Court Opinion

ID: 3042832
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:09:58.001266+00
Date Added: 2024-06-11T12:09:21.011457
License: Public Domain

United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT
                                   ___________

                                   No. 06-3910
                                   ___________

R.D. Offutt Company,                   *
                                       *
            Plaintiff - Appellee,      *
                                       * Appeal from the United States
     v.                                * District Court for the
                                       * District of North Dakota.
Lexington Insurance Company,           *
                                       *
            Defendant - Appellant.     *
                                  ___________

                             Submitted: June 11, 2007
                                 Filed: July 17, 2007
                                 ___________

Before MURPHY, BEAM, and SHEPHERD, Circuit Judges.
                           ___________

MURPHY, Circuit Judge.

       After the Lexington Insurance Company declined to cover expenses incurred
by its policyholder R.D. Offutt Company due to a switchgear failure, Offutt brought
this declaratory judgment and breach of contract action. The district court1 granted
Offutt’s motion for summary judgment and awarded it attorney fees, and Lexington
appeals. We affirm.

      1
       The Honorable Ralph R. Erickson, United States District Judge for the District
of North Dakota.
                                           I.

       R.D. Offutt Company is a Minnesota corporation whose principal place of
business in is Fargo, North Dakota. It owns properties in various states, including a
93,000 acre parcel of farmland near the Columbia River in Morrow County, Oregon.
Because Offutt manages this property through Threemile Canyon Farms, LLC, a
wholly owned subsidiary, the property is referred to as Threemile. Offutt leases to
various third party tenants on a long term basis. The tenants use the land to grow
crops such as potatoes, alfalfa, onions, wheat, and corn which require irrigation to
sustain them. Under the leases Offutt has entered into with its tenants, it is obligated
to provide them with water between March 20 and October 19 of every year and must
indemnify them against all liabilities, losses, and damage incurred due to any failure
to satisfy its obligations as lessor.

       On June 29, 2002 there was a switchgear failure at a water pumping station at
Threemile. That pumping station takes water from the Columbia River and directs it
to the farmland for crop irrigation and other purposes. The switchgear controlled the
supply of electricity to the pump, and its failure cut pumping capacity in half. Jimmy
Brewer, the farm manager at Threemile, testified in his deposition that if the failure
had not been addressed immediately, crops would have died and Offutt would have
faced liability claims from its tenants. There is also evidence that without irrigation
Offutt would have been liable to governmental agencies for wind erosion and airborne
dust.

       Offutt determined within the 48 hour period following the switchgear failure
that permanent replacement of the switchgear would take weeks or even months. In
order to maintain the pumping station’s full capacity in the meantime, Offutt's
manager rented portable generators and bought diesel fuel to supply them. Jimmy
Brewer testified that these measures were taken to prevent crop loss and liabilities to
tenants. Offutt spent $264,642.61 on the generators, fuel, and related labor and freight
charges.

                                          -2-
       Offutt had purchased insurance for Threemile from Lexington, a Delaware
corporation. Its policy covered "all risk of direct physical loss or damage" to "all real
and personal property" at Threemile which Offutt owned, used, leased, or intended for
use. The policy provided that in the event of loss or damage, Lexington would
consider Offutt the "sole and unconditional owner" of covered property,
notwithstanding any contracts or leases to the contrary. In addition to physical loss
or damage, the policy insured against losses resulting from business interruptions and
extra expenses caused by property damage. Under its expediting expense clause, the
policy covered "the reasonable extra cost of temporary repair and/or replacement
and/or expediting the repair and/or replacement of damaged property insured
hereunder." "[L]oss or damage to . . . [g]rowing crops" was specifically excluded
from coverage. Coverage extended from August 1, 2001 to August 1, 2002.

       After the switchgear failure caused Offutt to incur expenses, it submitted a
claim to Lexington for its costs in renting generators and purchasing fuel as well as
in permanently replacing the failed switchgear with a new one. Lexington paid Offutt
$628.262.35 to indemnify it for its costs in permanently replacing the switchgear, but
it declined to cover the expenses related to the generators and diesel fuel. Lexington
asserted that these expenses were not covered under the policy because they had been
incurred to save the crops growing at Threemile. Offutt then brought this case in the
District of North Dakota. Its complaint sought declaratory relief and alleged breach
of the insurance contract and bad faith denial of coverage. After discovery, both
parties moved for summary judgment.

