APR 1 NO. A13-0124

RLED· ~htft ofMinnesota

InSupremeCourtCedar Bluff Townhome Condominium Association, Inc.,

Respondent, vs.

American Family Mutual Insurance Company,

Appellant.

RESPONDENT'S RESPONSE BRIEF, ADDENDUM AND APPENDIX

E. Curtis Roeder (#195418) Anthony T. Smith (#313646) Alexander M. Jadin (#0387219) ROEDER SMITH JADIN, PLLC 7900 Xerxes Avenue South, Suite 2020 Bloomington, MN 55437 (952) 388-0289

Attornf!YS for Respondent Cedar Bluff Townhome Condominium Association, Inc.

Mark R. Bradford (#335940) Jeanne H. Unger (#131404) BASSFORD REMELE A Professional Association 33 South Sixth Street, Suite 3800 Minneapolis, MN 55402-3707 (612) 333-3000

Attornf!Ys for Appellant American Family Mutual Insurance Company

(Counsel for Amici Curiae appear on following page)

%014- BACHMAN LEGAL PRINTING- FAX (611. 337-8053- PHONE (611) 339-9518 or 1-800-715-3581

The appendix to this brief is not available for online viewing as specified in the Minnesota Rules of Public Access to the Records of the Judicial Branch, Rule 8, Subd. 2(e)(2).

\\'illiam J\1. Hart (#01505.26) Katherine ""-\. i\IcBride (#01685--1-3) MEAGHER & GEER, P.L.L.P. 33 South Sixth Street, Suite 4400 l\1inneapolis, MN 55402 (612) 338-0661

Attornrys for Amicus Curiae Imuram·e Federation if J\.1innesota

Beth A. Jenson Prouty (#0389.275) Stephen M. \Varner (#271275) ~-\RTHUR, CHAPJ\L\N, KETTERING, SMETAK & PIK_ALA, P.A. 500 Young Quinlan Building 81 South Ninth Street Minneapolis, MN 55402-3214 (612) 339-3500

Attornrys for Amicus Curiae Propn!y Casualty Insurance Association if America

Christopher H. Y etka (#236792) BARNES & THORNBURG, LLP 225 South Sixth Street, Suite 2800 Minneapolis, i\IN 55402-4662 (612) 333-2111

Attornrys for Amicus Cun-ae United Poliryho!ders

Adina R. Bergstrom (#0337833) Brenda J\I. Sauro (#0324656) SAURO & BERGSTROl\1, PLLC 539 Bielenberg Drive, Suite 200 Woodbury, MN 55125 (651) 389-9915

Attornrys for Amictts Cmiae A1innesota Association if Public Insurance Adjusters, LLC

J enneane Jansen (#236792) JANSEN & PALMER, LLC 4746 Elliot Avenue South Minneapolis, l\IN 55407 (612) 823-9088

Attornrysfor Amicus Curiae J\~Iinnesota Association for Justice

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ...................................................................... iii

STATEMENT OF ISSUES ........................................................................ !

STATEMENT OF FACTS ........................................................................... !

I. AMERICAN FAMILY INSURED CEDAR BLUFF UNDER

A REPLACEMENT COST INSURANCE POLICY ............................. 1

II. CEDAR BLUFF MADE AN INSURANCE CLAIM TO AMERICAN FAMILY FOR HAIL DAMAGE TO THE PROPERTY ...... .4

III. THE APPRAISAL PANEL DETERMINED THAT THE DAMAGED SIDING CANNOT BE REPLACED WITH COMPARABLE MATERIALS ............................................................. 5

IV. THE DISTRICT DENIED CEDAR BLUFF'S MOTION TO CONFIRM THE APPRAISAL AWARD AND FOUND THAT AMERICAN FAMILY WAS OBLIGATED TO REPLACE ONLY INDIVIDUAL DAMAGED SIDING BOARDS ........................ 7

V. THE COURT OF APPEALS REVERSED ........................................ 9

ARGUMENT ....................................................................................... 10

I. THE APPRAISAL PANEL HAD THE AUTHORITY TO DECIDE WHETHER DAMAGED SIDING COULD BE REPLACED WITH COMPARABLE MATERIALS ......................... 1 0

A. Standard of Review ........................................................ 1 0

B. Applicable Legal Standard ................................................ 1 0

C. The Appraisal Panel Acted Within Its Authority Based on a Century of Minnesota Case Law ......................................... 11

II. THE POLICY DOES NOT ALLOW AMERICAN FAMILY TO REPLACE DAMAGED SIDING BOARDS WITH MISMATCHED SIDING BOARDS ...................................................... 19

A. Standard of Review ....................................................... 19

B. Applicable Legal Standard ............................................... 19

C. The Policy Requires American Family to Repair the Property ...... 20

1. In the Absence of Comparable Materials, the Policy Broadly Requires American Family to Pay the Amount Necessary to Repair the Property, Including Replacing Undamaged Areas ......................... 20

2. The Case Law and Statutory Authority Relied Upon by American Family Is Inapplicable ........................ 24

3. A Color Mismatch is a Direct Physical Loss ................... 27

4. The Plain and Unambiguous Language of the Policy Requires American Family to Pay for Repairs with Materials "Used for the Same Purpose." ........................ 29

CONCLUSION ..................................................................................... 30

CERTIFICATE OF BRIEF LENGTH ........................................................... 32

11

TABLE OF AUTHORITIES

Cases:

AFSCME Council 96 v. Arrowhead Regional Corrections Board, 356 N.W.2d 295 (Minn. 1984) ............................................................ 11

Am. Cent. Ins. Co. v. Dist. Court, 125 Minn. 374, 147 N.W. 242 (1914) ............................................. 1, 12, 13

Am. Fami~v Ins. Co. v. Walser, 628 N. W.2d 605 (Minn. 2001) ......................................................... 1, 19

Baune v. Farmers Ins. Exch., 283 Minn. 54, 166 N.W.2d 335 (1969) ................................................... 23

County of Hennepin v. Law Enforcement Labor Servs., Inc., Local #I9, 527 N. W.2d 821 (Minn. 1995) ............................................................ 11

Dai1yland Ins. Co. v. Implement Dealers Ins. Co.,

294 Minn. 236, 199 N.W.2d 806 (1972) ............................................. 1, 19

David A. Brooks Enters., Inc. v. First Sys. Agencies, 370 N.W.2d 434 (Minn. Ct. App. 1985) ................................................. 10

Eledge v. Farmers Mut. Ins. Co. of Hooper, Nebraska, 571 N.W.2d 105 (Neb. Ct. App. 1997) ................................................... 23

Eng 'g & Canst. Innovations, Inc. v. L.H. Bolduc Co., Inc., 825 N.W.2d 695 (Minn. 2013) ............................................................ 21

Greene v. United Services Auto. Ass 'n, 936 N. W.2d 1178 (Pa. Super. Ct. 2007) ................................................. 23

Grondahl v. Bulluck, 318 N.W.2d 240 (Minn. 1982) ............................................................ 19

Iowa Kemper Ins. Co. v. Stone, 269 N. W.2d 885 (Minn. 1978) ............................................................ 19

Ill

Itasca Paper Co. v. Niagara Fire Ins. Co., 175 Minn. 73,220 N.W. 428 (1928) .............................................. 1, 13, 14

