Windridge of Naperville Condo v. Philadelphia Indemnity Insuran ( 2019 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 18‐2103
WINDRIDGE OF NAPERVILLE
CONDOMINIUM ASSOCIATION,
Plaintiff‐Appellee,
v.
PHILADELPHIA INDEMNITY INSURANCE
COMPANY,
Defendant‐Appellant.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:16‐CV‐3860 — Gary Feinerman, Judge.
____________________
ARGUED MARCH 27, 2019 — DECIDED AUGUST 7, 2019
____________________
Before EASTERBROOK, KANNE, and HAMILTON, Circuit
Judges.
HAMILTON, Circuit Judge. This appeal presents an insur‐
ance coverage dispute between Windridge of Naperville Con‐
dominium Association and Philadelphia Indemnity Insur‐
ance Company. On May 20, 2014, a hail and wind storm dam‐
aged buildings owned by Windridge. The buildings were
2 No. 18‐2103
insured by Philadelphia Indemnity. The storm physically
damaged the aluminum siding on the buildings’ south and
west sides. Philadelphia Indemnity contends that it is re‐
quired under the insurance policy to replace the siding only
on those sides. Windridge argues that replacement siding that
matches the undamaged north and east elevations is no
longer available, so Philadelphia Indemnity must replace the
siding on all four sides of the buildings so that all of the siding
matches. The district court granted summary judgment to
Windridge on that coverage issue. We affirm.
I. Factual & Procedural Background
We review the factual record in the light reasonably most
favorable to Philadelphia Indemnity as the non‐moving
party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255
(1986); Yahnke v. Kane County, 823 F.3d 1066, 1070 (7th Cir.
2016). For starters, the parties agree that the insurance policy
was in effect on May 20, 2014, when the hail and wind storm
damaged Windridge’s buildings. They also agree that the
storm directly damaged the siding only on the buildings’
south and west sides. Philadelphia Indemnity has already
paid $2.1 million to Windridge for that damage. Windridge
seeks additional money to replace the siding on the north and
east sides because matching siding is no longer available for
purchase. Windridge argues it is entitled under the policy to
have the buildings repaired so that, as before the storm, the
siding matches on all sides. Philadelphia Indemnity has re‐
fused to pay for these additional costs and argues that the pol‐
icy requires payment only to replace siding that was directly
hit and damaged by the hail and wind.
No. 18‐2103 3
A. The Insurance Policy
We start with the text of the insurance policy. Under the
coverage provision, Philadelphia Indemnity must “pay for di‐
rect physical ‘loss’ to Covered Property caused by or resulting
from any of the Covered Causes of Loss.” “Covered Property
… means,” among other things, the “‘Buildings’ described in
the Declarations.” “‘Buildings’ means buildings or struc‐
tures.” “‘Loss’ means accidental loss or damage.” The policy’s
loss valuation provision provides:
7. Valuation
We will determine the value of Covered Prop‐
erty in the event of “loss” as follows:
a. At replacement cost (without deduction
for depreciation) as of the time of “loss” …
(1) We will not pay more for “loss” on a
replacement costs basis than the least of:
(a) The Limit of Insurance applicable
to the lost or damaged property;
(b) The cost to replace the lost or dam‐
aged property with other property:
(i) Of comparable material and
quality; and
(ii) Used for the same purpose; or
(c) The amount you actually spend
that is necessary to repair or replace
the lost of damaged property.
4 No. 18‐2103
The policy’s loss payment provision provides:
4. Loss Payment
a. In the event of “loss” to Covered Property
covered by this Coverage form, at our op‐
tion, we will either:
(1) Pay the value of lost or damaged
property;
(2) Pay the cost of repairing or replacing
the lost or damaged property;
(3) Take all or any part of the property at
an agreed or appraised value; or
(4) Repair, rebuild or replace the prop‐
erty with other property of like kind and
quality.
