FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
SIERRA PACIFIC POWER COMPANY,
Plaintiff-Appellant, No. 09-16662
v. D.C. No.
HARTFORD STEAM BOILER 3:04-cv-00034-
LRH-RAM
INSPECTION & INSURANCE CO.;
ZURICH AMERICAN INSURANCE District of Nevada,
COMPANY, Reno
Defendants-Appellees.
SIERRA PACIFIC POWER COMPANY, No. 09-16802
Plaintiff-Appellee, D.C. No.
v. 3:04-cv-00034-
HARTFORD STEAM BOILER LRH-RAM
District of Nevada,
INSPECTION & INSURANCE CO.;
ZURICH AMERICAN INSURANCE Reno
COMPANY, ORDER
Defendants-Appellants. CERTIFYING
QUESTIONS TO
CALIFORNIA
SUPREME COURT
Filed January 5, 2012
Before: Ronald M. Gould and Consuelo M. Callahan,
Circuit Judges, and Edward R. Korman,
Senior District Judge.*
*The Honorable Edward R. Korman, Senior District Judge for the U.S.
District Court for Eastern New York, sitting by designation.
1
2 SIERRA PACIFIC v. HARTFORD STEAM BOILER
COUNSEL
For plaintiff-appellant/cross-appellee Sierra Pacific Power
Co.: William E. Peterson, of Reno, Nevada.
For defendants-appellees/cross-appellants Hartford Steam
Boiler Inspection & Ins. Co., et al., David E. Bland, of Minne-
apolis, Minnesota.
ORDER
On New Year’s Day, 1997, the Truckee River in the Sierra
Nevada Mountains flooded. The flood destroyed the Farad
Dam, which was owned by plaintiff Sierra Pacific Power Co.
(“Sierra”), and used in connection with its hydroelectric facil-
ity in Farad, California. Insurers Hartford Steam Boiler
Inspection & Insurance Co. (“Hartford”) and Zurich Ameri-
can Insurance Co. (“Zurich”) (together “Insurers”) insured
Sierra’s facilities, including the Farad Dam, with $200 million
in total coverage.
In this coverage dispute, a primary issue is whether, as a
matter of California insurance law, the building ordinance or
law exclusion excludes increased costs of replacement due to
building ordinances following a loss caused by a covered
peril. If it does exclude such costs, a secondary issue is
whether, again as a matter of California insurance law, other
costs that are prerequisites to building, such as costs of
obtaining permits and environmental impact studies, are
excluded by the building ordinance or law exclusion. The Cal-
ifornia Supreme Court has not ruled on these questions, and
the California Courts of Appeal have reached conflicting con-
clusions. As these questions are dispositive of a primary issue
in this appeal, we respectfully request that the California
Supreme Court exercise its discretion and decide the certified
questions presented below.
SIERRA PACIFIC v. HARTFORD STEAM BOILER 3
I. Questions Presented
Pursuant to Rule 8.548 of the California Rules of Court, we
request that the California Supreme Court answer the follow-
ing questions:
1. Whether, under California insurance law, a
building ordinance or law exclusion, found in
the Perils Exclusions section of a property insur-
ance policy, effectively excludes coverage for
increased costs caused by complying with ordi-
nances and regulations if the underlying loss
was caused by a covered peril.
2. Whether, under California insurance law, the
costs of obtaining building permits or conduct-
ing required environmental impact studies are
considered costs excluded by a building ordi-
nance or law exclusion, or whether these costs
are better considered as part of the replacement
cost under the policy.
The phrasing of the questions set forth above should not
restrict the California Supreme Court’s consideration of the
issues involved, and we understand that the court may refor-
mulate our questions. Cal. R. Ct. 8.548(f)(5). We will accept
the decision of the California Supreme Court. Cal. R. Ct.