       The district court, applying the law of North Dakota,2 concluded that the
contract’s expediting expense clause allowed for a temporary replacement for
damaged property and that the fuel and generator rental costs were covered. The
district court also concluded that the policy contemplated that covered property such
as the switchgear had value for the function it performed in addition to its value as a

      2
       Neither party challenges the district court’s choice of law.

                                          -3-
piece of property. The policy provision on expediting expenses therefore applied to
both the cost of temporarily replacing the switchgear’s function and the cost of
permanently replacing it. Because the rented generators and purchased fuel replaced
the switchgear’s function of powering the water pump, the expediting expense clause
covered the costs incurred in obtaining them. The district court decided that the
policy’s growing crops exclusion did not apply because it barred coverage for physical
loss or damage to crops, not for costs incurred to replace covered property in order to
save or protect crops. The court granted declaratory relief and summary judgment to
Offutt on the contract. It also granted summary judgment to Lexington on Offutt's
claim of bad faith on the theory that the question of coverage was reasonably
debatable. Offutt has not appealed that ruling, and the bad faith claim is not at issue
on this appeal.

       Offutt then moved for an award of attorney fees, citing North Dakota case law
which allows the insured to recover attorney fees in a declaratory judgment action
between the insurer and insured. Lexington opposed the motion, arguing that the
district court should not use its discretion to grant fees, pointing out that the insurance
policy did not provide for recovery of attorney fees and that Lexington’s good faith
weighed against a fee award. The district court concluded that the North Dakota
Supreme Court cases in which the insured was awarded attorney fees were
indistinguishable from the present case and that fees should be awarded. It further
determined that Offutt should not receive fees for time spent on its unsuccessful bad
faith claim. It therefore awarded fees in the amount of $26,093.25, representing the
time Offutt's attorneys had spent on the case other than on the bad faith claim.

       Lexington now appeals the grant of summary judgment and the award of
attorney fees. It argues that the district court erred in concluding that the policy
covered the generator and fuel costs which Offutt incurred. It claims the expediting
expense clause only covered temporary replacement of the damaged switchgear with
another. Further, the expenses are excluded from coverage because the policy does
not cover loss or damage to growing crops or liabilities incurred to third parties.

                                           -4-
Lexington also argues that the district court abused its discretion by awarding attorney
fees to Offutt since its denial of coverage had a reasonable basis. It contends in
addition that Offutt’s declaratory judgment action is only piggybacked on its breach
of contract claim which would not allow recovery of fees.

       Offutt responds that it does not seek recovery for damage to growing crops, but
rather for its expenses in replacing covered property. It contends that the plain
language of the growing crops exclusion and the expediting expense clause
demonstrate that the generator and fuel costs are not excluded but covered by the
policy, asserting that its motive to avoid crop loss and liability to third parties is
irrelevant. It also argues that the award of attorney fees was proper under North
Dakota law.

                                          II.

       We review a grant of summary judgment de novo, viewing the record in the
light most favorable to the nonmoving party; summary judgment is proper if there are
no genuine issues of material fact and the moving party is entitled to judgment as a
matter of law. Allianz Ins. Co. of Can. v. Sanftleben, 454 F.3d 853, 855 (8th Cir.
2006). We also review de novo a district court’s interpretation of an insurance
contract. Id.

       Lexington maintains that the district court erred in its grant of summary
judgment to Offutt. Its first argument is that the expenses Offutt incurred by renting
generators and purchasing fuel are not covered by the expediting expense clause. It
does not argue that the claimed expenses are unreasonable, but rather that they do not
qualify as expediting expenses at all. According to Lexington, the rented generators
and diesel fuel did not temporarily repair or replace the switchgear within the meaning
of the expediting expense clause. Lexington asserts that "replacement" is a term of
art limited to replacements of "like-kind equality." If Offutt had temporarily replaced
the damaged switchgear with a working one, the policy would have covered the

                                          -5-
expense. But rather than immediately replacing the switchgear, Lexington says,
Offutt rented generators and bought fuel. These expenses were unrelated to the
switchgear itself and are thus not covered by the policy. Lexington has already fully
indemnified Offutt for the replacement switchgear. To support its arguments,
Lexington relies on Detroit Edison Co. v. Protection Mutual Insurance Co., 134 F.3d
790 (6th Cir. 1998).

       Offutt responds that while the generators and fuel did not physically replace the
switchgear, they did replace its function and are therefore covered by the policy. It
also points out that the language of the policy in Detroit Edison was significantly
different from the policy here and that each case must turn on its own facts.