B. District Court & Appraisal Proceedings
After the storm, Windridge submitted a claim to Philadel‐
phia Indemnity, which paid $2.1 million for losses it conceded
were covered by the policy. Windridge brought this suit un‐
der diversity jurisdiction alleging that the insurance policy
entitled it to an independent appraisal to value the storm
damage. Windridge’s operative Second Amended Complaint
asserts a claim for breach of contract for Philadelphia Indem‐
nity’s failure to make full payment for the covered loss. The
complaint also seeks declaratory relief.
Windridge filed a motion to compel an appraisal, which
the district court granted in part and denied in part. The pol‐
icy’s appraisal provision states:
No. 18‐2103 5
If we and you disagree on the value of the prop‐
erty or the amount of “loss”, either may make
written demand for an appraisal of the “loss”.
In this event, each party will select a competent
and impartial appraiser. The two appraisers
will select an umpire. If they cannot agree, ei‐
ther may request that selection be made by a
judge of a court having jurisdiction. The ap‐
praisers will state separately the value of the
property and amount of “loss”. If they fail to
agree, they will submit their differences to the
umpire. A decision agreed to by any two will be
binding.
The court ordered Philadelphia Indemnity to proceed to ap‐
praisal as to the damage indisputably covered by the policy,
but not as to the claimed damage over which there was a gen‐
uine coverage dispute. Windridge of Naperville Condo. Ass’n v.
Philadelphia Indemnity Insurance Co., 2017 WL 372308, at *4
(N.D. Ill. Jan. 26, 2017).
Windridge moved for summary judgment on its declara‐
tory judgment claim, arguing that matching siding is not
available anymore and that, as a result, Philadelphia Indem‐
nity must pay to replace the siding on all four sides of the
buildings. The district court ruled that it could not grant sum‐
mary judgment to Windridge on the factual question under‐
lying the dispute (whether matching siding is available on the
market). Windridge of Naperville Condo. Ass’n v. Philadelphia In‐
demnity Insurance Co., 2018 WL 1784140, at *2 (N.D. Ill. Apr.
13, 2018). The court explained:
Windridge submits evidence that matching sid‐
ing has been discontinued and that no match
6 No. 18‐2103
exists. Doc. 71 at ¶¶ 14‐17. [Philadelphia Indem‐
nity] responds with evidence that a match does
exist. Doc. 74 at ¶¶ 14‐17; Doc. 77 at ¶¶ 7‐12. The
conflicting evidence gives rise to a genuine dis‐
pute about a material fact that precludes the
court from holding on summary judgment that
no match presently exists.
Id. The court therefore ruled that this question should be sub‐
mitted to appraisal. Id. at *5. The court gave Philadelphia In‐
demnity until May 4, 2018 to name an appraiser, and if it did
not do so, the court explained that Windridge could move the
court to appoint an appraiser. Id.1
The court then assumed that no matching siding is availa‐
ble and answered the legal question: whether the policy re‐
quires Philadelphia Indemnity to replace or pay to replace the
1 At oral argument, neither party’s counsel could tell us what had hap‐
pened in the appraisal ordered by the district court to determine whether
or not matching siding is available. Supplemental briefing has not done
much to clarify the issue. The parties seem to agree that no appraisal has
taken place following the district court’s summary judgment opinion.
Windridge contends that the first appraisal already determined that no
matching siding is available. Clearly the district court did not think that
was the case, as the court specifically ordered this question to be answered
in a second appraisal. Regardless, Philadelphia Indemnity conceded at
oral argument that “there is no longer matching siding available.” It also
appears that Philadelphia Indemnity conceded in the district court that its
own construction consultant determined that matching siding was avail‐
able only “until October 2015.” Philadelphia Indemnity’s contention that
matching siding was available was the only reason there was a factual dis‐
pute to submit to appraisal following the summary judgment ruling. Since
Philadelphia Indemnity seems to have abandoned this contention, we
conclude that there is no dispute here, and the parties agree matching sid‐
ing is not available.
No. 18‐2103 7
siding on all four elevations (to ensure matching) or only on
the physically damaged elevations. 2018 WL 1784140 at *2–*3.
