Contractor's Equipment Supply Co. v. TK Construction US, LLC et al

Filing 100

MEMORANDUM DECISION AND ORDER RE: ALTERRAS MOTION FOR SUMMARY JUDGMENT (DKT. 75 ) - IT IS THEREFORE ORDERED that Defendant Alterra America Insurance Companys Motion for Summary Judgment (Dkt. 75 ) is DENIED. Signed by Judge Ronald E. Bush. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (cjs)

UNITED STATES DISTRICT COURT
DISTRICT OF IDAHO

UNITED STATES OF AMERICA, for the use and
benefit of CONTRACTOR’S EQUIPMENT
SUPPLY CO., an Idaho corporation, doing business
as CESCO,
Use-Plaintiff,

Case No.: 1:14-cv-00134-REB

MEMORANDUM DECISION AND
ORDER RE: ALTERRA’S MOTION
FOR SUMMARY JUDGMENT (DKT.
75)

vs.
TK CONSTRUCTION, US, LLC, a Colorado
limited liability company; AMY FISCHER, an
individual; NORTH AMERICAN SPECIALTY
INSURANCE COMPANY, a New Hampshire
corporation; AMERICAN MINING INSURANCE
COMPANY, an Iowa corporation; and ALTERRA
AMERICA INSURANCE COMPANY, a Delaware
corporation,
Defendants.

Pending for decision is Defendant Alterra America Insurance Company’s
(“Alterra”) Motion for Summary Judgment (Dkt. 75). Having heard oral argument and being
otherwise advised, the Court rules as follows.
FACTUAL BACKGROUND1
TK Construction US, LLC (“TK”) contracted with the United States of America for TK
to furnish labor, materials and equipment, and perform certain work required to complete a
highway improvement project in Boise County, Idaho. (Second Amend. Compl. (Dkt. 47) ¶ 10.)

1

The factual background is drawn from the parties’ statements of facts. See Dkt. 75-2,
Dkt. 78-1.
MEMORANDUM DECISION AND ORDER - 1

TK then made rental contracts with CESCO for a John Deere 300D Articulated Haul Truck (the
“Truck”) and a John Deere 350G Excavator (the “Excavator”) to use on the highway project.
Id. ¶ 13.
Alterra issued an insurance policy to TK (“the Policy”). The Truck and the Excavator
were listed on a schedule of insured property. The Policy excluded losses “caused by”
mechanical breakdown, with language providing that “‘We’ do not pay for loss caused by any
mechanical, structural, or electrical breakdown or malfunction including a breakdown or
malfunction resulting from a structural, mechanical, or reconditioning process.” (Dkt. 75-3 at p.
21.) Elsewhere the Policy described “what must be done in case of a loss,” which included
giving prompt notice of the loss with a description of the property; exhibiting the damaged and
undamaged property as often as Alterra reasonably requests and allowing Alterra to inspect the
property; and not making any voluntarily payments or incurring any other expenses except as
respects protecting the property from further damage. (Dkt. 75-3 at pp. 35-37, 55.)
Under the Policy, payments for “your losses” were to be made to “you” (defined as the
“Insured,” which was TK) “unless another loss payee is named in the policy.” (Dkt. 75-3, p. 25.)
“Losses to property of others” were to be paid to “‘you’ on behalf of the owner; or the owner.”
(Id.) Policy Endorsement No. 4 added the Truck and the Excavator to the “Schedule of
Coverages” and named CESCO as a Loss Payee. (Id. at p. 55.) In pertinent part, Endorsement 4
provided: “We will pay ‘loss’ to you and: Cesco Rentals.” (Id.)
On or about May 8, 2013, the Truck’s transmission was damaged. CESCO and Pacific
Torque removed, repaired, and replaced the transmission. The “Service Estimate” document
created in that process states that CESCO’s mechanic “went out on a no movement call, found