Kavli v. Eagle Star Ins. Co., 206 Minn. 360,288 N.W. 723 (Minn. 1939) ............................................ 12

Lefto v. Hoggsbreath Enters., Inc., 581 N.W. 2d 855 (Minn. 1998) ........................................................... 10

Lipshultz v. General Ins. Co., 96 N.W.2d 880 (Minn. 1959) ............................................................. 27

Mahowald v. Minn. Gas Co., 344 N.W.2d 856 (Minn. 1984) ............................................................ 24

Marshall Produce Co. v. St. Paul Fire & Marine Ins. Co., 98 N.W.2d 280 (Minn. 1959) ............................................................. 28

McQuaid Market House Co. v. Home Ins. Co., 147 Minn. 254, 180 N.W. 97 (1920) ..................................................... 11

Minnesota Farmers Mut. Ins. Co. v. Smart, 204 Minn. 101,282 N.W. 658 (Minn. 1938) ........................................... 12

Mut. Serv. Cas. Ins. Co. v. Wilson Twp., 603 N.W.2d 151 (Minn. Ct. App. 1999) ................................................ 30

Nat'! Farmers Union Prop. & Cas. Co. v. Anderson, 372 N.W.2d 71 (Minn. Ct. App. 1985) .................................................. 23

N. States Power Co. v. Fid. & Cas. Co. of New York, 523 N.W.2d657 (Minn. 1994) ............................................................ 21

Ocean View Towers Association, Inc. v. QBE Insurance Corp., No. 11-60447,2011 WL 6754063 (S.D. Fla. Dec. 22, 2011) .................... 24, 26

Offerdahl v. Univ. of Minn. Hasps. & Clinics, 426N.W.2d425 (Minn. 1988) ............................................................ 19

QBE Ins. Co. v. Twin Homes of French Ridge Homeowners Ass 'n, 778 N.W.2d 393 (Minn. Ct. App. 2010) ................................. 1, 10, 14, 15, 19

IV

Quade \'. Secura Ins., 814 N.W.2d 703 (Minn. 2012) ................................................. !, 8, 12, 14

Rest Assured, Inc. v. American Motorist Insurance Co., No. C9-98-2302, 1999 WL 431112 (Minn. Ct. App. Jun. 29, 1999) ............ 24, 25

Sentinel Mgmt. Co. v. NH. Ins. Co., 563 N.W.2d 296 (Minn. Ct. App. 1997) ................................................. 28

Sterling State Bank v. Virginia Surety Co., 285 Minn. 348, 173 N.W.2d 342 (1969) ............................................. 1, 19

Struble v. Occidental Life Ins. Co., 265 Minn. 26, 120 N.W.2d 609 (1963) .................................................. 20

Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349 (Ind. 1982) ............................................................... 22

Weiler v. Union Ins. Co., No. A-05-454, 2006 WL 2403935 (Neb. Ct. App. Aug. 22, 2006) .................. 24

Statutes:

Minn. Stat. § 65A.O 1, subd. 3 ................................................................. .4, 12

Minn. Stat.§ 72A.01, et. seq . ...................................................................... 26

Minn. Stat.§ 72A.201, subd. 5(8) (2012) ....................................................... 27

Minn. Stat. § 480A.08, subd. 3(c) (2008) ....................................................... 24

Minn. Stat. § 572B.O 1, et seq . ........................................................................................... 1 0

Minn. Stat. § 572B.22 .............................................................................. 11

Minn. Stat. § 572B.23 .............................................................................. 11

Minn. Stat.§ 645.17 (1) (2012) .................................................................. 27

Other:

http://cn. wikipcdin.or!llwiki/Color ............................................................... 28

v

Michael A. Hatch, "Effects of the Claims Act- Regulator's Perspective," Understanding Errors and Omissions and the Fair Claims Practices Act, Minnesota Insurance and Legal Education (1985) ............................................. 27

MERRIAM WEBSTER ONLINE DICTIONARY,

l)JJJX_;'~~::\_\~_,l1J~D:i _a lll=\Y~h5l C'L~() l_ll~Q_i~:·t_i_()IJllJ'.Y J'Jl..Yi i C';! L .............................. 2 8

Vl

STATEMENT OF ISSUES

I. Did the appraisal panel have the authority to decide that damaged siding could not be replaced with property of comparable material and quality?

The appraisal panel determined that the damaged siding could not be replaced with

property of comparable material and quality. (Add.2.) The district court held that the

appraisal panel exceeded its authority. (Add.ll.) The court of appeals reversed. (Add.27 .)

Most apposite authority:

Quade v. Secura Ins., 814 N.W.2d 703 (Minn. 2012);

Itasca Paper Co. v. Niagara Fire Ins. Co., 175 Minn. 73, 220 N.W. 428 (1928);

Am. Cent. Ins. Co. v. Dist. Court, 125 Minn. 374 147 N.W. 242 (1914);

QBE Ins. Co. v. Twin Homes of French Ridge Homeowners Ass 'n, 778 N.W.2d 393 (Minn. Ct. App. 201 0).

II. Does the Policy's loss payment clause allow American Family to replace damaged siding boards with mismatched siding?

The district court held that the Policy's loss payment clause required American

Family to repair only individual damaged siding boards, and does not require American

Family to match the color of original siding. (Add.21.) The court of appeals reversed and

held that the Policy's loss payment clause was ambiguous. (Add.29.)

Most apposite authority:

Am. Family Ins. Co. v. Walser, 628 N.W.2d 605 (Minn. 2001);

Dairy/and Ins. Co. v. Implement Dealers Ins. Co.; 294 Minn. 236, 199 N.W.2d 806 (1972);

Sterling State Bank v. Virginia Surety Co., 285 Minn. 348, 173 N.W.2d 342 (1969).

1

STATEMENT OF FACTS

I. AMERICAN FAMILY INSURED CEDAR BLUFF UNDER A REPLACEMENT COST INSURANCE POLICY.

Appellant American Family Mutual Insurance Company ("American Family")

insured Respondent Cedar Bluff Townhome Condominium Association ("Cedar Bluff")

under an insurance policy, Policy No. 22-XC-9678-0 1 ("the Policy"). (Add.1; App.16-68.)

The Policy covered twenty (20) multi-unit residential condominium buildings operated by

Cedar Bluff ("the Property"). (Add. 1; App.20-26.) The Policy provided replacement cost

coverage for the Property. (App.26.) Cedar Bluffs annual premium for this insurance

coverage was $38,200.00. (!d.)

The Policy covered "direct physical loss of or damage to Covered Property at the

premises described in the Declarations caused by or resulting from any Covered Cause of

Loss." (App.34.) The Policy defined "Covered Property" as "Buildings, meaning the

buildings and structures at the premises described in the Declarations, ... [.]" (!d.) Thus,

the Policy covered direct physical loss of or damage to the Property.

The Policy includes a Loss Payment clause that specified how American Family

was to determine the value of covered losses to the Property. The Policy's Loss Payment

clause stated:

Loss Payment

In the event of loss or damage covered by this policy:

a. At our option, we will either:

* * *

2

(4) Repair, rebuild or replace the property with other property of like kind and quality, subject to paragraph d.(l)(e) below.

