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Creekwood Rental Townhomes, LLC v. Kiln Underwriting Ltd.

United States District Court, D. Minnesota

March 31, 2014

KILN UNDERWRITING LIMITED, a Capital Provider for Lloyd's Syndicate No. 510, which Syndicate subscribed severally, as its interests appear thereon and not jointly, to Lloyd's Certificates No. NMB 101-0203 as the Lead Underwriter, Defendant

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Edward Eshoo, Jr., CHILDRESS DUFFY LTD., Chicago, IL; SCOTT A. WILSON, Minneapolis, MN, for plaintiffs.

Arthur J. McColgan, II, WALKER WILCOX MATOUSEK, LLP, Chicago, IL; Stephen P. Laitinen, LARSON KING, LLP, Saint Paul, MN, for defendant.

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JOHN R. TUNHEIM, United States District Judge.

Plaintiffs Richard Lewandowski and Creekwood Rental Townhomes, LLC (" reekwood" ) (collectively, " Plaintiffs" ) bring this action against Defendant Kiln Underwriting Limited (" Kiln" ), alleging

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breach of contract. Kiln insured five townhome buildings that are owned by Lewandowski and leased to tenants through Creekwood. This dispute arises out of damage to the roofs of those buildings allegedly caused by a hail storm. An appraisal panel determined that the replacement cost for all of the damage to the property -- including the roofs -- was $262,368.51. Because Kiln concluded that damage to the roofs was due to wear and tear -- a cause excluded from coverage under Plaintiffs' insurance policy -- Kiln paid Plaintiffs only the portion of the award for damages to other parts of the property. Plaintiffs then brought this action alleging breach of contract for Kiln's failure to pay the remainder of the appraisal award and seeking a second appraisal for consideration of damages allegedly not considered by the first appraisal panel. Plaintiffs and Kiln both move for summary judgment. Because the Court finds that no material issue of fact remains regarding Plaintiffs' entitlement to the full appraisal award, it will grant Plaintiffs' motion for summary judgment to the extent it seeks to recover the remainder of the award. Additionally, because the Court finds that Plaintiffs are not entitled to a second appraisal as a matter of law, it will grant Kiln's motion for summary judgment with respect to that claim.



At the time of the hail storm giving rise to the present lawsuit, Lewandowski and his wife Lalainia were co-owners of five townhome buildings located in the 7100 block of Excelsior Way in St. Louis Park, Minnesota (" the Property" ). (Def.'s App.,[1] Ex. M at 4, May 3, 2013, Docket No. 246; Decl. of Paul Shapiro, Exs. 1-5, Oct. 29, 2012, Docket No. 201.)[2] Lewandowski and Lalainia were also the sole owners of Creekwood. (Second Aff. of Arthur J. McColgan, Ex. 2 (Dep. of Richard J. Lewandowski (" Lewandowski Dep." ) 11:21-12:9), Oct. 21, 2011, Docket 104.) Lewandowski became the sole owner of Creekwood sometime after November 22, 2010, when he and Lalainia divorced. (Lewandowski Dep. 11:19-12:9.) Creekwood executed lease agreements with tenants for the townhomes on the Property. ( Id. 12:18-13:12; List of Exhibits, Ex. C, Oct. 30, 2012, Docket No. 210.)[3]

Kiln issued Policy No. NMB101-0203 (" the Policy" ), a commercial property policy providing insurance to Plaintiffs for the period March 23, 2008, through March 23, 2009. (Def.'s App., Ex. A.)[4] The Policy was issued to Creekwood, Lewandowski,

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and Lalainia as named insureds. ( Id., Ex. A at 4.) The premises described in the Policy's declarations include the Property. ( Id., Ex. A at 5-6.)

Under the Policy, Kiln agreed to " pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss." ( Id., Ex. A at 31.) A cause of loss is covered under the Policy unless specifically excluded or limited. ( Id., Ex. A at 6, 45.)[5] The Policy excludes from coverage " loss or damage caused by or resulting from" among other things " [w]ear and tear" and " [r]ust or other corrosion, decay, deterioration, hidden or latent defect or any quality in property that causes it to damage or destroy itself." ( Id., Ex. A at 46.) Additionally, the Policy provides that Kiln " will not pay for loss or damage caused by or resulting from . . . [f]aulty, inadequate or defective . . . [m]aterials used in repair, construction, renovation or remodeling [or] [m]aintenance," unless the faulty materials or maintenance " result[] in a Covered Cause of loss." ( Id., Ex. A at 47-48.)

