Paros Properties v. Colorado Casualty Ins Co , 835 F.3d 1264 ( 2016 )

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS August 29, 2016
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
PAROS PROPERTIES LLC,
Plaintiff - Appellant,
No. 15-1369
v.
COLORADO CASUALTY INSURANCE
COMPANY; OHIO SECURITY
INSURANCE COMPANY,
Defendants - Appellees.
_________________________________
Appeal from the United States District Court
for the District of Colorado
(D.C. No. 1:14-CV-01190-MSK-NYW)
_________________________________
Mark D. Changaris (Kathleen T. Alt and George V. Berg, Jr., with him on the brief),
Berg Hill Greenleaf & Ruscitti, LLP, Boulder, Colorado, for Plaintiff-Appellant.
Brian J. Spano (Lyndsay K. Arundel, with him on the brief), Lewis Roca Rothgerber
LLP, Denver, Colorado, for Defendants-Appellees.
_________________________________
Before TYMKOVICH, Chief Judge, HARTZ, and MORITZ, Circuit Judges.
_________________________________
HARTZ, Circuit Judge.
_________________________________
I. INTRODUCTION
A mudslide destroyed a commercial building (the Building) in Boulder, Colorado,
owned by Paros Properties LLC (the Owner) and insured under a policy (the Policy)
issued by Colorado Casualty Insurance Company (the Insurer). The Owner filed an
insurance claim but the Insurer denied payment because damage from mudslides is
excluded from policy coverage. The Owner then filed a state-court suit seeking payment
under the Policy and damages for bad-faith breach of the insurance contract. It argued
that the mudslide caused the building to explode, bringing the incident within the scope
of an explosion exception to the Policy’s mudslide exclusion. The Insurer removed the
action to federal court, which granted summary judgment to the Insurer. On appeal the
Owner argues (1) that the district court lacked subject-matter jurisdiction because the
Insurer’s removal from state court was untimely and (2) that the district court erred on the
merits in holding that there was no coverage. We have jurisdiction under 28 U.S.C.
§ 1291. We hold that the notice of removal was too late. But because the district court
correctly ruled on the merits and the jurisdictional requirements were satisfied at that
time, we affirm the judgment below rather than burden the state court and the parties by
requiring relitigation.
II. BACKGROUND
Torrential rainfall hit Boulder in September 2013. On the night of September 12 a
violent flow of water, mud, and debris thundered down a hillside into the Building,
causing extensive damage. The Owner submitted an insurance claim but the Insurer
denied it after a brief inspection. It explained in a letter: “The inspection revealed that
there was a Mudslide that caused the damage to your buildings. Damages caused by
2
Mudslides or Mudflows are specifically excluded under your policy.” Aplt. App., Vol. 2
at 268.
The Owner retained counsel to challenge the denial. Counsel hired an engineer,
who inspected the Building on October 15, 2013, and (after a site inspection a year later)
issued a report on his findings on November 3, 2014. According to the report, “The
debris laden flow impacted the south elevation of the structure, causing a sudden reaction
of the wall structure.” Report of Edward L. Fronapfel, Supp. Aplee. App., Vol. 1 at 65.
The impact caused the property to “split into two separate structures along a north-south
wall line. The eastern portion laterally displaced to the northeast, while the western
portion laterally displaced to the northwest. The roof structure collapsed where the
building separation occurred due to the sudden loss of the bearing walls.” Id. at 73. The
Owner demolished the building on October 23, 2013.
On October 24, 2013, counsel for the Owner sent a letter to the Insurer claiming
wrongful denial of coverage. It stated that the “force of the mudslide caused [the
Owner’s] building, literally, to explode,” Aplt. App., Vol. 4 at 631, and that the resultant
damage was therefore compensable under the explosion exception to the mudslide
exclusion in the Policy. It also accused the Insurer of failing to conduct a full and
reasonable investigation of the Owner’s claim before denying coverage and, somewhat
oddly given the building’s demolition, requested that the Insurer “complete its
investigation into the facts and circumstances surrounding the loss to the . . . Building.”
Id. at 634. On November 14, the Insurer, which had not been advised of the demolition,
3
informed the Owner that it would continue to investigate the claim and had scheduled an
engineer to inspect the site the next morning. When the engineer arrived, he saw that the
Building had been demolished.
On January 29, 2014, the Owner’s attorney sent an email to the Insurer with
“further explanation of the amounts of the losses suffered by our client.” Aplt. App., Vol.
