The opinion
UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF OKLAHOMA
ALISHA HOSPITALITY, INC., )
)
Plaintiff, )
)
v. ) Case No. 21-CV-0251-CVE-JFJ
)
AMERICAN ZURICH INSURANCE )
COMPANY,1 )
)
Defendant. )
OPINION AND ORDER
Now before the Court are Defendant American Zurich Insurance Company’s Motion for
Summary Judgment and Brief in Support (Dkt. # 59) and Defendant American Zurich Insurance
Company’s Motion to Strike Portions of Jett McKay’s and Pete Scaffidi’s Declarations and Untimely
Submitted Pinnacle Estimate (Dkt. # 70). This case arises out of an insurance claim filed by Alisha
Hospitality, Inc. (Alisha) following a windstorm on May 25, 2019. Alisha’s insurer, American
Zurich Insurance Company (Zurich),2 argues that Alisha has failed to meet its burden to show that
the damages it seeks were proximately caused by the windstorm, rather than a 2017 tornado or
vandalism resulting from Alisha’s failure to secure its property. Dkt. # 59, at 5. Alisha responds that
it had substantially completed its repairs to the interior of the property and some exterior repairs from
1 The correct name of the defendant is American Zurich Insurance Company. Dkt. ## 13, 57.
Plaintiff is directed to take note of the correct corporate identity of the named defendant and
identify the defendant as American Zurich Insurance Company in future filings in this case.
2 Alisha had two separate insurance policies issued by Zurich affiliated entities, American
Zurich Insurance Company and Zurich American Insurance Company. The defendant in this
case is American Zurich Insurance Company; Alisha’s policy with Zurich American
Insurance Company is referenced as it pertains to the factual background of Alisha’s claims.
the 2017 tornado before the windstorm occurred, and any vandalism at the property occurred after
the May 29, 2019 windstorm. Dkt. # 69, at 19-20.
I.
Alisha owns a hotel located at 6030 East Skelly Drive in Tulsa, Oklahoma, and the property
was covered by a commercial property insurance policy issued by Zurich American Insurance
Company (Zurich American). Dkt. # 68-1, at 1697. The hotel suffered damage during a tornado on
August 7, 2017, and Alisha filed a claim under the commercial property insurance policy. Dkt. #
59, at 7; Dkt. # 68, at 6. Zurich American retained Young and Associates (YA) as a consultant to
inspect the property, and Zurich American issued payments of over $1,500,0003 to allow Alisha to
repair or replace damaged doors and windows, electrical equipment, air conditioners, plumbing, and
the exterior of the hotel. Dkt. # 59-16. Alisha spent approximately $1,000,000 of the insurance
proceeds to repair the property, but a substantial part of the insurance proceeds were used to pay the
lease, make mortgage payments, and pay other fees not directly related to repair of the property. Dkt.
# 59-17.
Alisha subsequently purchased a builder’s risk policy from Zurich for the property located
at 6030 East Skelly Drive, and the policy initially went into effect on February 26, 2018. Coverage
under the policy covers the “risk of loss or damage from the time when you are legally responsible
for the Covered Property on or after the effective date of this policy if all other conditions are met.”
Dkt. # 59-1, at 14. A “Covered Cause of Loss” is defined as the “risk of direct physical loss or
damage to Covered Property except those causes of loss listed in Section B. Exclusions.” Id. at 7.
3 The parties agree that Zurich American issued a total payment of $1,869,772.85 for the
tornado claim, but $1,513,324.30 was specifically designated for repairing the interior and
exterior of the property. Dkt. # 59, at 7; Dkt. # 68, at 6.
2
Most relevant to this case is the remodeler coverage, under which Zurich agreed to “pay for loss or
damage due to a Covered Cause of Loss to ‘existing buildings or structures’ described in the
Declarations to which ‘renovations and improvements’ are being made.” Id. at 19. The policy
provides that Zurich will pay the “actual cash value,” and the value of the renovations or
improvements “will be the lesser of the cost to repair or the cost to replace with like kind and quality
to the same point of completion that had been achieved immediately before the loss or damage.” Id.
Remodeler coverage contains an exclusion when there has been no ongoing construction activity for
at least 60 days before the loss or damage occurs, and Zurich will not pay for any loss or damage
caused by vandalism or water damage if this exclusion applies. Id. For other causes of loss not
expressly listed in the exclusions to remodeler coverage, Zurich will reduce the amount it would
otherwise pay for a covered loss by 15 percent if there has been no ongoing construction activity
within 60 days of the loss. Id. at 20. The policy contains a separate exclusion for damage to the
interior of a building caused by water damage from “rain, snow, sleet, ice, sand, or dust, whether
driven by wind or not, unless . . . [t]he building or structure first sustains damage by a Covered
Cause of Loss to its roof or walls through which the rain, snow, sleet, ice, sand, or dust enters . . .
.” Id. at 12.
The parties do not dispute that the tornado damage to the hotel had not been fully repaired
by May 2019. In late December 2018, Zurich had requested that YA re-inspect the property to
determine “the level of completed repairs and project status,” but YA had difficulty making contact
with the insured, Vipul Patel. Dkt. # 68-1, at 1697. YA performed an inspection of the ongoing
repairs in January 2019, even though it was unable to make contact with Patel, and one of the
contractors asked YA to wait for a representative of the insured, Dawn Price, to arrive before YA
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proceeded with its inspection. Id. Price met with YA and YA proceeded with the inspection, and
YA found that repairs were ongoing but substantially incomplete. Id. at 1698. Stucco work on the
exterior of the hotel was in progress, but most of the doors and windows were covered with boards.
Id. A ground view of the roof showed that the roof was unsecured or unattached at the perimeter.
Id. No plumbing had been installed in the interior of the building, and there were minimal lighting
or electrical fixtures installed on any of the four floors of the hotel. Id. No flooring had been
installed on any the four floors of the hotel, and a few doors had been installed on the second through
fourth floors. Id. Price spoke to Patel by telephone, and Price advised YA that Patel believed the
repairs were about fifty percent complete. Id. According to Price, Patel estimated that the repairs
would be completed in “August 2019 or 2020.” Id.
