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RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

ELECTRONIC CITATION: 2004 FED App. 0177P (6th Cir.)

File Name: 04a0177p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

_________________

DETROIT WATER TEAM JOINT

VENTURE,

Plaintiff-Appellee/

Cross-Appellant,

v.

AGRICULTURAL INSURANCE

COMPANY, an Ohio

Corporation,

Defendant-Appellee,

AMERICAN NATIONAL FIRE

INSURANCE COMPANY, an

Ohio Corporation,

Defendant-Appellant/

Cross-Appellee.

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Nos. 02-1324/1419

Appeal from the United States District Court

for the Eastern District of Michigan at Detroit.

No. 00-73239—Robert H. Cleland, District Judge.

Argued: October 23, 2003

Decided and Filed: June 11, 2004 

Before: KEITH, MARTIN, and SUTTON, Circuit Judges.

2 Detroit Water Team v.

Agricultural Ins. Co., et al.

Nos. 02-1324/1419

_________________

COUNSEL

ARGUED: Ann E. Erickson Gault, COLLINS, EINHORN,

FARRELL & ULANOFF, Southfield, Michigan, for

Appellant. Raymond A. Fylstra, KUBASIAK, FYLSTRA,

REIZEN & ROTUNNO, Chicago, Illinois, Thomas B.

Orlando, FORAN, GLENNON, PALANDECH & PONZI,

Chicago, Illinois, for Appellees. ON BRIEF: J. Mark

Cooney, COLLINS, EINHORN, FARRELL & ULANOFF,

Southfield, Michigan, for Appellant. Raymond A. Fylstra,

John C. Anderson, KUBASIAK, FYLSTRA, REIZEN &

ROTUNNO, Chicago, Illinois, Stephen J. Pokoj, FILDEW,

HINKS, GILBRIDE, MILLER & TODD, Detroit, Michigan,

Thomas B. Orlando, Matthew S. Ponzi, FORAN,

GLENNON, PALANDECH & PONZI, Chicago, Illinois,

Daniel J. Seymour, NAGI, BAXTER & SEYMOUR, Detroit,

Michigan, for Appellees.

_________________

OPINION

_________________

BOYCE F. MARTIN, JR., Circuit Judge. In these

consolidated cases, Detroit Water Team Joint Venture seeks

insurance coverage under an American National Fire

Insurance Company commercial general liability policy and

an Agricultural Insurance Company builder’s risk policy for

a loss incurred during the course of its renovation of a City of

Detroit water plant. The district court held that coverage was

available under the American National policy, but not under

the Agricultural policy. American National appeals the

district court’s award of summary judgment in favor of

Detroit Water Team with respect to coverage under the

commercial general liability policy, and Detroit Water Team

appeals the award of summary judgment in favor of
Nos. 02-1324/1419 Detroit Water Team v.

Agricultural Ins. Co., et al.

3

Agricultural with respect to coverage under the builder’s risk

policy. For the reasons discussed below, the district court’s

judgment is affirmed in part and reversed in part. 

I. BACKGROUND

Detroit Water Team entered into a “design/build” contract

with the City of Detroit to renovate the City’s water plant. In

connection with that project, Detroit Water Team procured

two insurance policies: (1) a commercial general liability

policy issued by American National, which covered Detroit

Water Team and one of its subcontractors, Adamo Demolition

Company; and (2) a builder’s risk policy issued by

Agricultural, which covered Detroit Water Team, all of its

subcontractors and other identified parties. 

The water plant renovation project called for demolition of

a portion of an old reservoir. Detroit Water Team hired

Adamo, a demolition subcontractor, to perform this

demolition work. Connected to one wall of the reservoir was

a semi-circular manhole structure. The reservoir and the

manhole structure shared one common wall that was made of

concrete; the rest of the manhole structure was made of

masonry. The manhole structure contained an electrical

system comprised of live wires, feeds and tubes, which

provided power and air to the functioning water plant. The

City and Detroit Water Team agreed that this electrical

system, along with the manhole structure that housed it,

would remain entirely intact throughout the renovation

project so that the water plant could continue to operate

during that time. Nevertheless, in the course of demolishing

the reservoir, Adamo also tore down the concrete wall that the

reservoir shared with the manhole, which caused the entire

manhole structure to collapse and the electrical system within

to sustain considerable damage. 

