James River Insurance v. Rapid Funding, LLC

FILED
United States Court of Appeals
PUBLISH Tenth Circuit

UNITED STATES COURT OF APPEALS July 29, 2011

Elisabeth A. Shumaker
TENTH CIRCUIT Clerk of Court

JAMES RIVER INSURANCE
COMPANY, an Ohio corporation,

Plaintiff - Appellant,

v. No. 10-1145

RAPID FUNDING, LLC, a Colorado
limited liability company,

Defendant – Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. No. 1:07-CV-01146-CMA-BNB)

Andrew M. Low (Richard P. Holme and Kyle W. Brenton, with him on the briefs), Davis
Graham & Stubbs LLP, Denver, Colorado, appearing for Appellant.

Diane Vaksdal Smith (Michael S. Burg, David K. TeSelle, and Thomas W. Henderson,
with her on the brief), Burg Simpson Eldredge Hersh & Jardine, P.C., Englewood,
Colorado, appearing for Appellee.

Before TYMKOVICH, BRORBY, and MATHESON, Circuit Judges.

MATHESON, Circuit Judge.
 I. INTRODUCTION

This case arose from a fire that destroyed a dilapidated Michigan apartment

building. The owner of the building, Rapid Funding, LLC, a Colorado limited liability

company, submitted a claim to its insurer, James River Insurance Company, an Ohio

corporation, for the full $3 million of insurance coverage the policy carried. James River

denied the claim because it determined that the building’s pre-fire value was less than

zero. Rapid Funding brought a diversity action against James River in Colorado federal

district court for breach of contract and insurance bad faith and won $3 million in

compensatory damages and $2.35 million in punitive damages.

James River argues on appeal that the damages verdict was based on valuation

testimony that the district court should have excluded under Federal Rule of Evidence

701. James River seeks a new trial on damages or remittitur of the damages verdict.

Rapid Funding counters that Colorado law, not the Federal Rules, should govern this

issue and that the testimony was admissible under Colorado law. Rapid Funding adds

that, even if the testimony were erroneously admitted, the error was harmless because

other evidence supports the jury’s damages verdict.

Rapid Funding cross-appeals the district court’s dismissal of its claim for new

damages under a Colorado statute that went into effect after James River refused

payment. The new statute allows an insured whose claim for payment of benefits has

been unreasonably delayed or denied to receive two times the covered benefit plus court

costs and attorney fees. See C.R.S. § 10-3-1116. Rapid Funding argues that James
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River’s failure to pay out the claim after James River unearthed new information in

discovery constituted a new act of bad faith that occurred after the statute went into

effect.

We hold that the valuation testimony was erroneously admitted, that the Federal

Rules of Evidence apply, and that the error was not harmless. We therefore REVERSE

and REMAND for a new trial limited to the issue of damages. We AFFIRM the district

court’s dismissal of Rapid Funding’s claim for new damages under C.R.S. § 10-3-1116.

II. BACKGROUND

A. Facts

Amsterdam Gardens, a complex of apartment buildings in Wyoming, Michigan,

was constructed in 1969. The complex was divided into the North Building and the

South Building, which were roughly equivalent in value.

The City of Wyoming condemned Amsterdam Gardens for building code

violations in 2003. The next year Robert Rice and Robert Niebauer bought the complex

for $2.6 million. To finance the deal, they borrowed $2.08 million in a mortgage loan

from Rapid Funding, payable in one year. Mr. Rice sold his interest in the property to

Mr. Niebauer, but remained jointly and severally liable for the debt to Rapid Funding.

Mr. Niebauer defaulted on the loan, and Rapid Funding filed for foreclosure.

Because Rapid Funding intended to purchase the complex at the foreclosure sale, it

sought insurance for the property from James River.

On October 12, 2006, James River issued a $3 million policy effective
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immediately. The coverage allowed Rapid Funding to make a claim for either the

property’s replacement cost or its actual cash value. The actual cash value option

allowed Rapid Funding to recover the value of the property without rebuilding it.

Meanwhile, Rapid Funding also retained Jeffrey Genzink, an appraiser, to value

the property. Mr. Genzink told Rapid Funding the land was worth an estimated $1.12

million. He could not, however, estimate the value of the buildings because he could not

find sales of comparable buildings and did not know if the buildings had lost structural

integrity.

Rapid Funding purchased Amsterdam Gardens at the sheriff’s foreclosure sale for

$1.8 million. The company then put the complex up for sale and received offers between

$1.0 and $1.2 million. Rapid Funding later agreed to sell the complex back to Mr. Rice

for $1.8 million and to forgive his $650,000 debt to Rapid Funding.

On January 24, 2007, before the sale to Mr. Rice was completed, an arson fire

burned the North Building to the ground. The City of Wyoming ordered Rapid Funding

to demolish the remainder of the North Building. Rapid Funding demolished the North

Building, and James River paid for the demolition. The City of Wyoming also ordered

Rapid Funding to rehabilitate the South Building into compliance with the building code

or to destroy it. Rapid Funding demolished the South Building.

Andrew Miller, Rapid Funding’s principal, hired a construction company,

Anderson Group International, to estimate the replacement cost of the North Building.

The Anderson Group report concluded that it would cost approximately $7.145 million to
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replace the North Building. In March and May 2007, Rapid Funding, through Mr. Miller,

submitted two Proofs of Loss to James River. They both claimed the North Building had

an actual cash value of $4.489 million before the fire. According to Mr. Miller, this

figure was based on applying a 40% depreciation factor to the Anderson Group’s

estimate of the replacement cost.

On May 30, 2007, James River denied the claim after concluding the North

Building had no value.

B. Procedural History

One day later, James River filed suit in Colorado federal district court and asked

for a declaratory judgment that it owed nothing on Rapid Funding’s actual cash value

claim. Rapid Funding counterclaimed for breach of insurance contract and breach of the

covenant of good faith and fair dealing.

1. Pretrial Motions

James River filed a motion in limine under Federal Rule of Evidence 702 to

exclude testimony that Andrew Miller planned to offer on the value of the North

Building. The district court held an evidentiary hearing to determine if Mr. Miller’s

testimony was admissible under Rule 702 and Daubert v. Merrell Dow Pharmaceuticals,

Inc., 509 U.S. 579 (1993). See James River Ins. Co. v. Rapid Funding, LLC, No. 07-cv-

01146-CMA-BNB, 2009 WL 481688 (D. Colo. Feb. 24, 2009).

