Steel Supply & Engineering Company v. Illinois National Insurance Company
Filing
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OPINION ; signed by Judge Robert Holmes Bell (Judge Robert Holmes Bell, kcb)
UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
STEEL SUPPLY & ENGINEERING
COMPANY,
Plaintiff,
File No. 1:13-CV-1034
v.
HON. ROBERT HOLMES BELL
ILLINOIS NATIONAL INSURANCE
COMPANY,
Defendant.
/
OPINION
This is an action for declaratory judgment removed to this Court from the Kent County
Circuit Court pursuant to 28 U.S.C. § 1441. The matter is presently before the Court on the parties’
cross-motions for summary judgment. (Def.’s Mot., ECF No. 16; Pl.’s Mot., ECF No. 19.) Each
party has filed a Response to the other’s motion, and a Reply.
Plaintiff’s underlying action seeks declaratory judgment that Defendant has breached its duty
to defend and duty to indemnify Plaintiff in separate litigation against which Plaintiff is defending
itself in Indiana state court. At issue in the cross motions is whether the subject matter of the Indiana
litigation alleges facts that fall within Plaintiff’s policy with Defendant. For the reasons that follow,
the Court holds that it does not.
I.
Plaintiff contracted with non-party the City of Carmel, Indiana, (the City) to supply and erect
steel structures as part of a larger project: the construction of a performing arts center. In June 2009,
the City discovered defects in the structural steel, in the type of bolts used to connect structural
components, in the substitution of an inferior part for one called for in the drawings, and a
subsequent deformation of a component used to support a dome-shaped “Palladium” structure made
of pre-cast roof panels.
The City sued Plaintiff in June 2011. The City alleges in the Indiana litigation that as a result
of the defects in the steel, the structure of the project was compromised, such that the structure itself
was unsafe. As a result of the defects, the City alleges that it was: forced to hire experts to evaluate
the defects and make a remediation plan; required to perform the remediations to make the structure
safe; forced to delay completion of the project; and forced to compensate other contractors for the
cost of the delays. (See generally 2nd Am. Compl. ¶¶ 34–78.)
Defendant initially agreed to defend Plaintiff in the Indiana litigation, under a reservation of
rights. After further investigation, Defendant denied coverage for the claims and withdrew its
defense and indemnity. Defendant denied coverage because, in its opinion, the damages claimed by
the City are not an “occurrence” of “property damage” as defined in the policy.
Effective at the time of the relevant underlying events was a Commercial General Liability
Insurance Policy (the Policy) issued to Plaintiff by Defendant. The parties do not dispute that the
Policy, in the relevant portion, obligated Defendant to provide coverage, and to indemnify and
defend Plaintiff as relevant here, for damages due to “property damage” if such property damage fell
within the scope of the policy. The property damage would only be covered if it were the result of
an “occurrence,” defined in the policy as “an accident, including continuous or repeated exposure
to substantially the same general harmful conditions.” (Policy, Compl. Ex. 1, ECF No. 1-1.) The
dispute in this case is whether the damage for which Plaintiff seeks defense and indemnity is the
result of an occurrence.
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II.
A.
Motion Standards
The Federal Rules of Civil Procedure require the Court to grant summary judgment “if the
movant shows that 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). In evaluating a motion for summary judgment
the Court must look beyond the pleadings and assess the proof to determine whether there is a
genuine need for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
When the moving party will not carry the burden of proof at trial, the party must identify “those
portions of pleadings, depositions, answers to interrogatories, and admissions on file, together with
the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact.”
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (internal quotations omitted). A defendant
moving for summary judgment is not required, however, to “support its motion with affidavits or
other similar materials negating the opponent’s claim.” Id.
In considering a motion for summary judgment, “the district court must construe the evidence
and draw all reasonable inferences in favor of the nonmoving party.” Martin v. Cincinnati Gas &
Elec. Co., 561 F.3d 439, 443 (6th Cir. 2009) (citing Jones v. Potter, 488 F.3d 397, 403 (6th Cir.
2007)). Nevertheless, the mere existence of a scintilla of evidence in support of a non-movant’s
position is not sufficient to create a genuine issue of material fact. Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 252 (1986). The proper inquiry is whether the evidence is such that a reasonable jury
could return a verdict for the non-moving party. Id.; see generally Street v. J.C. Bradford & Co., 886
F.2d 1472, 1476-80 (6th Cir. 1989). “When opposing parties tell two different stories, one of which
is blatantly contradicted by the record, so that no reasonable jury could believe it, a court should not
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adopt that version of the facts for purposes of ruling on a motion for summary judgment.” Scott v.
Harris, 550 U.S. 372, 380 (2007).
