Blakely v. USAA Casualty Insurance , 691 F. App'x 526 ( 2017 )

FILED
United States Court of Appeals
Tenth Circuit
June 27, 2017
UNITED STATES COURT OF APPEALS
Elisabeth A. Shumaker
TENTH CIRCUIT Clerk of Court
ALAN BLAKELY; COLELYN
BLAKELY,
Plaintiffs - Appellants,
No. 15-4059
v.
(D.C. No. 2:06-CV-00506-BSJ)
(D. Utah)
USAA CASUALTY INSURANCE
COMPANY,
Defendant - Appellee.
ORDER AND JUDGMENT *
Before HOLMES, MURPHY, and BACHARACH, Circuit Judges. **
Plaintiffs-Appellants Alan and Colelyn Blakely appeal from an adverse
summary judgment in which the district court determined that they failed to
demonstrate the damages necessary to advance a cognizable claim for breach of
the implied covenant of good faith and fair dealing (“Implied Covenant”) against
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Federal Rule of Appellate
Procedure 32.1 and Tenth Circuit Rule 32.1.
**
After examining the briefs and appellate record, this panel has
determined unanimously to resolve this appeal on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
submitted without oral argument.
their homeowner’s insurance provider, USAA Casualty Insurance Company
(“USAA”). This is the third time the Blakelys have appealed to this court based
on the same underlying facts and allegations. 1 Exercising jurisdiction under 28
U.S.C. § 1291, we affirm the district court’s grant of summary judgment in favor
of USAA.
I
Mr. and Ms. Blakely own a home in Bountiful, Utah, which was insured
under a homeowner’s insurance policy issued by USAA. The policy insured
against losses to the home and personal property. 2 In August 2002, a fire broke
1
The Blakelys filed a fourth appeal from the same district court
action, see Blakely v. USAA Cas. Ins. Co., No. 15-4017, but voluntarily dismissed
the appeal prior to merits briefing.
2
The policy provided the following procedure in the event of a loss:
2. Your Duties After Loss. In case of a loss to which this
insurance may apply, you must see that the following are done:
....
e. prepare an inventory of damaged personal property
showing the quantity, description, actual cash value and
amount of loss. Attach all bills, receipts and related
documents that justify the figures in the inventory;
....
g. send to us, within 60 days after our request, your
signed, sworn proof of loss which sets forth, to the best of
your knowledge and belief:
(continued...)
2
out in the basement of the home after a flooring contractor, Desert Rose Roofing,
Inc., doing business as Stone Touch (“Stone Touch”), applied a flammable
sealant. Although the fire was contained within the basement, smoke and soot
damaged other sections of the home, including floor joists, exposed subflooring,
and personal property.
2
(...continued)
(1) the time and cause of loss;
(2) the interest of the Insured and all others in the
property involved and all liens on the property;
(3) other insurance which may cover the loss;
(4) changes in title or occupancy of the property
during the term of the policy;
(5) specifications of damaged buildings and detailed
repair estimates;
(6) the inventory of damaged personal property
described in 2e above;
(7) receipts for Additional Living Expenses and
Temporary Living Expense, incurred and records
that support the Fair Rental Value loss; and
(8) evidence or affidavit that supports a claim under
ADDITIONAL COVERAGES, Credit Card, Fund
Transfer Card, Forgery and Counterfeit Money
coverage, stating the amount and causes of loss.
Aplts.’ App., Vol. VI, at 1225–26 (Ins. Policy, dated Nov. 2, 2001 through Nov. 2,
2002).
3
The Blakelys prepared an inventory of their losses and made a claim under
their USAA policy. USAA then sent an adjuster to inspect the damage, and
USAA’s preferred contractor ultimately repaired most of the damage to the home.
By mid-2003, USAA had paid out $93,332.20 on the claim—viz., $47,789.94 for
the home, $37,832.70 for personal property, and $7,709.56 for temporary housing.
However, the Blakelys were dissatisfied with the repairs to their home and the
extent to which their personal property had been cleaned or replaced. Although
USAA refused to authorize additional expenses, the Blakelys paid for further
cleaning and repairs themselves. Around this time, the Blakelys also filed suit
against Stone Touch. 3
In January 2005, the Blakelys invoked their contractual right to an
appraisal. 4 The Blakelys asserted that they were entitled to $468,575.05 on the
3
USAA later intervened in the Stone Touch suit under a subrogation
claim for the $93,332.20 that it paid on the Blakelys’ claim and any additional
sums.
4
The homeowner’s insurance policy contained an “appraisal clause”
related to the determination of the loss amount:
Appraisal. If you and we do not agree on the amount of loss,
either party can demand that the amount of the loss be
determined by appraisal. If either makes a written demand for
appraisal, each will select a competent, independent appraiser
and notify the other of the appraiser’s identity within 20 days of
receipt of the written demand.
The two appraisers will then select a competent, impartial
umpire. If the two appraisers are not able to agree upon the
(continued...)
4
claim; however, in October 2005, the three appraisers retained under the policy’s
terms—one by the Blakelys—awarded only $291,356.52. After a credit for the
$93,332.20 that USAA had already paid under the policy, the Blakelys were still
owed $197,524.32. 5 The Blakelys admit that with the payment of the remaining
appraisal award on December 5, 2005, USAA owes them nothing further under
the policy’s plain terms.
In 2006, the Blakelys filed suit against USAA in state court, claiming
breach of contract, breach of the Implied Covenant, breach of industry and
statutory standards, and intentional infliction of emotional distress. The Blakelys
alleged, inter alia, that they suffered financial and emotional damages resulting
from USAA’s failure to make adequate and timely repairs, reimbursements, and
4
(...continued)
umpire within 15 days, you and we can ask a judge of a court of
record in the state where the residence premises is located to
select an umpire.
The appraisers will then set the amount of loss. If they submit a
written report of any agreement to us, the amount agreed upon
will be the amount of loss. If they fail to agree within a
reasonable time, they will submit their differences to the umpire.
Written agreement signed by any two of these three will set the
amount of the loss. Each appraiser will be paid by the party
selecting that appraiser. Other expenses of the appraisal and the
compensation of the umpire will be equally paid by y ou and us.
Aplts.’ App., Vol. VI, at 1226.
5
Although the district court calculated the remaining balance as
$197,524.32, the actual remainder appears to have been $198,024.32.
5
investigations. USAA removed the suit to federal court based on diversity
jurisdiction. Following discovery, the district court granted summary judgment in
favor of USAA on all claims except the claim for breach of the Implied Covenant.
Instead of summary judgment, the district court granted USAA’s oral motion to
dismiss the Blakelys’ Implied-Covenant claim as frivolous under Federal Rule of
Civil Procedure 16(c)(2)(A).
The Blakelys appealed for the first time, and our court affirmed the district
court’s grant of summary judgment, but reversed the dismissal of the Implied-
Covenant claim. Without expressing an opinion “on the merits of the Blakelys’
claim for breach of the implied covenant of good faith and fair dealing,” we
specifically held that
the Blakelys alleged and put forth the following evidence
suggesting that USAA acted unreasonably in taking its initial
position regarding the loss amount: the appraisal award was
nearly three times, or $200,000 more, than USAA’s initial payout
of $93,322.20; USAA’s adjuster refused to communicate with the
Blakelys; USAA’s adjuster claimed that he could not smell
smoke when the smell proved noticeable [to the appraisers] in the
house three years later; USAA delegated adjustment of the
contents claim to a non-adjuster; and USAA refused to pay for
any repairs other than structural ones.
Blakely v. USAA Cas. Ins. Co., 633 F.3d 944, 950 (10th Cir. 2011). On remand,
the district court granted summary judgment in favor of USAA on the Blakelys’
Implied-Covenant claim. See Blakely v. USAA Cas. Ins. Co., No.
6
2:06–CV–00506, 2011 WL 6218212 (D. Utah Dec. 6, 2011), reversed and
remanded by 500 F. App’x 734 (10th Cir. 2012) (unpublished).
The Blakelys appealed a second time to this court, mounting a challenge to
the district court’s determination that they had put forward no genuine issue of
material fact. See Blakely, 500 F. App’x at 738. A panel of this court concluded
that the following four material facts suggested that USAA acted unreasonably:
viz., (1) USAA refused to replace several charred floor joists, and only replaced a
small section of burned subflooring after repeated complaints from the Blakelys;
(2) USAA’s structural adjuster refused at times to communicate with the
Blakelys; (3) the structural adjuster claimed not to be able to smell smoke, even
though the appraisers could smell smoke three years later; and (4) USAA’s
personal-property adjuster did not travel to Utah, delegated her duties to a person
who was not an adjuster, and denied coverage for numerous personal and
household items. See id. at 739–40. Pointing to Jones v. Farmers Insurance
Exchange, 286 P.3d 301 (Utah 2012), the panel explained that summary judgment
was inappropriate under Utah law, because “[a] jury could conclude [USAA]
breached its duties by undervaluing [the Blakelys’] loss” or “acted unreasonably
by not instructing [the Blakelys] to submit their claims in a signed proof of loss.”
Id. at 741.