On March 23, 2008, Kristin Dill of Kiln conducted an inspection of the Property and noted that the roof was in " average" condition. (Aff. of Coleman J. Braun ¶ 4, Ex. 2 at 2, Ex. 3, July 20, 2011, Docket No. 47.) An underwriting inspection conducted by Kiln on April 7, 2008, also noted that the buildings were in " good" condition. (Second Aff. of Scott May, Ex. 2 at 3, Dec. 1, 2011, Docket No. 140.)


On May 31, 2008, a hailstorm struck St. Louis Park. (Am. Compl. ¶ 12, July 26, 2010, Docket No. 23; Lewandowski Dep. 20:13-25; Second McColgan Aff., Ex. 3.) On June 3, 2008, Plaintiffs submitted a claim under the Policy, and described the damage for which coverage was sought as " [h]ail storm damage to roofs of buildings." (Second McColgan Aff., Ex. 3.)

On January 14, 2008 Jeff Queen from Kiln's claims adjuster, North American Claim Services, Inc. (" NACS" ), met with Lewandowski's roofing contractor to conduct an inspection of the Property. ( Id., Ex. 4 at 2, 4.) Queen concluded that " the roofs were in need of repair/replacement" " due to the deterioration of the shingles caused by typical weather conditions," and that " it did not appear that hail caused any additional damage to the actual roof, but for minor hail dents in the roofing vent caps." ( Id., Ex. 4 at 4-5.) NACS then retained a registered roofing observer, Wendell O. Finken of AMBE, Ltd., who inspected and photographed the roofs on September 19, 2008, and prepared a report. ( Id., Ex. 4 at 5; id., Ex. 5.) Finken concluded:

Based on our inspection we feel the existing roofs are currently in need of replacement. Deterioration and what appeared to be recent hail damage has left the roof system in a condition that cannot be relied upon to remain watertight. The degree of deterioration varies throughout the roof but we feel the entire roof should be completed as one project.

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Shingles on the north and lower roof sections do not show signs of hail damage but are nearing the end of their lifespan and currently need replacement. The south facing roofs are damaged by hail but it appears that . . . the roof was already deteriorated which greatly furthered the degree of damage. In addition, we recommend further investigation to determine if all roof areas are properly vented, and if the potential wall issues are resulting in deterioration of the roof system.

( Id., Ex. 5 at 3-4; see also id., Ex. 4 at 5.)

NACS reported its findings to Kiln in a letter dated October 21, 2008. ( Id., Ex. 4.) Citing the provisions of the Policy that exclude coverage for losses caused by wear and tear or inadequate maintenance, NACS recommended that Kiln decline coverage because " the current roofs pre-loss, were in dire need of maintenance and repair due to the deterioration of the existing shingles prior to the hail storm." ( Id., Ex. 4 at 3-4, 6.) NACS noted that " [t]he hail exacerbated the deterioration of the southern portion of the roof shingles which were already in need of replacement." ( Id., Ex. 4 at 3.) NACS also stated that Finken believed defective shingles may have caused at least part of the damage. ( Id., Ex. 4 at 5.) NACS concluded:

In review of the policy and the investigation and inspection of the claim, the roof at the insureds['] buildings were in dire need of replacement due to wear and tear of the roof and the fact that the asphalt shingle used deteriorated excessively prior to reaching its intended age. The hail storm would not have damaged the roof shingles, if they had not been already deteriorated and [in] need of replacement. Evidence to this effect is shown in the northern portions of the roof in which the shingles are not as deteriorated as the southern portion of the shingles. The northern portion of the roof had no evidence of hail damage and only the southern portion had evidence of hail damage due to the deterioration of the shingle itself.

( Id., Ex. 4 at 6.)

Additionally, in an email dated November 7, 2008, an NACS employee advised Kiln that Lewandowski " has fully admitted that he knew the roofs of the complex needed to be replaced long before the hail storm hit" but " [h]e just doesn't want to go down the same path of litigating against the product manufacturer who supplied what was suppose[d] to be a 25 year asphalt shingle that broke down in less than 8 years." ( Id., Ex. 6 at 2.)


