Standard Constr Co v. Maryland Cslty Co

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 Standard Construction Co. v. No. 02-6039 ELECTRONIC CITATION: 2004 FED App. 0068P (6th Cir.) Maryland Casualty Co., et al. File Name: 04a0068p.06 _________________ UNITED STATES COURT OF APPEALS COUNSEL FOR THE SIXTH CIRCUIT ARGUED: J. Robert Hall, MECKLER, BULGER & _________________ TILSON, Chicago, Illinois, for Appellants. J. Brooke Lathram, BURCH, PORTER & JOHNSON, Memphis, STANDARD CONSTRUCTION X Tennessee, for Appellee. ON BRIEF: J. Robert Hall, CO ., INC., - Michael M. Marick, MECKLER, BULGER & TILSON, Plaintiff-Appellee, - Chicago, Illinois, for Appellants. J. Brooke Lathram, - No. 02-6039 BURCH, PORTER & JOHNSON, Memphis, Tennessee, for - Appellee. v. > , BERTELSMAN, D. J., delivered the opinion of the court, - MARYLAND CASUALTY CO . in which COOK, J., joined. ROGERS, J. (pp. 16-17), - delivered a separate concurring opinion. and NORTHERN INSURANCE - CO . OF NEW YORK , - _________________ Defendants-Appellants. - - OPINION N _________________ Appeal from the United States District Court for the Western District of Tennessee at Memphis. BERTELSMAN, District Judge. Defendants, Maryland No. 01-02006—Diane K. Vescovo, Magistrate Judge. Casualty Company and Northern Insurance Company of New York, appeal the district court’s judgment in favor of plaintiff, Argued: December 11, 2003 Standard Construction Company. The district court ruled that defendants owed plaintiff both a duty to defend and a duty to Decided and Filed: March 4, 2004 indemnify under certain commercial general liability insurance policies. For the reasons set forth, we AFFIRM the Before: ROGERS and COOK, Circuit Judges; district court’s judgment. BERTELSMAN, District Judge.* Factual Background Standard Construction Company is an asphalt paving contractor. Maryland Casualty Company and Northern Insurance Company of New York insured Standard from January 1, 1990 through January 1, 1993, under three * The Honorable William O. Bertelsman, United States District Judge for the Eastern District of Kentucky, sitting by designation.

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successive one-year commercial general liability (“CGL”) and After receiving the engineer’s report, Fisher wrote to umbrella policies, respectively. Standard by letter, dated May 22, 1992, demanding that the company cease dumping on Love’s property, revoking any In March 1990, Standard entered into a contract with the authority Standard may have had for such dumping, and State of Tennessee to perform paving and road work as part requesting that Standard remove the debris. Fisher also stated of a road-widening project on Highway 64 near Arlington, that Love suffered from senile dementia and that her ability Tennessee. Under the contract, Standard was responsible for to enter into a binding contract was questionable. the clearing and removal of certain debris, to be performed in accord with specifications issued by the Tennessee After attempting unsuccessfully to locate a copy of the first Department of Transportation. These specifications required Love agreement, Standard obtained a second dumping Standard to remove debris from the construction area; to take agreement, signed either by Love or by Poole in Love’s name, ownership of the debris and dispose of it elsewhere; to secure dated June 17, 1992. Handwritten on the agreement was the written permission from landowners prior to dumping the notation: “agree to asp[halt] driveway + dump 2 loads of dirt debris on any private property; and to make reparations for in front yard.” Thereafter, Standard paved Love’s driveway any damage to private or public property that might occur and spread dirt on her land. during disposal. On November 22, 1994, Love, by and through her Standard subcontracted this disposal work to Ronald S. daughter, filed suit in Tennessee state court against Standard, Terry Construction Company. Terry’s superintendent, Gene Terry, Bobo and the State of Tennessee. Love asserted A. Bobo, obtained written permission from six owners of the various claims for damage to her property, including a claim property adjacent to Highway 64 to dump on their property for trespass. Standard tendered defense of the Love case to construction debris from the road-widening project. With Maryland and Northern, but the insurers denied coverage on respect to a seventh property owner, the then 90-year old several different grounds. Following