                                                    130 Nev., Advance Opinion    15
                        IN THE SUPREME COURT OF THE STATE OF NEVADA


                 FEDERAL INSURANCE COMPANY,                             No. 59639
                 Appellant/Cross-Respondent,
                 vs.                                                            MED
                 COAST CONVERTERS, INC.,
                 Respondent/Cross-Appellant.                                    DEC 2 4 2014

                                                                            E'
                                                                                      rop
                                                                             TAC'E K. I INDEHAN
                                                                                    d H „IC

                                                                             CHRiF GE     ( EEL (K
                             Appeal and cross-appeal from a judgment on a jury
                 finding an insurance company liable for breach of contract and violation of
                 the Nevada Unfair Claims Practices Act. Eighth Judicial District Court,
                 Clark County; Gloria Sturman, Judge.
                             Vacated in part, reversed, and remanded.

                 Lewis Roca Rothgerber LLP and Daniel F. Polsenberg and Joel D.
                 Henriod, Las Vegas; Pyatt Silvestri and James P.C. Silvestri, Las Vegas,
                 for Appellant/Cross-Respondent.

                 Lee, Hernandez, Landrum, Garofalo & Blake, APC, and David S. Lee and
                 Robert A. Carlson, Las Vegas; Lemons, Grundy & Eisenberg and Robert L.
                 Eisenberg and Tiffinay B. Pagni, Reno,
                 for Respondent/Cross-Appellant.




                 BEFORE THE COURT EN BANC.

                                                 OPINION
                 By the Court, GIBBONS, C.J.:
                             This case involves a dispute between an insured manufacturer
                 and its insurer. In the present case, electrical problems at a plastic bag
                 manufacturing plant led to damaged machinery and an increased number
                 of defective bags being produced. Following the electrical problems, the
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                manufacturer filed a claim with its insurance company. However, a
                dispute arose between the parties regarding whether losses associated
                with the defective bags should be covered under the insurance policy's
                property damage provision or its business interruption/extra expense
                provision. The parties further disputed whether a policy limit of $2
                million or $5 million should apply to the manufacturer's property loss.
                The district court submitted both of these issues to the jury. Following
                trial, the jury awarded the manufacturer $4,005,866 for breach of the
                insurance contract, impliedly finding that the insured's loss was property
                damage and that the $5 million property damage policy limit applied.
                            In this opinion, we first address whether categorizing the
                insured's loss under the policy presents a question of law or a question of
                fact. We conclude that categorizing the insured's loss under the policy is a
                question of law. Second, we address whether determining which policy
                limit applies to the insured's property loss presents a question of law or a
                question of fact. We conclude that determining which policy limit applies
                presents a question of law. Accordingly, we conclude that the district
                court erred in sending these questions to the jury. We therefore reverse
                the district court's judgment and remand this matter for further
                proceedings consistent with this opinion.
                                 FACTS AND PROCEDURAL HISTORY
                            Respondent/cross-appellant Coast Converters, Inc.,
                manufactured plastic bags in California. In 2003, Coast began moving its
                plastic bag factory, including machines and equipment, from California to
                Las Vegas. Corresponding with the move, in June 2003, Coast obtained a
                commercial package all-risk insurance policy from appellant/cross-
                respondent Federal Insurance Company. The insurance policy covered up
                to $2 million in property damage (PD) and up to $1.75 million for business
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                   interruptions/extra expenses (BI/EE).       On August 27, 2003, Coast
                   requested, and later received, an increase in the PD coverage limit from $2
                   million to $5 million.
                                In anticipation of Coast's move to Las Vegas, electrical
                   modifications were made to the Las Vegas facility. However, the
                   modifications were apparently inadequate, causing voltage fluctuations.
                   The voltage fluctuations damaged machinery used in the manufacturing
                   process and also caused the production of a larger-than-normal amount of
                   defective bags, or "scrap."
                                Coast filed a claim with Federal Insurance, seeking to recover
                   costs related to the damaged machinery and the production of increased
                   scrap. Coast pointed out that the defective bags were often hidden in rolls
                   of otherwise quality bags, rendering the defective bags largely
                   undiscoverable prior to sale. While it was able to pull some of the rolls
                   containing defective bags, Coast claimed that it was not made aware of the
                   defects until several orders were returned. Thus, Coast asserted that it
                   was unable to separate the defective bags from the quality ones, rendering
                   the entire package of bags a total loss.
                               Upon receiving Coast's claim, Federal Insurance investigated
                   the machine malfunctions and eventually made several payments to
                   Coast. Initially, Federal Insurance did not communicate under which
                   provision, PD or BI/EE, the payments were made. Federal Insurance later
                   allocated a small portion of the payments—relating to the damaged
                   machinery—to the PD coverage. However, the majority of the payments,
                   including payments for the increased scrap, were made under the BI/EE
                   coverage. Ultimately, Federal Insurance disbursed amounts covering the
                   increased scrap and other losses up to the entire $1.75 million BI/EE