8.548(b)(2); Hayes v. Cnty. of San Diego, 658 F.3d 867, 868
(9th Cir. 2011). There is no controlling precedent to these
questions because there is no California Supreme Court deci-
sion relevant to the issue, and the California Courts of Appeal
appear to be divided. See Cal. R. Ct. 8.548(a)(2). The Califor-
nia Supreme Court’s decision on these questions of California
law will determine the outcome of the primary issue in this
appeal. Cal. R. Ct. 8.548(a).
4 SIERRA PACIFIC v. HARTFORD STEAM BOILER
II. Factual and Procedural Background
A. The Dam and the Insurance Policies
Sierra is a publicly traded, investor-owned public utility
engaged in the sale, distribution, transmission, and generation
of electrical energy and natural gas. Sierra’s public service
territory includes most of Northern Nevada and parts of East-
ern California. Sierra is both a California public utility and a
Nevada public utility and its businesses are regulated by the
California Public Utilities Commission and the Public Service
Commission of Nevada.
For many years prior to 1997, Sierra operated the Farad
Dam, a hydroelectric dam on the Truckee River just west of
the California-Nevada border. The Farad Dam consisted of
nearly two miles of wooden flume, a forebay, a diversion
dam, and a power generating facility with related structures,
substation and transmission lines. On January 1, 1997, the
Truckee River flooded, destroying the Farad Dam. Sierra
insured the Farad Dam, along with the rest of its facilities,
using two identical insurance policies, one issued by Hartford
and one by Zurich (hereinafter, the “Policy”). The Farad Dam
is covered property under the Policy, and flood is a covered
peril.
The “policy insures against all risks of direct physical loss
or damage to the property insured from perils not otherwise
excluded, subject to the terms and conditions” contained in
the Policy. The Policy is divided into three sections. Section
A contains coverage for property, Section B contains cover-
age for boilers and machinery, and Section C contains general
provisions applicable to both. Section A also contains its own
exclusions section for both excluded property and perils. This
section does not contain an exclusion for increased cost of
construction due to changes in building ordinances.
Section C also includes a section containing perils exclu-
sions. The particular exclusion at issue here regarding build-
SIERRA PACIFIC v. HARTFORD STEAM BOILER 5
ing ordinances or laws is contained in this section (hereinafter
the “Building Ordinance Exclusion”), and states:
IV. PERILS EXCLUDED
This policy does not insure against loss or
damage caused by or resulting from:
***
E. any increase in the loss due to any
ordinance, law or regulation, rule or
ruling restricting or affecting repair,
alteration, use, operation, construction
or installation; or by any injunction or
process of any court, unless endorsed
hereon.
The Policy is a replacement cost policy covering the full cost
of repair or replacement of covered property for covered
losses subject to the limits and sublimits of the Policy. How-
ever, recovery for property not repaired or replaced is limited
to the actual cash value (“ACV”) of the property. This limita-
tion is described in the valuation provision within Section C,
also at issue here, which states:
W. Valuation
Unless otherwise endorsed hereon, adjust-
ment of the loss under this policy shall be:
***
6. on all other property covered by this
policy the cost of repair or replacement
(defined as the cost to repair or replace
the damaged property without deduc-
tion for depreciation with materials of
6 SIERRA PACIFIC v. HARTFORD STEAM BOILER
like kind, size, capacity and quality)
subject to:
a. liability under these terms shall not
exceed the smallest of the following:
(1) the cost to repair, rebuild or
replace on the same site with
material of like kind, size, capac-
ity and quality, whichever is
smallest;
(2) the actual expenditure incurred in
repairing, rebuilding or replacing
on the same or another site but
not to exceed size and operating
capacity that existed at the time
of loss, whichever is smallest.
b. in the event of loss or damage to
property which is not repaired,
rebuilt or replaced within two years
from the date of loss or damage, this
company shall not be liable for more
than the actual cash value (with
proper deduction for depreciation) of
the property destroyed;
all to be computed as of the time and at
the place of loss when with diligence and
dispatch rebuilding, repairing or replace-
ment of the damaged or destroyed prop-
erty could be effected.
ACV is not otherwise defined in the policy.
