverted that the pipe was ‘underground' as it was part of the original construction and infrastructure of the building and part of the building's fire suppression and/or plumbing systems”). It seems uncontroverted (and obvious from the pictures) that the pipe was literally under the ground, or at least “several feet beneath the floor,” and that excavation was required to access it, including removal of the concrete floor, dirt, clay, and rocks. PSOF 6 (including response). It is uncontroverted that this picture “shows the pipe's location in relation to the floor of the building and the excavation to reach the pipe.”

Image Omitted

PSOF 7. Owner also acknowledged in an email to its members that the pipe was “directly under the building.” PSOF 22. The pipe at some point ran beneath the footings of the building, but it's not clear where the break was located with regard to the footings. PSOF 4 (including response).

The parties ostensibly dispute whether water from the broken pipe “seeped up” through the foundation or floor. See PSOF 5 (including response). Insurer maintains that “[a]s a result of the pipe's failure, water seeped up through the floor and into the building.” Id. Owner disputes that and states there “is no evidence that the water ‘seeped up' through the floor.” Id. (including response). The testimony cited by Insurer on this point indicates that water was observed coming from under doors, Doc. 92-1 at 6 (White Dep. 14:3-14), that there was three inches of water throughout the first floor, id. (White Dep. 15:13-22), that water was in the building when a pipe under the concrete slab broke, id. at 7 (White Dep. 18:9-24), that “[t]here was a huge hole in the ground where the water had blew out” and digging was needed to make a repair, Doc. 92-2 at 4 (Quirk Dep. 11:19-12:2), and that a picture showed where “the water came out of the floor,” id. at 5 (Quirk Dep. 14:1-8). In support of the contention there is no evidence that water “seeped up,” Owner cites deposition testimony about the investigation that was done by Insurer, Doc. 86-11 at 12-13, and testimony by Bob Quirk, the plumber who did the repairs, which includes the statement that “[t]here was a huge hole in the ground where the water had blew out,” Doc. 86-4 at 4. Quirk also testified that “the floor had heaved” when the pipe broke, and that “if you've ever seen a water main break, it blows it right out of the ground.” See id.^[3]

Regardless, it is undisputed that the building sustained damage after the pipe broke. Specifically, water from the broken pipe caused damage to the building's entire first floor. DSOF 6. Owner reported the loss the same day. PSOF 10; DSOF 2. A representative of the building's management company was responsible for overseeing and coordinating repairs. DSOF 3-4. Owner retained ZIPCO as a general contractor to provide mitigation and repairs. PSOF 14; DSOF 7 (including response). Invoices for restoration and repairs totaled $1,746,003.36, which Owner paid. DSOF 8.

Insurer began investigating the loss by contacting the property manager. PSOF 11. A ZIPCO representative sent Insurer a photograph of the pipe. PSOF 15. Insurer sent a reservation of rights letter on July 25, 2022, and indicated there were potential coverage issues. PSOF 12-13; DSOF 17. Insurer did not make any determination as to the cause of the broken pipe, i.e. why the pipe failed. DSOF 13 (including response). The parties dispute the manner in which Insurer investigated the claim. Owner generally alleges Insurer did not independently investigate or hire anyone to independently investigate the broken pipe. Insurer contends it investigated by gathering information from the property manager, the contractor, and the insurance broker, and by reviewing photographs. See DSOF 14-16 (including responses). The field adjuster assigned by Insurer never went to the building to investigate the loss in person. DSOF 15.

Between July 26, 2022, and August 18, 2022, the parties^[4] discussed coverage for the loss. PSOF 18. On August 12, 2022, Insurer issued a letter denying coverage, citing a water exclusion in the policy as the reason. DSOF 18; PSOF 19, 21.

As a result of the denial, Owner did not have the capital to pay for the repairs to the building. DSOF 20. It had to quickly request capital. DSOF 21 (including response). The interest rate for the promissory notes was 20%. See DSOF 22 (including response). The parties dispute whether this rate was dictated or negotiated. See id. The parties also dispute Owner's obligation under the notes. Owner contends that it has an obligation to pay the notes back and that obligation “is actual and currently accruing.” DSOF 23 (including response). Insurer disputes that fact on the ground that the underlying testimony was: “We have an obligation to pay, but not currently. It's accruing.” Id. The parties dispute the nature of any obligation by Owner to repay any promissory note should it recover funds in this lawsuit. See DSOF 24 (including response).

As a result of the damage, at least some portion of the building was not fully tenantable for a period of time. DSOF 25 (including response).^[5] The largest tenant in the building, CBOE, lost access to at least some of its space for some period of time. See DSOF 25-26. The parties dispute whether Owner has any obligation to abate rental payments made during that time. See DSOF 2627 (including responses).

B. The Policy

The policy states that Insurer “will pay for 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.” Doc. 86-16 at 60. “Covered Property” includes the building, as well as fixtures and permanently installed equipment. Id. “Property Not Covered” is also listed and identifies various things including “[u]nderground pipes, flues or drains.” Id. at 61.

“Covered Causes of Loss means Risks of Direct Physical Loss unless the loss is” excluded under the “EXCLUSIONS” listed in the policy or limited in the “LIMITATIONS” section of the policy. Id. at 83. As relevant here, the policy states:

B. EXCLUSIONS

1. 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.

...

g. Water

(1) Flood, surface water, waves (including tidal wave and tsunami), tides, tidal water, overflow of any body of water, or spray from any of these, all whether or not driven by wind (including storm surge);

(2) Mudslide or mudflow;

(3) Water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment;^[6]

(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; or

(5) Waterborne material carried or otherwise moved by any of the water referred to in Paragraph (1), (3) or (4), or material carried or otherwise moved by mudslide or mudflow.

This

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