1 RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Six

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ELECTRO NIC CIT

ATION: 2004 FED App . 0177P (6th C ir.) File Name: 04a01 77p.06



### UNITED STATES COURT OF APPEALS

FOR THE SIXT H CIR CUIT

_________________
D ETROI T W ATER T EAM J OINT V ENTURE , Plaintiff-Appellee/

Cross-App ellant,

v.

A GRICULTU RAL I

NSURANCE C OMPANY , an Ohio Corporation, Defendant-Appellee,

A MERI CAN N ATION AL F IRE I NSURANCE C OMPANY , an Ohio Corporation, Defenda nt-Appel

lant/ Cross-Appellee. X

- - - -
> , - - - - - - - - - - - - - - N Nos. 02-1324/1419

Appeal from the United States District Court for the E astern D istrict of Michiga n at Detr oit. No. 00-73239—Robert H. Cleland, District Judge.

Argued: October 23, 2003
Decided and Filed: June 11, 2004

Befor e: KEI TH, MARTI

N, and SUT TON, Circ

uit Judges

. 2 Detroit Water Team v. Agricultu ral Ins. Co. , et al. Nos. 02-1324/1419

_________________ COUNSEL

ARGUED: Ann E. Er

ickson Ga ult, COL LI NS, EINHORN, FAR RE LL

& ULANOF F , Southfield, Michigan, for Appellan t. Raymond A

. Fylstra, KU BASIAK, FYL STRA, REIZEN & ROTUN

NO, Chica

go, I llin ois , Thomas B. Orlan do, FOR AN, GLEN NON , P ALAN DEC H & P ONZ I, Chicago, Illinoi s, for Appellees. ON BRI EF: J. Mark Co on ey, COLLINS, EINHORN, FARRELL & ULANOFF, Southfield, Michigan, for App ellant. Raymond A. Fy lstra, John C. Anderson , KUBA S IAK, FYL STRA, REIZEN & ROTUNNO, Chicag o, Ill inois, Stephen J. Pokoj, FILD EW, HIN KS, GIL BRIDE, MI

LL ER & TODD, De

troit, Michigan, Thomas B. Orlando, Matthew S. Ponzi, FORAN, GLENNON, PALAN

DECH & PO

NZI , Chicag o, Ill inois, Daniel J. Seymour, NAGI , BAXTER & SEYMOU

R, Detroi t, Michiga n, for Ap pellees

.

_________________ OPINION

_________________ BOYCE F. MARTI

N, JR., Circu

it Judge. I

n these consolidated

cases, D etroit

Water Team Joint Venture seeks insurance c over age under an America n National Fire In sura nce Company commercia l general liability

policy and an Agricultural I

nsurance Company builder’s risk policy for
a loss incur

red duri ng the c ourseof

its renovation of a City of Detroit water plant. The district

court he ld

that coverage was availab le under

the American National policy , but not under th e Agric

ultural po licy . Americ an Nation al appea ls th e districtcourt’s award of su mmary judgme nt in favor of Detroit Wat er Team with respect to coverag e under the commercial gener

al liabilit y policy , and Det

roit Water Team appeals the award of summary judgment in favor ofNos. 02-1324/1419 Detroit Water Team v. Agricultu ral Ins. Co. , et al. 3

Agriculturalwith respect to coverage under the builde

r’s risk po li cy. Fo r the reasons discussed below, the district court’s judgment is affirmed in part and reverse d in part.

I. BACKGROUND

Detroit Water Team entered

into a “design/build” contract with th e Ci ty of

Det roi t t o re nov ate th e Ci ty’s wat er p lan t. In connection

with that project, Detroit Water Team procured two insurance polici es: (1) a commercia l gener al liabilit y policy issued by America

n National, which cov ered D etroit Water Team and one of its subcontractors, Adamo Demolitio n Co mp an y; and (2) a builder’ s risk policy issued by Agric ultural, which covered D etroit Wat er 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 hire d Adamo, a demoliti on su bcont ractor , to perf

orm this demolition work. Connected to one wall of the reservoir was
a semi-cir cular ma n hole structure. The reservoir and the manhole structur e share d one comm

on wall that was made of
concre te; the rest of the manhole structure was made of

m as on ry. The manhole structure contained an electri ca l sy s temcomprised of live wires, feeds and tubes, which p rovided power and air to the functioning water pla nt . Th e City and Detroit Water Team agree d that this electrical sys tem, along w

ith the man

hole stru cture that housed

it , would remain entirely

intact t hroughout the renovation project so thatthe wat er plant could con

tinue to op erate during that time. Nevertheless, in the course of demolishing the reservoir, Adamo also tore down the concrete wall that the
reservoir sh ared with the manhole, which caused the entire manhole structure to collapse and the electri cal system within to sustain considerable damage.