       In Detroit Edison, a power company’s electrical transformers and underground
cables failed. In order to prevent the power plant from shutting down, the company
temporarily installed spare transformers and cables while awaiting permanent repairs
or replacement of the failed machinery. The power company had a property insurance
policy whose expediting expense clause covered extra costs incurred in "temporary
repair of damage to property and the extra costs of expediting the permanent repair or
replacement of damaged property." 134 F.3d at 791. The insurance company covered
the permanent repairs, but declined to pay for the temporary installation of spare
machinery. The Sixth Circuit held that the policy did not cover the temporary
installations because they were temporary replacements rather than repairs. It rejected
the insured's argument that the damaged entity was the power plant and that the
installation of temporary machinery was a temporary repair to the plant. The damage
to specific transformers and cables at the power plant could not "properly be equated
with loss or damage to the . . . plant as a unified whole." Id. at 795. Lexington argues
that we should follow Detroit Edison to conclude that only repairs or replacements to
the switchgear itself are covered under Offutt's policy.

      Offutt's policy is different from the one held by the power plant in Detroit
Edison. The policy in Detroit Edison covered only "temporary repair," but the

                                          -6-
expediting expense clause in Offutt's policy covers "the reasonable extra cost of
temporary repair and/or replacement" of insured property. Lexington urges us to
consider this difference unimportant. It characterizes the case as holding that every
piece of insured property must be considered separately for the purpose of expediting
expenses. It draws an analogy between the switchgear here and the transformers and
cables in Detroit Edison, and between Offutt's water pump and the Detroit power
plant. It argues that a "replacement" can only be reimbursed under the expediting
expense clause if it replaces the switchgear, even if the generators and fuel allowed
the water pump to function again, for under Detroit Edison the switchgear must be
considered separately from the other parts of the water pump. Lexington misconstrues
its insured's position. Offutt asserts that the generators and fuel were a temporary
"replacement" for the function performed by the switchgear, not for the function of
the whole water pump. Detroit Edison is not pertinent since the court there was
dealing with a policy covering only temporary "repairs" and it never had reason to
construe policy coverage for "replacements."

       The question here is whether the term "replacement" in Offutt's policy means
an exact replacement, as Lexington argues, or a functional replacement as Offutt
argues and the district court concluded. Neither party has been able to direct us to a
definition of "replacement" in the insurance contract, and we therefore treat the term
as undefined and apply its plain, ordinary meaning. See, e.g., Martin v. Allianz Life
Ins. Co. of N. Am., 573 N.W.2d 823, 825 (N.D. 1998). If Lexington had intended
"replacement" to be a term of art distinct in meaning from ordinary usage, it should
have defined it as such within the four corners of the contract. See Oxy USA, Inc. v.
Hartford Ins. Group, 58 F.3d 380, 382 (8th Cir. 1995) (applying North Dakota law).

       A dictionary is "a good source to determine the plain, ordinary meaning" of a
word. Hanneman v. Cont'l W. Ins. Co., 575 N.W.2d 445, 451 (N.D. 1998). The
listing for "replacement" refers to "replace" which is defined as "to provide or procure
a substitute or equivalent in place of." 2 Oxford English Dictionary 2495 (compact
ed. 1971). The meaning of "replace" is thus broad enough to include Offutt’s

                                          -7-
substitution of the generators and fuel in place of the switchgear. Since replacement
means a substitution of, or an equivalent to, what preceded, it includes functional as
well as exact replacements. That definition is also consistent with everyday usage.
A person replaces another in a job, for example; even though there may be significant
differences between the two people, the replacement will perform the same basic
function. See, e.g., Blair's Replacement Chosen, Grand Rapids Press, June 25, 2007,
at A4; see also Martin, 573 N.W.2d at 826 (ordinary meaning is definition which one
not trained in law would attach to term). Although the generators and fuel were not
identical to the switchgear, they substituted for the switchgear by providing the
electrical power it would normally provide.

       This reading of "replacement" is consistent with the insurance contract
examined as a whole and with an eye to its purpose, as it must be under North Dakota
law. See Bridston ex rel. Bridston v. Dover Corp., 352 N.W.2d 194, 196 (N.D. 1984);
see also N.D. Cent. Code § 9-07-06 (in construing contracts, "[e]ach clause is to help
interpret the others"). The policy here insured against "loss resulting from necessary
interruption of business conducted by the insured, and caused by the loss, damage or
destruction" of covered property. It also insured Offutt against "extra expense
incurred resulting from loss, damage, or destruction" to covered property. As the
district court noted, the presence of these two provisions suggests that the policy was
meant to insure property in order to protect Offutt’s business, namely providing good
conditions for tenants to grow crops and to that end ensuring an adequate water
supply. Because the generators and fuel temporarily replaced the instrumental value
of the switchgear, the cost of the generators and fuel is covered under the policy.