* * *

d. . .. we will determine the value of Covered Property as follows:

(1) At replacement cost without deduction for depreciation, subject to the following:

(a) ... we will pay the cost to repair or replace, after application of the deductible and without deduction for depreciation, but not more than the least ofthefollowing amounts:

(App.49 (emphasis added).)

(i) The Limit of Insurance under Section I - property that applies to the lost or damaged property;

(ii) the cost to replace, on the same premises, the lost or damaged property with other property:

1. of comparable material and quality; and

n. used for the same purpose; or

(iii) The amount that you actually spend that is necessary to repair or replace the lost or damaged property.

3

The Policy does not define "other property of like kind and quality" or "other

property ... of comparable material and quality ... used for the same purpose." (See

generally App.l6-68.)

The Policy also includes an insurance appraisal clause as required by the Minnesota

Standard Fire Insurance Policy, Minn. Stat. §65A.Ol, subd. 3. The appraisal clause states:

(App.48.)

Appraisal

If we and you disagree on the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of the loss. If they fail to agree, they will submit their difference to the umpire. A decision agreed to by any two will be binding.

II. CEDAR BLUFF MADE AN INSURANCE CLAIM TO AMERICAN FAMILY FOR HAIL DAMAGE TO THE PROPERTY.

On October 26, 2010, a hailstorm damaged the roofs, fascia, and siding at the

Property ("the Loss"). (Add.l.) American Family did not dispute that the hailstorm was a

Covered Cause of Loss under the Policy. (Add.l; Add.6; Add.13; App.9, p.l40:13-17.)

Nor did American Family dispute that the hailstorm damaged the siding on a1120 buildings.

(Add.l; App.9, p.140:18-21; App.ll, p.152:15-20.)

The existing siding was no longer manufactured in the same color. (Add.2; App.8.)

American Family's proposed replacement siding was only available in a shade lighter and

a shade darker than the existing siding. (Add.2; App.8, pp. 135:21-136:6.) American

Family admitted that the color difference between the existing siding and its proposed

4

replacement siding was noticeable, and that Cedar Bluffs homeowners might find it

significant. (App.9, p. 140:2-8.)

But American Family took the position that it was obligated to replace only the

individual damaged siding boards regardless of the color difference, and was not obligated

to replace the damaged siding with matching siding (App.9, p. 137:6-13; App.IO, p.

146:10-19.) Cedar Bluff disagreed with American Family's proposed patchwork repair

because it would not restore the Property to its pre-loss condition, i.e., with uniform

exterior siding. Accordingly, American Family and Cedar Bluff agreed to submit their

dispute regarding the Loss to an insurance appraisal. (See Add.1-3.)

III. THE APPRAISAL PANEL DETERMINED THAT THE DAMAGED SIDING CANNOT BE REPLACED WITH COMPARABLE MATERIALS.

American Family and Cedar Bluff participated in an insurance appraisal on August

8,2011. (Add.l.)

The dispute before the appraisal panel was how the value of the Loss should be

calculated. American Family contended that it should be calculated based on the cost to

repair only the individual damaged siding boards. (App.14, p. 167:2-6.) Cedar Bluff

contended that it should be calculated based on the cost to replace all of the siding because

the available siding was not a comparable material due to the color difference. (App.l4,

pp. 166:22-167:2.)

The appraisal panel considered witness testimony, exhibits, and arguments of

counsel regarding the scope of repair and the value of the loss. (Add. I.) The appraisal

panel also inspected the Property. (Add. I.) The appraisal panel also compared the color

5

of the existing siding to the commercially available replacement product. (App.13, pp.

161:15-163:22.)

The appraisal panel considered a wide range of facts in determining whether the

damaged siding could be replaced with comparable materials. Specifically, it considered:

(1) whether the existing siding was commercially available; (2) the texture of the existing

siding versus the proposed replacement siding; (3) the size of the existing siding versus the

proposed replacement siding; ( 4) the installation methods of the existing siding versus the

proposed replacement siding; and (5) the color of the existing siding versus the proposed

replacement siding. (Add.2.)

The appraisal panel also considered American Family's testimony that the available

siding was a shade lighter and a shade darker than the existing siding, that the color

difference was noticeable, and that Cedar Bluffs homeowners might find it significant.

(Add.2; App.8, pp. 135:21-136:6; App.9, 140:2-8.)

Based on the evidence and testimony presented by American Family and Cedar

Bluff, the appraisal panel determined that "the use of the commercially available siding to

repair the physically damaged siding was not a repair or replacement with comparable

materials of like kind and quality." (Add.2.)

The appraisal panel did not conclude that the Policy required an exact color match. 1

Rather, it applied a reasonableness standard:

Based on the above determinations, the panel concluded that there was not a reasonable match available for the existing

1 Nor did Cedar Bluff take this position at appraisal, at the district court, or before the Court of Appeals.

6

siding materials[.]

(I d. (emphasis added).)

Because the damaged siding could not be repaired with comparable materials, the

appraisal panel determined the value of the Loss based on the amount Cedar Bluff would

spend to repair the Property. (Id.) The appraisal determined that because the damaged

siding could not be replaced with comparable materials, the only way to repair the Property

was to replace all of the siding. (!d.)

IV. THE DISTRICT COURT DENIED CEDAR BLUFF'S MOTION TO CONFIRM THE APPRAISAL AWARD AND FOUND THAT AMERICAN FAMILY WAS OBLIGATED TO REPLACE ONLY INDIVIDUAL DAMAGED SIDING BOARDS.

Cedar Bluff moved to confirm the appraisal award in district court. (Add.5.) The

district court denied Cedar Bluffs motion, and held that the appraisal panel exceeded its

authority by purportedly interpreting the Policy:

(Add.ll.)

The appraisal panel considered and determined whether the phrase "comparable material and quality" required the siding to match in color. This decision was a policy interpretation. Because the appraisal panel specifically decided that the policy required a color match to be of "comparable material and quality", the panel made a coverage determination that exceeded their authority. There are fact issues remaining as to whether the policy does require a color match. Therefore, the Court cannot affirm the appraisal award and Plaintiffs motions to affirm the award and for summary judgment must be denied.

American Family and Cedar Bluff subsequently brought cross-motions for

summary judgment. (Add.12.) American Family asked the district court to find that the

7

Policy did not require it to repair the undamaged parts of the buildings, even though this

would leave the Property with mismatched siding. (Add.19.) Cedar Bluff asked the district

court to confirm the appraisal award pursuant to Quade v. Secura Ins., 814 N.W.2d 703

(Minn. 2012). (Add.18.)

The district court entered summary judgment in favor of American Family and

against Cedar Bluff. (Add.21.) In doing so, it ignored the appraisal panel's determination

that the damaged siding could not be replaced with comparable materials and made its own

determination that the commercially available siding was a comparable material:

(ld.)

Based on the plain language of the policy, it is evident that Defendant is not required to pay for the cost of replacing property that has not experienced direct physical loss or damage. As a result, this Court concludes that Defendant is not obligated to pay for the cost of replacing the undamaged siding. Furthermore, Plaintiff is not mandated to pay for siding that provides an exact "color match" to the original siding, as the term "color match" is not contained anywhere within the policy.

