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#3393586v1 IN THE COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
______________________ ________________
No. 21-11329
______________________ ________________
SKY HARBOR ATLANTA NORTHEAST, LLC
and CRESTLINE HOTELS & RESORTS, LLC,
Plaintiffs/Appellants,
v.
AFFILIATED FM INSURANCE COMPANY,
Defendant/Appellee.
______________________ __________________
On appeal from the U.S. District Court
Northern District of Georgia, Atlanta Division
Civil Action No. 1:17-CV-3910-JPB
______________________ __________________
BRIEF OF APPELLANTS
Michael L. Childress
Thomas J. Loucks
CHILDRESS LOUCKS
& PLUNKETT, LTD.
11 W. Illinois, 4th Floor
Chicago, Illinois 60654
Michael A. Dailey
ANDERSON DAILEY LLP
2002 Summit Blvd., Suite
1250
Atlanta, Georgia 30319
Michael B. Terry
Frank M. Lowrey IV
Megan E. Cambre
BONDURANT MIXSON
& ELMORE, LLP
1201 W. Peachtree St., NW, #3900
Atlanta, Georgia 30309
Christopher B. Noyes
Katherine A. Bruce
Brian S. Kabateck
KABATECK LLP
633 W. Fifth Street, Suite 3200
Los Angeles, California 90071
Attorneys for Appellants USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 1 of 75
Sky Harbor Atlanta Northeas t, LLC, et al. v. Affiliat ed FM Insurance Company
No. 21-11329
#3393586v1 C-1 of 3 CERTIFICATE OF INTERESTED PERSONS AND CORPORATE
DISCLOSURE STATEMENT
Pursuant to Rule 26.1 of the Fede ral Rules of Appellate Procedure,
and Local Rule 26.1-1(a), Appellants he reby file this Certificate of
Interested Persons, which includes tr ial judge(s), all attorneys, persons,
associations of persons, firms, part nerships, or corporations that have
an interest in the outcome of this ca se or appeal, including subsidiaries,
conglomerates, affiliates, parent corporations, any publicly held
corporation that owns 10% or more of the party’s stock, and other
identifiable legal entities related to a party:
Affiliated FM Insurance Company, Appellee
ASAP Property Holdings, Inc.
Barcelo Corporacion Empresarial, SA
Barcelo Crestline Corp.
Laura Bartlow, Esq., ZELLE, LLP, Counsel for Appellee
BCE-BCC, LLC
The Honorable J.P. Boulee, U.S. Di strict Judge, Northern District
of Georgia USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 2 of 75
#3393586v1 2 Katherine Bruce, Esq., KABATECK , LLP, Counsel for Appellants
Megan E. Cambre, Esq., BONDURANT MIXSON & ELMORE,
LLP, Counsel for Appellants
Michael Childress, Esq., CHIL DRESS LOUCKS & PLUNKETT,
LTD, Counsel for Appellants
James V. Chin, Esq., ZELLE, LLP, Counsel for Appellee
Constellation Capital, LLC
Crestline Hotels & Resorts, LLC, Appellant
Wei Cui
Michael Alan Dailey, Esq., AN DERSON DAILEY, LLP, Counsel
for Appellants
Robert N. Dokson, ELLIS FUNK, P.C., Special Master
Factory Mutual Insurance Company
JVW Investments LLC
Brian S. Kabateck, Esq., KABATECK, LLP, Counsel for
Appellants
Elizabeth Kniffen, Esq., ZELLE, LLP-MN, Counsel for Appellee
Thomas J. Loucks, Esq., CHILDRESS LOUCKS & PLUNKETT,
LTD, Counsel for Appellants USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 3 of 75
#3393586v1 3 Frank M. Lowrey IV, Esq., BONDURANT MIXSON & ELMORE,
LLP, Counsel for Appellants
Jonathan R. MacBride, Esq., ZE LLE, LLP, Counsel for Appellee
Christopher B. Noyes, Esq., KABATECK, LLP, Counsel for
Appellants
Megan Shutte, Esq., ZELLE, LL P-MN, Counsel for Appellee
Sky Harbor Atlanta Northeast, LLC, Appellant
Michael B. Terry, Esq., BONDURANT MIXSON & ELMORE,
LLP, Counsel for Appellants
The Honorable Amy Totenberg, U. S. District Judge, Northern
District of Georgia
Christopher Leo Troy, Esq., ZELLE , LLP, Counsel for Appellee
Julia Wong
Vicky Yuan
No publicly held company owns more than 10% of the stock of either
Appellant. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 4 of 75
#3393586v1 i STATEMENT REGARDING ORAL ARGUMENT
This case requires the applicat ion of contract interpretation
principles to a “all-risk” insurance po licy in the context of an extensive
factual record. All-risk policies are a common form of property
insurance, and their interpretation is important to many insurers and property owners. If the opinion belo w withstood appeal, it would create
an implicit and signific ant limitation in the coverage afforded by these
policies—a limitation untethered to an y actual policy language and not
recognized by the governing law. Ac cordingly, Appellants believe that
oral argument will assist this Cour t’s consideration of this appeal.
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 5 of 75
#3393586v1 ii TABLE OF CONTENTS
CERTIFICATE OF INTERESTE D PERSONS AND CORPORATE
DISCLOSURE STATEMENT ................................................................ C-1
STATEMENT REGARDING ORAL ARGUMENT .................................... i
TABLE OF AUTHORITIES ....................................................................... v
STATEMENT OF JURISDICTION .......................................................... ix
STATEMENT OF THE ISSUES ................................................................ 1
STATEMENT OF THE CASE ................................................................... 3
Acquisition of the Hotel ..................................................................... 3
The 2015 renovation reveals extens ive recent water intrusion,
water damage, and mold ................................................................... 9
AFM investigates the clai ms and denies coverage ......................... 11
The Policy language ........................................................................ 13
The summary judgment ruling ....................................................... 16
STANDARD OF REVIEW ........................................................................ 17
SUMMARY OF ARGUMENT .................................................................. 19
ARGUMENT AND AUTHORITIES ........................................................ 24
I. The Policy covers physic al loss and damage to the
Hotel even if it resulted from construction or design
defects that existed since the original construction ............. 24
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 6 of 75
#3393586v1 iii A. No Policy language limits or excludes coverage for
physical loss or damage resulting from a pre-
Policy defect in construction or design ......................... 24
B. The phrase “direct phys ical loss or damage” does
not implicitly bar recove ry for losses resulting
from pre-Policy defects ................................................. 26
II. The Policy does not bar coverage for direct physical loss
or damage if it occurred or started before the Policy
period ...................................................................................... 35
A. The Policy language does not limit or exclude
coverage for costs incu rred during the Policy
period to repair physical damage that occurred
before the Policy period ................................................ 37
B. Georgia has not recognized an implied exclusion
for losses known to the insured before the Policy
period ............................................................................. 38
C. Applying any “known loss,” “expected loss,” or
“fortuity requirement” here would depend on
issues of disputed fact ................................................... 39
D. At a minimum, Plaintiffs may recover the costs to
repair physical loss or damage that occurred
within the Policy period ................................................ 46
III. Before reading any unstate d coverage limitations into
the Policy, the Court should certify the issue to the
Georgia Supreme Court ......................................................... 50
IV. The district court erred in granting summary judgment
on Plaintiffs’ claim for bad faith denial of coverage ............. 51
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 7 of 75
#3393586v1 iv V. Sky Harbor is an insured under the Policy for purposes
of loss or damage to the Hotel, and Crestline is also a
named insured entitled to recover under the Policy ............ 51
A. Sky Harbor is an insured under the Policy for
purposes of loss or damage to the Hotel ...................... 52
B. Crestline is also a name d insured entitled to the
benefits AFM owes under the Policy ............................ 54
CONCLUSION ......................................................................................... 56
CERTIFICATE OF COMPLIANCE ........................................................ 58
CERTIFICATE OF SERVICE .................................................................. 59
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 8 of 75
#3393586v1 v TABLE OF AUTHORITIES
Case Page
*AFLAC Inc. v. Chubb & Sons, Inc. ,
260 Ga. App. 306 (2003) .......................................................... passim
Alea London Ltd. v. Am. Home Servs., Inc. ,
638 F.3d 768 (11th Cir. 2011) ......................................................... 18
Am. Ins. Co. v. Bateman ,
125 Ga. App. 189 (1971) .................................................................. 55
Am. Reliable Ins. Co. v. Woodward ,
143 Ga. App. 652 (1977) .................................................................. 55
Arrow Exterminators, Inc. v. Zurich Am. Ins. Co. ,
136 F.Supp.2d 1340 (N.D. Ga. 2001) .............................................. 38
Atl. Mut. Ins. Co. v. Lotz ,
384 F. Supp. 2d 1292 (E.D. Wis. 2005) ........................................... 40
Barrett v. Nat’l Union Fire Ins. Co. of Pittsburgh ,
304 Ga. App. 314 (2010) ................................................ 18, 25, 38, 53
Broome v. Allstate Ins. Co. ,
144 Ga. App. 318 (1977) .................................................................. 23
Buscher v. Economy Premier Assur. Co. ,
2006 WL 268781 (D. Mi nn. 2006) ........................................ 32-33, 35
Calabro v. Liberty Mut. Fire Ins. Co. ,
253 Ga. App. 96 (2001) .................................................................... 37
Caribbean I Owners’ Ass’n, Inc. v. Great Am. Ins. Co. of New York ,
600 F. Supp. 2d 1228 (S.D. Ala. 2009) ............................................ 39
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 9 of 75
#3393586v1 vi Cincinnati Ins. Co. v. Davis ,
153 Ga. App. 291 (1980) .................................................................. 25
City of Burlington v. Indem. Ins. Co. of N. Am. ,
332 F.3d 38 (2d Cir. 2003) ......................................................... 41, 51
Claussen v. Aetna Cas. & Sur. Co. ,
865 F.2d 1217 (11th Cir. 1989) ....................................................... 50
Columbia Cas. Co. v. Plantation Pipe Line Co. ,
338 Ga. App. 556 (2016) ............................................................. 38-39
Cont’l Cas. Co. v. H.S.I. Fin. Servs., Inc. ,
266 Ga. 260 (1996) ........................................................................... 37
Copeland v. Home Grown Music, Inc. ,
358 Ga. App. 743 (2021) .................................................................. 47
Eckstein v. Cincinnati Ins. Co. ,
469 F. Supp. 2d 444 (W.D. Ky. 2007) .................................. 32, 34-35
Ellis v. England ,
432 F.3d 1321 (11th Cir. 2005) ....................................................... 18
Essex Ins. Co. v. H & H Land Dev. Corp. ,
525 F. Supp. 2d 1344 (M.D. Ga. 2007) ............................................ 38
Flynt v. Life of S. Ins. Co. ,
312 Ga. App. 430 (2011) .................................................................. 47
Georgia Farm Bureaus Mut. Ins. Co. v. Franks ,
320 Ga. App. 131 (2013) ............................................................. 54-56
Gilreath Family & Cosmetic Dentistr y, Inc. v. Cincinnati Ins. Co. ,
2021 WL 3870697 (11th Cir. Aug. 31, 2021) .................................. 28
Great Am. All. Ins. Co. v. Anderson ,
847 F.3d 1327 (11th Cir. 2017) ....................................................... 39 USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 10 of 75
#3393586v1 vii
In re EHT US1, Inc., et al .,
Case No. 21-10036 (KBO), United States Bankruptcy Court
for the District of Delaware ............................................................. ix
Ingenco Holdings, LLC v. Ace Am. Ins. Co. ,
921 F.3d 803 (9th Cir. 2019) ........................................................... 40
Lipsitz v. Fireman’s Fund Insurance Co. ,
183 Ga. App. 270 (1987) ............................................................. 48-49
Lunceford v. Peachtr ee Cas. Ins. Co. ,
230 Ga. App. 4 (1997) ................................................................ 19, 38
McGrath v. Am. Family Mut. Ins. Co. ,
2008 WL 4531373 (N.D. I ll. 2008) ....................................... 32, 34-35
Morrison Grain Co. v. Utica Mut. Ins. Co. ,
632 F.2d 424 (5th Cir. 1980) ........................................................... 40
*NUCO Invs., Inc. v. Hartford Fire Ins. Co. ,
2005 WL 3307089 (N.D. Ga. De c. 5, 2005) ......................... 21, 32, 35
Scruggs v. Purvis,
218 Ga. 40 (1962) ............................................................................. 54
Sun Insurance Office, Ltd. v. Guest Camera Store, Inc. ,
108 Ga. App. 339 (1963) .................................................................. 48
Trinity Industries v. Insurance Co. of North America ,
916 F.2d 267 (5th Cir. 1990) ...................................................... 29-30
Western Pacific Mut. Ins. Co. v. Davies ,
267 Ga. App. 675 (2004) ................................................ 19, 20, 22, 25
Whiteside v. GEICO Indem. Co.,
977 F.3d 1014 (11th Cir. 2020) ....................................................... 51
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 11 of 75
#3393586v1 viii Other:
28 U.S.C. § 1291......................................................................................... ix
43 Am. Jur. 2d Insurance § 469 ............................................................... 40
Fed. R. Civ. P. 25(c) .................................................................................... x
O.C.G.A. § 15-2-9 ...................................................................................... 50
O.C.G.A. § 33-4-6(a) .................................................................................. 17
Restatement of Contracts § 291 ............................................................... 40
28 U.S.C. § 1332......................................................................................... ix
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 12 of 75
#3393586v1 ix STATEMENT OF JURISDICTION
This appeal is from a final district court judgment entered based
on the grant of summary judgment on all claims by all parties.