On remand a second time, the district court again granted summary
judgment in USAA’s favor. This time, however, the district court reasoned that
7
the Blakelys “failed to proffer plausible damages attributable to the alleged
breach of the implied contract covenant,” and “[a]bsent viable damages, the
exercise of trial pursuant to the Tenth Circuit’s mandate and application of Jones
would be purely academic.” Aplts.’ App., Vol. VIII, at 1683 (Dist. Ct. Order,
dated Apr. 2, 2015). More specifically, the district court considered the Blakelys’
alleged damages for emotional distress, economic loss, and attorney’s fees and
costs, and concluded that none were recoverable under Utah law.
The Blakelys timely appealed this decision of the district court.
II
This appeal presents the single issue of whether the Blakelys advanced a
theory of recoverable damages as part of their claim against USAA for breach of
the Implied Covenant. We review de novo the district court’s dismissal of their
claim on a motion for summary judgment. See Hertz v. Luzenac Grp., 576 F.3d
1103, 1107 (10th Cir. 2009) (“We review the dismissal of these claims on a
motion for summary judgment de novo.”); accord Harvey Barnett, Inc. v. Shidler,
338 F.3d 1125, 1129 (10th Cir. 2003). “The court shall grant summary judgment
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);
accord Macon v. United Parcel Serv., Inc., 743 F.3d 708, 712 (10th Cir. 2014).
Because this is a diversity case, we must independently discern the content
of and apply state law—specifically, Utah law. See, e.g., Mid-Continent Cas. Co.
8
v. Circle S Feed Store, LLC, 754 F.3d 1175, 1178 (10th Cir. 2014) (“Because this
is a diversity case, we ascertain and apply state law—in this case, New Mexico
law.”); Yousuf v. Cohlmia, 741 F.3d 31, 47 (10th Cir. 2014) (noting that, where
jurisdiction is based on the parties’ diverse citizenship, a federal court is “not to
reach our own judgment regarding the substance of the common law, but simply
to ascertain and apply state law.” (quoting Kokins v. Teleflex, Inc., 621 F.3d 1290,
1295 (10th Cir. 2010))); McIntosh v. Scottsdale Ins. Co., 992 F.2d 251, 253 (10th
Cir. 1993) (“We review de novo the district court’s rulings with respect to Kansas
law.”). Under Utah law, the construction of an insurance policy is a legal
question, which we review de novo. See Mid-Continent Cas. Co., 754 F.3d at
1178; see also S.W. Energy Corp. v. Cont’l Ins. Co., 974 P.2d 1239, 1242 (Utah
1999) (“Interpretation of an insurance policy involves ordinary rules of contract
construction. We accord no deference to the trial court’s interpretation of the
policy, but review the court’s legal conclusions for correctness.” (citation
omitted)).
A
“When the federal courts are called upon to interpret state law, the federal
court must look to the rulings of the highest state court, and, if no such rulings
exist, must endeavor to predict how that high court would rule.” Stickley v. State
Farm Mut. Auto. Ins. Co., 505 F.3d 1070, 1077 (10th Cir. 2007) (quoting Johnson
v. Riddle, 305 F.3d 1107, 1118 (10th Cir. 2002)). “The decision of an
9
intermediate appellate state court is a datum for ascertaining state law which is
not to be disregarded by a federal court unless it is convinced by other persuasive
data that the highest court of the state would decide otherwise.” Kokins, 621 F.3d
at 1297 (quoting Stickley, 505 F.3d at 1077); accord Etherton v. Owners Ins. Co.,
829 F.3d 1209, 1223 (10th Cir. 2016); cf. A.M. v. Holmes, 830 F.3d 1123,
1140–41 (10th Cir. 2016) (“When a state Supreme Court has not spoken on the
question at issue, we assume (without deciding) that a reasonable officer would
seek guidance regarding the scope of proper conduct at least in part from any
on-point decisions of the state’s intermediate court of appeals.”). However, under
the principles of stare decisis, “[w]hen a panel of this Court has rendered a
decision interpreting state law, that interpretation is binding on district courts in
this circuit, and on subsequent panels of this Court, unless an intervening decision
of the state’s highest court has resolved the issue.” Kokins, 621 F.3d at 1295
(quoting Wankier v. Crown Equip. Corp., 353 F.3d 862, 866 (10th Cir. 2003)).
At the outset, we must clarify the scope of the legal claim at issue in this
appeal. As discussed above, what remains of the Blakelys’ original cause of
action is their claim that USAA breached the Implied Covenant prior to January
2005 by failing, inter alia, to reasonably investigate the loss caused by the 2002
fire in their home. See Berube v. Fashion Ctr. Ltd., 771 P.2d 1033, 1046 (Utah
1989) (“Utah has recognized that all contracts contain a covenant of good faith
and fair dealing.”). Utah courts have stated that “an insurer’s ‘implied obligation
10
of good faith performance contemplates, at the very least, that the insurer will
diligently investigate the facts to enable it to determine whether a claim is valid,
will fairly evaluate the claim, and will thereafter act promptly and reasonably in
rejecting or settling the claim.’” 6 Jones, 286 P.3d at 304 (quoting Beck v.
Farmers Ins. Exch., 701 P.2d 795, 801 (Utah 1985)). As we noted in the
Blakelys’ first appeal to this court, in Utah, “the covenant of good faith and fair
dealing . . . . is [not] confined to the obligations imposed by the contract itself.”
Blakely, 633 F.3d at 947 (citations omitted).
Under Utah law, “[d]amages recoverable for breach of contract include
both general damages, i.e., those flowing naturally from the breach, and
consequential damages, i.e., those reasonably within the contemplation of, or
6
USAA underscores the distinction between the implied obligation to
perform an insurance contract in good faith in the “first-party” and “third-party”
contexts. In a first-party case, as here, “the insured sue[s] its insurer for bad faith
refusal to settle the insured’s claim.” Campbell v. State Farm Mut. Auto. Ins. Co.,
840 P.2d 130, 137 (Utah Ct. App. 1992). On the other hand, in the third-party
context, “an insurer is obligated to defend the insured against claims by others.”
Id. at 138. More specifically, in the third-party context, because the insurer owes
a “fiduciary duty to its insured to protect the insured’s interests,” Beck, 701 P.2d
at 799, “an insured may state a cause of action in tort for an insurer’s breach of
its obligations,” Campbell, 840 P.2d at 138. However, the implied contractual
obligation to perform a first-party insurance contract in good faith—though
implicating similar considerations as a third-party tort claim—involves a
contractual obligation. See Beck, 701 P.2d at 800 (“We therefore hold in a first-
party relationship between an insurer and its insured, the duties and obligations of
the parties are contractual rather than fiduciary.”); see also Black v. Allstate Ins.
Co., 100 P.3d 1163, 1169 (Utah 2004) (noting that, with respect to a first-party
situation, “[w]ithout more, a breach of those implied or express duties can give
rise only to a cause of action in contract, not one in tort” (alteration in original)
(quoting Beck, 100 P.3d at 800)).
11
reasonably foreseeable by, the parties at the time the contract was made.” Beck,
701 P.2d at 801. As noted, the Blakelys admit that, with the payment of the
remaining appraisal award on December 5, 2005, USAA owes them no further
amounts under the policy’s express terms. See Blakely, 633 F.3d at 947 (noting
the Blakelys’ admission that “no further amounts are either claimed or owing
under the policy”). Therefore, we must determine only whether the Blakelys
established that they have recoverable consequential damages—i.e., damages not
flowing naturally from the breach—under their claim for breach of the Implied
Covenant.
Utah law recognizes “a broad range of recoverable [consequential]
damages” in an action for breach of the Implied Covenant. Beck, 701 P.2d at 802
(noting that a “broad range” of damages “in excess of the policy limits” may be
“foreseeabl[e]” and “provable” in the Implied-Covenant context, because “an
insured frequently faces catastrophic consequences if funds are not available
within a reasonable period of time to cover an insured loss”); accord Machan v.
UNUM Life Ins. Co. of Am., 116 P.3d 342, 345–46 (Utah 2005) (discussing Beck’s
holding). Although Utah law categorizes actions for breach of the Implied
Covenant as contractual disputes, Utah courts have stated that “the measure of
damages . . . should ‘not ignor[e] the principal reason for [other courts’] adoption
12
of the [otherwise theoretically unsound] tort approach.’” 7 Billings v. Union
Bankers Ins. Co, 918 P.2d 461, 466 (Utah 1996) (alterations in original) (quoting
Beck, 701 P.2d at 801). Specifically, the operative rationale is “to remove any
incentive for insurers to breach the duty of good faith by expanding their
exposure to damages caused by such a breach beyond the predictable fixed dollar
amount of coverage provided by the policy.” Id.