The court determined that matching is required. Id. at *4. It
explained that, while Philadelphia Indemnity’s argument was
“attractive at first glance,” it “rests on the premise that the
phrase ‘Covered Property’ refers to the building on an eleva‐
tion‐by elevation basis as opposed to the building as a unified
whole.” Id. at *3. The court concluded that “the only sensible
result is to treat the damage as having occurred to the build‐
ing’s siding as a whole”:
If [Philadelphia Indemnity] were to replace the
siding on the damaged south and west eleva‐
tions with siding that did not match that on the
undamaged north and east elevations, it could
not possibly be said that Windridge had been
made whole, for it would be left with a building
suffering from a glaring and profound flaw.
Id. at *4. Alternatively, the court held that the policy terms are
ambiguous, and, under Illinois law, the contract must be con‐
strued in favor of coverage. Id. Philadelphia Indemnity has
appealed.2
2 The district court’s decision was sufficiently final for appellate juris‐
diction. See American Int’l Specialty Lines Insurance Co. v. Electronic Data
Systems Corp., 347 F.3d 665, 668 (7th Cir. 2003) (“an order that terminates
proceedings in the district court is final and appealable, whatever it is
called”), citing Green Tree Financial Corp.‐Alabama v. Randolph, 531 U.S. 79,
89 (2000). The district court issued a docket entry on April 13, 2018 that
serves as a final judgment declaring the parties’ rights and saying the case
was closed. Philadelphia Indemnity could not wait for any further order
before appealing.
8 No. 18‐2103
II. Discussion
We review de novo the district court’s summary judgment
ruling. Advance Cable Co., LLC v. Cincinnati Insurance Co., 788
F.3d 743, 746 (7th Cir. 2015). Summary judgment is appropri‐
ate only “if the movant shows that there is no genuine dispute
as to any material fact and the movant is entitled to judgment
as a matter of law.” Fed. R. Civ. P. 56(a).
“The interpretation of an insurance policy is a matter of
state law.” Westfield Insurance Co. v. Vandenberg, 796 F.3d 773,
777 (7th Cir. 2015). Here, Illinois law controls, so we look to
the decisions of the Illinois Supreme Court for guidance. Id.
The Illinois Supreme Court has explained:
An insurance policy is a contract, and the gen‐
eral rules governing the interpretation of other
types of contracts also govern the interpretation
of insurance policies. Accordingly, our primary
objective is to ascertain and give effect to the in‐
tention of the parties, as expressed in the policy
language. If the policy language is unambigu‐
ous, the policy will be applied as written, unless
it contravenes public policy. Whether an ambi‐
guity exists turns on whether the policy lan‐
guage is subject to more than one reasonable in‐
terpretation. Although “creative possibilities”
may be suggested, only reasonable interpreta‐
tions will be considered.
Hobbs v. Hartford Insurance Co. of the Midwest, 823 N.E.2d 561,
564 (Ill. 2005) (internal citations omitted). Further, “to ascer‐
tain the meaning of the policy’s language and the parties’ in‐
tent, the court must construe the policy as a whole and ‘take
No. 18‐2103 9
into account the type of insurance purchased, the nature of
the risks involved, and the overall purpose of the contract.’”
Travelers Insurance Co. v. Eljer Manufacturing, Inc., 757 N.E.2d
481, 491 (Ill. 2001), quoting American States Insurance Co. v. Ko‐
loms, 687 N.E.2d 72, 75 (Ill. 1997).
