UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

________________ _________________ MJH PROPERTIES LLC, Plaintiff - Appellant,

v. WESTCHESTER SURPLUS LINES INSURANCE COMPANY, Defendant - Appellee. No. 20-6002 (D.C. No. 5:19-CV-00577-HE) (W.D. Okla.)

________________ _________________ ORDER AND JUDGMENT *

________________ _________________ Before MATHESON , KELLY , and EID , Circuit Judges.

________________ _________________ MJH Properties, LLC (“MJH”) sued its insurer, Westchester Surplus Lines Insurance Company (“Westches ter”) in federal court, i nvoking diversity jurisdiction under 28 U.S.C. § 1332. It sought damages for Westches ter’s refusal to defend MJH in an underlying lawsuit brought in state co urt. In the underl ying lawsuit, two

* After examining the briefs and appella te record, this pa nel has determined unanimously that oral argument would not ma terially assist in the determination of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore ordered submitted without oral argument. This order and judgment is not binding precedent, except under the doctr ines of law of the case, res judicata, and collateral estoppel. It may be cite d, however, for its persuasi ve value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1. FILED United States Court of Appeals Tenth Circuit 

### June 10, 2020 Christopher M. Wolpert Clerk of Court2 individuals sued MJH for spraying pesticides that allegedly cause d them substantial bodily injury. The district court granted Westchester’ s motion to dismiss MJH’s breach of contract and bad faith claims . It determined that th e incident in the underlying lawsuit fell under an express coverage ex clusion in the policy, and Westchester therefore did not breach any dut y to defend or act in go od faith. MJH appealed. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.
I. BACKGROUND
A. Underlying Lawsuit The plaintiffs in the underlying laws uit—also described as third-party claimants—alleged that on June 21, 2017, an MJH employee sprayed their work premises with pest control pesticides that released toxic chemicals and caused them substantial bodily injury. Th ey contended that test samp les of MJH’s spray showed it contained Essentria IC3, piperonyl butoxide, and permethrins. They sued MJH for various claims, including neglig ence and vicarious liability.
B. Insurance Policy At the time of the underlying inci dent, MJH was covered by a general commercial liability policy fro m Westchester (the “Policy” ). The Policy obligated Westchester to defend MJH against suits s eeking damages due to “bodily injury” or “property damage,” but disc laimed a duty to defend agai nst suits “to which this insurance does not apply.” App., Vol. I at 240. The Policy expressly excluded from3 coverage “‘[b]odily injury’ or ‘property damage’ which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escap e of ‘pollutants’ at any time” (the “Total Pollution Exclusion”). Id. at 262. The Policy also expr essly defined “pollutants.” 1
C. Instant Action MJH asked Westchester to defend it against the underlying lawsuit. Westchester refused, explaining in its in surance appraiser’s letter that the Total Pollution Exclusion precluded coverage because the pl aintiffs alleged that “pollutants” caused their injuries. MJH sued Westchester, seeking damage s for Westchester’s refusal to defend under the Policy and alleging that West chester had (1) breached the Policy by refusing to defend MJH in the underlying lawsuit and (2) acted in bad faith. 2 MJH also alleged that its employee did not use “pollutants,” as defined in the Policy, because the pest control pesticides containe d only Essentria, whic h consists of “40%

1 The Policy defined “pollutants” as including “any solid, liquid, gaseous or thermal irritant or contamin ant, including smoke, vapor, s oot, fumes, acids, alkalis, chemicals and waste. Waste includes mate rials to be recycl ed, reconditioned or reclaimed.” App., Vol. I at 254.

