Devco/Kraus-Anderson v. Hartford Fire Ins. , 73 F.3d 811 ( 1996 )


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  •                            ----------------
    No. 94-3283MNST
    ________________
    *
    FIREMAN'S FUND INSURANCE           *
    COMPANY, a subrogee of Kraus-      *
    Anderson Construction Company,     *
    a member of the Devco/Kraus-       *
    Anderson Joint Venture;            *
    *
    Plaintiff,               *
    *
    DEVCO/KRAUS-ANDERSON JOINT         *   Appeal from the United States
    VENTURE, a Minnesota Joint         *   District Court for the
    Venture,                           *   District of Minnesota
    *
    Plaintiff-Appellant,     *
    *
    v.                                 *
    *
    THE HARTFORD FIRE INSURANCE        *
    COMPANY,                           *
    Defendant-Appellee.      *
    *
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    Submitted: May 17, 1995
    Filed:   January 11, 1996
    -----------
    Before: FAGG, Circuit Judge, and WOOD, JR.,* and JOHN R. GIBSON,
    Senior Circuit Judges.
    -----------
    HARLINGTON WOOD, JR., Senior Circuit Judge:
    This diversity case is a declaratory judgment action to
    determine whether appellee Hartford Fire Insurance Company
    (Hartford) has any obligation to defend or indemnify appellant
    *
    The Honorable Harlington Wood, Jr., United States Circuit
    Judge for the Seventh Circuit Court of Appeals, sitting by
    designation.
    1
    Devco/Kraus-Anderson Joint Venture (DKA) with respect to two
    claims arising out of damages to the Piper Jaffray Tower (Tower),
    an office building in Minneapolis, Minnesota. The district court
    found no duty either to defend or indemnify, and the plaintiffs
    appealed.
    I.  BACKGROUND & PROCEDURAL HISTORY
    The facts of this case are essentially undisputed. In
    November, 1982, DKA began construction of the Tower as the
    general contractor. This construction included the installation
    of a fire protection system utilizing a six-inch standpipe to
    transport water vertically in the Tower's stairwells. On the
    sixth floor of the building, the standpipe makes a horizontal run
    crossing from one stairwell to another, its weight supported by a
    series of hangers and braces. The system also includes two fire
    pumps that utilize "trip" settings to determine at what level of
    pressure the pumps will engage. These settings require periodic
    monitoring.
    Sometime after the Tower was completed in 1985, the trip
    settings were improperly reset. This caused a severe "water
    hammer" effect in the pipes whenever the system was activated for
    routine maintenance or to wash garage floors. This "water
    hammer," in turn, perhaps in combination with inappropriate or
    defective building materials, caused the hangers and braces
    supporting the horizontal section of pipe to loosen and become
    bent or displaced. These effects on the standpipe's support
    system were noticed by Tower maintenance personnel early in 1988,
    and an independent company undertook minor repairs. No one
    examined the trip settings, however, so the cycle began again:
    "water hammer," support system deterioration, and repair of
    symptoms rather than cause. Eventually, sagging under its own
    weight, the horizontal standpipe separated at a joint coupling on
    May 7, 1989, flooding the Tower with water and causing
    significant damage.
    Two lawsuits ensued. The first, brought by the Arkwright
    2
    Mutual Insurance Company (Arkwright) as the subrogee of the
    owners of the Tower, sought recovery from DKA and others for the
    water damage occurring on May 7, 1989. The second, brought by
    Piper Jaffray & Hopwood, Inc. (Piper) as a tenant of the Tower,
    sought recovery for water damage on the same set of facts.
    During the initial stages of this series of events, DKA was
    insured by Hartford under a comprehensive general insurance
    policy. The policy in question provided that:
    [Hartford] will pay those sums that the insured becomes
    legally obligated to pay as damages because of "bodily
    injury" or "property damage" to which this insurance
    applies. . . . This insurance applies only to "bodily       injur
    y"
    and
    "prop
    erty
    damag
    e"
    which
    occur
    s
    durin
    g the
    polic
    y
    perio
    d.