However, Utah’s adoption of a doctrine expanding insurers’ exposure
“beyond the bare contract terms” in the Implied-Covenant context remains subject
to important limitations. Beck, 701 P.2d at 801. More precisely, an insured is
entitled only to “those [consequential damages] reasonably within the
contemplation of, or reasonably foreseeable by, the parties at the time the contract
was made.” Machan, 116 P.3d at 346 (quoting Beck, 701 P.2d at 801). And,
Beck teaches that “[t]he foreseeability of [consequential] damages will always
hinge upon the nature and language of the [insurance] contract and the reasonable
7
To be clear, Utah courts have observed that there are two approaches
to measuring damages that various states apply to claims for breach of the
Implied Covenant: viz., the contract approach and the tort approach. See Beck,
701 P.2d at 801. Although Utah courts have “rejected the tort approach” in first-
party insurance claims, Billings, 918 P.2d at 466, and even noted that “the ability
of a plaintiff to recover in tort for breach of the implied covenant of good faith
and fair dealing in a contract ‘has the potential for distorting well-established
principles of contract law,’” Berube, 771 P.2d at 1046 (quoting Beck, 701 P.2d at
799), “a first-party insurer who breaches the implied covenant by unreasonably
denying the insured the benefits bargained for may be held liable for broad
consequential damages foreseeably caused by the breach, damages which might
include those for mental anguish and which would be closely analogous to those
available in states taking a tort approach,” Billings, 918 P.2d at 466.
13
expectations of the parties.” Beck, 701 P.2d at 802; see J. Calamari & J. Perillo,
C ONTRACTS , § 14-5 at 548 (4th ed. 1998) (noting that “there must be an express
or implied manifestation of intent to assume the risk of foreseeable consequential
damages”).
B
With these principles in mind, we turn to the theories of consequential
damages that the Blakelys have advanced in their claim for breach of the Implied
Covenant against USAA. In brief, the Blakelys contend that they are entitled to
damages for emotional distress and aggravation of medical conditions, the
appraisal and diminution in value of their home, and attorney’s fees. Having
surveyed Utah law, we conclude that, under the circumstances of this case, the
Blakelys have failed to advance a viable theory of recoverable damages.
1
Turning first to the Blakelys’ theory that they were entitled to
consequential damages related to emotional distress and aggravation of medical
conditions, they argue that the district court erred in ruling that “such damages
are only available in ‘rare’ and ‘unusual’ cases.” Aplts.’ Opening Br. at 26
(quoting the record). In their view, Utah law only requires an insured to
“convince a jury that his damages are ‘unusual’ in that they are more than the
typical disappointment, frustration, and anxiety ‘normally’ associated with an
insurance claim.” Id. at 28 (emphasis added). In this regard, the Blakelys assert
14
that they need not “show both bad faith and that it was unusual,” to survive a
motion for summary judgment with respect to emotional distress damages. Id.
a
The Blakelys have asserted, as part of their theory of emotional-distress
damages, that “stress related to USAA’s misconduct” exacerbated Ms. Blakely’s
preexisting medical condition and her high blood pressure. Id. at 33. However,
having concluded that the Blakelys’ amended complaint “makes no mention of
physical injuries and otherwise fails to provide notice that [the Blakelys] seek
damages for physical injuries,” the district court declined to consider physical
injuries as a basis for an award of damages. Aplts.’ App., Vol. VIII, at 1683 n.36.
USAA argues that the Blakelys failed to allege a separate theory of
physical injuries, apart from their prayer for emotional-distress damages. In
addressing this argument, the Blakelys point to several filings that refer to Ms.
Blakely’s medical condition: viz, an expert report attached to USAA’s
memorandum in support of summary judgment, which notes that stressful
situations tended to aggravate Ms. Blakely’s fibromyalgia; statements by the
Blakelys’ counsel during a pretrial conference that Ms. Blakely’s fibromyalgia
had been aggravated; and an assertion at the first summary-judgment hearing that
Ms. Blakely’s medical conditions had been aggravated.
Despite these references to Ms. Blakely’s medical conditions in the
summary-judgment proceedings, we cannot glean from the pleadings any
15
assertion of damages for physical injuries separate from the claimed emotional-
distress damages. That is, the Blakelys reference medical conditions only in
advancing a theory of emotional-distress damages, not in support of independent
damages related to the aggravation of a medical condition. For this reason, we
consider this separate theory of physical-injury damages to be forfeited in the
district court and—given that the Blakelys do not call for application of plain-
error review on appeal—to be also effectively waived. See, e.g., Richison v.
Ernest Grp., Inc., 634 F.3d 1123, 1131 (10th Cir. 2011) (“[T]he failure to argue
for plain error and its application on appeal—surely marks the end of the road for
an argument for reversal not first presented to the district court.”).
b
Although we consider the Blakelys’ physical-injury damages theory
waived, we must still assay the Blakelys’ theory of emotional-distress damages
under Utah’s legal standard for proving consequential damages in claims for
breach of the Implied Covenant. The specific legal standard that Utah applies to
claims for emotional distress under the Implied Covenant is that, “in unusual
cases, damages for mental anguish might be provable” where foreseeable given
“the nature and language of the contract and the reasonable expectations of the
parties.” Beck, 701 P.2d at 802 (emphasis added). However, “damages will not
be available for the mere disappointment, frustration, or anxiety normally
experienced in the process of filing an insurance claim and negotiating a
16
settlement with an insurer.” Id. at 802 n.6. In discussing this standard in an
analogous (but non-insurance) setting, the Utah Supreme Court held that “a non-
breaching party may recover general and/or consequential damages related to
emotional distress or mental anguish arising from a breach of contract when such
damages were both a foreseeable result of the breach and explicitly within the
contemplation of the parties at the time the contract was entered into.”
Carbaness v. Thomas, 232 P.3d 486, 508 (Utah 2010) (emphasis added). The
Carbaness court then reiterated Beck’s statement that “the applicability of
[emotional distress or mental anguish] damages ‘will always hinge upon the
nature and language of the contract and the reasonable expectations of the
parties.’” Id. (quoting Beck, 701 P.2d at 802).
Challenging the district court’s summary-judgment decision, the Blakelys
draw our attention to an interpretive dispute—namely, whether Beck’s limitation
of “damages for mental anguish” to “unusual cases” envisions “unusual” conduct
by the insurer (the view advanced by USAA and adopted by the district court), or
“unusual” damages by the insured (the Blakelys’ competing perspective). Beck,
701 P.2d at 802 (emphasis added); see also Aplts.’ Opening Br. at 27–30. We
need not—and thus do not—definitively opine on this interpretive dispute. That
is because, even assuming arguendo that Beck speaks to unusual damages—the
view the Blakelys have propounded—the express limitations on a consequential-
17
damages award for emotional distress squarely defeat the Blakelys’ entitlement to
such damages here.
Critically, Beck stated that, in “unusual cases,” “damages for mental
anguish might be provable” if “foreseeabl[e]” given “the nature and language of
the [insurance] contract and the reasonable expectations of the parties.” Beck,
701 P.2d at 802 (emphasis added). Beck, however, expressly defined those
damages to exclude “the mere disappointment, frustration, or anxiety normally
experienced in the process of filing an insurance claim and negotiating a
settlement with an insurer.” Id. at 802 n.6. In other words, Beck stressed the
noncompensable nature of damages derived from the stress, strain, and
aggravation inherent in any loss of property and subsequent insurance adjustment.
Analogously, the Utah Supreme Court teaches us that some delay necessarily
attends claim administration, stating that “parties to an insurance contract should
expect that an insurance company may require a reasonable amount of time to
process or investigate a claim before determining whether to pay or deny it.”
Machan, 116 P.3d at 347 (emphasis added). Accordingly, “[w]here an insurance
company’s breach consists only of ultimately resolving a claim incorrectly and
failing to pay the insured, we may presume that any damages sustained by the
insured during the initial reasonable investigation period were not caused by the
breach, as these damages would have been sustained even if the insurance
company had resolved the claim correctly in the insured’s favor.” Id.
18
Invoking Beck, the Blakelys argue that the fire caused by Stone Touch
“disrupted” their “living circumstances,” because the fire “destroyed or damaged”
“[m]uch of their personal belongings and interior contents” and displaced them
from “their home for many weeks.” Aplts.’ Opening Br. at 32. Pressing forward,
the Blakelys then claim that “the actions of USAA enhanced the already existing
anxiety from the fire,” because USAA (1) “wanted to replace their upscale,
custom furnishings with mediocre replacements”; (2) “lowballed [them during
claims administration] by nearly $300,000”; and (3) investigated and underwrote
their claim in a way that forced them “to live in their home before construction
was completed” and to endure “the smell of smoke” “for more than three years.”
Id. From this, the Blakelys reason, their emotional distress exceeded “the
disappointment or frustration ‘normally’ experienced during the insurance claim
process.” Id. at 31–32.
Not so. The Blakelys’ claim of “unusual” damages relies on the
prototypical “disappointment, frustration, or anxiety normally experienced in the
process of filing an insurance claim and negotiating a settlement with an
insurer”—a patently insufficient basis under Beck for an award of emotional-
distress damages. Beck, 701 P.2d at 802 n.6 (emphases added). Indeed, the first
two alleged breaches—USAA’s effort to replace the Blakelys’ “custom
furnishings with mediocre replacements” and the initial “lowball[]” adjustment,
Aplts.’ Opening Br. at 32—express only the Blakelys’ disappointment and
19
frustration with USAA’s evaluative process. Beck forecloses precisely this sort of
consequential-damages award.