The district court found, over James River’s objection, that Mr. Miller was

qualified to offer opinion testimony on the value of property given his experience in real
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estate. See id. at *5-7. The court added that, although additional qualifications beyond

that experience were not required, Mr. Miller was especially well-suited to value property

that his company owned and that he had inspected. Id. But the court decided not to

admit Mr. Miller’s valuation testimony under Rule 702 and Daubert because it was not

based on sufficient facts or data, was not the product of reliable principles and methods,

and the method he did use was not reliably applied in this case. Id. at *7-12.

At the hearing, Mr. Miller explained he intended to testify that the North Building

had an actual cash value of $4.489 million. Id. at *2. He based his valuation on the

$7.145 million replacement cost estimate from the Anderson Group and a 40%

depreciation factor. Id. at *8. To calculate the 40% depreciation rate, Mr. Miller

“divided the amount of money it would cost to rehabilitate each unit in the North

Building before the fire to like new condition, $20,000, by the amount it would cost to

completely replace each unit,” which he stated was $50,000. Id.

The district court said that the $50,000 per unit rehabilitated value had very little

foundation. Id. The court also explained, “when asked how he arrived at the $20,000

pre-fire rehabilitation estimate, Mr. Miller stated that he has ‘a feeling’ about how much

it would cost to rehabilitate each unit to like new condition.” Id. The court concluded,

“Daubert and Rule 702 require more than a ‘feeling.’” Id.

The court also examined the reliability factors articulated by the Supreme Court in

Daubert, which include:

(1) whether the method is susceptible to testing and has been subject to such
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 testing; (2) whether the method has been subjected to peer review; (3) whether
there is a known or potential error rate associated with the methodology used; and
(4) whether the relevant community of experts has accepted the expert's theory.

Id. at *10 (paraphrasing Daubert, 509 U.S. at 593-94). The court found the factors

counseled against admitting Mr. Miller’s testimony. Id. at *12.

James River later filed a motion in limine for an order “excluding evidence and

arguments relying on, referencing, or in support of Andrew Miller’s opinion regarding

valuation.” ROA, Vol. 2 at 403. At a hearing before the district court, Rapid Funding

stated that it intended to offer Mr. Miller’s valuation as lay opinion testimony under Rule

701. Rapid Funding argued that Mr. Miller had a right to explain how he arrived at the

Proofs of Loss. The district court characterized Rapid Funding’s proposal as an “oral

motion,” and Rapid Funding agreed. Id., Vol. 5 at 1074-75.

The district court ruled on this issue by denying James River’s motion in limine.

The court said:

I think that [Mr. Miller’s] testimony here is relevant to his explanation as to how
[he] came up to the number for his claim.
So while he is not going to be able to testify as an expert on valuation, and
I’m trying to figure out how I can mesh these two rulings. I think the only way
that we can do it, because I think he has a right to testify as to how he came up
with his claim, the number for his claim, is that I am going to have to have a
limiting instruction that is given to the jury that he is . . . not testifying as an
expert, and that this is essentially just a lay opinion . . . given by him.

Id. at 1107.

On August 5, 2008, C.R.S. § 10-3-1116 went into effect. This Colorado statute

permits an insured to sue an insurer for unreasonable denial or delay of benefits for twice

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the covered benefit plus court costs and attorney fees. Rapid Funding added a

counterclaim under the new statute, and James River moved to dismiss under Federal

Rule of Civil Procedure 12(b)(6). The district court granted James River’s motion and

dismissed the claim.

2. Trial

When Mr. Miller testified at trial, James River raised its objection again. The

Proofs of Loss—to which the parties had stipulated—came into evidence. Mr. Miller

testified to the $7.145 million replacement cost estimate from the Anderson Group, to his

40% depreciation figure, and his actual cash value estimate of $4.489 million. The court

instructed the jury that Mr. Miller was testifying as a lay witness, not as an expert.

Mr. Miller also testified that Rapid Funding purchased the complex at the sheriff’s

foreclosure sale for $1.8 million and that, when Rapid Funding put the complex up for

sale, it received offers between $1.0 and $1.2 million. Mr. Rice testified to buying the

complex for $2.6 million, and Mr. Miller testified that Rapid Funding had contracted to

sell the complex back to Mr. Rice for $1.8 million and forgive his $650,000 debt to Rapid

Funding.

John Meyer, an expert appraiser who worked for James River, testified that the

complex would be worth $6.6-7.0 million under habitable conditions. But after applying

what he called a “habitability factor” of $8.25 million to account for the cost of restoring

the buildings to a habitable condition, he concluded the value of the complex before the

fire was less than zero. He also testified that the land was worth $1.3 million and that the
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North Building and the South Building had approximately the same value.

In addition to presenting testimony from Mr. Miller, Rapid Funding called Edward

Reilly as an expert. He criticized the use of a habitability factor and testified that in his

55 years as an adjuster he had never seen an insurance company determine that an

insured property was worth less than zero. James River offered into evidence the video

deposition testimony of Mr. Genzink, Rapid Funding’s appraiser. Mr. Genzink said the

value of the land was $1.12 million.

In testimony on which Rapid Funding would later rely for its C.R.S. § 10-3-1116

argument, Anne Marie Marson, James River’s chief claims officer, testified that she

continued to review information on Rapid Funding’s claim up until the time of trial.

The jury found James River liable for breach of insurance contract and bad faith

and awarded Rapid Funding $3 million in compensatory damages and $2.35 million in

punitive damages. The $3 million was the maximum amount of compensatory damages

that Rapid Funding could have been awarded under the insurance policy limit.

3. Post-trial Motions

After trial, James River moved for remittitur or a new trial on the grounds that Mr.

Miller’s valuation testimony was erroneously admitted and that no other evidence was

sufficient to support the jury’s verdict. The district court denied the motion, holding that

it did not err in admitting Mr. Miller’s testimony under Rule 701. See James River Ins.

