MTI v. Employers Insurance Co. , 913 F.3d 1245 ( 2019 )

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS January 25, 2019
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
MTI, INC., formerly Midwest Towers,
Inc.,
Plaintiff - Appellant
v. No. 17-6206
EMPLOYERS INSURANCE COMPANY
OF WAUSAU,
Defendant - Appellee.
_________________________________
Appeal from the United States District Court
for the Western District of Oklahoma
(D.C. No. 5:15-CV-00716-R)
_________________________________
F. Thomas Cordell, Frailey, Chaffin, Cordell, Perryman & Sterkel, LLP, Chickasha,
Oklahoma, (Mort G. Welch, Welch & Smith, P.C., Oklahoma City, Oklahoma, with him
on the briefs), for Plaintiff-Appellant.
Jeffrey Gerish, Plunkett Cooney, P.C., Bloomfield Hills, Michigan, (Joseph R. Farris and
Emily D. Pearson, Franden, Farris, Quillin, Goodnight & Roberts, Tulsa, Oklahoma, with
him on the briefs), for Defendant-Appellee.
_________________________________
Before LUCERO, McKAY, and MATHESON, Circuit Judges.
_________________________________
LUCERO, Circuit Judge.
_________________________________
In this appeal, we consider two exclusions from a commercial general liability
policy that bar coverage for damage to “that particular part” of the property on which
an insured is performing operations, or which must be repaired or replaced due to the
insured’s incorrect work. Under Oklahoma law, our analysis proceeds in two steps.
First, we must determine as a matter of law whether the exclusions are ambiguous.
Kerr-McGee Corp. v. Admiral Ins. Co., 905 P.2d 760, 762 (Okla. 1995). We
conclude the phrase “that particular part” is susceptible to more than one reasonable
construction: it could refer to the distinct component upon which an insured works
or to all parts ultimately impacted by that work.
Because the language at issue is ambiguous we proceed to the second step, in
which “the contract will be interpreted consistent with the mutual intent of the
parties, with the ambiguity resolved most favorably to the insured and against the
insurance carrier.” Id. We thus adopt the narrower interpretation of the phrase “that
particular part,” under which the exclusion extends only to the distinct components
upon which work was performed. Exercising jurisdiction under 28 U.S.C. § 1291,
we reverse.
I
Western Farmers Electrical Cooperative (“WFEC”) owns cooling towers in
Oklahoma, which were serviced by MTI, Inc. (“MTI”), the appellant in this case.
Employers Insurance Company of Wausau (“Wausau”), the appellee, provided a
commercial general liability policy (the “Policy”) to MTI at all times material to this
appeal.
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A 2011 inspection by MTI revealed that the anchor bolts in Cooling Tower 1
were corroded. MTI and WFEC agreed to a new repair contract, which included the
following work:
Unit 1 Tower Anchors
Throughout the entire basin, install new 304 SS anchor castings.
Included will be 304SS anchor bolts and Hilti anchor adhesive.
Unit 1 Louvers
On four (4) cells, remove existing louvers and install a (3) row louver
system. New louvers will consist of 12oz. 4.2” corrugated FRP panels
supported on 2”x4” Douglas Fir supports. Included will be new
polypropylene support arms. Also included will be all necessary 304
stainless steel hardware.
Repairs on a separate cooling tower were also listed in the Tower 1 contract. The
cooling towers at issue are mostly wood structures, approximately 50 feet wide, 150
feet long, and 70 feet tall. They are set in sump pits approximately 12 feet deep. The
towers are stabilized with lateral wooden bracing beams, which are connected to the
concrete foundation of the sump pit with anchor bolts.
On May 23, 2011, MTI employees removed all 64 corroded anchor bolts in
Tower 1. Because the adhesive applicator had not yet arrived, MTI did not
immediately install new anchor bolts. Further, MTI did not provide any temporary
support to ensure the stability of the tower. On the night of May 24, extremely high
winds struck the tower, causing it to lean and several structural components to break.
Due to the extent of the structural damage, removal and replacement of the tower was
determined to be the only viable option. Although at least some internal operational
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equipment was not damaged, this equipment was deemed too dangerous to access and
recover.
WFEC demanded MTI pay the cost of removing and replacing the entire
tower, which totaled over $1.4 million. MTI filed a claim for coverage with its
insurer, Wausau, under the Policy. After Wausau declined to provide coverage, MTI
directly negotiated a settlement of $350,000 with WFEC. The balance of the tower
replacement cost was borne by WFEC’s insurer. MTI then sought recoupment of its
settlement amount from Wausau.