The final provision at issue here is found in the Extensions
of Coverage section of Section C. Specifically, the Policy pro-
vides:
SIERRA PACIFIC v. HARTFORD STEAM BOILER 7
I. Demolition and Increased Cost of Construc-
tion
1. If at the time of any direct physical loss
or damage insured against by this pol-
icy there is in force any ordinance reg-
ulating the construction, repair,
replacement or use of buildings or
structures, then this policy is extended
to cover:
a. the additional loss sustained in
demolishing any undamaged portion
of the buildings or structures necessi-
tated by such law or ordinance;
b. the cost incurred in actually rebuild-
ing both the damaged and demol-
ished portions of such buildings or
structures in a manner to satisfy such
law or ordinance.
The Demolition and Increased Cost of Construction (“DICC”)
coverage provided by this extension is limited to $10 million
through a specific sublimit in the declarations pages of the
policy.
B. Sierra’s Claim for Insurance Coverage
Sierra made a claim with the Insurers for the replacement
of the Farad Dam following the flood. In July, 1998, Sierra
obtained a preliminary estimate for the replacement cost of
the dam. The parties dispute the effect of this estimate. Sierra
claims that the estimate was an “obviously unreliable, admit-
tedly inaccurate and superseded” estimate, and the Insurers
claim that the number represented an agreement between
them and Sierra as to the cost to replace the dam as it existed
prior to the flood. Sierra also notes that this estimate was pre-
8 SIERRA PACIFIC v. HARTFORD STEAM BOILER
pared without the benefit of design drawings or actual con-
tractor bids for any required work.
When Sierra obtained the estimate to replace the dam in
July of 1998, it believed it would not need to comply with
detailed requirements for environmental impact studies under
the California Environmental Quality Act (“CEQA”). How-
ever, the California State Water Resources Control Board
(“CSWRCB”) eventually did require detailed environmental
impact studies, which resulted in design changes of the dam
and even required moving the location. Numerous permits
and easements were required to comply with these require-
ments. The costs associated with completing these studies,
obtaining permits and easements, and design changes necessi-
tated by the regulatory agencies were not included in the ini-
tial estimate to replace the dam.
Sierra could not begin construction of the dam without the
required permits, which it could not obtain until the
CSWRCB issued its approval of Sierra’s plans to rebuild the
dam, which it finally did on June 25, 2003. Sierra finally
obtained the requisite environmental permit from the
CSWRCB in March of 2004, but was not able to obtain a per-
mit from the California Transportation Commission until
sometime in 2005.
Meanwhile, in 2001, Sierra obtained bids and estimates to
actually replace the dam. The amount to rebuild the dam was
estimated to be $16,205,303. After the trial, the district court
made a factual finding that the actual estimated cost to replace
the dam was $19,800,000. The Insurers have not disputed that
the actual estimated replacement cost of the Farad Dam is
$19,800,000.
C. The District Court Proceedings
The case was tried at a bench trial beginning April 8, 2008.
The court issued its Findings of Fact and Conclusions of Law
on September 30, 2008, which include:
SIERRA PACIFIC v. HARTFORD STEAM BOILER 9
The Policy form provides for an exclusion for recov-
ery of costs of increased costs of construction result-
ing from the Peril of new law or ordinance, but
otherwise has no exclusion for increased costs of
construction resulting from covered losses.
The evidence established that the actual estimated
cost to replace Farad [Dam] is $19,800,000.
Sierra incurred costs and expenses to rebuild and
replace Farad Dam. These costs consisted of expen-
ditures made to remove debris, test soils, design the
dam, prepare construction plans and drawings, and
to procure the numerous licenses and permits neces-
sary to replace the dam. The costs exceeded
$4,000,000.
The available replacement cost coverage of the dam
includes design fees, permitting fees and other regu-
latory costs necessary to rebuild the dam.
The coverage available to Sierra included increased
costs of construction based on intervening changes
in the law.
The actual cash value (with proper deduction for
depreciation) of the Farad Dam is $1,261,200.
