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Hill v. Auto Owners Insurance Co.

United States District Court, D. South Dakota, Western Division

May 5, 2015

CARL HILL and JANICE HILL, Plaintiffs,
v.
AUTO OWNERS INSURANCE COMPANY, Defendant.

ORDER DENYING MOTION FOR SUMMARY JUDGMENT, GRANTING MOTION FOR JUDGMENT ON THE PLEADINGS, DENYING MOTION TO BIFURCATE AND STAY DISCOVERY, AND OVERRULING OBJECTIONS ON MOTION TO COMPEL

KAREN E. SCHREIER, District Judge.

Plaintiffs, Carl and Janice Hill, brought this action against defendant, Auto Owners Insurance Co., for breach of contract, bad faith, and unfair trade practices stemming from Auto Owners' denial of plaintiffs' claim for benefits due to alleged hail damage to their roof. Auto Owners moves for summary judgment on plaintiffs' bad faith and punitive damages claims and moves for judgment on the pleadings on plaintiffs' unfair trade practices claim. Auto Owners has also requested an early trial on the contract claim and a stay on discovery. Plaintiffs moved to compel certain discovery, which motion was referred to the United State Magistrate Judge for resolution and subsequently granted. For the following reasons, the court denies the motion for summary judgment, grants the motion for judgment on the pleadings, denies as moot the motion to bifurcate and stay discovery, and overrules Auto Owners' objections to the magistrate judge's order on the motion to compel.

BACKGROUND

The facts, viewed in the light most favorable to the nonmoving party, are as follows:

Plaintiffs live in Rapid City, South Dakota. In 1992, they bought their current house, and over the years have worked on repairing and improving their home. The roof was redone in 1998 as part of a remodeling project on the second story. Beginning in 2006, plaintiffs purchased an insurance policy for their home from Auto Owners, and have at all relevant times maintained that coverage. In May 2013, plaintiffs received a notice from Auto Owners that they would have to pay an extra premium to keep the replacement-cost coverage on their roof due to its age; they could also elect to forgo the extra premium and switch to actual-cash-value coverage.

On July 8, 2013, plaintiffs submitted a claim for hail damage resulting from a storm on June 24, 2011. Auto Owners previously had paid to replace the roof of a neighboring house due to damage from the same storm. Because Auto Owners does not have a claim office in Rapid City, it contacted Dakota Claims Service of Rapid City to investigate plaintiffs' claim.

Dakota Claims sent Steve Wolff to inspect plaintiffs' roof on July 10, 2013. Neither Carl nor Janice was present at the inspection. Wolff found evidence of hail damage to the front door trim and metal materials on the roof. Nonetheless, Wolff concluded that the shingles did not show any hail damage and the damage to the roof was due to weathering and maintenance issues. Wolff prepared a damage estimate, and because the damage to the metal materials on the roof was less than plaintiffs' deductible, Wolff recommended closing the file without payment. Based on Wolff's findings, Dan Highstreet, a claims representative for Auto Owners, sent plaintiffs a letter denying their claim.

Plaintiffs requested a re-inspection. On July 19, 2013, Mike Kirkeby from Dakota Claims inspected plaintiffs' roof. Plaintiffs were not present and indicate that Dakota Claims never called to set up this second inspection. Docket 23-6 at 3. Kirkeby noted that plaintiffs claimed their neighbors all had new roofs and observed that about half of the homes in the area had new roofs. Kirkeby reiterated that the roof had exposure damage. He also stated: "It is my opinion that there is no evidence of hail damage to the shingles as we have not had damaging hail in this part of Rapid City for over 14 years." Docket 29-8 at 3. Kirkeby concluded his report by warning that "I do believe the agent and insured will press the matter until a roof is purchased." Id.