On June 10, 2019, Alisha filed a vandalism claim under the builder’s risk policy with a
reported loss date of May 25, 2019, and Alisha claimed that “[v]andals damaged the interior
finishes, plumbing, and electrical systems.” Dkt. # 59-19, at 2. Alisha also made a claim for damage
resulting from a windstorm that occurred on May 25, 2019, and Alisha reported the windstorm claim
to Zurich on June 10, 2019. Dkt. # 59, at 9; Dkt. # 68, at 7. Before any insurance claim had been
filed, Alisha retained a public insurance adjustor, Pinnacle Limited (Pinnacle), and Jett McKay, the
president of Pinnacle, conducted an inspection of the property on May 29, 2019. Dkt. # 68-1, at 9.
McKay observed that the roof the of hotel had blown off during the storm from the west toward the
center of the building, but the roof did not completely detach. Id. Alisha attempted to pull the
thermoplastic polyolefin (TPO) roof back into place, but water was still entering the building at
several places. Id. McKay states that he saw “limited evidence of vandalism to certain building
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components” during his initial inspection, but he saw evidence of attempted vandalism to copper
pipes and the main electrical room. Id. at 9-10.
Zurich opened an investigation after receiving the insurance claims, and conducted a site
inspection on June 18, 2019. Dkt. # 59, at 6; Dkt. # 68, at 7. Zurich also retained Vertex
Engineering (Vertex) as an engineering consultant and YA as a building consultant. Id. Zurich’s
initial inspection was conducted by Zac Lindley of Insurance Claims Adjustors, and McKay was
present during the inspection. Dkt. # 68-1, at 1716-1721. Lindley noted that repairs to the interior
of the property were “in the process of being completed,” and the insured had just begun repairs to
the exterior of the building. Id. at 1717. Lindley saw extensive evidence of vandalism and he
believed that vagrants had been living in the hotel for some time. Id. Lindley recommended
mitigation work to remove debris and stop ongoing vandalism, but Lindley’s initial report was
focused on Alisha’s vandalism claim, not the damage caused by the windstorm. Id. at 1720. Lindley
conducted a second inspection on July 29, 2019, and the evidence he had gathered since his initial
inspection established that no construction work to the exterior of the property had taken place since
January 2019. Id. at 1723. Lindley clarified that he had been asked to assess Alisha’s vandalism loss
as to copper plumping and copper electrical components that had been removed, and other vandalism
damage was being considered as part of the windstorm damage claim. Id. at 1724. Lindley had met
with Zurich’s large loss adjustor, Bradley Dean, and had recommended that Zurich reserve between
$200,000 and $300,000 to repair the vandalism within the scope of Lindley’s investigation. Id. at
1725. However, he noted that there could be insurance coverage issues due to the length of time the
building was unoccupied and the lack of construction activity at the property. Id. at 1724.
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YA conducted an inspection of the property on July 22, 2019. Dkt. # 59-6, at 1. YA noted
that three separate insurance claims had been filed concerning the subject property, but it was
assigned to assess only the damage attributable to the May 25, 2019 windstorm. Id. YA received
an estimate from Pinnacle stating that it would take over $4.6 million to fully repair the property, but
YA found that Pinnacle failed to consider what damage was actually caused by the 2017 tornado,
vandalism, or the May 25, 2019 windstorm. Id. at 2. YA determined that damage to mechanical and
plumbing items, doors and door frames, and drywall were covered and paid for in connection with
the tornado claim, and the repairs to these items had not been completed at the time of the
windstorm. Id. These items were not included in YA’s estimate to repair damage caused by the
windstorm. YA provided an estimate of $1,321,900.39 to resolve Alisha’s insurance claim related
to the May 25, 2019 windstorm to restore the property to its pre-loss condition. Id. at 1. YA
specifically noted that it had received a mitigation estimate of $875,929.86 supplied by Unified
Disaster Resources (UDR), but YA disagreed with the proposed cost of UDR’s estimate and chose
to submit a mitigation quote from another contractor. Id. at 2; Dkt. # 68-1, at 1738-40.
Zurich retained Vertex to inspect the “cause and extent of reported damage to the roof
covering at the building and determine whether the conditions were attributable” to the May 25, 2019
windstorm. Dkt. # 59-7, at 3. Vertex conducted an initial investigation on August 13, 2019 and a
second inspection on November 12, 2019, and McKay was present during the inspections. Id. The
structure was covered by a TPO roof membrane at the time of the windstorm, but the metal parapet
caps had not been installed around the perimeter of the roof due to ongoing work to the exterior of
the building. Id. at 3-4. Vertex’s inspectors, Josh Thompson and Shawn Hardy, determined that the
nails used to secure the TPO roof to the structure were not adequate to withstand the uplift forces
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caused by the wind, and this resulted in a cascading roof failure. Id. at 6-7. The roof failure
permitted water to enter the building and the lack of a functioning HVAC system contributed to the
severity of the damage inside the building. Id. at 7. Vertex recommended repairs to the temporary
roof of the structure, replacement of damaged drywall, repair of bubbling and peeling paint, and
installation of additional fasteners along the base of the temporary roof. Id. at 8. Vertex’s report
clearly states that it was not offering an opinion as to insurance coverage for any of the recommended
repairs, and it had not reviewed Alisha’s insurance policy. Id.