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                policy limit Coast contended that the increased scrap losses should have
                been covered under the PD provision. However, Federal Insurance
                disagreed and refused to make any additional payments under the PD
                provision. Coast alleges that it ultimately went out of business as a result
                of Federal Insurance's refusal to pay. Coast then filed a complaint against
                Federal Insurance.
                            Both before and after trial, Federal Insurance asked the
                district court to determine (1) whether Coast's loss fell under the policy's
                PD provision or the BI/EE provision; and (2) if PD coverage was
                appropriate, whether the coverage limit was $2 million or $5 million. The
                district court, however, declined to answer these questions, opting instead
                to leave them to the jury. After a five-week jury trial, the jury found
                Federal Insurance liable in the amount of $4,005,866 for breaching the
                insurance contract and in the amount of $5,048,717 for violating the
                Nevada Unfair Claims Practices Act (UCPA), NRS 686A.310. The district
                court offset the judgment by amounts Coast obtained in settlement for its
                claims against other parties. The district court, however, refused to offset
                the judgment by the amount already paid on the increased scrap
                insurance claim, and awarded Coast attorney fees and prejudgment
                interest.
                            Federal Insurance now appeals, arguing that (1) the district
                court erred in refusing to rule, as a matter of law, on the policy coverage
                and policy limit issues, as well as on the UCPA claims; (2) substantial
                evidence does not support the jury's findings on the breach of contract and
                UCPA claims; (3) the jury erred in finding it liable under the UCPA; (4)
                the district court erred in refusing to offset the judgment by the amount
                already paid on the claim; and (5) the district court erred in granting