Detroit Water Team immediately r epaired the damaged electrical system and notified Americ anNat ional and 4 Detroit Water Team v. Agricultu ral Ins. Co. , et al. Nos. 02-1324/1419

1 As disc ussed mor e fully here in, De troit W ater T eam argue s that it

was obliga ted to repa ir the electr ical sy stem by virt ue of its con tract with the City , whi ch r equired it to “t ake immediate action to rest ore” any int errupte d servi ce “wit hin t wenty -four

(24) hours or less .” A griculturalof its expen ses. 1 After both insurers de nie d coverage, this lawsuit ensued and all parties moved for summary judgment. The district court held that coverage was availab le u nder the American National commercial ge neral liabil ity policy, but not und

er the Ag ricultur al builde r’s risk po li cy. American Nationalap peals the award of summary judgment in favor of Detro it

Water Team, and Detroit Water T eam appeals the award of summary judgment in favor

o f Agricultural.

II. ANALYSIS

W e review de novo a district court’s award o f summ ary judgmen t, as well as its interpretation of an i nsurance contract. Paramete

r Driven S

oftware v. Mass achus etts Bay Ins. Co. , 25 F.3d 332, 336-37 (6th Cir. 1994). Summary jud gment should be granted when “the pleading s, dep ositions , answers to interrogatories, and admis sions on file, together with the affidavits, if any , show that there is no genuine issue
as to any material f

act and that the moving

party is entitle d to
a judgment as a matter of l aw .” F ED

. R. C IV

. P. 56( c). In determiningwheth er a ge nuine issu

e of mate rial fac t exists,
we must draw all reasonable inferenc es in favor of the nonmoving party. Bonds v. Cox , 20 F .3d 697, 701 (6th Cir. 1994).

A. American National Policy

Our analysis of whethe

r coverage is available unde r th e Amer ican National policy beg

ins – and ends – with th e policy’sinsuring agreement, which provide s tha t American Nat iona l “will pay those sums that the I nsured becomesNos. 02-1324/1419 Detroit Water Team v. Agricultu ral Ins. Co. , et al. 5

legall y obligated to pay

as damage s becaus e of ‘bod ily in ju ry’
or ‘property da

mage’ to which this insurance applies.” The districtcourt held that Detroit Water Te am was no t “lega

lly obligated” to repair the electrical sy stem, bu t p redicted – noting the lack

of Michig an case s on point – tha t the Michigan Supreme Court would nevertheless require American National to prove t

hat it suffer

ed preju dice as a result of Detroit Water Team’s actions in ord er to b ar co verage. Finding that American National had failed t o demonstr ate any prejudice , the district court held that
covera ge was not

barred. For thefollowing reasons , we hold that the district court

was correct in determining that Detroit WaterT eam was not “legally obligated” to repair the electrical sys tem, but incor rect in predicting that the Michigan Su preme Court would require American National to p rov e that it suffered pr ejudic e in order to bar coverag e 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., Esico rp, Inc. v . Liberty M

ut. Ins. Co. , 266 F.3d

859, 864 ( 8th

Cir. 2001); Data Spec ialties, Inc. v. Trans cont’l In s. 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 “ s ums” that i

t incurred in repairing the damag edelectrical sy stem. The phrase “legally obligated” necessitates “more than i nchoate or potential liability.” Aetna Cas. & Sur. Co. v. Dow Chem. Co. , 10 F. Supp. 2d 771, 797 (E.D. Mich. 1998) (citing Rya n v. Royal Ins. Co. of Am. , 916 F.2d 731, 738-43 (1st Cir. 1990)). Alth ough t he M ichiga

n Supreme

Court has never expr

essly defined the phrase “legally

obligated,” decision s from the Michigan Court of App e als “imply ” – but do not express ly hold – “that the t erm ‘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) (citi ng Giffels v. Home Ins. Co. , 172 N. W.2d 540 6 Detroit Water Team v. Agricultu ral Ins. Co. , et al. Nos. 02-1324/1419