On August 20, 2019, Zurich issued an advanced payment to Alisha in the amount of
$203,685.75 for temporary repairs to the property, and Alisha completed the temporary repairs by
October 3, 2019. Dkt. # 59, at 9-10; Dkt. # 68, at 7. However, the temporary repairs did not wholly
prevent water from entering the building. Dkt. # 59-7, at 7. Zurich asked Vertex to conduct a
microbial damage assessment to evaluate the water damage to the interior of the property and
determine what repairs were necessary. Dkt. # 59-8, at 3. Vertex conducted an inspection on
November 18, 2019 and found that much of the sheetrock in the interior of the building needed to
be replaced. Id. at 5. Vertex observed visible mold growth (VMG) caused by ongoing water
intrusions from the roof, as well as from the windstorm. Id. Vertex conducted a second inspection
on December 4, 2020 in furtherance of the microbial damage assessment and did not find any
significant difference in the amount of VMG between the two inspections. Id. at 4-5. The inspector
saw damage to the interior of the property caused by vandalism. Id. Vertex noted that no remedial
work had taken place in the interior of the building since its November 2019 inspection, and the
interior of the property was in substantially the same condition as during the prior inspection. Id.
at 5. Vertex recommended the removal and replacement of any mold-impacted drywall materials,
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but Vertex stated that it had not reviewed Alisha’s insurance policy and it was not offering a
coverage opinion. Id. at 6.
Throughout Zurich’s investigation, it requested information from representatives of Alisha
concerning vandalism and construction activity at the site prior to the windstorm. Dkt. # 59-9; Dkt.
# 59-11; Dkt. # 59-12. In July 2019, Zurich requested copies of police reports supporting Alisha’s
vandalism claim and all construction records dating back to the inception of the builder’s risk policy.
Dkt. # 59-9, at 1. Zurich also sought records of any repairs completed as part of the 2017 tornado
claim. Id. Patel responded that he would “send that ASAP,” and McKay advised Zurich that he
would request the information from the insured so he could forward the materials to Zurich. Id.
Zurich issued the advance payment of $203,685.75 to Alisha, even though it had not received the
requested information, but Zurich made the payment under a reservation of its right to deny coverage
pending further investigation. Dkt. # 59-10. Zurich received police reports from Alisha on August
30, 2019, but Alisha advised Zurich that it had not obtained the construction records that it had
requested. Dkt. # 59-9, at 1. Zurich reminded Alisha that the builder’s risk policy excluded
coverage for vandalism if there had not been any construction activity at the site within 60 days prior
to the loss, and the policy provided for a 15 percent reduction for other types of covered losses based
on the lack of construction activity. Id. at 2. Even though Alisha had not provided construction
records to Zurich, McKay asked Zurich to issue a decision on their claim and pay mitigation costs
and all damage from the windstorm. Id. at 3. As of October 23, 2019, Zurich declined to forward
any more payments on the windstorm claim until it received additional information from Alisha.
Id. On December 30, 2019, Zurich advised McKay and Patel that Zurich had not received
construction records or any other evidence showing that any construction activity had occurred
8
within 60 days of the windstorm, and Zurich’s adjustor, Dean, told Alisha that Zurich would likely
apply exclusions and/or reductions based on the lack of construction activity. Dkt. # 59-11, at 3.
On February 10, 2020, Dean again advised Alisha that he had not received any documents
showing that construction activity took place at the hotel within 60 days of the windstorm, and he
notified Alisha that he would reduce the final payment by 15 percent. Dkt. # 59-12. Dean informed
Alisha that Zurich would be relying on YA’s estimate as the basis for calculating the final payment
to Alisha, minus certain deductions required by the insurance policy. Id. The final estimate prepared
by YA included payments for demolition of damaged building materials, reconstruction of damaged
building materials, contractor overhead, and emergency board up services. Dkt. # 59-13, at 2.
However, the estimate excluded costs incurred due to code upgrades, hazardous material abatement,
and city permit and engineering fees. Id. YA’s final estimate for repairs to the property was
$1,321,900.39, which was reduced by $97,309.72 for depreciation and additional 15 percent under
the ongoing construction provision of the policy. Id. at 13. Zurich issued a final payment of
$828,716.33 to Alisha. Id. at 16. Repairs to the hotel have not been completed and the property is
currently subject to a condemnation order issued by the City of Tulsa. Dkt. # 59-14.
Alisha disputes that Zurich has made all payments required under the builder’s risk policy,
and has provided several damages estimates by McKay in support of its claim for additional funds
under the policy. McKay inspected the property on May 29, 2019, four days after the windstorm,
and took photographs documenting damage to the property. Dkt. # 68-1, at 9-10. He conducted a
second inspection of the property on June 18, 2019, and a Zurich adjuster was present during this
inspection. Dkt. # 25, at 3; Dkt. # 68-1, at 11. McKay states that the roof of the property had been
properly repaired following the 2017 tornado, even if the repairs were incomplete as of May 25,
9
2019. Dkt. # 68-1, at 11. McKay noted that water was migrating from the roof into the interior of
the hotel and there were obvious signs of vandalism. Id. McKay prepared an estimate (Dkt. # 68-1,
at 51-407) stating that it would take $4,637,205.38 to restore the hotel to its pre-loss condition.
McKay subsequently produced revised estimates of $4,256.829.71 and $3,942.281.80 to remove
certain items of damages caused by vandalism or that were attributable to the 2017 tornado. Id. at
12. McKay reduced his third estimate from $3,942,281.80 to $3,717.854.11 to account for the actual
cash value of the property when the storm occurred. McKay testified in his deposition that he used
YA’s January 2019 report to determine the condition of the property when the windstorm occurred
in May 2019, because it appeared that little or no construction activity had occurred in the interim.
Dkt. # 59-2, at 9-10. McKay relied on the January 2019 condition of the property as a “starting
point,” and he did not initially consider whether certain repairs were covered as part of the 2017
tornado claim. Id. at 10. McKay assumed that water damage to the drywall in the interior of the
building was caused by the 2019 windstorm, not the act of vandals seeking to remove pipes from
inside the walls, even though he acknowledged that the removal of pipes could potentially cause
water damage. Id. at 12-14.
Alisha filed this case in Tulsa County District Court alleging claims of breach of contract and
bad faith against Zurich. Zurich removed the case to this Court on the basis of diversity jurisdiction
and, after pretrial discovery was completed, Zurich filed a motion for summary judgment (Dkt. # 59).