Detroit Water Team immediately repaired the damaged

electrical system and notified American National and

4 Detroit Water Team v.

Agricultural Ins. Co., et al.

Nos. 02-1324/1419

1

As discussed more fully herein, Detroit Water Team argues that it

was obligated to repair the electrical system by virtue of its contract with

the City, which required it to “take immediate action to restore” any

interrupted service “within twenty-four (24) hours or less.” 

Agricultural of its expenses.

1

 After both insurers denied

coverage, this lawsuit ensued and all parties moved for

summary judgment. The district court held that coverage was

available under the American National commercial general

liability policy, but not under the Agricultural builder’s risk

policy. American National appeals the award of summary

judgment in favor of Detroit Water Team, and Detroit Water

Team appeals the award of summary judgment in favor of

Agricultural. 

II. ANALYSIS

We review de novo a district court’s award of summary

judgment, as well as its interpretation of an insurance

contract. Parameter Driven Software v. Massachusetts Bay

Ins. Co., 25 F.3d 332, 336-37 (6th Cir. 1994). Summary

judgment should be granted when “the pleadings, depositions,

answers to interrogatories, and admissions on file, together

with the affidavits, if any, show that there is no genuine issue

as to any material fact and that the moving party is entitled to

a judgment as a matter of law.” FED. R. CIV. P. 56(c). In

determining whether a genuine issue of material fact exists,

we must draw all reasonable inferences in favor of the

nonmoving party. Bonds v. Cox, 20 F.3d 697, 701 (6th Cir.

1994). 

A. American National Policy

Our analysis of whether coverage is available under the

American National policy begins – and ends – with the

policy’s insuring agreement, which provides that American

National “will pay those sums that the Insured becomes
Nos. 02-1324/1419 Detroit Water Team v.

Agricultural Ins. Co., et al.

5

legally obligated to pay as damages because of ‘bodily injury’

or ‘property damage’ to which this insurance applies.” The

district court held that Detroit Water Team was not “legally

obligated” to repair the electrical system, but predicted –

noting the lack of Michigan cases on point – that the

Michigan Supreme Court would nevertheless require

American National to prove that it suffered prejudice as a

result of Detroit Water Team’s actions in order to bar

coverage. Finding that American National had failed to

demonstrate any prejudice, the district court held that

coverage was not barred. For the following reasons, we hold

that the district court was correct in determining that Detroit

Water Team was not “legally obligated” to repair the

electrical system, but incorrect in predicting that the Michigan

Supreme Court would require American National to prove

that it suffered prejudice in order to bar coverage on that

ground. 

It is well-established that an insured has the initial burden

of proving that its losses fall within the scope of the policy’s

insuring agreement. See, e.g., Esicorp, Inc. v. Liberty Mut.

Ins. Co., 266 F.3d 859, 864 (8th Cir. 2001); Data Specialties,

Inc. v. Transcont’l Ins. Co., 125 F.3d 909, 911 (5th Cir.

1997). Thus, Detroit Water Team has the burden of proving

that it was “legally obligated” to pay the “sums” that it

incurred in repairing the damaged electrical system. The

phrase “legally obligated” necessitates “more than inchoate or

potential liability.” Aetna Cas. & Sur. Co. v. Dow Chem. Co.,

10 F. Supp. 2d 771, 797 (E.D. Mich. 1998) (citing Ryan v.

Royal Ins. Co. of Am., 916 F.2d 731, 738-43 (1st Cir. 1990)).

Although the Michigan Supreme Court has never expressly

defined the phrase “legally obligated,” decisions from the

Michigan Court of Appeals “imply” – but do not expressly

hold – “that the term ‘legal obligation’ requires either a

judicial determination of liability or a settlement between the

insurer, insured and the claimant . . . .” Coil Anodizers, Inc.

v. Wolverine Ins. Co., 327 N.W.2d 416, 418 (Mich. App.

