Court Opinion

ID: 4362073
Source: CourtListenerOpinion
Date Created: 2019-01-25 17:00:27.699706+00
Date Added: 2024-06-11T11:49:18.297262
License: Public Domain

FILED
                                                                     United States Court of Appeals
                                      PUBLISH                                Tenth Circuit

                      UNITED STATES COURT OF APPEALS                       January 25, 2019

                                                                          Elisabeth A. Shumaker
                            FOR THE TENTH CIRCUIT                             Clerk of Court
                        _________________________________

MTI, INC., formerly Midwest Towers,
Inc.,

      Plaintiff - Appellant

v.                                                          No. 17-6206

EMPLOYERS INSURANCE COMPANY
OF WAUSAU,

      Defendant - Appellee.
                      _________________________________

                     Appeal from the United States District Court
                        for the Western District of Oklahoma
                             (D.C. No. 5:15-CV-00716-R)
                       _________________________________

F. Thomas Cordell, Frailey, Chaffin, Cordell, Perryman & Sterkel, LLP, Chickasha,
Oklahoma, (Mort G. Welch, Welch & Smith, P.C., Oklahoma City, Oklahoma, with him
on the briefs), for Plaintiff-Appellant.

Jeffrey Gerish, Plunkett Cooney, P.C., Bloomfield Hills, Michigan, (Joseph R. Farris and
Emily D. Pearson, Franden, Farris, Quillin, Goodnight & Roberts, Tulsa, Oklahoma, with
him on the briefs), for Defendant-Appellee.

                        _________________________________

Before LUCERO, McKAY, and MATHESON, Circuit Judges.
                  _________________________________

LUCERO, Circuit Judge.
                    _________________________________
      In this appeal, we consider two exclusions from a commercial general liability

policy that bar coverage for damage to “that particular part” of the property on which

an insured is performing operations, or which must be repaired or replaced due to the

insured’s incorrect work. Under Oklahoma law, our analysis proceeds in two steps.

First, we must determine as a matter of law whether the exclusions are ambiguous.

Kerr-McGee Corp. v. Admiral Ins. Co., 905 P.2d 760, 762 (Okla. 1995). We

conclude the phrase “that particular part” is susceptible to more than one reasonable

construction: it could refer to the distinct component upon which an insured works

or to all parts ultimately impacted by that work.

      Because the language at issue is ambiguous we proceed to the second step, in

which “the contract will be interpreted consistent with the mutual intent of the

parties, with the ambiguity resolved most favorably to the insured and against the

insurance carrier.” Id. We thus adopt the narrower interpretation of the phrase “that

particular part,” under which the exclusion extends only to the distinct components

upon which work was performed. Exercising jurisdiction under 28 U.S.C. § 1291,

we reverse.

                                           I

      Western Farmers Electrical Cooperative (“WFEC”) owns cooling towers in

Oklahoma, which were serviced by MTI, Inc. (“MTI”), the appellant in this case.

Employers Insurance Company of Wausau (“Wausau”), the appellee, provided a

commercial general liability policy (the “Policy”) to MTI at all times material to this

appeal.

                                           2
      A 2011 inspection by MTI revealed that the anchor bolts in Cooling Tower 1

were corroded. MTI and WFEC agreed to a new repair contract, which included the

following work:

      Unit 1 Tower Anchors
      Throughout the entire basin, install new 304 SS anchor castings.
      Included will be 304SS anchor bolts and Hilti anchor adhesive.

      Unit 1 Louvers
      On four (4) cells, remove existing louvers and install a (3) row louver
      system. New louvers will consist of 12oz. 4.2” corrugated FRP panels
      supported on 2”x4” Douglas Fir supports. Included will be new
      polypropylene support arms. Also included will be all necessary 304
      stainless steel hardware.

Repairs on a separate cooling tower were also listed in the Tower 1 contract. The

cooling towers at issue are mostly wood structures, approximately 50 feet wide, 150

feet long, and 70 feet tall. They are set in sump pits approximately 12 feet deep. The

towers are stabilized with lateral wooden bracing beams, which are connected to the

concrete foundation of the sump pit with anchor bolts.

      On May 23, 2011, MTI employees removed all 64 corroded anchor bolts in

Tower 1. Because the adhesive applicator had not yet arrived, MTI did not

immediately install new anchor bolts. Further, MTI did not provide any temporary

support to ensure the stability of the tower. On the night of May 24, extremely high

winds struck the tower, causing it to lean and several structural components to break.