    The
    "bodi
    ly
    injur
    y" or
    "prop
    erty
    damag
    e"
    must
    be
    cause
    d by
    an
    "occu
    rrenc
    e.".
    . .
    . . . .
    "Occurrence" means an accident, including continuous or
    3
    repeated exposure to substantially the same generally
    harmful conditions.
    . . . .
    "Property damage" means:
    (a) Physical injury to tangible property, including all
    resulting loss of use of that property; or
    (b) Loss of use of tangible property that is not physically
    injured.
    This coverage,1 begun in 1984, was renewed several times but
    allowed to expire on December 1, 1988, after the initial minor
    repairs to the standpipe but before its ultimate failure. No
    claim was filed at the time for the repairs.
    DKA tendered the defense of the Arkwright suit to Hartford
    in 1990 and again in 1992, alleging that the water damage in 1989
    was related to the earlier "damage" to the hangers and bracing
    system that occurred while Hartford was "on the risk." Hartford
    rejected both tenders, claiming no coverage for damages occurring
    outside the policy period. Fireman's Fund Insurance Company,
    which provided coverage to the Kraus-Anderson Construction
    Company (a participant in the DKA joint venture) following the
    expiration of the Hartford policy and the dissolution of the DKA
    joint venture in 1990, ultimately settled both the Arkwright and
    Piper suits.
    In the present action, DKA challenges Hartford's denial of
    coverage and seeks to recover from Hartford the attorneys' fees
    and settlement costs of the two prior actions along with this
    one. To accomplish this, DKA sought a declaratory judgment from
    the district court to establish Hartford's duty to defend and
    indemnify DKA for the underlying suits according to the terms of
    the policy described above. On cross motions for summary
    judgment, however, the district court held that neither duty
    existed. Addressing the duty to indemnify, the district court,
    1
    The policies in force over this period varied somewhat,
    but the differences are not raised by either party as significant
    to this case.
    4
    applying Minnesota law, found that the "actual injury" rule
    determined whether and when coverage is triggered by an
    "occurrence" causing damages. The court concluded that since the
    actual water damage occurred outside Hartford's policy period and
    could be distinguished from the gradual deterioration of the
    standpipe's support system, the Hartford policy did not apply.
    In terms of the duty to defend, the court found that the Piper
    plaintiffs lacked a compensable interest and therefore had no
    standing to bring their claims, while the Arkwright plaintiffs
    alleged no damages resulting from events prior to the ultimate
    failure of the standpipe on May 7, 1989. The court thus
    concluded that neither suit was arguably within Hartford's
    coverage, thus no duty to defend arose. This appeal followed.
    II.  ANALYSIS
    We review the entry of summary judgment de novo, as we do
    the district court's determination of Minnesota law. Burnette
    Techno-Metrics, Inc. v. TSI, Inc., 
    44 F.3d 641
    , 642 (8th Cir.
    1994). The parties have agreed to adopt the facts as alleged in
    DKA's complaint and statement of the case, therefore our task is
    to decide whether summary judgment was proper as a matter of law
    considering the terms of the policy at issue and the insurance
    law of Minnesota.
    A. The Duty to Indemnify
    On appeal, DKA alleges that the district court improperly
    characterized the facts involved, misinterpreted the language of
    Hartford's policy, and erroneously relied on the "actual injury"
    rule of Singsaas v. Diederich, 
    238 N.W.2d 878
     (Minn. 1976), in
    deciding that no duty to indemnify existed. These arguments are
    mutually dependent, and will be discussed together.
    Fundamental to DKA's entire indemnification argument is its
    interpretation of the coverage clause of the policy. This
    clause, DKA emphasizes, states that Hartford "will pay those sums
    that the insured becomes legally obligated to pay as damages
    because of 'bodily injury' or 'property damage' to which this
    5
    insurance applies" (emphasis supplied). To summarize its
    arguments, DKA would interpret this clause as covering all
    consequential damages, including those occurring after the policy
    period, resulting from any "injury" sustained by covered property
    during the policy period. Reading this coverage clause in
    conjunction with prevailing Minnesota cases and considering the
    circumstances here, however, we believe this interpretation is
    incorrect.
