West Side Salvage, Inc. v. RSUI Indemnity Company
Filing
Filed opinion of the court by Judge Kanne. AFFIRMED. Daniel A. Manion, Circuit Judge; Michael S. Kanne, Circuit Judge and Ilana Diamond Rovner, Circuit Judge. [6890876-1] [6890876] [16-3928]
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In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 16 3928
WEST SIDE SALVAGE, INC.,
Plaintiff Appellant,
v.
RSUI INDEMNITY COMPANY,
Defendant Appellee.
____________________
Appeal from the United States District Court for the
Southern District of Illinois.
No. 15 cv 0442 MJR SCW — Michael J. Reagan, Chief Judge.
____________________
ARGUED NOVEMBER 1, 2017 — DECIDED DECEMBER 18, 2017
____________________
Before MANION, KANNE, and ROVNER, Circuit Judges.
KANNE, Circuit Judge. In 2014, we held that West Side Sal
vage, Inc. was solely liable for the injuries that three workers
suffered in a grain bin explosion. We also held that West Side
was liable for $3 million in property damage to the bin, which
was owned by ConAgra Foods, Inc.
West Side had an $11 million excess insurance policy with
RSUI Indemnity Company. West Side sued RSUI, alleging that
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RSUI breached its duty to settle ConAgra’s property damage
claim. The district court granted summary judgment to RSUI.
West Side appeals. We affirm.
I. BACKGROUND
In 2010, ConAgra discovered a hot grain bin—a bin with
rising grain temperatures that poses a risk of fire and explo
sion—at its Chester, Illinois facility. It hired West Side to fix
the problem, but the grain bin exploded while West Side was
working on it. The explosion caused severe burns and injuries
to three workers and damaged the bin. The injured workers
sued West Side and ConAgra, and ConAgra filed a
cross claim against West Side for property damage to the bin.
West Side had a $1 million primary insurance policy with
Colony Insurance and an $11 million excess insurance policy
with RSUI. At the outset of the explosion litigation, Colony
tendered its limits and removed itself from the case. But a Col
ony hired attorney continued to represent West Side through
trial after West Side received reservation letters from RSUI.
The letters reflected RSUI’s position that ConAgra’s prop
erty damage claim against West Side may potentially fall out
side of coverage. Relevant to this appeal, West Side’s policy
with RSUI includes a damage to property clause, which ex
cludes certain property damage claims from coverage.
The parties tried but never reached a settlement in the ex
plosion litigation. After a jury trial, West Side and ConAgra
were found liable for the workers’ injuries, and West Side was
found liable for the property damage to ConAgra’s grain bin.
Both West Side and ConAgra appealed, and in Jentz v.
ConAgra Foods, Inc., 767 F.3d 688 (7th Cir. 2014), we reversed
the personal injury judgment as to ConAgra and held that
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West Side was solely liable for the workers’ injuries. We af
firmed the judgment against West Side on ConAgra’s prop
erty damage claim. This left West Side with significantly
greater liability than what its insurance policies covered.
Before we decided Jentz, West Side filed a complaint in dis
trict court, arguing that RSUI should have settled the explo
sion litigation claims within policy limits and breached its
duty to settle in not doing so. The district court dismissed that
action without prejudice. After we decided Jentz, West Side
and RSUI privately settled West Side’s claim that RSUI should
have settled the injured workers’ claims within policy limits.
But that settlement did not address the property damage
claim. Instead, West Side filed the action from which this ap
peal was taken, alleging that RSUI breached its duty to settle
the property damage claim within policy limits.
RSUI moved for summary judgment, advancing two argu
ments. It principally argued that the insurance policy doesn’t
cover the property damage claim, in part because there is a
damage to property exclusion in the policy that applies. It ar
gued in the alternative, though, that even if the claim is cov
ered by the insurance policy, West Side could not present ev
idence that RSUI breached its duty to settle. The district court
rejected the first argument but accepted the second. The court
reasoned that an insurer only has a duty to settle when there
is an offer to settle all claims against the insured at the same
time that there is a reasonable likelihood the insured will face
liability exceeding the policy limits. The court found that West
Side did not show there was a time when these conditions
were satisfied, and it granted summary judgment to RSUI.
West Side appeals.
