Federal Insurance Company v. Indeck Power Equipment Company
Filing
190
ORDER denying 165 Plaintiff Federal Insurance Company's Amended Motion for Summary Judgment. Signed by Honorable Timothy D. DeGiusti on 9/11/2018. (mb)
IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF OKLAHOMA
FEDERAL INSURANCE COMPANY, )
)
Plaintiff,
)
)
v.
)
)
INDECK POWER EQUIPMENT
)
COMPANY,
)
)
Defendant.
)
Case No. CIV-15-491-D
ORDER
Before the Court is Plaintiff Federal Insurance Company’s (“Federal”)
Amended Motion for Summary Judgment [Doc. No. 165]. Defendant Indeck
Power Equipment Company (“Indeck”) has filed its response in opposition
[Doc. No. 172] and Federal has replied [Doc. No. 179]. The matter is fully
briefed and at issue.
STATEMENT OF UNDISPUTED FACTS
This action arises out of insurance coverage disputes related to a water
treatment plant and improvements thereto designed and constructed for the
City of Altus, Oklahoma and the Altus Municipal Authority (collectively “the
Altus Plaintiffs”). Federal contends it has no duty to defend or indemnify
Indeck for a lawsuit brought by the Altus Plaintiffs against Indeck concerning
construction regarding the plant (“the Altus Litigation”).1 At the onset of this
litigation, the parties agreed to a bifurcated schedule in which they would first
litigate the issue of whether Federal owed a duty to defend Indeck before
conducting any discovery on the issue of whether Federal engaged in bad faith
in denying coverage [Doc. Nos. 53, 64]. Accordingly, the parties submitted a
Joint Stipulation of Undisputed Facts [Doc. No. 75] regarding the duty to
defend issue. The following statement of facts is taken from that stipulation
and other evidence in the record.
I.
THE INSURANCE POLICIES AT ISSUE
From December 2002 to December 2015, Federal issued commercial
general liability (CGL) insurance policies to Indeck, which provided insurance
coverage subject to the terms, conditions, exclusions, and limitations set forth
therein. Each of the Federal Policies were subject to a $1,000,000 per
occurrence limit and a $2,000,000 general aggregate limit. Subject to certain
exclusions discussed herein, the policies consistently stated Federal would
provide coverage for “property damage” caused by an “occurrence.” Under the
1
Since the inception of this lawsuit, the Altus Litigation has settled and Federal
has settled all claims against co-defendant, Glenn Briggs & Associates, Inc.
[Doc. Nos. 160, 174, 182]. Only claims involving Federal and Indeck remain.
2
policy, “property damage” was defined as (1) physical injury to tangible
property, including resulting loss of use of that property or (2) loss of use of
tangible property that is not physically injured. An “occurrence” was defined
as “an accident, including continuous or repeated exposure to substantially the
same general harmful conditions.”
The 2002-2003 Federal Policy included the following exclusions:
Exclusions
This insurance does not apply to:
11.
12.
***
Property damage to your product arising out of it or any
part of it.
Property damage to your work arising out of it or any part
of it and included in the products-completed operations
hazard.
This exclusion does not apply if the damaged work or the
work out of which the damage arises was performed on your
behalf by a subcontractor.
13.
Property damage to impaired property or property that has
not been physically injured arising out of:
a.
A defect, deficiency, inadequacy or dangerous
condition in your product or your work; or
b.
A delay or failure by you or anyone acting on your
behalf to perform a contract or agreement in
accordance with its terms.
This exclusion does not apply to the loss of use of other
property arising out of a sudden or accidental physical injury
3
14.
to your product or your work after it has been put to its
intended use.
Damages claimed for any loss, cost or expense incurred by
you or others for the loss of use, withdrawal, recall,
inspection, repair, replacement, adjustment, removal or
disposal of:
a.
Your product;
b.
Your work; or
c.
Impaired property;
(Emphasis in original).
