Ardente v. Standard Fire Insurance Co. , 744 F.3d 815 ( 2014 )

United States Court of Appeals
For the First Circuit
No. 13-2000
EVAN ARDENTE,
Plaintiff, Appellee,
v.
THE STANDARD FIRE INSURANCE COMPANY,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. William E. Smith, U.S. District Judge]
Before
Torruella, Circuit Judge,
Souter,* Associate Justice,
and Selya, Circuit Judge.
Daniel F. Sullivan, with whom Wystan M. Ackerman, Dana M.
Horton and Robinson & Cole LLP, were on brief for appellant.
Kurt T. Kalberer II, with whom Christopher E. Hultquist and
DarrowEverett, LLP, were on brief for appellee.
March 12, 2014
*
Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
TORRUELLA, Circuit Judge. Standard Fire Insurance
Company appeals from a district court order awarding Evan Ardente
summary judgment on his claim for breach of a yacht insurance
policy. Because the policy does not cover the type of damage
sustained by Ardente's yacht, we reverse.
I. Background
Standard Fire insured Ardente's yacht. At some point
after purchasing the boat, Ardente noticed that its top speed had
decreased and that it was not navigating properly. The parties
agree that these were symptoms of water damage to the yacht's hull.
They also agree about how water was getting into the hull. A
ship's hull has holes for the installation of fixtures, such as
port lights. Normally, the material surrounding these so-called
"installation holes" is solid laminate, which is waterproof. But
in Ardente's yacht, the installation holes are surrounded by balsa
wood, which is not waterproof. Water seeping into the balsa wood
around the installation holes then spread throughout the hull.
Ardente presented a claim to Standard Fire, which denied
coverage on the ground that the claim fell within an exclusion for
manufacturing defects. Ardente sued in state court, alleging,
among other claims, breach of contract, whereafter Standard Fire
removed the case to federal court. The parties then filed cross
motions for summary judgment.
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The district court granted summary judgment in favor of
Standard Fire on all of Ardente's claims except for the breach of
contract allegation. Ardente v. Standard Fire Ins. Co., 906 F.
Supp. 2d 22 (D.R.I. 2012). On that claim, the district court
granted Ardente summary judgment with respect to liability,
interpreting the policy in such a way that the damage fell within
an exception to the exclusion for manufacturing defects. The issue
of damages was reserved for trial, but the parties reached a
stipulation with respect to damages, and the district court entered
judgment. Standard Fire appealed.
II. Discussion
We review de novo both the district court's grant of
summary judgment and its interpretation of the insurance policy.
Penn-Am. Ins. Co. v. Lavigne, 617 F.3d 82, 84 (1st Cir. 2010).
Summary judgment is appropriate when the record, viewed in the
light most favorable to the nonmovant, reveals no genuine issue of
material fact and that the movant is entitled to judgment as a
matter of law. See id. This case presents no factual issues and
asks only whether Ardente's loss is covered by the policy, a legal
question properly resolved by summary judgment. See Littlefield v.
Acadia Ins. Co., 392 F.3d 1, 6 (1st Cir. 2004).
The parties agree that Rhode Island law governs the
interpretation of the policy. Under Rhode Island law, if the terms
of an insurance policy are unambiguous, there is no further need
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for judicial construction. Amica Mut. Ins. Co. v. Streicker, 583
A.2d 550, 551 (R.I. 1990). To determine whether ambiguity exists,
the policy must be viewed in its entirety and the language must be
given its plain, everyday meaning. Id. at 552. Where a policy is
ambiguous, it will be construed against the insurer. Id. But "[a]
policy is not to be described as ambiguous because a word is viewed
in isolation or a phrase is taken out of context. A court should
not, through an effort to seek out ambiguity when there is no
ambiguity, make an insurer assume a liability not imposed by the
policy." McGowan v. Conn. Gen. Life Ins. Co., 289 A.2d 428, 429
(R.I. 1972).
Ardente's Standard Fire policy explicitly disclaims
coverage for "loss or damage caused by or resulting from . . .
[d]efects in manufacture, including defects in construction,
workmanship and design other than latent defects as defined in the
policy" (emphasis added). This provision is referred to as the
"manufacture-defect exclusion," and the emphasized exception to
that exclusion is referred to as the "latent-defect exception."
The parties agree that use of balsa wood instead of solid laminate
constitutes a manufacturing defect, but they disagree over whether
the defect falls within the latent-defect exception.