Co. v. Rapid Funding, LLC, No. 07-cv-01146-CMA-BNB, 2010 WL 965523 (D. Colo.

Mar. 16, 2010) at *2. The court added that, even if the testimony were admitted
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erroneously, it was harmless error because the jury could have reached its damages result

by relying on Mr. Meyer’s $6.6-7.0 million figure and disregarding his $8.25 million

habitability factor. Id. at *3.

Rapid Funding moved for a post-trial award of damages under C.R.S. § 10-3-1116

because Ms. Marson’s testimony proved that James River committed new acts of bad

faith after the August 5, 2008 date when the new statute went into effect. The court

denied this motion, finding that Rapid Funding’s argument was substantially the same as

Rapid Funding’s pretrial motion. See id. at *5.

This appeal and cross-appeal timely followed. Because the district court entered a

final judgment, we have jurisdiction pursuant to 28 U.S.C. § 1291.

III. DISCUSSION

A. Issues and Standards of Review

First, we address whether the district court properly admitted Andrew Miller’s

valuation testimony. “We review a district court's determination regarding the

admissibility of evidence under an abuse of discretion standard.” United States v.

Contreras, 536 F.3d 1167, 1170 (10th Cir. 2008) (ruling on whether evidence was

properly admitted under Federal Rule of Evidence 701). If we conclude that the district

court abused its discretion in admitting the testimony, we must then determine whether

the error was harmless. “An erroneous admission of evidence is harmless unless it had a

substantial influence on the outcome or leaves one in grave doubt as to whether it had

such effect.” United States v. Yeley-Davis, 632 F.3d 673, 685 (10th Cir. 2011) (quotation
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omitted).

The same standard of review applies to the district court’s rulings on James

River’s proposed remedies. “We review the district court's decision to deny a new trial

or remittitur under an abuse of discretion standard.” Smith v. Ingersoll-Rand Co., 214

F.3d 1235, 1251 (10th Cir. 2000).

Second, we address whether the district court erred in dismissing Rapid Funding’s

motions to add a claim for new damages under C.R.S. § 10-3-1116. The district court’s

decision required an interpretation of C.R.S. § 10-3-1116. See James River, 2010 WL

965523 at *5. “This court's review of district court statutory interpretation is de novo.”

Wedelstedt v. Wiley, 477 F.3d 1160, 1165 (10th Cir. 2007). Because C.R.S. § 10-3-1116

is a Colorado statute, we must ask how the Colorado Supreme Court would interpret it.

“To properly discern the content of state law, we must defer to the most recent decisions

of the state's highest court.” Kokins v. Teleflex, Inc., 621 F.3d 1290, 1295 (10th Cir.

2010) (quotation omitted).

B. Inadmissibility of Mr. Miller’s Valuation Testimony

On appeal, James River argues that Mr. Miller’s valuation testimony was

inadmissible under Rule 701. Rapid Funding responds that the testimony should have

been admitted under the Colorado landowner rule and that, even if the testimony were

erroneously admitted, the error was harmless. We first explain that because Mr. Miller’s

valuation testimony was based on technical or specialized knowledge, it should not, as

expert testimony, have been admitted under Rule 701. We next determine that,
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regardless of whether federal or Colorado evidence law applies, his testimony would still

not be admissible. We then find that the district court’s erroneous admission of this

testimony was reversible and not a harmless error.

1. Inadmissibility under Rule 701

Federal Rule of Evidence 701 provides:

If the witness is not testifying as an expert, the witness' testimony in the form of
opinions or inferences is limited to those opinions or inferences which are (a)
rationally based on the perception of the witness, (b) helpful to a clear
understanding of the witness' testimony or the determination of a fact in issue, and
(c) not based on scientific, technical, or other specialized knowledge within the
scope of Rule 702.

In ruling on James River’s “Motion for a New Trial, Judgment as a Matter of Law,

or Remittitur,” the district court defended its decision to allow Mr. Miller to testify based

on Rule 701. See James River, 2010 WL 965523 at *1-3. The court explained that its

pretrial exclusion of Mr. Miller’s testimony under Rule 702 did not preclude its

admission under another rule, in this case Rule 701. Id. at *2.

The district court also pointed to the advisory committee’s note to Rule 701, which

states that “most courts have permitted the owner or officer of a business to testify to the

value . . . of the business, without the necessity of qualifying the witness as an

accountant, appraiser, or similar expert.” Id. (quoting Fed. R. Evid. 701 advisory

committee’s note, 2000 amendments). The court noted that it instructed the jury that Mr.

Miller was not testifying as an expert. The instruction, the court said, “obviated the risk

that the jury impermissibly considered Mr. Miller an ‘expert.’” Id.

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 On appeal, James River argues that Mr. Miller’s valuation testimony was

inadmissible under Rule 701(b) because it was unreliable—as evidenced by the district

court’s analysis not to admit it under Rule 702—and therefore unhelpful to the jury.

James River also argues that the testimony was inadmissible under Rule 701(c) because it

was Rule 702 expert testimony. James River cites the advisory committee’s note to Rule

702, which states, in part, that “within the scope of the rule are . . . the large group

sometimes called ‘skilled’ witnesses, such as bankers or landowners testifying to land

values.” Fed. R. Evid. 702 advisory committee’s note. James River also emphasizes that

Mr. Miller’s testimony was based in part on a technical report by the Anderson Group

and his own specialized experience as a real estate developer.

In response, Rapid Funding makes no argument on appeal that Mr. Miller’s

valuation testimony was properly admitted under the Federal Rules of Evidence. Rapid

Funding’s brief relies instead on its Colorado landowner rule and harmless error

arguments.

We need not reach James River’s Rule 701(b) argument because Mr. Miller’s

valuation testimony was expert opinion testimony based on technical or specialized

knowledge and therefore inadmissible under Rule 701(c). As we have said, Rule 701

“does not permit a lay witness to express an opinion as to matters which are beyond the

realm of common experience and which require the special skill and knowledge of an

expert witness.” Randolph v. Collectramatic, Inc., 590 F.2d 844, 846 (10th Cir. 1979).

Mr. Miller’s opinion was based on technical or specialized knowledge. He
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attempted to calculate a post-fire estimate of the pre-fire value of a dilapidated,

condemned, 39-year old building. Four reasons support our conclusion that this

testimony fell outside the category of lay opinion.