    The policy language on which DKA relies has been, in various
    forms, part of standardized comprehensive liability insurance
    forms for quite some time. See, e.g., Robert E. Keeton,
    Insurance Law §§ 2.11(c), 5.10(d) (1971). Unfortunately, efforts
    to clarify the precise intent of the terms and wording of such
    policies by shifting phrasing patterns or changing definitions
    have often been ineffective. Several cases cited by the parties
    have dealt with consequential damage coverage issues similar to
    those discussed here, yet the difficulty persists. Hartford
    asserts that the wording of the new standard form at issue here,
    which does not explicitly require damages to result within the
    policy period, was made "more readable" by moving the older
    definition of "occurrence" ("an accident resulting, during the
    policy period, in bodily injury or property damage") into the
    coverage grant ("This insurance applies only to . . . 'property
    damage' which occurs during the policy period."). This may be
    so, but risking protracted litigation to achieve better
    readability is a dubious venture, especially where substantive
    issues like consequential damages are potentially affected.
    Nevertheless, though Minnesota courts ordinarily interpret
    ambiguous policy language strictly in favor of the insured, see
    State Farm Ins. Cos. v. Seefeld, 
    481 N.W.2d 62
    , 64 (Minn. 1992),
    this is not a case of simple ambiguity. Other factors influence
    our decision. First is the question of whether the facts here
    trigger an "occurrence" under this policy. The Minnesota Supreme
    Court has adopted the "actual injury" test to determine when
    coverage applies. See Singsaas v. Diederich, 
    238 N.W.2d 878
    6
    (1976). In Singsaas, the defendant company negligently performed
    work on a "manlift" elevator by using a soft metal part to secure
    the lifting cable to the elevator car. 
    Id. at 879
    . The
    plaintiff was severely injured when the soft metal connection
    deteriorated and separated from the cable, causing the elevator
    to fall. 
    Id. at 880
    . The defendant was insured while it
    performed the repair work and during most of the period of the
    connection's deterioration, but terminated the policy before the
    elevator's fall. 
    Id.
     The defendant sought coverage for the
    plaintiff's damages on the theory that the "accident" consisted
    of the negligent installation and subsequent deterioration of the
    part, all occurring during the policy period. 
    Id. at 881
    . The
    Minnesota Supreme Court rejected this theory, however, and
    adopted the general rule that "the time of the occurrence is not
    the time the wrongful act was committed but the time the
    complaining party was actually damaged." 
    Id. at 880
     (citations
    omitted).
    In this case, the district court found that the alleged
    damages to the pipe's support system were similar to the gradual
    deterioration involved in the Singsaas case, and that the later
    water damage alone was the relevant injury. We find this analogy
    persuasive. Against the background of the actual injury rule,
    the simple--and tenuously related--issue of causation in this
    case is insufficient to trigger the obligation to indemnify. Our
    conclusion is supported by the fact that the limited and
    inexpensive repairs to the pipe's supporting system could easily
    be characterized as measures to prevent unknown future damage
    only, and thus would be outside the definition of "property
    damage." See Northern States Power Co. v. Fidelity & Casualty
    Co. of New York, 
    504 N.W.2d 240
    , 245-46 (Minn. Ct. App. 1993)
    ("Expenditures to prevent future [damage] of a type which has yet
    to occur or from a source which has yet to cause [damage],
    however, are not covered because these costs are not causally
    related to the property damage."), aff'd as modified on other
    grounds, 
    523 N.W.2d 657
     (Minn. 1994). No damages were claimed
    7
    when the pipe's support system underwent repair, nor were any
    damages to this system claimed as a basis for the underlying
    Piper and Arkwright suits, which focused exclusively on the later
    water damage.