The policy defines "latent defect" as "a hidden flaw
inherent in the material existing at the time of the original
building of the yacht, which is not discoverable by ordinary
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observation or methods of testing." The parties agree that the use
of balsa wood was a flaw that existed at the time of the original
building of the yacht and that it was not discoverable by ordinary
observation or methods of testing. The only dispute is whether the
balsa wood constitutes "a hidden flaw inherent in the material."
Standard Fire claims that the material, in this case the balsa
wood, was not flawed in any way; that it was perfectly good balsa
wood, and that it did what balsa wood does -- absorb water.
Unsurprisingly, Ardente takes the opposite tack and argues that
while the balsa wood itself was not flawed, the use of balsa wood,
instead of solid laminate, was certainly a flaw.
The district court sided with Ardente. It first
determined that the phrase, "flaw inherent in the material" -- part
of the definition of "latent defect" -- contained a contradiction.
According to the district court:
The word "inherent" requires that a latent
defect be characteristic of or intrinsic to
the material. The word "flaw" imposes the
exact opposite requirement. It includes
problems with a specific piece of material,
but not problems characteristic of the
material itself. In short, giving the terms
their plain and reasonable meaning, there can
be no such thing as an inherent flaw.
Ardente, 906 F. Supp. 2d at 27. Because ambiguity in an insurance
policy is interpreted against the insurer, the district court
refused to let this apparent contradiction render the entire
latent-defect exception meaningless. Instead, to reflect the
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reasonable expectations of the insured, the district court
interpreted "latent defect" to include the flawed use of unflawed
material. Said the district court, "The use of balsa wood in these
areas was a flaw in the construction of the Yacht, even if it was
not a flaw in the underlying material itself." Id. at 28.
We fear that the district court committed the error
against which McGowan warns: deeming a policy ambiguous, and thus
making an insurer liable, by taking a term out of context and
viewing it in insolation. See 289 A.2d at 429. The policy's
definition of "latent defect" -- "a hidden flaw inherent in the
material existing at the time of the original building of the
yacht, which is not discoverable by ordinary observation or methods
of testing" -- while not a model of precision, is not self-
contradictory. Viewing the definition in its entirety and giving
the language its plain, everyday meaning, see Streicker, 583 A.2d
at 552, the gist is clear. The phrase refers to flaws in the
material used to build the boat that were not noticeable. A
quintessential example, we imagine, is a piece of wood with a
hairline fracture or with an undetectable termite infestation.
If anything, the definition could be criticized not as
self-contradictory but as redundant. It mentions flaws that are
"hidden" but goes on to add that they must be "not discoverable by
ordinary observation or methods of testing," which is another way
of saying "hidden." Indeed, the word "inherent" is yet a third
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means of emphasizing this same quality: In this context, inherent
means "within" and conveys that the flaw must impugn the material
in a way that evaded observation at the time it was handled. While
"inherent" may not have been the best choice of words, and
reiterated an already redundant aspect of the definition, the
district court failed to give that term its everyday meaning by
reading it to require that the flaw inhere in every piece of the
type of material under consideration.
We acknowledge that redundancy may itself be a form of
ambiguity; indeed, one canon of interpretation urges courts to give
each word meaning, thereby avoiding surplusage. See Andrukiewicz
v. Andrukiewicz, 860 A.2d 235, 239 (R.I. 2004). But we offer two
responses. First, we note a general point -- colorfully made by
the Sixth Circuit -- about redundancy in insurance policies:
[The] label ["redundancy"] surely is not a
fatal one when it comes to insurance
contracts . . . where redundancies abound. In
just this one provision of the 80-page
insurance contract, there are at least three
truly redundant phrases . . . : (1) "loss or
damage"; (2) "caused by or resulting from";
and (3) "faulty, inadequate or defective." As
in so many insurance contracts, iteration is
afoot throughout--from an exclusion for "war
and military action" to one for "fraudulent,
dishonest or criminal acts or omissions" to
one for flooding of "lakes, reservoirs, ponds,
brooks, rivers, streams, harbors, oceans or
any other body of water or watercourse" to
numerous others.
. . . .
All of this helps to reveal the limits
of the interpretive canon . . . that courts
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must avoid interpreting contracts to contain
superfluous words. The canon is one among many
tools for dealing with ambiguity, not a tool
for creating ambiguity in the first place.
Where there are two ways to read the text--and
the one that avoids surplusage makes the text
ambiguous--applying the rule against
surplusage is, absent other indications,
inappropriate.