First, Mr. Miller’s testimony did not qualify as lay opinion under Rule 701. Rule

701 allows lay witnesses to offer “observations [that] are common enough and require . . .

a limited amount of expertise, if any.” United States v. VonWillie, 59 F.3d 922, 929 (9th

Cir. 1995). The Third Circuit has explained:

The prototypical example of the type of evidence contemplated by the adoption of
Rule 701 relates to the appearance of persons or things, identity, the manner of
conduct, competency of a person, degrees of light or darkness, sound, size, weight,
distance, and an endless number of items that cannot be described factually in
words apart from inferences.

Asplundh Mfg. Div. v. Benton Harbor Eng., 57 F.3d 1190, 1196 (3d Cir. 1995).

Two Tenth Circuit cases illustrate the difference between Rule 701 lay opinion

testimony and Rule 702 expert testimony. In Bryant v. Farmers Insurance Exchange,

432 F.3d 1114 (10th Cir. 2005), we held that a witness should have been permitted under

Rule 701 to testify to elementary mathematical operations:

Taking a simple average of 103 numbers, though technically a statistical
determination, is not so complex a task that litigants need to hire experts in order
to deem the evidence trustworthy. A mathematical calculation well within the
ability of anyone with a grade-school education is, in our opinion, more aptly
characterized as a lay opinion under Fed. R. Evid. 701.

Id. at 1124.

In LifeWise Master Funding v. Telebank, 374 F.3d 917 (10th Cir. 2004), we found

inadmissible under Rule 701 a CEO’s testimony about his business’s lost profits because
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his results were based on more sophisticated economic models. “The model concerned

moving averages, compounded growth rates, and S-curves. [The witness] could not

testify about these technical, specialized subjects under Rule 701.” Id. at 929. We

explained that “a person may testify as a lay witness only if his opinions or inferences do

not require any specialized knowledge and could be reached by any ordinary person.” Id.

(quotation omitted).

Mr. Miller’s testimony more closely resembled the testimony in LifeWise than in

Bryant. Unlike taking an average, calculating depreciation requires more than applying

basic mathematics. Technical judgment is required in choosing among different types of

depreciation. See E.I. DuPont de Nemours & Co, Inc. v. Robin Hood Shifting & Fleeting

Serv., Inc., 899 F.2d 377, 381-82 (5th Cir. 1990) (explaining “straight-line” and

“progressive” depreciation); see also Dickler v. CIGNA Prop. and Cas. Co., 957 F.2d

1088, 1099 (3d Cir. 1992) (explaining that “a dispute exists over whether the term

depreciation implies only physical depreciation or includes a broader concept including

obsolescence and economic and functional depreciation.” (quotation omitted)).

Moreover, Mr. Miller had to do more than calculate depreciation for a 39-year old

building. He also needed to account for the deterioration and neglect that caused the

North Building to be condemned. Accurately accounting for the interaction between

depreciation and damage requires professional experience and is beyond the scope of lay

opinion testimony.

Second, Mr. Miller’s calculations were based in part on his professional
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experience in real estate. Rapid Funding argues that, as “a licensed real estate broker,”

Mr. Miller was better situated than most owners to make this determination. See Aple.

Br. at 33. Instead of supporting the admissibility of Mr. Miller’s testimony as lay

opinion, Rapid Funding’s argument places Mr. Miller’s testimony into the category of

expert opinion. “[K]nowledge derived from previous professional experience falls

squarely within the scope of Rule 702 and thus by definition outside of Rule 701.”

United States v. Smith, 640 F.3d 358, 365 (D.C. Cir. 2011) (quotation omitted).

Third, Mr. Miller relied on a technical report by an outside expert. Rapid Funding

hired the Anderson Group to estimate the replacement value of the North Building. At

trial, Mr. Miller stated that his valuation relied on the conclusions of the Anderson Group

report. The report runs 1,525 pages and uses specialized accounting calculations. Mr.

Miller based his testimony not only on his own professional experience, he also relied on

the extensive technical analysis and conclusions of a professional appraisal company.

Such testimony should only be admitted under Rule 702, not Rule 701. See also Fed. R.

Evid. 703 (“The facts or data in the particular case upon which an expert bases an opinion

or inference may be those perceived by or made known to the expert at or before the

hearing.”).

Fourth, the Federal Rules of Evidence generally consider landowner testimony

about land value to be expert opinion. The Rule 702 advisory committee’s note states

that landowners testifying to land value are “skilled witnesses” under Rule 702. See Fed.

R. Evid. 702, advisory committee’s note; see also LaCombe v. A-T-O, Inc., 679 F.2d 431,
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434 n.4 (5th Cir. 1982) (“Although both sides in this appeal have argued in terms of the

general principles applicable to [Rule 701], the testimony of an owner as to the value of

his property is admitted under the Federal Rules of Evidence under [Rule 702]”); Turner

v. Murphy Oil USA, 759 F. Supp. 2d 854, 857-58 (E.D. La. 2011) (“[T]he owner of real

property may testify as to the value of her property. . . . Such testimony is to be deemed

admissible as expert testimony under Rule 702.” (quotation omitted)).1

The district court’s reference to the Rule 701 advisory committee’s note about

business owners testifying to the value of their businesses does not support the

admissibility of Mr. Miller’s valuation testimony. Mr. Miller was not testifying to the

value of Rapid Funding’s business or its projected profit. In LifeWise, we clarified that

the note allowing business owners to testify about the value of their businesses does not

1
United States v. 10,031.98 Acres of Land, 850 F.2d 634 (10th Cir. 1988), a
condemnation case in which landowner testimony was at issue, did not mention Rule 701
and suggested, citing LaCombe, that such testimony could be admitted under Rule 702.
Id. at 636 (also citing the advisory committee’s note to Fed. R. Evid. 702). 10,031.98
Acres was decided before Daubert, Kumho, and the 2000 amendments to Rule 702
established the reliability test for expert testimony. If expert testimony is not reliable
under Daubert/Kumho, it is not admissible under Rule 702, and Rule 701(c) forbids its
admission under Rule 701. In this case, the testimony was expert. The district court held
it to be unreliable and inadmissible under Rule 702. It should not have been admitted as
opinion evidence under Rule 701. Although 10,031.98 Acres, LaCombe, and the Rule
702 advisory committee note point to landowner testimony on value as being expert in
nature, with proper foundation, it may in the appropriate case be admitted as lay opinion
under Rule 701. See Cunningham v. Masterwear Corp., 569 F.3d 673, 676 (7th Cir.
2009) (landowner “can testify about [value] either as a matter within his personal
knowledge . . . or, if he is an expert on property values, as an expert witness”). But
where, as here, the testimony was expert opinion, it may not be admitted under Rule 701
by virtue of Rule 701(c).