In the policy, “your work” was defined as (1) work or operations
performed by Indeck or on its behalf; and (2) materials, parts or equipment
furnished in connection with such work or operations, including any warranties
or representations made at any time with respect to the fitness, quality,
durability, performance, or use of its work and the providing of or failure to
provide instructions or warnings. “Your property” was defined as “[a]ny goods
or products, other than real property, manufactured, sold, handled, distributed
or disposed of by … [Indeck] … others trading under [Indeck’s] name; or [a]
person or organization whose assets or business [Indeck] acquired.” The term
also included such items as “[c]ontainers (other than vehicles), materials, parts
or equipment furnished in connection with such goods or products.”
“Impaired property” was defined as tangible property, other than
Indeck’s product or work, that could not be used or was less useful because (1)
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it incorporated Indeck’s product or work that is known or thought to be
defective, deficient, inadequate or dangerous or (2) Indeck failed to fulfill the
terms and conditions of a contract or agreement, if such property can be
restored to use by either the repair, replacement, adjustment or removal of
Indeck’s product or work or by it fulfilling the terms and conditions of the
contract.
II.
THE WATER TREATMENT SYSTEM AND THE ALTUS LITIGATION
On January 19, 1999, the Altus Plaintiffs entered into an “Agreement for
Engineering Services” with Glen Briggs & Associates (“the Briggs Contract”).
In 2003, Indeck agreed to construct the Water Treatment System for the Altus
Plaintiffs. Altus, Indeck, and Briggs agreed to a “Date of Substantial
Completion” of January 10, 2006, for Indeck’s construction of the Water
Treatment System.2
2
The exact scope and nature of work Indeck and Briggs were to perform is
unclear from the parties’ submissions. For example, Briggs’ contract states it
was to provide professional engineering services for the construction of a
“water treatment plant.” [Doc. No. 75-1]. Indeck’s contract says it was to
commence and complete the construction of a “Reverse Osmosis Water
Treatment Plant … RO/UF Process Equipment (Including Alternate Bid Full
Membrane Replacement.”). [Doc. No. 75-2].
5
On November 5, 2013, the Altus Plaintiffs filed a lawsuit against Briggs
arising out of the Water Treatment System styled City of Altus, et al. v. Glenn
Briggs & Associates, Inc., et al., Case No. CJ-2013-144, Jackson County
District Court, State of Oklahoma (“the Altus action”). On January 6, 2014, the
Altus Plaintiffs filed an Amended Petition that added Indeck as a defendant.
Federal agreed to defend Indeck, through independent counsel of Indeck’s
choosing, subject to a reservation of rights set forth in correspondence dated
April 2, 2014.
On February 11, 2016, Altus filed a Third Amended Complaint in the
Altus action, alleging, inter alia, as follows:
1)
Indeck entered into a contract with the Altus Plaintiffs for
the construction of the Water Treatment Plant and
improvements thereto, and breached the contract by failing
to fulfill its obligations under the contract;
2)
Indeck negligently designed, supervised, constructed,
maintained, planned and/or evaluated the Water Treatment
Plant and improvements thereto;
3)
Indeck warranted, both expressly and impliedly, goods sold
to the Altus Plaintiffs for use in the Altus Water Treatment
Plant and breached said warranties;
4)
Indeck made fraudulent assertions that its proposed repair of
the the Altus Plaintiffs’ membranes would result in a
properly working OF and RO water treatment plant;
6
5)
The Altus Plaintiffs were entitled to punitive damages for the
fraudulent assertions by Indeck with regards to the proposed
repair of the plaintiffs’ membranes in an amount in excess of
$75,000, as Indeck’s fraudulent assertions were intentional
and with malice;
6)
Indeck and another company, Hydranautics, conspired to
withhold information and test results from the Altus
Plaintiffs which would have notified them of mistakes and
damages to the plant caused by the acts and/or omissions of
Indeck and/or Hydranautics during the initial operations;
7)
Had the Altus Plaintiffs been given this information and the
test results, Indeck and/or Hydranautics would have been
required to fulfill their warranty requirements and may have
voided the contract, but the information was intentionally
hidden from the plaintiffs to their detriment by Indeck and
Hydranautics;
8)
The Altus Plaintiffs were entitled to punitive damages for the
fraudulent acts and omissions of Indeck and Hydranautics
with regards to their hiding and withholding information
concerning damages to the plant as their fraudulent acts and
omissions were intentional and with malice;
9)
As a result of the actions of Indeck and others, the Altus
Plaintiffs incurred damages in excess of $75,000; and
10)
Indeck’s actions constituted a reckless, willful and wanton
disregard for the rights of the Altus Plaintiffs, as well as
gross negligence, which entitled them to punitive damages
in addition to any actual damages awarded.