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II. ANALYSIS
We review a district court’s grant of summary judgment de
novo, construing the facts and making reasonable inferences
in favor of the nonmovant, here, West Side. See Perez v.
Thorntons, Inc., 731 F.3d 699, 703 (7th Cir. 2013). We may affirm
“on any ground supported in the record, so long as that
ground was adequately addressed in the district court and the
nonmoving party had an opportunity to contest the issue.”
Cardoso v. Robert Bosch Corp., 427 F.3d 429, 432 (7th Cir. 2005).
In this court, RSUI repeats the two arguments it made in
its motion for summary judgment as alternative bases for af
firmance: that the insurance policy doesn’t cover ConAgra’s
property damage claim and that, even if there is coverage,
West Side can’t show RSUI breached its duty to settle.
In support of its first argument, RSUI contends that the
damage to property clause in the policy excludes ConAgra’s
claim against West Side from coverage. We agree.
We interpret the damage to property exclusion in accord
ance with the law of the forum state, Illinois. Under Illinois
law, the damage to property clause excludes ConAgra’s claim
against West Side from coverage. And RSUI had no duty to
settle a claim that the insurance policy doesn’t cover. See Am.
Family Mut. Ins. Co. v. Westfield Ins. Co., 962 N.E.2d 993, 1000
(Ill. App. Ct. 2011).
A. Illinois law applies to the analysis of the damage to property
exclusion.
As a federal court sitting in diversity, we turn to state law
to determine whether an insurance coverage exclusion ap
plies. See, e.g., Neth. Ins. Co. v. Phusion Projects, Inc., 737 F.3d
1174, 1177 (7th Cir. 2013); Cincinnati Ins. Co. v. Flanders Elec.
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Motor Serv., Inc., 40 F.3d 146, 150 (7th Cir. 1994). But the parties
dispute which state law we should apply, so we turn first to a
choice of law analysis using the rules of the forum state, here,
Illinois. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941).
Illinois courts engage in a choice of law analysis only if
there is a conflict between Illinois law and the law of another
state such that “a difference in law will make a difference in
the outcome.” Townsend v. Sears, Roebuck & Co., 879 N.E.2d
893, 898 (Ill. 2007). The party who seeks a choice of law deter
mination must establish the existence of an outcome determi
native conflict. Bridgeview Health Care Ctr., Ltd. v. State Farm
Fire & Cas. Co., 10 N.E.3d 902, 905 (Ill. 2014). If the party fails
to establish the existence of such a conflict, the court applies
the law of the forum state. See id.; Gleim v. Roberts, 919 N.E.2d
367, 370 (Ill. App. Ct. 2009).
West Side argues that a conflict exists between Illinois and
Iowa law that affects whether the damage to property exclu
sion bars coverage for ConAgra’s property damage claim. In
support of this contention, West Side points to National Surety
Corp. v. Westlake Investments, LLC, 880 N.W.2d 724 (Iowa 2016).
Westlake addressed whether an insurance policy covered a
property damage claim arising after construction work was
completed. When a property damage claim arises after work is
completed, whether that claim is covered by the policy de
pends on the application of the “damage to ‘your work’” ex
clusion. Id. at 739–40 (The “‘your work’ exclusion generally
excludes from coverage property damage arising out of com
pleted work performed by or on behalf of the insured.”).
But ConAgra brought a claim for property damage caused
by ongoing operations, not completed work. When a prop
erty damage claim arises during ongoing operations, whether
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that claim is covered by the policy depends on the application
of the damage to property exclusion, instead. See id. at 739
(noting that the damage to property exclusion generally ex
cludes from coverage property damage due to work incor
rectly performed on it, but it generally does not apply if the
property damage arises out of completed work). Thus,
Westlake is not outcome determinative in this case.
In the absence of a demonstrated conflict, we apply the
law of the forum state (Illinois) to determine whether the
damage to property exclusion applies to ConAgra’s prop
erty damage claim against West Side.
B. The damage to property provision excludes ConAgra’s
claim against West Side from coverage.