The district court had subject matte r jurisdiction over this action
pursuant to 28 U.S.C. § 1332 becaus e the matter in controversy exceeds
$75,000 and is between citizens of di fferent states. The order granting
both sides’ motions for summary ju dgment was entered on March 15,
2021. Dkt. 289. The district court entered final judgment on March 16, 2021. Dkt. 290. Appellants filed a timely notice of appeal on April 14, 2021. Dkt. 294. So this Court has juri sdiction over th is appeal from
final judgment pursuant to 28 U.S.C. § 1291.
Relatedly, the bankruptcy proc eedings involving Sky Harbor
Atlanta Northeast, LLC (“Sky Harbor”) do not preclude resolution of
appellants’ appeal.
1 Sky Harbor purchased the hotel at issue in this
case in 2013. Sky Harbor filed this suit in 2017, along with its co-
plaintiff and appellant Crestline Hotels & Resorts, LLC, which
managed the hotel for Sky Harbor. Dkt. 1. In 2018, Sky Harbor
1 In re EHT US1, Inc., et al ., Case No. 21-10036 (KBO), United
States Bankruptcy Court for the District of Delaware. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 13 of 75
#3393586v1 x assigned the right to pursue and re ceive the proceeds of the insurance
claim to its then-owner—ASAP Pro perty Holdings, Inc. (“ASAP
Property”). ASAP Property did not mo ve to substitute itself for Sky
Harbor as a named plaintiff in the district court, nor was there any
requirement to do so.2
In early 2021, Sky Harbor—now owne d by an entity unrelated to
ASAP Property—filed for bankruptcy protection.3 When Appellants’
counsel learned of that development, Appellants alerted this Court and
requested a stay of the appeal. During that stay, ASAP Property
initiated an adversary proceeding in Sky Harbor’s bankruptcy to resolve
any question by any participant in those proceeds whether ASAP
Property owned the insurance claim that it was prosecuting in Sky
Harbor’s name, as opposed to that claim being part of the bankruptcy
estate, subject to creditor claims.
2 The Federal Rule of Civil Proce dure governing substitution of
parties provides: “If an interest is transferred, the action may be
continued by or against the original party unless the court, on motion,
orders the transferee to be substituted in the acti on or joined with the
original party.” Fed. R. Civ. P. 25(c) (emphasis added).
3 See note 1 supra . USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 14 of 75
#3393586v1 xi That adversary proceeding was resolved by a May 6, 2022
Stipulation entered in Sky Harbor’s bankruptcy.4 That Stipulation
quitclaimed to ASAP Property any in terest that Sky Harbor may or
may not have in the insurance claim against AFM. Id. By doing so, the
Stipulation resolved any potential di spute over the effectiveness of Sky
Harbor’s 2018 pre-bankruptcy assign ment to ASAP Property of the
right to pursue and receive the proc eeds of the insurance claim asserted
in this action.
In that Stipulation, Sky Harbor’s liquidating trustee agreed that
“ASAP Property may continue to pros ecute, settle or otherwise dispose
of the AFM Lawsuit in its sole and absolute discretion, and that the
AFM Lawsuit ( including any appeals ) may continue without regard to
any impediments that may exist as a re sult of the automatic stay or the
Plan.”5 Accordingly, this appeal may proceed.6
4 Appellants’ Motion to Subs titute (May 18, 2022), Ex. A.
5 Appellants’ Motion to Substitu te (May 18, 2022), Ex. A at 4 ¶ 2
(emphasis added).
6 To avoid any future confusion, particularly on the part of non-
parties, Appellants moved this Cour t to substitute ASAP Property for
Sky Harbor under F.R.A.P. 43. See Appellants’ Motion to Substitute
(May 18, 2022). Appellee opposed that motion on various fact-intensive
grounds, but both sides agree that substitution need not occur for USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 15 of 75
#3393586v1 xii
Appellants’ appeal to proceed. See Appellants’ Reply Regarding Motion
to Substitute (June 15, 2022). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 16 of 75
#3393586v1 1 STATEMENT OF THE ISSUES
This case involves an “all-risk” in surance policy, a common form of
property insurance. The policy here covered physical loss and damage to
the insured hotel arising from any risk not expressly excluded from
coverage. Appellants seek coverage under this policy for the costs of
repairing extensive water and mold damage they discovered in 2015,
during the policy period.
The district court held that ther e was no insurance coverage as a
matter of law because the damage di scovered during the policy period
was ultimately attributable to cons truction and desi gn defects that
existed prior to the policy period. Dkt. 289 at 10.7 The court
acknowledged that the policy contai ns no express limitation excluding
coverage if physical loss or damage resulted from a defect that existed
when the policy went into effect. Bu t it nevertheless held that such
resulting losses were not covered, based on unstated limitations
7 All page citations are to the page number that appears in the
CM/ECF header at the top of the pa ge, rather than any internal page
numbering. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 17 of 75
#3393586v1 2 supposedly implied by the nature of an all-risk policy or the concepts of
“risk” and “fortuity.”
This appeal presents th e following issues:
1) Whether the district court erred in concluding, as a matter of
law, that the hotel suffered no phys ical loss or damage covered by the
all-risk insurance policy.
2) Whether the district court erred in granting summary
judgment on the insurer’s liability fo r bad faith denial of coverage, a
holding based solely upon the cour t’s conclusion that there was no
covered loss.
3) Whether Sky Harbor Atlanta Northeast, LLC (the entity
that owned the hotel at the time of the losses and when this suit was
filed) was an insured under the policy for the purposes of any loss or damage to the hotel.
8
8 No one disputes that plaintiff/appellant Crestline Hotels &
Resorts, LLC, which managed and obta ined insurance for the hotel, is a
named insured. No one disputes that the hotel is an insured property.
See, e.g. , Dkt. 289 at 3 (summary judg ment order finding that AFM
insured the hotel through policies issued to Crestline). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 18 of 75
#3393586v1 3 STATEMENT OF THE CASE
Appellants Sky Harbor Northeast, LLC (“Sky Harbor”) and
Crestline Hotels & Resorts, LLC (“Crestline”) (together, “Plaintiffs”) seek coverage under their all-risk policy for extensive water and mold
damage they discovered during the period that the appellee, Affiliated
FM Insurance Company (“AFM”), insu red the Atlanta Hilton Northeast
Hotel (“the Hotel”).
9
Acquisition of the Hotel
The Hotel consists of a 10-floor structure with 272 guest rooms
(“the tower”) as well as common spac e, including meeting rooms and a
ballroom, located in a low-rise portion of the building. See Dkt. 239-16
at 2; Dkt. 265-17 at 34-35. Sky Harbor purchased the Hotel on
November 5, 2013. Dkt. 239-1 at 2; Dk t. 256 at 6; Dkt. 237-8. Crestline,
a leading provider of hotel mana gement services, operated and
managed the Hotel on Sky Harbor ’s behalf. Dkt. 239-9 at 1.
Crestline amended its existing all- risk policy with AFM to add the
Hotel to the list of insured locations, effective as of the date of Sky
9 Regarding the status of Sky Harb or and its relationship to ASAP
Property, see appellants’ Statement of Jurisdiction. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 19 of 75
#3393586v1 4 Harbor’s purchase. See Dkt. 239-4. In exchange, Crestline agreed to pay
an additional annual premium. Id. Crestline renewed this policy with
AFM in 2014 and again in 2015. See Dkt. 237-3; 239-5; 239-6. The policy
language is the same across all three policy years. Id.; Dkt. 239-4. So,
for simplicity’s sake, we refer to the “Policy,” even though AFM
technically issued three identica l policies covering the Hotel.
Before acquiring the Hotel, Sk y Harbor retained third-party
experts AEI and CERES to evaluate the property, and it obtained an
appraisal analysis from PKF Co nsulting. Dkt. 240-26 at 86:8-21; id. at
103:11-16; id. at 20:13-23; Dkt. 265-17. Each of these experts indicated
that the Hotel was in a satisfac tory condition as of 2013.