Upon direction from Kiln, NACS sent Plaintiffs a denial of coverage letter dated November 21, 2008. ( Id., Ex. 7.) The denial of coverage was based on the provisions of the Policy excluding from coverage damage caused by wear and tear or faulty maintenance and Kiln's conclusion that the roof was in need of replacement prior to the hailstorm due to deterioration of the shingles. ( Id., Ex. 7 at 3-4.) NACS informed Lewandowski that " [a]ll parties acknowledge that the hail storm struck the roofs of the property, however the replacement needed of the shingles is not caused by the hail storm." ( Id., Ex. 7 at 3.)

Following the denial of coverage, Plaintiffs demanded an appraisal in an email dated November 25, 2008. ( Id., Ex. 8.) The demand was made pursuant to the Policy's Appraisal Condition, which states:

E. Loss Conditions
The following conditions apply in addition to the Common Policy Conditions and the Commercial Property Conditions.
. . .

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2. Appraisal
If we and you disagree on the value of the property 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, either may request that selection be made by a judge of a court having jurisdiction. The appraisers 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. Each party will:
a. Pay its chosen appraiser; and
b. Bear the other expenses of the appraisal and umpire equally.
If there is an appraisal, [Kiln] will still retain [its] right to deny the claim.

(Def.'s App., Ex. A at 39.)


In December 2008, Kiln appointed Engle Martin Claims Administrative Services, Inc. (" EMCAS" ) to replace NACS as Kiln's third party claims administrator. (Lewandowski Dep. 36:9-15; Def.'s App., Ex. D at 3.) EMCAS retained Engle Martin & Associates (" EMA" ) to respond to the appraisal demand. (Second May Aff., Ex. 7.) Scott May of EMA was appointed to serve as Kiln's adjuster on Plaintiffs' claim. (Def.'s App., Ex. D (Dep. of Scott May (" May Dep." ) 62:22-63:9); Second May Aff. ¶ 2, Ex. 7.)[6]

May met with Lewandowski at the Property in December 2008, to inspect the roofs, but did not complete the inspection due to weather conditions. ( See Lewandowski Dep. 38:21-39:23; May Dep. 117:20-25.) May wrote Plaintiffs a letter on December 15, requesting that Plaintiffs contact him when the roofs were " free of snow and ice" so that they could be inspected. (Second May Aff., Ex. 7.) However, Plaintiffs had already replaced the roofs on two of the townhomes in October 2008 and replaced the roofs on the other three townhomes in the spring of 2009, before May was able to inspect them. (Lewandowski Dep. 124:6-19; Appraisal Hearing Tr. (" Tr." ) 99, Aug. 3, 2011, Docket No. 66.)


Plaintiffs reiterated their appraisal demand in February 2009. (Second McColgan Aff., Ex. 10.) An appraisal panel was formed, consisting of three appraisers: Paul Norcia, who was appointed by Plaintiffs, Richard Herzog, who was appointed by Kiln, and James Stoops, who was selected by Norcia and Herzog to serve as the umpire. (Second McColgan Aff., Ex. 11 (Dep. of Thomas Irmiter (" Irmiter Dep." ) 60:9-21); Second May Aff., Ex. 9 at 3; Tr. 3.)

The appraisal was scheduled for April 29, 2009. (Second McColgan Aff., Ex. 12 at 3.) The appraisal panel, May, Lewandowski, and Lewandowski's expert Thomas Irmiter met at the Property to begin the appraisal. (Second May Aff., Ex. 9 at 3.) At the site visit, Norcia raised the issue that portions of the townhomes other than the roofs --specifically the fascia, downspouts, gutters, windows, and siding -- may have also been damaged by the hail storm. ( Id. ) Umpire Stoops determined that the appraisal process could not proceed until

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the parties exchanged competing damage estimates relating to portions of the Property other than the roofs. ( Id. )

The appraisal was rescheduled to August 27, 2009, and consisted of a site visit followed by a hearing during which documentary evidence and live witness testimony was presented. (Lewandowski Dep. 48:11-20; see generally Tr.) The focus of the appraisal was " the scope and price issues pertaining to the storm damage claim that is at issue." (Tr. 5.) At the appraisal, in its opening statement Kiln admitted that there was damage caused by the hail storm to the soft metals on the north and east facing sides of the buildings and soft metal on the roof. (Tr. 9.) Kiln denied, however, that the shingles were damaged by hail, claiming instead that damage was due to deterioration and defective shingles exacerbated by weather conditions and improper ventilation. (Tr. 9, 11-12.)