See Third Amended Petition [Doc. No. 75-7].
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During the course of discovery, the Altus Plaintiffs stated that due to the
interconnected nature of the plant, failure of one area led to damage throughout
the entire system; therefore, the plant had yet to achieve the full extent of its
contracted use and levels. The plaintiffs further stated that the plant and
wastewater system did not work as required under the parties’ contract, and the
membrane facility did not function correctly. See Pls. Responses to Def. Indeck
Power Equip. Co.’s Interrogatories and Requests for Production [Doc. No. 753].
STANDARD OF DECISION
“Summary judgment is proper if, viewing the evidence in the light most
favorable to the non-moving party, there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” Bonidy
v. U.S. Postal Service, 790 F.3d 1121, 1124 (10th Cir. 2015) (citing Peterson
v. Martinez, 707 F.3d 1197, 1207 (10th Cir. 2013)). An issue is “genuine” if
there is sufficient evidence on each side so that a rational trier of fact could
resolve the issue either way. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670
(10th Cir. 1998). An issue of fact is “material” if under the substantive law it
is essential to the proper disposition of the claim. Id. Unsupported conclusory
allegations do not create an issue of fact. Finstuen v. Crutcher, 496 F.3d 1139,
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1144 (10th Cir. 2007). “If a party that would bear the burden of persuasion at
trial does not come forward with sufficient evidence on an essential element of
its prima facie case, all issues concerning all other elements of the claim and
any defenses become immaterial.” Adler, 144 F.3d at 670 (citing Celotex Corp.
v. Catrett, 477 U.S. 317, 322-23 (1986)).
Once the moving party has met its burden, the burden shifts to the
nonmoving party to present sufficient evidence in specific, factual form to
establish a genuine factual dispute. Bacchus Indus., Inc. v. Arvin Indus., Inc.,
939 F.2d 887, 891 (10th Cir. 1991). The nonmoving party may not rest upon
the mere allegations or denials of its pleadings. Rather, it must go beyond the
pleadings and establish, through admissible evidence, that there is a genuine
issue of material fact that must be resolved by the trier of fact. Salehpoor v.
Shahinpoor, 358 F.3d 782, 786 (10th Cir. 2004).
DISCUSSION
The parties agree that Illinois law governs the present dispute. Under
Illinois law:
[A]n insurance policy is a contract, and the same rules of
construction that apply to other types of contracts apply to
insurance policies. Thus, a court must construe the policy as a
whole, taking into account the type of insurance purchased, the
nature of the risks involved, and the overall purpose of the contract.
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The primary objective is to ascertain and give effect to the
intention of the parties as expressed in the agreement. A court must
accord the insurance policy’s terms their plain and ordinary
meaning.
Archer Daniels Midland Co. v. Burlington Ins. Co. Group, Inc., 785 F. Supp.
2d 722, 727 (N.D. Ill. 2011) (internal citations and quotations omitted).
The insurer’s duty to defend its insured is broader than the duty to
indemnify because it arises in cases of arguable or potential coverage.
Lockwood Int’l, B.V. v. Volm Bag Co., Inc., 273 F.3d 741, 746 (7th Cir. 2001);
Cincinnati Ins. Co. v. Taylor-Morley, Inc., 556 F. Supp. 2d 908, 913 (S.D. Ill.