4 at 625. The email indicated that the Building loss exceeded $1.1 million. (The policy
limit was $907,600.) The record contains no indication that the Insurer responded to this
email.
On February 26, 2014, the Owner filed its suit in Colorado state court. The
complaint alleged “catastrophic damage to the Property and its contents” and claimed
damages relating to cleanup, reconstruction, and loss of income and use. Complaint,
Aplt. App., Vol. 1 at 21 ¶ 19. It did not quantify the damages other than to say that “[t]he
amount in dispute is more than $15,000.” Id. at 20 ¶ 6. It also referenced, but did not
attach, correspondence sent “[o]n or about January 30, 2014.” Id. at 23 ¶ 31. On appeal
the Owner claims that this was a reference to its January 29 email tallying losses
exceeding $1.1 million.
On April 23, 2014, in its initial damages disclosures under Colorado Rule of Civil
Procedure 26(a)(1)(C), the Owner claimed to be “in the process of calculating specific
damage amounts” and listed the amount of all damages as “TBD.” Aplt. App., Vol. 1 at
30. Two days later, the Owner served its first supplemental disclosures, enumerating
damages exceeding $1.3 million. Id. at 32–33. Three days after that, the Insurer
4
removed the case to the United States District Court for the District of Colorado. The
Owner moved that court to remand, but the court denied the motion and later granted
summary judgment to the Insurer.
III. TIMELINESS OF REMOVAL
A. General Principles
The Insurer was served with the complaint on February 26, 2014, and filed its
notice of removal on April 28, 2014. Under the federal removal statute the notice
ordinarily must be filed “within 30 days after the receipt by the defendant, through
service or otherwise, of a copy of the initial pleading setting forth the claim for relief
upon which such action or proceeding is based.” 28 U.S.C. § 1446(b)(1).1 This deadline
was clearly not met. The Insurer relies, however, on an escape hatch. Under another
provision of the removal statute, “if the case stated by the initial pleading is not
removable, a notice of removal may be filed within 30 days after receipt by the
defendant, through service or otherwise, of a copy of an amended pleading, motion, order
or other paper from which it may first be ascertained that the case is one which is or has
1
28 U.S.C. § 1446(b)(1) states:
The notice of removal of a civil action or proceeding shall be filed within
30 days after the receipt by the defendant, through service or otherwise, of a
copy of the initial pleading setting forth the claim for relief upon which
such action or proceeding is based, or within 30 days after the service of
summons upon the defendant if such initial pleading has then been filed in
court and is not required to be served on the defendant, whichever period is
shorter.
5
become removable.” Id. § 1446(b)(3).2 Most courts, including this one, have
consistently interpreted the term other paper broadly to include state-court filings and
discovery. See, e.g., Huffman v. Saul Holdings Ltd. Partnership, 194 F.3d 1072, 1079
(10th Cir. 1999) (30-day clock triggered by deposition testimony); DeBry v.
Transamerica Corp., 601 F.2d 480, 488–89 (10th Cir. 1979) (clock not triggered by
ambiguous deposition testimony); 14C Charles Alan Wright and Arthur R. Miller,
Federal Practice and Procedure § 3731, at 524 (“The federal courts have given the
reference to ‘other paper’ an expansive construction and have included a wide array of
documents within its scope.”) And this position has now been codified in 28 U.S.C. §
1446(c)(3)(A).3
The Insurer points out that it could not remove the case to federal court under
diversity jurisdiction (it is not disputed that the Owner and the Insurer are citizens of
different states) unless the amount in controversy was at least $75,000, see 28 U.S.C. §
2
28 U.S.C. § 1446(b)(3) states:
Except as provided in subsection (c) [setting a one-year time limit, unless
the plaintiff acted in bad faith to prevent removal], if the case stated by the
initial pleading is not removable, a notice of removal may be filed within
30 days after receipt by the defendant, through service or otherwise, of a
copy of an amended pleading, motion, order or other paper from which it
may first be ascertained that the case is one which is or has become
removable.
3
28 U.S.C. § 1446(c)(3)(A) states:
If the case stated by the initial pleading is not removable solely because the
amount in controversy does not exceed the amount specified in section
1332(a), information relating to the amount in controversy in the record of
the State proceeding, or in responses to discovery, shall be treated as an
‘other paper’ under subsection (b)(3).