For example, AEI performed a Pro perty Condition Evaluation and
determined that the Hotel was in “overall good condition.” Dkt. 265-15
at 8. AEI reported that the “Substructure,” “Superstructure,”
“Windows,” “Doors/Frames,” and “Roof Drainage” were “[g]ood,” with no
action items. Id. at 6, 25. AEI did not identify any “material
deficiencies,” that is, deficiencies that required immediate corrective
action. Id. at 8. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 20 of 75
#3393586v1 5 AEI further reported that the Hotel’s then-general manager
represented that there were no “com plaints regarding window leaks or
window condensation,” “that he wa s not aware of mold or microbial
growth at the Hotel and that occupants have not had complaints
concerning mold or microbial growth.” Id. at 265-15 at 27; id. at 49. The
general manager was also not aware of any roof leaks, water leaks or
infiltration, nor of any associated damage. Id. at 49. AEI concluded that
“[t]here was no evidence of wi ndow leaks or condensation,” id. at 27.
AEI also conducted its own survey fo r mold and found no evidence of
“microbial growth and/or water damage.” Id. at 49.
The CERES report likewise indicated that the Hotel was in good
condition. CERES found no signs of significant staining or corrosion
inside the building and that the “building construction materials
appeared to be in good condition.” Dkt. 265-16 at 9, 10. The appraisal
report from PKF Consulting similarl y noted that there were “[n]o major
defects or deferred maintenance” and that the functional utility of the
Hotel was “good.” Dkt. 265-17 at 39, 41. In addition, PKF’s appraiser
inspected the Hotel and found no evid ence of structural deficiencies. Id.
at 135. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 21 of 75
#3393586v1 6 During due diligence, Sky Ha rbor reviewed seller-provided
property condition reports. See J. Yuan Depo., Dkt. 240-26 at 37:2-12;
id. at 68:14-19. These included report s generated when the seller had
originally acquired the Hotel. Id. at 78:20-21; 79:16-21. At least one
report from 2003 mentioned mold in the first-floor ballroom. Id. at
78:12-15. This was ten years before Sky Harbor bought the Hotel and
ten years before the satisfactory evaluations by AEI, CERES, and PKF
Consulting.
Jerome Yuan, chief investment o fficer at ASAP Property and a
corporate designee for Sky Harbor, testified that, after reviewing the due diligence reports described above, he “didn’t think that there was a
mold problem or any cause of mold at the hotel.” Dkt. 240-26 at 85:17-20. He personally inspected the Ho tel in 2013 and saw no evidence of
the problems referenced in the 2003 report. Id. at 79:25-80:6. And he
believed that the seller had fixed any mold or water intrusion problems
referenced in the old 2003 report, particularly after reviewing the
seller’s maintenance and improvement records.
10
10 See Dkt. 240-26 at 81:10-13 (“the report was from 2003. . . I
expected the ownership to fix any problems.”); id. at 82:4-9 (“[T]he seller
provided their historical capex in voices where they fixed -- I mean, USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 22 of 75
#3393586v1 7 During due diligence, Sky Harbor became aware of a few “spot”
problems that were consistent with regular maintenance issues in a
hotel of this size. Dkt. 240-25 at 71:5. These issues existed in approximately 20 (out of 272) guest rooms. See Dkt. 239-16 at 2 . Both
Jerome Yuan and Frank Yuan, CEO at ASAP Property and a corporate
designee for Sky Harbor, testified th at the seller was responsible for
remediating some mold identified in the guest rooms prior to the sale.
Dkt. 240-26 at 84:16-85:2; id. at 145:18-24; Dkt. 240-25 at 195:11-25.
And the seller confirmed that it had completed these remediations prior
to closing. See Dkt. 265-11 at 2. As Chri stopher Flagg of Crestline
testified, “we were told that the mold was remediated by the seller, that
we took over a clean hote l.” Dkt. 240-11 at 139:11-12; see also id. at
140:19-141:7.
While operating the Hotel, Plainti ffs became aware of minor mold
or leak issues, such as bathwater or air-conditioning issues, of the sort
that could be addressed through re gular maintenance. Dkt. 240-25 at
71:1-72:25. For example, Frank Yuan testified that monthly reports by
maybe it’s not mold specific, but wh ere they fixed the property and had
it up to date.”). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 23 of 75
#3393586v1 8 Hotel managers would sometimes indica te that there was a leak or spot
of mold in one room or another an d that they had taken care of it. Id.
He also testified that he was aware of a few problems, such as faucet or
toilet leaks that may cause mold if left unchecked but considered these “regular maintenance” issues. Id. at 108:24-109:3.
Based on his experience with hote ls, Frank Yuan knew that there
would always be “some mold,” but no thing remotely of the “magnitude”
later discovered at the Hote l during the 2015 renovation. Id. at 109:5-
110:18. He testified that the extent an d nature of the roof leaks became
evident only when he visited in October 2015 and “saw the water
pouring down from the roof . . . to the first floor.” Id. at 100:2-9; see also
id. at 79:15-81:12.
Marcy Adams, the Hotel’s Genera l Manager, likewise testified
that she didn’t know of any systemic problems with the Hotel before the
2015 renovation. Dkt. 240-02 at 40:11-23. She had no indication that
mold was a problem throughout the Ho tel or even “in certain specific
areas.” Id. at 31:25-32:2. For example, sh e did not know the exterior
brick was leaking until after the interior drywall was removed for
renovation. Id. at 50:6-51:23. She also testified that, prior to the USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 24 of 75
#3393586v1 9 September 2015 renovation, Crestline di d not know that there was mold
in the fan coil units, in or bene ath the carpets, or in the bathroom
fixtures. Id. at 28:23-31:12, 61:11-14 . To the extent that there had been
occasional reports of mold prior to the renovation, management had
been able to resolve these “sporadic” problems and identify and fix the
“case-by-case” causes, such as pinhole leaks in pipes or a toilet overflow.
Id. at 30:4-16.
The 2015 renovation reveals extensive recent water
intrusion, water damage, and mold
In September 2015, Plaintiffs bega n renovating the Hotel. During
this process, they disc overed extensive mold behind the vinyl wallpaper
in the guest rooms on the ninth an d tenth floors. Dkt. 240-25 at 73:15-
23, 98:15-102:8. Plaintiffs also lear ned of roof, plumbing, and exterior
leaks that appeared to have caused the mold and water damage to the Hotel. Id.
Plaintiffs retained third-party Liberty Building Forensics Group
(“Liberty”) to investigate the causes and extent of the water leaks and mold. Dkt. 240-25 at 81:1-83:15; Dk t. 239-16 at 27. Liberty’s 31-page
report details the water damage th e Hotel sustained “during recent USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 25 of 75
#3393586v1 10 rainwater events,” including a sign ificant storm on August 22 and 23,
2015. Dkt. 239-16 at 27.
Liberty observed water intr usion through the building
envelope while onsite and when these areas were tested. It is
Liberty’s opinion that this wa ter intrusion occurred during
recent rainwater events. One such event occurred on August
22 and 23, 2015.
Id. As noted above, a Sky Harbor wi tness had also seen water pouring
into the Hotel in Octo ber 2015 through the roof. Supra at 6. And, while
on site, Liberty observed additional rain and water vapor intrusion in
November 2015. Dkt. 239-16 at 8.
Liberty ultimately concluded th at water leaks “through the no-
hub piping system for the rainwater drains,” “through the brick and glazing façade,” and “through the r oof penetrations occurred while
Liberty was onsite and would have occurred during events like the one
documented on August 22 and 23 …. These leaks have damaged adjacent areas including the wa llboard, insulation, and framing
systems. These damages necessitate the removal and repair of these areas as a result of recent leak s and damage.” Dkt. 239-16 at 33.
Liberty further concluded that “w ater vapor intrusion through the
brick and glazing facade occurred over the cooling season during July USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 26 of 75
#3393586v1 11 2015 … result[ing] in water damage to adjacent areas including the
wallboard, insulation and framing sy stems. This mechanism of damage
acted in combination with rainwater intrusion throughout the exterior
cladding to cause damage in some areas.” Id.; see also id. at 32.
Consistent with this report, Liberty’s president testified that the
Hotel’s exterior sheathing was dama ged by rainwater and other water
intrusion caused by the August 2015 rainfall event and that there was
“additional damage” to th e interior sheathing of the Hotel during the
summer of 2015. See Dkt. 240-10 at 237:3-14; id. at 233:3-244:12.
In other words, Liberty docume nted significant rainwater and
water vapor intrusion into the Hote l in 2015, well into the coverage
period that starting in late 2013. Libe rty’s report details the millions of
dollars of repairs necessary to reme diate the damage caused by these
intrusions. Dkt. 239-16 at 10, 34-37.
AFM investigates the claims and denies coverage Plaintiffs’ insurance broker noti fied AFM of their claims on
September 21, 2015. Dkt. 239-1 at 5. The next day, an AFM adjuster,
along with a hired consultant from Engineered Solutions Incorporated
(ESI), went to the Hotel to investigate the damage. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 27 of 75
#3393586v1 12 Crestline submitted a signed and sworn Proof of Loss on February
11, 2016. Dkt. 237-10 at 4; Dkt. 239-16. That same day, AFM sent
Crestline a letter advising that AFM needed additional information and
documentation to comple te its coverage evaluation. Dkt. 239-13 at 11-
12. Sky Harbor submitted its Proof of Loss on March 11, 2016. Dkt. 239-
13 at 13. Plaintiffs attached a copy of Liberty’s report with the Proofs of
Loss they submitted to AFM. Dkt. 239-16 at 7.
On March 30, 2016, AFM wrote to confirm receipt of Plaintiffs’
Proofs of Loss. Dkt. 239-23 at 14. AFM indicated that “further
information will be needed before we can respond to either Proof of
Loss” and requested an extension of time to respond. Id. Plaintiffs
complied with AFM’s requests for additional information. Id.
Throughout spring 2016, AFM continue d to request further information
and conducted multiple site visits to inspect the Hotel as additional
floors were being renovated. Id. On May 20, 2016, AFM rejected the
Proofs of Loss. Id. at 15, 52-54.
Despite denying the Proofs of Loss, AFM continued to investigate
Plaintiffs’ claim, includin g visits to the Hotel in June and July of 2016.
Id. at 16. In late June, AFM informed Plaintiffs that it was exercising USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 28 of 75
#3393586v1 13 its right to take Examinations Un der Oath and to examine pertinent
documents. Id. AFM conducted these examinations in fall 2016. Id.
AFM confirmed its denial of covera ge by letter dated January 6,
2017, asserting that no specific event had caused the losses, that most of the losses were excluded under the policy, and that the losses had developed over time and prior to the effective date of the policy. Dkt.
237-14 at 1-2. Plaintiffs filed suit. Dkt. 1.
The Policy language
AFM’s Policy “insures against all risks of direct physical loss or
damage to insured property except as excluded under this policy.” Dkt.