* * *

What the policy does mandate is that Defendant pay to replace the damaged property with siding that is of "comparable materials and quality." Defendant has satisfied that obligation, because it has offered to pay for replacement siding that is made by the same manufacturer of the original siding and is of the same grade and quality. As a result, this Court concludes that Defendant has satisfied its obligations under the policy and its motion for summary judgment must be granted.

8

V. THE COURT OF APPEALS REVERSED.

The court of appeals reversed, and held: ( 1) the district court erred by not confirming

the appraisal award; and (2) the Policy language requiring American Family to replace with

"comparable materials and quality" was ambiguous. (Add.27; Add. 29.)

The court first held that the district court erred by refusing to confirm the appraisal

award because the appraisal panel had the authority to consider whether the damaged siding

could be replaced with comparable materials:

The appraisal panel considered whether the amount of loss included only the directly damaged individual siding boards, or whether the loss included all of the siding because the directly damaged boards could not be replaced with matching siding. In deciding that the amount of loss included all of the siding, the appraisal panel necessarily interpreted the phrases "replace . . . with other property of like kind and quality" and "replace ... with other property . . . [o]f of comparable material and quality." Under the reasoning of Quade, the appraisal panel had the authority to consider the meaning of those phrases when determining the amount of loss. Therefore, the district court erred by refusing to confirm the appraisal award on the grounds that the appraisal panel exceeded its authority.

(Add.27 (emphasis added).)

The court next held that the Policy was ambiguous because Cedar Bluff could

reasonably interpret the "comparable material and quality" policy language to mean

matching material:

[T]he policy does not define property "oflike kind and quality" or property "of comparable material and quality." Cedar Bluff interprets this language to mean that a repair of its damaged buildings requires that the buildings have uniformly colored siding. Cedar Bluffs interpretation is not an unreasonable

9

(Add.29.)

understanding of the policy language; a reasonable person could understand that "comparable material" means material that is the same color as the damaged property. Because there is more than one reasonable interpretation of the policy language, the policy is ambiguous. * * *

We conclude that the district court erred as a matter of law by failing to resolve the ambiguous policy language in favor of the insured, Cedar Bluff.

ARGUMENT

I. THE APPRAISAL PANEL HAD THE AUTHORITY TO DECIDE WHETHER DAMAGED SIDING COULD BE REPLACED WITH COMPARABLE MATERIALS.

A. Standard of Review.

This dispute arises out of the trial court's order granting summary judgment to

American Family based on its application of Minnesota's arbitration statute to the appraisal

award. Accordingly, it is subject to de novo review. See, e.g., Lefto v. Hoggsbreath

Enters., Inc., 581 N.W. 2d 855, 856 (Minn. 1998) (trial court's ruling on summary

judgment motion based on application of statutory language to undisputed facts is

conclusion of law reviewed de novo).

B. Applicable Legal Standard.

Minnesota's arbitration statute, Minn. Stat. § 572B.01, et seq., applies to appraisal

awards. QBE Ins. Corp. v. Twin Homes of French Ridge Homeowners Ass 'n, 778 N.W.2d

393, 398 (Minn. Ct. App. 2010); David A. Brooks Enters., Inc. v. First Sys. Agencies, 370

N. W.2d 434, 435 (Minn. Ct. App. 1985).

10

Under the arbitration statute, a trial court must confirm an appraisal award unless it

finds that there are grounds for vacating, modifying, or correcting the award. Minn. Stat.

§ 572B.22. A trial court can vacate an appraisal award only in limited situations, such as

when the appraisers exceed their powers. Minn. Stat. § 572B.23.

Appraisal awards have a presumption of validity, and the burden of overcoming the

award rests on the party attacking it. McQuaid Market House Co. v. Home Ins. Co., 147

Minn. 254, 180 N.W. 97 (1920). Appraisal awards can be vacated only if the appraisal

panel "clearly exceeded" its authority, "and not because the court disagrees with the

decision on the merits." County of Hennepin v. Law Enforcement Labor Servs., Inc., Local

#19, 527 N.W.2d 821, 824 (Minn. 1995) (citing AFSCME Council 96 v. Arrowhead

Regional Corrections Board, 356 N.W.2d 295, 299-300 (Minn. 1984)).

As set forth below, the district court should have confirmed the appraisal award

because the appraisal panel acted within its authority when it determined that the damaged

siding could not be replaced with comparable materials.

C. The Appraisal Panel Acted Within Its Authority Based on a Century of Minnesota Case Law.

American Family ignores the threshold question- whether the appraisal panel acted

within its authority when it decided that damaged siding could not be replaced with

comparable material. Minnesota has consistently held for the last hundred years that

appraisal panels have the authority to resolve both fact questions and mixed questions of

law and fact when determining the value of a loss. This is exactly what the appraisal panel

did in this case, and why the district court should have confirmed the appraisal award.

11

Minnesota has long recognized that insurance appraisals are remedial in nature, and

serve an important public policy purpose by providing policyholders with a plain, speedy,

inexpensive and just determination of the extent of the loss. Quade v. Secura, 814 N.W.2d

703, 707 (Minn. 2012); Kavli v. Eagle Star Ins. Co., 206 Minn. 360, 364, 288 N.W. 723,

725 (Minn. 1939); Minnesota Farmers Mut. Ins. Co. v. Smart, 204 Minn. 101,106, 282

N.W. 658, 661 (Minn. 1938). Insurance appraisals provide such an important benefit to

policyholders that the Minnesota legislature has mandated appraisal clauses in insurance

policies since 1895. Minn. Stat. § 65A.Ol, subd. 3.

Consistent with appraisal's remedial nature, the Minnesota Supreme Court has

consistently held for over a century that appraisal panels have wide latitude to consider the

facts and evidence, and to resolve both questions of fact and mixed questions of law and

fact in discharging their duty to determine the value of a loss. In American Century

Insurance Company v. District Court, the Minnesota Supreme Court held that parties have

the right to present evidence to the appraisal panel. 125 Minn. 374, 378-79, 147 N.W.

242, 244 (1914). The Court opined that the parties' right to be heard was critical because

the appraisal panel's ability to determine the value of a loss implicated both fact questions

and mixed questions of fact and law:

[T]he appraisers must determine many matters other than the mere value of specific property produced before them for examination and appraisal. They must determine the quantity of property covered by the policy ... , the quantity destroyed, the quantity damaged, whether the damage resulted from causes covered by the policy or from other causes not covered thereby, and various other questions, both of law and fact, upon which the parties may differ. Under such circumstances

12

the parties are entitled to be heard unless the contract shows that such was not the intention.

125 Minn. at 378-79, 147 N.W. at 244 (emphasis added).

In Itasca Paper Co. v. Niagara Fire Ins. Co., the Minnesota Supreme Court

explained that appraisal panels have the authority to resolve mixed questions of fact and

law incidental to the value of a loss. The issue in Itasca Paper was whether an appraisal

panel could determine whether damaged property was "pulpwood" under the insurance

policy. 175 Minn. 73, 77, 220 N.W. 425, 426 (1928). The Court held that the appraisal

panel had the authority to construe the meaning of the term "pulpwood" because it was

incidental to its determination of the value of the loss. 175 Minn. at 78, 220 N.W.2d at

427. The Court reasoned that pure questions of law are different from mixed questions of

law and fact:

[l]fthe intention of the parties is to be learned, not alone from the language employed, but from the language construed in the light of all the surrounding facts and circumstances and the meaning of the words used in the trade, the question becomes largely one of fact. Issues involving controlling facts having incidental questions of law must be recognized as mixed questions of law and fact.