amendments to the Love Cassella Love, Bobo obtained a similar agreement signed by complaint, the insurers again refused to defend Standard. Love’s daughter, Louise Poole, in Love’s name. Standard eventually settled the Love matter for approximately $200,000. Terry, believing that it had Love’s permission, proceeded to dump construction debris, including trees, corrugated metal On January 5, 2001, Standard filed the instant declaratory pipes, concrete chunks with exposed steel, and asphalt, on judgment action alleging that the insurers breached their Love’s property. At that time, Love’s property, which was duties to defend and indemnify Standard in connection with zoned commercial, was the subject of condemnation the Love lawsuit. The parties consented to the jurisdiction of proceedings brought by the State in connection with the United States Magistrate Judge Diane K. Vescovo, pursuant widening project. William H. Fisher, an attorney representing to 28 U.S.C. § 636(c). Love in the condemnation action, retained an engineer to inspect Love’s property. The engineer opined that the debris After discovery, the parties filed cross-motions for dumped on Love’s property rendered the land unsuitable for summary judgment. By order, dated May 15, 2002, development. Magistrate Judge Vescovo granted summary judgment in Standard’s favor as to the duty to defend, ruling that property

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damage resulting from trespass would constitute a covered Analysis claim under the applicable policies and that certain “business risk” exclusions relied upon by the insurers were inapplicable A. Standard of Review to claims by a stranger to the construction contract for damages resulting from a trespass. Magistrate Judge Vescovo We review the district court’s grant of summary judgment denied the motions as to the duty to indemnify, however, de novo, employing the same legal standard applied by the finding that there were genuine disputes of material fact as to district court. Westfield Ins. Co. v. Tech Dry, Inc., 336 F.3d whether a contract was entered into between Love and 503, 506 (6th Cir. 2003) (citation omitted). The same Standard (through Terry) so as to trigger the business risk standard applies where the district court denies summary exclusions. judgment based upon purely legal grounds. Id. The district court’s findings of fact are reviewed under the clearly Magistrate Judge Vescovo conducted a bench trial on erroneous standard. See Fed. R. Civ. P. 52(a). June 17 and 18, 2002, after which she entered Findings of Fact, Conclusions of Law, and a Judgment in Standard’s B. Applicable Law favor. Specifically, Magistrate Judge Vescovo found that Terry’s disposal of construction debris on Love’s property The district court held that Tennessee law was applicable, constituted a trespass because, although Terry (and Standard) and neither party contests this ruling. Throughout the opinion believed it had Love’s permission to dump the debris, in and briefs, however, citations are made to authorities of many reality such consent was lacking because Love herself was jurisdictions, since the policy provisions and cases incompetent to enter into any agreement and because her interpreting them are reasonably uniform. We agree with this daughter, Poole, had neither actual nor implied authority to do approach. so on Love’s behalf. Thus, no contract between Love and Standard ever existed, and Terry’s dumping on the property C. Scope of Coverage was wrongful. 1. “Occurrence” Magistrate Judge Vescovo also concluded that Standard The insuring agreement of these policies1 states, in had acted reasonably in settling the Love case and that pertinent part: Standard had not impaired the insurers’ subrogation rights. a. We will pay those sums that the insured becomes The trial court awarded Standard $244,750 for its Love legally obligated to pay as damages because of defense costs; $200,000 for its settlement costs; and “bodily injury” or “property damage” to which this $6,487.30 in pre-judgment interest. insurance applies. We will have the right and duty The insurers now appeal the grant of partial summary to defend any “suit” seeking those damages. . . . judgment to Standard on the issue of the duty to defend, the denial of summary judgment on that issue to the insurers, and the judgment in favor of Standard on the duty of 1 indemnification. The relevant terms in the Maryland and Northern policies are identical.

