                                                                      FILED
                                                           United States Court of Appeals
                                                                   Tenth Circuit

                                                                January 11, 2010
                     UNITED STATES COURT OF APPEALS
                                                  Elisabeth A. Shumaker
                                                                   Clerk of Court
                            FOR THE TENTH CIRCUIT


    GUS VAKAS; GEORGE VAKAS,

                Plaintiffs-Appellants,

    v.                                                  No. 09-3141
                                              (D.C. No. 6:08-CV-01127-EFM)
    HARTFORD CASUALTY                                    (D. Kan.)
    INSURANCE COMPANY,

                Defendant-Appellee.


                             ORDER AND JUDGMENT *


Before KELLY, PORFILIO, and O’BRIEN, Circuit Judges.



         The question before us is whether Hartford Casualty Insurance Company

must pay the replacement cost value for business property destroyed in a fire,

even though the appellants did not actually replace the property. We have

jurisdiction under 28 U.S.C. § 1291 to review the district court’s grant of

summary judgment in favor of Hartford. Because the insurance policy at issue


*
       After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and
collateral estoppel. It may be cited, however, for its persuasive value consistent
with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
explicitly provides that Hartford will not pay replacement costs for any property

that is not actually replaced, we affirm.

                                    Background

      On August 29, 2007, fire destroyed a medical office building and its

contents in Coffeyville, Kansas. The building and contents were covered by a

Hartford insurance policy issued to John Vakas, M.D., who passed away on

March 13, 2005. The appellants are Dr. Vakas’ heirs, and it is undisputed that

they possess an interest in the policy.

      The policy provides for a maximum of $240,800 in replacement costs for

business personal property. The appellants replaced only four items of property.

Hartford asserted they were entitled only to the actual cash value of the remainder

of the destroyed property. Accordingly, Hartford tendered appellants a check for

$129,851.83. The appellants disagreed with Hartford’s reading of the policy and

rejected the check. They brought suit in the district court, arguing that they were

entitled either to the policy limits of $240,800 because all of the building’s

contents were destroyed, or, in the alternative, to the replacement-cost value of

$190,231.13 because the policy provided for replacement-cost value. The district

court granted Hartford’s motion for summary judgment, holding the contract was

not ambiguous and it was Hartford’s prerogative to determine whether to pay

replacement-cost value.




                                            -2-
                                     Analysis

      “In diversity cases like this one, the substantive law of the forum state

governs the analysis of the underlying claims, but we are governed by federal law

in determining the propriety of the district court’s grant of summary judgment.”

Stickley v. State Farm Mut. Auto. Ins. Co., 505 F.3d 1070, 1076 (10th Cir. 2007)

(quotation omitted). “Accordingly, we review the grant of summary judgment de

novo, applying the same standard as the district court pursuant to Rule 56(c) of

the Federal Rules of Civil Procedure.” Id. (quotation omitted).

      Under Kansas law:

             If the language in an insurance policy is clear and
      unambiguous, it must be construed in its plain, ordinary, and popular
      sense and according to the sense and meaning of the terms used. An
      insurance policy is ambiguous when it contains language of doubtful
      or conflicting meaning based on a reasonable construction of the
      policy’s language. An ambiguity does not exist merely because the
      parties disagree on the interpretation of the language.

             To determine whether an insurance contract is ambiguous, the
      court must not consider what the insurer intends the language to
      mean. Instead, the court must view the language as to what a
      reasonably prudent insured would understand the language to mean.
      This does not mean that the policy should be construed according to
      the insured’s uninformed expectations of the policy’s coverage.

            Courts should not strain to find an ambiguity when common
      sense shows there is none. The court must consider the terms of an
      insurance policy as a whole, without fragmenting the various
      provisions and endorsements.

            As a general rule, exceptions, limitations, and exclusions to
      insurance policies are narrowly construed. The insurer assumes the
      duty to define limitations to an insured’s coverage in clear and

                                        -3-
      explicit terms. To restrict or limit coverage, an insurer must use
      clear and unambiguous language. Otherwise, the insurance policy
      will be construed in favor of the insured.

Marshall v. Kan. Med. Mut. Ins. Co., 73 P.3d 120, 130 (Kan. 2003) (citations

omitted).

      The appellants assert they are entitled to either the policy limits or the

stipulated replacement-cost value. But there does not appear to be any basis for

the appellants to collect additional monies just because the property was entirely

destroyed and the policy limits happen to exceed the replacement-cost value.

Accordingly, we focus on whether the policy entitles the appellants to receive

replacement-cost value for the unreplaced items.

      The applicable policy provisions are as follows:

      E.     PROPERTY LOSS CONDITIONS

             ...