The district court also found that the parties had not reached
an agreement on the ACV of the dam at the time of loss. The
district court had previously ruled that the ACV of the dam
should be calculated based upon replacement cost of the dam
less depreciation, and this ruling was confirmed in the court’s
order following trial.1 Sierra timely filed its notice of appeal
and the Insurers timely filed a notice of cross-appeal.
1
The district court initially ruled that Nevada law should apply to the
insurance coverage questions at issue. Following the bench trial, the court
10 SIERRA PACIFIC v. HARTFORD STEAM BOILER
III. Basis for Certification
The parties agree that if Sierra timely replaces the dam it
is entitled to replacement cost of the dam. Alternatively, if it
does not replace the dam, there is no question that it is entitled
to the ACV of the dam, which the district court correctly
determined to be calculated as replacement cost less deprecia-
tion.2 Thus, to determine ACV, it is necessary to first deter-
mine the replacement cost of the dam. Similarly, if Sierra
does replace the dam within the time allowed by the policy,
it is entitled to at least the ACV of the dam until it has com-
pleted replacement, at which time it will be entitled to the
remaining portion of the replacement cost (which should
amount to the depreciation).
indicated it “would have some reason to reconsider its ruling” regarding
choice of law, but stated it did not believe there was a difference between
Nevada and California law at issue. We find that based upon Nevada’s
choice of law provisions, California law applies to the dispute, primarily
because the dam was located in California. See Williams v. United Servs.
Auto. Ass’n, 849 P.2d 265, 266-67 (Nev. 1993).
2
We recognize that in California, ACV is deemed to be fair market
value, or “the price that a willing buyer would pay a willing seller, neither
being under any compulsion to sell or buy.” Cheeks v. Cal. Fair Plan
Ass’n, 71 Cal. Rptr. 2d 568, 571 (Cal. Ct. App. 1998) (quoting Jefferson
Ins. Co. v. Super. Ct., 3 Cal. 3d at 402). However, where the property to
be replaced has no sales market, such as the Farad Dam, California Courts
have sanctioned the use of replacement cost less depreciation as an accept-
able method for determining ACV. Id. at 572 n.5. Cheeks is particularly
instructive as it suggests wording for insurers to use to dictate replacement
cost less depreciation as a measure of ACV, and the instant policy con-
tains that language. Id. (“If [Insurers] want to determine ‘actual cash
value’ on the basis of replacement cost less depreciation all [they] ha[ve]
to do is say so in the policy . . . . This can be accomplished by using words
such as ‘actual cash value, with proper deduction for depreciation.’ ” Id.
(quoting Hughes v. Potomac Ins. Co., 18 Cal. Rptr. 650, 658 (Cal. Ct.
App. 1962)) (emphasis added)). Since the Policy uses these precise words,
the ACV should be determined as replacement cost less depreciation of
the dam.
SIERRA PACIFIC v. HARTFORD STEAM BOILER 11
A primary issue in this appeal is whether the replacement
cost should include increased costs due to complying with
ordinances affecting the construction. This is an important
question in California, as virtually all multi-peril property
insurance policies contain exclusions similar to the Building
Ordinance Exclusion at issue here. The second question,
applicable only if the increased costs are effectively excluded
by the Building Ordinance Exclusion, is whether costs for
complying with regulatory agency required environmental
impact studies are considered costs excluded by this exclu-
sion.
A. Building Ordinance Exclusion
1. Relevant Case Law
The California Supreme Court has not addressed the ques-
tion whether a building ordinance or law exclusion contained
in a section of perils exclusions, similar to the one at issue
here, is effective to limit the coverage for an insured structure
by excluding costs for complying with intervening building
code changes. Jurisdictions that have addressed this question
have reached differing conclusions.3 The California Courts of
Appeal appear to be split on the issue as well. The most recent
decision, Fire Insurance Exchange v. Superior Court (Alt-
man), 10 Cal. Rptr. 3d 617, 631 (Cal. Ct. App. 2004) (“Fire
Insurance Exchange”), found that a similar exclusion does not
exclude costs to comply with building codes when the loss
3
Compare Dupre v. Allstate Ins. Co., 62 P.3d 1024, 1029-30 (Colo.