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b. This insurance applies to “bodily injury” and v. Evans, 814 S.W.2d 49 (Tenn. 1991), the court, after noting “property damage” only if: several approaches to this issue by various courts, held: (1) The “bodily injury” or “property damage” is After carefully weighing the implications of the several caused by an “occurrence” that takes place in approaches discussed in the preceding paragraphs, this the “coverage territory;” and Court is persuaded that the best approach, and the one that should be adopted in Tennessee, is that followed by (2) The “bodily injury” or “property damage” a majority of the states that have had an opportunity to occurs during the policy period. construe the language involved in this case. That is, in order to find that an intended or expected acts exclusion The policies further define “occurrence” as an “accident, applies, it must be established that the insured intended including continuous or repeated exposure to substantially the the act and also intended or expected that injury would same general harmful conditions.” The term “accident,” result. These are separate and distinct inquiries because however, is not defined. In addition, the policy excludes from many intentional acts produce unexpected results and coverage “bodily injury” or “property damage” that is comprehensive liability insurance would be somewhat “expected or intended from the standpoint of the insured.” pointless if protection were precluded if, for example, the intent to cause harm was not an essential (and required) Appellants argue that there was no coverage under the showing. . . . The intent itself may be actual or inferred policies because Standard intended to dump the debris on from the nature of the act and the accompanying Love’s land. This situation, it asserts, does not fit the policy’s reasonable foreseeability of harm. It is immaterial that definition of an “occurrence.” the actual harm was of a different character or magnitude or nature than that intended. The district court held that the dumping was an “occurrence” or “accident” within the meaning of the policy Id. at 55-56 (citation omitted) (italics in original). because, while the dumping was intentional, the fact that it was done without permission, thus making it wrongful, was We reject appellants’ argument that Evans is “irrelevant” not intended by the insured. because the court there was construing an exclusion rather than a coverage term. As the trial court here noted, the We agree with this conclusion. As pointed out by the trial “expected or intended” language of the exclusion discussed in court, “if the resulting damages are unintended, the resulting Evans was historically part of the definition of “occurrence.” damage is accidental even though the original acts were Moreover, whether expressed as part of the definition of intentional.” (J.A. at 169) (Order) (quoting State Farm Fire “occurrence” or stated as a separate exclusion, the point is the and Cas. Co. v. CTC Development Corp., 720 So.2d 1072, same. 1075 (Fla. 1998)). Moreover, this court recently reached a similar conclusion A Supreme Court of Tennessee opinion relied upon by the in a case where it had occasion to comment at length on the trial court is instructive. In Tennessee Farmers Mut. Ins. Co. meaning of “occurrence/accident” in liability policies. See Westfield Ins. Co. v. Tech Dry, Inc., 336 F.3d 503 (6th Cir.

