Wheeler v. Allstate Insurance Company
687 F. App'x 757
| 10th Cir. | 2017Background
- Wheeler owned an insured seasonal cabin that flooded after a basement sink pipe failed; the leak began ~60–70 days before discovery but produced heavy spraying initially.
- Allstate denied coverage relying on a policy exclusion for “seepage” defined as continuous or repeated leakage “over a period of weeks, months, or years” (Exclusion 3).
- Wheeler sought only damages he contended were caused within the first 13 days of the escape (short-term damages), while conceding other long-term damage existed.
- The policy also contains an exclusion for wear/tear/mechanical causes (Exclusion 7) but an exception covering direct physical damage caused by the “sudden and accidental escape of water” (Exception to Exclusion 7).
- The magistrate judge granted Allstate summary judgment on breach of contract and bad-faith claims, finding Exclusion 3 barred recovery; the Tenth Circuit reversed and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Is Exclusion 3 ambiguous and/or does it bar Wheeler’s claimed short-term damages? | Wheeler: Exclusion 3 (seepage over “weeks”) does not exclude damage caused in <14 days; short-term damages fall outside Exclusion 3. | Allstate: Exclusion 3 unambiguously applies because the overall leak persisted for weeks; thus all damage from that leak is excluded. | Court: Assume Exclusion 3 unambiguous but it excludes only damage “caused by” leakage over weeks; damage completed within <14 days is not excluded if severable. Genuine fact dispute on separability precluded summary judgment. |
| 2) Can short-term and long-term water damage be severed and proven separately? | Wheeler: His expert can identify damage completed within first 13 days; those losses are severable and covered. | Allstate: Its expert said separation is impossible; the leak produced continuous, inseparable loss, so severability is immaterial because Exclusion 3 applies to the event. | Court: Severability is a material factual dispute; viewing evidence for Wheeler, a jury could find short-term losses separable. Summary judgment was improper. |
| 3) If severable, does the Exception to Exclusion 7 ("sudden and accidental" escape) cover short-term damage despite delayed discovery? | Wheeler: The pipe burst was abrupt and accidental; Gridley and Utah law treat the suddenness of the escape itself as controlling, so the exception applies even if discovery was delayed. | Allstate: Because leak persisted and was discovered after 60–70 days, it was not “sudden and accidental” and exception does not apply. | Court: Utah precedent (Gridley, affirmed by Sharon Steel) controls: escape that is abrupt/unexpected is “sudden and accidental” even if undiscovered for months. If Wheeler proves short-term damage, the Exception applies and coverage exists. |
| 4) Was Allstate’s denial a breach of the implied covenant of good faith (bad faith), or was the dispute "fairly debatable"? | Wheeler: Allstate prematurely denied coverage after a cursory inspection; evidence supports bad-faith claim. | Allstate: Denial was reasonable; coverage was debatable so no bad faith. | Court: Bad-faith is a factual issue. Because Allstate lacked objective evidence at denial and investigation/reasonableness are disputed, the fairly-debatable defense does not justify summary judgment. |
Key Cases Cited
- Gridley Associates, Ltd. v. Transamerica Ins. Co., 828 P.2d 524 (Utah Ct. App. 1992) ("sudden and accidental" focuses on abrupt, unexpected escape; length of undiscovery irrelevant)
- Sharon Steel Corp. v. Aetna Gas. & Sur. Co., 931 P.2d 127 (Utah 1997) (approves and reaffirms Gridley; distinguishes routine, continuous discharges)
- Quaker State Minit-Lube, Inc. v. Fireman’s Fund Ins. Co., 52 F.3d 1522 (10th Cir. 1995) (applies Utah law that "sudden and accidental" requires abrupt/unexpected discharge; continuous routine discharges not "sudden")
- Anaconda Minerals Co. v. Stoller Chem. Co., 990 F.2d 1175 (10th Cir. 1993) (addresses "sudden and accidental" in pollution contexts under Utah law)
- Hartford Accident & Indem. Co. v. U.S. Fid. & Guar. Co., 962 F.2d 1484 (10th Cir. 1992) (same analytical framework for "sudden and accidental")
- Jones v. Farmers Ins. Exchange, 286 P.3d 301 (Utah 2012) (clarifies limits of "fairly debatable" defense at summary judgment; insurer must have conflicting evidence at time of denial to invoke defense)