1982) (citing Giffels v. Home Ins. Co., 172 N.W.2d 540

6 Detroit Water Team v.

Agricultural Ins. Co., et al.

Nos. 02-1324/1419

(Mich. App. 1969); MacDonald v. State Farm Mut. Auto. Ins.

Co., 165 N.W.2d 665 (Mich. App. 1968)). In this case, it is

undisputed that there has been no judicial determination or

settlement establishing Detroit Water Team’s liability. 

Detroit Water Team argues that its legal obligation to repair

the electrical system derives from two sources: general tort

principles and its contract with the City. We disagree on both

fronts. In an effort to establish tort liability, Detroit Water

Team argues that “[t]here is a well settled princip[le] in

Michigan, as well as other jurisdictions, that a duty of

ordinary care arises from the performance of a contractual

obligation.” Chamberlain v. Bissell, 547 F. Supp. 1067, 1081

(W.D. Mich. 1982). Detroit Water Team contends that, by

virtue of its design/build contract with the City, it had a

contractual obligation “to exercise ordinary care to protect the

[City]’s property from damage resulting from [Detroit Water

Team’s]demolition activities,” and that Detroit Water Team’s

negligent performance of that contractual obligation was

actionable in tort. Detroit Water Team Br. at 41. 

Detroit Water Team’s argument misconstrues the identity

of the negligent party, if any, in this case. As the parties have

stipulated, it was Adamo, not Detroit Water Team, whose

demolition activities proximately caused the damage to the

electrical system. There is no evidence that Detroit Water

Team has committed any negligence whatsoever. Detroit

Water Team apparently assumes that it is liable for Adamo’s

negligence, but the general rule under Michigan law is that a

general contractor is not liable for the negligence of its

subcontractor. Candelaria v. B.C. Gen. Contractors, Inc.,

600 N.W.2d 348, 352 (Mich. App. 1999). While several

exceptions to this general rule exist, id., Detroit Water Team

has not argued that any apply here, and our independent

review of the record confirms that none of the exceptions

applies under the facts of this case. Therefore, Detroit Water

Team has failed to carry its burden of proving that it was

“legally obligated” in tort to repair the electrical system. 
Nos. 02-1324/1419 Detroit Water Team v.

Agricultural Ins. Co., et al.

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2

Detroit Water Team seems to suggest that this provision requires

any interrupted service to be completely restored within twenty-four hours

of the interruption. In fact, however, we read the provision as merely

requiring that “immediate action” aimed at restoring the service be taken

within twenty-four hours. 

Detroit Water Team also argues that it was “legally

obligated” to make the repairs by virtue of its contract with

the City, which required it to “take immediate action” to

restore any interrupted service within twenty-four hours.

2

There is some dispute as to whether contractual liability, as

opposed to tort liability, can ever constitute a “legal[]

obligat[ion]” within the meaning of the policy’s insuring

agreement. Compare 1 Lee R. Russ & Thomas F. Segalla,

Couch in Insurance § 103:14 (3d ed. 2003) (“While the

phrase ‘legal liability’ includes liability assumed by contract,

the phrases ‘liability imposed by law,’ and ‘legally obligated

to pay as damages’ do not.”), and Hartford Accident &

Indem. Co. v. Reale, 644 N.Y.S.2d 442, 443 (App. Div. 1996)

(“the purpose of a commercial general liability policy . . . is

to provide coverage for tort liability for physical damage to

others and not for contractual liability of the insured for

economic loss”), and Action Ads, Inc. v. Great Am. Ins. Co.,

685 P.2d 42, 45 (Wyo. 1984) (liability insurance

“encompasses liability which the law imposes on all insureds

for their tortious conduct and not on the liability which a

particular insured may choose to assume pursuant to

contract”),withVandenburg v. Superior Court, 982 P.2d 229,

243-46 (Cal. 1999) (holding that it is “incorrect” to

“distinguish[] contract from tort liability for purposes of the

CGL insurance coverage phrase ‘legally obligated to pay as

damages[]’”). 