MEMORANDUM DECISION AND ORDER - 2

truck loaded, transmission locked in forward gear, transmission oil looked and smelled burnt . .
.” CESCO’s shop foreman, Barry Smith, said TK called him to say that the Truck would not
move. Smith called that a “transmission failure.” (Pl.’s Statement of Facts, Dkt. 75-2, ¶¶ 5-10.)
On July 18, 2013, Alterra received its first notice of the loss related to the Truck (“the
Truck claim”). Nearly a month later, on August 16, 2013, Alterra hired an independent
investigator to perform an investigation on the truck and its transmission. Alterra made a
decision to deny the Truck claim based upon that investigation. (Def.’s Statement of Facts, Dkt.
78-1, ¶ 2.) On September 18, 2013, the outside adjusting firm assigned by Alterra to adjust the
claim sent a letter to TK denying the Truck claim because it fell within the mechanical
breakdown exclusion in the Policy.2 (Pl.’s Facts ¶ 11.)
On or about October 15, 2013, the Excavator was damaged when it was struck by falling
rock. Alterra received notice of the loss in December 2013 (“the Excavator claim”). On April
11, 2014, the Excavator claim was approved and Debra Thompson, an employee of Markel
Service, Inc. (Alterra’s parent company), submitted a Payment Request Form, requesting that a
check be issued to CESCO and mailed to TK. On or about April 14, 2014, Alterra mailed a
check for the Excavator claim to TK, made out to TK only. On April 20, 2015, subsequent to
the filing of this lawsuit, a separate payment was made to CESCO, in the amount of the
Excavator claim, minus the deductible, plus interest at the statutory rate. (Pl.’s Facts ¶¶ 12-16.)

2

CESCO disputes that the cause of the transmission failure was “mechanical
breakdown” and asserts that the cause of the loss was TK’s negligence.
MEMORANDUM DECISION AND ORDER - 3

SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate where a party can show that, as to any claim or
defense, “there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). One principal purpose of summary
judgment “is to isolate and dispose of factually unsupported claims . . . .” Celotex Corp. v.
Catrett, 477 U.S. 317, 323-34 (1986). It is “not a disfavored procedural shortcut,” but is instead
the “principal tool[ ] by which factually insufficient claims or defenses [can] be isolated and
prevented from going to trial with the attendant unwarranted consumption of public and private
resources.” Id. at 327. “[T]he mere existence of some alleged factual dispute between the
parties will not defeat an otherwise properly supported motion for summary judgment.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). There must be a genuine dispute
as to any material fact – a fact “that may affect the outcome of the case.” Id. at 248.
The evidence must be viewed in the light most favorable to the non-moving party, and
the Court must not make credibility findings. Id. at 255. Direct testimony of the non-movant
must be believed, however implausible. Leslie v. Grupo ICA, 198 F.3d 1152, 1159 (9th Cir.
1999). On the other hand, the Court is not required to adopt unreasonable inferences from
circumstantial evidence. See McLaughlin v. Liu, 849 F.2d 1205, 1208 (9th Cir. 1988).
The moving party bears the initial burden of demonstrating the absence of a genuine
dispute as to a material fact. See Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir. 2001) (en
banc). To carry this burden, the moving party need not introduce any affirmative evidence (such
as affidavits or deposition excerpts) but may simply point out the absence of evidence to support

MEMORANDUM DECISION AND ORDER - 4

the nonmoving party’s case. See Fairbank v. Wunderman Cato Johnson, 212 F.3d 528, 532 (9th
Cir. 2000).
This shifts the burden to the non-moving party to produce evidence sufficient to support a
jury verdict in his favor. See Devereaux, 263 F.3d at 1076. The non-moving party must go
beyond the pleadings and show by “affidavits, or by the depositions, answers to interrogatories,
or admissions on file” that a genuine dispute of material fact exists. Celotex, 477 U.S. at 324.
DISCUSSION
A.

The Truck Claim
1.

Mechanical Breakdown Exclusion

The parties disagree on whether the Truck claim is covered by the Policy. Alterra
argues that the Truck claim falls within the “mechanical breakdown” exclusion of the Policy and
is not covered. Alterra contends that a “mechanical breakdown” occurred, and coverage is not
available, because the transmission seized up and the truck would no longer run; i.e., in
everyday language, the Truck “broke down.” (Def.’s Mem. (Dkt. 75-1), p. 6.) CESCO
contends that any mechanical breakdown occurred because of a TK employee’s negligence in
operating and maintaining the Truck, which negligence ultimately led to the loss and the damage
it caused and that such a scenario is a covered loss under the Policy. (Pl.’s Mem. (Dkt. 78), p.
3.) This argument stems from CESCO’s characterization of the Alterra policy as an “all-risk”
policy, and that unless a risk is specifically excluded, the loss is covered.3 Here, CESCO

