In a dispute over the property policy's requirement that lost or damaged property be repaired or replaced, the Minnesota Supreme Court held that the policy language called for replacement of undamaged siding panels to obtain a color match. Cedar Bluff Townhome Condominium Ass'n, Inc. v. Am. Family Mut. Ins. Co., 2014 Minn. LEXIS 661 (Minn. Dec. 17, 2014).
During a hail storm, all 20 of Cedar Bluff's buildings sustained some damage. The roofs on all of the buildings needed to be replaced, and at least one siding panel on each building sustained damage. Eleven of the 20 buildings had three or fewer damaged panels. At the time of the hail storm, the siding was approximately 11 years old, and the color of the panels had faded. Replacement panels were available, but not in the same color.
Cedar Bluff submitted a claim under its businessowners' policy to American Family. The policy obligated the insurer to pay for "direct physical loss of or damage to Covered Property at the premises . . . caused by or resulting from any Covered Cause of Loss." "Covered Property" was broadly defined in the policy to include buildings at the premises.
The policy also included a "Loss Payment" clause specifying how a covered loss or damage would be paid for. Here, American Family chose to "[p]ay the cost of repairing or replacing the lost or damaged property." The replacement cost was the cost to replace "the lost or damage property with other property . . . of comparable material and quality."
Cedar Bluff argued that all of the siding on each building had to be replaced because there would be a color mismatch with the existing panels if only the damaged siding panels were replaced. American Family claimed that the policy only required replacement of the individual panels actually damaged by the hail storm.
Cedar Bluff demanded an appraisal under the policy's terms. The appraisal panel found that the original siding could not be matched in terms of color. Therefore, there was not a reasonable match available for the existing siding materials. The appraisal panel issued an award for "a total replacement of the siding" in the amount of $361,108 for the replacement cost of property of comparable material and quality.
American Family refused to pay. It believed the award was based on the appraisal panel's unauthorized coverage determinations. Cedar Bluff then sued to confirm the appraisal award.
The trial court granted summary judgment to American Family, determining that the insurer was not obligated to pay for the undamaged siding. The court of appeals reversed. It held that the appraisal panel had authority to consider the meaning of "comparable material and quality" when determining the amount of the loss. A reasonable person could understand that "comparable material" meant that it was the same color as the damaged property.
The Minnesota Supreme Court affirmed the court of appeals. The phrase ""comparable material and quality" meant a reasonable color match between the new and existing siding when replacing damage siding. The court ruled that the color mismatch constituted "direct physical loss of or damage to Covered Property." Because of the color mismatch resulting from the inability to replace the hail-damaged siding panels with siding of "comparable material and quality," the covered property - Cedar Bluff's buildings - sustained a "distinct, demonstrable, and physical alteration." Thus, the covered property sustained a covered loss. The trial court erred when it refused to confirm the appraisal panel's award.