!d. (citations omitted) (emphasis added). The Court further stated that appraisal panels

must have the authority to resolve mixed questions oflaw and fact in order for the appraisal

process to operate efficiently, and that their findings on these issues must be final:

Questions of law and mixed questions of law and fact as well as questions ofpurefact must, for the efficient operation of the board and its plan of procedure, be construed as within the jurisdiction ofthe board. For the purposes of reaching its

13

conclusion, only, the findings of the board on questions of both law and fact are conclusive upon the parties.

!d. (emphasis added).

The Minnesota Supreme Court recently reiterated an appraisal panel's authority to

resolve fact questions and mixed questions of fact and law in Quade v. Secura Insurance.

In that case, the Court reaffirmed its holdings in American Century Insurance Co. and

Itasca Paper that appraisal panels have the authority to resolve both fact questions and

mixed questions of fact and law. See Quade, 814 N.W.2d at 707 (citing Itasca Paper for

premise that appraisal panels have authority to resolve "questions of law or fact, which are

involved as mere incidents to a determination of the amount of loss or damage").

Finally, the Minnesota Court of Appeals' recent decision in QBE Insurance Corp.

v. Twin Homes of French Ridge Homeowners Association is directly on point. The QBE

court held that an appraisal panel had the authority to decide whether damaged property

could be replaced with comparable materials. 778 N.W.2d 398 (Minn. Ct. App. 2010).

The appraisal decided that damaged shingles at a townhome association could not be

replaced with comparable materials, and issued an award for total roof replacement. !d. at

395. The insurer argued that the appraisal panel exceeded its authority and made a

coverage determination. !d. The court rejected this argument because the insurance

policy's loss valuation clause required the appraisal panel to consider whether repairs could

be made with comparable materials in determining the value of the loss:

The policy's replacement loss formula directed the panel to determine the value of the loss by (1) repair or replacement cost of the damaged shingles (using comparable materials),

14

(2) the amount actually and necessarily expended to repair or replace the shingles, or (3) the limits of insurance. The appraisal panel determined that the loss could not be remedied by repair or replacement because the shingles used on the buildings were no longer manufactured and/or the nondamaged shingles were too worn to be suitable to connect to new shingles, so they rejected the first valuation method and applied the second. Consistent with the plain language of the insurance contract allowing the panel to value the loss at the amount actually and necessarily expended to repair or replace the shingles, the panel's decision is a proper determination of the value of loss to respondent.

I d. at 398 (emphasis added).

The court further held that the appraisal panel's decision regarding the availability

of comparable shingles was a valuation question, not a coverage question:

Jd.at 399.

In this case, the insurer has conceded that causation exists for purposes of coverage, but it questions only whether liability exists for purposes of valuation. The appraisal panel was authorized to decide valuation questions. Valuation was at issue, and the appraisal decided only that issue by arriving at a dollar figure representing the value of the loss. Thus, the appraisal panel's decision was within its authority, and the requirement that there be a "clear showing" that the appraisers exceeded their authority in deciding the matter was not met. * * * Therefore, we conclude that the appraisal panel did not exceed its authority in deciding the valuation of respondent's loss, and the district court properly affirmed the appraisal panel's decision and granted summary judgment.

This case is on all fours with QBE. In both cases, the appraisal panels discharged

their duty to determine the value of an admittedly insured loss under a loss payment clause

that required the insurer to make repairs with comparable materials. Just as the appraisal

panel in QBE had the authority to determine whether damaged roof shingles could be

15

replaced with comparable material,2 this appraisal panel had the authority to determine

whether damaged siding could be replaced with comparable material.

The inescapable truth in this case is that the appraisal panel had the authority to

decide whether the proposed replacement siding was a comparable material. The appraisal

panel had to make this determination in order to determine the value of the loss.

Even American Family admits that appraisal panels have the authority to decide

whether something is a comparable material for purposes of valuing an insured loss. In its

brief, it concedes that whether something is a comparable material is a fact question that

requires the appraisal panel to consider several factors:

[T]he insurer must pay to replace damaged property with property that has a "comparable" color. This certainly can include the exact same color, and certainly can include the original material. But it can also include something less absolute. The color should be reasonably close to what the insured had at the time of loss, taking into consideration circumstances like: the availability of the original product; the availability of other material that might provide a better color match; the degree of color difference the replacement product would produce; and testimony about the impact the replacement material might have on the value of the insured property as a whole.

Appraisers are in the best position to consider and weigh these factors.

(App.'s Br. at 17 (emphasis added).)

But the appraisal panel in this case considered all the factors American Family

identified. Specifically, it considered: (1) whether the existing siding was available; (2)

2 And just as the appraisal panel in Itasca Paper had the authority to determine whether damaged property was "pulpwood."

16

the texture of the proposed replacement siding compared to the existing siding; (3) the size

of the proposed replacement siding compared to the existing siding; ( 4) the installation

methods of the proposed replacement siding compared to the existing siding; (5) the color

of the proposed replacement siding compared to the existing siding; (6) American Family's

testimony that the available siding was a shade lighter and a shade darker than the existing

siding; (7) American Family's testimony that the color difference was noticeable; and (8)

American Family's testimony that Cedar Bluffs homeowners might find the color

difference significant. (Add.2; App.8, pp. 135:21-136:6; App.9, 140:2-8.)

What American Family really wants is for appraisal panels to decide these issues,

as long as they decide them in its favor. Although it admits that appraisal panels "are in

the best position to consider and weigh" evidence regarding the availability of comparable

materials for purposes of valuing a loss, it argues that this particular appraisal panel

somehow "strayed too far" when it made its determination. (App. 's Br. at 14 and 17.) But

the appraisal panel's authority does not tum on whether American Family thinks it "strayed

too far" or disagrees with its decision. The law in Minnesota is clear- appraisal panels get

to make those kinds of decisions, and those decisions are final.

American Family would have this Court depart from a century of established case

law and narrow the scope of appraisal panels' authority to resolve fact questions and mixed

questions of law and fact incidental to determining the value of a loss. This would

undermine the important public policy purpose of insurance appraisals, i.e., providing a

plain, speedy, inexpensive and just determination of the extent of the loss because nearly

17

every insurance dispute regarding the extent and value of a loss, no matter how big or how

small, will end up in court rather than appraisal.

Nearly every dispute regarding the extent and value of a loss involves mixed

questions oflaw and fact. An appraisal panel must necessarily review, interpret, and apply

policy language to determine the extent of a loss. For example, an appraisal panel must

determine whether property sustained "actual physical damage" as required by the policy

before it can determine the extent of a loss. And an appraisal panel cannot determine the

value of a loss in a vacuum- it must determine the value of the loss based on the policy's

loss payment clause. All of these are tasks that appraisal panels have ably resolved without

the aid of the court for over a century.

The better rule- and one consistent with this Court's previous holdings in American

Century, Itasca Paper, Quade, and QBE - is that appraisal panels have the authority to

decide mixed questions of fact and law incidental to determining the value of a loss. The

appraisal panel's decision in this case regarding whether damage can be repaired with

"comparable materials" is a mixed question of fact and law incidental to the determination

of the value of a loss. The appraisal panel was well within its authority to decide this issue.