    Second, turning to the policy language, while the actual
    damages rule of Singsaas was accepted in the context of an older
    version of the standard policy, more recent cases from the
    Minnesota Supreme Court have found the rule applicable to the
    newer standard forms as well. See Jostens, Inc. v. CNA Ins., 
    403 N.W.2d 625
    , 630 (Minn. 1987), overruled on other grounds by
    Northern States Power Co. v. Fidelity & Casualty Co. of New York,
    
    523 N.W.2d 657
     (Minn. 1994). DKA cites two cases which rely in
    part on different interpretations of policy language similar to
    the current form, see Federated Mutual Ins. Co. v. Concrete
    Units, Inc., 
    363 N.W.2d 751
     (Minn. 1985); St. Paul Fire & Marine
    Ins. Co. v. National Chiropractic Mutual Ins. Co., 
    496 N.W.2d 411
    (Minn. Ct. App. 1993), but these cases are not based on the
    precise issues considered here, nor do they involve the same
    coverage or triggering requirements.
    Finally, when more than one insurer is involved
    (consecutively), as the evidence here indicates, the Minnesota
    Supreme Court has stated that the actual damages rule is
    "strongly interrelated" to, and must be resolved consistently
    with, the allocation issue: "The essence of the actual injury
    trigger theory is that each insurer is held liable for only those
    damages which occurred during its policy period; no insurer is
    held liable for damages outside its policy period." Northern
    States Power Co. v. Fidelity & Casualty Co. of New York, 
    523 N.W.2d 657
    , 662 (Minn. 1994). While this concern may not dictate
    the outcome of every multiple insurer case where causation and
    policy language are in question, it is relevant and appropriately
    considered here.
    These factors lead us to conclude that no duty of
    indemnification existed, and we affirm the district court on this
    issue.
    8
    B.  The Duty to Defend
    The duty to defend under an insurance policy is broader than
    the duty to indemnify. St. Paul Fire & Marine Ins. Co. v.
    Briggs, 
    464 N.W.2d 535
    , 539 (Minn. Ct. App. 1990). An insurer's
    obligation to defend is contractual in nature and is determined
    by the allegations of the complaint; if any part of a cause of
    action is arguably within the scope of coverage, the insurer must
    defend. Prahm v. Rupp Constr. Co., 
    277 N.W.2d 389
    , 390 (Minn.
    1979).
    Looking to the complaints in the underlying cases here, the
    district court concluded that the Piper claimants, the tenants of
    the Tower who had no ownership interest in the building or its
    fire protection system, had no standing to bring claims for
    damages based on injuries to those items. That finding is not
    challenged on appeal.
    The Arkwright complaint alleged that the inadequate support
    system for the standpipe directly caused the coupling's
    separation and the ultimate water damage. In the "wherefore"
    clause of the complaint, the Arkwright plaintiffs sought damages
    including:
    (a)   Amounts for the cost of repair and restoration to the
    Piper Jaffray Tower Building structure, including but
    not limited to its structural, mechanical, electrical,
    fire protection, water, elevator, and other building
    systems; . . .
    The complaint, however, alleges no specific damages prior to the
    May 7, 1989 date of the water damage. DKA asserts that Hartford
    knew of its claim for $753 for materials to repair the "fire
    protection" (standpipe) system, but these repairs were undertaken
    after the pipe separation and water damage on May 7, 1989.
    After discovery had taken place, DKA again submitted a
    tender of defense, notifying Hartford of its conclusions and
    coverage theory. This theory was similar to that stated above
    with respect to indemnification; it rested entirely on an
    interpretation of the policy and the facts at odds with the
    9
    actual damages rule of Singsaas. In view of our discussion of
    that theory above, we agree with the district court that claims
    based on it were not "arguably within the scope of the policy's
    coverage." St. Paul Fire & Marine, 490 N.W.2d at 632.
    For the foregoing reasons, the district court's grant of
    summary judgment in favor of Hartford is AFFIRMED.
    A true copy.
    ATTEST:
    Clerk, U.S. Court of Appeals, Eighth Circuit.
    10