The parties agree that the Policy was active at the time of the incident.
Wausau denied coverage under two exclusions. Those provisions bar coverage for:
j. Damage To Property
“Property damage” to:
....
(5) That 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
(6) That particular part of any property that must be restored, repaired or
replaced because “your work” was incorrectly performed on it.
MTI eventually filed suit against Wausau in Oklahoma state court for breach
of contract. Wausau removed the case to federal court. On Wausau’s motion for
summary judgment, the district court held that the events described fell within the
scope of both exclusion j(5) and j(6), and entered judgment in favor of Wausau. MTI
timely appealed.
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II
We review a district court’s grant of summary judgment de novo. Greystone
Constr., Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272, 1277 (10th Cir. 2011),
as amended on reh’g in part (Dec. 23, 2011). Summary judgment is appropriate only
if there is no genuine issue of material fact and the moving party is entitled to
judgment as a matter of law. Id. We also review a district court’s interpretation of
state contract law de novo. City of Wichita v. Sw. Bell Tel. Co., 24 F.3d 1282, 1286
(10th Cir. 1994).
Because this is a diversity action, we “apply the substantive law of the forum
state.” Pepsi-Cola Bottling Co. of Pittsburg, Inc. v. PepsiCo, Inc., 431 F.3d 1241,
1255 (10th Cir. 2005). The parties agree that MTI’s claim is governed by Oklahoma
contract law, and that there are no binding decisions on this precise issue from the
state courts. We accordingly seek to predict how the Oklahoma Supreme Court
would rule. See Carl v. City of Overland Park, 65 F.3d 866, 872 (10th Cir. 1995).
A
Under Oklahoma law, “[w]hen addressing a dispute concerning the language
of an insurance policy our first step is to determine as a matter of law whether the
policy language at issue is ambiguous.” Cranfill v. Aetna Life Ins. Co., 49 P.3d 703,
706 (Okla. 2002). A provision is ambiguous if it is facially susceptible to two
interpretations, considered from the standpoint of a reasonably prudent layperson. Id.
If the language is not ambiguous, “we accept the language in its plain, ordinary and
popular sense.” Id.
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Our initial inquiry is thus whether exclusions j(5) and j(6) are ambiguous.
Exclusion j(5) excludes coverage for property damage to “[t]hat particular part . . . on
which you . . . are performing operations, if the ‘property damage’ arises out of those
operations.” Similarly, exclusion j(6) excludes property damage to “[t]hat particular
part of any property that must be restored, repaired or replaced because ‘your work’
was incorrectly performed on it.” The key phrase for this appeal is “that particular
part.”
Although the Oklahoma Supreme Court has not explicitly addressed this
language, these specific exclusions have received inconsistent treatment from a
number of other state and federal courts. See, e.g., Roaring Lion, LLC v. Nautilus
Ins. Co., No. CV 11-2-M-DWM-JCL, 2011 WL 3956132, at *5-7 (D. Mont. July 15,
2011) (unpublished) (noting the varied interpretations of these exclusions). The fact
that jurisdictions have differed in their evaluation of terms does not, however,
establish that the language in question is necessarily ambiguous. BP Am., Inc. v.
State Auto Prop. & Cas. Ins. Co., 148 P.3d 832, 836 (Okla. 2005), as corrected (Oct.
30, 2006).
As several courts have explained, “that particular part” is narrowing language.
See Fortney & Weygandt, Inc. v. Am. Mfrs. Mut. Ins. Co., 595 F.3d 308, 311 (6th
Cir. 2010) (describing the words “that particular part” as “trebly restrictive, straining
to the point of awkwardness to make clear that the exclusion applies only to building
parts on which defective work was performed, and not to the building generally”);
Mid-Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207, 215 (5th Cir. 2009) (noting
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“[t]he narrowing ‘that particular part’ language”); Columbia Mut. Ins. Co. v. Schauf,
967 S.W.2d 74, 80 (Mo. 1998) (“By using the words particular part, the provision
evidences the intent to narrow the scope of the exclusion as much as possible.”
(emphasis omitted)); ACUITY v. Burd & Smith Constr., Inc., 721 N.W.2d 33, 41
(N.D. 2006) (pointing to “the limiting language ‘particular part of real property’”);
Glob. Modular, Inc. v. Kadena Pac., Inc., 222 Cal. Rptr. 3d 819, 829 (Cal. Ct. App.