Zurich argues that Alisha cannot prevail on its breach of contract claim, because Alisha has not met
its burden to show that its damages were actually caused by the 2019 windstorm. Zurich also argues
that certain types of damages are not covered by the builder’s risk policy, such as vandalism, damage
attributable to the 2017 tornado, and code-related costs. Zurich also argues that the damages should
10
be reduced to the actual cash value of the building, rather than the replacement cost, and that Alisha
failed to mitigate its damages by performing necessary repairs following the 2017 tornado. Alisha
filed a response (Dkt. # 68) to the motion for summary judgment and included a fourth estimate by
McKay concerning Alisha’s damages. McKay’s new estimate reduces Alisha’s claimed damages
from $3,717,854.11 to $3,370,405.43, both stated in terms of actual cash value. Dkt. # 68-1, at 12-
13. McKay states that he is removing additional items from his estimate that are not related to the
May 25, 2019 windstorm or are not covered by the policy, and he claims he corrected a scrivener’s
error concerning the cost of packaged terminal air conditioning (PTAC) units. Id. at 13-14.
II.
Summary judgment pursuant to Fed. R. Civ. P. 56 is appropriate where there is no genuine
dispute as to any material fact and the moving party is entitled to judgment as a matter of law.
Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 250 (1986); Kendall v. Watkins, 998 F.2d 848, 850 (10th Cir. 1993). The plain language of
Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon
motion, against a party who fails to make a showing sufficient to establish the existence of an
element essential to that party’s case, and on which that party will bear the burden of proof at trial.
Celotex, 477 U.S. at 317. “Summary judgment procedure is properly regarded not as a disfavored
procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed
‘to secure the just, speedy and inexpensive determination of every action.’” Id. at 327.
“When the moving party has carried its burden under Rule 56(c), its opponent must do more
than simply show that there is some metaphysical doubt as to the material facts. . . . Where the
record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there
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is no ‘genuine issue for trial.’” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
586-87 (1986) (citations omitted). “The mere existence of a scintilla of evidence in support of the
plaintiff’s position will be insufficient; there must be evidence on which the [trier of fact] could
reasonably find for the plaintiff.” Anderson, 477 U.S. at 252. In essence, the inquiry for the Court
is “whether the evidence presents a sufficient disagreement to require submission to a jury or
whether it is so one-sided that one party must prevail as a matter of law.” Id. at 250. In its review,
the Court construes the record in the light most favorable to the party opposing summary judgment.
Garratt v. Walker, 164 F.3d 1249, 1251 (10th Cir. 1998).
III.
Zurich argues that it paid Alisha all amounts owed under the builder’s risk policy for damage
to the hotel that was proximately caused by the May 25, 2019 windstorm, and Alisha has not met its
burden to show that any additional amounts are covered by the policy. Dkt. # 59, at 5. Zurich also
argues that certain types of damages, such as code-related costs and damage caused by Alisha’s
failure to mitigate, are not covered by the policy. Id. Should the Court find that summary judgment
is inappropriate on Alisha’s breach of contract claim, Zurich argues that there is a legitimate dispute
between the parties concerning Alisha’s demand for additional amounts under the policy, and Zurich
cannot be held liable for bad faith. Id. at 6. Alisha responds that Zurich’s estimate of approximately
$1.3 million for damage to the hotel was arbitrary and based on an inadequate investigation, and
Alisha asserts that Zurich should have accepted the “accurate” estimate provided by Alisha’s
representative, McKay, after he inspected the property in May and June 2019. Dkt. # 69, at 20-21.
Alisha argues that Zurich breached the insurance contract and acted in bad faith by underpaying the
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claim, conducting an inadequate investigation, and delaying in making a payment on Alisha’s
windstorm damage claim. Id.
A.
Before reaching Zurich’s motion for summary judgment, the Court will consider Zurich’s
request to strike statements in McKay’s declaration and his previously undisclosed fourth estimate
of Alisha’s damages caused by the 2019 windstorm. Zurich asks the Court to strike statements in
McKay’s declaration and his fourth revised estimate of Alisha’s damages, because these materials
were not produced during pretrial discovery and were prepared after the filing of Zurich’s motion
for summary judgment. Dkt. # 70. McKay previously prepared three estimates of Alisha’s damages
as a result of the 2019 windstorm, and he appeared to take the position during his deposition that he
either could not or was not obligated to determine the cause of different aspects of Alisha’s damages.
McKay has prepared a fourth estimate that was attached to Alisha’s response (Dkt. # 68) to Zurich’s
motion for summary judgment, and McKay deducts certain amounts that he now claims were either
scrivener’s errors or were not covered under the builder’s risk policy. Alisha argues that McKay has
merely clarified or corrected his prior opinions, and Zurich will not be prejudiced by the Court’s
consideration of McKay’s fourth estimate of damages or his revised opinions as stated in his
declaration. Dkt. # 72. Zurich also asks the Court to strike the declaration of Pete Scaffidi, the chief
executive officer of UDR, concerning Alisha’s mitigation damages, because the declaration is
allegedly “self-serving” and “conclusory.” Dkt. # 70, at 8-10.
The Federal Rules of Civil Procedure require an expert witness to prepare a report containing
a “complete statement of all opinions to be expressed and the basis and reasons for them . . . .” Fed.
R. Civ. P. 26(a)(2)(B). A party’s failure to disclose the identity of an expert witness or provide a
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timely expert report requires the court to automatically exclude expert testimony unless the violation
of Rule 26(a)(2) was justified or was harmless under the circumstances. Fed. R. Civ. P. 37(c)(1);
Jacobsen v. Deseret Book Co., 287 F.3d 936, 951-52 (10th Cir. 2002). A court may exclude specific
opinions or bases for the expert’s opinions that were not fairly disclosed in the expert’s report.
Keach v. United States Trust Co., 419 F.3d 626, 641 (7th Cir. 2005). The Tenth Circuit has
identified four factors to determine whether a violation of Rule 26(a)(2) was harmless or justified:
(1) the prejudice or surprise to the party against whom the testimony is offered; (2) the ability of the
party to cure the prejudice; (3) the extent to which introducing such testimony would disrupt the trial;
and (4) the moving party’s bad faith or willfulness. Woodworker’s Supply, Inc., v. Principal Mut.