The Blakelys’ third source of distress—that they had to live in their home
before construction was completed and had to endure the smell of smoke for more
than three years—fares no better in advancing their cause. Although the Blakelys
take exception to living in an unrepaired house smelling strongly of smoke, they
offer no explanation for their three-year delay in invoking the appraisal procedure
authorized by the parties’ policy. As discussed above, Utah law makes clear that
damages under the Implied Covenant must at least be foreseeable within “the
nature and language of the contract and the reasonable expectations of the
parties.” Beck, 701 P.2d at 802. Because the policy here expressly authorized the
Blakelys to demand an appraisal—viz., to invoke a contractual mechanism clearly
designed to bring loss-payment disputes to a reasonably prompt conclusion—we
see nothing foreseeable about their purported, delay-related distress, which
allegedly stemmed from the Blakelys’ need to occupy an unrepaired home that
was permeated with the smell of smoke for three years.
Furthermore, although the cases the Blakelys cite—e.g., Kewin v. Mass.
Mut. Life Ins. Co., 295 N.W.2d 50, 53 (Mich. 1980); Stewart v. Rudner, 84
N.W.2d 816, 824 (Mich. 1957); and Lamm v. Shingleton, 55 S.E.2d 810, 813
(N.C. 1949)—support an award of damages for emotional distress when the
failure to perform contractual obligations “concerns matters of mental concern
20
and solicitude,” Aplts.’ Opening Br. at 31, the Blakelys provide no direct legal
support for an award of emotional-distress damages in the context of an insurance
policy that provides, as here, a basis to enforce contractual obligations against the
insurer (i.e., the appraisal provision). Again, the Blakelys do not explain their
delayed invocation of the appraisal clause—and when they did finally invoke it,
USAA fully compensated them for the damage to their home in accordance with
that procedure.
In sum, we see no error in the district court’s conclusion that the Blakelys
failed to demonstrate emotional-distress damages. Even assuming arguendo that
Beck’s focus is on “unusual” damages (as opposed to “unusual” insurer conduct),
the Blakelys have not presented the sort of “unusual case[]” that Beck
contemplates. See Beck, 701 P.2d at 802. 8
2
8
The Blakelys also argue that they are entitled to damages for
economic loss and lost income because they “had to spend their personal time
[performing remedial work], resulting in lost income.” Aplts.’ Opening Br. at 45.
They assert that the district court conflated benefits and damages when it noted
that “[t]he policy does not provide personal injury protection or other first-party
losses for lost wages or income that are typically a part of other types of
insurance policies (e.g., auto insurance).” Aplts.’ App., Vol. VIII, at 1687.
Although the Blakelys are correct that consequential damages may exceed
contract benefits, see Billings, 918 P.2d at 467, they must still allege and develop
facts showing that USAA’s alleged breach of the Implied Covenant caused the
consequential loss and that the loss was foreseeable within the nature of the
contract, see Beck, 701 P.2d at 802. The Blakelys have not made this showing.
21
The Blakelys next argue that “had USAA fulfilled its obligations to fairly
and timely investigate, evaluate, and pay, [they] would not have been forced to
invoke the insurance policy’s appraisal policy, which cost them significant
amounts of money.” Aplts.’ Opening Br. at 39. At the outset, it is clear that Utah
law forbids contracts from abrogating relief appropriately available under the
Implied Covenant. See Christiansen v. Farmers Ins. Exch., 116 P.3d 259, 261–62
(Utah 2005) (“A claim for breach of the implied covenant of good faith and fair
dealing . . . is based on judicially recognized duties not found within the four
corners of the contract. These duties, unlike the duties expressly stated in the
contract, are not subject to alteration by the parties.” (citation omitted)).
However, relief under the Implied Covenant must be “‘consistent with the agreed
common purpose’ of the contract.” Id. at 262 (quoting St. Benedict’s Dev. Co. v.
St. Benedict’s Hosp., 811 P.2d 194, 200 (Utah 1991)).
As the district court explained, the Blakelys “have not argued that [USAA]
did not pay the cost of its own appraiser or split the other expenses of the
appraisal and the compensation of the umpire.” Aplts.’ App., Vol. VIII, at 1689.
The appraisal clause provided that “[e]ach appraiser will be paid by the party
selecting that appraiser,” id. Vol. VI, at 1226, and that “[o]ther expenses of the
appraisal and the compensation of the umpire will be equally paid by you and us,”
id. Because the Blakelys argue only that they should be compensated for the
costs of the appraisal, in order to grant the Blakelys’ requested relief, the district
22
court would have had to override the express terms of the policy (which, as noted,
allocated appraisal-related expenses between the parties). Put another way, the
Blakelys are, in effect, seeking compensatory damages for the cost of the
appraisal, not consequential damages for a breach of the Implied Covenant.
Granting such damages on appeal would require us to override an express
provision of the policy. For this reason, the Blakelys’ prayer for consequential
damages with respect to the appraisal clause must fail.
3
The Blakelys next argue that they are entitled to be compensated for
attorney’s fees incurred as a result of (1) their suit against Stone Touch (the
contractor that caused the fire), (2) their invocation of the appraisal clause, and
(3) the litigation expenses related to the instant case. The district court disagreed,
ruling that it was not “foreseeable that Plaintiffs [would] go outside th[e]
methodology [of the policy and appraisal clause] and instead sue Stone Touch,”
id. Vol. VIII, at 1688, and that the appraisal clause already allocated costs
associated with its invocation under the express terms of the policy, see id. at
1689. The district court further explained that “the fees and costs in the instant
case are not stand-alone damages sufficient to support a breach of the implied
covenant claim.” Id.
It is beyond peradventure that “[u]nder Utah law, plaintiffs may recover
attorney fees if they are successful in pursuing a first-party bad faith suit against
23
their insurer.” Campbell v. State Farm Mut. Auto. Ass’n, 65 P.3d 1134, 1168
(Utah 2001), vacated on other grounds by 538 U.S. 408 (2003); accord Gibbs M.
Smith, Inc. v. U.S. Fidelity & Guar. Co., 949 P.2d 337, 344 (Utah 1997) (“[I]n
first-party actions, attorney fees are recoverable where there has been a breach of
the implied covenant of good faith and fair dealing which inheres in every
insurance contract.”); see also Billings, 918 P.2d at 468 (“Attorney fees may be
recoverable as consequential damages flowing from an insurer’s breach of either
the express or implied terms of an insurance contract.”). “However, as
consequential damages, attorney fees are recoverable only if they were
‘reasonably within the contemplation of, or reasonably foreseeable by, the parties
at the time the contract was made.’” Billings, 918 P.2d at 486 (quoting Beck, 701
P.2d at 801). And, “[t]he foreseeability of any such damages will always hinge
upon the nature and language of the contract and the reasonable expectations of
the parties.” Beck, 701 P.2d at 802. In this case, we cannot conclude that
additional attorney’s fees would have been foreseeable to the parties, because the
Blakelys only invoked the appraisal clause after filing suit against Stone Touch
and the policy’s express terms clearly spelled out the allocation of the resulting
appraisal costs.
As for the attorney’s fees related to the instant case, the Blakelys are
correct that they would be entitled to a fee award if they were adjudicated the
24
prevailing party. See Highland Constr. Co. v. Stevenson, 636 P.2d 1034, 1038
(Utah 1981) (“In any action brought upon either of the bonds provided herein
. . . the prevailing party, upon each separate cause of action, shall recover a
reasonable attorney’s fee to be taxed as costs.” (alteration in original) (quoting
Utah Code Ann. § 14–1–8 (1953))). However, as the district court noted, this rule
does not provide an independent cause of action for attorney’s fees, but rather
allows a fee award “upon each separate cause of action.” Id. (quoting Utah Code.
Ann. § 14–1–8). Therefore, to be entitled to a fee award in the instant case, the
Blakelys must prevail in advancing a theory of damages under the Implied
Covenant independent of attorney’s fees.
Because the Blakelys have not done so, an attorney’s fees award for costs
incurred in litigating the instant case would not be proper. We are equally
unpersuaded that attorney’s fees incurred in litigating the Stone Touch case and in
invoking the appraisal clause are warranted, because those costs and fees were
avoidable or accounted for under the express terms of the policy, and the Blakelys
have not offered an explanation to the contrary.
The Blakelys nonetheless argue that they would be entitled to a fee award if
they prevailed in a claim for nominal damages. See Aplts.’ Opening Br. at 44;
see, e.g., Turtle Mgmt., Inc. v. Haggis Mgmt., Inc., 645 P.2d 667, 670 (Utah 1982)
(“Nominal damages are recoverable upon a breach of contract if no actual or
substantial damages resulted from the breach or if the amount of damages has not
25
been proven.”); accord Holmes Dev., LLC v. Cook, 48 P.3d 895, 906 (Utah 2002)
(finding that the plaintiff’s recovery would be “limited to nominal damages”
because the defendant “cured the breach” before the plaintiff “incurred actual
damages”). However, the Blakelys stumble at the outset because they have not
advanced a theory of nominal damages independent of their other damages
theories. More specifically, even assuming arguendo that a prevailing party in a
suit for nominal damages under the Implied Covenant would be entitled to
attorney’s fees—a proposition the Blakelys do not support with any legal
authority—the party would still be obliged to advance a theory of nominal
damages. And, as noted, the Blakelys have not done so. Thus, we conclude that
the Blakelys have made no showing qualifying them for any attorney’s fees.