             5.    Loss Payment

                   In the event of physical loss or physical damage covered
                   by this policy:

                   a. At our option we will either:

                      (1) Pay the value of physically lost or physically
                          damaged property, as described in paragraph d.
                          below.

                      (2) Pay the cost of repairing and replacing the
                          physically lost or physically damaged property,
                          plus any reduction in value of repaired items;


                                         -4-
   (3) Take all or any part of the property at an agreed or
       appraised value;

   (4) Repair, rebuild or replace the property with other
       property of like kind and quality.

b. We will give notice of our intentions within 30 days
   after we receive the sworn statement of loss.

c. We will not pay you more than your financial interest
   in the Covered Property.

d. We will determine the value of Covered Property as
   follows:

   (1) At replacement cost (without deduction for
       depreciation), except as provided in (2) through
       (7) below.

       (a) You may make a claim for physical loss or
           physical damage covered by this insurance on
           an actual cash value basis instead of on a
           replacement cost basis. In the event you
           elect to have physical loss or physical
           damage settled on an actual cash value basis,
           you may still make a claim on a replacement
           cost basis if you notify us of your intent to do
           so within 180 days after the physical loss or
           physical damage.

       (b) We will not pay on a replacement cost basis
           for any physical loss or physical damage:

            (i)   Until the physically lost or physically
                  damaged property is actually repaired or
                  replaced; and

            (ii) Unless the repairs or replacement are
                 made as soon as reasonably possible
                 after the physical loss or physical
                 damage.

                       -5-
                               ...

                          (c) We will not pay more for physical loss or
                              physical damage on a replacement cost basis
                              than the least of:

                               (i)   The cost to replace, on the same
                                     premises, the physically lost or
                                     physically damaged property with other
                                     property of comparable material and
                                     quality and which is used for the same
                                     purpose; or

                               (ii) The amount you actually spend that is
                                    necessary to repair or replace the
                                    physically lost or physically damaged
                                    property.

Aplt. App. at A-87 to A-89.

      It is not clear from the record which § E.5.a. payment option Hartford

selected. The district court assumed that the tender was made under § E.5.a.(3),

the option to “[t]ake all or any part of the property at an agreed or appraised

value.” We disagree. The parties have stipulated to certain amounts for actual

cash value and replacement-cost value, but they have not agreed on the value of

the property. If they had, they would not now be before this court, each

advocating the adoption of a different value standard. Moreover, the record does

not reflect any appraisal other than Hartford’s own valuation of the actual cash

value of the destroyed property (the appellants did not demand an appraisal).

Thus, we cannot conclude that Hartford acted pursuant to § E.5.a.(3).




                                         -6-
      But “we may affirm a district court decision on any grounds for which there

is a record sufficient to permit conclusions of law, even grounds not relied on by

the district court.” Stickley, 505 F.3d at 1076 (quotation omitted). And in

contrast to § E.5.a.(3), § E.5.a.(1) does not require the parties to agree on a value,

but instead allows Hartford to “[p]ay the value of physically lost or physically

damaged property,” under the value-determination provisions set forth in § E.5.d.

Section E.5.a.(1) more accurately reflects Hartford’s conduct in this case.

      As the appellants assert, under § E.5.d.(1), the presumptive method of

valuing the destroyed property is replacement cost. But as the district court

recognized, paragraph d.(1) also carries limitations in subparagraphs (1)(b) and

(1)(c), which clearly provide that Hartford is not liable to pay replacement-cost

value unless and until property actually is replaced. Reading § d.(1) without

taking account of subparagraphs (1)(b) and (1)(c) would impermissibly fragment

the policy.

      The policy is not ambiguous or internally inconsistent. In light of the clear

language of §§ E.5.d.(1)(b) and (c), a reasonably prudent insured would

understand that Hartford would not pay replacement-cost value unless and until

the property actually was replaced. Cf. Burchett v. Kan. Mut. Ins. Co., 48 P.3d

1290, 1291-92 (Kan. App. 2002) (“The unambiguous terms of the contract require

the insured to actually repair or replace the damaged property before he or she

may collect the full replacement cost. If the insured does not repair or replace the

                                          -7-
damaged property, he or she is only entitled to actual cash value.”). It is

undisputed that the appellants did not replace the bulk of the property for which

they seek reimbursement. Having failed to satisfy the policy’s explicit

requirements for payment of replacement costs, and therefore having made

themselves ineligible to receive payment on that basis for all but four items, the

appellants implicitly elected the “actual cash value” payment option in

§ E.5.d.(1)(a) for the bulk of the property. Hartford is not liable to pay

replacement-cost value for the property the appellants never replaced.

                                     Conclusion

      The judgment of the district court is AFFIRMED.


                                                     Entered for the Court



                                                     Terrence L. O’Brien
                                                     Circuit Judge




                                          -8-
