The Seventh Circuit is becoming a difficult venue for insurers.  In November we reported that the Court of Appeals had held that the phrase “continuous or repeated exposure” in definition of occurrence meant that a continuous trigger theory applied, leaving the carrier exposed to a claim for 11 years of gradual water damage that was first reported 5 years after the last insurance policy expired.  Last month, in Advance Cable Co. v. Cincinnati Ins. Co., 2015 WL 3630699, 2015 U.S. App. LEXIS 9805 (7th Cir., Jun. 11, 2015), the same court held that cosmetic hail damage to a roof that had no affect on the structure’s functionality or life expectancy nonetheless constituted “direct physical loss” and required the insurer to pay for a replacement.

Advance Cable had a building in Middleton, Wisconsin that sustained hail damage on April 3, 2011.  The insurer’s claim representative inspected the roof and observed no damage.  Six months later, the policyholder was contemplating a sale, and the buyer had the structure looked at.  Its inspector stated that there was “definitely hail damage,” and the insured asked the carrier to reopen its claim.  The resulting report by the insurer’s representative found hail dents up to 1” in diameter but concluded that these neither “affect[ed] the performance of the [roof] panels” nor “detract[ed] from the panels’ life expectancy.”  There was no evidence of record to the contrary.

The insurer refused to pay for a new roof, and the policyholder sued.  The district court granted the carrier’s motion for summary judgment, and an appeal to the Court of Appeals followed.  On June 11th, a unanimous panel of three circuit judges affirmed, in an opinion written by Chief Judge Diane Pamela Wood.

The contract of insurance afforded coverage for “direct physical loss” to covered property.  The terms “direct” and “physical” were undefined, but the policy defined “loss” as “accidental loss or damage.”  The court looked first at “direct,” which Chief Judge Wood held was “meant to exclude situations in which an intervening force plays some role in the damage.”  In the matter at hand, the court noted that “everyone agrees that the hailstorm was the culprit.”

The judges next turned their attention to “physical” which the insurer urged the court to defined as material or structural in nature.  The judges rejected that.  As the opinion explained:

hail caused visible indentations to the surface of [the] roof.  This denting changes the physical characteristics of the roof and thus satisfies the language of the policy. . . . [T]he hail, in denting the building’s rooftop, physically and directly damaged it.

Finally, the court directed its attention to the meaning of “loss or damage.”  The carrier’s position was that the phrase connoted harm and that “the dents caused by the hail did not harm the roof enough to diminish its function or value.”  Chief Judge Wood dismissed that as a “no harm, no foul” argument, and she focused instead on the word “or” in the phrase.  As her opinion observed:

The district court, in deciding that [“accidental loss or damage”] encompasses all hail denting — both dents that diminish the functionality of the roof and dents that may be only cosmetic — emphasized the disjunctive nature of the definition.  The policy covers loss or damage.  This indicated to the district court that even without a measurable “loss” in value or in function, “the policy expressly contemplates the possibility that there may still be ‘damage,’ presumably giving it a different meaning than the word ‘loss.’ ”  This was a sensible conclusion.

The judges also noted that there was evidence of record that the insurer contemplated inserting language in other policies that would spell out the fact that cosmetic damage was excluded.  That was clearly a sensible step but one that almost always has unfortunate consequences when – as here — a court finds out about that when asked to construe a policy without it.