4
Finally, we address the Blakelys’ entitlement to consequential damages for
the alleged diminution in their property’s value. During the final pretrial hearing
on April 23, 2013, the Blakelys’ counsel and the district court engaged in the
following colloquy concerning the diminution-in-value claim:
Court: Now, does that come in – well, now, you talk about
devaluation of the home. I thought the home was
paid for by the express contract[.]
Counsel: The reason why [the Blakelys] are asserting a claim
for the devaluation in their home is based upon the
following. Had USAA paid the appropriate amount,
done their investigation, properly evaluated and
timely paid, they would not have incurred the
26
attorney’s fees and litigation expenses, both
associated with the Stone Touch as well as the
appraisal. And because of the attorney’s fees and
expenses in that regard, they did not have sufficient
money to replace the floor joists and the other items
that needed to be done.
Court: That was part of the adjustment amount.
Counsel: Pardon me?
Court: They were paid for that. The adjustment amount
paid for the house.
Counsel: Correct. But the consequential damages under the
bad faith claim is that because they incurred the
attorney’s fees and expenses, that was not available
to them to –
Court: They were paid for that. The fact that they didn’t
do it is telling in two ways. It’s one thing to talk
about attorney’s fees and quite another thing to talk
about a house that you say is diminished because
they didn’t do what they were paid to do. That’s
just gone. I won’t deal with the devaluation of the
home.
Aplts.’ App., Vol. VIII, at 1575–76 (capitalization omitted) (Tr. of Final Pretrial
Hr’g, dated Apr. 23, 2013). Thus, the Blakelys contended that USAA’s allegedly
bad-faith adjustment required them to incur “attorney’s fees and [litigation]
expenses” to obtain full payment on their insurance claim, leaving them without
“sufficient” funds to perform repairs, even after being paid the appraisal amount;
that, in turn, resulted in a devaluation in their home’s fair market value. Id. at
1576; see also Aplts.’ Reply Br. at 26 (“The Blakelys have alleged that, because
27
of USAA’s delays and other bad faith, they had to use the appraisal payment to
pay down debt they had incurred because of that bad faith, such as the appraisal
and litigation expenses discussed above. They were left with insufficient funds to
make needed repairs, as a result of which (in addition to the length of time itself
to that point) the value of the house diminished.”). The district court effectively
dismissed this claim during the final pretrial hearing. 9 As noted, the court said
that the Blakelys “were paid for that. . . . [T]hey didn’t do what they were paid to
do. . . . I won’t deal with the devaluation of the home.” Aplts.’ App., Vol. VIII,
at 1576 (capitalization omitted).
On appeal, the Blakelys challenge the district court’s reasoning, arguing
that the district court erroneously “assumed that the appraisers’ determination of
policy benefits barred the Blakelys’ claims for consequential damages arising
from the untimely payment of those benefits.” Aplts.’ Opening Br. at 48. Citing
Miller v. USAA Casualty Insurance Co., 44 P.3d 663 (Utah 2002), the Blakelys
contend instead that Utah law “quite clear[ly]” permits this very claim for
consequential damages, e.g., a devaluation claim arising from the untimely
payment of insurance benefits. Aplts.’ Opening Br. at 48. For the reasons that
follow, we conclude that the Blakelys’ diminution-in-value claim is untenable.
9
We view the district court’s pretrial exclusion of the Blakelys’
diminution-in-value claim as an effective dismissal. See Blakely, 633 F.3d at 949
(construing similar action by the district court as a “dismissal”).
28
We first introduce Miller, then explain our reasoning. In Miller, the Miller
family filed an insurance claim with USAA after their basement water heater
burst, and USAA retained an independent adjuster to assess the damage. 44 P.3d
at 667. Dissatisfied with the assessment, the Millers filed suit against USAA
asserting a contractual claim for the recovery of physical damage to their home,
and extra-contractual claims for, among other things, emotional distress and loss
of use. USAA moved to dismiss, arguing that the parties’ appraisal clause—in all
material respects, the same one implicated here—required that the parties’ dispute
“be resolved via the appraisal process.” Id. at 668 (quoting the record).
Reasoning that the “parties [were] bound by contract to settle the dispute in th[e]
case by appraisal,” the trial court “dismissed all of the Millers’ claims, including
the extra-contractual claims, because USAA invoked the appraisal clause of the
insurance contract.” Id. at 675 (first alteration in original). After the appraisal
panel declined “to embark on the laborious task of analyzing the extra-contractual
claims”—but did reach an award on their contractual claims, id. at 669—the
Millers proceeded to raise their extra-contractual claims in a separate civil action.
The trial court in that separate civil action, however, “dismiss[ed] the extra-
contractual claims,” reasoning that the earlier dismissal “constituted a final
judgment on the merits and, thus, those claims were precluded by res judicata and
the appraisal agreement.” Id. at 668–69.
29
On appeal, the Utah Supreme Court considered the Millers’ argument that
the trial courts’ treatment of their extra-contractual claims deprived them of due
process. As part of that inquiry, the Miller court noted that the appraisal clause
required only that the appraisers “set the ‘amount of loss,’” meaning that “the
clause necessarily applie[d] only to property damage claims.” Id. at 676. The
court then explained that the “amount of loss as used in the appraisal clause refers
to the value of the injury or damage for which the Millers may seek indemnity,”
and contrasted contractual claims over that “amount of loss” with extra-
contractual claims that do not “pertain to the amount of loss under the insurance
contract,” id.
In contesting the district court’s order, the Blakelys seize on Miller to rebut
any suggestion that their “amount of loss” payment under the appraisal clause
precluded them, as a matter of law, from recovering consequential damages under
a diminution-in-value theory. We do not question that if the district court had
predicated its dismissal on this legal ground, its ruling would, at the very least,
have been in tension with Miller. But we do not interpret the district court’s
order that way. In response to the Blakelys’ argument, the district court held:
“They were paid for that. . . . It’s one thing to talk about attorney’s fees and quite
another thing to talk about a house that you say is diminished because they didn’t
do what they were paid to do.” Aplts.’ App., Vol. VIII, at 1576 (emphases added)
(capitalization omitted). In other words, the district court simply reasoned that
30
the Blakelys’ own conduct—i.e., failing to allocate the money from the appraisal
process to restoration and repairs, as intended—caused any dimunition in value,
see id., not that the appraisal award itself precluded, as a matter of law, the
recovery of consequential damages under a diminution-in-value theory.
Accordingly, we perceive no conflict between the district court’s rationale and
Miller. 10
Nor, for that matter, can we conclude that these sorts of self-inflicted
injuries would have been foreseen by the parties or within their reasonable
10
In arguing to the contrary, the Blakelys refer to remarks made during
an earlier pretrial hearing on March 31, 2008. See Aplt.’s Reply Br. at 27. There,
they claim, the district court expressed a view that “the ‘measure’ of the
Blakelys’ damage [was] the amount awarded in the property damage appraisal.”
Id. Our reading of the relevant aspect of the pretrial hearing transcript reveals
some ambiguity in the district court’s remarks regarding the legal effect of the
appraisal award. See Aplts.’ App., Vol. VII, 1360–61 (Tr. of Pretrial Hr’g, dated
Mar. 31, 2008). Nonetheless, even if we interpreted the court’s comments in the
2008 pretrial hearing as the Blakelys do, we would recognize our focus should be
on the rationale the court articulated in dismissing the diminution-of-value claim
more than five years later. That is because district courts are not encouraged or
obliged to adhere to prior interlocutory rulings—much less prior comments—if
they conclude that those rulings (or comments) are erroneous and would result in
reversal. See, e.g., Major v. Benton, 647 F.2d 110, 112 (10th Cir. 1981) (“When a
lower court is convinced that an interlocutory ruling it has made is substantially
erroneous, the only sensible thing to do is to set itself right to avoid subsequent
reversal.”); see also Unioil v. Elledge (In re Unioil, Inc.), 962 F.2d 988, 993 (10th
Cir. 1992) (“Only final judgments may qualify as law of the case; where a ruling
remains subject to reconsideration, the doctrine is inapplicable.”); United States v.
Bettenhausen, 499 F.2d 1223, 1230 (10th Cir. 1974) (“The rule of the law of the
case does not apply unless there is a final judgment that decided the issue. . . .
The ruling in question here could have been reconsidered by the trial court and
was not final.” (citations omitted)). And the district court’s rationale supporting
its dismissal five years after the 2008 pretrial hearing do not evince any conflict
with Miller.
31
expectations, as Beck requires. As articulated in Beck, Utah law limits an award
of consequential damages to “those [harms] reasonably within the contemplation
of, or reasonably foreseeable by, the parties at the time the contract was made.”