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allow for Rule 702 testimony to be admitted under Rule 701. 374 F.3d at 929. We noted

that, when courts had allowed business owners to testify about business (as opposed to

property) value, “the owners had sufficient personal knowledge of their respective

businesses and of the factors on which they relied to estimate lost profits” or “the owners

offered valuations based on straightforward, common sense calculations.” Id. at 929-30.

The district court allowed Rapid Funding to do exactly what Rule 701(c) prevents:

circumvent Rule 702 by offering expert testimony as lay opinion. As the advisory

committee’s note to the Rule 701 2000 amendments explains:

Rule 701 has been amended to eliminate the risk that the reliability requirements
set forth in Rule 702 will be evaded through the simple expedient of proffering an
expert in lay witness clothing. Under the amendment, a witness' testimony must be
scrutinized under the rules regulating expert opinion to the extent that the witness
is providing testimony based on scientific, technical, or other specialized
knowledge within the scope of Rule 702.

See also Hirst v. Inverness Hotel Corp., 544 F.3d 221, 227-28 (3d Cir. 2008) (“[A] party

simply may not use Rule 701 as an end-run around the reliability requirements of Rule

702 . . . . Preventing such attempts is the very purpose of subsection (c).”).

Mr. Miller’s testimony should not have been admitted under Rule 701. It was an

abuse of discretion to do so. His testimony was based on technical or specialized

knowledge, which is excluded from the category of lay opinion under Rule 701(c).

2. Rapid Funding’s Misplaced Reliance on Colorado Law

Rapid Funding argues that Mr. Miller’s testimony was properly admitted, but it

does not rely, as the district court did, on Federal Rule of Evidence 701. Instead, Rapid

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Funding contends that, because this is a diversity case, Mr. Miller’s testimony was

admissible under a Colorado common law rule that allows landowners to testify to the

value of their property. See In re Marriage of Plummer, 709 P.2d 1388, 1389 (Colo.

App. 1985) (“An owner may state his opinion of the value of his own property without

being qualified as an expert witness.”).

Rapid Funding’s argument is unavailing because Mr. Miller’s testimony was

inadmissible regardless of whether we apply the federal or Colorado law. To show why

this is so, we first explain how courts determine the applicability of a federal rule or state

law in a diversity case following Shady Grove Orthopedic Assoc., P.A. v. Allstate Ins.

Co., 130 S. Ct. 1431 (2010). We then apply Shady Grove’s test and conclude that

Federal Rule 701 and Colorado law do not conflict.

a. Determining the Applicable Rule of Evidence

In a federal court diversity case, “[e]xcept in matters governed by the Federal

Constitution or by acts of Congress, the law to be applied in any case is the law of the

state.” Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938). Erie interpreted the Rules of

Decision Act, which requires that “[t]he laws of the several states, except where the

Constitution or treaties of the United States or Acts of Congress otherwise require or

provide, shall be regarded as rules of decision in civil actions in the courts of the United

States, in cases where they apply.” 28 U.S.C. § 1652. As the Supreme Court explained

in Hanna v. Plumer, 380 U.S. 460, 465 (1965), “[t]he broad command of Erie was . . .

federal courts are to apply state substantive law and federal procedural law.”
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 Hanna presented a choice between Federal Rule of Civil Procedure 4(d) and a

Massachusetts statute governing service of process. Id. at 461-62. The Court held Erie

inapplicable to the Federal Rules of Civil Procedure. Id. at 470-71. Instead, the Court

resolved the choice-of-law issue by construing the Rules Enabling Act, the federal statute

under which the Rules were adopted. Id. at 464-66. Based on its reading of the Rules

Enabling Act, the Court found that Federal Rule of Civil Procedure 4(d) applied. Id. at

473-74.

The Rules Enabling Act gives the Supreme Court “the power to prescribe general

rules of practice and procedure and rules of evidence for cases in” federal courts,

provided that “[s]uch rules shall not abridge, enlarge or modify any substantive right.”

28 U.S.C. § 2072. Since Hanna, the language of the Rules Enabling Act has governed

the choice between a rule adopted under the Act and state law.

The most recent case interpreting the Rules Enabling Act is Shady Grove. The

plaintiffs filed a class action suit that was barred under a New York statute but permitted

under Federal Rule of Civil Procedure 23. 130 S. Ct. at 1436-37. The question was

whether the federal rule or state law applied. The Justices splintered three ways. Justice

Scalia wrote for a four-justice plurality holding that Rule 23 applied. Id. at 1448. Justice

Ginsburg wrote for the four dissenters. Id. at 1460. Justice Stevens concurred, and the

Tenth Circuit has understood his concurrence to be the controlling opinion in Shady

Grove. See Garman v. Campbell Cnty. Sch. Dist. No. 1, 630 F.3d 977, 983 n.6 (10th Cir.

2010) (“we look to Justice Stevens' concurrence for guidance on [whether a federal rule
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or state law governs].”).2 Justice Stevens concurred in the judgment that Rule 23 applied

but relied on narrower grounds than the plurality, agreeing with the dissent “that there are

some state procedural rules that federal courts must apply in diversity cases because they

function as a part of the State's definition of substantive rights and remedies.” Shady

Grove, 130 S. Ct. at 1448.

Justice Stevens explained that, in a diversity case, “when a situation is covered by

a federal rule . . . . the Rules Enabling Act . . . controls.” Id. at 1448. The Supreme Court

promulgated Rule 23 under the Rules Enabling Act. See id. at 1437.

