Insurer Must Replace All Siding Even Though Only Two Sides Damaged

The Seventh Circuit (Judges Easterbrook, Kanne, and Hamilton), applying Illinois law, held insurer was required to cover the cost to replace aluminum siding on all sides of the buildings owned by the insured, even though the wind and hail damage occurred on two sides of the buildings, because the policy required the insurer to return the buildings to pre-storm status and replacement siding to match the existing siding was no longer available.

In May 2014, a hail and windstorm damaged buildings owned by Windridge of Naperville Condominium Association (“Windridge”).  The buildings were insured by Philadelphia Indemnity Insurance Company (“Philadelphia”).  The storm damaged the aluminum siding on the buildings’ south and west sides.  Windridge argued replacement siding that matched the undamaged north and east sides of the buildings was no longer available, so under the policy Philadelphia was required to replace the siding on all four sides of the buildings so that all sides matched.  Philadelphia argued the policy only required it to replace siding that was directly damaged by the hail and wind.

The Court of Appeals held the Philadelphia policy was a “replacement-cost policy,” meaning it provides a “make whole remedy that must strive to approximate the situation [the insured] would have occupied had the [loss] not occurred.”  The policy required Philadelphia to “pay for direct physical ‘loss’ to Covered Property,” including buildings or structures.

The Court of Appeals held the policy was ambiguous in at least two respects under the facts presented.  First, whether “direct physical loss” only contemplates the storm damage to two sides of the buildings or, alternatively, whether “direct physical loss” also contemplates damage to the buildings as a whole where matching siding is unavailable.  Second, whether the unit of “Covered Property” referred to each panel of siding vs. each side of the buildings vs. the buildings as a whole.  The Court of Appeals held the policy was susceptible to two reasonable interpretations so, under Illinois law, they interpreted the policy in favor of coverage – thereby requiring Philadelphia to cover the cost to replace all of the siding on the buildings.

The Court of Appeals held Philadelphia’s argument that “direct physical loss” only requires replacement of specific panels did not withstand basic hypotheticals.  For example, Philadelphia’s interpretation would mean, if a storm damages every other panel, the policy would only require the replacement of every other panel.  “An interpretation of the policy that left Windridge with a horizontal or vertical striped effect on its buildings would not be reasonable.  The better construction … is that each building as a whole suffered direct physical loss as a result of the storm.  The storm altered the appearance of the buildings such that they were damaged.  Condominium buildings with mismatched siding are not a post-storm outcome that the insured was required to accept under this replacement policy.”  The Court of Appeals noted, however, that situations involving more limited damage may require a different outcome, such as where one shingle at the corner of a slate roof is damaged.  The policyholder would not be entitled to a new roof if a matching shingle were no longer available.  Instead, the policyholder would be entitled to compensation for the repair of the one shingle and the presumably minor decrease in value of the building due to the mismatched tile.  Windridge of Naperville Condominium Association v. Philadelphia Indemnity Insurance Company, No. 18-2103 (7th Cir. Aug. 7, 2019).