Though a court must construe exclusions liberally in favor
of the insured and against the insurer, “if an exclusion is clear
and unambiguous and does not contravene public policy, it
must be applied as written.” Pekin Ins. Co. v. Willett, 704
N.E.2d 923, 925 (Ill. App. Ct. 1998). West Side does not argue
that the damage to property exclusion is ambiguous or con
travenes public policy. Thus, we apply the exclusion as it is
written.
The damage to property exclusion eliminates insurance
coverage for property damage to:
“(5) [t]hat particular part of real property on
which you or any contractors or subcontractors
working directly or indirectly on your behalf are
performing operations, if the ‘property damage’
arises out of those operations; or
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(6) [t]hat particular part of any property that
must be restored, repaired or replaced because
‘your work’ was incorrectly performed on it.”
(R. 1 at 30–31.) The contract defines “property damage” as
“[p]hysical injury to tangible property,” (R. 1 at 40), and it de
fines “your work” as “[w]ork or operations performed by you
or on your behalf,” (R. 1 at 41). This exclusion is “premised on
the theory that liability policies are not intended to provide
protection against the insured’s own faulty workmanship or
product, which are normal risks associated with the conduct
of the insured’s business.” State Farm Fire & Cas. Co. v. Tiller
son, 777 N.E.2d 986, 992 (Ill. App. Ct. 2002).
The district court read these provisions narrowly, conclud
ing that the exclusion only applied if the insured was sued for
property damage caused by work on that particular piece of
property. To reach this conclusion, the district court did not
apply Illinois law and instead relied on Columbia Mutual Ins.
Co. v. Schauf, 967 S.W.2d 74 (Mo. 1998) (en banc). In that case,
a painter was hired to paint all interior and exterior surfaces
of a home. Schauf, 967 S.W.2d at 76. After the painter used a
spraying compressor to paint the kitchen cabinets, he began
cleaning the compressor inside the home before he left for the
day. Id. The equipment started a fire that damaged the home,
and the homeowners sued the painter for that damage. Id. In
a declaratory action brought by the painter’s insurer, the court
held that only damage to the kitchen cabinets was excluded
from coverage because that was the only part of real property
on which the painter was performing operations. Id. at 80.
Applying Schauf to this case, the district court found that
“a reasonable interpretation of the facts could lead to the con
clusion” that West Side was not working on the grain bin
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when it exploded but instead was only handling the grain in
side of it. (R. 65 at 13.) Because ConAgra sued for the damage
to the bin, not for the loss of the grain, a jury could find that
ConAgra’s property damage claim was still covered by the in
surance policy despite the damage to property exclusion.
We decline to adopt the district court’s interpretation and
instead hold that the damage to property exclusion applies
here. Under Illinois law, the damage to property exclusion is
not interpreted so narrowly. “The exclusion[] do[es] not ex
clude coverage for damage done only to the precise area of
the property being worked on. Rather, the exclusion[]
appl[ies] to property damage caused by poor workmanship.”
Willett, 704 N.E.2d at 926.
In Willett, the homeowners hired a worker to empty their
swimming pool, paint it, and fill it with water and chemicals
to prepare it for use. Id. at 924. After the worker emptied and
painted the pool, but before he filled it, the pool pushed out
of the ground from a heavy rainstorm. Id. The homeowners
filed a complaint against the worker, alleging that he failed to
fill the pool in a timely manner and that this failure caused
damage to the pool while he was working on it. Id. at 926. Wil
lett’s insurance company brought an action seeking a declara
tion that Willett’s insurance policy did not cover the home
owner’s claim against him. The court held that the policy ex
cluded the homeowner’s claim from coverage, resting its
holding on the applicability of damage to property provi
sions that are identical to the ones here. Id.
Just as Willett’s insurance policy did not cover the damage
to the swimming pool because he “performed his work incor
rectly by failing to fill the pool in a timely manner,” West
Side’s insurance policy does not cover the damage to the grain
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bin because West Side performed its work incorrectly by fail
ing to reduce the grain temperature in a timely manner. Id.
Even if it is true that West Side was only working on the grain
when the explosion occurred, it is immaterial. The damage
to property exclusion does not apply only to the precise area
of the property being worked on if the work performed was
poor. See id.