The Federal Rules of Evidence include provisions adopted by Congress and

provisions adopted by the Supreme Court under the Rules Enabling Act. The different

methods of adoption affect our choice-of-law analysis in the Tenth Circuit. The original

Federal Rules of Evidence were enacted as an act of Congress in 1975. See Act of Jan. 2,

1975, Pub. L. No. 93-595, 88 Stat.1926. But part (c) of Rule 701, which excludes Mr.

Miller’s testimony, was added to Rule 701 in the 2000 Amendments to the Federal Rules

of Evidence. The 2000 Amendments were not adopted as a statute, but were adopted

under the Rules Enabling Act.

2
Garman relied on Marks v. United States, 430 U.S. 188, 193 (1977), which
stated that “[w]hen a fragmented Court decides a case and no single rationale explaining
the result enjoys the assent of five Justices, the holding of the Court may be viewed as
that position taken by those Members who concurred in the judgments on the narrowest
grounds.” See also Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper, Federal
Practice and Procedure § 4509 (2d ed. 2011) (explaining that “federal courts have
differed in their application of [Shady Grove]. . . . Some courts apply Justice Stevens's
concurrence as the controlling opinion.”).

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 We addressed how the original Federal Rules of Evidence apply in diversity cases

in Sims v. Great American Life Insurance Company, 469 F.3d 870, 877 (10th Cir. 2006).

We held that, because they were adopted by an Act of Congress, the original rules are not

governed by Erie, the Rules of Decision Act, or the Rules Enabling Act. Sims, 469 F.3d

at 883. Instead, the original rules are governed by Stewart Organization, Inc. v. Ricoh

Corp., 487 U.S. 22 (1988), which controls the application of federal statutes in diversity

cases. Sims, 469 F.3d at 877. We declined to resolve how diversity courts should apply

amendments to the Federal Rules of Evidence that were adopted under the Rules

Enabling Act. Sims, 469 F.3d at 879 n.5 (“Again, we note that a number of the Federal

Rules of Evidence have been amended since 1975. We do not address how these

amendments affect the reach of either the Rules Enabling Act or the Rules of Decision

Act.”).

Shady Grove—the most recent Supreme Court case interpreting how to apply rules

adopted under the Rules Enabling Act in a diversity case—governs the application of

Rule 701(c) here. Justice Stevens offered a two-step framework for resolving an alleged

conflict between an Enabling Act federal rule and state law.

First, the diversity court “determine[s] whether the scope of the federal rule is

sufficiently broad to control the issue before the court, thereby leaving no room for the

operation of seemingly conflicting state law.” Shady Grove, 130 S. Ct. at 1451

(quotations omitted). “In some instances, the plain meaning of a federal rule will not

come into direct collision with the state law, and both can operate.” Id. (quotations
-22-
omitted). In other words, the first step is to determine whether the federal rule and state

law conflict.

Second, if applying the federal rule and state law results in a “direct collision, the

court must decide whether application of the federal rule represents a valid exercise of the

rulemaking authority . . . [under] the Rules Enabling Act.” Id. (quotations and citation

omitted). “That Act requires, inter alia, that federal rules ‘not abridge, enlarge or modify

any substantive right.’” Id. (quoting the Rules Enabling Act, 28 U.S.C. § 2072(b)).

In this case we consider the relationship between Federal Rule of Evidence 701(c)

and Colorado law. We have concluded that Mr. Miller’s testimony is inadmissible under

Rule 701. Rapid Funding contends the testimony is admissible under Colorado law. We

now apply Justice Stevens’s framework to this case.

b. Federal Rule 701 and Colorado Rule 701 Do Not Conflict—Mr.
Miller’s Testimony Is Inadmissible Under Both

If Mr. Miller’s testimony were evaluated for admissibility under Colorado law as

lay opinion, the starting point would be Colorado Rule of Evidence 701, which is

identical to Federal Rule of Evidence 701. Compare Colo. R. Evid. 701 with Fed. R.

Evid. 701. There is no “direct collision.” See Shady Grove, 130 S. Ct. at 1451. Since

2002, Colorado Rule 701 has, like Federal Rule 701, included a part (c) that prohibits

scientific, technical or specialized knowledge testimony from being admitted as lay

opinion testimony. See Colo. R. Evid. 701(c); see also People v. Veren, 140 P.3d 131,

136 (Colo. App. 2005) (explaining that “[t]he amendment to CRE 701 mirrors the

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amendment adopted in 2000 to Fed. R. Evid. 701.”). Because Mr. Miller’s testimony is

based on technical or specialized knowledge, his testimony is inadmissible under

Colorado Rule 701(c).

Rapid Funding does not mention the Colorado Rules of Evidence. Instead, it

relies on Colorado landowner rule case law. The committee comment to Colorado Rule

701 explains that “[t]his rule does not foreclose an owner from giving an opinion as to the

value of his real property.” Colo. R. Evid. 701 Committee Comment. This comment pre-

dated the amendment that added part (c) to Rule 701. See, e.g., Colo. R. Evid. 701

(1997) (including comment but not part (c)). It does not affect Rule 701(c)’s requirement

that lay opinion testimony cannot be based on technical or specialized knowledge. See

Veren, 140 P.3d at 137 (“As reflected in the text of the amendment to [Colo. R. Evid.]

701 and in the advisory committee's note to Fed. R. Evid. 701, the critical inquiry is

whether a witness's testimony is based upon ‘specialized knowledge.’”).

The comment establishes that landowner valuation testimony, if not based on

technical or specialized knowledge, may be admitted as lay opinion testimony. The

Colorado Court of Appeals has explained that the amendments that added part (c) to

Federal and Colorado Rule 701 do “not distinguish between expert and lay witnesses, but

rather between expert and lay testimony.” Veren, 140 P.3d at 136 (quoting Fed. R. Evid.

701 advisory committee’s note). Mr. Miller did not give lay landowner valuation

testimony. As we have shown, Mr. Miller’s testimony was based on technical or

specialized knowledge and therefore is not admissible under either Federal or Colorado
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Rule 701.

Because Mr. Miller’s testimony is inadmissible under both Federal Rule 701 and

Colorado Rule 701, the two rules do not conflict. We do not need to reach step two of

the Shady Grove analysis because there is no “direct collision” between the federal rule

and state law. See Shady Grove, 130 S. Ct. at 1451. We hold that the district court’s

admission of Mr. Miller’s testimony was erroneous and an abuse of discretion.