237-3 at 15 (emphasis added); see also 239-5 at 15; 239-6 at 15. As
quoted in AFM’s denial letter, the Policy excludes two categories of perils. Dkt. 237-14 at 4-5. The firs t group of perils—Group I—is an
absolute exclusion. Id. at 4. That is, losses resulting from those perils
(e.g., nuclear reaction) are “excluded regardless of any other cause or
event whether or not insured under this policy that contributes
concurrently or in any sequen ce to the loss or damage.” Id. The second
category of excluded perils—Group II—are limited by what is sometimes known as an “ensuing lo ss” or “resulting loss” clause. Id. at USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 29 of 75
#3393586v1 14 5. That is, Group II perils are cove red only to the extent that those
perils cause direct physical loss or damage, in which case the “resulting
direct physical loss or damage is covered.” Id.
The Policy classifies “latent defe ct” and “defects in materials,
faulty workmanship, faulty constructi on or faulty design” as Group II
perils. Id. So there is no coverage for such defects except to the extent
that they cause “direct physical loss or damage.” Dkt. 237-3 at 31 (2013
policy); see also 239-5 at 15; 239-6 at 15. In that case the “resulting
direct physical loss or damage is covered” even though the cost of
correcting the underlying defect itself is not. Id. AFM admits as much
in its summary judgment briefing:
The Policies do not insure against loss or damage caused by
“wear and tear, deterioration, depletion, rust, corrosion,
erosion, inherent vice, latent de fect” or “defects in materials,
faulty workmanship, faulty cons truction or faulty design.” If
direct physical loss or damage insured by the Policies results
from these conditions, however, then that resulting direct
physical loss or damage is covered .
Dkt. 238-1 at 34 (emphasis added).
In other words, AFM’s policy does n’t cover the cost of correcting a
construction or design defect that a llows water to enter the Hotel. But if
that water damages the carpet in the room below, the cost of repairing USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 30 of 75
#3393586v1 15 or replacing the damaged carpet is co vered as a resulting loss. Likewise,
if that water damaged “the wallboard , insulation, and framing systems”
of the Hotel, as Liberty concluded11, then the cost of repairing that
damage is covered.
The Policy classifies mold as a Gr oup I peril “except as provided in
Section D., Extensions of Covera ge, Item 18.” Dkt. 237-3 at 30 (2013
policy); see also Dkt. 237-5 at 37; Dkt. 237-6 at 40. Item 18, in turn,
extends the Policy to cover mold dama ge resulting from physical loss or
damage to the Hotel up to a $1 million sub-limit. Dkt. 237-3 at 25 (2013 policy); see also Dkt. 237-5 at 42; Dkt. 237-6 at 45. “This coverage
includes any cost or expenses to clean up, remove, contain, treat,
detoxify or neutralize fungus, mold or mildew from the insured property
resulting from such loss or damage.” Id. Thus, if mold resulted from
direct physical loss or damage (thr ough water infiltra tion, for example),
the costs of removal and remediation are covered.
AFM’s Policy contains no general co verage limitation or exclusion
for losses caused by an underlying co ndition (such as a design defect)
11 Dkt. 239-16 at 33. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 31 of 75
#3393586v1 16 that existed before the Policy pe riod. Nor, as the district court
acknowledged, does it contain an y general coverage limitation or
exclusion for losses that began before the Policy period. Dkt. 259 at 8.
Instead, the Policy enumerates two— and only two—perils for which no
resulting losses are covered if the pe ril began before th e Policy period.
Specifically, the Policy provides that it does not cover losses caused by
earth movement or flood12 “commencing before the effective … date and
time of this policy.”13
The summary judgment ruling The district court granted AF M’s summary judgment motion,
concluding that there was no coverage for any of Plaintiffs’ losses. The
court acknowledged “that the policies do not specifically state that losses incurred prior to the policy peri od are excluded.” Dkt. 289 at 8.
But the court decided that there was no coverage because “[t]he
12 Lest there be any confusion, “fl ood” is defined in the Policy and
relates to water, spray, and pressure events from a “body of water,” not
rain or water vapor. See Dkt. 237-3 at 40. The water and mold issues
here are not traceable to a “flood” event, nor does AFM argue for such
an exclusion. See generally Dkt. 237-14 (denial letter) & Dkt. 238-1
(AFM’s summary judgment brief).
13 Dkt. 237-3 at 16 (2013 policy); Dkt. 237-5 at 23 (2014 policy);
Dkt. 237-6 at 26 (2015 policy) (emphasis added). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 32 of 75
#3393586v1 17 undisputed evidence shows that the origin of the water intrusion was
the result of defects existing sinc e the original construction of the
Hotel.” Id. at 9. Because the water intrus ion was caused by defects that
existed before the Policy, the district court concluded “that there was no
actual change to the condition of th e Hotel which was occasioned by an
accident, external or other fortuitous event.” Id.
Based on that reasoning, the cour t held that none of Plaintiffs’
claimed losses were covered. Id. at 9-10. And, relying solely on this no-
coverage holding, the court also gr anted summary judgment for AFM on
Plaintiffs’ bad faith clai m under O.C.G.A. § 33-4-6(a). Id. at 11.14 The
court entered final judgment on all cl aims by all parties. Dkt. 290. This
appeal followed.
STANDARD OF REVIEW
“We review de novo the district court’s grant of a motion for
summary judgment, considering all of the evidence and the inferences it
14 The district court also granted summary judgment for Plaintiffs
on AFM’s counterclaims for fraud and conspiracy, which essentially
allege that Plaintiffs filed an insurance claim despite supposedly
knowing that they had suffered no covered losses. The court concluded
that because AFM had engaged in its own extensive investigation, it did
not justifiably rely on any suppose d misrepresentation by Plaintiffs. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 33 of 75
#3393586v1 18 may yield in the light most fav orable to the nonmoving party.” Ellis v.
England , 432 F.3d 1321, 1325 (11th Cir. 2005). Likewise, “[t]he
construction of an insurance contra ct is a question of law the Court
reviews de novo. ” Alea London Ltd. v. Am. Home Servs., Inc. , 638 F.3d
768, 773 n.7 (11th Cir. 2011).
The parties and district court agr ee that Georgia law governs this
insurance claim for damage to a Georgia hotel.15 “Under Georgia law,
insurance policies are liberally constr ued in favor of coverage, and the
conditions and provisions of contra cts of insurance will be strictly
construed against the insurer who prep ares such contracts. Thus, while
coverage provisions are construed broa dly in favor of the object to be
accomplished exclusions in an in surance policy are ... interpreted
narrowly, in favor of the insured.” Barrett v. Nat’l Union Fire Ins. Co. of
Pittsburgh , 304 Ga. App. 314, 320 (2010) (citations and internal
punctuation omitted).
That is particularly true for the all-risks policy here: “‘the insurer,
having affirmatively expressed co verage through broad promises,
15 See, e.g. , Dkt. 238-1 at 10 n.1 (AFM’s summary judgment brief);
Dkt. 289 (summary judgment or der applying Georgia law). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 34 of 75
#3393586v1 19 assumes a duty to define any li mitations on the coverage in clear and
explicit terms.’” Western Pacific Mut. Ins. Co. v. Davies , 267 Ga. App.
675, 680 (2004) (citation omitted, em phasis added). “[A]n exclusion
sought to be invoked by the insurer will be liberally construed in favor
of the insured and strictly construed against the insurer when it is not
clear and unequivocal ….” Id.; see also Lunceford v. Peachtree Cas. Ins.
Co., 230 Ga. App. 4, 4–5 (1997).
SUMMARY OF ARGUMENT
The district court erred in determ ining, as a matter of law, that
AFM’s all-risks Policy covers none of Plaintiffs’ losses. The court
believed that those losses were barre d because the water that caused
physical damage and mold contamin ation was able to enter the Hotel
due to original design an d construction defects that predated the Policy.
The court did not base that conclu sion upon any Policy language
limiting or excluding cove rage for physical loss and damage if caused by
a pre-Policy defect. There is no such language, although there is an
exclusion for two specific perils not at issue here that forecloses any
coverage if the peril commence d before the Policy period. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 35 of 75
#3393586v1 20 As noted above, the Policy’s Grou p II exclusion for design and
construction defects maintains covera ge for any physical loss or damage
to the insured structure resulting fr om those defects. And, although
nominally a Group I peril, mold th at results from physical loss of
damage to the Hotel is covered up to $1 million. And AFM sold
Plaintiffs this Policy to ensure an existing structure long after its
original design and construction . Its Policy says nothing about
excluding physical loss or damage caused by design and construction defects if (as one would expect) th ose defects had existed before the
Policy issued—indeed, since the Hotel was built. If that’s what AFM intended, it had “a duty to define an y [such] limitations on the coverage
in clear and explicit terms.’” Western Pacific , 267 Ga. App. at 680. It did
not.
Instead of policy language, the di strict court based its coverage
ruling upon a single case— AFLAC Inc. v. Chubb & Sons, Inc. , 260 Ga.
App. 306 (2003). AFLAC held that an insured property owner suffered
no physical loss or damage when it incurred costs to fix a programming
defect in its computers (a lack of Y2K compatibility). That programming
defect had not caused any physical damage to the computer or any of USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 36 of 75
#3393586v1 21 the insured’s property. Instead, th e insured’s only purported loss was
the cost of pre-emptively fixing that defect before it caused any damage.
The district court erred in thinking that AFLAC —a case where
the defect caused no physical loss or damage—governed this case. AFLAC does not foreclose recovery for an insured—like Plaintiffs
here—who has suffered actual physical loss or damage resulting from a
pre-Policy defect.
Plaintiffs do not contend they can recover the cost of correcting the
underlying design or construction de fects that allowed water to enter
the Hotel. But they do seek to recove r the costs of repairing the physical
loss and damage caused by that infiltrating water, such as the extensive
damage to the Hotel’s wallboard, insu lation, framing systems, and other
areas documented by Plaintiffs’ expert consultants. As the Northern District of Georgia explained in another hotel mold case, “even if defective design or faulty workmans hip contributed to the growth of
mold, damage to the [hotel’s] ventila tion system, air conditioners, walls,
wall coverings, or the exhaust system is ‘resulting damage’ that is
covered by insurance.” NUCO Invs., Inc. v. Hartford Fire Ins. Co. , 2005
WL 3307089, at *5 (N.D. Ga. Dec. 5, 2005). The same is true here. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 37 of 75
#3393586v1 22 This case would be like AFLAC if Plaintiffs were seeking to
recover solely the costs of correcting the underlying defects, rather than
the property damage that resulted fr om them. The former isn’t covered,
but the latter is, just as AFM admits in its summary judgment briefing. See Dkt. 238-1 at 34 (quoted abo ve at 12). In short, AFLAC did not
involve any resulting direct physical loss or damage. This case does.
The district court did not base its coverage holding on the
presence of some water or mold in the Hotel prior to the Policy period.