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2003) (applying Kentucky law). There, the insured, a carpet- We thus agree with the trial court that, as a matter of law, the cleaning company, hired an individual as a carpet cleaner, but act falls within the definition of “occurrence.” it negligently failed to perform a background check on him. Id. at 505. The individual subsequently gained entrance to a 2. “Property Damage”/The “Your Work” Exclusion customer’s home to clean her carpet and, using knowledge of the premises gained in that endeavor, later broke into the Appellants also assign as error the district court’s holding home and murdered the homeowner. Id. The homeowner’s that the underlying Love action sought recovery for “property estate sued the insured carpet-cleaning company. damage” under these liability policies. As defined in the policies, “property damage” means: The insurance company argued that this scenario did not constitute an “occurrence” under the policy because both the a. Physical injury to tangible property, including all hiring and murder were intentional. The policy at issue resulting loss of use of the property; or defined “occurrence” exactly as the policies do here: as “an b. Loss of use of tangible property that is not accident, including continuous or repeated exposure to physically injured. substantially the same general harmful conditions.” Id. The policies exclude coverage, however, for “property This court rejected the insurance company’s argument. damage” to “impaired property” arising out of a “defect, First, we held that the term “accident” was not ambiguous, deficiency, inadequacy or dangerous condition in ‘your observing that the ordinary meaning of that term is “an event product’ or ‘your work.’” which . . . is unusual and not expected by the person to whom it happens.” Id. at 507 (quoting Black’s Law Dictionary (5th Appellants’ contention, as we understand it, is that because ed. 1979)). Further, we noted that an “accident is generally Standard was performing work pursuant to a contract with the understood as an unfortunate consequence which befalls an State, the tort it committed against Love - - a stranger to that actor through his inattention, carelessness or perhaps for no contract - - is not covered either because it was caused merely explicable reason at all.” Id. (quoting Fryman v. Pilot Life by faulty workmanship and/or because the injury arose out of Ins. Co., 704 S.W.2d 205, 206 (Ky. 1986)). “The result is not Standard’s “work.” a product of desire and is perforce accidental.” Id. We agree with the district court’s resolution of this issue. In Westfield, the insured deliberately hired a person, but The trial court reasoned that, since Love was a third person, that act had unforseen and unintended consequences due to not a party to Standard’s contract with the State, the damage the insured’s negligence, thus bringing the event within the to her property from the wrongful dumping was not subject to definition of “occurrence” for purposes of its liability the exclusion for “your [the insured’s] work.” insurance. This principle was derived from the decision of the In the instant case, the insured deliberately dumped debris Supreme Court of Tennessee in Vernon Williams & Son on Love’s property, but that act too had unforeseen and Constr., Inc. v. Continental Ins. Co., 591 S.W.2d 760 (Tenn. unintended consequences due to the insured’s negligence in 1979). There, speaking of this type of coverage, the court failing to secure a valid agreement from the property’s owner. pointed out: “The coverage is for tort liability for physical

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damages to others and not for contractual liability of the That particular part of real property on which you or any insured for economic loss because the product or completed contractors or subcontractors working directly or work is not that for which the damaged person bargained.” indirectly on your behalf are performing operations, if Id. at 764 (citation omitted) (emphasis added). the “property damage” arises out of those operations. Further, “it clearly appears that property damage claims of As previously noted, at the conclusion of the third persons resulting from the insured’s breach of an indemnification trial, the district court found as a fact that implied warranty are covered unless the claimed loss is there was no permission by Love for Terry to dump debris on confined to the insured’s work or work product.” Id. her land, and that Standard thus had no contract with her. (emphasis added). Therefore, it held that the dumping was a trespass. This finding is not clearly erroneous. In the instant case, it is not the manner in which the dumping was performed (the “work”) that is faulty or caused The district court further held that Exclusion j(5) was not damage, but rather that the dumping itself at the location in applicable, since it was not intended to apply to claims by question was unauthorized. Some damage to Love’s land third parties, but only to claims by the entity with which the inevitably resulted. The damage was to the land, not to the insured construction contractor had expressly contracted. insured’s “work.” Therefore, there is coverage for “property (J.A. at 19-22) (Findings of Fact and Conclusions of Law). damage” and the “your work” exclusion does not apply. Thus, the district court further held that whether Love was a Accord Standard Fire Ins. Co. v. Chester-O’Donley & Assoc., third-party beneficiary of Standard’s construction contract Inc., 972 S.W.2d 1, 10 (Tenn. App. 1998) (“The exclusion with the State was immaterial. does not apply if there is damage to property other than the insured’s work.”) (discussing extensively the history of this We agree with these conclusions. Appellants cite Vinsant policy language and many other cases and texts); Weedo v. Elec. Contractors v. Aetna Cas. & Surety Co., 530 S.W.2d 76 Stone-E-Brick, Inc., 405 A.2d 788, 791-95 (N.J. 1979) (Tenn. 1975), and Standard Fire Ins. Co. v. Chester- (extensive discussion).2 O’Donley & Assoc., Inc., 972 S.W.2d 1 (Tenn. App. 1998). Neither of these cases, however, is of help to the insurers 3. Exclusion 2j(5) because neither involved a third party. Rather, both were actions by the owner with whom the insured construction Appellants also assign as error the district court’s company had contracted. conclusion that the exclusion found in section 2j(5) of the policy does not apply to Standard’s claim. This exclusion The Tennessee court describes general liability policies as precludes coverage for property damage to: follows: General liability policies are not “all-risk” policies. . . . They provide an insured with indemnification for damages up to policy limits for which the insured 2 becomes liable as a result of tort liability to a third The discussion of the general principle underlying business risk party. . . . The risk insured by these policies is the exclusions, infra, is also pertinent to this subsection.