3. Harmless Error

We next address whether the district court’s erroneous admission of Mr. Miller’s

testimony was harmless error. “An erroneous admission of evidence is harmless unless it

had a substantial influence on the outcome or leaves one in grave doubt as to whether it

had such effect.” Yeley-Davis, 632 F.3d at 685 (quotation omitted).

The district court, in ruling on James River’s post-trial motion, said that if it erred

in admitting Mr. Miller’s testimony, the error was harmless because the jury could have

relied on Mr. Meyer’s estimate that the value of the property under habitable conditions

was more than $6.6 million. See James River, 2010 WL 965523 at *3. On appeal, Rapid

Funding proposes three alternative bases for the jury’s damages verdict: the Meyer

estimate that the district court mentioned, Mr. Miller’s $4.489 million pre-fire figure

asserted in Rapid Funding’s Proofs of Loss, and the Anderson Group’s $7.145 million

replacement cost estimate. None of the foregoing can adequately support the damages

verdict, especially in light of the other evidence in the record.

a. Mr. Meyer’s Testimony
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 Both the district court in its post-trial order and Rapid Funding on appeal argue

that the jury could have based its damages verdict on Mr. Meyer’s testimony. See James

River, 2010 WL 965523 at *3. To do so, the jury would have had to (1) accept Mr.

Meyer’s claim that the complex would be worth $6.6-7.0 million in habitable condition;

and (2) disregard Mr. Meyer’s habitability factor discount, which reduced the value of the

property below zero. Rapid Funding suggests that the jury could have reached this

conclusion because of Mr. Reilly’s testimony casting doubt on the habitability factor.

Although it is conceivable for a jury to find part of a witness’s testimony credible

and other parts not credible, the steps of Mr. Meyer’s analysis are not severable. Mr.

Meyer specifically disavowed that the complex had a value of $6.6-7.0 million. His

estimate applied only to the building after being restored to habitable condition, and no

one claimed the building was habitable before the fire. Indeed, it was indisputably

uninhabitable. That is why it had been condemned.

Even if the jury could have believed Mr. Reilly’s criticism of the habitability

factor, neither Mr. Reilly nor any other witness offered an alternative means to discount

for the cost of restoring the buildings to habitability. A rational jury could not value the

North Building based on a number associated with something that did not exist—a

habitable building.

Rapid Funding also questions Mr. Meyer’s expertise as an appraiser of residential

real estate. But if Mr. Meyer is not qualified to appraise residential real estate, his $6.6-

7.0 million figure is just as suspect as his habitability factor, and Rapid Funding cannot
-26-
successfully argue that the former but not the latter suffices to uphold the damages

verdict.

b. Proofs of Loss

Rapid Funding contends that the jury could have based its damages verdict on the

Proofs of Loss that Rapid Funding submitted in its insurance claim. The claim contained

the same $4.489 million number included in Mr. Miller’s erroneously admitted valuation

testimony.

James River responds that the Proofs of Loss were only admitted to prove that

Rapid Funding had submitted a claim. Rapid Funding argues that James River, when it

stipulated to the admission of the Proofs, should have sought a jury instruction limiting

the evidence to establishing that Rapid Funding submitted a claim. James River points to

the futility of asking for a limiting instruction on the Proofs of Loss when it had just lost a

motion in limine to prevent Mr. Miller from testifying to the value asserted in the Proofs

of Loss.

Regardless of whether James River should have sought a limiting instruction, a

rational jury could not rely on the Proofs of Loss to establish damages.3 The Proofs of

Loss were allegations of what Rapid Funding believed it could prove the North Building

was worth. Just as allegations in a complaint cannot establish the facts they assert,

neither can allegations in a Proof of Loss. To uphold the damages verdict based on the

3
The district court said the testimony was “relevant to [Mr. Miller’s] explanation
as to how [he] came up to the number for his claim.” ROA, Vol. 5 at 1107.

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Proofs of Loss would be to misunderstand what they represent.

As we have said, “[t]he purpose of . . . proof of loss clauses in primary insurance

contracts is to afford the insurer an opportunity to form an intelligent estimate of its

liabilities.” Sec. Mut. Cas. Co. v. Century Cas. Co., 531 F.2d 974, 978 (10th Cir. 1976);

see also State ex rel. Arnold v. Ommen, 201 P.3d 1127, 1138 (Wyo. 2009) (“The purpose

of a proof of loss is to enable an insurer to investigate a claim and determine its rights and

liabilities.”). That is all the Proofs of Loss were meant to do here: to provide James

River with the opportunity to investigate the value of Rapid Funding’s claim and then

arrive at an accurate estimate of its value.

c. Anderson Group Estimate

Mr. Miller’s Proofs of Loss relied, in part, on a number in the report he

commissioned from the Anderson Group. The Anderson Group estimated that it would

cost $7.145 million to replace the North Building. Rapid Funding argues that the jury

could have based its damages verdict at least in part on that estimate.

The Anderson Group, however, did not provide an estimate of the actual cash

value of the North Building, just its replacement and demolition costs. James River did

not refuse a claim for the replacement cost of the building; it refused Rapid Funding’s

claim for actual cash value. Mr. Miller’s valuation testimony did not reliably convert the

replacement cost figure into an actual cash value figure, and there was no evidence

admitted that could have allowed the jury to make that conversion other than Mr. Miller’s

inadmissible valuation testimony. We also note that the Anderson Group report was not
-28-
admitted in evidence.

d. Other Evidence

There is room for debate over the North Building’s worth before the fire. Some

evidence admitted at trial suggests that the value was less than $3 million, which further

supports the conclusion that the error of admitting Mr. Miller’s valuation of $4.489

million was not harmless.

Robert Rice and Robert Niebauer bought the Amsterdam Gardens complex—the

land, the South Building, and the North Building—for $2.6 million. Rapid Funding

purchased the complex at the sheriff’s foreclosure sale for $1.8 million. When Rapid

Funding put the complex up for sale, it received offers between $1 and $1.2 million.

