J-McDaniel Construction Co v. Mid-Continent Casualty Company ( 2014 )

  •                  United States Court of Appeals
                                For the Eighth Circuit
                                    No. 13-2673
                            J-McDaniel Construction Co., Inc.
                            lllllllllllllllllllll Plaintiff - Appellant
     Mid-Continent Casualty Company; Oklahoma Surety Company; John Does, 1-40
                          lllllllllllllllllllll Defendants - Appellees
                         Appeal from United States District Court
                     for the Eastern District of Arkansas - Little Rock
                                Submitted: April 16, 2014
                       Filed: August 4, 2014 (Corrected 8/4/2014)
    Before SMITH, COLLOTON, and GRUENDER, Circuit Judges.
    SMITH, Circuit Judge.
          In 2011, J-McDaniel Construction Co. ("J-McDaniel") settled a lawsuit arising
    from subcontractors's faulty workmanship during construction of an Arkansas home.
    J-McDaniel sought coverage for the damages to be paid in the settlement from Mid-
    Continent Casualty Co. ("Mid-Continent") under its Commercial General Liability
    Insurance (CGL) policy. Mid-Continent denied coverage, asserting that the terms of
    the policy did not include faulty workmanship or subcontractor negligence. J-
    McDaniel sued, alleging that Mid-Continent breached the insurance contract. Sitting
    in diversity jurisdiction, the district court1 dismissed the claim. The court found that
    the policy excluded coverage for subcontractor negligence and that under Arkansas
    law the CGL policy did not cover faulty workmanship. We affirm.
                                        I. Background
            J-McDaniel is a residential construction general contractor. It employs
    subcontractors for every portion of construction. J-McDaniel purchased a CGL policy
    from Mid-Continent in 2005; the policy was in force at all times relevant to this
    litigation. The CGL policy provided coverage for "property damage" caused by an
    "occurrence" as defined in the policy. An "occurrence" was defined as "an accident,
    including continuous or repeated exposure to substantially the same general harmful
    conditions." The policy also includes an endorsement excluding coverage for damage
    arising from the work of subcontractors.
           David and Susan Conrad sued J-McDaniel for defects in the construction of
    their home in 2006, allegedly resulting from faulty workmanship on the part of the
    subcontractors. J-McDaniel and the Conrads ultimately settled. Mid-Continent refused
    to defend or indemnify J-McDaniel. Mid-Continent agreed that the defects in the
    Conrad home constituted "property damage," but argued that the damage did not arise
    from an "occurrence" as defined by the policy.
          J-McDaniel sued Mid-Continent, asserting alternative claims of breach of
    contract, unconscionability, and negligence under Arkansas law. The breach-of-
    contract claim turned on whether the faulty workmanship on the Conrad home was an
    "occurrence" within the meaning of the policy. The district court dismissed the claim
    pursuant to Essex Ins. Co. v. Holder, 
    261 S.W.3d 456
    , 460 (Ark. 2008). In Essex, the
            The Honorable Brian S. Miller, United States District Judge for the Eastern
    District of Arkansas.
    Arkansas Supreme Court held that "defective workmanship standing alone—resulting
    in damages only to the work product itself—is not an occurrence" as defined in a
    similar CGL policy.2 The district court dismissed the negligence claim as time-barred.
    Finally, the court dismissed the unconscionability claim because it amounted to no
    more than "mere conclusory statements [that] fail to state a claim for relief."
           J-McDaniel moved for leave to file an amended complaint, which would have
    added an estoppel claim. This claim asserted that Mid-Continent should be estopped
    from denying coverage because it based its premiums on the cost of subcontractor
    work. J-McDaniel contended that Mid-Continent's tying its premium to contractor cost
    led purchasers to assume that coverage included the work of the subcontractors
    notwithstanding an endorsement excluding coverage for subcontractor work. The
    district court denied the motion on grounds of futility. The court found that the
    amendment would not withstand a motion to dismiss under Harasyn v. St. Paul
    Guardian Ins. Co., 
    75 S.W.3d 696
    , 702 (Ark. 2002). In Harasyn, the Arkansas
    Supreme Court held that "coverage in a contract of insurance cannot be extended by
    waiver or estoppel."
                                        II. Discussion
          J-McDaniel appeals the district court's dismissal of its breach of contract claim
    and the court's denial of its motion to amend.
                                   A. Breach of Contract
          "This court reviews de novo the grant of a motion to dismiss, taking all facts
    alleged in the complaint as true. Dismissal is proper where the plaintiffs' complaint
           Interestingly, the Arkansas legislature has overruled Essex by statute,
    see Arkansas Code Annotated § 23-79-155, since the construction of the Conrad
    home. However, the district court found that Arkansas law barred retroactive
    application of the statute based on Arkansas Department of Human Services v.
    866 S.W.2d 823
    , 825 (Ark. 1993).
    fails to state a claim upon which relief can be granted." Charles Brooks Co. v.