3

An all-risk insurance policy extends coverage to risks not generally covered under
other insurance policies. See Associated Aviation Underwriters v. George Koch Sons, Inc., 712
N.E.2d 1071, 1073 (Ind. Ct. App. 1999)
MEMORANDUM DECISION AND ORDER - 5

argues, the transmission was damaged due because of the negligence of a TK employee; hence,
the loss is covered. Id.
Insurance policies are contracts between the insurer and the insured. See Mortensen v.
Stewart Title Guar. Co., 235 P.3d 387, 392 (Idaho 2010) (citing Hall v. Farmers Alliance Mut.
Ins. Co., 179 P.3d 276, 280 (Idaho 2008)). Whether an insurance policy is ambiguous is a
question of law over which the court exercises free review. See Armstrong v. Farmers Ins. Co.
of Idaho, 205 P.3d 1203, 1205 (Idaho 2009) (citing Purvis v. Progressive Cas. Ins. Co ., 127
P.3d 116, 119 (Idaho 2005)) (citation omitted). If the court finds the policy language to be
unambiguous, the court is to construe the policy as written. “The court by construction cannot
create a liability not assumed by the insurer nor make a new contract for the parties, or one
different from that plainly intended, nor add words to the contract of insurance to either create or
avoid liability.” Id. “Unless contrary intent is shown, common, non-technical words are given
the meaning applied by laymen in daily usage—as opposed to the meaning derived from legal
usage—in order to effectuate the intent of the parties.” Id. (quoting Howard v. Ore. Mut. Ins.
Co., 46 P.3d 510, 513 (Idaho 2002)). Where there is an ambiguity in an insurance contract,
special rules of construction apply to protect the insured. See id. at 1206 (citing Hall, 179 P.3d
at 281).
In deciding whether a particular provision is ambiguous, the provision must be read
within the context in which it occurs in the policy. See Armstrong, 205 P.3d at 1206 (citing
Purvis, 127 P.3d at 119). An insurance policy provision is ambiguous if “it is reasonably subject
to conflicting interpretations.” North Pac. Ins. Co. v. Mai, 939 P.2d 570, 572 (Idaho 1997).
Because insurance contracts are adhesion contracts that are not typically subject to negotiation

MEMORANDUM DECISION AND ORDER - 6

between the parties, any ambiguity that exists in the contract is construed most strongly against
the insurer and in favor of the insured. See Armstrong, 205 P.3d at 1206 (citing Arreguin v.
Farmers Ins. Co., 180 P.3d 498, 500 (Idaho 2008)). Further, insurance contracts are to be
construed “in a manner which will provide full coverage for the indicated risks rather than to
narrow its protection.” Smith v. O/P Transp., 918 P.2d 281, 284 (Idaho 1996). “The burden is
on the insurer to use clear and precise language if it wishes to restrict the scope of its coverage.”
Arreguin, 180 P.3d at 500.
Alterra argues that the mechanical breakdown exclusion is unambiguous and commonly
understood to describe an occurrence where a vehicle stops running. Here, the truck stopped
working and therefore, Alterra argues, it was a “mechanical breakdown” and excluded by the
Policy. (Def.’s Mem., p. 6.) CESCO contends that the mechanical breakdown exclusion is
ambiguous and should be construed against the insurance company. (Pl.’s Mem., p. 3.)
The Court finds that the exclusion does not unambiguously exclude coverage for losses
caused by covered perils (e.g., negligence) that lead to the fact of a mechanical breakdown, as
distinct from a loss caused by a mechanical breakdown in and of itself.
There is no decision of the Idaho appellate courts that has been relied upon by the parties,
or that the Court has identified, on the specific issue here. However, decisions from other
jurisdictions support CESCO’s argument that a mechanical breakdown exclusion will apply only
where the damage is caused by mechanical defects and not by an insured risk, such as
negligence. In an Indiana case, an all-risk policy covered “any physical damage loss” to the
insured aircraft. The policy excluded losses for “physical damage . . . caused by and confined to
. . . mechanical or electrical breakdown or failure of equipment . . . .” Associated Aviation