The policy here is a replacement‐cost policy. See FSC Paper
Corp. v. Sun Insurance Co. of New York, 744 F.2d 1279, 1283 (7th
Cir. 1984) (Illinois law) (“a replacement cost policy, by defini‐
tion, provides a ‘make‐whole’ remedy” that “must strive to
approximate the situation [the insured] would have occupied
had the fire not occurred”). In the policy here, Philadelphia
Indemnity promised to “pay for direct physical ‘loss’ to Cov‐
ered Property caused by or resulting from” the storm, with
the amount of loss being “[t]he cost to replace the lost or dam‐
aged property with other property … [o]f comparable mate‐
rial and quality … and … [u]sed for the same purpose[.]” The
loss payment provision offers four different measures for loss,
leaving Philadelphia Indemnity free to choose the least ex‐
pensive: pay the value of lost or damaged property; pay the
cost of repairing or replacing the lost or damaged property;
take all or any part of the property at an agreed or appraised
value; or repair, rebuild or replace the property with other
property of like kind and quality.3
3 While only this fourth option includes the phrase “of like kind and
quality,” the valuation provision applies to all four choices—meaning
that, regardless of which option Philadelphia Indemnity chooses, replace‐
ment property must be “[o]f comparable material and quality.” Philadel‐
phia Indemnity has chosen option two: “Pay the cost of repairing or re‐
placing the lost or damaged property.” Accordingly, it must pay the cost
of replacing the damaged property with property that is comparable in its
material and quality.
10 No. 18‐2103
As we see it, two phrases in the coverage provision of the
policy are potentially ambiguous as applied to the facts here:
(1) “direct physical loss” and (2) “covered property.” These
phrases have definitions in the policy. “Loss” is defined as
“accidental loss or damage.” “Covered property” is defined
to include, among other things, Windridge’s “buildings.”
Neither definition in the policy answers the question we face
here. The district court’s conclusion that the buildings as a
whole were damaged—and that all of the siding must be re‐
placed to ensure matching—is a sensible construction of the
policy language as applied to these facts. Philadelphia Indem‐
nity’s interpretation—pay to replace only the specific panels
of siding that were directly hit by hail, leading to two‐tone
buildings—is less reasonable. Regardless, the unit of covered
property to consider under the policy (each panel of siding vs.
each side vs. the buildings as a whole) is ambiguous as ap‐
plied to these facts, so under Illinois law, we favor the inter‐
pretation that leads to coverage. See West American Insurance
Co. v. Yorkville Nat. Bank, 939 N.E.2d 288, 293 (Ill. 2010); State
Auto Prop. & Cas. Insurance Co. v. Brumit Services, Inc., 877 F.3d
355, 357 (7th Cir. 2017).
Courts around the country have confronted similar so‐
called “matching” issues. The results have been mixed, as the
district court noted. While several opinions are instructive,
this case is governed by the language in the Windridge policy
with Philadelphia Indemnity. However, the coverage, valua‐
tion, and loss payment provisions of the policy here are nearly
identical to those at issue in National Presbyterian Church, Inc.
v. GuideOne Mut. Insurance Co., 82 F. Supp. 3d 55, 57–58
(D.D.C. 2015) (applying District of Columbia law). The factual
dispute was also nearly identical. Some, but not all, of a
church’s exterior limestone panels were damaged in an
No. 18‐2103 11
earthquake. Id. at 56. The question was whether the property
insurer was required under the policy to replace all of the
limestone panels to ensure matching or just the panels that
were directly damaged. Id.
Judge Bates’ analysis of the issue is persuasive. He ex‐
plained that “the crux of the issue seems to be whether this
policy’s coverage of damaged property refers to the smallest
unit possible (an individual panel, a single shingle, a specific
patch of flooring) or to one larger (the entire façade, the whole
roof, a continuous stretch of flooring).” Id. at 59. The court de‐
termined that the policy was ambiguous as applied to the
damage to specific portions of the building, at least where re‐
pairs to only those portions would leave aesthetic matching
issues, so the court found in favor of the insured, holding that
matching was required and all of the limestone panels needed
to be replaced. Id. at 60.
We face essentially the same issue under the same lan‐
guage and arrive at the same result. Put simply, Philadelphia
Indemnity is required to replace or pay to replace covered
property that suffered a “direct physical loss”—i.e., property
that has been damaged. “Covered property” could be inter‐
preted to mean each panel of siding, or to mean the entire
damaged sides of buildings, or the entire damaged buildings.
As for “direct physical loss,” Philadelphia Indemnity makes
much of the words “direct” and “physical,” but we have pre‐
viously explained that “common sense suggests” the term
“direct” is meant to exclude situations in which an interven‐
ing force plays some role in the damage. Advance Cable Co.,
LLC v. Cincinnati Insurance Co., 788 F.3d 743, 746 (7th Cir. 2015)
(Wisconsin law). We have also explained that “physical”
12 No. 18‐2103
generally refers to tangible as opposed to intangible damage.