On July 20, 2013, [1] plaintiffs' house was hit by another hail storm. Plaintiffs were home during this storm and recorded a video showing the hail. Following this storm, plaintiffs submitted another claim for hail damage to their roof on the advice of their insurance agent. Auto Owners again retained Dakota Claims, and adjuster Moya Bieber inspected plaintiffs' roof on August 12, 2013. Carl was present for this inspection, and he claimed that Bieber never went on the roof but instead waited in the street while an unknown person inspected the roof. See Docket 23-6 at 3. Bieber's report noted damage related to weathering and exposure. She also reported hail damage to the front door trim and the metal materials on the roof, consistent with the previous findings of Wolff and Kirkeby. Because there was no new damage, Bieber recommended closing the claim without payment. Based on Bieber's report, Highstreet again sent plaintiffs a letter denying their claim and informing them that damage from weather, deterioration, or faulty maintenance was not covered under the policy.

Auto Owners also retained Hermanson Egge Engineering, Inc., to inspect plaintiffs' roof for hail damage. Larry Hermanson performed an inspection on September 6, 2013. Hermanson concluded that half to three quarters of the shingles on plaintiffs' roof were in poor condition due to a poorly vented attic space, which had caused blistering, holes, and grain loss. Unlike Wolff, Kirkeby, or Bieber, Hermanson did not mention weathering as a cause for the deterioration of the shingles, and he stated that some of the shingles on the west surface were in good condition. Hermanson observed hail damage to the metal surfaces on the roof but concluded that the shingles had not suffered any hail damage.

Plaintiffs also obtained inspections independent of their insurance company. Sometime between July 19 and July 31, 2013, Kevin Kisner of Exceptional Exteriors inspected plaintiffs' roof, saw hail damage, and advised plaintiffs to file an insurance claim. On August 28, 2013, Jack Brockman of Allied Construction inspected the roof and observed random indentations and areas missing granules indicative of hail damage. On September 29 and 30, 2014, counsel for plaintiffs retained Paul Brenkman to perform an inspection on the roof. Brenkman observed hail damage to roof-top shingles, vents, flue caps, gutters, and wood exterior siding and moldings. Brenkman termed the hail damage "definitive" and opined that it was unreasonable for Auto Owners to ignore the signs of hail damage on plaintiffs' roof. Docket 29-3 at 4, 6.

Plaintiffs filed this suit claiming damages for breach of contract, [2] bad faith, and unfair trade practices. Docket 19 at 6 (amended complaint filed August 15, 2014). Plaintiffs also claim they are entitled to punitive damages and attorney's fees. Id. On September 18, 2014, Auto Owners moved for summary judgment on the bad faith and punitive damages claims. Docket 21. Separately, Auto Owners moved for judgment on the pleadings on the unfair trade practices claim. Docket 24. Finally, Auto Owners moved for a separate early trial on the contract claim and to stay discovery on the remaining claims until after the contract issue was resolved. Docket 26.

While these motions were pending, Auto Owners retained Haag Engineering to inspect plaintiffs' roof. Richard Herzog performed the inspection on October 23, 2014, to "determine the extent of hail-related damage from specific storms on June 24, 2011, and July 20, 2013." Docket 40-1 at 2. Over a year after the second storm, Herzog found "[h]ail-impact spatter marks ranging from 120448- to 120442-inch across... on various surfaces, particularly on horizontal surfaces or vertical surfaces facing south." Id. at 4. The south elevation of the garage and the south side of a flue pipe showed marks up to 320448-inch across. Id. Significantly, Herzog stated, "[o]ther indications of hail impact were visible to vertical surfaces on all four elevations of the dwelling." Id. Consistent with the other inspections, Herzog noted hail damage to metal parts of the roof and damage to a large number of shingles from weathering and age.[3] Id. at 5. Herzog estimated that hail had damaged over 100 shingles on the house and 20 shingles on the garage. Id. at 6. Based on the number of hail-damaged shingles, Herzog concluded that "the cost of individual repair of damaged shingles likely would approach or exceed the reasonable cost for full shingle replacement." Id. at 7. Following Herzog's inspection, Auto Owners agreed to pay for replacement of all the shingles pursuant to the policy, without condition or release. Docket 42 at 1-2.

Subsequently, plaintiffs filed a motion to compel certain discovery, Docket 43, which this court referred to United States Magistrate Judge Veronica Duffy. The magistrate judge issued an order granting the motion to compel. Docket 50. Auto Owners filed an objection requesting that this court set aside the order granting the motion to compel. Docket 53.