6
1332(a) (requirements for diversity jurisdiction); id. § 1441(a) (requirements for
removal), and it contends that the initial complaint left in doubt whether the Owner’s
claim equaled or exceeded $75,000. It says that it was not put on notice until April 25,
when the Owner disclosed its damages computation of over $1.3 million.
The question before us, then, is when could the Insurer “first . . . ascertain[] that
the case [was] one which [was] or [had] become removable.” Id. § 1446(b)(3). In
particular, could the Insurer have ascertained removability from the complaint itself and,
if not, could it have done so from some “other paper” it received before the Owner
disclosed its damages computation?
This circuit has been very strict in assessing whether the grounds for removal are
ascertainable. We require a specific allegation that damages exceed the federal
jurisdictional amount of $75,000.4 The 30-day clock does not begin to run until the
plaintiff provides the defendant with “clear and unequivocal notice” that the suit is
removable. Akin v. Ashland Chemical Co., 156 F.3d 1030, 1036 (10th Cir. 1998). In
4
It also suffices to allege facts from which the amount may be easily derived through
arithmetic. For example, if a class-action complaint seeks $25,000 for each of 500
plaintiffs, it alleges damages of $12.5 million. But the amount must be unambiguous.
Compare Kuxhausen v. BMW Fin. Servs. NA LLC, 707 F.3d 1136, 1140 (9th Cir. 2013)
(“[T]he statute requires a defendant to apply a reasonable amount of intelligence in
ascertaining removability. Multiplying figures clearly stated in a complaint is an aspect
of that duty.” (internal quotation marks omitted) (citation omitted)) with Cutrone v.
Mortgage Elec. Registration Sys., Inc., 749 F.3d 137, 139 (2d Cir. 2014) (In a case under
the Class Action Fairness Act requiring that the amount in controversy exceed
$5,000,000, see 28 U.S.C. § 1332(d)(2), “the named plaintiffs’ identification of their
damages ($6,835.20) and their allegation that the potential class ‘includes hundreds, and
likely thousands, of persons and entities,’ were not adequate to trigger the 30-day
removal period.”).
7
Akin federal jurisdiction hinged upon whether exposure to a toxic substance occurred
within a federal enclave. See id. at 1034. The complaint alleged “injuries sustained
‘while working at’ Tinker Air Force Base.” Id. at 1035. We held that this allegation “did
not provide unequivocal notice of the right to remove” because the phrase while working
at was ambiguous; it could have been a “geographical modifier” (meaning the exposure
occurred on the base) or a “durational modifier” (exposure occurred during the time the
plaintiffs were employed by the base). See id.
Huffman, 194 F.3d 1072, is similar. The plaintiffs leased space to operate a retail
furniture store, but the defendant landlord failed to fix a leaking roof for a number of
months. See id. at 1075. The lessees filed a complaint containing numerous allegations
from which the defendant might well have surmised that damages exceeded the
jurisdictional floor: that the “constant problem with the roof leaking made it almost
impossible to carry on a business,” that it “was impossible to avoid or prevent the moldy,
damp, smelly atmosphere of the store,” and that “[c]ustomers complained and often left
quickly without taking time to browse or really shop the furniture items because of these
intolerable conditions.” Id. (internal quotation marks omitted). Further, the complaint
sought actual and punitive damages. Id. at 1077. But as to dollar amount the complaint
said only that the plaintiffs sought “in excess of $10,000.” Id. at 1077 (internal quotation
marks omitted). We ruled that based on the complaint, the defendant “could only guess
as to whether the claim exceeded $75,000” and that the complaint therefore failed to put
the defendant on notice of removability. Id. The 30-day clock was not triggered until the
8
store owner’s deposition testimony that the plaintiffs sought more than $300,000. See id.
at 1079.
DeBry, 601 F.2d 480, illustrates that our strict standard also applies to notice
provided after the complaint. We considered whether the plaintiff’s deposition testimony
gave notice that he was a citizen of Utah (for purposes of establishing diversity of
citizenship). The complaint alleged that he had been a citizen of Utah until June 1972.
See id. at 481–82. He testified that after “mov[ing] to California [from Salt Lake City]
the first part of July of 1972,” he had “returned [to Salt Lake City] in August of [1974]
and purchased a unit.” Id. at 495. We held that this testimony did not give notice.
Because the plaintiff “did not say that he had permanently moved,” the defendant did not
“learn with certainty” from the deposition that the plaintiff was a citizen of Utah. Id. at
488–89.