Due to the extent of the structural damage, removal and replacement of the tower was

determined to be the only viable option. Although at least some internal operational

                                          3
equipment was not damaged, this equipment was deemed too dangerous to access and

recover.

      WFEC demanded MTI pay the cost of removing and replacing the entire

tower, which totaled over $1.4 million. MTI filed a claim for coverage with its

insurer, Wausau, under the Policy. After Wausau declined to provide coverage, MTI

directly negotiated a settlement of $350,000 with WFEC. The balance of the tower

replacement cost was borne by WFEC’s insurer. MTI then sought recoupment of its

settlement amount from Wausau.

      The parties agree that the Policy was active at the time of the incident.

Wausau denied coverage under two exclusions. Those provisions bar coverage for:

      j. Damage To Property

      “Property damage” to:
      ....

      (5) That particular part of real property on which you or any contractors
      or subcontractors working directly or indirectly on your behalf are
      performing operations, if the “property damage” arises out of those
      operations; or

      (6) That particular part of any property that must be restored, repaired or
      replaced because “your work” was incorrectly performed on it.

      MTI eventually filed suit against Wausau in Oklahoma state court for breach

of contract. Wausau removed the case to federal court. On Wausau’s motion for

summary judgment, the district court held that the events described fell within the

scope of both exclusion j(5) and j(6), and entered judgment in favor of Wausau. MTI

timely appealed.

                                           4
                                           II

      We review a district court’s grant of summary judgment de novo. Greystone

Constr., Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272, 1277 (10th Cir. 2011),

as amended on reh’g in part (Dec. 23, 2011). Summary judgment is appropriate only

if there is no genuine issue of material fact and the moving party is entitled to

judgment as a matter of law. Id. We also review a district court’s interpretation of

state contract law de novo. City of Wichita v. Sw. Bell Tel. Co., 24 F.3d 1282, 1286

(10th Cir. 1994).

      Because this is a diversity action, we “apply the substantive law of the forum

state.” Pepsi-Cola Bottling Co. of Pittsburg, Inc. v. PepsiCo, Inc., 431 F.3d 1241,

1255 (10th Cir. 2005). The parties agree that MTI’s claim is governed by Oklahoma

contract law, and that there are no binding decisions on this precise issue from the

state courts. We accordingly seek to predict how the Oklahoma Supreme Court

would rule. See Carl v. City of Overland Park, 65 F.3d 866, 872 (10th Cir. 1995).

                                           A

      Under Oklahoma law, “[w]hen addressing a dispute concerning the language

of an insurance policy our first step is to determine as a matter of law whether the

policy language at issue is ambiguous.” Cranfill v. Aetna Life Ins. Co., 49 P.3d 703,

706 (Okla. 2002). A provision is ambiguous if it is facially susceptible to two

interpretations, considered from the standpoint of a reasonably prudent layperson. Id.

If the language is not ambiguous, “we accept the language in its plain, ordinary and

popular sense.” Id.

                                            5
         Our initial inquiry is thus whether exclusions j(5) and j(6) are ambiguous.

Exclusion j(5) excludes coverage for property damage to “[t]hat particular part . . . on

which you . . . are performing operations, if the ‘property damage’ arises out of those

operations.” Similarly, exclusion j(6) excludes property damage to “[t]hat particular

part of any property that must be restored, repaired or replaced because ‘your work’

was incorrectly performed on it.” The key phrase for this appeal is “that particular

part.”

         Although the Oklahoma Supreme Court has not explicitly addressed this

language, these specific exclusions have received inconsistent treatment from a

number of other state and federal courts. See, e.g., Roaring Lion, LLC v. Nautilus

Ins. Co., No. CV 11-2-M-DWM-JCL, 2011 WL 3956132, at *5-7 (D. Mont. July 15,

2011) (unpublished) (noting the varied interpretations of these exclusions). The fact

that jurisdictions have differed in their evaluation of terms does not, however,

establish that the language in question is necessarily ambiguous. BP Am., Inc. v.

State Auto Prop. & Cas. Ins. Co., 148 P.3d 832, 836 (Okla. 2005), as corrected (Oct.

30, 2006).

         As several courts have explained, “that particular part” is narrowing language.