The standards upon which the Court evaluates a motion for summary judgment do not change
simply because the parties present cross motions. Relford v. Lexington–Fayette Urban Cnty. Gov’t,
390 F.3d 452, 456 (6th Cir. 2004). “The fact that both parties have moved for summary judgment
does not mean that the court must grant judgment as a matter of law for one side or the other;
summary judgment in favor of either party is not proper if disputes remain as to material facts.” Taft
Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir.1991) (quoting Mingus Constructors, Inc.
v. United States, 812 F.2d 1387, 1391 (Fed. Cir.1987)).
B.
Applicable Law
Although both parties assume in their pleadings or briefs that Michigan law governs this
case, because this is a diversity case presenting state-law claims, and because the events giving rise
to the case took place outside of Michigan, as a threshold matter the Court must determine what law
to apply. It is well-settled that a federal court sitting in diversity must apply the conflict of laws
principles of the forum state to determine which state’s substantive law to apply. Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496–97 (1941). Michigan courts apply Michigan law unless
a “rational reason” exists to apply the law of another state. Sutherland v. Kennington Truck Serv.,
Ltd., 562 N.W.2d 466, 471 (Mich. 1997). To determine if a rational reason exists, a court must
undertake a two-step analysis: (1) does another state have an interest in having its law applied, and
if so; (2) do Michigan’s interests mandate that Michigan law apply in spite of the foreign state’s
interest. Id. (citing Olmstead v. Anderson, 400 N.W.2d 292, 304 (Mich. 1987)). If no other state has
an interest, the presumption that Michigan law applies cannot be overcome. Sutherland, 562 N.W.2d
at 471.
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According to the Michigan Supreme Court, “The injury state always has an interest in
conduct within its borders, whether or not its citizens are involved.” Olmstead, 400 N.W.2d at 304.1
Here, although the events that precipitated the present suit occurred in Indiana, the ultimate question
here is one of interpretation of an insurance policy between Michigan and Illinois corporations.
Therefore, under Olmstead, Indiana does not have an interest in the outcome of this litigation. The
Court holds, therefore, that Michigan law applies.
Michigan’s choice of law principles with regard to contract disputes support this conclusion.
See Mill’s Pride, Inc. v. Cont’l Ins. Co., 300 F.3d 701, 704–05 (6th Cir. 2002) (citing Chrysler Corp.
v. Skyline Indus. Servs., Inc., 528 N.W.2d. 698 (Mich. 1995)) (noting that Michigan uses a modified
lex loci contractus rule that takes into account the intent of the parties and other policy
considerations).
C.
Duty to Defend
Under Michigan law, it is well-settled that the duty to defend is broader than the duty to
indemnify. Citizens Ins. Co. v. Pro-Seal Serv Grp., Inc., 710 N.W.2d 547, 551 (Mich. Ct. App.
2005), rev’d on other grounds, 730 N.W.2d 682 (Mich. 2007); Radenbaugh v. Farm Bureau Gne.
Ins. Co. of Mich., 610 N.W.2d 272, 275 (Mich. Ct. App. 2000). “The duty to defend is related to the
duty to indemnify in that it arises only with respect to insurance afforded by the policy. If the policy
does not apply, there is no duty to defend.” Am. Bumper & Mfg. Co. v. Hartford Fire Ins. Co., 552
N.W.2d 475, 481 (Mich. 1996). To determine if the duty to defend exists, a court must “consider the
language of the insurance policy and construe its terms to find the scope of the coverage of the
policy.” Citizens, 710 N.W.2d at 551.
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Olmstead distinguishes between a state’s interest in regulating conduct and its interest in
limiting damages. If the only issue is damages and the litigants are not citizens of the state where the
injury took place, that state will have no interest in the litigation. Olmstead, 400 N.W.2d at 304.
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Whether the duty to defend is triggered depends on the allegations in the complaint filed
against the insured. Id. An insurer, however, must look beyond the third party’s allegations to
determine whether coverage is possible. Radenbaugh, 610 N.W.2d at 275. The insurer’s duty is not
limited to meritorious suits and if “the allegations of a third party against the policyholder even
arguably come within the policy coverage, the insurer must provide a defense.” Am. Bumper, 550
N.W.2d at 481; Detroit Edison Co. v. Mich. Mut. Ins. Co., 301 N.W.2d 832, 835 (Mich. Ct. App.
1981). “An insurer has a duty to defend, despite theories of liability asserted against any insured
which are not covered under the policy, if there are any theories of recovery that fall within the
policy.” Id. (citing Dochod v. Cent. Mut. Ins. Co., 264 N.W.2d 122 (Mich. Ct. App. 1978)). Doubt
as to whether allegations fall within the policy must be resolved in favor of the insured. Citizens, 710
N.W.2d at 551.
In the present case, the alleged proximate cause of the City’s damages is Plaintiff’s defective
workmanship both in fabricating and erecting the steel components of the City’s project. The issue
of contention is whether the damages the City alleges are an “occurrence” under Plaintiff’s Policy
with Defendant, and therefore whether Defendant owes Plaintiff a duty to defend against the City’s
lawsuit.