Life Ins. Co., 170 F.3d 985, 993 (10th Cir. 1999). Under Rule 26 (a)(2)(D)(ii), any expert evidence
that “is intended solely to contradict or rebut evidence on the same subject matter identified by
another party under Rule 26(a)(2)(B) or (C)” must be exchanged within 30 days after the opposing
party’s disclosure. In contrast to rebuttal expert evidence, a party is required to supplement expert
disclosures under Rule 26(e) “in a timely manner if the party learns that in some material respect the
disclosure or response is incomplete or incorrect . . . .” Fed. R. Civ. P. 26(e)(1)(A). A party must
supplement its expert disclosures “by the time the party’s pretrial disclosures under Rule 26(a)(3)
are due.”
Under Rule 26(e), a party is under a duty to supplement “in a timely manner if the party
learns that in some material respect the disclosure is incomplete or incorrect and if the additional and
corrective information has not otherwise been made known to the other parties during the discovery
process or in writing . . . .” Rule 26(e)(1) does not permit parties to produce “supplemental reports
whenever they believe such reports would be ‘desirable’ or ‘necessary’ to their case,” and
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supplemental reports are permitted “(1) upon court order; (2) when the party learns that the earlier
information is inaccurate or incomplete; or (3) when answers to discovery requests are inaccurate
or incomplete.” Minebea Co., Ltd. v. Papst, 231 F.R.D. 3, 6 (D.D.C. 2005). Although parties are
permitted to supplement expert disclosures, Rule 26(e) “does not give license to sandbag one’s
opponent with claims and issues which should have been included in the expert witness’ report.”
Leviton Mfg. Co., Inc. v. Nicor, Inc., 2007 WL 1306759 *4 (D.N.M. April 20, 2007) (quoting Beller
v. United States, 221 F.R.D. 696, 701 (D.N.M. 2003)). As one court has noted:
A supplemental expert report that states additional opinions or rationales or seeks to
“strengthen” or “deepen” opinions expressed in the original expert report exceeds the
bounds of permissible supplementation and is subject to exclusion under Rule
37(c)(1). “To rule otherwise would create a system where preliminary [expert]
reports could be followed by supplementary reports and there would be no finality
to expert reports, as each side, in order to buttress its case or position, could
‘supplement’ existing reports and modify opinions previously given. This result
would be the antithesis of the full expert disclosure requirements stated in Rule 26(a).
Cook v. Rockwell Int’l Corp., 2006 WL 3533049 *87 (D. Colo. Dec. 7, 2006) (citations omitted).
Permitting late supplementation of expert reports also has the effect of denying the opposing party
the opportunity to file a meaningful Daubert motion as to questionable expert testimony. See Miller
ex rel. S.M. v. Bd. of Educ. of Albuquerque Public Schools, 455 F. Supp. 2d 1286, 1299 (D.N.M.
2006).
Prior to the filing of this case, McKay produced an estimate stating that Zurich was obligated
to pay $4,637,205.38 to fully compensate Alisha for damage caused by the 2019 windstorm. Dkt.
# 68-1, at 12. McKay produced a second estimate in March 2022 reducing his estimate from
$,4,637,205.38 to $4,256,829.71, and he was deposed by Zurich’s counsel in July 2022. McKay
testified that his initial approach was simply to assess the condition of the property as he found it
15
after the May 2019 windstorm, and he compared that to the condition of the property as described
in YA’s January 2019 report. Dkt. # 59-2, at 9. McKay’s deposition testimony suggests that he
initially made little attempt to distinguish whether certain elements of damages were caused by the
2017 tornado, vandalism, or the 2019 windstorm. In September 2022, McKay provided a third
estimate further reducing his assessment of Alisha’s potential damages to $3,942,281.80, reduced
to $3,717,854.11 in actual cash value. Dkt. # 68-1, at 774-1130. Zurich filed its motion for
summary judgment on December 9, 2022, and Zurich relied on McKay’s third estimate and his
deposition testimony as the basis for its argument that Alisha failed to meet its burden to distinguish
between different potential causes of damage. Alisha subsequently filed a response to Zurich’s
motion for summary judgment, and Alisha attached a new and previously undisclosed fourth
estimate by McKay further reducing his estimate of Alisha’s damages.
Zurich argues that McKay’s fourth estimate of Alisha’s damages is not based on any new
evidence, and Alisha should have provided Zurich with a copy of the new estimate before the
discovery cutoff expired. Dkt. # 70, at 3-5. Alisha does not respond to the argument that its fourth
damages estimate was untimely, but it does argue that Zurich will not be prejudiced if the Court
considers a new damages estimate that merely corrects or clarifies a previously disclosed expert
opinion. Dkt. # 72, at 7-13. The Court finds that Alisha has essentially provided no explanation for
its delay in producing McKay’s fourth estimate to Zurich, but Zurich has failed to show that it will
actually be prejudiced if Alisha is permitted to use the estimate in support of its claims. McKay’s
fourth estimate essentially concedes that Alisha cannot recover certain types of damages as part of
its windstorm damage claim, and he is not asserting that Alisha is entitled to additional damages that
had not previously been disclosed in discovery. McKay’s fourth estimate effectively concedes that
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certain elements of damages identified in Zurich’s motion for summary judgment are not covered
by the builder’s risk policy.4 Zurich has not shown that it will be required to conduct additional
discovery in light of McKay’s fourth estimate, and the estimate will also not support the existence
of any issue of disputed fact that would not have been present without the new estimate. While
Alisha should have disclosed McKay’s new estimate in a more timely fashion, the Court does not
find that Zurich will be prejudiced by the Court’s consideration of the new estimate when ruling on
Zurich’s motion for summary judgment, and Zurich’s request to strike McKay’s fourth estimate and
certain statements in McKay’s declaration is denied.
Zurich also asks the Court to strike Pete Scaffidi’s declaration concerning mitigation costs,
because the declaration is “self-serving” and conclusory. Dkt. # 70, at 8. Scaffidi states that he is
the chief executive officer of Unified Disaster Resources (UDR), and he specializes in evaluating
water damage to buildings to determine the scope of mitigation and repair. Dkt. # 68-1, at 1747.