Beck, 701 P.2d at 801. The harms at issue here—that effected the alleged
diminution in value of the Blakelys’ property—do not satisfy this standard
because USAA and the Blakelys could not have reasonably contemplated or
foreseen that the Blakelys would be the primary actors in imposing these harms
on themselves, especially when doing so involved the Blakelys’ decision to forgo
contractual remedies. More specifically, it was the Blakelys who elected to
pursue litigation against Stone Touch in lieu of an early contractual appraisal
process, and the Blakelys who allocated, in significant part, the appraisal payout
to litigation rather than restoring their home to its original value, as intended
under the policy. In short, because the Blakelys’ own conduct engendered much
of the claimed delay in restoring their home and the resulting (ostensible)
diminution in value, we discern no basis to conclude that their diminution-in-
value claim would have been “reasonably within the contemplation of, or
reasonably foreseeable by, the parties.” Id. Thus, their diminution-in-value claim
fails under Beck.
Finally, even if the Blakelys could overcome these deficiencies, we detect
an alternative ground for affirmance. See Elwell v. Byers, 699 F.3d 1208, 1213
(10th Cir. 2012) (“We can affirm a lower court’s ruling on any grounds
32
adequately supported by the record, even grounds not relied upon by the district
court.”). Specifically, regardless of the substantive merits of their diminution-in-
value claim, the Blakelys do not directs us—as USAA observes—to any record
evidence of the alleged diminution in value. Rather, they cite an irrelevant
portion of USAA’s briefing before the district court, and then assert, without
actual evidentiary support, that “the burned joists, floor, and other fire/smoke
damage . . . caused a significant devaluation in the home’s fair market value.”
Aplts.’ Opening Br. at 17. That is not enough. On this alternative ground too, we
find the diminution-in-value claim untenable. In sum, the Blakelys cannot prevail
on appeal on their diminution-in-value claim. We uphold the district court’s
judgment regarding this claim.
**************
In sum, we see no viable footing for the recovery of consequential
damages, nor have the Blakelys advanced a cognizable theory for nominal
damages. Accordingly, the Blakelys cannot prevail on their claim for breach of
the Implied Covenant and are not entitled to an award of attorney’s fees and
costs.
33
III
For the foregoing reasons, we AFFIRM the district court’s grant of
summary judgment in favor of the Defendant-Appellee, USAA.
ENTERED FOR THE COURT
Jerome A. Holmes
Circuit Judge
34
Blakely v. USAA Casualty Insurance Co., No. 15-4059
BACHARACH, J., dissenting.
I respectfully dissent. Unlike the majority, I believe that a reasonable
fact-finder, guided by applicable Utah law, could find that as a result of
the defendant’s bad faith, the Blakelys suffered damages for
 emotional distress,
 lost income,
 appraisal expenses and attorney fees, and
 other attorney fees.
I also believe that the Blakelys could at least reasonably argue that the
recoverable damages included the diminution in the value of their house.
As a result, I would reverse the district court’s rulings.
I. The Blakelys allegedly suffered damages from breach of the
implied covenant of good faith and fair dealing.
Plaintiffs Mr. Alan Blakely and Mrs. Colelyn Blakely had a home
insurance policy with Defendant USAA Casualty Insurance Company. In
August 2002, a home fire caused significant damage to their home, leading
the Blakelys to submit an insurance claim to USAA.
The Blakelys were dissatisfied with USAA’s response, believing that
USAA had not paid enough for the fire damage, had refused to make
necessary repairs, had avoided communication, and had improperly
delegated tasks to non-adjusters. This dissatisfaction led the Blakelys to
take matters into their own hands, making repairs at their own expense,
suing the contractor responsible for the fire (Stone Touch), and invoking
the insurance policy’s option for an appraisal procedure. The appraisal
procedure led to a determination that USAA had substantially underpaid
the Blakelys. Complying with this determination, USAA paid more to the
Blakelys; and the parties agree that USAA has now paid everything
required under the express terms of the policy.
But the Blakelys allege that USAA had acted improperly earlier,
leading to this suit, which comes to us for the third time. See Blakely v.
USAA Cas. Ins. Co., 633 F.3d 944 (10th Cir. 2011); Blakely v. USAA Cas.
Ins. Co., 500 F. App’x 734 (10th Cir. 2012). The only remaining claim is
USAA’s alleged breach of the insurance policy’s implied covenant of good
faith and fair dealing. On this claim, the Blakelys assert five theories of
damages:
1. injuries from emotional distress
2. loss of income
3. expenses and attorney fees from the appraisal procedure
4. other attorney fees and
5. diminution in the value of their house. 1
1
The Blakelys also appear to assert a sixth theory: physical damages
from the exacerbation of their preexisting medical conditions. As the
majority explains, however, the Blakelys never presented this theory in
district court as a stand-alone claim. Maj. Op. at 15-16. Therefore, I
consider such damages as encompassed within the Blakelys’ emotional-
distress damages.
2
At a pretrial conference, the district court dismissed the Blakelys’
“diminution-in-value theory” as legally frivolous. USAA then moved for
summary judgment, asserting that the Blakelys could not legally recover
damages on their four other theories. The district court agreed and granted
summary judgment to USAA on these four theories. The majority affirms,
but I would reverse.
II. Legal Background
In this diversity case, we apply Utah substantive law. Erie R.R. Co.
v. Tompkins, 304 U.S. 64, 78 (1938). In applying Utah law, we follow the
opinions of Utah’s Supreme Court. Wade v. EMCASCO Ins. Co., 483 F.3d
657, 665-66 (10th Cir. 2007). If the Utah Supreme Court has not issued a
controlling opinion, we predict what the court would do, drawing guidance
from Utah’s other courts, appellate opinions in other states with similar
legal principles, federal district court opinions interpreting Utah law, and
“‘the general weight and trend of authority.’” Id. at 666 (quoting
MidAmerica Constr. Mgmt., Inc. v. MasTec N. Am., Inc., 436 F.3d 1257,
1262 (10th Cir. 2006)).
A. Utah’s Implied Covenant of Good Faith and Fair Dealing
All contracts in Utah contain an implied covenant of good faith and
fair dealing. Prince v. Bear River Mut. Ins. Co., 56 P.3d 524, 533 (Utah
2002). Under this covenant, the parties promise not to intentionally injure
3
one another’s right to the fruits of the contract. Id. To keep this promise,
the parties must act consistently with the contract’s common purpose and
the parties’ justified expectations. Id. In the insurance context, this means
that the insurer must reasonably investigate, evaluate, and resolve an
insured’s claim. Jones v. Farmers Ins. Exch., 286 P.3d 301, 304 (Utah
2012).
B. Consequential Damages for Breaching the Implied Covenant
A party who breaches the implied covenant of good faith and fair
dealing can incur liability for consequential damages. Machan v. UNUM
Life Ins. Co. of Am., 116 P.3d 342, 345 (Utah 2005). These damages are
not confined to the parties’ express contractual obligations. Id.
To recover such damages, the non-breaching party must prove that
the particular damages were foreseeable when the parties contracted.
Mahmood v. Ross, 990 P.2d 933, 938 (Utah 1999). Foreseeability hinges on
the nature and language of the contract and on the parties’ reasonable
expectations. Machan, 116 P.3d at 346.
Because damages lie “‘within the jury’s province,’” the existence and
amount of damages constitute questions of fact. Lopez v. United Auto. Ins.
Co., 274 P.3d 897, 905 (Utah 2012) (quoting Judd v. Drezga, 103 P.3d 135,
144 (Utah 2004)). In any given case, however, the court must “conform the
jury’s findings to applicable law.” Judd, 103 P.3d at 144. Put otherwise,
the jury makes factual findings against the backdrop of Utah law.
4
This backdrop includes guidance from the Utah Supreme Court on the
availability of damages for emotional distress. In an “‘ordinary commercial
contract,’” emotional-distress damages are foreseeable only if the damages
were both “a foreseeable result of the breach of contract and explicitly
within the contemplation of the parties.” Cabaness v. Thomas, 232 P.3d
486, 508 (Utah 2010) (emphasis in original) (quoting Stewart v. Rudner, 84
N.W.2d 816, 823 (Mich. 1957)).
In the insurance context, however, explicit contemplation is not
required. Insurance is purchased not only for compensation of a loss, but
also to “‘provide peace of mind for the insured.’” Id. at 507 (quoting Beck
v. Farmers Ins. Exch., 701 P.2d 795, 802 (Utah 1985)). Such peace of mind
is a fruit of the contract that “the insured has bargained for.” Machan, 116
P.3d at 345. Put otherwise, an insured’s mental wellbeing is always on the
minds of the contracting parties.
But not every type of an insured’s mental distress is foreseeable. The
Utah Supreme Court has held that emotional-distress damages are
foreseeable only in “unusual cases.” Beck, 701 P.2d at 802. The court did
not expressly define an “unusual” case, but indicated that an insurer could
not foresee the need to compensate for the “disappointment, frustration, or
anxiety” that an insured “normally” experiences in trying to obtain
insurance proceeds from the insurer. Id. at 802 n.6; see Cabaness, 232 P.3d
at 507-08. It appears, then, that emotional-distress damages are “unusual”
5
if these damages extend beyond the “normal[]” reactions of
disappointment, frustration, or anxiety. See Beck, 701 P.2d at 802 n.6; see
also Machan, 116 P.3d at 346 (suggesting that an insured could be
compensated for the exacerbation of medical conditions caused by
emotional stress (citing Acquista v. N.Y. Life Ins. Co., 730 N.Y.S.2d 272,
276 (N.Y. App. Div. 2001))); Billings v. Union Bankers Ins. Co., 918 P.2d
461, 467-68 (Utah 1996) (affirming an award of emotional-distress
damages when the insured’s lack of a complete recovery resulted in great
mental distress).