        Lexington next argues that Offutt’s motivation in renting the generators and
buying fuel brought the expenses into the policy exclusion for growing crops because
Offutt incurred them in order to protect growing crops and to avoid exposure to
liability which might arise from damaged or destroyed crops. In Offutt's view,
however, the language of the exclusion does not reach the expenses it incurred in
renting generators and buying fuel. Lexington bears the burden of establishing that

                                         -8-
an exclusion applies. See Kasper v. Provident Life Ins. Co., 285 N.W.2d 548, 554
(N.D. 1979); Lovas v. St. Paul Ins. Cos., 240 N.W.2d 53, 62 (N.D. 1976).

       The policy excludes "loss or damage to . . . growing crops," but Offutt is not
claiming loss or damage to growing crops. The record does not indicate that any
crops were ever lost or damaged. Rather, Offutt seeks to be indemnified for expenses
incurred in replacing covered property in order to prevent loss or damage to growing
crops. We agree with Offutt that the plain language of the exclusion does not apply
to the expenses claimed in this case. Lexington has cited no authority to show that an
insured’s purpose or intent is relevant to the coverage analysis we must perform.

       We also note that Lexington's argument would exclude from coverage the
expenses for the purchase and permanent installation of another switchgear, but it has
conceded these expenses are covered. Offutt's business as owner of Threemile is to
provide conditions for its tenants to be able to grow their crops. Every piece of
covered property on Threemile must directly or indirectly further that business, and
so every repair or replacement to covered property is performed in order to protect and
cultivate the crops grown on the land. When Offutt permanently replaced the
switchgear, for example, it did so in order to provide irrigation for the crops. If an
intent to protect growing crops excluded otherwise covered expenses, then the
switchgear's permanent replacement, along with almost any replacement or repair to
covered property on Threemile, would not be covered under the policy. Since
Lexington promptly reimbursed Offutt for the permanent replacement of the
switchgear, it is clear that neither party believes that intent to protect excluded
property can exclude otherwise covered expenses from coverage under this policy.

       Finally, Lexington asserts that the insurance policy in this case is a first party
property insurance policy rather than a third party liability insurance policy. The
policy was designed to protect loss or damage to property owned by Offutt rather than
to reimburse Offutt against liability to a third party. According to Lexington, Offutt's
expenses are not covered because they were incurred in order to avoid liability to third

                                          -9-
party tenants for interrupted irrigation. In substance, this argument recapitulates
Lexington's other argument that an intent or purpose to protect growing crops can
move otherwise covered expenses outside the bounds of coverage. Lexington has
pointed to no authority which convinces us that an insured's intent or purpose should
inform our coverage analysis. Moreover, unlike its argument about the growing crops
exclusion, Lexington's argument relating to third party liability does not appear to rely
on a concrete exclusion in the policy.

       We conclude that the district court did not err in concluding that the expenses
for renting generators and buying fuel were covered under Offutt's policy and in
granting it summary judgment.

                                          III.

       Lexington contends that the district court abused its discretion by awarding
attorney fees to Offutt. In its view the cases in which the North Dakota Supreme
Court has awarded attorney fees to insureds are distinguishable and its lack of bad
faith made the district court’s award inappropriate. Offutt responds that the law of
North Dakota clearly favors an award of attorney fees in this case.

       The North Dakota Supreme Court has ruled that attorney fees may be awarded
against an insurance company in a declaratory judgment action when coverage exists
under the insured's policy. That conclusion is based on a statute enacted by the state
legislature providing that "[f]urther relief based on a declaratory judgment or decree
may be granted whenever necessary or proper." N.D. Cent. Code § 32-23-08. The
supreme court has reasoned that fees are among the types of further relief that the
legislature had in mind to be available in declaratory judgment actions. See, e.g.,
State Farm & Cas. Co. v. Sigman, 508 N.W.2d 323 (N.D. 1993).

