Kaiser v. Allstate Indem. Co.

307 Neb. 562

949 N.W.2d 787

Jeremy KAISER, appellant,

v.ALLSTATE INDEMNITY COMPANY, appellee.

No. S-19-858.

Supreme Court of Nebraska.

Filed October 23, 2020

Matthew P. Saathoff and Donald E. Loudner III, of Saathoff Law Group, P.C., L.L.O., Omaha, for appellant.

Leslie S. Stryker Viehman and Brian D. Nolan, Omaha, of Nolan, Olson & Stryker, P.C., L.L.O., for appellee.

Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, Papik, and Freudenberg, JJ.

Heavican, C.J.

I. INTRODUCTION

Jeremy Kaiser filed an insurance claim alleging that his tenants damaged his rental house by producing or using methamphetamine indoors. Allstate Indemnity Company (Allstate) denied the claim. The district court granted summary judgment for Allstate, holding that the loss was excluded from coverage under Allstate's insurance policy with Kaiser. Kaiser appeals.

We moved Kaiser's appeal to our docket to decide whether property loss from his tenants’ producing or using methamphetamine indoors was a covered peril. We conclude that it is not and affirm the decision of the district court.

II. FACTUAL BACKGROUND

Kaiser owned real property in Omaha, Nebraska, that he maintained as a rental house. He carried a rental insurance policy for the property through Allstate. According to the policy, Allstate agreed to cover most direct physical loss to the property.

However, as relevant here, paragraphs 12, 13(e) and (f), 18, and 19(d) excluded from coverage any property loss "consisting of or caused by" the following perils:

12. Any type of vapors, fumes, acids, toxic chemicals, toxic gasses, toxic liquids, toxic solids, waste materials, [i]rritants, contaminants, or pollutants, [i]ncluding, but not limited to:

a) lead in any form;

b) asbestos in any form;

c) radon in any form; or d) oil, fuel oil, kerosene, liquid propane or gasoline intended for, or from, a storage tank located at the residence premises.

13....

....

e) Contamination, including, but not limited to, the presence of toxic, noxious, or hazardous gasses, chemicals, liquids, solids or other substances at the residence premises or in the air, land or water serving the residence premises;

f) Smog, smoke from the manufacturing of any controlled substance, agricultural smudging and industrial operations[.]

....

18. Vandalism. However, we do cover sudden and accidental direct physical loss caused by fire resulting from vandalism unless your dwelling has been vacant or unoccupied for more than 90 consecutive days immediately prior to the vandalism.

19. Any act of a tenant, or guests of a tenant, unless the act results in sudden and accidental direct physical loss caused by:

....

d) [S]moke. However, we do not cover loss caused by smoke from the manufacturing of controlled substances, agricultural smudging or industrial operations[.]

(Emphasis omitted.) The Allstate insurance policy further provided that when property loss resulted from multiple causes, the loss was wholly excluded from coverage if "the predominant cause(s) of loss is (are) excluded."

Kaiser did not make regular inspections of his rental house. Beginning in February 2013, he received reports from persons living near the property that the house was being used for drug-related activity.

After his tenants voluntarily surrendered the property on May 1, 2013, Kaiser inspected the house and found evidence of methamphetamine. Kaiser retained Absolute Bio Recovery Service to conduct preliminary tests of the house. Absolute Bio Recovery Service discovered methamphetamine vapor and residue throughout the house and recommended that the house be decontaminated before it could be safely rented to new tenants.

On May 7, 2013, Kaiser submitted a claim to Allstate for the cleanup costs. On May 8, Allstate denied the claim.

Despite the denial of coverage, Kaiser worked to remediate and decontaminate the house throughout May 2013. He removed flooring, HVAC equipment, and light fixtures from the house, all of which had absorbed methamphetamine vapor and residue. He also hired Meth Lab Cleanup LLC, a company that specialized in restorations of this kind. On May 26, Meth Lab Cleanup certified that the house was again fit for human habitation.

On February 11, 2014, Kaiser filed a complaint against Allstate in the district court for Douglas County. Kaiser asserted two claims: breach of contract and bad faith. According to Kaiser, "[a]t sometime [sic] after April 15, 2012, the Tenants converted the Property into a methamphetamine lab and started producing methamphetamine." According to the complaint, this claim should have been covered by Allstate as "vandalism and malicious mischief," but it was wrongfully denied. Kaiser sought $38,361.80 for remediation costs, lost rent, and compensation from serving as the general contractor overseeing the house's restoration. Allstate timely filed an answer disputing Kaiser's claims.