Alisha hired UDR as a restoration contractor following the 2019 windstorm, and UDR proposed a
budget of $815,824.99 to mitigate water damage caused by the windstorm. Id. at 1748. In August
2020, UDR prepared a revised estimate based on new information and the mitigation budget was
increased to $875,929.86. Id. The Court declines to strike Scaffidi’s declaration, and the issues
raised by Zurich are more appropriate for cross-examination if Scaffidi should testify at trial. The
fact that Scaffidi’s declaration is favorable to Alisha does not make it impermissibly “self-serving,”
4 In light of McKay’s concessions, the Court finds that it unnecessary to consider Zurich’s
arguments that specific items of damages are excluded from coverage under the policy. See
Dkt. # 59, at 21-26. Zurich may raise specific damages issues in a motion in limine if Zurich
believes that McKay’s fourth estimate does not concede each issue raised in Zurich’s motion
for summary judgment. However, these are fact intensive issues and will likely be reserved
for the jury, and such a motion should be filed only if the facts concerning the issue are
clearly undisputed.
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as nearly every affidavit or declaration submitted by a party tends to seem “self-serving” from the
perspective of the opposing party. Scaffidi’s declaration states that he was asked to prepare a
mitigation budget, and he does not suggest that he was asked to differentiate between different
potential causes of damage or that all of the damage was attributable to the May 25, 2019 windstorm.
UDR’s mitigation budgets are sufficiently supported by documentary evidence explaining the need
for mitigation work, and the Court finds no basis to strike Scaffidi’s declaration from the summary
judgment record.
B.
Zurich argues that Alisha cannot meet its burden to show that any amount of damages it seeks
beyond what has already been paid by Zurich was proximately caused by the 2019 windstorm, and
Zurich seeks summary judgment on Alisha’s breach of contract claim. Dkt. # 59, at 19-20. Alisha
responds that it promptly conducted an inspection of the property following the windstorm and
provided an accurate summary of the damage caused by the windstorm to Zurich, and Alisha claims
that Zurich’s own inspection of the property confirmed the accuracy of Alisha’s initial investigation.
Dkt. # 68, at 20. Alisha argues that Zurich refused to pay all covered damages caused by the
windstorm, and its eventual and untimely payment of approximately $1,300,000 was arbitrary and
insufficient under the builder’s risk policy. Id. at 20-21.
Under Oklahoma law, “[a] breach of contract is a material failure of performance of a duty
arising under or imposed by agreement.” Lewis v. Farmers Ins. Co., 681 P.2d 67, 69 (Okla. 1983).
The three elements of a breach of contract claim are “1) formation of a contract; 2) breach of the
contract; and 3) damages as a direct result of the breach.” Digital Design Grp., Inc. v. Info. Builders,
Inc., 24 P.3d 834, 843 (Okla. 2001). Insurance policies are contracts and are interpreted in
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accordance with the general principles of contract law. May v. Mid-Century Ins. Co., 151 P.3d 132,
140 (Okla. 2006). “A contract must be considered as a whole so as to give effect to all its provisions
without narrowly concentrating upon some clause or language taken out of context.” Lewis v. Sac
& Fox Tribe of Okla. Housing Auth., 896 P.2d 503, 514 (Okla.1994). “The terms of the parties’
contract, if unambiguous, clear, and consistent, are accepted in their plain and ordinary sense, and
the contract will be enforced to carry out the intention of the parties as it existed at the time the
contract was negotiated.” Dodson v. St. Paul Ins. Co., 812 P.2d 372, 376 (Okla.1991); see also
OKLA. STAT. tit. 15 § 160.
In January 2019, YA inspected the insured property to determine the status of repairs
following a 2017 tornado, and the primary finding from the inspection was that repairs were ongoing
but substantially incomplete. Windows and doors were boarded up, plumbing and electrical fixtures
had not been installed, and no flooring had been installed on any floor of the hotel. Dkt. # 68-1, at
1698. The insured, Patel, represented that repairs were approximately 50 percent complete. Id. at
1699. The windstorm occurred on May 25, 2019, and Alisha retained Pinnacle to assist it with the
resolution of a potential insurance claim. McKay conducted his initial investigation on May 29,
2019, and Alisha filed vandalism and storm damage claims on June 10, 2019. Zurich sent an
inspector to the property to conduct an inspection on June 18, 2019, and the inspector noted that
repairs to the roof and exterior were underway but not completed at the time of the windstorm. Id.
at 1710. Approximately 75 percent of the rooms suffered extensive water damage after the new but
incomplete roof blew off during the windstorm, and the inspector stated that the new roof had not
been properly installed. Id. No construction activity had taken place at the hotel since January 2019,
and the adjuster noted that the lack of construction activity and the unoccupied status of the building
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could affect insurance coverage. Id. Zurich retained YA and Vertex to assess the damage to the
insured property, and additional inspections took place over the next six months. YA estimated that
Alisha suffered a loss of approximately $1.3 million that could be attributed to the 2019 windstorm.
McKay prepared an estimate on behalf of Alisha, and he claimed that Alisha was owed over $4.6
million under the builder’s risk policy. Zurich requested police reports and construction records
from Alisha to properly evaluate Alisha’s vandalism claim. Alisha was ultimately able to produce
police reports in support of its vandalism claim, but Alisha could not produce any evidence of
ongoing construction activity within 60 days of the windstorm. Dkt. # 59-9, at 1. Zurich ultimately
found that Alisha’s windstorm damage claim was covered by the builder’s risk policy, and Zurich
relied on YA’s estimate of approximately $1.3 million to resolve the claim.
Zurich is correct that Alisha initially made little or no effort to show that certain items of
damages were caused by the 2019 windstorm, and Alisha’s expert, McKay, simply estimated
Alisha’s damages based on the condition of the property at the time of his inspection. McKay failed
to give adequate consideration to the 2017 tornado and Alisha’s own admission that some of the
damage to the property was caused by vandalism. However, viewing the evidence in a light most
favorable to Alisha, the Court finds that there is a genuine dispute of material fact as to the full
amount owed to Alisha on its claim for damages related to the 2019 windstorm. Oklahoma law does
place the initial burden on the insured to show that it has a covered loss, and there is no dispute that
Alisha has met this burden. See Cherokee Nation v. Lexington Ins. Co., 521 P.3d 1261, 1267 (Okla.