But that rationale could not sust ain summary judgment either. No
Policy language excludes loss or damage suffered before the Policy
period. No Policy language excludes loss or damage suffered during the
Policy period if similar loss or dama ge occurred before the Policy Period.
In other words, nothing in the Policy says that if there is a patch of
mold or a single rainfall intrusio n before the Policy, any mold or
damage later caused by water intrusio n during the Policy isn’t covered.
Again, any such “limitations on the coverage” would have required
“clear and explicit terms.’” Western Pacific , 267 Ga. App. at 680.
16
16 “Any and all ambiguities in an insurance contract shall be
construed most favorably toward the insured and most strongly against
the insurer. This is particularly true where construction of an USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 38 of 75
#3393586v1 23 As recited above, there is ample ev idence of significant rain and
water vapor intrusion during the Po licy period, particularly in 2015,
causing extensive damage to the Hote l. And, to the extent it matters
under the law, there is substantial ev idence that Plaintiffs did not know
of or anticipate this type or sc ope of damage before AFM issued
coverage in late 2013. A jury could ea sily find that Plaintiffs believed
that the isolated issues with mold or water that manifested before the
2015 renovation were (1) limited in scope; (2) materially different in cause; (3) remedied before purcha se or through routine maintenance
after purchase; and (4) not remotely comparable to the damage they
discovered in 2015. Indeed, AFM itse lf had insured and inspected the
Hotel when it was still operated by its previous owner. And it did not
detect any of the issues that it no w claims were existing and obvious
before Sky Harbor’s 2013 purchase.
Ultimately, the district court shou ld have resolved the coverage
questions in this case based on the plain Policy language. Instead, it
accepted AFM’s invitation to infer unwritten coverage limitations and
exemption or exclusion is at issue.” Broome v. Allstate Ins. Co. , 144 Ga.
App. 318, 319 (1977) (citations and punctuation omitted). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 39 of 75
#3393586v1 24 exclusions supposedly implied by the na ture of an all-risk policy, or the
concepts of “risk” and “fortuity.” Th is Court should reverse the district
court’s no-coverage holding, along wi th its derivative grant of summary
judgment on Plaintiffs’ claim fo r bad faith denial of coverage.
ARGUMENT AND AUTHORITIES
I. The Policy covers physical loss and damage to the Hotel
even if it resulted from constr uction or design defects that
existed since the original construction.
A. No Policy language limits or excludes coverage for
physical loss or damage re sulting from a pre-Policy
defect in construction or design.
AFM’s Policy “insures against all risks of direct physical loss or
damage to insured property except as excluded under this policy.” Dkt.
237-3 at 15 (emphasis added); see also 239-5 at 15; 239-6 at 15. To
repeat: “all risks … except as excluded.”
As AFM concedes, the Group II exclusion for design and
construction defects maintains cove rage for physical loss or damage
resulting from those defects. Supra at 12. This language says nothing
about excluding physical loss or dama ge caused by such defects if the
defects existed before the Policy pe riod. That would have been a very
important thing for an insured to kn ow when purchasing coverage for USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 40 of 75
#3393586v1 25 an existing structure. And it would have been an easy limitation for
AFM to express, if that was what it intended. If AFM desired such a limitation, it had the duty to expres s it “in clear and explicit terms.”
Western Pacific , 267 Ga. App. at 680.
The absence of any such limitation, let alone a clear and explicit
one, makes this an easy case. “[T]he conditions and provisions of contracts of insurance will be strict ly construed against the insurer who
prepares such contracts.” Barrett , 304 Ga. App. at 320. The coverage
limitation that AFM seeks to enforce is not in the Policy language, and
that should have been the end of the inquiry.
Moreover, “[i]n construing an insurance policy, the test is not
what the insurer intended its word s to mean, but what a reasonable
person in the position of the insu red would understand them to mean.”
Cincinnati Ins. Co. v. Davis , 153 Ga. App. 291, 295 (1980). As AFM
acknowledges, its policy covers physic al loss or damage to the property
resulting from “latent defect” or “defects in materials, faulty
workmanship, faulty construction or faulty design.” Supra at 12. A
reasonable insured buying insurance to cover an existing building
would not assume that loss or dama ge to the structure falls outside USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 41 of 75
#3393586v1 26 coverage if it resulted from a constr uction or design defect that existed
before the Policy period. By their na ture, most design and construction
defects originate before or during cons truction, even if they do not cause
damage for years afterwards. If AF M wanted to exclude coverage for
losses resulting from pre-Policy defe cts, it had to say so clearly.
B. The phrase “direct physical loss or damage” does not
implicitly bar recovery fo r losses resulting from pre-
Policy defects.
The district court relied upon one case— AFLAC Inc. v. Chubb &
Sons, Inc. , 260 Ga. App. 306 (2003)—to conc lude that the Hotel suffered
no direct physical loss. Dkt. 289 at 9-10. Specifical ly, the court held that
there was no change to the Hotel du ring the Policy period because the
underlying construction and design de fects that later allowed water to
infiltrate the Hotel had existed since its original constr uction. That fact,
in the district court’s view, precluded coverage. Id. at 9.
However, Plaintiffs do not seek to recover for the costs of
correcting the underlying defects that allowed water to infiltrate the
Hotel. Instead, Plaintiffs seek cove rage for the direct physical loss and
damage to the Hotel as a result of that infiltration of water. As
explained above, that is precisely th e balance struck by AFM’s policy. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 42 of 75
#3393586v1 27 The costs of correcting bad constructi on or design are not covered, but
“[i]f direct physical loss or damage insured by the Policies results from
these conditions … then that resultin g direct physical loss or damage is
covered.” Dkt. 238-1 at 34 (AFM’s summary judgment brief).
In other words, this Policy insures against the risk that a defect in
the original design or construction of the Hote l would later result in
physical loss or damage to the st ructure. That’s what an insured
expects even in a routine homeow ner’s policy—if the homebuilder’s
long-ago failure to properly seal th e chimney later allo ws rainwater to
enter the house and damage the in terior ceiling and walls, then
insurance should cover the costs of repair (even if it won’t cover the
costs of sealing the chimney). That ’s what happened here. Original
construction and design problems al lowed rain and water vapor to enter
the Hotel, damaging the wallboard, insulation, framing systems, and other aspects of the structure.
In AFLAC , the insured sought to recover the expenses associated
with converting its computer software to four-digit date recognition in
anticipation of Y2K. 260 Ga. A pp. at 306. AFLAC embarked on a
remediation effort to preempt any problems. Id. at 308. In other words, USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 43 of 75
#3393586v1 28 AFLAC fixed the defect before it caused any physical damage or loss
and sought to recover the costs of doing so.
The court rejected AFLAC’s insurance coverage claim,
determining that there was “[n]o chan ge in such systems as evidenced
by direct physical loss of or damage thereto as a result of a fortuitous
event.” 260 Ga. App. at 308–09. AFLAC’s claim was appropriately
denied because there was no change —indeed no damage of any kind—to
its systems or structures. It sought only “maintenance and renovation
expense[s]” to upgrade its technology in advance of an event that may or may not have caused physical damage in the future. Id. The expenses
incurred to update the software co ding could not be categorized as
covered losses because, when those funds were spent, there was no
physical damage to the computer. Id.
17
So in AFLAC there was no ensuing ph ysical damage or loss
resulting from the software defect , only the cost of upgrading the
17 In applying AFLAC , this Court too has held that “direct physical
loss” requires that the insured prop erty have suffered some sort of
physical effect. See Gilreath Family & Cosmetic Dentistry, Inc. v.
Cincinnati Ins. Co. , 21-11046, 2021 WL 3870697, at *2 (11th Cir. Aug.
31, 2021). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 44 of 75
#3393586v1 29 software. It would be as if the Pl aintiffs here had discovered and
remediated all construction and desi gn defects before water entered the
Hotel and were seeking coverage only for the costs of remediating those
defects. That’s not the case.
The central holding in AFLAC (and the cases upon which it relies)
is that an insured must have suffered some sort of physical damage or
loss. ALFAC built upon the Fifth Circuit’s decision in Trinity Industries
v. Insurance Co. of North America , 916 F.2d 267, 271 (5th Cir. 1990).
Trinity involved an all-risk insurance policy issued to a shipbuilder. Id.
The shipbuilder sought coverage fo r sums it paid to satisfy an
arbitration award for the costs of repa iring a twist in the hull, a defect
that the shipbuilder knew exis ted when it sold the ship. Id. There was
no coverage because the ship “was unchanged in any aspect by the
arbitration award” and the in sured could not point to any physical
consequence that could be traced to the defect. Id. Just as in AFLAC ,
there was no ensuing physical damage resulting from the defect, only
the cost of repairing the defect itself.
As the Fifth Circuit recognized in Trinity , there is a difference
between an insured seeking coverage for the expenses associated with USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 45 of 75
#3393586v1 30 repairing defective workmanship and cases in which the insured seeks
coverage for subsequent losses occa sioned by defective workmanship.
Id. at 270. If the defective workma nship causes the property to be
destroyed or damaged, the insured ma y not recover the costs to correct
the defect, but the insured is cove red for the “cost to rebuild the
structure in its defective state.” Id.
By way of example, had AFLAC’s computer been damaged by
overheating as it struggled to in terpret two-digit dates in the new
millennium, then the cost to repair or replace the computer would have
been covered, even though the pr ogramming defect had existed since
the software was created. And had the ship in Trinity taken on water at
sea because of the twist in its hull, any resulting water damage to the
ship’s deck or internal system s would have been covered.
Here, the Hotel suffered extensive damage from water infiltration
during the Policy period, which is, wi thout a doubt, a form of physical
damage.18 The water damage was caused by external events, namely
18 For example, Brian Cook, Staff VP & Senior Adjuster for AFM,
testified that “damage from water is a covered risk” and if water
“contacts undamaged property, it da mages it.” Dkt. 240-05 at 120:8-10,
160:16-25. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 46 of 75
#3393586v1 31 atmospheric changes and water intrus ion from rainstorms. That such
intrusions were made possible by defects that existed since the
construction of the Hotel does not preclude coverage for the damage
that those defects allowed. The coverage-triggering change in the Hotel’s condition was not the under lying defects, but the extensive
damage to the wallboard, insulation, framing systems, and other portions of the structure caused by water infiltration during the Policy
period.
Thus, Plaintiffs do not, as the district court wrongly believed,
“seek insurance proceeds to cover the ‘ordinary cost of doing business,’
that is, maintenance and renovation expenses.” Dkt. 289 at 9-10 (quoting AFLAC , 260 Ga. App. at 309). That is what AFLAC was doing,
in attempting to recover the cost of upgrading its computers, rather
than costs of repairing some physical loss or damage caused by the programming defect. But it is not wh at Plaintiffs are doing here. They
seek coverage for the physical lo ss or damage caused by underlying
construction and design defects, rath er than the cost of correcting those
defects. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 47 of 75
#3393586v1 32 Multiple court decisions illustrate how an all-risk policy applies to
physical loss or damage resultin g from a construction defect. See, e.g. ,
NUCO , 2005 WL 3307089, at *5; Buscher v. Economy Premier Assur.