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                      attorney fees as special damages. Coast cross-appeals, arguing that the
                      district court erred in offsetting the judgment by amounts obtained in
                      settlements and in its calculation of prejudgment interest.
                                                    DISCUSSION
                      Categorizing Coast's loss under the policy was a question of law for the
                      district court to decide
                                   Federal Insurance argues that the district court erred in
                      allowing the jury to determine which policy provision, PD or BIJEE,
                      applied to Coast's increased scrap. We agree.
                                   In contract matters, the jury may be charged with deciding
                      any factual disputes. State, Univ. & Cmty. Coll. Sys. v. Sutton,   120 Nev.
                      972, 983, 103 P.3d 8, 15 (2004). But "in the absence of ambiguity or other
                      factual complexities,' contract interpretation presents a question of law"
                      for the district court to decide, "with de novo review to follow in this
                      court." Galardi v. Naples Polaris, L.L.C., 129 Nev. „ 301 P.3d 364,
                      366 (2013) (quoting Ellison v. Cal. State Auto. Ass'n, 106 Nev. 601, 603,
                      797 P.2d 975, 977 (1990)); see also Farmers Ins. Exch. v. Neal, 119 Nev. 62,
                      64, 64 P.3d 472, 473 (2003) (noting that the task of interpreting a contract
                      is a question of law).
                                   Here, deciding which policy provision, PD or BI/EE, applies to
                      Coast's increased scrap is a question of contract interpretation, and thus,
                      is a question of law. Because categorizing Coast's loss under the policy is
                      a question of law, the district court erred in sending it to the jury.
                      Moreover, because the policy provision dispute is a question of law, "[t]his
                      court is obligated to make its own independent determinations and should
                      not defer to those of the district court." Musser v. Bank of Am., 114 Nev.
                      945, 947, 964 P.2d 51, 52 (1998); see also Hartford Accident & Indem. Co.
                      v. Wesolowski,    305 N.E.2d 907, 909-10 (N.Y. 1973) (interpreting an
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                insurance policy, even though the issue was wrongly sent to the jury
                below, where the policy was unambiguous and the parties agreed that no
                extrinsic evidence bearing on the parties' intent existed).
                               Accordingly, as the parties have fully briefed the legal
                interpretation issue before this court, we will now address whether the
                policy's PD provision or the MEE provision covered Coast's increased
                scrap.
                         Interpretation of the insurance policy
                               "An insurance policy is a contract that must be enforced
                according to its terms to accomplish the intent of the parties."    Farmers
                Ins. Exch., 119 Nev. at 64, 64 P.3d at 473. We consider an insurance
                policy as a whole, giving it a reasonable and harmonious reading.    Century
                Sur. Co. v. Casino W., Inc., 130 Nev. „ 329 P.3d 614, 616 (2014). "If
                a provision in an insurance contract is unambiguous, a court will interpret
                and enforce it according to the plain and ordinary meaning of its terms."
                Powell v. Liberty Mut. Fire Ins. Co., 127 Nev. „ 252 P.3d 668, 672
                (2011); cf. Grand Hotel Gift Shop v. Granite State Ins. Co., 108 Nev. 811,
                819, 839 P.2d 599, 604 (1992) (stating that ambiguous or unclear terms in
                an insurance contract are resolved in favor of the insured). "[W]hether an
                insurance policy is ambiguous turns on whether it creates reasonable
                expectations of coverage as drafted." Powell, 127 Nev. at , 252 P.3d at
                672 (quoting United Nat'l Ins. Co. v. Frontier Ins. Co., 120 Nev. 678, 684,
                99 P.3d 1153, 1157 (2004)). This court "will not rewrite contract
                provisions that are otherwise unambiguous . . . [or] increase an obligation
                to the insured where such was intentionally and unambiguously limited
                by the parties." Farmers Ins. Grp. v. Stonik ex rel. Stonik, 110 Nev. 64, 67,
                867 P.2d 389, 391 (1994).

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                             Here, prior to determining, as a matter of law, whether
                 Coast's increased scrap is covered by the policy's PD provision or the
                 BI/EE provision, one factual question must be resolved by the jury: on
                 what date did Coast become aware that continued use of its machines
                 would result in the production of an increased amount of scrap? We
                 conclude that increased scrap produced after this date is covered by the
                 policy's BI/EE provision, and increased scrap produced before this date is
                 covered by the policy's PD provision.'
                      The BI I EE provision applies to excess scrap produced after Coast
                      became aware that continued use of its machines would result in the
                      production of an increased amount of defective bags
                             The parties dispute whether Coast knew that the continued
                 use of its machines would produce an increased number of defective bags.
                 Federal Insurance argues that as of October 2003, Coast was aware of the
                 machinery and electrical problems and decided to continue to use those
                 machines to manufacture bags, despite being aware that scrap would be
                 produced at a higher rate than norma1. 2 Coast contends that, while it
                 became aware of electrical problems in September 2003 and of the
                 resulting damaged bags in October 2003, it investigated those issues and
                 only continued production after it was determined that the problems had
                 been fixed. Coast further asserts that it was not until additional damaged

                       'The record indicates that even under normal manufacturing
                 conditions, at least some scrap was produced. Accordingly, coverage under
                 both the BI/EE provision and PD provision will only apply to scrap that is
                 produced in excess of the normal amount.

                       2The record suggests that Coast normally produced around 8%
                 scrap, which increased to upwards of 20% sometime after the electrical
                 problems began.