2 MJH also sued Chubb No rth American Claims (“C NAC”) in its original complaint but not in its amended complain t. MJH requested CNAC’s dismissal in the joint status report, Dist. Ct. Doc. 20 at 2, and the di strict court dismissed CNAC, App., Vol. II at 15 n.1. MJH has not appealed CNAC’s dismissal.4 mineral oil, 37% wintergreen oil, 10% ro semary oil and 13% other ingredients.” Id. at 185. Westchester moved to dismiss under Fede ral Rule of Civil Procedure 12(b)(6) for failure to state a claim. It again ar gued that because MJH used pesticides that were “pollutants,” the Total Po llution Exclusion applied. Id. at 195 (“[T]here was and is no coverage, no breach of the policy a nd no basis for a claim for bad faith.”). The district court granted the motion. Firs t, it held that MJH failed to state a breach of contract claim because the petit ion in the underlying lawsuit showed that the Total Pollution Exclusion applied and We stchester thus had no duty to defend. Second, the court held that because Okla homa law required “an insured [to] show that he is entitled to covera ge to prevail on a bad-faith claim,” MJH had “failed to state a bad-faith claim.” App., Vo l. II at 19 (quotations omitted). MJH timely appealed.
II. DISCUSSION
A. Standard of Review “We review a district court’s dismissa l under Federal Rule of Civil Procedure 12(b)(6) de novo.” Khalik v. United Air Lines , 671 F.3d 1188, 1190 (10th Cir. 2012). “[T]o withstand a Rule 12(b)(6) motion to dismiss, a complaint must contain enough allegations of facts, taken as true, ‘to state a claim to re lief that is plausible on its face.’” Id. (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570 (2007)).5 B. Pertinent Oklahoma Law In this diversity suit brou ght in the U.S. District C ourt for the West ern District of Oklahoma, the substantive law of th e forum state of Oklahoma applies. Edens v. The Netherlands Ins. Co. , 834 F.3d 1116, 1120 (10th Cir. 2016). Contract Law “Oklahoma contract law applies to this diversity action.” Automax Hyundai S., LLC v. Zurich Am. Ins. Co. , 720 F.3d 798, 804 (10th Cir. 2013). Under Oklahoma law, an insurance policy is a cont ract and interpreted accordingly. First Bank of Turley v. Fid. & Deposit Ins. Co. of Md. , 928 P.2d 298, 302 (Okla. 1996). 3 In the absence of ambiguous langua ge, Oklahoma courts enfo rce an insurance contract’s express terms and take the language’s plain and ordinary meaning. Pitco Prod. Co. v. Chaparral Energy, Inc. , 63 P.3d 541, 546 (Okla. 2003). “The test for ambiguity is whether the language is su sceptible to two interpretations on its face from the standpoint of a reasonably prudent lay person, not from that of a lawyer.” Am. Econ. Ins. Co. v. Bogdahn , 89 P.3d 1051, 1054 (Okla. 2004) (quotations and alterations omitted).

3 Under Oklahoma law, “[t]he general declaration of insurance coverage, as established by the insurance policy a nd limited by its pr ovisions, normally determines the insuran ce carrier’s liability.” Dodson v. St. Paul Ins. Co , 812 P.2d 372, 377 (Okla. 1991). Exclusions are re ad serially, and each one “eliminates coverage and operates independently agains t the general declar ation of insurance coverage and all prior exclusions.” Id

.6 A liability insurance polic y generally contains the insurer’s two basic contractual duties to the insu red: the duty to defend and the duty to indemnify. First Bank of Turley , 928 P.2d at 302-03. The insurer’s duty to defend is “broader than[] the duty to indemnify” and applies “whenever [the insurer] ascertai ns the presence of facts that give rise to the potential of liability under the policy.” Id. at 303 (emphasis omitted). This determination must be “measured by the facts that were known and knowable—by what the insurer knows or by what the insurer was capable of discovering itself—at the time the insured’s request was tendered.” Id. at 305 (emphasis omitted); see Automax Hyundai , 720 F.3d at 804 (explaining that under Oklahoma law, “[t]he duty to defend is triggered by the fa cts reasonably available at the time the defense is demanded”). Duty to Defend Under Oklahoma law, “[t]he insurer’s defense duty is determined on the basis of information gleaned from the [underlyi ng suit’s] petition (and other pleadings), from the insured and from ot her sources available to the insurer at the time the defense is demanded.” First Bank of Turley , 928 P.2d at 303 (emphasis omitted). Although the insured bears th e initial burden to request a defense, once the request is made, the insurer bears the burden to inve stigate the underlying facts and determine whether they tri gger coverage. Id. at 304. 4 In determining whether an insured has