Co., 2006 WL 268781 (D. Minn. 2006); McGrath v. Am. Family Mut. Ins.
Co., 2008 WL 4531373 (N.D. Ill. 2008); and Eckstein v. Cincinnati Ins.
Co., 469 F. Supp. 2d 444, 454 (W.D. Ky. 2007).
Nuco is particularly on point. The property insurer refused to
cover any of the costs associated with mold damage at a hotel, based on
a coverage exclusion for faulty design or construction. Applying Georgia
law, a different judge of the Northern District of Georgia rejected the
insurer’s position, reasoning that
even if design or workmanship problems were found to be a
proximate cause of the mold damage for which NUCO seeks
recovery, under the plain lang uage of the Policy, NUCO can
recover damages for loss or damage resulting from defective
design, faulty material, and fau lty workmanship. In other
words, had NUCO filed a claim prior to the growth of mold
seeking replacement of th e ventilation system, air
conditioners, walls, wall coveri ngs, or the addition of a
totally new exhaust system because these items were
defectively designed, this cl aim would be barred by the
exclusion at issue here. But, as the Policy clearly states,
resulting damage is covered.
2005 WL 3307089, at *5 (emphasis adde d). “Thus, even if defective
design or faulty workmanship cont ributed to the growth of mold, USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 48 of 75
#3393586v1 33 damage to the ventilation system , air conditioners, walls, wall
coverings, or the exhaust system is ‘resulting damage’ and is not excluded by the plain language of the Policy.” Id.
Buscher involved a policy that insure d against “actual accidental
physical loss or damage to property,” with an exclusion for loss caused
by faults in construction ma terial. 2006 WL 268781. The insured
homeowners suffered water damage to their closet ceiling, insulation,
sheetrock, wall paint, baseboard, and carpet due to water leakage. Id.
The insurer determined that the water leakage resulted from a construction defect in the chimney flashing. Id. The homeowners also
conducted moisture testing and determined that there was extensive water and mold damage to the inte rior wall assembly, which was the
result of rain and snow penetratin g the exterior building envelope. Id.
The Buscher court held that the water damage to the home
constituted “actual accidental physical loss or damage.” Id. at *4. The
court also held that the policy’s co nstruction defect exclusion “does not
exclude water damage resulting from a construction defect.” Id. at *5
(emphasis added). While the construc tion defect exclusion may bar the
portion of the homeowner’s claim for the costs of repairing the flashing USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 49 of 75
#3393586v1 34 and fixing the exterior envelope, it did not bar all losses resulting from
construction defects. Id.
The court reached a similar conclusion in McGrath . The
homeowners sought coverage under an all-risks policy for water damage
to their dry wall and insulati on. 2008 WL 4531373. Their insurer
denied coverage, asserting that the water damage resulted from
construction or design defects in the walls that allowed water to infiltrate the building. Id. The court rejected the insurer’s position,
finding that the policy’s construction and design defects exclusion did
not bar coverage for loss from “moisture intrusion that occurred as a
result of construction or design defects.” Id. at *6 (emphasis added).
Instead, the exclusion barred only the costs of correcting the defects
themselves.
Finally, in Eckstein , 469 F. Supp. 2d 444, the court held that a
construction-defect exclusion did not preclude coverage for losses caused
by leaks in a defective roof. The co urt recognized that “water damage
ensuing from a defective roof is co vered as an ensuing loss, but the
exclusion for faulty construction exclud es coverage to repair the roof.”
Id. at 454. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 50 of 75
#3393586v1 35 As in Nuco , Buscher , McGrath , and Eckstein , the construction and
design defect exclusion here does no t bar coverage for water damage to
the Hotel that results from impr oper design, installation, or
construction. Furthermore, AFM’s po licy goes further than the policy
language at issue in Buscher and McGrath , making this case
particularly easy. AFM’s policy includes affirmative language
confirming that “resulting direct physical loss or damage [caused by
construction or design defects] is covered.” Supra at 12.
In sum, the district court erred by holding that AFM’s policy does
not cover direct physical loss or da mage that results from pre-Policy
construction or design defects. The Policy doesn’t say that, and neither
does Georgia law.
II. The Policy does not bar coverage for direct physical loss or
damage if it occurred or star ted before the Policy period.
The district court expressly bas ed its summary judgment ruling
on the fact that “the origin of th e water intrusion was the result of
defects existing since the original co nstruction of the Hotel.” Dkt. 289 at
9. As addressed above, that was e rror. And, for three reasons, the
district court’s ruling cannot be affi rmed based upon the presence of
some pre-Policy water or mo ld damage at the Hotel. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 51 of 75
#3393586v1 36 First, the Policy language does not limit or exclude coverage for
costs the insured incurs during the Policy period to repair physical
damage that occurred before the Policy period.
Second, Georgia has not adopted an implied exclusion for losses
already known to the insured prior to the policy inception. But even
jurisdictions recognizing such a “known loss” doctrine do not apply it to
losses that the insured discovers duri ng the policy period. Based on the
evidence, a jury could easily find that that is what happened here.
Third, even if Plaintiffs couldn’t recover the costs for repairing any
damage the Hotel suffered before th e Policy period, they could recover
for repairing the significant damage suffered during that period—in
particular, the effects of the 2015 summer and fall storms and water
vapor infiltration described in Libe rty’s report. The Policy excludes
damage from conditions that commen ced before the Policy period only
in two specific circumstances, neit her applicable here. So the Policy
cannot properly be read to exclude co verage for other types of losses on
the ground that they commenced to some degree before the Policy issued. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 52 of 75
#3393586v1 37 A. The Policy language does not limit or exclude
coverage for costs incurred during the Policy period
to repair physical damage that occurred before the
Policy period.
The district court recognized that AFM’s Policy “do[es] not
specifically state that losses incurr ed prior to the policy period are
excluded.” Dkt. 289 at 8. Since cove rage exclusions must be clear and
explicit, that should have ended the inquiry. An unstated limitation is
not a limitation.
“Under Georgia law, an insurance company is free to fix the terms
of its policies as it sees fit, so long as such terms are not contrary to law,
and it is equally free to insure ag ainst certain risks while excluding
others.” Cont’l Cas. Co. v. H.S.I. Fin. Servs., Inc. , 266 Ga. 260, 262
(1996). So nothing precludes an insu rer from covering costs that an
insured incurs during the policy peri od to repair damage that occurred
before coverage commenced.
Some Georgia cases have involved policies that expressly limit
coverage to damage caused by some occurrence or accident during the
policy period .19 Other policies expressly co ver “property damage only
19 See, e.g., Calabro v. Liberty Mut. Fire Ins. Co. , 253 Ga. App. 96,
97 (2001) (policy “required that pr operty damage result from an USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 53 of 75
#3393586v1 38 when ‘prior to the policy period, no insured ... knew that the ... ‘property
damage’ had occurred, in whole or in part.’”20 But AFM’s Policy contains
no such requirements or limitati ons. And, as explained above, the
district court misread the one case ( AFLAC ) upon which it relied to
infer such an implicit requirement.
Thus, particularly when “liber ally construed in favor of
coverage,”21 AFM’s Policy must be read to cover costs its insured incurs
during the Policy period to repair phys ical loss or damage, even if that
loss or damage occurred before the Policy was effective.
B. Georgia has not recogniz ed an implied exclusion
for losses known to the insured before the Policy
period.
Georgia law is clear: any exclusions to coverage must be clear and
explicit, rather than implied. See, e.g. , Lunceford , 230 Ga. App. at 4–5;
accidental occurrence during the policy period”); Columbia Cas. Co. v.
Plantation Pipe Line Co. , 338 Ga. App. 556, 558-559 (2016) (“This policy
applies to injury or destruction taki ng place during this policy period. .
.”); Arrow Exterminators, Inc. v. Zurich Am. Ins. Co. , 136 F.Supp.2d
1340, 1349 (N.D. Ga. 2001) (“This insu rance applies to ‘bodily injury’
and ‘property damage’ only if: . . . . [i t] occurs during the policy period.”).
20 Essex Ins. Co. v. H & H Land Dev. Corp. , 525 F. Supp. 2d 1344,
1345 (M.D. Ga. 2007) (quoting policy).
21 Barrett , 304 Ga. App. at 320. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 54 of 75
#3393586v1 39 Great Am. All. Ins. Co. v. Anderson , 847 F.3d 1327, 1331-32 (11th Cir.
2017). Georgia’s Court of Appeals has observed that, although accepted
in some jurisdictions, Georgia has no t recognized an implicit exclusion
based on an insured’s knowledge of pre-existing damage, also referred
to as the “known loss” doctrine.22 That observation came long after the
AFLAC decision on which the district court relied.
A federal court should not impo se “known loss” and related
doctrines to limit the rights of a Georgia insured when Georgia has not
done so. See, e.g. , Caribbean I Owners’ Ass’n, Inc. v. Great Am. Ins. Co.
of New York , 600 F. Supp. 2d 1228, 1247 (S.D. Ala. 2009) (declining to
impose related “expected loss,” “los s in progress,” “known loss,” and
“fortuity” doctrines to bar insura nce claim when th e governing Alabama
law had not recognized those doctrines).
C. Applying any “known loss,” “expected loss,” or
“fortuity requirement” here would depend on issues
of disputed fact.
Some jurisdictions require that a loss must be “fortuitous” to be
covered. That “fortuity requiremen t” is closely related to, perhaps
22 Columbia Cas. Co. v. Plantation Pipe Line Co. , 338 Ga. App.
556, 564 (2016) (physica l precedent only). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 55 of 75
#3393586v1 40 synonymous with, the “known loss” doctrine. See, e.g. , 43 Am. Jur. 2d
Insurance § 469. Even in jurisdictions where th e fortuity requirement
applies, it does not bar coverage if the loss is not known or expected
when the policy commences. Indeed, AFM acknowledged below that a
requirement that the Hotel’s losses mu st be “fortuitous” does not bar
coverage if the loss is unknown or unexpected when the policy commences.
23
The most commonly adopted fortuity doctrine is from the First
Restatement of Contracts.24 Indeed, this Court has applied the
Restatement’s definition of fortui tous when interpreting contracts
under Florida law.25 The Restatement defines a fortuitous event as one
“dependent on chance.” Id. (quoting Restatement of Contracts § 291,
cmt. a (1932)). Importantly, though, it can include pre-policy events
23 Dkt. 238-1 at 21 (“Most courts, as well as the First Restatement
of Contracts, adhere to the view that a loss is fortuitous if neither party
knew or contemplated there was a defe ct in the insured property at the
time the insurance contract was issued.”) (quoting Atl. Mut. Ins. Co. v.