Assuming – without deciding – that contractual liability

can, in appropriate cases, constitute a legal obligation within

the meaning of the policy’s insuring agreement, the question

becomes whether this is such an appropriate case. The

8 Detroit Water Team v.

Agricultural Ins. Co., et al.

Nos. 02-1324/1419

answer to that question would generally depend upon whether

Detroit Water Team’s risks in dealing with the City –

specifically, the risk that it would have to take immediate

action to restore an interrupted service – aligned with the risks

that Detroit Water Team and American National agreed

would be insured under the policy. While we do not believe

that these risks aligned, we need not definitively decide that

issue given that coverage would be barred in any event

because Detroit Water Team’s contractual obligation to make

the repairs was not sufficiently definite as to constitute a legal

obligation for which the insuring agreement provides

coverage. 

In determining whether a particular loss falls within the

scope of an insuring agreement, it is necessary to focus upon

“[t]he nature of the damage and the risk involved . . . .”

Vandenburg, 982 P.2d at 244. The nature of the damage in

this case is that during the course of its demolition work,

Adamo caused property damage to the electrical system that

was running the City’s water plant. Adamo was a named

insured under the American National policy that was issued

to Detroit Water Team, and the risk of Adamo causing such

property damage was precisely the “nature” of the “risk” for

which Adamo was insured under that policy. If any party was

“legally obligated” to pay any “sums” because of this

incident, it was Adamo. Notably, had Detroit Water Team

not rushed to repair the damage, the City presumably would

have sought damages from Adamo, in which case coverage

likely would have been available under the American

National policy. Detroit Water Team’s anticipatory actions,

however, thwarted that process from occurring. Although

Detroit Water Team did undertake certain contractual

obligations to restore interrupted service, any legal liability

that Detroit Water Team may have incurred on the basis of

that contract is entirely speculative. There was certainly no

judicial determination or settlement establishing Detroit

Water Team’s liability in this regard, nor any other reason to

believe that its liability was anything more than merely
Nos. 02-1324/1419 Detroit Water Team v.

Agricultural Ins. Co., et al.

9

“inchoate” or “potential.” Aetna, 10 F. Supp. 2d at 797

(citing Ryan, 916 F.2d at 738-43). Therefore, Detroit Water

Team has failed to carry its burden of proving that it was

“legally obligated” by contract to repair the electrical system.

Having concluded that Detroit Water Team was not

“legally obligated” to repair the electrical system, we must

next address the district court’s prediction that the Michigan

Supreme Courtwouldrequire insurers like American National

to prove that they suffered prejudice in order to bar coverage

for a loss that does not fall within the policy’s insuring

agreement. The district court’s prediction was based upon its

view that the purpose of the “legally obligated” language is

analogous to the purpose of “notice” and “cooperation”

provisions – i.e., to prevent collusion between the insured and

the claimant – and that because insurers generally must prove

prejudice in order to bar coverage in reliance upon an

insured’s breach of a “notice” or “cooperation” provision, a

similar prejudice requirement should apply to the “legally

obligated” language in the insuring agreement. Notably,

however, the district court cited no cases – from Michigan or

any other jurisdiction – that recognize or impose such a

requirement. 

We begin by noting that not even Detroit Water Team

attempts to defend the district court’s imposition of the

prejudice requirement, and our independent research leads us

to conclude that the imposition of such a requirement is

indefensible. The critical flaw in the district court’s reasoning

is that it overlooks a significant distinction between the

“legally obligated” language and the “notice” and

“cooperation” provisions: the “legally obligated” language

appears in the policy’s insuring agreement, whereas the other

provisions appear in the policy’s exclusions. By requiring an

insurer to prove that it suffered prejudice as a result of having

to provide coverage for a loss that does not even fall within

the insuring agreement, the district court has not only

sanctioned an absurd result, it has relieved the insured of its

10 Detroit Water Team v.

Agricultural Ins. Co., et al.