DISCUSSION

I. Motion for Summary Judgment

A. Legal Standard

Summary judgment is appropriate if the movant "shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The moving party can meet this burden by presenting evidence that there is no dispute of material fact or that the nonmoving party has not presented evidence to support an element of her case on which she bears the ultimate burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). To avoid summary judgment, "[t]he nonmoving party may not rest on mere allegations or denials, but must demonstrate on the record the existence of specific facts which create a genuine issue for trial.'" Mosley v. City of Northwoods, Mo., 415 F.3d 908, 910 (8th Cir. 2005) (quoting Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995)).

Summary judgment is precluded if there is a dispute in facts that could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). For purposes of a summary judgment motion, the court views the facts and the inferences drawn from such facts "in the light most favorable to the party opposing the motion." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986).

B. Bad Faith Claim

Auto Owners argues summary judgment[4] is appropriate on plaintiffs' bad faith claims because its decision to deny plaintiffs' claim was made in good faith. Plaintiffs, on the other hand, argue that there are questions of material fact as to whether Auto Owners acted in bad faith when it denied their claim.

The South Dakota Supreme Court[5] laid out the test for whether summary judgment is appropriate in a first-party bad faith claim in Dakota, Minn. & E. R.R. Corp. v. Acuity, 771 N.W.2d 623 (S.D. 2009).

[T]here must be an absence of a reasonable basis for denial of policy benefits [or failure to comply with a duty under the insurance contract] and the knowledge or reckless disregard [of the lack] of a reasonable basis for denial, implicit in that test is our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless disregard of a lack of reasonable basis for denial or a reckless indifference to facts or to proofs submitted by the insured.
Under these tests of the tort of bad faith, an insurance company, however, may challenge claims which are fairly debatable and will be found liable only where it has intentionally denied (or failed to process or pay) a claim without a reasonable basis.

Id. at 629 (quoting Walz v. Fireman's Fund Ins. Co., 556 N.W.2d 68, 70 (S.D. 1996)). First-party bad faith is an intentional tort and occurs when an insurance company consciously engages in wrongdoing during its processing or paying of policy benefits. Hein v. Acuity, 731 N.W.2d 231, 235 (S.D. 2007). But if an insured's claim is fairly debatable either in fact or law, an insurer cannot be said to have denied the claim in bad faith. Dakota, Minn. & E. R.R. Corp., 771 N.W.2d at 630. "The questions of whether the insurer's actions were unreasonable or whether the claim was fairly debatable must be viewed at the time the insurer made the decision to deny or litigate the claim, rather than pay it." Id. "The question of whether an insurer has acted in bad faith is generally a question of fact." Bertelsen v. Allstate Ins. Co., 833 N.W.2d 545, 554 (S.D. 2013).

Auto Owners argues it had an objectively reasonable basis for its claim decisions because four inspections found no hail damage to plaintiffs' roof. Docket 21 at 5-9. For support, Auto Owners points to Stene v. State Farm Mutual Automobile Insurance Co., 583 N.W.2d 399 (S.D. 1998).[6] In Stene, the South Dakota Supreme Court held that an insurer was entitled to summary judgment on a bad faith claim because ample evidence supported the insurer's valuation of the claim and the plaintiff "was simply erroneously convinced that he was entitled to" full payment. Id. at 403. Stene makes clear that if an insurance company has a reasonable basis for denying a claim it cannot be held liable for acting in bad faith. But Stene does not stand for the proposition that an insurer automatically has a reasonable basis for denying a claim simply because it hires someone to produce an estimate or a report.

It would be possible for a jury to find that it was unreasonable for Auto Owners to rely on the reports provided by Wolff, Kirkeby, Bieber, and Hermanson, and that Auto Owners knew its reliance on those reports was unreasonable. For example, Kirkeby stated in his report that there had been no damaging hail in Rapid City in fourteen years, despite the fact that he-and every other person who inspected plaintiffs' roof-observed hail damage to the metal materials on plaintiffs' roof. Furthermore, Auto Owners paid to replace a neighbor's roof due to hail damage from the same 2011 storm. Based on the reports noting hail damage to the metal materials on ...


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