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possibility that the insured’s product or work will cause losses are generally beyond the effective control of either bodily injury or damage to property other than the work the contractor or owner . . . [The] risk of third party itself for which the insured may be found liable. personal injury or property damage claim[s] due to defective workmanship or materials may be shifted by the Standard Fire, 972 S.W.2d at 6-7 (citations omitted) contractor purchasing a comprehensive general liability (emphasis added). insurance policy. . . . However, in addition to and apart from those risks, the contractor likewise has a contractual The Standard Fire court further cites with approval an business risk that he may be liable to the owner resulting article by Peter J. Neeson and Phillip J. Meyer entitled “The from failure to properly complete the building project Comprehensive General Liability Policy and Its Business itself in a manner so as to not cause damage to it. This Risk Exclusions: An Overview.” Id. at 7 n. 8. There, the risk is one the general contractor effectively controls and learned authors state: one which the insurer does not assume because it has no effective control over those risks and cannot establish The Business Risk exclusions do not purport to bar predictable and affordable insurance rates. coverage for personal injuries or for physical injury to other property which are caused by the insured’s product Id. at 81-82 (quoting Knutson Constr. Co. v. St. Paul Fire and or work. Marine Ins. Co., 396 N.W.2d 229, 234 (Minn. 1986)) (emphasis added). Peter J. Neeson & Phillip J. Meyer, The Comprehensive General Liability Policy and Its Business Risk Exclusions: An Thus: Overview, 79-80, reprinted in Reference Handbook on the Comprehensive General Liability Policy (American Bar When read together, these [business risk] provisions Ass’n 1995). exclude coverage when there has been no physical injury to tangible property other than the insured’s work. We agree with these observations and also with the authors’ application of these principles to construction projects: Standard Fire, 972 S.W.2d at 12 (emphasis added). In every construction project, the owner and contractor In other words, there is coverage where there has been incur risks or exposure to loss. Some of these risks can physical injury to tangible property that is not the insured’s be shifted to insurers -- others cannot. The owner has the work. As we have pointed out earlier in this opinion, we risk that the contractor will fail to properly perform his agree with the district court’s view that Love’s tangible real contractual obligations. This risk can be shifted by the property is not the insured’s “work,” and that it was owner either securing, or requiring the contractor to physically damaged by having the construction debris from provide, a performance bond. The owner likewise has the road-widening project dumped on it. Therefore, this the risk the project may be destroyed by fire, explosion exclusion does not apply. See Thommes v. Milwaukee Mut. or the like during construction. The contractor may have Ins. Co., 622 N.W.2d 155, 159-60 (Minn. App. 2001) a similar risk. Either or both may shift that risk to an (holding that j(5) exclusion did not bar coverage for claim insurer by acquiring a builder’s risk policy. Again, such against insured by third party arising out of insured’s damage

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to third party’s property), aff’d, 641 N.W.2d 877 (Minn. ____________________ 2002). Cf. Dewitt Constr. Inc. v. Charter Oak Fire Ins. Co., 307 F.3d 1127, 1134-35 (9th Cir. 2002) (holding that j(5) CONCURRENCE exclusion did not bar coverage for damage to subcontractors’ ____________________ work because damage did not arise from insured’s performing operations on subcontractors’ work). ROGERS, Circuit Judge, concurring. I concur in the majority opinion. I write separately to explain why, in my D. Other Issues view, the seemingly applicable “j(5)” exclusion does not apply in the circumstances of this case. The insurers also claim that the district court erred in holding that they were not prejudiced by a delay in notice. The insurance policies in this case, in