Our strict rule is justified by important practical considerations. Litigation
concerning when the defendant realized or should have realized the amount in
controversy or the like can expend considerable resources of the court and the parties.
And the expenditure is wholly unnecessary. Any time the plaintiff wishes to start the 30-
day clock, it can provide the defendant with an unambiguous notice of what is being
claimed. For similar reasons, other circuits have held that they will not inquire into a
defendant’s subjective knowledge or what the defendant should have inferred from an
investigation or a review of its files. See, e.g., Moltner v. Starbucks Coffee Co., 624 F.3d
34, 38 (2d Cir. 2010) (“[T]he removal clock does not start to run until the plaintiff serves
9
the defendant with a paper that explicitly specifies the amount of monetary damages
sought . . . . Requiring a defendant to read the complaint and guess the amount of
damages that the plaintiff seeks will create uncertainty and risks increasing the time and
money spent on litigation.”); Foster v. Mut. Fire, Marine & Inland Ins. Co., 986 F.2d 48,
54 (3d Cir. 1993), overruled on other grounds by Murphy Bros., Inc. v. Michetti Pipe
Stringing, Inc., 526 U.S. 344 (1999) (“[T]he relevant test is not what the defendants
purportedly knew, but what [the plaintiff’s] documents said.”); Lovern v. Gen. Motors
Corp., 121 F.3d 160, 162 (4th Cir. 1997) (“[W]e will not require courts to inquire into the
subjective knowledge of the defendant, an inquiry that could degenerate into a mini-trial
regarding who knew what and when . . . . [The grounds for removal must] be apparent
within the four corners of the initial pleading or subsequent paper.”); Mumfrey v. CVS
Pharmacy, Inc., 719 F.3d 392, 399 (5th Cir. 2013) (seeking to “promote efficiency by
preventing courts from expending copious time determining what a defendant should
have known or have been able to ascertain at the time of the initial pleading” and to
“avoid encouraging defendants to remove cases prematurely for fear of accidentally
letting the thirty-day window to federal court close when it is unclear that the initial
pleading satisfies the amount in controversy”); Graiser v. Visionworks of Am., Inc., 819
F.3d 277, 285 (6th Cir. 2016) (“[A] defendant is not required to search its own business
records or perform an independent investigation into a plaintiff’s indeterminate
allegations to determine removability.” (internal quotation marks omitted)); Walker v.
Trailer Transit, Inc., 727 F.3d 819, 825 (7th Cir. 2013) (requiring “specific and
10
unambiguous notice that the case satisfies federal jurisdictional requirements and
therefore is removable. Assessing the timeliness of removal should not involve a fact-
intensive inquiry about what the defendant subjectively knew or should have discovered
through independent investigation.”); In re Willis, 228 F.3d 896, 897 (8th Cir. 2000) (per
curiam) (“[T]he thirty-day time limit of section 1446(b) begins running upon receipt of
the initial complaint only when the complaint explicitly discloses the plaintiff is seeking
damages in excess of the federal jurisdictional amount.”); Carvalho v. Equifax Info.
Servs., LLC, 629 F.3d 876, 886 (9th Cir. 2010) (“We adopted this bright-line approach to
avoid the spectre of inevitable collateral litigation over whether defendant had subjective
knowledge, or whether defendant conducted sufficient inquiry.” (alterations and internal
quotation marks omitted)); cf. Romulus v. CVS Pharm., Inc., 770 F.3d 67, 80 (1st Cir.
2014) (“The timeliness inquiry is limited to the information in the plaintiffs’ papers. . . .
The defendant has no duty to perform significant investigation of its own data to ascertain
removability.”).5
We now turn to the specifics of this case.
B. Application to this case
5
On the other hand, a defendant need not await such unambiguous notice before filing a
notice of removal. Once it reasonably believes that the jurisdictional prerequisites have
been satisfied, it can properly seek removal. The plaintiff may decide not to object. But
if there is a dispute, the court can resolve the parties’ factual and legal conflicts. See Dart
Cherokee Basin Operating Co., LLC v. Owens, 135 S. Ct. 547, 553–54 (2014) (“If the
plaintiff contests the defendant’s allegation, . . . both sides submit proof and the court
decides, by a preponderance of the evidence, whether the amount-in-controversy
requirement has been satisfied.”). That the defendant has the right to remove does not
mean the defendant has the duty to remove, which is triggered only by receipt of clear
and unequivocal notice from the plaintiff.