Lotz, 384 F. Supp. 2d 129 2, 1298 (E.D. Wis. 2005)).
24 See Ingenco Holdings, LLC v. Ace Am. Ins. Co. , 921 F.3d 803,
814–19 (9th Cir. 2019).
25 Morrison Grain Co. v. Utica Mut. Ins. Co. , 632 F.2d 424, 431
(5th Cir. 1980). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 56 of 75
#3393586v1 41 provided that “the fact is unknown to the parties.” Id. The inquiry is not
whether a pre-existing defect would inevitably cause damage, but what
the parties knew and expected when they entered the insurance contract. Id.; see, e.g., City of Burlington v. Indem. Ins. Co. of N. Am. ,
332 F.3d 38, 49 (2d Cir. 2003).
Thus, even if there is an imp lied fortuity requirement, the
question would not be whether the defects that had existed since the
Hotel was built would inevitably cause problems. The question is what the parties knew and expected. Here, the district court did not find an
absence of any fact dispute as to what the parties knew about the
Hotel’s condition and when they kn ew it; instead, the court wrongly
thought it dispositive that the parties have now determined that much
of the damage was ultimately attrib utable to defects that existed prior
to the Policy. See Dkt. 289 at 8 n.1 & 9.
On this record, what the parties knew and expected about the
defects and damage to the Hotel wh en the Policy issued presents
disputed questions of fact. The evid ence would allow a reasonable jury
to find that Plaintiffs did not know of pre-Policy defects or damage that USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 57 of 75
#3393586v1 42 would preclude any recovery unde r the Policy. That evidence is
recounted above, pp. 6-9, but to summarize:
First, Plaintiffs reviewed numero us pre-purchase reports that the
Hotel was in good condition, and that any reported problems were
consistent with regular maintenance issues. The AEI report, the CERES report, and the PKF report a ll found that the Hotel was in a
satisfactory condition. To the extent that AFM relies on earlier reported
problems of mold from 2003, that wa s in a different area of the Hotel
than the extensive damage to th e guestroom tower and there is
evidence that the seller had remedi ated those issues prior to the 2013
sale, and more important to any kn own-loss or fortuity requirement,
that the Plaintiffs expected and believed that to be true.
26
Second, there is evidence that the substantial damage and mold
discovered during the reno vation was the result of 2015 water vapor
and rain intrusions. That was certai nly the conclusion of Liberty, the
26 Moreover, Crestline is the expr essly named insured, and there
is no evidence that Crestline saw any prior reports of mold prior to
securing the insurance policy. At a minimum, Crestline would be
entitled to recover for the Hotel’s losses as it did not know of the
existence, extent, and nature of th e damage at the time the policies
were issued. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 58 of 75
#3393586v1 43 consultant that evaluated the Hote l in 2015 and 2016 shortly after the
discovery of extensive water and mold damage. As detailed above,
Liberty concludes that a major cool ing season during July 2015 and a
severe rainstorm in August 2015 caus ed the damage it documented in
its expert report. Dkt. 239-16 at 27-33.
Third, there is evidence that, prio r to the Policy period, Plaintiffs
had not discovered anything like the extensive water in trusion, damage,
mold revealed by the 2015 renovation . Below AFM pointed to testimony
that there were occasional proble ms with leaks or mold. But these
occasional problems do not compare to the systemic ones that Plaintiffs
discovered during the 2015 renovation, including widespread mold in
the walls, floors, and fan units.
It is one thing to learn that isol ated pin-hole leaks in pipes or
toilets or faucets have led to patc hes of mold somewhere in a large
hotel. It is another thing to see ra inwater pouring into the building in
2015 (as did Sky Harbor representative Frank Yuan) or to learn about
the systemic defects in the piping system, roof penetrations, and other
systems that Liberty blamed for the 2015 water intrusions. Supra at 6-
9. Plaintiffs presented testimon y from both the management and USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 59 of 75
#3393586v1 44 owners of the Hotel that, before reno vation, they were not aware of and
did not expect anything at all like the extensive water intrusion, mold,
and damage revealed during that process. Supra at 6-9.
Rather than somehow conclusively refute this evidence, AFM’s
witnesses admitted that at least some of the claimed damage may have
occurred during the policy periods. For example, AFM adjuster Joel
Brown testified that “[i]t is possible for a rain event to be a discrete
event” causing a loss. Dkt. 240-4 at 88:8-12. And Chris Dawkins, an
engineer for AFM’s expert (ESL), admitted that a single rain event
could have caused erosion to the ca ulking on the roof, Dkt. 240-06 at
267:1-12, and that at least some of the leaks could have occurred
“during the policy periods.” Dkt. 240-7 at 41:15-42:2. Further, AFM
could not “identify when the HVAC system went out of balance,”
causing water vapor intrusion from th e outside air. Dkt. 240-4 at 90:25-
91:1. As noted above, Liberty conclu ded that this intrusion occurred in
July 2015.
In sum, AFM cannot establish— certainly not for purposes of
summary judgment—that the extensive damage underlying Plaintiffs’ claims preceded the Policy, rather than being caused by weather USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 60 of 75
#3393586v1 45 conditions in 2015, as Plaintiffs’ evidence indicates. Indeed, AFM’s
investigating contractor (ESL) never attempted to gather weather data
or otherwise refute the indication s that the August rainstorm was
responsible for significant damage to the Hotel. Dkt. 240-06 at 268:9-
269:25.
Finally , AFM performed its own inspec tions of the Hotel prior to
issuing the Policy and never identi fied any of the problems it now
claims were known and obvious. Br ian Cook, Vice-President of AFM’s
Special Investigations Unit, testifie d that before insuring a property,
AFM inspects the property to determin e whether it is a good risk or bad
risk and discuss any “deficiencies” with the insured. Dkt. 240-05 at
108:8-21. Notably, AFM had insured the Hotel before its former owners
sold the property to Sky Harbor, so it has a longer association with this
property than Plaintiffs do.
In 2010, three years before Sky Harbor’s purchase, AFM
conducted a risk evaluation of the Hotel. Dkt. 265-27. Despite a
comprehensive inspection and eval uation, AFM’s underwriting report
did not identify water damage, at mospheric intrusion, or mold
problems. Id. Later, around February 2014, AFM’s field engineer USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 61 of 75
#3393586v1 46 inspected the Hotel and did not identi fy or report any of the supposedly
obvious structural deficiencies and pervasive water intrusion and mold
that AFM claims existed before 2015. Dkt. 265-1 at 21 (PF 41).
In other words, AFM did not di scover the problems that had
supposedly existed since construction . And AFM markets itself as an
engineering-based insurance company, with 180 years of engineering
expertise, that deploys 1,800 specially trained engineers to provide on-
site evaluations, identify expo sures, and conduct location-based
engineering underwriting to rate risks. Dkt. 265-31.
On top of this, AFM’s parent co mpany, FM, had insured the Hotel
at or around the time of the 2003 re ports that purportedly identified the
existence of water and mold damage. Dkt. 265-26 at 2. Despite this, FM
insured the property. Id. These facts, too, preclude a ruling that any
known loss or fortuity requirement bar s all recovery as a matter of law.
D. At a minimum, Plaintiffs may recover the costs to
repair physical loss or damage that occurred within the Policy period.
Insurance contracts must be read as a whole, giving effect to each
provision and interpreted so that ea ch provision harmonizes with the
others. See AFLAC , 260 Ga. App. at 307. And it is a well-known USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 62 of 75
#3393586v1 47 principle of contract interpretation that the express mention of one
thing implies the exclusion of another. Copeland v. Home Grown Music,
Inc., 358 Ga. App. 743, 748 (2021). So when an insurer uses certain
contractual language in one circumst ance but not another, that “should
be treated as a matter of considered choice.” Flynt v. Life of S. Ins. Co. ,
312 Ga. App. 430, 436 (2011).
As noted above, AFM’s Policy explicitly does not cover losses
arising from two types of conditions if they began before the Policy
issued. Specifically, the Policy does not cover losses caused by earth
movement or flood “ commencing before the effective … date and time of
this policy.”27 Given AFM’s choice to specify that it would not provide
coverage for losses arising from thes e two conditions if they commenced
before coverage, it is wrong to read the Policy as implicitly barring
coverage for losses occasioned by an y other, non-specified events that
may have started or prior to the effective date. The difference in
language AFM drafted must be tr eated as its considered choice.
27 Dkt. 237-3 at 16 (2013 policy); Dkt. 237-5 at 23 (2014 policy);
Dkt. 237-6 at 26 (2015 policy) (emphasi s added). As noted above, “flood”
connotes a body of surface water, ra ther than rainwater or water vapor
entering a structure, and no one contends otherwise. See supra at n. 12. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 63 of 75
#3393586v1 48 The Policy does not say that the costs to repair loss or damage
that occurs within the Policy peri od are not covered if there were
similar losses or damage before. Unde r that standard, substantial water
or mold damage to the structure an d contents of the Hotel occurring
during the Policy period woul d be uncovered if there was any water or
mold in the structure before the Po licy commenced. That would create a
huge exception to coverage, not ex pressed in any policy language.
Georgia law does not permit a court to infer such an implicit limitation.
Under Georgia law, a jury must re solve disputes over whether and
to what extent damage occurred during the period covered by insurance.
In Lipsitz v. Fireman’ s Fund Insurance Co. , 183 Ga. App. 270, 270
(1987), the insured’s roof collapsed five days after his “all-risk”
insurance policy expired. It was fo r the jury to decide whether the
accumulation of ice in the roof th at occurred during the policy period
caused a serious impairment of struct ural integrity or whether the rain
that occurred after the policy’s expiration was the key factor. Id.
Likewise, in Sun Insurance Office, Ltd. v. Guest Camera Store,
Inc., 108 Ga. App. 339, 345 (1963), the defendant insurer had evidence
that “tended strongly to disprove ” plaintiff’s contention that a USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 64 of 75
#3393586v1 49 windstorm punctured a roof and subsequently allowed rainwater
intrusion. That evidence included records that the wind was only 22 mph and an expert report that no more than 12 gallons of water could
have entered through the holes allegedly caused by windstorm. Id. But
these question of whether the wind storm caused the physical damage
was for a jury, given competing lay testimony that the wind was blowing very hard and expert test imony that one August storm could
cause over 1,800 gallons of water to fall on one half of the roof. Id.
Here, as in Lipsitz and Guest Camera , there are fact questions
regarding the extent and amount of recoverable loss. As noted above,
Plaintiffs are entitled to the most favorable interpretation of the Policy.
But even under the most restrictive re ading, they would be entitled to
recover the costs to repair physical loss and damage caused by weather
events during the policy period, incl uding those from July to November
2015. The district court erred in gr anting summary judgment on all
claims for coverage. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 65 of 75
#3393586v1 50 III. Before reading any unstated coverage limitations into the
Policy, the Court should cert ify the issue to the Georgia
Supreme Court.