May testified that he saw evidence of delamination and blistering, but not hail damage on sample shingles from the Plaintiffs' roofs that were available at the appraisal hearing. (Tr. 86-87.) May further testified that it was difficult for him to make any recommendation to the insurance company about the damage because of the number of repairs that had been made on the Property prior to his inspection. (Tr. 91.) He also testified that he could not state whether there was hail damage to the roofs because of his lack of inspection. (Tr. 99.)

Kiln's engineering expert, Nathan Prieve, P.E., inspected photographs of the damage to the Property but did not inspect the roofs before they were replaced. (Tr. 151.) Based on the photographs, Prieve testified that the roofs of Plaintiffs' buildings sustained no hail damage on the north or south sides as a result of the May 31, 2008 storm. (Tr. 153-56.) He did state, however, that there may have been granule loss to the shingles from the storm. (Tr. 170.) He observed heavy wear and tear, erosion, and shingles that did not hold up as well as some other shingles. (Tr. 153.) He suggested that the wear was worse on the southern side because of the sun exposure. (Tr. 154.) He stated, based on having observed marks caused by the hail in other locations on the Property, that the hail that hit the roofs was relatively small in size. (Tr. 153, 156, 162-63.) While Prieve did not believe the damage to the roof was caused by hail, he admitted that there was no published standard on what constitutes a " hail hit" on a shingle. (Tr. 167.)

Finken, the roof consultant retained by NACS in September 2008 to assess Plaintiffs' claim, agreed with Prieve's testimony. Finken testified, based upon his personal observation of the roofs that:

I observed a roof that was extremely deteriorated and in need of replacement . . . . because of cupping, cracking, delaminating, [and] granules easily falling off. There were areas where we suspected that water penetration could occur, the fact that some nails were exposed underneath because of the cracking and delamination. Some openings in shingles.

(Tr. 119.) He stated that the deterioration was worse on the south facing surfaces. ( Id. at 120.) He further stated that he did not believe these issues were caused by hail but rather the deterioration was caused by " normal conditions," product failure, and improper ventilation. (Tr. 119-20, 125.) He opined that the south facing shingles were so far deteriorated that they could not hold up to normal weather conditions, including any level of hail. (Tr. 126.) Thus, he stated, " South facing roofs are damaged by hail but it appears that the roof was already deteriorated

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which greatly furthered the degree of damage." (Tr. 132-33.) He clarified that the roof " was damaged to the point that it was completely and totally damaged" and had no more " useful life" before the hail storm and could thus not have been damaged further by hail, even though there were some hail marks. (Tr. 133, 144-45.) He did not notice any hail damage to the north facing slopes. (Tr. 132.)

Plaintiffs responded that there was hail damage on the roof. (Tr. 27.) Plaintiffs retained Irmiter, a licensed building official, to act as their damages consultant and to present evidence to the appraisal panel. (Second McColgan Aff., Ex. 11 at 3.) Irmiter works for Forensic Building Science, Inc. (" FBS" ). ( Id. ) Irmiter testified that he has personally replaced hundreds of roofs, is a certified state building official, has a great deal of experience with shingles and roofing materials, and has been qualified as an expert by various courts on construction defects and other issues. (Tr. 35-36.) Irmiter consulted with Bryan Oakley of FBS, a professional engineer, in arriving at his conclusions. ( See Tr. 35; List of Exs. in Supp. of Mot. for Summ. J., Ex. D 48:6-17, Dec. 1, 2011, Docket No. 142.)

At the hearing, Plaintiffs produced actual shingles from the north side of the roofs and Irmiter testified that they showed hail dents rather than deterioration. (Tr. 16, 27.) Plaintiffs also produced photographs of the alleged hail damage. In addition, Plaintiffs presented a damage estimate prepared by the Lindsay Consulting Group (the " Lindsay Estimate" ). (Second McColgan Aff., Ex. 13.) Irmiter personally prepared the Lindsay Estimate. (Irmiter Dep. 62:16-17.) The appraisal panel admitted the Lindsay Estimate into evidence. ( Id. 65:10-14; Tr. 20.) The Lindsay Estimate concluded that the Property required $1,349,891.13 in repairs as a result of the May 31, 2008 hail storm. (Second McColgan Aff., Ex. 13 at 11.) The Lindsay Estimate called for total replacement of all roofs, window and stucco upgrades due to building codes, repairs to the soffit and fascia, repairs to gutters that would be damaged during replacement of the roofs, and installation of ice shields to prevent ice damming. ( Id., Ex. 13.) Irmiter testified that the Lindsay Estimate " represented the ...

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