the “j(5)” exclusion, We find no error in this conclusion. exclude coverage for “property damage” to Appellants further challenge the district court’s ruling that, That particular part of real property on which you or any by refusing to defend Standard against the underlying action contractors or subcontractors working directly or by Love, appellants waived any right to control the indirectly on your behalf are performing operations, if settlement. We believe, however, that the district court’s the “property damage” arises out of those operations. ruling on this issue was correct. See, e.g., Esicorp, Inc. v. Liberty Mut. Ins. Co., 193 F.3d 966, 970 (8th Cir. 1999) Notably, the policies do not define “performing operations” (noting that by refusing to defend, the insurer gives up its or “operations.” contractual right to control defense, and insured may negotiate reasonable settlement); Cambridge Mut. Fire Ins. Two canons of constructions are crucial to my resolution of Co., 692 A.2d 1388, 1391-92 (Me. 1997) (similar); Sentinel this issue. First, the insurer bears the burden of showing that Ins. Co., Ltd. v. First Ins. Co. of Hawai’i, 875 P.2d 894, 913 an exception applies. Interstate Life & Acc. Ins. Co. v. (Haw. 1994) (by breaching duty to defend, insurer forfeits any Gammons, 408 S.W.2d 397, 399 (Tenn. Ct. App. 1966). right to control defense costs and strategy; insured is then Second, ambiguous insurance contracts, and, in particular, entitled to negotiate reasonable settlement). ambiguous language limiting coverage, are construed in favor of the insured. American Justice Ins. Reciprocal v. For the foregoing reasons, the district court’s judgment is Hutchinson, 15 S.W.3d 811, 815 (Tenn. 2000); Interstate Life affirmed. & Acc. Ins. Co., 408 S.W.2d at 399. The insurers argue that the j(5) exclusion applies because, under Standard’s contract with the State of Tennessee, Standard was required to dispose of construction debris. As explained in the majority opinion, Standard entered into a contract with the State of Tennessee to perform paving and road widening work as part of a state project to widen Highway 64 from two to five lanes. In the contract, Standard

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agreed to “clear and grub” vegetation and debris, to remove “structures and obstructions,” and to dispose of this material “outside the limits of view from the project.” Regarding the “clearing and grubbing,” Standard was required to “make all necessary arrangements with property owners for obtaining suitable disposal locations,” and the cost involved was “included in the unit price bid for other items of construction.” Regarding the removal of “structures and obstructions,” the contract provided that, “[i]f the material is disposed of on private property, [Standard] shall secure written permission from the property owner.” While in my view the question is close, the term “operations” is ambiguous in that it is not clear whether Standard was “performing operations” on Ms. Love’s property when it dumped debris there. It is true that Standard was required under the contract to dispose of construction debris and to obtain permission from any property owners on whose property Standard chose to dispose of the debris. However, Standard was not obligated to dispose of the debris in any particular fashion—Standard owned the debris once it was removed and could dispose of it in a number of ways. It was not necessary for Standard to dump debris on Ms. Love’s property in order to fulfill its contract to widen the highway. The requirement that Standard obtain permission before it dumped debris on private land simply served to shield the State of Tennessee from liability to third parties. As the district court found, “work on Ms. Love’s property was an additional duty or task that Standard was to undertake through additional contracts with adjacent landowners.” Or as Standard argues, it was “hired” to widen a road—not to perform work on Ms. Love’s land. Thus, given that the canons of construction favor coverage, and that, as explained in the majority opinion, coverage in the present case coincides with the underlying purpose of CGL insurance, the district court properly concluded that the j(5) exclusion does not apply.