2017) (holding that “the phrase is intended to be a narrowing element, one that limits
the provision’s application to a distinct part of a construction project”). These courts
have thus determined the scope of coverage by looking to the “distinct component
parts” on which an insured conducts operations. Mid-Continent, 557 F.3d at 217.
Several of these cases are instructive. In Mid-Continent, the Fifth Circuit held
that exclusion j(6) did not bar coverage for damage to interior work caused by the
failure to properly water seal exterior finishes and retaining walls because “[t]he
exterior finishes and retaining walls were distinct component parts that were each the
subject of separate construction processes and are severable from the” interior
components. Id. Similarly, in Fortney & Weygandt, the Sixth Circuit concluded that
exclusion j(6) did not bar coverage for a restaurant that had to be completely rebuilt
due to faulty foundation work by the insured. 595 F.3d at 309-11. In ACUITY, the
North Dakota Supreme Court held that a contractor hired to do work on a roof could
recover for damage to the interior of an apartment building caused by defective work
on the roof. 721 N.W.2d at 42. And in Shauf, the Missouri Supreme Court
concluded that only kitchen cabinets were excluded when a machine being used on
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those cabinets caused a fire that resulted in damage throughout a home. 967 S.W.2d
at 76, 81.
Other courts have adopted a broader reading. For example, in William
Crawford, Inc. v. Travelers Ins. Co., 838 F. Supp. 157 (S.D.N.Y. 1993), the court
rejected the argument that “(j)(5) only excludes coverage for the damage to that
specific part of the apartment on which [the insured] was actually doing work when
the accident occurred,” instead holding that damage to the entire apartment was
excluded. Id. at 158. Similarly, in Jet Line Services, Inc. v. American Employers
Ins. Co., 537 N.E.2d 107 (Mass. 1989), the court remarked that “whether at the time
of the property damage an employee of the insured is or is not in one area or another
of the property on which the insured has agreed to perform operations is not
significant to the coverage question.” Id. at 111.
Under Oklahoma law, it is the responsibility of the insurer desiring to limit
liability to employ clear language in the contract. Haworth v. Jantzen, 172 P.3d 193,
197 (Okla. 2006). Wausau has failed to do so in this case. The phrase “that
particular part” could be read to refer solely to the direct object on which the insured
was operating. Alternatively, it could apply to those parts of the project directly
impacted by the insured party’s work. We agree with those courts that have held the
former interpretation is a reasonable one, although we acknowledge that the latter is
also reasonable. Because both readings are permissible, the exclusions are facially
ambiguous. Cranfill, 49 P.3d at 706.
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B
“If the language is ambiguous, we apply well-settled rules of construction to
determine the meaning of the ambiguous language.” Id. Specifically, it is our
mandate to “construe the policy to give a reasonable effect to all of its provisions,
and we liberally construe words of inclusion in favor of the insured and strictly
construe words of exclusion against the insurer.” Id. (citation omitted); see also
Dodson v. St. Paul Ins. Co., 812 P.2d 372, 377 (Okla. 1991) (“In case of doubt,
exclusions exempting certain specified risks are construed strictly against the
insurer.”).
Because the exclusions are ambiguous, they must be strictly and narrowly
construed in a manner favorable to the insured party. Haworth, 172 P.3d at 197. “In
construing an ambiguity or uncertainty against the insurer and in favor of the insured,
Oklahoma looks to the objectively reasonable expectations of the insured to fashion a
remedy.” Id. Further, “an interpretation which makes a contract fair and reasonable
is selected over that which yields a harsh or unreasonable result.” Max True
Plastering Co. v. U.S. Fid. & Guar. Co., 912 P.2d 861, 865 (Okla. 1996). In this
case, interpreting “that particular part” to refer to the distinct components upon which
work is performed best comports with these rules of interpretation.
Even under this definition, determining the “particular part” on which an
insured works “will vary with the facts and circumstances of each particular case.”
Vinsant Elec. Contractors v. Aetna Cas. & Sur. Co., 530 S.W.2d 76, 77 (Tenn. 1975).
In some instances, a larger unit will properly be considered the particular part. See,
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e.g., Jet Line Servs., 537 N.E.2d at 111 (concluding exclusion j(5) barred coverage
for entire fuel tank rather than only the bottom portion of the tank because insured
“was retained to clean the entire tank, and it was the entire tank on which operations
were being performed within the meaning of the policy language”). In some cases,
an entire structure may qualify. For example, several cases have held that the
exclusions so apply when an insured was hired to raise the entire structure. See, e.g.,
Lafayette Ins. Co. v. Peerboom, 813 F. Supp. 2d 823, 834 (S.D. Miss. 2011); Grinnell
Mut. Reinsurance Co. v. Lynne, 686 N.W.2d 118, 125 (N.D. 2004).