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                bags were returned and additional investigation was conducted that it
                became aware of the full extent of the damaged machinery and the
                connection to the defective bags. It is undisputed, however, that Coast
                continued bag production throughout the relevant period in order to meet
                its obligations to customers.
                            We conclude that the proper interpretation of the insurance
                policy is that the BI/EE provision applies to increased scrap produced after
                Coast became aware that continued use of its machines would result in
                the production of an increased amount of defective bags. The BI/EE
                provision applies to increased scrap produced after this date for two
                reasons.
                            First, increased scrap produced after this date unambiguously
                fits the definition of an extra expense under the policy. The policy defines
                extra expense in relevant part as "necessary expenses you incur: in an
                attempt to continue operations, over and above the expenses you would
                have normally incurred." Defective bags produced after the date Coast
                was aware that continued production would lead to increased scrap fits
                the definition of an "extra expense," because it was an expense above that
                associated with normal production, which Coast incurred "in an attempt to
                continue operations" in order to fulfill customer obligations despite
                ongoing electrical problems.
                            Second, scrap produced after this date cannot be categorized
                as property based on the implied requirement of fortuity; hence, it can
                only be covered under the policy's BITEE provision. It is well recognized
                that insurable loss of or damage to property must be occasioned by a
                fortuitous, noninevitable, and nonintentional event.           See City of
                Burlington v. Indem. Ins. Co. of N. Am., 332 F.3d 38, 47-48 (2d Cir. 2003);

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                  Univ. of Cincinnati v. Arkwright Mut. Ins. Co., 51 F.3d 1277, 1281 (6th
                  Cir. 1995) ("The application of the implied requirement of fortuity [to
                  insurance contracts] is universally recognized." (internal quotation
                  omitted)); see also Avis v. Hartford Fire Ins. Co., 195 S.E.2d 545, 547-49
                  (N.C. 1973). In other words, a loss occasioned by the insured's own
                  decision to act in a way that will predictably result in a loss is not
                  fortuitous; and thus, such a loss is generally not covered.   See, e.g., Univ.
                  of Cincinnati, 51 F.3d at 1282 ("[C]ourts generally do not recognize
                  deliberate actions that produce predictable and anticipated damages as
                  fortuitous events under all-risk insurance policies."). Further, the fortuity
                  principle applies even if not explicitly written into the insurance contracts
                  Thus, under the implied requirement of fortuity, the PD provision cannot
                  apply to scrap produced as a result of Coast's decision to continue
                  production despite being aware that damaged bags would be produced at a
                  higher rate than normal.
                              In sum, deciding when Coast became aware that continued
                  production would lead to increased scrap is a factual question for the jury.
                  However, once the jury determines when that occurred, the district court
                  must then apply that fact and conclude, as a matter of law, that increased
                  scrap produced after that date is covered under the insurance policy's
                  BIJEE provision.




                        3 Here,Coast's duties under the policy included "ltlak[ingl every
                  reasonable step to protect the covered property from further damage."



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                       The PD provision applies to excess scrap produced before Coast
                       became aware that continued use of its machines would result in the
                       production of an increased amount of defective bags
                              Here, the PD provision covered "direct physical loss or
                 damage to . . . personal property caused by or resulting from a peril." The
                 policy defines personal property as "all your business personal property;
                 business personal property in which you have an insurable interest;
                 patterns, molds and dies." Included in business personal property is
                 "stock." The policy splits "stock" into four subcategories: (1) raw stock, (2)
                 stock in process, (3) finished stock, and (4) goods held in storage for sale.
                 "Raw stock" is defined as "material in the state in which you receive it for
                 conversion into finished stock." "Stock in process" is defined as "raw stock
                 that has undergone any aging, seasoning, mechanical or other process of
                 manufacture, but which has not become finished stock." Finally, "finished
                 stock" is defined as "goods you have manufactured which are in their
                 completed state and ready for sale."
                             The policy explicitly defines these terms because the loss
                 payment basis for "finished stock" is different than the loss payment basis
                 for "raw stock" or "stock in process." Specifically, the loss payment basis
                 for "finished stock" is the "selling price less the value of discounts and
                 costs you would have incurred." In contrast, the loss payment basis for
                 "raw stock" is the cash valueS or replacement value, and the loss payment
                 basis for "stock in process" is the "cost of raw materials and costs expended
                 as of the date of loss or damage." Because of the different loss payment
                 basis, damaged property that is deemed to be "finished stock" may be
                 valued much higher than property deemed to be another type of stock.
                 Based on the evidence presented at trial and the jury's award of more than
                 $4 million for Coast's breach of contract claim, it can be inferred that the