App. 2002), Bering Strait School Dist. v. RLI Ins., 873 P.2d 1292, 1296
(Alaska 1994), Farmers Union Mut. Ins. Co. v. Oakland, 825 P.2d 554
(Mont. 1992), and Garnett v. Transamerica Ins. Servs., 800 P.2d 656
(Idaho 1990) (interpreting similar language and holding perils exclusions
do not operate to exclude increased costs to replace due to intervening
changes in building ordinances), with Spears v. Shelter Mut. Ins. Co., 73
P.3d 865, 867-69 (Okla. 2003), and Dombrowsky v. Farmers Ins. Co. of
Wash., 928 P.2d 1127 (Wash. Ct. App. 1996) (finding exclusion does limit
coverage).
12 SIERRA PACIFIC v. HARTFORD STEAM BOILER
itself is caused by a covered peril. Earlier decisions, most
notably Bischel v. Fire Insurance Exchange, 2 Cal. Rptr. 2d
575, 581 (Cal. Ct. App. 1991), found that the exclusion did
preclude coverage. The California Supreme Court denied
review in both cases.
In Fire Insurance Exchange, the court emphasized that the
exclusion for losses caused by enforcement of building codes
or ordinances was in a section containing only perils exclu-
sions. Moreover, there was no limiting language in the valua-
tion section of the policy or insuring clause, but by
comparison there is such limiting language in the standard
form policy in California Insurance Code Section 2071.4 Fire
Ins. Exch., 10 Cal. Rptr. 3d at 632. The court stated, “[t]he
exclusion’s location in a long list of excluded perils, com-
bined with the words ‘caused directly or indirectly by,’ indi-
cate that its intended function is to exclude a peril, not to
place a limit on replacement costs.” Id. at 634 (citing Bank of
the West v. Super. Ct., 2 Cal. 4th 1254, 1265 (1992)).
In addition, the court noted that “increased costs are not a
peril, [and] nowhere does the exclusion use the term,
‘increased costs.’ It excludes loss caused by or consisting of
enforcement, which is not a cost, and which appears in a list
of perils.” Id. at 633 (emphasis original). California courts
hold that “direct physical loss ‘contemplates an actual change
in insured property then in a satisfactory state, occasioned by
accident or other fortuitous event directly upon the property
causing it to become unsatisfactory for future use or requiring
that repairs be made to make it so.’ ” MRI Healthcare Ctr. of
Glendale, Inc. v. State Farm Gen. Ins. Co., 115 Cal. Rptr. 3d
4
The standard form policy need not be used where the policy provides
coverage more favorable to the insured than the standard form. Like the
policy in Fire Insurance Exchange, and indeed like most property policies
in California, the Policy at issue here provides multi-peril coverage on a
replacement cost basis, which is more favorable to the insured than the
standard form’s actual cash value coverage for the peril of fire. Thus, the
standard form does not control.
SIERRA PACIFIC v. HARTFORD STEAM BOILER 13
27, 37 (Cal. Ct. App. 2010) (quoting AFLAC, Inc. v. Chubb
& Sons, Inc. 581 S.E. 2d 317, 319 (Ga. Ct. App. 2003)). Thus,
“loss” and “costs” are distinct concepts.
Other California cases have reviewed similar exclusions
and reached different conclusions. Bischel relied on two pre-
vious cases dealing with actual cash value policies, Breshears
v. Ind. Lumbermens Mut. Ins. Co. 63 Cal. Rptr. 879 (Cal. Ct.
App. 1967) and McCorkle v. State Farm Ins. Co., 270 Cal.
Rptr. 492 (Cal. Ct. App. 1990), and held that the standard
form policy, which governed those two cases, excluded costs
from building code updates. Bischel, 2 Cal. Rptr. 2d at 580.