4 “[W]hen presented with a claim by its insured, an insurer must conduct an investigation reasonably a ppropriate under the circu mstances . . . .” Newport v.7 stated a plausible claim for breach of a duty to defend, the court may consider, in addition to the breach co mplaint, the petition in the underlying action. See Smith v. United States , 561 F.3d 1090, 1098 (10th Cir. 2009). 5
In Bituminous Cas. Corp. v. Cowen Constr., Inc. , 55 P.3d 1030, 1035 (Okla. 2002), the Oklahoma Supreme Court upheld as “clear and una mbiguous” a total pollution exclusion provision nearly identical to the one here. 6 Because the provision was not limited to envir onmental pollutants, the Bituminous court determined it

USAA , 11 P.3d 190, 195 (Okla. 2000) (quotations omitted). “Under Oklahoma law, an insurer’s investigation need onl y be reasonable, not perfect.” Shotts v. GEICO Gen. Ins. Co. , 943 F.3d 1304, 1317 (10th Cir. 2019) (quotations and alterations omitted).

5 To survive a motion to di smiss, the insured party mu st state a plausible claim showing the insurer’s duty to defend. In evaluating a Rule 12(b)(6) motion to dismiss, we may consider the petition in the underlying case. See Smith , 561 F.3d at 1098 (“In evaluating a Rule 12(b)(6) motion to dismiss, courts ma y consider not only the complaint itself, but also attached exhibits, and docum ents incorporated into the complaint by reference[,] . . . [and] documen ts referred to in the complaint if the documents are central to th e plaintiff’s claim and the parties do not dispute the documents’ authenticity.” (quotations a nd citations omitted)). MJH’s amended complaint references the unde rlying petition, which, under First Bank of Turley , is central to whether Westch ester had a duty to defend. 928 P.2d at 303.

6 In Bituminous , the total pollution exclusion provision exempted from coverage third-party actions fo r “[b]odily injury or propert y damage arising out of the actual, alleged or threatened discharge, disp ersal, release or esca pe of pollutants.” 55 P.3d at 1031 n.1. It defi ned “pollutants” as “any solid , liquid, gaseous or thermal irritant or contaminant, including smoke, va por, soot, fumes, acids, alkalis, chemicals and waste.” Id.8 excluded the third-party clai mant’s lead poisoning claims against the insured from
coverage. Id. 7
Good Faith Under Oklahoma law, “[a]n insurer has an implied-in-l aw duty to act in good faith and deal fairly with the insured to ensure that the po licy benefits are received.” Badillo v. Mid Century Ins. Co. , 121 P.3d 1080, 1093 (O kla. 2005) (quotations omitted). A plaintiff seeki ng damages for the insurer’s alleged bad faith conduct must prove insurance cov erage for its claim. See id. at 1093-94 (finding district court did not erroneously dismiss plaintiff’s bad fa ith claim where plaintiff failed to show entitlement to in surance coverage); Edens , 834 F.3d at 1129 (“Under Oklahoma law, an insured must show that he is entitled to cov erage to prevail on a bad-faith claim.”).
C. Analysis Based on our review of relevant Oklahom a law, the terms of the Policy and Total Pollution Exclusion, and the petition in the underlying state court action, we affirm the district court’s de termination that MJH has fai led to state a breach of contract or bad fa ith claim.