11
The Owner relies on two sources to establish that the Insurer should have
ascertained the amount in controversy more than 30 days before it filed its notice of
removal: (1) an email sent before suit was filed and (2) the civil cover sheet filed with the
complaint. We first address the email.
1. Presuit email
On January 29, 2014, the Owner’s counsel sent an email to the Insurer setting
forth an assessment of the losses suffered from destruction of the Building. The
assessment, which totaled almost $1.2 million, arose from damage to the building, lost
rental income, and debris removal. We first consider whether the email can be
considered an “other paper” and then whether it would suffice to provide notice as part of
the complaint.
A written demand from counsel may be an “other paper” under § 1446(b)(3)
“from which it may first be ascertained that the case is one which is or has become
removable.” Several circuit courts have so held. See Romulus, 770 F.3d at 78; Babasa v.
LensCrafters, Inc., 498 F.3d 972, 975 (9th Cir. 2007); Addo v. Globe Life & Acc. Ins.
Co., 230 F.3d 759, 762 (5th Cir. 2000). See generally Wright & Miller, Federal Practice
and Procedure § 3731, at 524, 545 (“The federal courts have given the reference to ‘other
paper’ an expansive construction and have included a wide array of documents within its
scope . . . [including] correspondence between the parties and their attorneys or between
the attorneys.”). But those cases have involved only postsuit demands. This limitation
makes sense because the statutory language clearly does not contemplate “papers”
12
submitted before the complaint was filed. After all, the removal clock under § 1446(b)(3)
starts ticking upon receipt of the “paper,” so the time for removal after receipt of a presuit
paper could well expire before service of the complaint and would never extend beyond
the time permitted by § 1446(b)(1)—which is 30 days after service of the complaint or
summons. We agree with the other circuits to have considered the matter that a presuit
communication is not an “other paper.” See Chapman v. Powermatic, Inc., 969 F.2d 160,
164 (5th Cir. 1992) (“By its plain terms the statute requires that if an ‘other paper’ is to
trigger the thirty-day time period of the second paragraph of § 1446(b), the defendant
must receive the ‘other paper’ only after it receives the initial pleading.”); Carvalho, 629
F.3d at 885–86 (same).
Perhaps, however, presuit demand could provide adequate notice if it were
incorporated into the complaint. The Owner points out that its complaint contains the
allegation that “[o]n or about January 30, 2014, [Owner] followed up with [the Insurer]
again to provide updated information regarding [the Owner’s] damages.” Complaint,
Aplt. App., Vol. 1 at 23 ¶ 31. But this reference fails for two reasons. First, there is
ambiguity about the date. The allegation in the complaint refers to an email sent “on or
about January 30,” which is not a “clear and unequivocal” reference to an email actually
sent on January 29. Second, the email does not communicate a demand. It sets forth
alleged damages without stating how much the Insurer must pay. Indeed, the total
damages asserted in the email exceed the policy limits, so the Owner was presumably not
seeking payment of all the listed damages. Also, if the Owner’s claim was limited to the
13
loss caused by an explosion resulting from the mudslide, the claim would not include
property damage caused by the mudslide alone.
2. Civil Cover Sheet
The Owner also alleges that the Insurer was on notice of the amount in
controversy because of the civil cover sheet filed in state court with the complaint. For
cases seeking $100,000 or less, Colorado uses a simplified procedure with detailed early
disclosures and limited discovery. See C.R.C.P. 16.1. So that the court can determine
whether the procedure applies, civil complaints (except in certain types of excluded cases
not present here) must be accompanied by a civil cover sheet indicating whether the
amount in controversy exceeds $100,000. See C.R.C.P. 16.1(b)(3). In this case the
Owner checked the box indicating that the suit sought more than $100,000.
If the cover sheet is not considered part of the “initial pleading” under §
1446(b)(1), it is at least properly considered an “other paper” under § 1446(b)(3). The
question is whether its content provides adequate notice.
We previously declined to decide in an unpublished opinion whether a defendant
could support its removal notice by reference to a plaintiff’s check mark on the Colorado
civil cover sheet. See Warner v. CitiMortgage, Inc., 533 Fed. Appx. 813, 816 (10th Cir.
2013). But at least one federal district judge in Colorado has determined that the cover
sheet is notice that starts the removal clock. See Henderson v. Target Stores, Inc., 431 F.
