08 Aug Breaking Down the Seventh Circuit’s Decision in Windridge v. Philadelphia
On the whole, yesterday’s decision by the Seventh Circuit U.S. Court of Appeals’ in the case Windridge of Naperville Condominium Association v. Philadelphia Indemnity Ins. Co. http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2019/D08-07/C:18-2103:J:Hamilton:aut:T:fnOp:N:2381073:S:0 is a victory for policyholders, particularly in Illinois, Wisconsin, and Indiana. The court’s holding, affirming the decision reached by Judge Feinerman sitting in the Northern District of Illinois, is clear and concise: “Each building  suffered a direct physical loss, which was caused by or resulted from the hail and wind storm, and Philadelphia Indemnity therefore must pay to return the buildings to their pre-storm status – i.e., with matching siding on all sides. Windridge seeks only to be put back in the position it was in before the storm. Having mismatched siding on its buildings would not be the same position. Since no matching replacement siding is available, Philadelphia Indemnity must pay to replace all of the siding on Windridge’s buildings.”
In so holding, the seventh circuit followed the district court’s lead and concluded that it was a sensible construction of the policy terms “direct physical loss” and “covered property” when applied to the facts of the case to mean “that the unit of damaged property is the buildings as a whole – not solely each elevation or each panel of siding.” Writing for the court, Judge Hamilton goes on to state that the “storm altered the appearance of the buildings such that they were damaged. Condominium buildings with mismatched siding are not a post-storm outcome that the insured was required to accept under this replacement cost policy.”
Curiously, the court goes on to use a hypothetical scenario to draw an arbitrary line where “one shingle at the corner of a slate roof is damaged and no matching replacement shingle is available.” Rather than apply the same analysis as it did the siding, the court writes that in such a scenario “a building owner would not be entitled to an entire new roof.” That the court felt the need to address an issue not even before it in dicta is unfortunate, particularly given its tortured analysis of the loss payment provision in the policy at issue.
Specifically, in direct violation of black letter insurance law, the court inserts its own definition for the word “value” in the loss payment provision to mean a loss in market value of the entire property. Of course, such a definition does not exist in the policy. To the contrary, as the court even explains in the opinion, the policy has an entire provision dedicated to defining the term “value.” As the court states, the “valuation” provision states that it will determine the value of Covered Property in the event of “loss” . . . at replacement cost (or actual cash value) which in this instance is further defined, per usual, as “the cost to replace the lost or damaged property with other property of comparable material and quality and used for the same purpose.” The court even states that “the policy here is a replacement-cost policy and cites Illinois law stating “a replacement cost policy, by definition, provides a ‘make-whole’ remedy” that “must strive to approximate the situation [the insured] would have occupied had the fire not occurred.” That the court managed to misconstrue this basic provision is surprising to say the least.
If one listens to the oral arguments, it is understandable why the court decided to include this dicta in its opinion. Judge Easterbrook’s questioning in particular demonstrated that the court wanted to know where to draw the line on the matching issue. The solution, however, was simple – let the trier of fact decide what constitutes replacement cost (or actual cash value) in a disputed claim where matching is an issue. In the hypothetical posed by the court, it is quite possible that such a trier of fact would determine that replacing one shingle would, to quote the court, “return the building to its pre-storm status.”
Critically, such a trier of fact in a disputed claim could include an appraisal panel. This would have made particular sense in this case given the lower court’s holding that “[t]he dispute regarding whether there are matches available for the siding on the north and east elevations, and thus whether PIIC must replace or pay to replace the siding on all four elevations or just on the two physically damaged elevations, is a dispute regarding loss amount,” and thus was a “question proper for appraisal.” Given the seventh circuits affirmation of the opinion as a whole, it would have seemed that addressing the issue in this manner was the easiest answer to the dilemma facing the court. Instead, it unnecessarily inserted its own definition for a term already clearly defined by the policy.
It should also be noted that carriers have already started to rewrite their policies to limit and exclude matching in an effort to avoid court rulings such as this one. The question is whether it is fraudulent to sell such policies as “replacement cost,” when they make it impossible for policyholders to be “returned to pre-storm status.” Here’s hoping that the court’s reasoning in Windridge will eventually help answer that question in favor of policyholders everywhere.