(Mich. App. 1969); MacDona ld v. State Farm Mut. Auto. Ins. Co. , 165 N.W.2d 6 65 (Mich. App. 1968 )). I n this cas e, it

i s undis puted

that there has been no judicial determination or settlement establishing Detroit Water Team’s liability

. Detroit Water Te am arg

ues that it s legal

obligat ion to rep air the electrical sy stem derives from two sources: genera l tort principles and its contract with t he Cit y. We disagr

ee on both fr onts. In an effort to establish tort liability, Detroi t Wate r Team argues that “[t]her e i s a well se ttled prin cip[le] in Michigan, as well a s other ju risdic t ions, that a duty of ordinary care a rises fr om the per

formanc e of a contr actu al obligation.” Chamberla in v. Bisse ll , 547 F. Supp. 1067, 1081 (W .D. M ich. 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 prope rty from d amage resulting from [Detroit Water Team’s] demolition activities,” and that Detroit Water Team ’ s neg lig ent performance of that contractual oblig ation was actionable in tort. Detroit Water Team Br. at 41.

Detroit Water Team’s argum ent m isconstru es the ide ntity of the neg ligent p arty , if any, in this case. As the parties have stipulat ed, it was Adam

o, not Det

roit Water

Team, whose demolition activities prox imately caused the damage to the
e lectrica l system. There is no evide nce that Detroit Water Team has co mmitted an y ne glige nce wha tsoever . 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 li able for the neg ligenc e of its subcontractor. Candelaria v. B.C. Gen. Contractors, Inc. , 600 N.W.2d 348, 352 (Mich. App. 1999). While sever a l exceptions to this general rule exist, id. , Detroit Water Team has not argued that any

appl y here, and our independent review of th e rec ord confirms that none of the exceptions applies under the facts of this case. Therefor e, Detroit Water Team has failed to carry

its burden of proving that it was “legally obligated” in tort to repair the electrica l system.Nos. 02-1324/1419 Detroit Water Team v. Agricultu ral Ins. Co. , et al. 7

2 De troit W ater Team seems to suggest that t his provision requi r es any int errupte d servi ce to be complet ely r estoredwithin twenty- four hours of the i nterruptio n. I n fact, ho weve r, we rea d the p rovisio n as m erely requiring that

“immediat e acti on” aimed at rest oring t

he servi ce be taken within twe nty-four ho urs. Detroit Water Tea m also arg

ues that it

was “legally obligated” to ma ke th e r ep ai rs by v irtue of i ts contra ct with the C ity, which require d it to “take immediate action” t o restore any

interrupted service withi n twenty -four ho urs. 2 There is some dispute as to whether con tractual liability, as opposed to tort l iabil ity , can

ever cons titute a “ leg al[] obli gat [ion]”

within the meaning of the policy ’s insuring agree ment. Compare

1 Lee R. Russ & Thom as F. Segalla , Couch in Insurance § 103:14 (3d ed. 2003) (“While the phrase ‘l eg al li ab il it y’ includes liability assumed by c ontract , the phrases

‘liability imposed by law,’ and ‘ legally

obligated to pay as damages’ do not.”), and Hartfo rd Accide nt & Indem. Co. v. Rea le , 644 N.Y.S.2d 442, 443 (App. Div. 1996) (“the purpose o f a comme rcial g eneral

liability policy . . . is to pr o vide cove

rage f or tort lia bility for phy sical da mage to others and not for contr actual liability of the insured f or 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 im

poses on a

ll insureds for their tortious conduct and not on the liability which a particular insured may choose

to assume p u rsuant to contract”), with Vandenburg v. Superior C ourt , 982 P.2d 229, 243-46 (Cal . 1999) (h olding that it is “incorrect” to “dist in guish[] contract from tort liability for purposes of the CGLinsurance coverage phr ase ‘legally