To summarize, for an insured to recover emotional-distress damages,
the damages must be unusual and foreseeable.
III. Summary Judgment Rulings: Emotional Distress, Lost Income,
Expenses and Attorney Fees for the Appraisal Procedure, and
Other Attorney Fees
We apply these legal principles in reviewing the summary-judgment
rulings. These rulings rejected the availability of damages for emotional
distress, lost income, use of the appraisal procedure, and attorney fees
unrelated to the approval procedure. I would reverse these rulings.
A. Standard of Review
We engage in de novo review, viewing the evidence and drawing all
reasonable inferences in favor of the Blakelys. Birch v. Polaris Indus.,
Inc., 812 F.3d 1238, 1251 (10th Cir. 2015). Summary judgment was proper
only if
6
 there was no genuine dispute regarding a material fact and
 USAA was entitled to judgment as a matter of law.
Id.
B. The district court improperly concluded that the Blakelys
are not entitled to consequential damages for emotional
distress.
The district court concluded that the Blakelys had failed to prove that
their emotional distress was unusual or foreseeable. This conclusion was
erroneous for two reasons:
1. The Blakelys presented evidence of damages for
emotional distress surpassing the mere “disappointment,
frustration, or anxiety” that commonly arises when
seeking insurance proceeds.
2. When entering the insurance agreement, the parties could
foresee emotional-distress damages arising from USAA’s
bad faith, as this agreement was meant to provide security
and peace of mind by insuring the Blakelys’ most
intimate space—their home.
First, Mr. and Mrs. Blakely’s injuries are “unusual” and would be
compensable under Utah law. For example, the Blakelys presented
evidence of the development and exacerbation of medical conditions
resulting from stress created by USAA’s alleged bad faith. See Machan,
116 P.3d at 346 (suggesting that an insured could be compensated for
stress-induced exacerbation of medical conditions).
For example, Mr. Blakely presented evidence of high blood pressure
caused by his interactions with USAA. See Appellants’ App’x, vol. II at
7
353; Appellants’ App’x, vol. VII at 1318; Appellants’ App’x, vol. VIII at
1614. Mrs. Blakely similarly presented evidence of depression,
fibromyalgia, and headaches from the “continued stress” created by
USAA’s conduct. Appellants’ App’x, vol. I at 176; Appellants’ App’x, vol.
VI at 1138; see also Appellants’ App’x, vol. II at 353 (alleging that the
conflict with USAA “seriously progressed” Mrs. Blakely’s physical
conditions). These injuries are not the result of typical “disappointment,
frustration, or anxiety” from dealing with an insurance company, and the
district court erred in concluding otherwise. 2
The Blakelys also presented evidence involving heightened distress
when they had to leave their home for an extended period and return before
the repairs were complete. This evidence indicated that the Blakelys
needed to return too early, exposing them to the sight of fire damage and
the smell of smoke, which created distress that was beyond ordinary.
Appellant’s App’x, vol. II at 353, 371.
Second, the district court erred by concluding that the contracting
parties could not have foreseen damages for emotional distress. The Utah
2
In the alternative, USAA contends that the Blakelys lack evidence of
exacerbation of their medical conditions. Appellee’s Resp. Br. at 19-22.
The Blakelys maintain otherwise and point out that this contention was not
argued as a ground for summary judgment. Appellants’ Reply Br. at 12.
Assuming that USAA properly raised this contention, I would conclude
that a reasonable fact-finder could infer exacerbation of medical conditions
from USAA’s handling of the claim. See id. at 13-15 (providing citations
to the summary-judgment record).
8
Supreme Court has explained that insurance is purchased to “provide peace
of mind.” Beck v. Farmers Ins. Exch., 701 P.2d 795, 802 (Utah 1985). And
a breach of the implied covenant of good faith for a contract that is
“specifically directed toward matters of mental concern and solicitude” is
likely to result in damages for emotional distress and mental anguish.
Cabaness v. Thomas, 232 P.3d 486, 508 (Utah 2010). 3
Not all damages are foreseeable when an insurer violates an
insurance policy in bad faith. See Beck, 701 P.2d at 802 (noting that in
unusual cases, emotional-distress damages “might be provable”). But this
was not just any insurance policy; this was insurance that covered the
insureds’ home. See Hargrave v. Leigh, 273 P. 298, 301 (Utah 1928)
(noting that the “natural consequence” for being forced to leave one’s
home can include “mental anguish and suffering”). A fact-finder might
reasonably find that USAA could foresee that its conduct would directly
affect the Blakelys’ ability to enjoy the refuge and solace of their home,
3
The district court characterized Cabaness as a clarification or
modification of Beck, creating a requirement for explicit contemplation of
emotional-distress damages at the time of the contract. See Blakely v.
USAA Cas. Ins. Co., No. 06-cv-00506, 2015 WL 1522752, at *9 (D. Utah
Apr. 2, 2015) (stating that Cabaness “clarified, or at least modified” Beck,
and holding that emotional-distress damages were not foreseeable in part
because “there is no evidence that emotional damages . . . were
contemplated explicitly by the parties”). But, Cabaness discussed explicit
contemplation in the context of an “ordinary commercial contract,” as
opposed to insurance contracts, which always contemplate an insured’s
peace of mind. See Part II(B), above.
9
resulting in the sort of emotional distress that the Blakelys allegedly
suffered. See Orkin Exterminating Co. v. Donavan, 519 So. 2d 1330, 1333
(Ala. 1988) (“The breach of a contract . . . which affects the habitability of
a house, can reasonably be foreseen to affect the solicitude and well-being
of the occupants.”); see also John A. Sebert, Jr., Punitive and
Nonpecuniary Damages in Actions Based Upon Contract: Toward
Achieving the Objective of Full Compensation, 33 UCLA L. Rev. 1565,
1589 & n.88 (1986) (explaining that courts permit damages for emotional
distress in connection with contracts involving a person’s home, while
courts have disallowed damages for emotional distress in commercial
contexts).
The Blakelys’ policy specifically addressed their ability to live in
their house. For example, USAA promised to insure any additional living
expenses if the Blakelys’ house was “not fit to live in . . . so that [the
Blakelys could] maintain [their] normal standard of living.” Appellants’
App’x, vol. VI at 1233. And the policy specifically disclaimed coverage
for the Blakelys’ commercial activities conducted on the premises,
providing further evidence that the insurance policy was specifically
directed toward matters of mental concern and solicitude. See id. at 1216,
1228 (excluding insurance coverage for “business” or “rental” property and
activities).
10
For this reason, a material fact-question existed on whether USAA
could have foreseen the availability of emotional-distress damages. The
Blakelys presented evidence suggesting more than simple disappointment,
frustration or anxiety; and the parties’ focus on the intimate space of a
home could have led USAA to foresee damages for emotional distress.
Thus, the district court erred in granting summary judgment to USAA on
the claim for emotional-distress damages.
C. The district court erred in granting summary judgment to
USAA on the Blakelys’ claims for consequential damages
from (1) lost income, (2) expenses and attorney fees
incurred in the appraisal procedure, and (3) attorney fees
unrelated to the appraisal procedure.
The summary-judgment ruling also addressed three other forms of
consequential damages: (1) lost income, (2) expenses and attorney fees
from using the optional appraisal procedure, and (3) other attorney fees.
For the first two—lost income and appraisal damages—the district court
held that the damages were unavailable because they were unforeseeable. I
respectfully disagree.
For the third form of damages—attorney fees unrelated to the
appraisal—the district court divided the damages into two subcategories:
1. attorney fees from the Stone Touch litigation and
2. attorney fees from the present litigation.
For the first subcategory, the district court held that attorney fees were not
reasonably foreseeable. For the second subcategory, the court concluded
11
that the Blakelys could not recover such fees given the absence of any
other predicate damages. I believe that the district court erred with regard
to both subcategories.
1. The fact-finder might reasonably infer that USAA could
foresee the need to compensate for lost income upon a
breach of the implied covenant of good faith and fair
dealing.
The district court concluded that the Blakelys’ home insurance policy
did not cover lost income. According to the district court, the absence of
express coverage for lost income prevented USAA from foreseeing this
type of loss. But the district court mistook the nature of its inquiry.
“[C]onsequential damages that an insured might foreseeably incur due to
an insurance company’s breach of the implied covenant of good faith may
encompass ‘losses well in excess of the policy limits, such as for a home
. . . .’” Machan v. UNUM Life Ins. Co. of Am., 116 P.3d 342, 345-46 (Utah
2005) (quoting Beck v. Farmers Ins. Exch., 701 P.2d 795, 802 (Utah
1985)). The Blakelys allegedly suffered lost income because they had spent
personal time repairing their home.