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                jury categorized the increased scrap as not only property, but also as
                "finished stock."
                            Federal Insurance argues that even if the increased scrap is
                covered by the PD provision, it cannot be "finished stock," because the
                defective bags were not "in their completed state and ready for sale."
                Federal Insurance argues that the bags were not "completed" because
                their defects resulted in them being returned. In contrast, Coast argues
                that the defective bags were "finished stock," because they had completed
                the manufacturing process and were sold.
                            First, we conclude that the PD provision applies to excess
                scrap produced before Coast became aware that continued use of its
                machines would result in the production of an increased number of
                defective bags. The PD provision covers "stock" as business personal
                property. The policy's definition of "stock" refers to the goods Coast
                produced. Thus, Coast's "stock" included the plastic bags, defective or
                otherwise, that it was in the business of producing. Accordingly, the
                defective bags produced by Coast were business personal property covered
                by the policy's PD provision.
                            Second, we conclude that the increased scrap that is covered
                by the PD provision unambiguously fits the definition of "finished stock,"
                which is defined as "goods you have manufactured which are in their
                completed state and ready for sale." While the bags were ultimately
                returned to Coast because of defects, the defective bags had completed the
                manufacturing process and were sold to Coast's customers. In other
                words, the bags were in their "completed state," because there were no
                additional steps for Coast to take in the manufacturing process prior to
                sale.   See Merriam-Webster's Collegiate Dictionary 254 (11th ed. 2007)

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                (defining "complete" as "having all necessary parts, elements, or steps").
                Reading the policy as a whole, it is clear that the definition of "finished
                stock" was intended to include bags that have completed the
                manufacturing process but are ultimately returned for defects caused by a
                covered peril. This is evidenced by the fact that the loss payment basis for
                "finished stock" is the sales price of the goods. The policy provides that
                Coast be compensated for the sales price of the defective bags because, but
                for the covered peril—the damaged machinery—the defective bags would
                not have been returned and Coast would have realized the sales price from
                its customers.
                            In sum, we conclude that the PD provision applies to excess
                scrap produced before Coast became aware that continued use of its
                machines would result in the production of an increased amount of
                defective bags. We further conclude that the excess scrap covered by the
                PD provision must be categorized as "finished stock," and should be valued
                as such under the terms of the policy.
                Determining which PD policy limit applies was a question of law for the
                district court to decide
                            Coast originally had PD coverage of $2 million which it later
                increased to $5 million The parties now dispute whether the applicable
                PD policy limit is $2 million or $5 million. The district court left this
                decision to the jury. However, in Nevada, determining whether an
                insurance policy applies to ongoing property damage is decided using the
                "manifestation rule," a legal principle. See Jackson v. State Farm Fire &
                Gas. Co., 108 Nev. 504, 509, 835 P.2d 786, 789 (1992). Accordingly, we
                conclude that determining which PD policy limit applies presents a




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                question of law; and thus, the district court erred in sending the issue to
                the jury. 4 Because determining which PD policy limit applies presents a
                question of law, this court will resolve the issue by making our "own
                independent determinations and [will] not defer to those of the district
                court." Musser v. Bank of Am., 114 Nev. 945, 947, 964 P.2d 51, 52 (1998).
                      Legal determination of the PD policy limit
                              Federal Insurance argues that the district court erred in not
                adopting a legal rule to govern the question of whether the increased limit
                applies. Federal Insurance further argues that under applicable law, the
                $2 million policy limit applies because Coast knew or should have known
                of ongoing property damage when it applied for the policy limit increase on
                August 27, 2003. In response, Coast argues that the jury's award of
                $4,005,866 in breach of contract damages implies that the jury found that
                the $5 million policy limit applies, and that such a finding is supported by
                substantial evidence.
                              In Jackson v. State Farm Fire & Casualty Co., this court
                adopted the so-called "manifestation rule." 108 Nev. at 509, 835 P.2d at

                      4 The jury was given an instruction vaguely defining the
                "manifestation rule," but was not instructed on how this legal principle
                should be applied to its factual findings. Jury instruction No. 27 provided:

                              [s]ometimes an event happens that causes
                              continuing damage over time In such a situation,
                              insurance coverage is provided by the particular
                              insurance in effect at the point in time appreciable
                              damage occurs, and is or should be known to
                              insured such that a reasonable insured would be
                              aware that his notification duty under the policy
                              has been triggered. This is known as the damage
                              manifestation rule.


