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Indianapolis Airport Authority v. Travelers Property Casualty Co. of America

United States Court of Appeals, Seventh Circuit

February 17, 2017

Indianapolis Airport Authority, Plaintiff-Appellant,
Travelers Property Casualty Co. of America, Defendant-Appellee.

          Argued December 9, 2016

         Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. l:13-cv-01316-JMS-MPB - Jane Magnus-Stinson, Chief Judge.

          Before Williams and Hamilton, Circuit Judges, and Chang, District Judge. [*]

          Hamilton, Circuit Judge.

         In this diversity-jurisdiction case, the Indianapolis Airport Authority sued Travelers Property Casualty Company of America over Travelers' partial denial of a claim for coverage arising from an airport construction accident that occurred in 2007. On motions for summary judgment, the district court interpreted the insurance contract in favor of Travelers on several issues. Following summary judgment, the Airport Authority's case was narrowed to a claim for unreimbursed inspection costs associated with the incident. Then, two weeks before trial was set to begin on that claim, the district court entered an evidentiary order that effectively precluded the Airport Authority from proving that sole remaining claim. The Airport Authority sought entry of final judgment so that it could appeal, and the district court entered judgment in Travelers' favor. On the Airport Authority's appeal, we affirm in part and reverse in part the district court's summary judgment order, and we vacate the evidentiary order for further consideration in light of this opinion.

         I. Factual and Procedural Background

         Plaintiff Indianapolis Airport Authority owns and operates the Midfield Terminal, a passenger terminal that opened for business on November 11, 2008. The Midfield Terminal project cost over $1 billion-and like any project of such magnitude, it had its share of setbacks. In January 2007, two shoring towers were being used to lift steel trusses to the roof of the terminal. Those shoring towers failed, causing a portion of the terminal's roof structure to drop by about twelve inches. As a result of that "Shoring Tower Incident, " work on the terminal stopped temporarily. The Airport Authority incurred millions of dollars in inspection and repair costs, as well as ancillary costs traceable to the incident. Yet despite the setback, the project remained largely on schedule. Before the Shoring Tower Incident, the terminal had been scheduled to open for business on September 28, 2008. It ultimately opened 44 days later, on November 11, 2008.

         Construction of the Midfield Terminal project was insured by a commercial inland marine policy underwritten by defendant, Travelers. Unlike most insurance policies for consumers, the policy was not a boilerplate contract of adhesion but was instead a customized policy negotiated by the parties. The policy included three categories of coverage at issue in this litigation: (1) builders' risk (the "General Coverage Provision"); (2) soft costs (the "Soft Cost Provision"), particularly bond interest in excess of the budgeted amount; and (3) expenses to reduce the amount of loss, known a little awkwardly as ERAL (the "ERAL Provision"), an additional coverage feature that paid for certain expenses incurred by the Airport Authority to reduce delay and mitigate soft costs. The policy also included other coverages and coverage extensions that are not at issue here. We have considered the breadth and complexity of the policy in evaluating the scope of the provisions that are at issue, particularly the General Coverage Provision.

         In 2008, the Airport Authority provided Travelers with a tentative proof of loss statement for the Shoring Tower Incident. It submitted a revised, sworn proof of loss statement in 2012. In its proof of loss, the Airport Authority identified a total claim of approximately $12.8 million, less $3.6 million in payments that Travelers had already made. Following further adjustments by the Airport Authority and some additional payments by Travelers, the insurance company rendered a final claim decision in July 2013, leaving the Airport Authority with a non-covered loss of a little over $9 million exclusive of any soft costs.

         The Airport Authority then sued, alleging that Travelers breached its contract and seeking a declaratory judgment on the extent of coverage and the parties' rights and obligations under the policy. After discovery, the parties filed cross-motions for summary judgment. The district court denied the Airport Authority's motion and granted Travelers' motion in large part. The court construed the General Coverage Provision narrowly, and it held that the Airport Authority was not entitled to soft costs or ERAL coverage. See Indianapolis Airport Authority v. Travelers Property Casualty Co. of America, 178 F.Supp.3d 745, 764-65 (S.D. Ind. 2016).

         As a practical matter, after the district court's summary judgment order, only one aspect of the Airport Authority's non-covered loss remained for trial: its claim for around $2 million in inspection costs under the General Coverage Provision. Shortly before trial was scheduled to begin, however, Travelers moved to exclude opinion testimony by two key witnesses whom the Airport Authority had designated as hybrid fact/expert witnesses pursuant to Federal Rule of Civil Procedure 26(a)(2)(C). The district court restricted the subject matter about which those hybrid witnesses might testify while also holding that the Airport Authority would have to prove its damages with expert testimony. See Indianapolis Airport Authority v. Travelers Property Casualty Co. of America, No. l:13-cv-01316-JMS-MPB, 2016 WL 2997506, at *10, 13-14 (S.D. Ind. May 23, 2016). That ruling proved fatal to the Airport Authority's remaining claim because it had designated no damages expert. The Airport Authority therefore moved for entry of final judgment, reserving its right to appeal the adverse rulings. The district court entered final judgment in Travelers' favor.