After some discovery, the parties filed cross-motions for summary judgment. Stating that it lacked "competent evidence of how the damage was actually caused," the district court entered an order denying both motions.

Kaiser filed an amended complaint alleging that he lacked sufficient knowledge as to whether the property loss was caused by his tenants’ using or manufacturing methamphetamine. Allstate filed an amended answer in which it specifically cited, as affirmative defenses, exclusions in paragraphs 9, 12, 13(e) and (f), 18, and 19(d) of its insurance policy. Kaiser and Allstate both filed renewed cross-motions for summary judgment. Kaiser also filed a motion to file a second amended complaint, which the district court denied.

On January 26, 2017, the district court issued an order granting Allstate's motion for summary judgment and denying Kaiser's competing motion. The district court found that Kaiser's tenants had manufactured methamphetamine in the house. Additionally, based on an affidavit from Allstate's expert, a professor of chemistry at the University of Nebraska at Omaha, the district court found that methamphetamine damaged Kaiser's property in two ways: first, "methamphetamine vapor is a toxic chemical, gas or liquid, depending upon the assumed physical state at a particular point in time," and second, "[m]ethamphetamine residue is a contaminant, chemical residue and pollutant." Accordingly, the district court agreed with Allstate that Kaiser's property loss was excluded from coverage under paragraphs 12 and 13(e) and (f) of Allstate's insurance policy. The district court also found that Kaiser's property loss was not covered under paragraph 18 or paragraph 19(d).

Kaiser appealed the district court's summary judgment. This court summarily dismissed the appeal pursuant to Neb. Ct. R. App. P. § 2-107(A)(2) (rev. 2017) because we could not find that the district court had entered a final, appealable order. On remand, the district court issued an order clarifying that its previous order was intended to dismiss both Kaiser's contract cause of action and his bad faith cause of action.

Kaiser then filed the current notice of appeal.

III. ASSIGNMENTS OF ERROR

Kaiser assigns, consolidated and restated, that the district court erred in finding that (1) Kaiser's property loss was excluded from coverage under paragraphs 12 and 13(e) and (f) of the Allstate insurance policy, (2) Kaiser's property loss was not covered under paragraph 18 or paragraph 19(d) of the Allstate insurance policy, and (3) summary judgment was improper because a genuine issue of material fact remained as to whether Kaiser's property loss was caused by methamphetamine production or use.

IV. STANDARD OF REVIEW

Interpretation of an insurance policy is a question of law.¹ In reviewing questions of law, an appellate court must reach its own conclusions independent of the lower court's conclusions.²

An appellate court reviews the district court's grant of summary judgment de novo, viewing the record in the light most favorable to the nonmoving party and drawing all reasonable inferences in that party's favor.³

V. ANALYSIS

1. ALLSTATE INSURANCE POLICY

The issue presented on appeal is whether the district court erred in finding that under the Allstate insurance policy, Kaiser's property loss was excluded from coverage.

In assessing which party in an insurance dispute bears the burden of proving or disproving coverage, a court must first determine whether the insurance policy presumptively extends coverage to all, or only to specific, perils.⁴ A specific perils policy covers limited risks and, by implication, excludes all other risks.⁵ In contrast, an all perils policy impliedly covers all risks except those expressly addressed in the policy's exclusion paragraphs.⁶

Under a specific perils policy, the insured carries the initial burden of proving that a provision in the insurance policy requires the insurer to provide coverage for a specific type of loss.⁷ But that initial burden is presumed met in an all perils policy, provided the insured can show that covered property was damaged.⁸ Once the initial burden of proving coverage is met, the insurer bears the burden of proving the applicability of an exclusion under the policy as an affirmative defense.⁹

Here, Kaiser characterizes his Allstate policy as an all perils policy. Allstate did not dispute that characterization in its brief or at oral argument. Thus, assuming that Kaiser's characterization is accurate, Kaiser met his initial burden when the parties stipulated that at the relevant time, the damaged property was covered under the Allstate insurance policy. It is, in turn, Allstate's burden to prove that the property loss from Kaiser's tenants’ producing or using methamphetamine in the house was specifically excluded from coverage by its policy.

(a) Paragraphs 12 and 13(e) and (f)

The district court found that Allstate met its burden of proof by showing that Kaiser's property loss was caused by the presence of "methamphetamine vapor" and "[m]ethamphetamine residue" in the house. According to the district court, this meant that the property...