As applied to the facts of this case, we conclude the “particular part” on which
MTI was “performing operations” and upon which work “was incorrectly performed”
should reasonably be understood as the anchor bolts. Those bolts constitute “distinct
component parts” of the tower, analogous to items like “interior drywall, stud
framing, electrical wiring, and wood flooring.” Mid-Continent, 557 F.3d at 217.
MTI performed work incorrectly by removing them without promptly replacing them
or bracing the structure. We further conclude it is objectively reasonable that MTI
would expect coverage for the cost of replacing the entire tower, including all of its
operational elements, given the ambiguous language of exclusions j(5) and j(6).
C
Contrary to Wausau’s assertion, interpreting the Policy in this manner does not
convert it into a performance bond. See generally Black & Veatch Corp. v. Aspen
Ins. (Uk) Ltd, 882 F.3d 952, 969 (10th Cir. 2018) (“Both insurance policies and
performance bonds are used to spread risk, but they differ in fundamental ways. An
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insurance policy spreads the contractor’s risk. A performance bond guarantees
completion of the contract upon the contractor’s default.”). In Dodson, the
Oklahoma Supreme Court, interpreting a different policy provision, noted that it
would be inappropriate to “effectively convert [a] policy into a performance bond or
guarantee of contractual performance” by reading a policy to cover “the repair and
replacement of the insured’s own faulty workmanship.” 812 P.2d at 378 (quotation
omitted). But that concern is not at issue here. MTI is not requesting that Wausau
cover the cost of replacing the anchor bolts, which would be the heart of any faulty
workmanship claim. The Dodson decision recognized this distinction, stating that a
policy would provide coverage if the insured’s faulty workmanship “results in
damage to property other than the insured’s work or product.” Id. (quotation
omitted). The monetary values at issue underline this point. MTI agreed to complete
certain work for $46,273. A performance bond for such a project would not likely
result in liability of over $1.4 million.
Similarly, we are not persuaded by Wausau’s argument that the Policy
contains an implied “business risk exclusion” that would otherwise override the
express language. Absent a violation of public policy, businesses are free to contract
to their preferred degree of risk embodied by the precise terms by which they choose
to articulate the insurance relationship. See generally Siloam Springs Hotel, LLC v.
Century Sur. Co., 392 P.3d 262, 268 (Okla. 2017). Oklahoma courts do not, as a
matter of course, read broad business risk exclusions into contracts, and this court
will not do so when it would override the express language of the contract. See Mid-
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Continent, 557 F.3d at 216 (dismissing similar argument because “whether there is
coverage in a particular case depends on the language contained in the policy at
issue”).
Finally, we reject Wausau’s contention that this court has previously decided
the issue presented. Our court has considered these exclusions, albeit under Kansas
law. See Advantage Homebuilding, LLC v. Maryland Cas. Co., 470 F.3d 1003 (10th
Cir. 2006). In that case, we held that exclusions j(5) and j(6) apply when property
damage occurs while the insured’s work is ongoing regardless of when the damage is
discovered. Id. at 1010-12. Wausau focuses on two sentences of that opinion. We
stated that exclusion j(5) applies “whenever property damage arises out of the work
of the insured, its contractors, or its subcontractors while performing operations.” Id.
at 1011 (quotation and italics omitted). We also stated that exclusion j(6) “was
intended to exclude ‘property damage’ that directly or consequentially occurs from
the faulty workmanship of the insured.” Id. at 1012.
But Advantage did not address the meaning of the phrase “that particular part.”
It had no occasion to do so because the insured there contracted to build entire
homes. Id. at 1009. Accordingly, any statement made in Advantage as to that
question would constitute dicta. And as we have previously noted, dicta, “being
peripheral, may not have received the full and careful consideration of the court that
uttered it.” OXY USA, Inc. v. Babbitt, 230 F.3d 1178, 1184 (10th Cir. 2000)
(quotation omitted). Further, Wausau’s argument based on Advantage plainly goes
too far. If, for example, portions of Tower 1 broke free during the windstorm and
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destroyed nearby homes, that damage would fit within the description offered in
Advantage. 470 F.3d at 1011, 1012. But there is no argument to be made that nearby
homes would qualify as “that particular part” of the property on which MTI was
working.
III
For the forgoing reasons, we REVERSE the district court’s grant of summary
judgment in favor of Wausau and remand for further proceedings construing the
ambiguous exclusions in favor of MTI.
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