         On appeal, the Airport Authority challenges both the district court's summary judgment order and its order on Travelers' motions to exclude. With respect to the summary judgment order, we agree with the district court's construction of the General Coverage Provision. We also agree that the Airport Authority has no compensable soft cost claim because of the deductible. However, we disagree with the district court's conclusion that the policy's ERAL Provision was not triggered. If the Airport Authority can demonstrate with competent evidence that it incurred expenses to reduce soft costs for which Travelers otherwise would have been liable, it may recover those expenses under the ERAL Provision, subject to policy limits. With respect to the district court's evidentiary rulings, we think it best to vacate those rulings for the court's reconsideration in light of our analysis concerning the scope of insurance coverage and the topics for trial. We provide some guideposts for the court and the parties on remand.[1]

         II. The Scope of Coverage

         A. Legal Standards

         We review de novo the district court's decision on the parties' cross-motions for summary judgment, construing all facts and drawing all reasonable inferences in favor of the party against whom the motion under consideration was filed. Hess v. Board of Trustees of Southern Illinois University, 839 F.3d 668, 673 (7th Cir. 2016).

         The parties agree that Indiana law governs our interpretation of the insurance policy at issue here. In Indiana, insurance policies are generally subject to the same rules of construction that apply to other types of contracts. Frye v. Auto-Owners Ins. Co., 845 F.3d 782, 788 (7th Cir. 2017), citing Just ice v. American Family Mutual Ins. Co., 4 N.E.3d 1171, 1176 (Ind. 2014). In determining the meaning of policy provisions, we "consider all of the provisions ... and not just individual words, phrases, or paragraphs. Thus, the insurance policy must be construed as a whole." Burkett v. American Family Ins. Group, 737 N.E.2d 447, 452 (Ind. App. 2000) (citations omitted). "If the policy's language is clear and unambiguous, it is to be given its plain and ordinary meaning." National Fire & Casualty Co. v. West ex rel. Norris, 107 F.3d 531, 535 (7th Cir. 1997). A special rule of construction applies, however, when an insurance contract contains ambiguous language: such language must be "construed both to favor the insured and to further indemnity." Id.

         B. The General Coverage Provision

         The policy's General Coverage Provision stated that Travelers would pay for "loss" ("accidental loss or damage") to "Covered Property" from any "Covered Causes of Loss." The term "Covered Property" was defined as "Builders' Risk, " which was further defined as property described in the policy declarations and consisting of "Buildings or structures in- eluding temporary structures" and "Property that will become a permanent part of the buildings or structures."[2] The term "Covered Causes of Loss" was defined as the "RISKS OF DIRECT PHYSICAL 'LOSS.'" A separate but related provision appearing in the policy's general conditions, which the parties refer to as the "Valuation Condition/' explained that property value at the time of loss was the lesser of (1) its actual cash value, (2) the cost of reasonably restoring the property to its pre-loss condition, or (3) the cost of replacing the property with substantially identically property.

         The district court held that the General Coverage Provision was unambiguous and that it covered only "direct physical damage caused by the Shoring Tower Incident" and the "cost of reasonably restoring the damaged property to its condition immediately before the Shoring Tower Incident." Indianapolis Airport Authority, 178 F.Supp.3d at 764. We agree with that interpretation.

         The Airport Authority argues that, because the General Coverage Provision defined the covered causes of loss as the risks of direct physical loss, that coverage must extend beyond mere physical damage. The Airport Authority's argument fails to appreciate that "Covered Property" was limited to "Builders' Risk, " i.e., buildings and structures. In other words, the General Coverage Provision pays only for accidental loss or damage (resulting from a covered cause of loss) to physical structures. Direct repair costs would count, as would inspection costs associated with direct repair. But the economic and consequential costs that the Airport Authority describes in its operative Second Amended Complaint (which include costs of resequencing and accelerating different construction tasks, costs to resolve change orders and contractor claims, and overtime expenses to minimize delays) are not included under general coverage. That is not to say that these consequential costs are necessarily excluded from all coverage: they may qualify under one of the policy's additional coverage provisions, such as the ERAL Provision discussed below. But they are not compensable under the General Coverage Provision. On the contrary, the policy's exclusions section stated that "loss" (as the term is used in the General Coverage Provision) did not include damages resulting from "Delay, loss of use or loss of market." See One Place Condominium, LLC v. Travelers Property Casualty Co. of America, No. 11 C 2520, 2015 WL 2226202, at *5 (N.D. 111. Apr. 22, 2015) ("[W]hile the insured may recover the entire cost ... to repair the damage to the property itself ... if that damage resulted in increased material and labor costs to construct the remainder of the project ... there is only limited [additional] coverage ... .").

         In arguing for a more expansive understanding of the General Coverage Provision, the Airport Authority cites treatises saying that general coverage ordinarily applies to "direct physical loss" only. The Airport Authority also cites a more recent version of Travelers' form policy, which now states that Travelers will pay for "direct physical loss of or damage to Covered Property." The Airport Authority describes the differences between the General Coverage Provision and the comparable provisions in these extrinsic sources as "significant and material." We cannot rely on extrinsic sources because the operative language in the General Coverage Provision is unambiguous. See AM General LLC v. Armour, 46 N.E.3d 436, 440 (Ind. 2015) ("Clear and unambiguous terms in the contract are deemed conclusive, and when they are present we will not construe or look to extrinsic evidence, but will merely apply the contractual provisions.") (citation omitted). While the newer Travelers language is even clearer than the version in the Airport Authority policy, the latter is sufficiently clear to enforce as written in this case.

         The Airport Authority also challenges the district court's reliance on the Valuation Condition to determine the scope of loss under the General Coverage Provision. According to the Airport Authority, the Valuation Condition "has no bearing on the amount of loss that is recoverable; rather, it solely addresses the value of ... Covered Property." We doubt a property insurer would have any reason to value property apart from determining its obligations in the event of loss. The plain text of the Valuation Condition linked valuation to loss: "In the event of loss or damage, the value of property will be determined as of the time of loss or damage." The district judge correctly understood the Valuation Condition to provide a ...

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