obligated to pay as damages[]’”). Assuming – without d

ec iding – that contr

actual li ability can, inappropr

iate cases, c onstitute a

legal o bligation within the meaning of the policy ’s insuring agreement, the question becomes whether this is such an app ropr iate case. The 8 Detroit Water Team v. Agricultu ral Ins. Co. , et al. Nos. 02-1324/1419

answer to that que stion would

generally depend upon

whether Detroit Water Team’s risks i n d ea li ng wi th th e C it y – spe ci fi ca ll y, the risk that it would have to ta

ke immedia

te actionto restor

e an inte rrupted service – aligne d with

the risks that Detroit Water Team and American National ag r eed would be insured under the policy . While we do not believe that these risks aligned, we need not definitively decide tha t issu e given that coverage would be barred in any ev en t because Detroit Water Team’s contractual obligation to make the repairs was not sufficiently definite as to constitute a legal obligation

for which the insur in g agreement provides coverage.
Indetermi

ning w hether a particular loss falls within the scope of an insuring agreeme nt, it is necessary to foc

us upon “[t]he nature of the damage and the r isk involved

. . . .” Vandenbu rg , 982 P.2d at 244. The natu re of the damage in this case is that during the cou rse of its demolition work, Adamo caused prope rty damage to the electrical sy stem that
was runnin g the City’s water plant. Ada mo was a named insured under the American Nation al policy that was issued to Detroit Water Tea

m, and the risk of Adamo causing such property da

mage was precisely

the “nature” of the“risk” for whichAdamo was insured under that policy. If any

party was “leg ally obligat ed” to pa

y a ny “ sums” bec ause of t his incident , it was Adamo. Notably, had De troit Water Team

n o trushed to

repair the dama ge, the City presuma bly would have sou gh t dama ges from Adamo , in wh ich cas e cover age likely would have been available under the Amer ican Na ti on al po li cy. Detroit Wa ter Tea m’s antic ipatory

actions, however, thwarted that process from occurrin g. Alt hough Detroit Wat er Team did undertake certain contra ctual obligations to restore interrupted service, a ny legal l iability that Detroit Wa

ter Tea m may have in cu rred on the basis of that co nt ra ct is en ti re ly s pe cu la ti ve . T he re wa s c er ta in ly n o judicial d etermina

tion or settlement e stablishin g Detr oit Water Team’s l iability

in this regard, nor

any other re ason to believe that its l iabili ty was any thing mor

e than me

relyNos. 02-1324/1419 Detroit Water Team v. Agricultu ral Ins. Co. , et al. 9

“inchoate” or “potential.” Aetna , 10 F. Supp. 2 d at 79 7 (citi ng Ryan , 916 F.2d at 738-43). Theref ore, Detroit

Water Team has faile d to carr

y its b u rden of proving that it was “lega lly obligated” by contract to repair the electrical sys tem. Havingconcluded that Detroit Water Team was not “lega lly ob l igated

” to repa ir the ele ctrical

sys tem, we mu st next address the district court’s prediction that the Michigan Supreme C ourt would require insurer s like American National to prove that they suff

ered prejudic e in

order t o bar co verage for a loss that

does not fall within the policy’s insuring agree ment. The district court’s prediction was based upon its viewthat the p

urpose of the “leg ally

obligat ed” lang uage is analogous to the purpose of “notice” and “coop erati on” provisions – i.e., toprevent collusion between the insured and the claimant

– and that

because insurers generally

must prove prejudice in order to bar cove rage in reliance upon an insured’s breach of a “notice” or “c ooperation” provision, a similar pre judic e requir

ement sho

uld apply to the “le gally obligated” langua

ge in the insuring agree ment. Nota

bl y, however, the district court cited no cases – from Michigan or any other jur

isdiction –

that recogni ze or impose such a requirement.