In a case where the insurance policy defined the duty to defend and an occurrence in exactly
the same language as the present case, the Michigan Court of Appeals held that “defective
workmanship . . ., standing alone, [is] not the result of an occurrence within the meaning of the
insurance contract.” Hawkeye–Security Ins. Co. v. Vector Constr. Co., 460 N.W.2d 329, 334 (Mich.
Ct. App. 1990). Rather, for coverage to be afforded under such a policy “the insured’s faulty work
product” must damage “the property of others.” Id.
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Both parties recognize Hawkeye as controlling authority, but disagree on its application.
Defendant argues that Hawkeye’s holding compels this Court to rule in its favor because all the
damages claimed in the City’s complaint are for costs associated with remediation and delays caused
to other parts of the construction process by Plaintiff’s faulty workmanship. Plaintiff counters that
“the damage caused by the alleged defects is not limited to the erected steel structure.” (Pl.’s Resp.
5, ECF No. 24.) Plaintiff cites many Michigan cases that stand for the proposition that the duty to
defend extends to cases where faulty workmanship causes damage to a the property of a third party.
Plaintiff argues that, at the very least, the precast roof panels of the Palladium were damaged due to
the allegedly defective workmanship, as evidenced by photographs and an affidavit submitted with
its brief.
Plaintiff also argues in the alternative that Hawkeye’s holding should be reconsidered in light
of new case law from the Indiana Supreme Court. (Pl.’s Br. 13 n.8, ECF No. 20 (citing Sheeran
Const. Co., Inc. v. Cont’l Cas. Co., 935. N.E.2d 160 (Ind. 2010).) As this Court has already held,
Michigan law governs this case. Hawkeye articulates a policy of Michigan Courts that dates back
nearly 25 years that the Supreme Court of Michigan has not sought to modify. “[F]ederal courts
sitting in a diversity case are in ‘a particularly poor position ... to endorse [a] fundamental policy
innovation’” Combs v. Int’l Ins. Co., 354 F.3d 568, 577–78 (6th Cir. 2004) (quoting Dayton v. Peck,
Stow & Wilcox Co., 739 F.2d 690, 694 (1st Cir. 1984)). The Court will therefore apply Hawkeye to
the present case.
Looking to the allegations in the City’s second amended complaint the Court finds that the
City made the following allegations relevant to the present case:
(1)
the Palladium has a large dome with steel framing and a precast concrete roof plank system;
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(2)
the City discovered rips in the structural steel that needed remediation;
(3)
the defects caused Plaintiff and the City to call into question the Project’s overall structural
safety and integrity;
(4)
the Project faced imminent failure because of the defects;
(5)
the City had to engage a civil engineering firm to assess the damage and form a remediation
plan;
(6)
the engineering firm identified the following defects: use of improper bolts; use of improper
structural elements; and flaws in the actual fabrication of steel elements
(7)
the defects required extensive remediation to make the project safe;
(8)
the remediation efforts delayed the scheduling of other contractors and caused the City
financial damages; and
(9)
the civil engineering firm has discovered additional, smaller flaws in the steelwork that have
required ongoing remediation.
These allegations relate solely to Plaintiff’s allegedly deficient workmanship. The Court does not
construe Defendant’s duty under Radenbaugh, 610 N.W.2d at 275, to look beyond the allegations
in the complaint as a duty to look to all claims a third party could bring against an insured. Rather,
the policy underlying a broad duty to defend is to require insurers to see if, under the facts as alleged
in the complaint, any theory of liability that would be covered under the policy could attach to the
insured.
Here, Plaintiff does not dispute that the facts alleged in the complaint, by themselves, would
not fall within the definition of “occurrence” under its policy, and thus would not trigger Defendant’s
duty to defend. Nor would any of the theories of liability alleged be an occurrence. Rather, Plaintiff
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argues that facts outside the complaint—namely that the precast concrete portions of the Palladium’s
dome were damaged due to its faulty workmanship—are an occurrence within the meaning of the
policy. However, as discussed above, just because the City could bring a suit that would trigger
Defendant’s duty to defend does not mean that it has.
The Michigan cases defining the contours of an insurer’s duty to defend require the insurer
to ascertain if there are theories of liability supported by the facts alleged in the complaint, but not
specifically pled. Here, as argued by Defendant, the complaint alleges no facts that support a theory
of recovery that would trigger its duty to defend. Summary judgment in Defendant’s favor will
therefore be granted.
Plaintiff presents additional arguments in its motion, assuming that there is a duty to defend,
as to why none of the policy exclusions apply. In light of the Court’s holding as to coverage,
however, these arguments are moot.
III.
For the foregoing reasons, the Court will grant Defendant’s Motion for Summary Judgment
and deny Plaintiff’s Motion for Partial Summary Judgment.
The Court will issue an Order and Judgment consistent with this Opinion.
Dated: August 18, 2014
/s/ Robert Holmes Bell
ROBERT HOLMES BELL
UNITED STATES DISTRICT JUDGE
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