Supp. 2d 1143, 1144 (D. Colo. 2006) (civil cover sheet is an “other paper” that put the
defendant on notice that the amount in controversy exceeded $75,000). We think that
14
view is sound. There is no ambiguity in the cover sheet. And we see no reason not to
credit an assertion by an officer of the court on a matter of significant consequence in the
state proceeding (whether or not simplified procedures will apply). Because the Insurer’s
notice of removal was filed more than 30 days after it received the cover sheet, the notice
was untimely.
That does not, however, end the matter. Although the district court should have
remanded the case to state court, a lot of water has now flowed under the bridge. Must
we now order that the litigation start anew in state court? The Supreme Court tells us no.
In Caterpillar Inc. v. Lewis, 519 U.S. 61, 64 (1996), a unanimous Supreme Court
declared that “a district court’s error in failing to remand a case improperly removed is
not fatal to the ensuing adjudication if federal jurisdictional requirements are met at the
time judgment is entered.” In that case the federal district court (erroneously) denied a
motion to remand a removed case when the parties were not completely diverse; the
nondiverse parties later settled and the case proceeded to trial and judgment. See id. at
64. The Supreme Court ruled that the defective removal did not require that the judgment
be vacated. Untimeliness is a “statutory flaw,” not a “jurisdictional defect.” Id. at 73
(emphasis omitted). And “[o]nce a diversity case has been tried in federal court,” the
Court wrote, “considerations of finality, efficiency, and economy become
overwhelming.” Id. at 75. “To wipe out the adjudication postjudgment, and return to
state court a case now satisfying all federal jurisdictional requirements, would impose an
15
exorbitant cost on our dual court system, a cost incompatible with the fair and
unprotracted administration of justice.” Id. at 77.
Here, it was clear by the time the Insurer filed its notice of removal that the
amount in controversy exceeded $75,000. Although there was no trial in this case, this
circuit has confirmed that the rule of Caterpillar applies not only after a trial but also
when “judgment is based on . . . a district court’s ruling on a dispositive motion.”
Huffman, 194 F.3d at 1080. Remand to state court would therefore be improper if we
upheld the summary judgment. On the other hand, the efficiency rationale of Caterpillar
would disappear if we reversed the district court’s summary judgment, because the case
would need to proceed anew anyway, and it might as well proceed in state court as in
federal. See id. But, as we proceed to explain, we affirm the judgment below.
IV. POLICY COVERAGE
Turning to the merits, we agree that the Owner failed to raise a genuine issue of
material fact that the damage to the Building is covered by the Policy. The critical policy
provision is the “Water Exclusion Endorsement,” which excludes from coverage any
damage caused by the following water-based sources:
1. Flood, surface water, waves (including tidal wave and tsunami),
tides, tidal water, overflow of any body of water, or spray from any of
these, all whether or not driven by wind (including storm surge);
2. Mudslide or mudflow;
3. Water that backs up or overflows or is otherwise discharged from a
sewer, drain, sump, sump pump or related equipment;
4. Water under the ground surface pressing on, or flowing or seeping
through:
16
a. Foundations, walls, floors or paved surfaces;
b. Basements, whether paved or not; or
c. Doors, windows or other openings; or
5. Waterborne material carried or otherwise moved by any of the water
referred to in Paragraph 1., 3., or 4., or material carried or otherwise
moved by mudslide or mudflow.
This exclusion applies regardless of whether any of the above, in
Paragraphs 1. through 5., is caused by an act of nature or is otherwise
caused.
Supp. Aplee. Appx., Vol. 8 at 555. There is, however, an exception to this exclusion for
damage from explosions:
But if any of the above, in Paragraphs 1. through 5., results in fire,
explosion or sprinkler leakage, we will pay for the loss or damage
caused by that fire, explosion or sprinkler leakage (if sprinkler leakage
is a Covered Cause of Loss).
Id. In short, the Policy does not cover damage caused by water, but does cover damage
caused by an explosion caused by water.
Although the Insurer has the burden of establishing that the Owner’s loss fell
within the exclusion, see Colorado Intergovernmental Risk Sharing Agency v. Northfield
Ins. Co., 207 P.3d 839, 842 (Colo. App. 2008), the Owner does not dispute that the
damage was caused by a mudslide. But it makes two arguments why it is still covered:
(1) the damage to the Building was not caused by surface water and is therefore not
within the water-exclusion provision; (2) the Building was destroyed not by the mudslide
itself, but by a resulting explosion. We are not persuaded.