We begin by

noting that not even Detroit Water Team attemptsto defen

d th e district court’s imposition of the prejudice require

ment, and our independent research lea ds us to conclud e thatthe imposit ion of such a requi

rement is indefensible. The critical flaw in the district court’s reasoning is that it overlo oks a significant distinction between the “lega lly obligated” languag e and the “notice” and “cooperation” provision s: the “le gally obl igated ” langu age appears in the policy’sinsuring agree ment, whereas the other provisions appear in the policy ’s exclusions

. By re quiring an insurer to prove that it suffered

prejudic e as a

result of having to provide c overag e for a l oss that doe s not even fall withi n t he insuring ag

reemen t, the distr

ict cour t has not on

ly sanctioned

an absurd r

esult, it ha s relieve d the insur ed of its 10 Detroit Water Team v. Agricultu ral Ins. Co. , et al. Nos. 02-1324/1419

burden of provin g the ap plicabili ty of the ins uring a greement,
see su pra Es icorp , 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 conseq u ences, p articula

rly in light of the conspicuous

lack of a uthorit y sup porting such a rule.

Insum, we hold

that because Detroit Water Team was not “lega lly oblig at ed” to pay f

or the repairs to the electrical sys tem, American National properly denied coverage on that ground – regardless of whether it suffe red prejudice as a res

ult of Detroit Water Team’s actions.

B. Agricultural Builder’s Risk Policy
The on ly i ssue regarding the Agr icultura l builder’ s risk policy concerns the applicability of “Exclusion M,” whic h bars coverage for: [l]oss or damag e to prope rty in existe nce at the
c omme ncement

of this policy which [1] is not a part of the construction operations insured hereun d er and/or [2] for whic

h the valu e is not included in the total insured value shown in the schedule attached to this policy

. Detroit Water Te am appea

ls the district court’s determination that this exclusi on bars c overag e for the loss at issu

e in this
case.
It is undisputedthat the electrical sy stem was “proper ty in existence at the commencement of t h[e] policy .” Detro it Water Team ass erts th at the phrase “and/or” is ambiguous and, therefore, that the exclusion should be read to a pply only if both cond

itions are satisfie d – i.e., if

both the pr

operty “is nota part of the construction operations insured hereunder” and the “val ue [of the propert y] isnot inc luded in the total insured value shown in

the schedule attached to this policy .”Nos. 02-1324/1419 Detroit Water Team v. Agricultu ral Ins. Co. , et al. 11

Detroit Water Te am also asserts that, regardless of how “and/or ” is interpr

eted, ne ither condition spe cified in exclusion M is satisf

ied in this case. We find

both assertions unpersuasive. First, we hold that the use of the “and/or ” langu age in exclusion M unambiguously mea ns 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 occ asions where intentmay proper

ly be expressed by

‘an d/ or,’ indicating ‘both, or either.’”) ; Local Div. 589, Amal g amated Tra nsit 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

tha t the sec ond condi

tion spec ified in exclusion M has been satisfied – i.e., the “value” of the electrical system

was “not included in the total insured value shownin the schedule at

tached t o th[e] policy.”

The sche dule attache d to the pol icy

provides as follow s: (a) Estimated Contract Price . . . . . . . . . . $214,542,000 (b) Soft Costs

. . . . . . . . . . . . . . . . . . . . . . . .$2,500,000 (c) Value of Owner

Furnished Material . . . .$ Inc luded (d) Total Insured Value . . . . . . . . . .

. . . . $217,042,000

The record reveals that the “Total I nsured V al ue” fig

ure is equivalent

to the amount of the actual cash replacement value of the insurable work, or

the amoun

t that woul d

be necessary to redo the

entire project if

every th ing were somehow destroyed. Th e u nd is pu te d d ep os it io n t es ti mo ny o f David May , Vice

Pres iden

t and Gene ral C ounse l of Wa

ls h Construction Company of I llinois – a general contractor that participated

in the j oint ventu

re with D etroit Wat

er Team in 12 Detroit Water Team v. Agricultu ral Ins. Co. , et al. Nos. 02-1324/1419

th is case – indicates that the “Total I nsured Value” does not include the value of

the electrical sy

stem conta

ined withi nthe manhole.

Becau se the value

of the el ectr

ical system was “not include d in the tota

l insured value shown in the sc

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

held that exclusion M bars coverage under the Ag ricultural policy.

III. CONCLUSION

For all the foregoing reasons, we REVERSE the distri ct court’s award of summary judgment in favor of Detroit Water Team and REMAND this case to the district cour t with instructions to aw ard s ummary judgme nt in favor of American National, and w e A FFIRM the district court’s award of summary

judgment in favor of Agricultural.