MEMORANDUM DECISION AND ORDER - 7

Underwriters v. Koch Sons, 712 N.E.2d 1071, 1074 (Ind. Ct. App. 1999). The insurer denied a
claim for damage to an engine caused by a third party who improperly installed a seal ring
during maintenance, on the basis that such a claim was barred by the “breakdown” exclusion.
Id. Applying a proximate cause analysis, the court ruled that the exclusion did not apply,
reasoning that “mechanical breakdown . . . can either be the cause of a loss or the effect of a loss
. . .although mechanical breakdown may have occurred as a result of the negligence” but that in
this instance “it was the negligence (a covered peril) which was the cause of the loss. . . .” Id. at
1076. When “an insured risk itself sets into operation a chain of causation in which the last step
may have been an excepted risk,” the court said, “the excepted risk will not defeat recovery.” Id.
at 1075 (internal citation and quotation omitted).
In a New Mexico case, a policy “insure[d] against all risks” with the exception of “loss or
damage due and confined to . . . mechanical breakdown or failure . . . .” Rust Tractor, Co. v.
Consolidated Constructors, Inc., 526 P.2d 800, 802 (Ct. App. N.M. 1974). In Rust Tractor, a
failure to maintain necessary oil levels caused a mechanical breakdown of a construction loader.
Id. The court disagreed with the insurer who contended that a claim connected to the breakdown
was excluded, holding that the “ negligent failure to maintain an oil level is an ‘external cause’
and is insured against. That negligent failure operated to subject the loader to mechanical
breakdown which was excluded. The loss was covered.” Id. See also Connie’s Construction v.
Continental Western Ins. Co., 227 N.W.2d 204 (Iowa 1975); Union Savings Bank v. Allstate
Indemnity Co, 830 F. Supp. 2d 623 (S.D. Ind. 2011); Cornell v. Grinnell Mutual Reinsurance
Co. 723 N.W.2d 453 (Iowa Ct. App. 2006); Caccioppo v. United Servs. Automobile Ass’n, 479
Misc.2d 698 (N.Y. Civ. Ct. 1984).

MEMORANDUM DECISION AND ORDER - 8

The Court agrees with the reasoning of these courts, which have held that when the
mechanical breakdown is the result of a negligent act, which otherwise is a covered peril, rather
than the cause of a loss, then a mechanical breakdown exclusion does not bar coverage. For
purposes of this motion, Alterra does not contest (but also does not admit) that negligence of the
operator of the Truck led the transmission to fail.4 In an all-risk policy, such as the Alterra
policy, to read the mechanical breakdown as does Alterra would eliminate coverage in many
situations that would otherwise be covered in all-risk policy. This would be contrary to Idaho
law that insurance contracts are to be strictly construed against the insurer, particularly when
they are ambiguous. Bonner County v. Panhandle Rodeo Ass’n, 620 P.2d 1102 (Idaho 1980).
The Policy does not exclude coverage for negligence which “sets into motion excluded perils,”
such as mechanical breakdown. See Associated Aviation Underwriters, 712 N.E.2d at 1076.
The Court denies Alterra’s motion for summary judgment on the mechanical breakdown
exclusion.
2.

Other Policy Provisions

In the alternative, Alterra contends that CESCO’s claims fail because CESCO did not
comply with the “What Must Be Done in Case of Loss” section of the Policy. Specifically,
Alterra argues that CESCO did not “exhibit” the damaged property for Alterra to inspect because
the transmission was removed, repaired, and replaced before Alterra received notice of the claim.

4

Whether negligence resulted in the failed transmission is a question that will be left to

trial.