     Lexington argues that Sigman, as well as another case upon which Offutt relies,
Western National Mutual Insurance Co. v. University of North Dakota, 643 N.W.2d

                                          -10-
4 (N.D. 2002), are distinguishable from the present case. It points out that the
insurance policy in Sigman explicitly provided for an award of attorney fees to the
insured which Offutt's policy does not. Sigman stated in addition, however, that the
state declaratory judgment statute provided "an independent ground" for the award of
fees, 508 N.W.2d at 326, making a contractual provision unnecessary to recover them.
Lexington also argues that Sigman and Western National were both declaratory
judgment actions brought by an insurance company. Neither case based its award of
fees on which party initiated the action, however. Both awards were based on the
principle that an insured who must engage in litigation to obtain coverage is entitled
to regain the cost of ensuring the full benefit of coverage for which he contracted. See
Western National, 643 N.W.2d at 19; Sigman, 508 N.W.2d at 327. That principle is
equally applicable when the insured initiates the litigation, for both plaintiffs and
defendants incur attorney fees.

       Lexington also argues that Offutt's declaratory judgment action is nothing more
than a mirror of its breach of contract count, and fees should not be awarded because
North Dakota does not award them in breach of contract actions. Offutt responds that
the North Dakota Supreme Court has already dealt with such circumstances. In
Western National, an insurer brought an action against an insured seeking resolution
of a coverage dispute arising from property damage. The trial court held there was a
genuine issue of fact on a dispositive causation question and held a bifurcated trial.
In the first phase the jury decided causation in favor of the insured, and in the second
it awarded the insured damages of over $3.3 million in compensation for benefits due
under the policy. The trial court subsequently awarded costs and attorney fees to the
insured, despite the fact that the insurer had initiated the action, and the supreme court
affirmed. The opinion in Western National states at one point that the form of action
there was one for declaratory judgment, see 643 N.W.2d at 8, but later indicated that
the insured was seeking "damages for a breach of contract." Id. at 18. Indeed, it
affirmed the trial court's award of prejudgment interest under a statute which provides
that a litigant may recover prejudgment interest if it is also entitled to "damages
certain or capable of being made certain." N.D. Cent. Code § 32-03-04 (emphasis

                                          -11-
added). The insured in that case thus recovered attorney fees in a case including a
breach of contract claim.3

         Finally, Lexington argues that the North Dakota statute's language is couched
in discretionary terms and thus an award of attorney fees is not mandatory. Because
Lexington lacked bad faith in its denial of Offutt's coverage, it says it would be
inappropriate to award Offutt fees. The North Dakota Supreme Court has never
suggested that the absence of bad faith is relevant to an award of fees to the insured.
In fact, in Western National the jury found that the insurer had not acted in bad faith
by denying coverage, 643 N.W.2d at 8, a finding that was not challenged on appeal,
and fees were nonetheless awarded. More fundamentally, the supreme court has based
its decisions in this area on the principle that insureds should be made whole, not on
a desire to deter bad acts by insurers.4 As the court has stated, "When the insured gets
. . . policy protection only by court order after litigating coverage, it is both 'necessary'
and 'proper' to award attorney fees and costs to give the insured the full benefit of his
insurance contract." Sigman, 508 N.W.2d at 326-27. This principle applies even if
an insurer denies coverage in good faith, since even a good faith denial that leads to
litigation forces the insured to spend money litigating the issue of coverage.
Moreover, the district court was careful not to award Offutt fees for time spent

       3
        It is conceivable that Western National may have been only a declaratory
judgment action with damages awarded as supplemental relief under N.D. Cent. Code
§ 32-23-08. See Principal Mut. Life Ins. Co. v. Straus, 863 P.2d 447, 451 (N.M.
1993) (damages available as supplemental relief under Uniform Declaratory
Judgments Act). Nevertheless, by including the breach of contract claim Offutt did
not obtain any relief that would have been unavailable in a pure declaratory judgment
action, and Lexington admits that the contract claim added no legal or factual question
to the case.
       4
       The Connecticut Supreme Court recently differentiated states which award
attorney fees as a rule in coverage actions from those which award fees only when
there was bad faith; it included North Dakota in the first group. See ACMAT Corp.
v. Greater N.Y. Mut. Ins. Co., 923 A.2d 697, 703 & n.9, 705 & n.11 (Conn. 2007).

                                            -12-
litigating the unsuccessful bad faith claim. We conclude that the district court did not
abuse its discretion in its fee award.

                                          IV.

      For these reasons we affirm the judgment of the district court.

                       _______________________________

                                         -13-