Holding otherwise would undermine the basic premise of
the damage to property exclusion: that general liability poli
cies are not intended to protect the insured from the normal
risks of its business. See Tillerson, 777 N.E.2d at 992. The dam
age that West Side caused was one of the normal risks associ
ated with its business of remedying hot grain bins before they
explode. See Auto Owners Ins. Co. v. Chorak & Sons, Inc., No. 07
C 4454, 2008 WL 3286986, at *4 (Ill. App. Ct. 2008) (noting that
the insured was asking the insurer to provide coverage for
damage that was the result “of the normal risks associated
with” the activity the insured was performing and holding
that the damage to property exclusion applied to bar such
coverage).
C. Because RSUI didn’t cover ConAgra’s claim against West
Side, RSUI had no duty to settle it.
“[The] duty to act in good faith in responding to settle
ment offers … only exists where there is coverage under the
policy.” Am. Family Mut. Ins. Co. v. Westfield Ins. Co., 962
N.E.2d 993, 1000 (Ill. App. Ct. 2011). The damage to property
exclusion removed ConAgra’s claim from coverage under
West Side’s policy with RSUI, so RSUI had no duty to act in
good faith in responding to an offer to settle that claim. West
Side’s three arguments that RSUI should nonetheless be held
accountable for failing to settle the claim are unavailing.
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West Side first contends that there is an applicable excep
tion to the damage to property exclusion. In support, it points
to an exception to an entirely different exclusion—the “your
work” exclusion. The exceptions to the damage to property ex
clusion do not apply. (See R. 1 at 30–31.)
Next, West Side argues that “RSUI is estopped from assert
ing lack of coverage as a defense,” because “RSUI took over
[the defense] and insisted on handling the settlement discus
sions.” (Appellant’s Reply Br. at 10–11.) But if “an underlying
complaint presents an issue of potential insurance coverage,
and the insurer believes that the policy does not cover the
claim, the insurer may not refuse to defend the insured, but
must either defend the suit under a reservation of rights or
seek a declaration of no coverage.” See Mobil Oil Corp. v. Md.
Cas. Co., 681 N.E.2d 552, 560 (Ill. App. Ct. 1997). In this case,
RSUI sent West Side reservation letters before it began to de
fend the suit. (Appellant’s Reply Br. at 10.)
Additionally, West Side was represented through trial by
independent counsel hired by its primary insurance carrier,
not RSUI. (R. 59 at 3.) See Home Ins. Co. v. Three I Truck Line,
Inc., 95 F. Supp. 2d 901, 905–06 (N.D. Ill. 2000) (after recogniz
ing that a reservation of rights may not insulate a defense of
non coverage if the insurer prejudices the insured during the
defense of the action, noting that an insured should acquire
its own counsel to avoid the insurer “subvert[ing] the in
sured’s ability to protect its own interests”); see also Twin City
Fire Ins. Co. v. Country Mut. Ins. Co., 23 F.3d 1175, 1179 (7th Cir.
1994) (noting that Illinois’s duty to settle is an “implied correl
ative” of the insurer’s control over the defense). Because RSUI
took sufficient steps to ensure that it would not prejudice
West Side’s defense even though RSUI was involved in it,
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RSUI is not estopped from asserting a defense of non cover
age.
Finally, West Side argues that RSUI is liable for ConAgra’s
$3 million judgment against West Side—“even if ConAgra’s
property damage claim was uncovered”—because the judg
ment was a consequential damage arising from RSUI’s bad
faith failure to settle the injured workers’ claims. (Appellant’s
Reply Br. at 12.) But West Side cannot recover any damages,
including consequential damages, for a claim that it did not
even bring: West Side and RSUI privately settled West Side’s
claim that RSUI failed to settle the injured worker’s claims.
(Appellant’s Br. at 27.) West Side’s argument that it is now en
titled to consequential damages from that claim is without
merit.
III.CONCLUSION
We may affirm summary judgment on any basis sup
ported by the record, so long as the ground was adequately
addressed below. RSUI advanced two arguments for why it
was entitled to summary judgment on West Side’s claim that
it breached its duty to settle ConAgra’s property damage
claim: that the insurance policy does not cover the claim and,
in the alternative, that West Side can’t prove that RSUI
breached its duty to settle even if the policy covers the claim.
Summary judgment was appropriate on the first ground, so
we need not reach the merits of the second.
AFFIRMED.
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