    Georgia-Pacific, LLC, 
    552 F.3d 718
    , 721 (8th Cir. 2009) (citations and quotations
    omitted). To state a valid claim for breach of contract in Arkansas, the plaintiff "need
    only assert the existence of a valid and enforceable contract between the plaintiff and
    defendant, the obligation of defendant thereunder, a violation by the defendant, and
    damages resulting to plaintiff from the breach." Perry v. Baptist Health, 
    189 S.W.3d 54
    , 58 (Ark. 2004) (citations omitted).
            J-McDaniel asserts that Mid-Continent breached the insurance contract by
    refusing to defend J-McDaniel against, or indemnify it for, the Conrad suit. J-
    McDaniel concedes that under applicable Arkansas law at the time the suit was
    filed—the Arkansas Supreme Court's Essex decision—the CGL policy did not cover
    faulty workmanship. It contends, however, that the legal landscape is shifting and that
    states are trending toward including faulty workmanship within CGL policy coverage.
    Furthermore, Arkansas Code § 23-79-155 effectively overruled Essex in 2011. In light
    of these developments, J-McDaniel predicts that the Arkansas Supreme Court would
    reverse Essex if presented with the issue today. J-McDaniel, therefore, asks this court
    to act as though it sat in the place of the Arkansas Supreme Court and overrule Essex,
    thus effectively giving retroactive effect to the amended Arkansas statute.
           We decline J-McDaniel's invitation to reverse Essex and apply § 23-79-155
    retroactively. Arkansas entertains a presumption against retroactive application of
    statutes. Steward v. Statler, 
    266 S.W.3d 710
    , 713 (Ark. 2007) ("Generally,
    retroactivity is a matter of legislative intent, and unless it expressly states otherwise,
    we presume the legislature intends for its laws to apply only prospectively."). The
    Arkansas Supreme Court specifically held that an "[insuror's] right to deny coverage
    under the law then in effect is a substantive right. Legislation which changes
    substantive rights does not operate retroactively." Carmichael v. Nationwide Life Ins.
    810 S.W.2d 39
    , 42 (Ark. 1991) (citation omitted). Furthermore, "an insurance
    policy is governed by statutes in effect at the time of its issuance." State Farm Mut.
    Auto. Ins. Co. v. Henderson, 
    150 S.W.3d 276
    , 281 (Ark. 2004) (citations omitted).
    Arkansas law is clear: we may not retroactively apply § 23-79-155 to the insurance
    contract between J-McDaniel and Mid-Continent.
           Nor may we simply disregard Essex. For the relevant time period, the Arkansas
    Supreme Court definitively answered the question of whether subcontractor work
    product is included within the bounds of CGL coverage. We have no authority to
    speculate as to how that court would rule if presented with the question again.
    Furthermore, the Essex court specifically contemplated the now-majority rule and
    found it unpersuasive. See Essex, 
    261 S.W.3d 456
    , 460 ("While several jurisdictions
    have found CGL policies to be ambiguous and construed the ambiguity against the
    drafter, we find these cases unpersuasive.") (citing Lamar Homes, Inc. v. Mid-
    Continent Cas. Co., 
    242 S.W.3d 1
     (Tex. 2007). Sitting in diversity jurisdiction, we are
    not at liberty to disregard the binding law of the state, nor may we substitute our
    judgment for that of the Arkansas Supreme Court. See Erie R. Co. v. Tompkins, 
    304 U.S. 64
    , 78 (1938). The district court properly applied binding state law, therefore it
    did not err by dismissing J-McDaniel's breach-of-contract claim.
                                       B. Leave to Amend
           Federal Rule of Civil Procedure 15(a)(2) provides that a party may amend its
    pleading only with the opposing party's consent or the leave of the court and that
    "leave to amend should be granted freely when justice so requires." In re Cerner Corp.
    Sec. Litig., 
    425 F.3d 1079
    , 1086 (8th Cir. 2005) (citations, quotation, and alteration
    omitted). "Nevertheless, futility is a valid reason for denial of a motion to amend." Id.
    (citation omitted). "Denial of a motion for leave to amend on the basis of futility
    means the district court has reached the legal conclusion that the amended complaint
    could not withstand a motion to dismiss under Rule 12(b)(6) of the Federal Rules of
    Civil Procedure." Zutz v. Nelson, 
    601 F.3d 842
    , 850 (8th Cir. 2010) (citation and
    quotation omitted). "[W]hen the district court denies leave on the basis of futility we
    review the underlying legal conclusions de novo." Id. (citation and quotation omitted).
           J-McDaniel's proposed amended complaint fails to state a claim on which relief
    may be granted. In this case, the policy specifically excluded coverage for
    subcontractor negligence. As the district court found, under Arkansas law "the
    doctrine of waiver or estoppel cannot be given the effect of enlarging or extending the
    coverage as defined in the contract." Harasyn, 75 S.W.3d at 702 (citations omitted).
    Nor may estoppel "be asserted to extend coverage under a contract in which it was
    excluded by specific language." Id. (citation omitted). Because J-McDaniel seeks to
    extend coverage to subcontractor negligence through a claim of estoppel, the district
    court did not err by denying J-McDaniel leave to amend its complaint.
                                     III. Conclusion
          Accordingly, we affirm the judgment of the district court.