2008). An insurer’s duty to defend arises when the allegations of the
underlying complaint potentially come within the coverage of the policy. Title
Industry Assur. Co., R.R.G. v. First Am. Title Ins. Co., 853 F.3d 876, 883 (7th
Cir. 2017); Millers Mut. Ins. Ass’n of Ill. v. Ainsworth Seed Co., Inc., 552
N.E.2d 254, 256 (Ill. App. Ct. 1989) (“[T]he obligation of an insurer to defend
an action brought against its insured must be decided by comparing the
allegations of the complaint against the insured with the terms of the policy.”)
(citations omitted). This is commonly referred to as the “eight corners” rule.
Title Industry, 853 F.3d at 883; Pekin Ins. Co. v. Illinois Cement Co., LLC, 51
N.E.3d 812, 820 (Ill. App. Ct. 2016). “The insurer may not simply refuse to
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defend a suit against its insured unless it is clear from the underlying complaint
‘that the allegations fail to state facts which bring the case within, or potentially
within, the policy’s coverage.’” Title Industry, 853 F.3d at 883 (citation
omitted).
Therefore,
[i]n conducting its review, the court liberally construes the
underlying complaint and the insurance policy in the manner
reasonably most favorable to the insured. The court gives little
weight to the legal labels attached to the underlying allegations.
Because the duty to defend usually depends on the contents of
these written documents—the insurance policy and the complaints
against the insured—the issue can often be decided on a motion
for summary judgment. The rule of Illinois law most important
here is that if the underlying complaint alleges several theories of
recovery, the insurer’s duty to defend arises even if only one such
theory is within the potential coverage of the policy.
Id. (internal citations and quotations omitted).
When an insurer brings a timely declaratory judgment action, courts may
look beyond the four corners of the underlying complaint and consider
extrinsic evidence. Title Industry, 853 F.3d at 884 (“To require the trial court
to look solely to the complaint in the underlying action to determine coverage
would ... greatly diminish a declaratory action’s purpose of settling and fixing
the rights of the parties.”).
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Federal contends no duty to defend was triggered because (1) the Altus
Plaintiffs’ claims do not constitute “property damage” as that term is defined
under the Federal Policies, (2) the Altus Plaintiffs’ damages were not caused
by an “occurrence” as that term is defined under the policies, and (3) certain
exclusions in the policies bar coverage. Upon review, and being mindful of the
standard that the duty to defend is triggered unless it is clear from the
underlying complaint that the allegations fail to bring the case within or
potentially within the policy’s coverage, and that if even one theory of recovery
is within the potential coverage of the policy there is a duty to defend, the Court
finds that the underlying allegations against Indeck are sufficient to trigger
Federal’s duty to defend under the circumstances here.
In the Altus Litigation, the Third Amended Petition alleged that Indeck
negligently designed, supervised, constructed, maintained, planned and/or
evaluated the Water Treatment Plant and improvements thereto. See Third
Amend. Pet. ¶ 6 (emphasis added) [Doc. No. 75-7]. As acknowledged by the
Seventh Circuit, Illinois law recognizes that negligently performed work or
defective work can give rise to an “occurrence” under a CGL policy, especially
where, as in this case, the policy defines an “occurrence” as “continuous or
repeated exposure to conditions.” See Westfield Ins. Co. v. Nat’l Decorating
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Service, Inc., 863 F.3d 690, 697 (7th Cir. 2017) (citing Lyerla v. AMCO Ins.
Co., 536 F.3d 684, 690 (7th Cir. 2008)).
Moreover, it is true, as Federal contends, that the duty to defend is not
triggered where the loss is alleged to have been sustained as a result of defects
in, or damage to, the insured’s own project. See id. However, damage to
something other than the project itself does constitute an “occurrence.” See id.
