In Wheeler v. Allstate Insurance Company, Wheeler insured his cabin with Allstate.  A friend stopped by the cabin in the spring and found a pipe had burst and there was water in the basement.  There was extensive damage.  It was determined that the pipe burst two months before discovery and was likely caused by a failed valve.  Allstate said it was unlikely the claim would be covered, and sent an outside adjuster to look at the cabin.  The adjuster  “inspected the cabin for “ten minutes tops” and “took like two or three pictures and left” without inspecting the source of the water.”  Summary judgment was granted to Allstate and the Tenth Circuit reversed.

Mr. Wheeler’s homeowners insurance policy (the “Policy”) contained several provisions concerning coverage for water damage. The language relevant to this case reads as follows:
Losses We Do Not Cover Under Coverage A, Coverage B and Coverage C
A. We do not cover loss to the property described in Coverage A— Dwelling Protection or Coverage B—Other Structures Protection consisting of or caused by the following:
. . . .
3. Seepage, meaning continuous or repeated seepage or leakage over a period of weeks, months, or years, of water, steam or fuel:
a) from a plumbing . . . system; or
b) from, within or around any plumbing fixtures, including, but not limited to . . . sinks or other fixtures designed for the use of water or steam.
. . . .
7. a) wear and tear, aging, marring, scratching, deterioration, inherent vice, or latent defect;
b) mechanical breakdown;
. . . .
d) rust or other corrosion;
. . . .
If any of a) through h) cause the sudden and accidental escape of water or steam from a plumbing . . . system within your dwelling, we cover the direct physical damage caused by the water or steam. If loss to covered property is caused by water or steam not otherwise excluded, we will cover the cost of tearing out and replacing any part of your dwelling necessary to repair the system or appliance. This does not include damage to the defective system or appliance from which the water escaped.

For ease of understanding, we will refer to section A.3 as “Exclusion 3”; to section A.7 as
“Exclusion 7”; and to the final paragraph of section A.7 as the “Exception to Exclusion
7” or the “Exception.”

On April 26, 2011, Allstate sent Mr. Wheeler a letter denying his claim; the letter cited to Exclusion 3.

Mr. Wheeler, the policyholder claimed that the long term damage excluded under Exclusion 3 could be separated from the short term damage he was claiming, based on his expert’s report.  Whether Wheeler could prove short term damages distinct from long term damages was a material fact as to both the breach of contract claim and bad faith claim.  So, summary judgment to Allstate was reversed.

Note the decision is 35 pages plus a dissent.