Id. at 746–47.4
Thus, while Philadelphia Indemnity’s position that only
the siding directly hit by the storm is covered is not indefen‐
sible and has some support in case law, the language of the
policy is not so clear and in fact favors an interpretation that
the unit of damaged property is the buildings as a whole—
not solely each elevation or each panel of siding. As illustrated
during oral argument, many hypotheticals caution against
Philadelphia Indemnity’s interpretation. Suppose the storm
damaged every other piece of siding on only the east eleva‐
tions of the buildings. Or suppose a storm damaged only the
middle three feet of every piece of siding on the buildings.
Philadelphia Indemnity would have us view the unit of dam‐
aged property as an individual side of a building, or individ‐
ual panels of siding, or even mere sections of individual pan‐
els of siding. An interpretation of the policy that left
Windridge with a horizontal or vertical striped effect on its
buildings would not be reasonable. The better construction,
4An alteration in appearance constitutes physical, tangible damage.
The Illinois Supreme Court has explained that “the term ‘physical injury’
unambiguously connotes damage to tangible property causing an altera‐
tion in appearance, shape, color or in other material dimension.” Travelers
Insurance Co. v. Eljer Manufacturing, Inc., 757 N.E.2d 481, 502 (Ill. 2001).
Similarly, we have acknowledged that “[t]he central meaning of the term
[physical injury] as it is used in everyday English—the image it would
conjure up in the mind of a person unschooled in the subtleties of insur‐
ance law—is of a harmful change in appearance, shape, composition, or
some other physical dimension of the ‘injured’ person or thing.” Eljer Man‐
ufacturing, Inc. v. Liberty Mut. Insurance Co., 972 F.2d 805, 808–09 (7th Cir.
1992) (Illinois law). In applying Wisconsin law, we have also explained
that cosmetic damage to a roof caused by a hail storm was a covered “di‐
rect physical loss” to the property. Advance Cable Co., 788 F.3d at 746–47.
No. 18‐2103 13
and one certainly permitted by policy language that is ambig‐
uous as applied to these facts, is that each building as a whole
suffered direct physical loss as a result of the storm. The storm
altered the appearance of the buildings such that they were
damaged. Condominium buildings with mismatched siding
are not a post‐storm outcome that the insured was required to
accept under this replacement‐cost policy. As Judge Bates rea‐
soned in National Presbyterian Church:
Imagine that an insurance company pays for re‐
pairs to one wall of an insured’s dining room.
The room’s paint color—a light blue—is no
longer manufactured. If the insurance company
were to insist on a bright red or even dark blue
paint—of the same quality and manufacture—
just for that single wall, no one would feel that
the insured had been made whole; only repaint‐
ing the whole room would do that.
82 F. Supp. 3d at 60.5
Philadelphia Indemnity points out that it does not control
what siding is available on the market, and specifically
whether a siding company continues to manufacture a partic‐
ular color of siding. This is a risk Philadelphia Indemnity took
5 We are also persuaded by Trout Brook South Condo. Ass’n v. Har‐
leysville Worcester Insurance Co., 995 F. Supp. 2d 1035 (D. Minn. 2014) (Min‐
nesota law). There, the policy covered “direct physical loss” to “covered
property,” and the definition of “covered property” “indicate[d] coverage
extends to ‘buildings and structures.’” Id. at 1042. The court held that “the
Policy suggests that ‘covered property’ is each of Trout Brook’s buildings,
and not individual items (such as shingles or siding) attached or appurte‐
nant to them. And it is undisputed that each building sustained ‘direct
physical loss’ from the 2010 hail storm.” Id.