Nos. 02-1324/1419

burden of proving the applicability of the insuring agreement,

see supra Esicorp, 266 F.3d at 864; Data Specialties, 125

F.3d at 911, and has shifted that burden onto the insurer. We

do not believe that the Michigan Supreme Court would adopt

a rule that would lead to these consequences, particularly in

light of the conspicuous lack of authority supporting such a

rule.

In sum, we hold that because Detroit Water Team was not

“legally obligated” to pay for the repairs to the electrical

system, American National properly denied coverage on that

ground – regardless of whether it suffered prejudice as a result

of Detroit Water Team’s actions. 

B. Agricultural Builder’s Risk Policy

The only issue regarding the Agricultural builder’s risk

policy concerns the applicability of “Exclusion M,” which

bars coverage for:

[l]oss or damage to property in existence at the

commencement of this policy which [1] is not a part of

the construction operations insured hereunder and/or

[2] for which the value is not included in the total insured

value shown in the schedule attached to this policy. 

Detroit Water Team appeals the district court’s determination

that this exclusion bars coverage for the loss at issue in this

case.

It is undisputed that the electrical system was “property in

existence at the commencement of th[e] policy.” Detroit

Water Team asserts that the phrase “and/or” is ambiguous

and, therefore, that the exclusion should be read to apply only

if both conditions are satisfied – i.e., if both the property “is

not a part of the construction operations insured hereunder”

and the “value [of the property] is not included in the total

insured value shown in the schedule attached to this policy.”
Nos. 02-1324/1419 Detroit Water Team v.

Agricultural Ins. Co., et al.

11

Detroit Water Team also asserts that, regardless of how

“and/or” is interpreted, neither condition specified in

exclusion M is satisfied in this case. We find both assertions

unpersuasive. 

First, we hold that the use of the “and/or” language in

exclusion M unambiguously means that the exclusion applies

if either or both of the two specified conditions are met. See,

e.g., Michigan Pub. Serv. Co. v. City of Sheboygan, 37

N.W.2d 116, 129 (Mich. 1949) (“There are occasions where

intent may properly be expressed by ‘and/or,’ indicating

‘both, or either.’”); Local Div. 589, Amalgamated Transit

Union, AFL-CIO, CLC v. Commonwealth, 666 F.2d 618, 627

(1st Cir. 1981) (“the words ‘and/or’ commonly mean ‘the one

or the other or both’”).

Second, we hold that the second condition specified in

exclusion M has been satisfied – i.e., the “value” of the

electrical system was “not included in the total insured value

shown in the schedule attached to th[e] policy.” The schedule

attached to the policy provides as follows:

(a) Estimated Contract Price . . . . . . . . . . $214,542,000

(b) Soft Costs . . . . . . . . . . . . . . . . . . . . . . . .$2,500,000

(c) Value of Owner Furnished Material . . . .$ Included

(d) Total Insured Value . . . . . . . . . . . . . . $217,042,000

The record reveals that the “Total Insured Value” figure is

equivalent to the amount of the actual cash replacement value

of the insurable work, or the amount that would be necessary

to redo the entire project if everything were somehow

destroyed. The undisputed deposition testimony of David

May, Vice President and General Counsel of Walsh

Construction Company of Illinois – a general contractor that

participated in the joint venture with Detroit Water Team in

12 Detroit Water Team v.

Agricultural Ins. Co., et al.

Nos. 02-1324/1419

this case – indicates that the “Total Insured Value” does not

include the value of the electrical system contained within the

manhole.

Because the value of the electrical system was “not

included in the total insured value shown in the schedule

attached to th[e] policy,” the district court properly held that

exclusion M bars coverage under the Agricultural policy. 

III. CONCLUSION

For all the foregoing reasons, we REVERSE the district

court’s award of summary judgment in favor of Detroit Water

Team and REMAND this case to the district court with

instructions to award summary judgment in favor of

American National, and we AFFIRM the district court’s

award of summary judgment in favor of Agricultural.