TMW Enterprises, Inc. v. Fed. Ins. Co., 619 F.3d 574, 577-78 (6th
Cir. 2010) (Sutton, J.) (citations and internal quotation marks
omitted).
Second, accepting that "inherent" in the policy's
definition is redundant, we fail to see how this redundancy invites
the reading adopted by the district court and urged by Ardente.
Granting that ambiguity should be interpreted against the insurer
and in light of the reasonable expectations of the insured, if
ambiguity lives in the phrase "inherent flaw," that phrase, and not
another, should be so construed. That remedy might, for example,
entail striking the word "inherent" so that the definition would
read, "a hidden flaw inherent in the material existing at the time
of the original building of the yacht, which is not discoverable by
ordinary observation or methods of testing." But instead of doing
that, the district court changed the word "material" to "yacht,"
such that "latent defect" referred to a "hidden flaw in the yacht."
This might have been proper had ambiguity marred the word
"material," but the district court found ambiguity not in that term
but in the term "inherent flaw."
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For his part, Ardente does argue that the term "material"
is ambiguous. He urges us to interpret "material" to mean not the
balsa wood, but something like, "all of the stuff that is near the
installation holes." Part of that "stuff" is the balsa wood, and
it is that fact -- the fact that balsa wood makes up some of the
"stuff" surrounding the installation holes -- that, according to
Ardente, constitutes the flaw.
Ardente's interpretation would create surplusage, and not
that of the relatively benign variety that comes with describing a
flaw as both "hidden" and "inherent." His interpretation of the
word "material" would allow the latent-defect exception to swallow
the manufacture-defect exclusion, rendering the exclusion
superfluous and doing violence to the policy. The policy expressly
excludes from coverage damage caused by "[d]efects in manufacture,
including defects in construction, workmanship, and design other
than latent defects." To say that "material" in the definition of
"latent defect" refers not to an individual raw ingredient used in
constructing the yacht, but rather to a composite of various raw
ingredients that appear in close proximity in a particular area of
the ship, yields the following result: If a carpenter building the
yacht accidentally affixes balsa wood instead of solid laminate
around the installation holes, we could refer to the defect as a
"latent defect" instead of a "defect in construction or
workmanship." Similarly, if an engineer drawing the blueprints of
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the yacht accidentally calls for balsa wood instead of solid
laminate to be placed around the installation holes, we could refer
to that defect as a "latent defect" instead of a "defect in
design." But it is clear that the policy meant to exclude from
coverage precisely those types of defects.
As a last ditch effort to support affirmance, Ardente
makes two arguments based on sources that are irrelevant here.
First, Ardente argues that the policy's definition of "latent
defect" guts the term of a broader meaning that it allegedly enjoys
under Rhode Island common law. Citing one Rhode Island case and
Black's Law Dictionary, Ardente contends that, at common law,
"latent defect" would mean a hidden flaw in the yacht, as opposed
to a hidden flaw in the balsa wood. But in the case cited, the
policy did not define "latent defect," see Neri v. Nationwide Mut.
Fire Ins. Co., 719 A.2d 1150, 1153-54 (R.I. 1998), and whatever
interpretation courts might adopt in the absence of an explicit
policy definition has no bearing on this case, where Ardente's
policy defines the term.
Second, Ardente accuses Standard Fire of defining "latent
defect" to include flaws that some other insurance policies capture
with a separate "faulty materials" exception. Ardente cites TRAVCO
Insurance Co. v. Ward, 715 F. Supp. 2d 699, 710 (E.D. Va. 2010),
aff'd, 504 F. App'x 251 (4th Cir. 2013), where, because the policy
explicitly excluded loss caused by both "latent defects" and
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"faulty materials," the court avoided surplusage by interpreting
the undefined term "latent defect" not to include faulty materials.
Id. But Standard Fire was free to define "latent defect" to include
faulty materials and, given that its policy contains no separate
exclusion for "faulty materials," that seems to be precisely what
Standard Fire did.
Because the damage to Ardente's yacht does not fall
within the latent-defect exception to the manufacture-defect
exclusion, Standard Fire -- not Ardente -- was entitled to summary
judgment on the breach of contract claim. We need not reach
Standard Fire's alternative arguments supporting reversal.
III. Conclusion
For the foregoing reasons, the district court's order
granting Ardente summary judgment on his breach of contract claim
is REVERSED, the judgment in favor of Ardente is VACATED, and the
district court is directed to grant Standard Fire's cross motion
for summary judgment and to enter judgment in Standard Fire's
favor. No costs are awarded.
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