17
A. Surface Water
The Owner’s surface-water argument is easily resolved. The Owner relies on
Heller v. Fire Insurance Exchange, a Division of Farmers Insurance Group, 800 P.2d
1006, 1007 (Colo. 1990), in which runoffs of melted snow damaged a mountain residence
in Vail, Colorado. The insurance policy excluded loss caused by “flood, surface water,
waves, tidal water, overflow of a body of water, or spray from any of these, whether
driven by wind or not.” Id. at 1008 n.2. The insurer denied coverage on the ground that
surface water had caused the damage. See id. at 1008. The Colorado Supreme Court
ruled for the plaintiffs. It defined surface water in part as water that “follows no defined
course or channel.” Id. at 1009. But in that case the “path of the water had been diverted
. . . by three parallel trenches . . . . fifteen to twenty feet long, three feet wide, six inches
deep, and lined with plastic sheets, rocks and tree limbs.” Id. at 1007. The court
reasoned that “the runoff lost its character as surface water when it was diverted by the
trenches and therefore was not within the surface water exclusion.” Id. at 1009.
The Owner argues that, as in Heller, the water here lost its character as surface
water because it “was diverted by man-made parking lots, roadways, drainpipes, and
culverts on Flagstaff Mountain uphill from the Building.” Aplt. Br. at 57. This diversion
seems less dramatic than the one in Heller, but the factual distinctions are of no
consequence because the terms of the policies are different. In Heller the relevant
exclusion was for surface water. See Heller, 800 P.2d at 1008. The exclusion here
encompasses “surface water,” but it also includes “mudslide or mudflow.” Supp. Aplee.
18
App., Vol. 8 at 555. The Owner concedes the damage to have been caused by “an
avalanche of mud, rocks, and debris . . . [that] careened into the Building.” Aplt. Br. at 2.
The Owner does not, and could not, make any argument that the avalanche was not a
mudslide. And under the Policy it makes no difference whether any water causing the
avalanche had been diverted by manmade features; mudslide damage is excluded whether
the mudslide “is caused by an act of nature or is otherwise caused.” Supp. Aplee. App.,
Vol. 8 at 555.
B. Explosion
As for the Owner’s second argument, the facts do matter. The Owner contends
that the mudslide “caus[ed] the Building to violently and suddenly burst apart with a loud
boom,” that is to say, caused the building to explode, thus bringing the damage within the
explosion exception to the water exclusion. Aplt. Br. at 2. We disagree that demolition
by an external cascade of water, mud, and debris is an explosion under the Policy.
“In interpreting a contract, we seek to give effect to the intent and reasonable
expectations of the parties.” Thompson v. Maryland Cas. Co., 84 P.3d 496, 501 (Colo.
2004) (en banc). “Accordingly, unless the parties intend otherwise, terms in an insurance
policy should be assigned their plain and ordinary meaning.” Id. To comport with public
policy and principles of fairness, we construe ambiguous terms in an insurance policy
against the insurer. See id. at 501–02. We also “read the provisions of the policy as a
whole, rather than reading them in isolation.” Cyprus Amax Minerals Co. v. Lexington
Ins. Co., 74 P.3d 294, 299 (Colo. 2003) (en banc); see Sec. Ins. Co. of Hartford v.
19
Houser, 552 P.2d 308, 310 (Colo. 1976) (en banc) (interpreting an insurance-policy
clause based on the purpose of the clause within the policy).
The Policy itself does not define the term explosion. But that does not mean that
the term must be construed to encompass all possible meanings, even if found in the
dictionary. Context matters. We would be reluctant, for example, to construe policy
language to include figurative meanings. See Rhinelander v. Ins. Co. of Pennsylvania, 8
U.S. 29, 44 (1807) (“Commercial contracts have but little connection with figurative
language.”). Although a football player may “explode” off the line of scrimmage, we
would not construe the exception to the exclusion to include damage to a wall from
someone (even someone who is 6’6” tall and weighs 330 pounds) fleeing a flash flood.
Nor does it make sense to construe the term explosion in a way that would undermine the
exclusion to which it is an exception. The Owner urges us to find an explosion any time
an external impact transfers sufficient kinetic energy to a structure to destroy it. But the
exclusion includes tidal waves, tsunamis, and mudslides, which all typically produce
extreme forces that can smash anything in their paths; to adopt the Owner’s conception
would be to read those exclusions out of the Policy.