(citing Milwaukee Mut. Ins. Co. v. J.P. Larsen, Inc., 956 N.E.2d 524, 532 (Ill.
App. Ct. 2011)). As noted above, the Court finds there is conflicting evidence,
here regarding the exact scope of Indeck’s work. It is unclear on the present
summary judgment record whether Indeck’s work extended to the entire plan
and system, or whether certain aspects of the system were beyond the scope of
Indeck’s work. As noted above, viewing the record and evidence in the light
most favorable to Indeck, as the Court must, the underlying petition and
attendant discovery suggest the Altus Plaintiffs sought damages to parts of the
water treatment system beyond those components Indeck was responsible to
build or improve. Because there is persuasive evidence on both sides of the
parties’ dispute on this issue, summary judgment is not appropriate.
Regarding property damage, the record evidence supports the inference
that the Altus Plaintiffs allege the existence of “property damage” as that term
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was defined. As noted supra, “property damage” was consistently defined
throughout the policies as (1) physical injury to tangible property, including
resulting loss of use of that property or (2) loss of use of tangible property that
is not physically injured. Here, the Altus Plaintiffs, in discovery, alleged
damage throughout the system due at least in part to Indeck’s acts and/or
omissions.
Finally, Federal’s contention that certain exclusions found within the
policies bar coverage is rejected. Federal contends that several “business risk
exclusions” exclude damage to Indeck’s “product,” its “work,” and “impaired
property.”3 Specifically, Federal contends that the “your product” and
“impaired property” exclusions bar coverage because these proceedings
involve damage to Indeck’s “product,” i.e., the goods and products that Indeck
manufactured and handled, and “impaired property,” i.e., the water treatment
system that was allegedly made less useful because of a deficiency in Indeck’s
3
Business risk exclusions are standard in CGL policies. Sokol and Co. v.
Atlantic Mut. Ins. Co., 430 F.3d 417, 423 (7th Cir. 2005). “The purpose of
business risk exclusions is to exclude coverage of risks that could be avoided
by the insured company itself; that is, to effectuate the intent of the parties that
the CGL coverage be for tort liability resulting from the product and/or work
of the insured company, and not a warranty on the quality of the product or
work itself.” American Ins. Co. v. Crown Packaging Intern., 813 F. Supp. 2d
1027, 1046 (N.D. Ind. 2011) (citation omitted).
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products, its services, or because of Indeck’s failure to fulfill the terms of the
contract.
Under Illinois law, exclusions in a policy are construed liberally in favor
of the insured and narrowly against the insurer. West Side Salvage, Inc. v. RSUI
Indemnity Co., 878 F.3d 219, 224 (7th Cir. 2017). Accordingly, it must be
“clear and free from doubt” that an exclusion applies. RSUI Indemnity Co. v.
McDonough Dist. Hosp., No. 4:16-cv-4177, 2017 WL 4319117, at *4 (C.D.
Ill. Sept. 28, 2017) (quoting Atlantic Mut. Ins. Co. v. American Academy of
Orthopaedic Surgeons, 734 N.E.2d 50, 56 (Ill. App. Ct. 2000)). As indicated
above, Federal’s motion on this issue is denied, since it cannot be established
from the record evidence that the only damage alleged in the underlying
petition was due to Indeck’s own work and to its own product. Nor does the
Court find the “impaired property” exclusion applicable, since there is no
evidence in the record that the subject property has been restored to use by
either the repair, replacement, adjustment or removal of Indeck’s product or
work or by Indeck fulfilling the terms and conditions of the contract.
In sum, because there is conflicting evidence on the nature and scope of
Indeck’s work, and it cannot be said that at least one theory of recovery in the
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Altus Litigation does not fall within the scope of the policy, Federal’s
Amended Motion for Summary Judgment is denied.
CONCLUSION
Plaintiff Federal Insurance Company’s Amended Motion for Summary
Judgment [Doc. No. 165] is DENIED as set forth herein.
IT IS SO ORDERED this 11th day of September 2018.
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