The fact-finder might reasonably find that USAA could foresee the
need to compensate for lost income upon a breach of the implied covenant
of good faith and fair dealing. And foreseeability is a question of fact,
which generally cannot be decided on summary judgment. See Rees v.
Albertson’s, Inc., 587 P.2d 130, 133 (Utah 1978) (stating that causation
12
requires reasonable foreseeability, which involves a factual question
“generally for the fact-trier, court or jury, to determine”). Thus, USAA was
not entitled to summary judgment on the claim for lost income.
2. Appraisal-related expenses and attorney fees could be
recoverable upon a breach of the implied covenant of good
faith and fair dealing.
The district court also rejected the Blakelys’ claims involving
expenses and attorney fees from using the appraisal procedure, reasoning
that the insurance policy defined who would pay. But the Blakelys
presented evidence showing that they had resorted to the appraisal
procedure only because USAA had breached the implied covenant of good
faith and fair dealing.
This evidence suggests that the Blakelys would not have needed to
use the appraisal procedure if USAA had acted in good faith. The appraisal
procedure was only an option, not a requirement, in the event of a dispute.
See Appellants’ App’x, vol. VI at 1226 (“[E]ither party can demand . . .
appraisal . . . .” (emphasis added)); id. at 1235 (noting that USAA will pay
for losses if the parties either reach an agreement, go through appraisal, or
receive “entry of a final judgment”). A fact-finder could reasonably find
that the policy had been designed to allocate expenses for reasonable
disputes, not disputes created by USAA’s breach of the implied covenant
of good faith and fair dealing. See Beck v. Farmers Ins. Exch., 701 P.2d
795, 801 (Utah 1985) (“When an insurer has breached [the implied] duty
13
[of good faith], it is liable for damages suffered in consequence of that
breach.”).
Nonetheless, USAA argues that the Blakelys waited too long to
invoke the appraisal procedure. Appellee’s Resp. Br. at 22. The majority
similarly states that the Blakelys “offer no explanation for their three-year
delay in invoking the appraisal procedure” and characterizes the appraisal
damages as “delay-related distress.” Maj. Op. at 20.
But the appraisal procedure was optional, and the fact-finder could
reasonably find that the Blakelys had a good reason for delaying appraisal.
As we said in a prior appeal, the Blakelys waited because “they had been
trying to pursue their claims against [Stone Touch].” Blakely v. USAA Cas.
Ins. Co., 500 F. App’x 734, 737 (10th Cir. 2012). And the Blakelys
presented evidence indicating that they had to sue Stone Touch only
because USAA had allegedly acted in bad faith. In these circumstances, the
fact-finder could justifiably find that the Blakelys had acted reasonably in
the face of USAA’s resistance, pursuing the tortfeasor that caused the fire
and then resorting to the appraisal procedure.
In my view, a genuine, material factual dispute exists on the
recoverability of the Blakelys’ expenses and attorney fees incurred in the
appraisal procedure. 4
4
USAA also asserts that it acted in good faith because it “did not deny
the appraisal request.” Appellee’s Resp. Br. at 23. But USAA’s
14
3. The parties’ agreement may have contemplated other
attorney fees.
The Blakelys also claimed attorney fees from the Stone Touch
litigation and from the present litigation. The district court rejected these
claims.
For attorney fees from the Stone Touch litigation, the district court
reasoned that attorney fees were not foreseeable given the policy’s
discussion of the appraisal procedure. But as discussed above, the
appraisal procedure was optional. See Part III(C)(2). A fact-finder could
reasonably find that USAA had foreseen that the Blakelys would sue a
responsible third party and incur attorney fees as a result of USAA’s bad
faith. 5
For attorney fees from the present litigation, the district court did not
discuss foreseeability. Instead, the district court determined that such
attorney fees could be awarded only if there was another predicate damage
participation in the appraisal does not prevent a finding of bad faith for
earlier conduct.
5
In the alternative, USAA argues that (1) a subrogation agreement
precludes such fees and (2) USAA already paid such fees. Appellee’s Resp.
Br. at 25-26. The Blakelys maintain otherwise and contend that USAA did
not raise these arguments in the motion for summary judgment. Appellants’
Reply Br. at 21-22. I agree that USAA did not raise these arguments in its
summary-judgment motion; therefore I would not consider these
arguments. See Burnette v. Dresser Indus., Inc. 849 F.2d 1277, 1285 (10th
Cir. 1988) (“We will not address the first theory because [the defendant]
did not raise it in its motion for summary judgment . . . .”).
15
award. Having disposed of all of the Blakelys’ other theories on damages,
the district court denied these attorney fees.
In my view, however, the Blakelys may be able to recover other
damages. Thus, I would reject the district court’s rationale for denying
attorney fees. 6 In addition, I believe that a jury could find that such
attorney fees were foreseeable. Thus, I would reverse the award of
summary judgment on the Blakelys’ claim for attorney fees incurred in this
litigation.
IV. Ruling on Frivolousness: Damages for Diminution in the Value of
the Blakelys’ House
At a pretrial conference, the district court dismissed as legally
frivolous the Blakelys’ claim involving damages from diminution in the
value of their house. Appellants’ App’x, vol. VIII at 1575-76; see also
Blakely v. USAA Cas. Ins. Co., 633 F.3d 944, 949 (10th Cir. 2011) (noting
that a district court may dismiss frivolous claims at a pretrial conference
under Federal Rule of Civil Procedure 16(c)(2)(A)). In my view, the ruling
was erroneous.
In considering this ruling, we apply the abuse-of-discretion standard.
Blakely, 633 F.3d at 949.
6
As a result, I have not addressed the Blakelys’ contention that
attorney fees for this litigation should be available even if the
compensatory award were limited to nominal damages.
16
We previously found an abuse of discretion when the district court
dismissed the implied-covenant claim. Blakely v. USAA Cas. Ins. Co., 633
F.3d 944, 949-50 (10th Cir. 2011). There we stated the standard:
“[A] complaint . . . is frivolous where it lacks an arguable basis
either in law or in fact.” See Neitze v. Williams, 490 U.S. 319,
325, 109 S. Ct. 1827, 104 L. Ed. 2d 338 (1989); Denton v.
Hernandez, 504 U.S. 25, 33, 112 S. Ct. 1728, 118 L. Ed. 2d 340
(1992) (describing frivolous claims as “fanciful,” “fantastic,”
and “delusional,” and holding “a finding of factual
frivolousness is appropriate when the facts alleged rise to the
level of the irrational or the wholly incredible, whether or not
there are judicially noticeable facts available to contradict
them.”).
Id. Applying this standard, our court concluded that the Blakelys’ claim
was not “wholly incredible” and was not frivolous. Id. at 950. In my view,
these conclusions are equally fitting here.
The district court considered the diminution-in-value claim as
frivolous because USAA had fulfilled its express contractual obligations,
which included paying for home repairs. Appellants’ App’x, vol. VIII at
1575-76. The Blakelys agreed that USAA had paid for such repairs, but
claimed that USAA’s bad faith had required use of the insurance proceeds
for appraisal and litigation expenses. Id. at 1576. The district court
regarded the claim as frivolous because the Blakelys had not repaired their
home even though they had been paid for these repairs. Id.
On appeal, the Blakelys reassert their position with some
embellishment. See Appellant’s Opening Br. at 46-50. In response, USAA
17
reasserts the district court’s reasoning. Appellee’s Resp. Br. at 32-33
(“Despite receiving money to restore the home to its original condition, the
Blakelys did not repair that home.”). 7
We need not opine on whether the Blakelys’ claim is persuasive, for
it is at least arguable. Because of USAA’s alleged bad faith, the Blakelys
had to spend substantial funds for the appraisal and litigation. To spend
those funds, the Blakelys had to dip into coffers that could otherwise have
been used for home repairs. Thus, the Blakelys can reasonably argue that
USAA’s breach of the implied covenant caused the house to diminish in
value notwithstanding USAA’s eventual payments.
Neither USAA nor the district court has directly addressed the
Blakelys’ theory or identified any pertinent case law. Indeed, the issue
appears to be one of first impression for any state. In light of the absence
of pertinent guidance from USAA or any case law, I would regard the
Blakelys’ theory as at least arguable. See Suazo v. NCL (Bahamas), Ltd.,
822 F.3d 543, 556 (11th Cir. 2016) (“Where an appeal requires a court to
decide an issue of first impression in a circuit court, it is not frivolous.”).
7
In the alternative, USAA asserts that the policy did “not provide for
any diminution of value.” Appellee’s Resp. Br. at 32. But damages for
breaching the covenant of good faith and faith dealing are not confined to
the parties’ express contractual obligations. Machan v. UNUM Life Ins. Co.
of Am., 116 P.3d 342, 345-46 (Utah 2005); see Part II(B), above.
18
As a result, I would reverse the dismissal of this claim based on
frivolousness.
V. Conclusion
In my view, we should reverse the district court’s grant of summary
judgment. The district court erroneously concluded that the Blakelys were
foreclosed from claiming consequential damages for emotional distress,
and the district court made factual findings that should have been left for
the jury to decide. The district court also erroneously dismissed the
Blakelys’ claim for damages from their home’s diminution in value.
Because the majority upholds these rulings, I respectfully dissent.
19