14 No. 18‐2103
on under the policy. Windridge has no more control of the
siding marketplace than Philadelphia Indemnity does. Phila‐
delphia Indemnity seeks to leave Windridge with buildings
that have two sides in one color and two sides in another. Just
as with the dining‐room hypothetical, Windridge has not yet
been made whole. It has not been returned to its pre‐storm
status. Philadelphia Indemnity chose to insure Windridge’s
“buildings,” which—because of the storm—were all dam‐
aged. Due to the extent of the damage and the lack of match‐
ing siding available on the market, the better construction of
this ambiguous policy is that it requires Philadelphia Indem‐
nity to replace the siding on all four elevations of the build‐
ings.6
Philadelphia Indemnity cites several “matching” cases
that it thinks should lead us to favor its position. See, e.g.,
Mohr v. American Auto. Insurance Co., 2004 WL 533475, at *10–
*15 (N.D. Ill. Mar. 5, 2004) (court concluded that different pol‐
icy language did not require “aesthetic perfection,” and that,
after bench trial, the insured failed to prove that replacing en‐
tire roof was necessary); Woods Apartments, LLC v. United
States Fire Insurance Co., 2013 WL 3929706, at *2 (W.D. Ky. July
29, 2013) (hurricane damaged parts of siding and roof on
plaintiffs’ apartment buildings; court found that, without
6 Philadelphia Indemnity contends that matching siding was available
after the storm for almost a year and a half and that Windridge is to blame
for not acting sooner to replace the siding. Philadelphia Indemnity also
cites § 7(a)(2) of the policy, which provides that it is not obliged to pay on
a replacement‐cost basis until the property is actually repaired or replaced
and that the repair or replacement must occur “as soon as reasonably pos‐
sible.” The district court found that Windridge provided timely notice of
the loss, and we agree. And in the face of the parties’ dispute, Windridge
was not required to spend money that might or might not be covered.
No. 18‐2103 15
evidence that comparable material was unavailable, the pol‐
icy unambiguously required the insurer to repair or replace
only those portions of the property damaged by the hurri‐
cane); Ocean View Towers Ass’n, Inc. v. QBE Insurance Corp.,
2011 WL 6754063, at *10 (S.D. Fla. Dec. 22, 2011) (court found
that “direct physical loss or damage” policy language did not
cover replacing undamaged property to assure matching);
Harbor House Condominium Ass’n v. Massachusetts Bay Insur‐
ance Co., 703 F. Supp. 1313, 1317–18 (N.D. Ill. 1988) (court
found that insureds failed to prove that damage to one part of
pipe system caused damage to entire system).
Our focus here is on the specific contract language used
here, and cases involving different contract language from
different jurisdictions are not that helpful. Further, our ap‐
proach leaves plenty of room for common sense in situations
involving more limited damage. If one shingle at the corner
of a slate roof is damaged and no matching replacement shin‐
gle is available, a building owner would not be entitled to an
entire new roof. Windridge conceded as much at oral argu‐
ment. Under the policy here, the building owner instead
would be entitled to compensation for the (presumably mi‐
nor) decrease in value of the building due to one non‐match‐
ing shingle.7 By contrast, the decrease in value would be sig‐
nificant if a building were left with zebra‐striped siding. In
that case, the insurer would almost certainly choose to pay to
7 The policy here gave Philadelphia Indemnity the option of paying
the value of lost or damaged property. If one shingle in the corner of a roof
were damaged and a perfectly‐matching shingle were not available on the
market, Philadelphia Indemnity could pay for a repair and for the minor
reduction in value of the property resulting from one mismatched shingle
in the corner.
16 No. 18‐2103
replace the siding rather than compensate the building owner
for the reduction in value of its building.
Each building here suffered a direct physical loss, which
was caused by or resulted from the hail and wind storm, and
Philadelphia Indemnity therefore must pay to return the
buildings to their pre‐storm status—i.e., with matching siding
on all sides. Windridge seeks only to be put back in the posi‐
tion it was in before the storm. Having mismatched siding on
its buildings would not be the same position. Since no match‐
ing replacement siding is available, Philadelphia Indemnity
must pay to replace all of the siding on Windridge’s build‐
ings.
The district court’s judgment in favor of Windridge is
AFFIRMED.