What makes most sense in the present context is the classical notion of an
explosion, as from a bomb or leaking gas. Such an explosion involves a buildup of
internal pressure and a sudden bursting outward in all available directions. The exception
would apply, for example, if a mudslide damaged a gas pipe, creating a leak of gas that
was ignited and exploded. Our understanding of the term is consistent with that of other
20
courts construing “explosion” in an insurance policy. See Pre-Cast Concrete Prods., Inc.
v. Home Ins. Co., 417 F.2d 1323, 1328 (7th Cir. 1969) (“[A]n explosion occurs when the
pressure inside the container exceeds the strength of the container and results in a sudden
release of the pressure.”); Jersey Ins. Co. of N.Y. v. Heffron, 242 F.2d 136, 139 (4th Cir.
1957) (finding an explosion where “the roof, falling intact like a huge piston … gradually
built a compression of air . . . great enough to burst the first story windows”);
Commercial Union Fire Ins. Co. v. Bank of Ga., 197 F.2d 455, 457 (5th Cir. 1952) (In a
bursting-fire-hydrant case, “the bursting [was] caused by excessive pressure, and the
pressure [was] caused by pent-up energy.”); Bower v. Aetna Ins. Co., 54 F. Supp. 897,
898 (N.D. Tex. 1944) (“The application of a force from within the radiators which the
radiators, or the pipes, could not resist, and burst, or exploded is apparently what
happened.”); Sperling v. Allstate Indemnity Company, 944 A.2d, 210, 217 (Vt. 2007) (“In
the absence of the release of energy through an ignitable substance, decisions require a
buildup of internal pressure preceding the rupture in order to define the event as an
explosion.”).
To convince us that the term explosion includes causes not driven by internal
pressure, the Owner points to Stone Container Corp. v. Hartford Steam Boiler Inspection
& Ins. Co., 165 F.3d 1157, 1160 (7th Cir. 1999), which states in dictum that a
watermelon explodes when shot through with a bullet. But that statement does not help
the Owner. The court was asked to limit the term explosion to an event caused by
“combustion or some other chemical reaction.” Id. at 1159. It declined, explaining that
21
to limit explosion in that way would improperly exclude from the term’s scope an atomic
bomb or “volcanic explosions, as well as the ‘explosion’ of a tire caused by a blowout,
the explosion of a melon caused by a bullet . . . .” Id. at 1160. This comment reflects a
(seemingly correct) belief that the melon explodes due to some source other than
combustion or chemical reaction. It does not suggest that the source is something other
than a buildup of internal pressure. And that is, in fact, the case, as far as we can discern:
a bullet entering a watermelon compresses the fluid within it and creates a hydrostatic
shock wave through the fluid that presses in all directions against the rind until it bursts.
See “Hydrostatic shock,” available at https://en.wikipedia.org/wiki/Hydrostatic_shock
(last visited August 2, 2016); “Why do watermelons explode,” available at
http://bit.ly/1qC0OfW (last visited August 2, 2016).
Given our understanding of the policy language, we must affirm the district court.
The Owner does argue briefly that a buildup of internal pressure did damage the building.
Drawing an analogy to the popping of an overfilled balloon, the Owner suggests “that
mud, water, and debris may have filled up the Building to the point of failure, at which
time the walls burst outward in a catastrophic and sudden explosion.” Aplt. Br. at 55.
The problem for the Owner is that there is no evidence to support this argument. The
Owner’s own engineer found that the north-traveling mudslide displaced the building’s
walls upon impact, not after filling the building with mud. See Fronapfel Report, Supp.
Aplee. App., Vol. 1 at 65 (“The debris laden flow impacted the south elevation of the
22
structure, causing a sudden reaction of the wall structure . . . .”).6 The walls moved
laterally to the north, not outward in all directions. And the roof did not burst outward as
from an explosion, but rather “collapsed.” Id. at 73.
V. CONCLUSION
We AFFIRM the district court’s orders denying the Owner’s motion to remand
and granting summary judgment to the Insurer. Our affirmance moots the Owner’s other
arguments on appeal.
6
The expert who prepared the report testified at his deposition as follows:
Q. There’s no evidence of any internal gases or internal pressures that
caused the damage to the building, is there?
...
A. When we’re talking about internal pressures to the loss of the bearing,
potentially, yes. If we’re talking about like a pressure vessel, I don’t
believe so. We’re talking pressure differentials, but we’re not talking
internal pressure increase like blowing up a balloon. I didn’t see that. The
walls didn’t shift all outward in one blow. I believe they moved in one
direction.
Deposition of Edward Fronapfel, Aplt. App., Vol. 19 at 2297.
23