Bischel relied on the fact that California Insurance Code Sec-
tion 2071 “authorizes use of an ordinance or law exclusion[
to] find ordinary rules of construction against the insurer are
not applicable with respect to this provision.” Id.
Since the policy at issue in Fire Insurance Exchange was
a replacement cost policy, that court concluded that Bischel,
Breshears, and McCorkle did not dictate that the increased
costs should be excluded. 10 Cal. Rptr. 3d at 631. Fire Insur-
ance Exchange further criticized the Bischel court for not dis-
cussing the effect of the difference between actual cash value
policies and replacement cost policies since Bischel did
involve a replacement cost policy. Id. at 631-32. Fire Insur-
ance Exchange “conclude[d] that Bischel is an anomaly, and
[noted] that its reasoning has not been followed in any pub-
lished California judicial opinion.” Id. at 632. While Bischel
has not been followed since Fire Insurance Exchange, it has
not been overturned. Thus, we are unable to predict how the
California Supreme Court would decide the issue.
2. The DICC Coverage Extension
The Insurers contend that any coverage for increased costs
due to intervening changes in building codes or ordinances is
limited to that offered in the Demolition and Increased Cost
of Construction coverage extension. However, even though
14 SIERRA PACIFIC v. HARTFORD STEAM BOILER
this coverage extension would cover the extra expense
incurred as a result of complying with intervening changes in
building ordinances, it does not limit coverage otherwise
available under the Policy. This coverage extension gives
additional coverage not available elsewhere under the Policy
for demolishing undamaged portions of the building or struc-
ture if required by new building ordinances. Thus, this exten-
sion of coverage cannot limit liability under the Policy.
3. Conclusion
If the Policy excludes increased costs due to building ordi-
nances, the Building Ordinance Exclusion is the only poten-
tial source of that limitation. The California Supreme Court
has not indicated whether such an exclusion, which is located
in a list of perils exclusions and purports to exclude increases
in the loss rather than the costs to repair or replace, is effec-
tive to limit an insurer’s liability. The California Courts of
Appeal have reached conflicting results on the issue; therefore
we respectfully request the California Supreme Court decide
this question of California law.
B. Costs in Preparation For Construction
If the Building Ordinance Exclusion is determined to
exclude the increased costs due to building ordinances, the
second question is whether costs such as the costs for obtain-
ing building permits and complying with CSWRCB mandated
environmental impact studies are included within the exclu-
sion. While these costs were required by ordinances or regula-
tions, it is unclear whether California would consider these
costs, which are prerequisites to building rather than actual
increased construction costs, to be within the Building Ordi-
nance Exclusion. We have been unable to find any California
case law on this issue. Because these costs are often signifi-
cant — in this case the district court found them to be $4 mil-
lion — we respectfully request the California Supreme Court
decide this question.
SIERRA PACIFIC v. HARTFORD STEAM BOILER 15
IV. Administrative Information
If our request for certification is granted, we designate
Sierra as petitioner. See Cal. R. Ct. 8.548(b)(1). The name and
address of counsel for Sierra are William E. Peterson, Morris
Peterson, 6100 Neil Road, Suite 555, Reno, NV 89511. The
name and address for the Insurers are David E. Bland, Robins,
Kaplan, Miller & Ciresi L.L.P., 800 LaSalle Ave., 2800
LaSalle Plaza, Minneapolis, MN 55402.
In accordance with California Rule of Court 8.548, the
Clerk of this court shall file the original and ten copies of this
order, along with all briefs on appeal to this court and any
record materials as requested, with the California Supreme
Court. The Clerk shall also file certificates of service with the
parties to this appeal. Cal. R. Ct. 8.548(c), (d).
V. Stay of Proceedings
In light of this court’s decision to certify the issues pre-
sented here, all further proceedings in this case before our
court are stayed pending final action by the California
Supreme Court. The parties shall notify the Clerk of this court
after the California Supreme Court accepts or rejects certifica-
tion, and again within fourteen days if the California Supreme
Court issues a decision.
This court retains jurisdiction over any further proceedings
in this case.
IT IS SO ORDERED.