2022). Zurich argues that Alisha has an additional burden of establishing that each element of
damages sought by Alisha was proximately caused by the 2019 windstorm. Dkt. # 59, at 19. The
cases cited by Zurich do not explain what burden is placed on an insured after it makes an initial
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showing that it suffered a covered loss and, at this stage of the case, it is unnecessary for the Court
to resolve what burden is on Alisha to show that specific damages are covered under the policy.
Zurich has shown that the 2017 tornado, ongoing vandalism, and the 2019 windstorm are potential
causes of damage to Alisha’s property, and Alisha must make some attempt to show that specific
damages are related to the 2019 windstorm in order to recover on its breach of contract claim. This
does not mean that the Alisha has a burden to show with absolute certainty that specific items of
damages were caused by the 2019 windstorm, rather than the 2017 tornado or vandalism. A
reasonable jury could conclude that Alisha is entitled to some additional amount of recovery on its
insurance claim, beyond the amounts already paid by Zurich, and Zurich is not entitled to summary
judgment on Alisha’s breach of contract claim.
C.
Zurich argues that the evidence shows that there is a legitimate dispute between the parties
concerning the amount of the loss resulting from the May 25, 2019 windstorm, and Zurich claims
that it conducted a reasonable investigation in an effort to resolve Alisha’s windstorm damage claim.
Dkt. # 59, at 27-29. Alisha responds that Zurich significantly underpaid Alisha’s insurance claim
from the May 25, 2019 windstorm based on an inadequate investigation, and Alisha argues that
Zurich’s unreasonable delay in paying the claim caused additional harm by preventing Alisha from
reopening the hotel in a timely manner. Dkt. # 68, at 25-29.
The Oklahoma Supreme Court has held that “an insurer has an implied duty to deal fairly and
act in good faith with its insured and that the violation of this duty gives rise to an action in tort for
which consequential and, in a proper case, punitive, damages may be sought.” Christian v. Am.
Home. Assurance Co., 577 P.2d 899, 904 (Okla. 1977). “The core of a bad-faith claim ‘is the
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insurer’s unreasonable, bad-faith conduct, including the unjustified withholding of payment due
under a policy.’” Flores v. Monumental Life Ins. Co., 620 F.3d 1248, 1255 (10th Cir. 2010) (quoting
McCorkle v. Great Atl. Ins. Co., 637 P.2d 583, 587 (Okla. 1981)). To succeed on a bad faith claim,
plaintiffs “must present evidence from which a reasonable jury could conclude that the insurer did
not have a reasonable good faith belief for withholding payment of [plaintiffs’] claim.” Oulds v.
Principal Mut. Life Ins. Co., 6 F.3d 1431, 1436 (10th Cir. 1993); accord Shotts v. GEICO Gen. Ins.
Co., 943 F.3d 1304, 1314 (10th Cir. 2019). According to the Tenth Circuit, courts generally use a
two-step analysis to determine whether a plaintiff has made a sufficient showing of bad faith. Shotts,
943 F.3d at 1314-15. The Court considers 1) “whether there is a legitimate dispute between the
insurer and the insured regarding coverage or the value of the claim”; and 2) “if the court determines
there is a legitimate dispute between the parties, ... whether the plaintiff offered specific additional
evidence to demonstrate bad faith.” Id. at 1315. “The additional evidence required for this showing”
may include evidence that 1) “the insurer did not actually rely on th[e] legitimate [dispute] to deny
coverage”; 2) the insurer “denied the claim for an illegitimate reason”; 3) the insurer “otherwise
failed to treat the insured fairly’; and 4) “the insured performed an inadequate investigation of the
claim.” Id, (internal quotations and citations omitted) (emphasis and alterations in Shotts, 943 F.3d
at 1315).
The Court will initially consider whether there was a legitimate dispute between the parties
regarding the value of Alisha’s insurance claim.’ The incident giving rise to Alisha’s claim took
Alisha relies on cases decided by the Oklahoma Supreme Court and the Oklahoma Court of
Civil Appeals to argue that the reasonableness on an insurer’s decision to dispute coverage
is nearly always a question of fact for the jury. Dkt. # 68, at 27. However, these decisions
are based on Oklahoma’s summary judgment standard, not Fed. R. Civ. P. 56, and the cases
cited by Alisha have no bearing on the standard of review that should be applied by this
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place on May 25, 2019, and Alisha filed a claim with Zurich on June 10, 2019. Zurich promptly
conducted a site inspection after receiving notice of Alisha’s vandalism and storm damage claims,
and Zurich retained YA and Vertex as consultants. Zurich conducted an initial site investigation on
June 18, 2019, and the adjustor observed extensive damage caused by vandalism that appeared to
have taken place prior to the windstorm. Dkt. # 68-1, at 1717. YA and Vertex performed their own
investigations in July and August 2019. YA observed extensive damage to the hotel, but much of
the damaged property fell within the scope of the prior claim for the 2017 tornado. Dkt. # 59-6, at
2. Many of the repairs from the 2017 tornado had not been completed by Alisha, and YA’s estimate
for damage caused by the 2019 windstorm did not include any amounts for incomplete repairs from
the 2017 tornado. Id. Vertex determined that the nails used to secure the TPO roof to the structure
were inadequate and water entered the hotel after the uplift forces of the storm caused the roof to fail.
Dkt. # 59-7, at 6-7. Vertex recommended temporary repairs to the roof and Alisha received an
advance payment of over $200,000 to make temporary repairs. Zurich requested police reports about
alleged vandalism and records showing whether any construction activity had taken place within 60
days of the windstorm. Dkt. # 59, at 9-10; Dkt. # 68, at 7. Zurich had to request this evidence
several times as Alisha failed to respond to Zurich’s requests, and Alisha was ultimately unable to
produce any evidence that construction activity had been ongoing at the time of the windstorm.