The district court erred in holding that the appraisal panel exceeded its authority and by

failing to confirm the appraisal award. The court of appeals properly reversed. Cedar Bluff

asks this Court to affirm the court of appeals' decision.

18

II. THE POLICY DOES NOT ALLOW AMERICAN FAMILY TO REPLACE DAMAGED SIDING BOARDS WITH MISMATCHED SIDING BOARDS.

A. Standard of Review.

Interpretation of insurance policy language presents a question of law that the court

reviews de novo on appeal. Iowa Kemper Ins. Co. v. Stone, 269 N.W.2d 885, 887 (Minn.

1978).

In revtewmg an order granting summary judgment, an appellate court must

determine whether any genuine issues of material fact exist and whether the district court

correctly applied the law. Offerdahl v. Univ. of Minn. Hasps. & Clinics, 426 N.W.2d 425,

427 (Minn. 1988). On appeal, the court must view the evidence in the light most favorable

to the party against whom summary judgment was granted. Grondahl v. Bulluck, 318

N.W.2d 240, 242 (Minn. 1982).

B. Applicable Legal Standard.

Insurance policies are interpreted to give effect to the intent of the parties. See

Dairy/and Ins. Co. v. Implement Dealers Ins. Co., 294 Minn. 236, 244-45, 199 N.W.2d

806, 811 (1972). When interpreting an insurance contract, the court gives words their

natural and ordinary meaning, and resolves ambiguities in favor of the policyholder. QBE

Ins. Corp., 778 N.W.2d at 397 (citing Am. Family Ins. Co. v. Walser, 628 N.W.2d 605,609

(Minn. 2001)). Courts are to avoid an interpretation of an insurance policy that will forfeit

the rights of the policyholder, unless such intent is manifest in "clear and unambiguous"

language. Sterling State Bank v. Virginia Surety Co., 285 Minn. 348, 353-54, 173 N.W.2d

19

342,346 (1969); see also Struble v. Occidental Life Ins. Co., 265 Minn. 26, 35, 120 N.W.2d

609, 616 (1963).

C. The Policy Requires American Family to Repair the Property.

Because the appraisal panel acted within its authority when it decided that the

proposed replacement siding was not a comparable material for purposes of determining

the value of the Loss, American Family has no alternative but to frame this as a coverage

dispute. In doing so, it advances two arguments: ( 1) its payment obligation under the

Policy extends only to portions of the Property that have sustained physical loss or damage;

and (2) under the Policy, "comparable materials" does not mean "same materials." The

Policy language does not support either argument.

1. In the Absence of Comparable Materials, the Policy Broadly Requires American Family to Pay the Amount Necessary to Repair the Property, Including Replacing Undamaged Areas.

American Family first argues that the Policy does not require it to pay to repair or

replace undamaged materials because it covers "direct physical loss of or damage to

Covered Property at the premises described in the Declarations caused by or resulting from

any Covered Cause of Loss." (App. 's Br. at 9; see also App.34.) This argument fails.

First, American Family's interpretation disregards the Policy's definition of "Covered

Property." Second, American Family's payment obligation is determined by the Policy's

Loss Payment clause, not its triggering clause.

The Policy covers "direct physical loss of or damage to Covered Property"

(App.34.) The Policy defines "Covered Property" as "buildings, meaning the buildings

and structures at the premises described in the Declarations." (!d.) Courts do not construe

20

individual words or phrases in an insurance policy in isolation; rather, the policy must be

read as a whole. Eng'g & Canst. Innovations, Inc. v. L.H. Bolduc Co., Inc., 825 N.W.2d

695, 707 (Minn. 2013). Here, the Policy language providing coverage for "direct physical

loss of or damage to" must be read in conjunction with the Policy's definition of "Covered

Property." Thus, the Policy covers "direct physical loss of or damage to" Cedar Bluffs

"[b ]uildings, meaning the buildings and structures at the premises described in the

Declarations."

But this Policy language merely determines whether coverage is triggered. An

insurance policy is "triggered" if it provides some coverage for damages. N. States Power

Co. v. Fid. & Cas. Co. of New York, 523 N.W.2d 657, 660 (Minn. 1994); In this case, the

Policy covers "direct physical loss of or damage to" Cedar Bluffs "[b]uildings, meaning

the buildings and structures at the premises described in the Declarations." Therefore,

coverage is triggered if any of Cedar Bluffs buildings suffer direct physical loss or

damage.

Once coverage is triggered, the Policy's Loss Payment clause determines American

Family's payment obligation. The Loss Payment clause requires American Family to

repair the Property "with other property of like kind and quality." (App.49.) The Loss

Payment clause also requires American Family to determine the value of an insured loss

"at replacement cost without deduction for depreciation." (!d.) And it requires American

Family to determine the value of "Covered Property" (i.e., Cedar Bluffs buildings) based

on the lowest of: ( 1) the insurance policy limits; (2) the cost to repair the damage with other

21

property of comparable materials used for the same purpose; or (3) the amount actually

needed to repair the damage. (!d.)

The Policy's Loss Payment clause does not limit American Family's payment

obligation to only those portions of the Property that suffered physical damage. Instead, it

broadly requires American Family to pay to repair or replace damage to "Covered

Property," i.e., Cedar Bluffs buildings. In some cases, this may require American Family

to repair only damaged portions of Cedar Bluffs buildings if comparable materials are

available. But if comparable materials are not available, like the appraisal panel found in

this case, then American Family is broadly obligated to pay "the amount that [Cedar Bluff]

actually spend[s] that is necessary to repair or replace the lost or damaged property." (!d.)

This may include replacement of undamaged parts of Cedar Bluffs buildings if such work

is necessary to repair the damage.

This interpretation of the Policy's Loss Payment clause is consistent with the

purpose of replacement cost coverage. Replacement cost coverage reimburses the

policyholder for the full cost of repairs, even if that results in putting the policyholder in a

better position than he was before the loss. Travelers Indem. Co. v. Armstrong, 442 N.E.2d

349, 352 (Ind. 1982). As the Indiana Supreme Court explained, insurance companies like

American Family receive higher premiums for replacement cost coverage to account for

the possibility that a policyholder like Cedar Bluff will be placed in a better position as a

result of a loss:

Replacement cost insurance on the other hand is not a pure indemnity agreement. It is an optional coverage that may be purchased and added to a basic fire policy by endorsement. It

22

is more expensive because the rate of premiums is higher and the amount of insurance to which that rate applies is usually higher.

* * *

When the insurance industry adopted a standard extension of coverage endorsement to provide replacement cost, it took into account the one great hazard in providing this kind of coverage: the possibility for the insured to reap a substantial profit, if fire occurs.

I d. at 353 (emphasis added).

American Family wants this Court to narrow the scope of its payment obligation

under the Policy's Loss Payment clause from "Covered Property" to "damaged building

components." But it is well settled that this Court must give the Policy's loss payment

language its ordinary meaning and cannot redraft the Policy to narrow American Family's

payment obligation. Baune v. Farmers Ins. Exch., 283 Minn. 54, 58, 166 N.W.2d 335, 338

(1969); Nat'! Farmers Union Prop. & Cas. Co. v. Anderson, 372 N.W.2d 71, 74 (Minn.