The Policy language and existing principles of G eorgia law provide
everything this Court needs to reve rse. Affirmance, by contrast, would
make new law. If this Court does no t simply reverse the district court’s
holding that some implied known loss or fortuity requirement excludes
coverage here, it should certify that issue to Georgia’ s highest court.
The interpretation of insurance co ntracts is “peculiarly a question
of state law.” Claussen v. Aetna Cas. & Sur. Co. , 865 F.2d 1217, 1217
(11th Cir. 1989). Certification to the Georgia Supreme Court is
appropriate when “there is no clear precedent in the decisions of the
courts of Georgia.” Id.; see also O.C.G.A. § 15-2-9 (allowing certification
when there are “no clear controlling precedents in the decisions of the
Supreme Court of this state”).
There is no Georgia court deci sion affirmatively and clearly
holding that some fortuity doctrine or other inherent feature of an all-
risk policy bars coverage under the ci rcumstances here. Therefore, if the
Court does not reverse, it should ce rtify a question on the existence and USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 66 of 75
#3393586v1 51 scope of any such implied exclusions to the authoritative state court, as
this Court28 and other circuit cour ts have done before.29
IV. The district court erred in granting summary judgment on
Plaintiffs’ claim for bad faith denial of coverage.
The district court granted summary judgment to AFM on
Plaintiffs’ claim for bad fai th denial of coverage on the sole ground that
there was no coverage as a matter of law. Dkt. 289 at 10-11. Because
that no-coverage ruling is error, th e Court should reverse the grant of
summary judgment on Plaintiffs ’ bad faith claim as well.
V. Sky Harbor is an insured under the Policy for purposes of
loss or damage to the Hotel, and Crestline is also a named
insured entitled to recover under the Policy.
The district court dismissed Sky Harbor’s claims for breach of
contract and bad faith, finding that it was not an insured under the
Policy. Dkt. 289 at 12. AFM does not dispute that Crestline—which managed the Hotel for AFM—is a name d insured. As to Crestline, AFM
sought summary judgment on the bas is that Crestline had supposedly
28 See, e.g., Whiteside v. GEICO Indem. Co. , 977 F.3d 1014, 1022
(11th Cir. 2020) (certify ing Georgia insurance law questions to the
Georgia Supreme Court).
29 City of Burlington , 332 F.3d at 38 (certify ing question regarding
interpretation of all-risk policy to the state court). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 67 of 75
#3393586v1 52 suffered no damages. Dkt. 238-1 at 4-6, 18-19. Neither of these
arguments is any basis to bar recovery.
A. Sky Harbor is an insured under the Policy for
purposes of loss or damage to the Hotel.
The Policy identifies the named insureds as Crestline and “any
interest[s] . . . which are owned, cont rolled or operated by” Crestline.
Dkt. 237-3 at 3 (2013 policy); Dkt. 23 7-5 at 5 (2014 policy); Dkt. 237-6 at
7 (2015 policy). To be sure, Crestline did not own, control, or operate
Sky Harbor itself. But as Hotel mana ger, it indisputably controlled and
operated Sky Harbor’s interest in the Hotel, which is identified as an
insured property. Dkt. 237-3. The ma nagement contract made Crestline
Sky Harbor’s “ exclusive agent to supervise, direct and control
management and operation of the Ho tel.” Dkt. 239-09 at 1 (emphasis
added). Because Crestline controlled and operated Sky Harbor’s interest
in the Hotel, Sky Harbor is an insured under the Policy for purposes of any loss or damage to the Hotel.
30
30 See Dkt. 262 at 2, 15-16 (raising this argument in opposition to
summary judgment). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 68 of 75
#3393586v1 53 The question is not, as the distri ct court thought, merely whether
Sky Harbor was a Crestline subsidiary. The Policy defines insureds as Crestline “and its wholly or majority owned subsidiaries and any
interest … owned, controlled or operated by any one or more of those
named insureds.” Dkt. 265-3 at 15 (emphasis added); Dkt. 237-5 at 7
(2014 policy); Dkt. 237-6 at 9 (2015 polic y). Like any contract, insurance
contracts must be read as a whole, giving effect to each provision
whenever possible. See AFLAC , 260 Ga. App. at 307. So the Court must
construe “and any interests” to ha ve meaning different and independent
from “wholly or majority owned subsid iaries.” And if there were doubt,
it would be resolved by the Georgi a-law mandate to construe insurance
policies liberally in favor of coverage. Barrett , 304 Ga. App. at 320.
Moreover, AFM performed the Policy consistent with everyone’s
understanding that Sky Harbor wa s an insured. AFM corresponded
with Sky Harbor on the claim as an “Additional Named Insured,”
demanded information and document s from Sky Harbor, and demanded USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 69 of 75
#3393586v1 54 Sky Harbor’s representatives and em ployees’ examinations under oath.
Dkt. 265-01 at 25 (PF 48); see also Dkt. 265-32 at 4.31
In sum, Sky Harbor is a named insured for purposes of losses to
the Hotel because Crestline managed its interest in the Hotel and the Hotel is an insured property.
B. Crestline is also a named insured entitled to the
benefits AFM owes under the Policy.
Whether Sky Harbor is an insured is ultimately academic because
Crestline is indisputably a named insured, and the Hotel is indisputably an insured property. As an insured with an insurable
interest, Crestline may recover wh atever payments AFM owes under
the insurance contract. See, e.g. , Georgia Farm Bureaus Mut. Ins. Co. v.
Franks , 320 Ga. App. 131, 133 (2013).
“The test of insurable interest in property is whether the insured
has such a right, title, or interest therein, or relation thereto , that he will
be benefited by its preservation an d continued existence, or suffer a
direct pecuniary loss from its destruct ion or injury by the peril insured
31 “The construction placed upon a co ntract by the parties thereto, as
shown by their acts and conduct, is entitled to much weight and may be
conclusive upon them.” Scruggs v. Purvis, 218 Ga. 40, 42 (1962). USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 70 of 75
#3393586v1 55 against.’” Am. Reliable Ins. Co. v. Woodward , 143 Ga. App. 652, 653
(1977) (emphasis added). “[H]aving titl e or legal ownership is not the
sine qua non of having an insurable interest, so long as the insured has
some lawful interest which may be slight or contingent, legal or
equitable.” Franks , 320 Ga. App. at 133–39.
As property manager, Crestline ha d a direct economic interest in
the preservation and continued exis tence of the Hotel. “[O]nce any
insurable interest is shown to exist, . . . it is the policy at issue . . . that
determines the amount the insured is entitled to recover.” Franks , 320
Ga. App. at 134-39. The policies fix lo ss at the cost to repair or replace
the property. Dkt. 237-3 at 3 (2013 policy); Dkt. 237-5 at 5 (2014 policy);
Dkt. 237-6 at 7 (2015 policy) . Crestline is thus entitled to recover the
“amount which it would cost to re pair or replace the property.” See Am.
Ins. Co. v. Bateman , 125 Ga. App. 189, 192-93 (1971).
In Bateman , it was irrelevant that the insured had not paid for
the work on the building and migh t never be liable for that work.
Because Bateman had an insurable in terest in the property, he was
entitled to recover under the terms of the policy. Id. The policy controls
the amount of recovery, not th e insured’s ownership interest. See also USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 71 of 75
#3393586v1 56 Franks , 320 Ga. App. at 134-39 (rejecting the insurer’s contention “that
the measure of his ownership inte rest, being less than sole and
undivided, limits his recovery to a fraction of the policy limits”).
Crestline had an insurable inte rest in the property and is
therefore entitled to recover for the costs to repair the property under
the policy. And, as a factual matter, Crestline did not admit that it had
no damages; it indicated merely that, as the property manager, it either
did not know the exact amounts incurr ed to fix the property and it had
not paid out of pocket for remediation of the Hotel. See Dkt. 238-21 at
25 (RFA 72-74); Dkt. 238-1 9 at 161:18-165:13. That doesn’t mean that
Crestline did not suffer a covered “lo ss” under the meaning of the Policy
or that it lacks an insurable interest in the hotel.
CONCLUSION
Plaintiffs are entitled to covera ge under the plain language of the
policy and Georgia law. The district court erred by holding otherwise.
The Court should reverse the dist rict court’s grant of summary
judgment in favor of AFM and remand for further proceedings. USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 72 of 75
#3393586v1 57 Respectfully submitted, th is 27th day of June, 2022.
Michael L. Childress
(admitted pro hac vice )
[email protected]
Thomas J. Loucks
(admitted pro hac vice )
[email protected]
CHILDRESS LOUCKS
& PLUNKETT, LTD.
11 W. Illinois
4th Floor
Chicago, Illinois 60654
Telephone: 312-494-0200
Michael A. Dailey
Georgia Bar No. 203250
[email protected]
ANDERSON DAILEY LLP
2002 Summit Blvd.
Suite 1250
Atlanta, Georgia 30319
Telephone: 404-442-1800
/s/ Frank M. Lowrey IV
Michael B. Terry
Georgia Bar No. 702582
[email protected]
Frank M. Lowrey IV
Georgia Bar No. 410310
[email protected]
Megan E. Cambre
Georgia Bar No. 167133
[email protected]
BONDURANT MIXSON
& ELMORE, LLP
1201 W. Peachtree St. NW
Ste 3900
Atlanta, Georgia 30309
Tel: 404.881.4100
Christopher B. Noyes
(admitted pro hac vice )
[email protected]
Katherine A. Bruce
(admitted pro hac vice )
[email protected]
Brian S. Kabateck
(admitted pro hac vice )
[email protected]
KABATECK LLP
633 W. Fifth Street, Ste 3200
Los Angeles, California 90071
Telephone: 213-217-5000
Attorneys for Appellants
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 73 of 75
#3393586v1 58 LOCAL RULE 7.1D CERTIFICATION OF COMPLIANCE
I hereby certify that this brief, filed on June 27, 2022, complies
with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) because
this brief contains 11,975 words, ex cluding the parts exempted by Fed.
R. App. P. 32(f). This brief complies with the typeface requirements of
Fed. R. App. P. 32(a)(5) and the type-s tyle requirements of Fed. R. App.
P. 32(a)(6) because it has been prepar ed in a proportionally spaced
typeface using Microsoft Word Centur y Schoolbook size 14-point font.
/s/ Frank M. Lowrey IV
Frank M. Lowrey IV Georgia Bar No. 410310
[email protected]
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 74 of 75
#3393586v1 59 CERTIFICATE OF SERVICE
I hereby certify that, on the date this certificate was signed, a copy
of the foregoing was electronically filed with the Cler k of Court using
the CM/ECF system which will automati cally send notification of such
filing to all attorneys of record.
Dated: June 27, 2022
/s/ Frank M. Lowrey IV
Frank M. Lowrey IV Georgia Bar No. 410310
[email protected]
USCA11 Case: 21-11329 Document: 44 Date Filed: 06/27/2022 Page: 75 of 75