Zurich issued a final payment of $828,716.33 to Alisha, but Alisha contends that it is owed
substantially more to fully resolve its windstorm damage claim.
The primary evidence supporting Alisha’s assertion that Zurich acted in bad faith by
underpaying the windstorm damage claim are McKay’s damages estimates. Alisha describes
Court when evaluating Zurich’s motion for summary judgment.
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McKay’s estimates as an accurate representations of its damages, and Alisha claims that its
investigation “determined the nature, timing, and scope of the damage to the Property, differentiating
among windstorm-related damage, vandalism-related damage, and pre-existing damage.” Dkt. # 68,
at 20. The mere fact that Zurich failed to accept McKay’s recommendations concerning the full
amount of Alisha’s loss does not tend to show that Zurich acted in bad faith. The Oklahoma
Supreme Court has been clear that “there can be disagreements between insurer and insured on a
variety of matters such as insurable interest, extent of coverage, cause of loss, amount of loss, or
breach of policy conditions,” and the tort of bad faith does not apply when an insurer reasonably
chooses to withhold payment or litigate a legitimate coverage dispute. Porter v. Oklahoma Farm
Bureau Mut. Ins. Co., 330 P.3d 511, 518 (Okla. 2014). Zurich’s decision to reject McKay’s initial
estimate is well-supported of in light of McKay’s frequent revisions to his initial damages estimate,
and McKay has continued to revise his damages estimate even after the filing of Zurich’s motion for
summary judgment. McKay initially gave little weight to the different potential causes of damage
to the hotel, and he demanded that Zurich pay Alisha’s windstorm damage before Zurich had
completed its investigation. Dkt. # 59-9, at 1. Zurich’s rejection of McKay’s initial estimate was
reasonable under the circumstances and does not show that Zurich acted in bad faith.
Alisha also argues that Zurich acted in bad faith by conducting an inadequate investigation.
Alisha argues that Zurich overlooked or intentionally failed to consider the following categories of
evidence when determining the amount of the loss: (1) evidence concerning the status of repairs from
the 2017 tornado; (2) evidence establishing that certain acts of vandalism occurred after the May
2019 windstorm; and (3) evidence of category 3 water exposure that would have required removal
and replacement of items. Dkt. # 68, at 27. The evidence establishes that Zurich was aware of the
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January 2019 report by YA documenting the status of repairs to the property caused by the 2017
tornado. YA performed the January 2019 assessment of the status of repairs to the hotel, and Zurich
also retained YA to serve as the building consultant following the 2019 windstorm. Dkt. # 59-6, at
2. YA’s consultant, Robert Gattenby, had clearly reviewed the January 2019 report when he
prepared his estimate for covered damage to the property following the 2019 windstorm. Gattenby
specifically recommended that damage to windows, stucco, doors, and door frames be excluded from
coverage, because these items were paid for by Zurich as part of the 2017 tornado claim. Id. Alisha
argues that Zurich should have found that acts of vandalism only occurred after the May 25, 2019
windstorm, and this is primarily based on McKay’s assessment that vandalism occurred between his
May 29, 2019 and June 18, 2019 inspections. However, Lindley conducted his investigation on June
18, 2019 as well, and he noted that vagrants appeared to have been living inside the hotel for a
substantial period of time. Dkt. # 68-1, at 1717. Lindley’s report suggests that the vagrancy
preceded the 2019 windstorm, and he makes a distinction between pre-storm and post-storm acts of
vandalism. Id. At a minimum, there is disputed evidence concerning the timing of acts of
vandalism, and Zurich conducted a reasonable investigation into this issue. Finally, Alisha argues
that Zurich failed to investigate Category 3 water damage that would have necessitated removal and
replacement of certain building components. The evidence shows that Zurich was well aware of the
severity of the damage, but the primary issue in this case is the cause, not the severity, of damage to
the hotel. This argument does not tend to show that Zurich’s investigation was inadequate or the
Zurich purposefully or negligently ignored covered damage to the property.
The Court finds that Zurich is entitled to summary judgment on Alisha’s bad faith claim.
Zurich has shown that it had a legitimate basis to dispute the amount owed to Alisha on its claim for
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damage caused by the May 25, 2019 windstorm. The parties’ dispute is primarily based on Zurich’s
reliance on YA’s estimate of $1.3 million for covered damage to Alisha’s property and Alisha’s
assertion that McKay’s various estimates of its damages are more accurate. The Court has
determined that this issue should be resolved by a jury as to Alisha’s breach of contract claim, but
the evidence is more than sufficient to give rise to a legitimate coverage dispute for the purpose of
a bad faith claim. Alisha’s disputes with the adequacy of Zurich’s investigation have more to do
with Zurich’s decision as to the amount ultimately paid to resolve Alisha’s claim, rather than the
investigation itself, and there is no evidence tending to show that Zurich intentionally ignored or
overlooked relevant issues in terms of its investigation. Concerning Alisha’s assertion the Zurich
delayed in making payment on the claim, much of the delay was attributable to Alisha’s failure to
produce police reports and construction records, and Zurich’s decision to give Alisha additional time
to produce these records was not an act of bad faith.
IT IS THEREFORE ORDERED that Defendant American Zurich Insurance Company’s
Motion for Summary Judgment and Brief in Support (Dkt. # 59) is granted in part and denied in
part: the motion is granted as to Alisha’s bad faith claim and denied as to Alisha’s breach of contract
claim.
IT IS FURTHER ORDERED that Defendant American Zurich Insurance Company’s
Motion to Strike Portions of Jett McKay’s and Pete Scaffidi’s Declarations and Untimely Submitted
Pinnacle Estimate (Dkt. # 70) is denied.
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IT IS FURTHER ORDERED that the parties are directed to file an updated joint status
report no later than July 24, 2023.
DATED this 13th day of July, 2023.
/ a
CORD. Y¥ Eohs <__—
CLAIRE V.EAGAN \—
UNITED STATES DISTRICT JUDGE
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