MEMORANDUM DECISION AND ORDER - 9

Alterra also argues that CESCO voluntarily paid to repair the truck before Alterra received
notice of the loss, thus violating the “no voluntary payments” provision.5
First, CESCO’s claim is not barred by a failure to “exhibit” the damaged property.
“When [an] insurance company proceeds with its own investigation and makes a determination
as to liability and denies coverage as a result of its own investigation and determination, it is
deemed to have waived its right to demand further proof of loss.” Tippets v. Gem State Mutual
Life Assoc., Inc., 416 P.2d 38, 41 (Idaho 1966). After it received notice of the claim, Alterra
initiated and completed an independent investigation into the loss and then denied coverage
based on that investigation. Further, Alterra has not argued nor is there evidence of any
prejudice to Alterra stemming from any alleged failure by TK or CESCO to exhibit the Truck at
an earlier time. Alterra did inspect the damaged property. There was no attempt to hide the
damaged property, or to prevent Alterra from conducting its investigation. See Leach v.
Farmer’s Automobile Ins. Exch., 213 P.2d 920, 923 (Idaho 1950) (“Violations of conditions by
the insured will not release the insurer unless it is prejudiced by the violation.”); State of Idaho v.
Bunker Hill Co., 647 F. Supp. 1064, 1075 (D. Idaho 1986) (“[S]ubstantial performance by the
insured is all that is required to satisfy these conditions . . . .”).
Second, as to the argument regarding “no voluntary payments,” the Court agrees with the
reasoning in Safeco Ins. Co. of Illinois v. Klein, 2012 WL 4754557 (D. Idaho 2012), in which the
court addressed a voluntary payment clause and held that, at a minimum, an insurer must
demonstrate that the purpose of the nonvoluntary payment clause was undermined in order to bar

5

Alterra no longer relies upon its position on the “prompt notice,” as acknowledged by
counsel during oral argument.

MEMORANDUM DECISION AND ORDER - 10

coverage. Id. at *3. That case involved a duty to defend and the court recognized that “once an
insurer has agreed to provide a defense, an insured cannot settle the matter without notice to the
insurer, and thereby strip the insurer of its ability to defend.” Id. No such purpose of the
nonvoluntary payment clause in the Policy was undermined here, nor has Alterra argued such.
Indeed, the purpose of repairing the transmission in the Truck was to get it back into service.
The instant situation is vastly different than settling a lawsuit and then seeking indemnification
from the insured, thereby “depriving [the insurer] of its contractual right to control the settlement
process” and undermining the purpose of the nonvoluntary payment clause. Id. at *4.
The Court denies Alterra’s motion for summary judgment on the grounds that CESCO
failed to comply with these provisions.
B.

The Excavator Claim
CESCO has been paid on its Excavator Claim. However, CESCO seeks attorney fees in

regard to that claim under Idaho Code § 41-1830, which provides:
Any insurer issuing any policy, certificate or contract of insurance,
surety, guaranty or indemnity of any kind or nature whatsoever
that fails to pay a person entitled thereto within thirty (30) days
after proof of loss has been furnished as provided in such policy,
certificate or contract, . . . shall in any action thereafter
commenced against the insurer in any court in this state, . . . for
recovery under the terms of the policy, certificate or contract, pay
such further amount as the court shall adjudge reasonable as
attorney’s fees in such action or arbitration.
I.C. § 41-1839(1). Alterra argues that even if its first check was written to TK only, payment
was nonetheless (1) paid within 30 days of proof of loss; and (2) payment complied with the
Policy which required that payment for claims involving rented property be sent either to the
insured or the owner of the property.

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The relevant portion of the Policy is Endorsement No. 4 which added CESCO as a Loss
Payee and states: “We will pay ‘loss’ to you and: CESCO Rentals.” (Dkt. 75-3, p. 55.)
However, Alterra made payment only to TK, not to TK and CESCO. It was not until after this
lawsuit began that Alterra made a separate payment to CESCO, but that payment was made long
after the 30 days allotted in the statute. Hence, even though there was a payment arguably made
within the 30 day window of the statute, it was not payment in the manner required by the
language of Endorsement No. 4.
Alterra made a payment that arguably was within the statutory period, but it made the
payment in the wrong fashion under the Policy and did not include CESCO. If TK were seeking
recovery for fees under the statute, Alterra’s argument would have some strength but the
argument carries no weight as to the payment made to CESCO. Under the terms of the Policy
and Idaho Code § 41-1830, CESCO was entitled to payment on the Excavator claim within 30
days. Payment was not made in that time period. Therefore, Alterra is not entitled to summary
judgment on CESCO’s claim for attorney fees.
ORDER
IT IS THEREFORE ORDERED that Defendant Alterra America Insurance Company’s
Motion for Summary Judgment (Dkt. 75) is DENIED.

DATED: June 28, 2017

Honorable Ronald E. Bush
Chief U. S. Magistrate Judge

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