Ct. App. 1985).

American Family could have drafted the Policy to limit its loss payment obligation

to damaged building components. Other insurance companies issue policies that limit their

payment obligation solely to damaged portions of buildings. See, e.g., Greene v. United

Services Auto. Ass 'n, 936 N.W.2d 1178 (Pa. Super. Ct. 2007) (insurance policy required

insurer to pay only "the replacement cost of that part of the building damaged'' (emphasis

added)); Eledge v. Farmers Mut. Ins. Co. of Hooper, Neb., 571 N.W.2d 105 (Neb. Ct. App.

1997) (insurance policy required insurer to pay only "the replacement cost of that part of

the building damaged for like construction and use on the same premises" (emphasis

23

added)); Weiler v. Union Ins. Co., No. A-05-454, 2006 WL 2403935 (Neb. Ct. App. Aug.

22, 2006) (same). Unlike these carriers, American Family chose not to narrowly tailor its

policy. If it wants to restrict coverage, then it should change its policy language. 3 But that

is not the function of this Court.

For these reasons, the Court should affirm the court of appeals and find that when

comparable materials are not available, as the appraisal panel found in this case, the Policy

broadly requires American Family to pay the amount necessary to repair or replace the

Property, including replacement of undamaged parts of the Property if necessary to repair

the damage.

2. The Case Law and Statutory Authority Relied Upon by American Family Is Inapplicable.

Next, neither Rest Assured, Inc. v. American Motorist Insurance Co., No. C9-98-

2302, 1999 WL 431112, at * 1 (Minn. Ct. App. Jun. 29, 1999) nor Ocean View Towers

Association, Inc. v. QBE Insurance Corp., No. 11-60447, 2011 WL 6754063 (S.D. Fla.

Dec. 22, 2011) support American Family's argument. First, neither of these unpublished

opinions are binding precedent. See Minn. Stat.§ 480A.08, subd. 3(c) (2008) (unpublished

opinions of the Court of Appeals are not precedential); Mahowald v. Minn. Gas Co., 344

N.W.2d 856, 861 (Minn. 1984) (decisions from foreign jurisdictions are not binding).

Second, neither is applicable to this case.

3 American Family acknowledged that it changed the language of its homeowners policies in response to a ruling by the Hennepin County District Court in 2002 in a suit filed by the Minnesota Attorney General that interpreted the policy to require color matching. (App.11, pp. 151:14-152:4.) But it admitted that it did not change the language of its commercial policies like the Policy here. (!d.)

24

Rest Assured, Inc. is inapplicable because it concerned a coverage dispute, not a

value dispute. The Policy in Rest Assured, Inc. provided coverage for collapse caused by

the weight of ice and snow. Rest Assured, Inc., 1999 WL 421112, at *1. The

policyholder's roof partially collapsed as a result of ice and snow. !d. The insurer paid to

replace the damaged roof trusses. !d. The policyholder wanted the insurer to pay to replace

the remaining undamaged roof trusses because they were defectively designed. !d. The

insurer denied coverage for the undamaged roof trusses because they "were not physically

changed or damaged from a covered cause of loss." !d. The court of appeals agreed and

held that the insurer was not obligated to replace the undamaged roof trusses because the

defective design was not a covered cause of loss:

In this case, however, we fail to see how the unbroken trusses were injured, tangibly or otherwise, in March 1997 under the weight of snow on the roof. We do not believe the direct physical loss or damage required by the policy language includes construction defects alone. Indeed, because the policy language contemplates instances in which construction defects might partially contribute to a covered injury, the suggestion that construction defects alone could constitute a covered injury is inconsistent with the policy language.

!d. at *2 (emphasis added).

Unlike Rest Assured, Inc., this case concerns an admittedly covered loss. (Add.1;

App.9, p.140:13-21; App.11, p. 152:15-20.) Additionally, the purpose of roof trusses is

purely functional while the purpose of siding is both functional and aesthetic. Therefore,

Rest Assured, Inc. is not dispositive.

25

American Family's reliance on Ocean View Towers Association, Inc. is even less

sound, as this case actually supports Cedar Bluffs position. In Ocean View Towers Ass 'n,

Inc., the United States District Court for the Southern District of Florida noted that it is

common industry practice for insurers to pay for repairs and replacement with matching

siding, and that the carrier should do so in that case:

As a matter of industry custom and practice, estimates may include coverage for "matching" with regarding to "[a]ny continuous run of an item or adjoining area" where materials such as ... siding ... and roof tiles are involved. In granting summary judgment here, the Court does not hold that "matching" is never appropriate. To the contrary, the Court merely holds that the unambiguous language of this insurance policy does not require it in all circumstances. * * * Nevertheless, QBE should ensure coverage for "matching" consistent with standard industry practice where repairs concern "any continuous run of an item or adjoining area" for materials such as ... siding ... and roof tiles.

Id at fn. 4 (emphasis added). Thus, Ocean View Towers Association, Inc. supports Cedar

Bluffs position that insurers like American Family must make repairs with matching

products.

Finally, American Family's reliance on the Minnesota Fair Claims Practices Act,

Minn. Stat. § 72A.Ol, et seq., is misplaced. Since 1984, the Unfair Claims Practices Act

has prohibited insurers from engaging in unfair settlement practices, including:

[S]ettling or offering to settle a claim or part of a claim with the insured under replacement value provisions for less than the sum necessary to replace the damaged item with one of like kind and quality ... [.]

26

Minn. Stat. §72A.201, subd. 5(8) (2012). Consistent with this statutory language requiring

replacement of damaged property with property "of like kind and quality," American

Family is obligated to pay claims in an amount sufficient to provide matching replacement

materials.

The legislature did not intend to pass a law allowing insurers to pay claims in a

manner that leaves consumers worse off after a storm than before the storm hits, i.e., with

mismatched siding or roofing. In fact, one of the key purposes of the Unfair Claims

Practices Act is to ensure consumer protection. Michael A. Hatch, "Effects of the Claims

Act- Regulator's Perspective," Understanding Errors and Omissions and the Fair Claims

Practices Act, Minnesota Insurance and Legal Education (1985), at 2. American Family's

position that an insurer can repair a damaged building with mismatched components hardly

constitutes enhanced consumer protection. And, of course, it is assumed that the legislature

does not intend an absurd or umeasonable result. Minn. Stat.§ 645.17 (1) (2012).

For these reasons, the Court should reject American Family's arguments under Rest

Assured, Inc., Ocean View Towers Association, Inc., and the Minnesota Unfair Claims

Practices Act.

3. A Color Mismatch Is a Direct Physical Loss.

American Family also fails to recognize that a color mismatch is itself a direct

physical loss.

The Minnesota Supreme Court has ruled that the word "direct" in the context of an

insurance policy covering "direct loss" simply means "immediate" or "proximate" as

opposed to "remote." Lipshultz v. General Ins. Co., 96 N.W.2d 880, 886 (Minn. 1959);

27

Marshall Produce Co. v. St. Paul Fire & Marine Ins. Co., 98 N. W.2d 280, 289 (Minn.

1959). Additionally, "direct physical loss" may also exist in the absence of structural

damage to the insured property. Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296,300

(Minn. Ct. App. 1997).