Rapid Funding contracted to sell the complex back to Mr. Rice for $1.8 million and to

forgive his $650,000 debt to Rapid Funding.

These figures are evidence of the value of the complex, not the North Building.

They include the value of the land. Mr. Genzink told Rapid Funding the land was worth

an estimated $1.12 million. These figures also include the value of the South Building,

which was worth approximately the same as the North Building. To derive an estimate

for the value of the North Building from any of these figures for the whole complex, one

would need to subtract $1.12-1.3 million to account for the value of the land and divide

the difference by two to account for the South Building, a result significantly less than $3

million.

4. Remand for a New Trial
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 Without Mr. Miller’s valuation testimony, the jury’s damages verdict must be

overturned. Because the remaining evidence did not lend itself to a reliable estimate of

the pre-fire value of the North Building, the appropriate remedy is not to reduce the

damages through remittitur, but to have a new trial so the parties can introduce reliable

valuation evidence and a jury can reach an accurate damages verdict. Accordingly, we

remand this case for a new trial limited to the issue of damages.

C. C.R.S. § 10-3-1116

A recently enacted Colorado statute entitled in part “Remedies for unreasonable

delay or denial of benefits” provides: “A first-party claimant . . . whose claim for

payment of benefits has been unreasonably delayed or denied may bring an action in a

district court to recover reasonable attorney fees and court costs and two times the

covered benefit.” C.R.S. § 10-3-1116(1). Rapid Funding argues that it is entitled to

additional damages under this new statute.

Resolution of this issue hinges on the timeline of events. Rapid Funding

submitted its Proofs of Loss for its claim in March and May 2007. James River denied

the claim on May 30, 2007. C.R.S. § 10-3-1116 went into effect on August 5, 2008.

Therefore, to prevail on its argument for new damages, Rapid Funding must prove that

the Colorado legislature meant C.R.S. § 10-3-1116 to apply retroactively or that James

River engaged in a new act of bad faith after August 5, 2008.

In a pre-trial motion, Rapid Funding argued both that the statute applied

retroactively and that James River had engaged in acts of bad faith after August 5, 2008
-30-
when it failed to reverse its position after learning new information during discovery.

The district court rejected both arguments and dismissed Rapid Funding’s claim under

C.R.S. § 10-3-1116. See James River, 2009 WL 524994 at *9.

On retroactivity, the court noted that both Colorado law and federal law presume

that statutes do not apply retroactively absent specific legislative intent. See id. at *7

(citing City of Colo. Springs v. Powell, 156 P.3d 461, 464 (Colo. 2007); United States v.

Husted, 545 F.3d 1240, 1246 (10th Cir. 2008)). The court said that, because the new

statute “lacks any explicit indication from the Colorado legislature that its provisions

should apply retroactively,” the presumption stands, and the statute does not apply

retroactively. Id. at *8.

On post-August 5, 2008 acts of bad faith, the court said that if it “held that each

new fact brought out during discovery created the basis for a new and separate breach of

a [good faith and fair dealing] claim, a pleading and docketing quagmire would ensue as

the parties constantly amended their pleadings in response to new depositions and

discovery responses.” Id. at *9.

Rapid Funding raised this issue again in a post-trial motion, adding that James

River’s claims agent Ms. Marson had testified that James River continued to review new

information about the claim up through trial. The court rejected this argument: “There is

no principled distinction between the ‘information unearthed in discovery’ and the

testimony of Ms. Marson that she continued to review new information up through trial;

the risk of permitting a separate bad faith claim each time a new fact is considered is
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equally prevalent in both circumstances.” James River, 2010 WL 965523 at *5. The

court therefore dismissed the motion for new damages. Id. at *10.

Rapid Funding appeals that ruling. It does not appeal the district court’s holding

that the statute does not apply retroactively. Rapid Funding argues instead that James

River’s failure to pay out the claim after August 5, 2008 constituted an unreasonable

delay. According to Rapid Funding, James River owed it a continuing duty to evaluate

the loss as new information became available, and that duty continued through trial.

Therefore, Rapid Funding, relying again on Ms. Marson’s testimony, argues that James

River had no reasonable basis to refuse to pay out after it allegedly discovered during the

litigation that it owed Rapid Funding something for the actual cash value.

James River argues that it never delayed paying Rapid Funding’s claim; it denied

the claim. Treating its denial as a “delay” would read “denial” out of the language of the

statute.

“To properly discern the content of state law, we must defer to the most recent

decisions of the state's highest court.” Kokins, 621 F.3d at 1295 (quotation omitted).

There is no Colorado case law interpreting this aspect of the new statute. In the general

context of Colorado insurance law, the Colorado Supreme Court has said that “it is the

affirmative act of the insurer in unreasonably refusing to pay a claim and failing to act in

good faith, and not the condition of nonpayment, that forms the basis for liability in tort.”

Farmers Grp., Inc. v. Trimble, 691 P.2d 1138, 1142 (Colo. 1984).

In this case, the jury determined that James River unreasonably refused payment
-32-
on May 30, 2007. No unreasonable refusal occurred after C.R.S. § 10-3-1116 went into

effect on August 5, 2008. We agree with James River, consistent with Trimble, that its

refusal to pay Rapid Funding for the North Building was a discrete denial rather than a

continuing delay. To hold otherwise would effectively require insurance company

defendants in James River’s position to front any payment they dispute with their

insureds before trial or face the prospect of additional damages beyond what they owe for

their alleged unreasonable refusal.

Rapid Funding is entitled to whatever damages it might win on remand, but not

under C.R.S. § 10-3-1116.

IV. CONCLUSION

The Federal Rules of Evidence applied to the admissibility of Mr. Miller’s

valuation testimony. Because that testimony was based on technical or specialized

knowledge, it was erroneously admitted under Federal Rule 701. The remaining

evidence cannot support the jury’s damages verdict. The error in admitting Mr. Miller’s

valuation testimony was reversible and not harmless. The damages verdict is

REVERSED and the case is REMANDED for a new trial to determine damages.

We also AFFIRM the district court’s dismissal of Rapid Funding’s claim under

C.R.S. § 10-3-1116. We DENY Rapid Funding’s “Motion to Strike Attachment to and

Arguments in Appellant’s Reply Brief.”

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