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                   789. Under the "manifestation rule," an insurer is only liable under an
                   insurance policy if the policy was in effect when the loss became manifest.
                   Id. at 506, 835 P.2d at 788. A loss becomes manifest at the "point in time
                   when appreciable damage occurs and is or should be known to the insured,
                   such that a reasonable insured would be aware that his notification duty
                   under the policy has been triggered." Id. at 509, 835 P.2d at 790 (internal
                   quotation omitted). Further, "[t]he manifestation date will generally be a
                   question of fact" for the jury; however, a court can decide the
                   manifestation date "where the undisputed evidence establishes that no
                   damage had been discovered before a given date." Id.
                               Here, the parties dispute when "manifestation" occurred.
                   Because the date of manifestation is "generally. . . a question of fact," we
                   conclude that determining when "manifestation" occurred is a question of
                   fact for the jury to decide.   See id.        However, once the jury determines
                   when "manifestation" occurred, the district court must then apply that
                   fact to the law and determine which policy limit applies. Specifically, if
                   the jury finds that Coast knew or should have known of "appreciable
                   [property] damage" prior to increasing its PD coverage to $5 million, then
                   the increase in coverage does not apply, and an award for breach of
                   contract based on property damage cannot exceed $2 million.             See id.
                   (internal quotation omitted). In contrast, if the jury finds that Coast did
                   not know or should not have known of "appreciable [property] damage"
                   prior to increasing the PD coverage to $5 million, then the increase does
                   apply and an award for breach of contract based on property damage
                   cannot exceed $5 million See id. (internal quotation omitted).
                   Coast's UCPA claim is dependent on a proper interpretation of the contract
                               At trial, Coast presented evidence suggesting that Federal
                   Insurance violated the UCPA, in part because Federal Insurance
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                 incorrectly determined that excess scrap was covered under the policy's
                 BI/EE provision. Thus, Coast's UCPA claim must await the district
                 court's determination of how the excess scrap should be categorized under
                 the policy pending the jury's finding of when Coast became aware that
                 continued production would lead to increased scrap.     FGA, Inc. v. Giglio,
                 128 Nev. „ 278 P.3d 490,496 (2012) (holding that a verdict cannot
                 stand where one of several "overlapping factual theories support a single
                 theory of recovery" and one of those theories is challenged on appeal).
                 Accordingly, judgment on the jury's verdict regarding Federal Insurance's
                 liability under the UCPA is vacated, and the issue is remanded for a new
                 trial.
                                               CONCLUSION
                             First, we conclude that because contract interpretation is a
                 question of law, the district court should have decided, as a matter of law,
                 whether Coast's loss was covered under the policy's PD provision or its
                 BI/EE provision. Thus, the district court erred in submitting this question
                 to the jury. We further conclude that under a proper interpretation of the
                 policy, losses incurred after Coast became aware that electrical problems
                 would cause increased scrap to be produced are covered under the policy's
                 BI/EE provision. Conversely, we conclude that losses incurred before
                 Coast became aware that electrical problems would cause increased scrap
                 to be produced are covered under the policy's PD provision, and should be
                 valued as "finished stock."
                             Second, we conclude that determining which PD policy limit
                 applies is a question of law for the district court to decide. Specifically,
                 once the jury determines when Coast knew or should have known of
                 "appreciable [property] damage," the district court must then apply the
                 "manifestation rule" and determine which policy limit applies to Coast's
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                   property loss. Once the policy limit is established, a breach of contract
                   award based on property damage cannot exceed that amount.
                               Finally, we conclude that because the jury's verdict on Coast's
                   UCPA claim was influenced by an improper interpretation of the contract,
                   the verdict must be vacated. We therefore vacate in part, and reverse and
                   remand for further proceedings consistent with this opinion.'


                                                                                   , C.J.
                                                       Gibbons




                   Pickering

                                                  J.
                   Haraty

                   nStressate, J.
                   Parraguirre




                         5 Based upon our holding, we vacate the award of attorney fees and
                   do not address the other issues raised by the parties. Although we could
                   address the remaining issues of law raised, many of these issues depend
                   on the insurance coverage issue. Therefore, we conclude that it is not
                   appropriate to address them at this time.



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