While the Policy does not define "physical," it is commonly defined as "having

material existence" or "perceptible especially through the senses." MERRIAM WEBSTER

ONLINE DICTIONARY, http://www.merriam-webster.com/dictionary/physical. Color has

both a material existence and is perceptible to the senses. Color is scientifically understood

as a physical property that can be visibly perceived:

[T]he visual perceptual property corresponding in humans to the categories called red, blue, yellow, green and others. * * * Color categories and physical specifications of color are also associated with objects or materials based on their physical properties such as light absorption, reflection, or emission spectra.

WIKIPEDIA, THE FREE ENCYCLOPEDIA, COLOR, at http://en.wikipcdia.ondwiki/Color.4

Accordingly, the mismatch to Cedar Bluffs buildings is a "physical loss" based on the

visual appearance of the mismatch perceived through the senses (i.e., sight).

Because color is a physical characteristic, American Family's anti-matching

argument crumbles. The simple fact is that before the Loss, the Property had uniform

matching siding. The Policy provides replacement cost coverage, and requires American

4 Color is scientifically accepted as a physical characteristic. But even non-scientists understand color to be a physical characteristic. For example, asking someone to describe the physical characteristics of the American flag would likely elicit an answer that includes not just "stars and stripes," but also "red, white, and blue."

28

Family to restore Cedar Bluff to its pre-loss condition. American Family cannot satisfy its

obligation under the Policy to repair the damage to the Property with only partial siding

replacement. A partial repair would leave Cedar Bluff in a worse condition than it was

before the Loss, with mismatched siding. Stated another way, a partial repair would only

continue the direct physical loss to Cedar Bluff suffered by leaving it with buildings that

look worse than they did before the Loss. The mismatch is part of the Loss because the

hail damage to the siding caused the resulting appearance loss that would occur if partial

siding repairs occurs.

Therefore, this Court should reject American Family's argument that color matching

is not a component of physical loss.

4. The Plain and Unambiguous Language of the Policy Requires American Family to Pay for Repairs with Materials "Used for the Same Purpose."

American Family next argues that under the Policy's Loss Payment clause,

"comparable materials" does not mean "same materials." This argument disregards the

plain language of the Policy's Loss Payment clause, which requires American Family to

pay for repairs with "other property ... of comparable material and quality ... used for the

same purpose." (Add.49 (emphasis added).) Read as a whole, as it was intended to be,

this language unambiguously requires American Family to pay for siding that serves the

same purpose as the existing siding.

Siding serves many purposes. One of its purposes is functional - a weatherproof

barrier that protects the home from the elements. But another purpose is aesthetic - to

provide a uniform, pleasing exterior appearance. Mismatched replacement siding may

29

serve a functional purpose, but it does not satisfy the aesthetic purpose. Rather, it creates

a noticeable eyesore that did not exist before the storm. American Family's argument

focuses on the functional purpose of siding but ignores its aesthetic purpose. Its disregard

for the aesthetic purpose of siding on a building defies common sense. And when

interpreting an insurance policy, this Court does not abandon its common sense. Mut. Serv.

Cas. Ins. Co. v. Wilson Twp., 603 N.W.2d 151, 153 (Minn. Ct. App. 1999).

American Family essentially wants this Court to construe the Policy's Loss Payment

clause to require repairs with materials that serve only the same functional purpose.

American Family could have added an exclusion or limitation in its replacement coverage

under the Policy for what should be the common and easily anticipated event that matching

siding materials would no longer be available for repairs over the entire useful life of the

buildings. American Family's Policy contains no such exclusion or limitation. Further,

the greater cost to American Family to achieve a matching result on a home is not

justification to narrow the scope of its obligation.

CONCLUSION

Consistent with over a century of Minnesota case law, the court of appeals correctly

held that the appraisal panel had the authority to determine whether the damage to the

Property could be repaired with comparable materials in discharging its duty to determine

the value of the Loss. American Family presented no evidence that the appraisal panel

exceeded its authority. Accordingly, this Court should affirm the court of appeals'

decision.

30

This Court should also find that the Policy broadly obligates American Family to

pay the amount necessary to repair or replace the Property when comparable materials are

not available, including replacement of undamaged parts of Covered Property if necessary

to repair the damage.

Respectfully submitted,

Dated: April 21, 20 14

31

ROEDER SMITH JADIN, PLLC

By ________________ __

E. Curtis Roeder, (#195418) Anthony Smith (#313646) Alexander Jadin (#0387219) 7900 Xerxes A venue South Suite 2020 Bloomington, MN. 55437 Ph: (952) 388-0289 Fax: (612) 235-7927

Attorneys for Respondent

CERTIFICATE OF BRIEF LENGTH

The undersigned counsel for Respondent Cedar Bluff Townhome Condominium

Association, Inc. certifies that this brief complies with the requirements of Minn. R. Civ.

App. P. 132.01 in that it is printed in proportionately spaced typefont utilizing Microsoft

Word 2013 and contains 7,969 words, excluding the Table of Contents and Table of

Authorities.

Dated: April21, 2014

32

ROEDER SMITH JADIN, PLLC

By ________ ~-------­E. Curtis Roeder, (#195418) Anthony Smith (#313646) Alexander Jadin (#0387219) 7900 Xerxes A venue South Suite 2020 Bloomington, MN. 55437 Ph: (952) 388-0289 Fax: (612) 235-7927

Attorneys for Respondent

~tate of cfolt ittnesotu )

) SS.SS.

<Couttttl of ~:tettttepitt )

APPELLATE COURTS

APR 21 2014

J\ f f i 0 tlli'l Stephen M. West, being first duly sworn, states that he is an employee of Bachman Legal Printing, located at 733 Marquette Avenue, Suite 109, Minneapolis, MN 55402. That on April21, 2014, he prepared the Respondent's Response Brief, Addendum and Appendix, case number A13-0124, and served 2 copies of same upon the following attorney(s) or responsible person(s) by Personal Hand-delivery, via courier.

Mark R. Bradford Jeanne H. Unger BASSFORD REMELE A Prifessional Association 33 South Sixth Street, Suite 3800 Minneapolis, MN 55402-3707

William M. Hart Katherine A. McBride MEAGHER & GEER, P.L.L.P. 33 South Sixth Street, Suite 4400 Minneapolis, MN 55402

Subscribed and sworn to before me on April21, 2014

Beth A. Jenson Prouty Stephen M. Warner ARTHUR, CHAPMAN, KETTERING, SMETAK & PIKALA, P.A. 500 Young Quinlan Building 81 South Ninth Street Minneapolis, MN 55402-3214

Christopher H. Y etka BARNES & THORNBURG, LLP 225 South Sixth Street, Suite 2800 Minneapolis, MN 55402-4662

Adina R. Bergstrom Brenda M. Sauro SAURO & BERGSTROM, PLLC 539 Bielenberg Drive, Suite 200 Woodbury, MN 55125

J enneane Jan sen JANSEN & PALMER, LLC 4 7 46 Elliot Avenue South Minneapolis, MN 55407

(612) 339-9518. (800) 715-3582 12) 337-8053 • www.bachmanprint.com

733 Marquette Avenue Suite 109

Minneapolis. MN 55402