7 Since the 1970s, courts have addre ssed “the extent to which pollution exclusions apply to preclude coverage in commercial gen eral liability (CGL) policies.” Headwaters Res., Inc. v. Illinois Union Ins. Co. , 770 F.3d 885, 889 (10th Cir. 2014). Courts either (1) “apply the po llution exclusions as written because they find them clear and unmistakable” or (2 ) “narrow the exclusions to traditional environmental pollution.” Id. (quotations omitted). Okla homa falls into the first camp. See Bituminous , 55 P.3d at 1035.9 First, the district court correctly di smissed the breach of contract claim because MJH failed to show that Westches ter had a duty to defe nd under the Policy. The underlying lawsuit’s peti tion alleged that MJH used Essentria IC3, piperonyl butoxide, and permethrins. See App., Vol. I at 283. MJH does not dispute on appeal that piperonyl butoxide and permethrins are “pollutants” as defined in the Policy. Aplt. Br. at 1, 8-9; see Aplt. Reply Br. at 1-2. Although the Oklahoma Supreme Court did not address thes e specific substances in Bituminous , it interpreted a nearly identical total pollu tion exclusion provision broadl y to include non-environmental pollutants. 55 P.3d at 1035. As in Bituminous , we find no ambiguity here and conclude the district court did not err in determining that at least one of the underlying petition’s three al leged substances is a “po llutant” within the defined term’s plain and ordinary meaning. See Pitco Prod. Co. , 63 P.3d at 546. 8 On appeal, MJH argues that its ame nded complaint (1) alleged that its employee used only Essentria IC3, which contains non-pollutant substances; (2) conflicts with the underlying petition; a nd (3) states a plausible claim. See Aplt. Br. at 1, 8-9

. But under Oklahoma law, the underlyi ng petition’s alleged facts place the spraying incident squarely in the Policy’ s Total Pollution Exclusion provision. MJH has not alleged that “facts that were known and knowabl e” by Westchester gave rise

8 The plain language of the Total Pollution Exclusion encompasses any “actual, alleged , or threatened . . . ‘pollutants.’” App., Vol. I at 262 (emphasis added).10 to potential liability under the Policy. See First Bank of Turley , 928 P.2d at 303, 305. 9 Second, the district court correctly dism issed MJH’s bad faith claim. MJH has failed to show coverage under the Policy, wh ich is necessary to prevail on a bad faith claim. See Badillo , 121 P.3d at 1093-94. On app eal, MJH argues that Westchester acted in bad faith by failing to defend, reas onably investigate, or properly consider the test results. See Aplt. Br. at 10-11. These ar guments are unresponsive to the district court’s proper determin ation that MJH’s bad faith cl aim fails together with its breach of contract claim.

9 The underlying petition stated th at although the MJH employee “ initially advised the Oklahoma Highway Patrol that he only used a spray known as Essentria IC3 in his spray canister to spray the Leased Premises,” the Highway Patrol’s test results “indicated that in addition to th e Essentria IC3, the spray contained two additional toxic chemicals: piperonyl buto xide (PBO) and permethrins.” App., Vol. I at 283 (emphasis added). When Westchester denied coverage and a duty to defend, its appraiser’s letter to MJH explained that it analyzed the Po licy, the Total Pollution Exclusion, and the underlying petition. Id. at 292-93. The record does not show that MJH responded to the appraiser by identifying facts that We stchester knew or should have known concerning its duty to defend. In its fe deral lawsuit, MJH’s sole support for its allegation that its employee used only Esse ntria was a one-page attachment from the Highway Patrol’s report listi ng Essentria’s ingredients. See Dist. Ct. Doc. 9-1 at 1. As the underlying petition allege d, this same report disclose d the test results showing that the spray include d toxic chemicals. See App., Vol. I at 283.11 III. CONCLUSION We affirm the district court’s grant of Westchester’s motion to dismiss.

Entered for the Court

Scott M. Matheson, Jr. Circuit Judge