Opinion ID: 626374
Heading Depth: 2
Heading Rank: 3

Heading: Declaratory Judgment Regarding Coverage

Text: We review a grant of summary judgment de novo. Geiger v. Tower Auto., 579 F.3d 614, 620 (6th Cir. 2009). The moving party bears the burden of proving the absence of a genuine issue of material fact and its entitlement to summary judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Colony argues for reversal on three grounds. First, it maintains that the primary policy excludes punitive damages. Second, it contends that the Colony policy, in any case, does not incorporate the primary policy’s exclusion of “[s]anctions, fines, and penalties.” Third, it offers that, even assuming ambiguity of the primary policy regarding punitive damages, the ambiguity disappears once one reads the primary policy and the first-layer excess policy together as part of one contract: the first-layer excess policy’s express exclusion of punitive damages must trump the primary policy’s silence. Because the third argument requires reversal, we bypass the parties’ dispute about whether Colony forfeited the first and second arguments. We begin by noting that nothing in the Colony insuring agreement prohibits incorporation of the primary policy’s term excluding “[s]anctions, fines, or penalties,” its general coverage term promising to pay for “claims,” or the first-layer excess policy’s term excluding “punitive damages.” Therefore, the coverage provision and both exclusions apply equally to the Colony policy. Tennessee law requires courts to read all parts of the contract “together to give meaning to the document as a whole,” in order to construe its plain meaning. Maggart v. Almany Realtors, Inc., 259 S.W.3d 700, 705 (Tenn. 2008); see id. at 704 (“It is the universal rule that a contract must be viewed 6 Nos. 10-5745, 10-6402 Chad Youth, et al v. Colony Nat’l Ins. Co. from beginning to end and all its terms must pass in review, for one clause may modify, limit or illuminate another.” (quoting Cocke Cnty. Bd. of Highway Comm’rs v. Newport Utils. Bd., 690 S.W.2d 231, 237 (Tenn. 1985)). As such, the specific and express exclusion of punitive damages in the first-layer excess policy informs our reading of the primary policy’s general commitment to cover unexcluded claims. Cocke Cnty. Bd. of Highway Comm’rs, 690 S.W.2d at 237 (“As a rule, where there are, in a contract, both general and special provisions relating to the same thing, the special provisions control.” (quoting 17 Am. Jur. 2d. Contracts § 270 (1964))). We perceive no conflict between the first-layer excess policy’s express exclusion and the primary policy’s silence regarding punitive damages. Giving effect to the first-layer excess policy’s express exclusion of punitive damages implements both underlying policies without conflict: such a reading excludes punitive damages, as the first-layer excess policy requires, without offending the primary policy’s ambiguous silence regarding punitive damages and its general commitment to cover unexcluded claims. Therefore, following Cocke, Colony may still honor the primary policy’s general commitment to cover unexcluded claims and its ambiguous exclusion of “[s]anctions, fines, and penalties,” while applying the first-layer excess policy’s specific exclusion of punitive damages. The insureds, by contrast, propose that we first read the primary policy’s exclusion of “[s]anctions, fines, and penalties” in isolation and determine its meaning separately, without consulting other provisions in the Colony policy. First, they deem the primary policy’s exclusion of “[s]anctions, fines, and penalties” ambiguous. By applying a rule of construction interpreting all ambiguities in favor of the insured, they conclude that the primary policy covers punitive damages. 7 Nos. 10-5745, 10-6402 Chad Youth, et al v. Colony Nat’l Ins. Co. Then, finding a conflict between this interpretation of the primary policy (favorably construed to cover punitive damages) and the express punitive-damages exclusion of the first-layer excess policy, they construe this perceived conflict in the insureds’ favor again, in favor of coverage. This approach would require applying the rule of construction in favor of the insured twice: first, after reading the primary policy in isolation to prop up the view that the primary policy covers punitive damages, and second, after discerning a conflict between the first-layer excess policy and an already-bootstrapped interpretation of the primary policy. Tennessee law precludes this multistep method of construction. See Allmand v. Pavletic, 292 S.W.3d 618, 631 (Tenn. 2009) (“[T]he better rule in all cases is to read the whole instrument and give effect to every part if possible, and thereby reach its true meaning, and not resort to artificial or arbitrary rules until the former rule is exhausted.” (internal quotation marks and citation omitted)); Standard Life Ins. Co. v. Hughes, 315 S.W.2d 239, 243 (Tenn. 1958) (“[T]he rule of ambiguity and construction against the insurer does not permit a court to create an ambiguity where none exists.”); Crouch v. Shepard, 44 Tenn. 383, 388 (1867) (holding that the rule of interpreting contract “more strongly against the party using it” is “a rule of strictness and rigor, and not to be resorted to but when other rules of exposition fail.”). We derive nothing from examining how the parties to the primary policy would have interpreted that policy’s coverage, in isolation. Rather, we must determine how the parties to the Colony policy would have read all of its incorporated provisions—together—as part of one policy. Tennessee law forecloses the insureds’ remaining arguments. First, the insureds present parol evidence of a primary policy quote in Colony’s possession at the time of the Colony policy’s 8 Nos. 10-5745, 10-6402 Chad Youth, et al v. Colony Nat’l Ins. Co. issuance, which specified that the primary policy “has no exclusion for Punitive Damages.” This quote, they argue, proves Colony’s view that the primary policy covered punitive damages. But Tennessee law sanctions a party’s use of extrinsic evidence only to resolve ambiguities, not create them. See Fariss v. Bry-Block Co., 346 S.W.2d 705, 707 (Tenn. 1961). And even if we were to accept this quote as evidence of Colony’s understanding of the meaning of the primary policy, it fails to illuminate how reasonable parties would have construed the terms incorporated from the primary policy and the first-layer excess policy, when read together as parts of the Colony policy. Second, the insureds suggest that the express exclusions in the Colony policy for terrorism and certain mailrelated claims would be superfluous if the express terrorism-and-mail exclusions incorporated from the first-layer excess policy could contradict the silence of the primary policy. (The first-layer excess policy, like the Colony policy, expressly excludes terrorism and mail claims, while the primary policy does not.) But “an exclusion clause cannot be used to create liability where none would otherwise exist.” Hughes, 315 S.W.2d at 243 (quoting Murphey v. Inter-Ocean Cas. Co., 186 N.E. 902, 903 (Ind. Ct. App. 1933)). We cannot interpret Colony’s decision to expressly reiterate one exclusion as an implicit renunciation of all of its incorporated exclusions. The fact that Colony could have drafted its policy in a clearer fashion fails to move the debate here, that is, whether Colony’s policy unambiguously excludes punitive-damages coverage. To conclude, we read the primary policy with the first-layer excess policy’s express exclusion, as part of the same contract. We glean the meaning of the Colony policy from the perspective of the Colony policy’s contracting parties (who would have read the first-layer excess policy and the primary policy together as one whole), rather than from the perspective of the primary 9 Nos. 10-5745, 10-6402 Chad Youth, et al v. Colony Nat’l Ins. Co. policy’s contracting parties (reading the primary policy without the benefit of the language in the other policies). And we apply a rule of construction favoring the insureds only if the two incorporated exclusions and the coverage provisions—read together—remain ambiguous. Applying these principles, we discern no ambiguity exists to trigger application of the “in favor of the insured” rule of construction. A reasonable layperson construing a contract that covers “any ‘claims’” but excludes “punitive damages” would understand that the contract’s scope of coverage excludes “punitive damages.”1