See Fortney & Weygandt, Inc. v. Am. Mfrs. Mut. Ins. Co., 595 F.3d 308, 311 (6th

Cir. 2010) (describing the words “that particular part” as “trebly restrictive, straining

to the point of awkwardness to make clear that the exclusion applies only to building

parts on which defective work was performed, and not to the building generally”);

Mid-Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207, 215 (5th Cir. 2009) (noting

                                             6
“[t]he narrowing ‘that particular part’ language”); Columbia Mut. Ins. Co. v. Schauf,

967 S.W.2d 74, 80 (Mo. 1998) (“By using the words particular part, the provision

evidences the intent to narrow the scope of the exclusion as much as possible.”

(emphasis omitted)); ACUITY v. Burd & Smith Constr., Inc., 721 N.W.2d 33, 41

(N.D. 2006) (pointing to “the limiting language ‘particular part of real property’”);

Glob. Modular, Inc. v. Kadena Pac., Inc., 222 Cal. Rptr. 3d 819, 829 (Cal. Ct. App.

2017) (holding that “the phrase is intended to be a narrowing element, one that limits

the provision’s application to a distinct part of a construction project”). These courts

have thus determined the scope of coverage by looking to the “distinct component

parts” on which an insured conducts operations. Mid-Continent, 557 F.3d at 217.

      Several of these cases are instructive. In Mid-Continent, the Fifth Circuit held

that exclusion j(6) did not bar coverage for damage to interior work caused by the

failure to properly water seal exterior finishes and retaining walls because “[t]he

exterior finishes and retaining walls were distinct component parts that were each the

subject of separate construction processes and are severable from the” interior

components. Id. Similarly, in Fortney & Weygandt, the Sixth Circuit concluded that

exclusion j(6) did not bar coverage for a restaurant that had to be completely rebuilt

due to faulty foundation work by the insured. 595 F.3d at 309-11. In ACUITY, the

North Dakota Supreme Court held that a contractor hired to do work on a roof could

recover for damage to the interior of an apartment building caused by defective work

on the roof. 721 N.W.2d at 42. And in Shauf, the Missouri Supreme Court

concluded that only kitchen cabinets were excluded when a machine being used on

                                           7
those cabinets caused a fire that resulted in damage throughout a home. 967 S.W.2d

at 76, 81.

       Other courts have adopted a broader reading. For example, in William

Crawford, Inc. v. Travelers Ins. Co., 838 F. Supp. 157 (S.D.N.Y. 1993), the court

rejected the argument that “(j)(5) only excludes coverage for the damage to that

specific part of the apartment on which [the insured] was actually doing work when

the accident occurred,” instead holding that damage to the entire apartment was

excluded. Id. at 158. Similarly, in Jet Line Services, Inc. v. American Employers

Ins. Co., 537 N.E.2d 107 (Mass. 1989), the court remarked that “whether at the time

of the property damage an employee of the insured is or is not in one area or another

of the property on which the insured has agreed to perform operations is not

significant to the coverage question.” Id. at 111.

       Under Oklahoma law, it is the responsibility of the insurer desiring to limit

liability to employ clear language in the contract. Haworth v. Jantzen, 172 P.3d 193,

197 (Okla. 2006). Wausau has failed to do so in this case. The phrase “that

particular part” could be read to refer solely to the direct object on which the insured

was operating. Alternatively, it could apply to those parts of the project directly

impacted by the insured party’s work. We agree with those courts that have held the

former interpretation is a reasonable one, although we acknowledge that the latter is

also reasonable. Because both readings are permissible, the exclusions are facially

ambiguous. Cranfill, 49 P.3d at 706.

                                           8
                                           B

       “If the language is ambiguous, we apply well-settled rules of construction to

determine the meaning of the ambiguous language.” Id. Specifically, it is our

mandate to “construe the policy to give a reasonable effect to all of its provisions,

and we liberally construe words of inclusion in favor of the insured and strictly

construe words of exclusion against the insurer.” Id. (citation omitted); see also

Dodson v. St. Paul Ins. Co., 812 P.2d 372, 377 (Okla. 1991) (“In case of doubt,

exclusions exempting certain specified risks are construed strictly against the

insurer.”).

       Because the exclusions are ambiguous, they must be strictly and narrowly

construed in a manner favorable to the insured party. Haworth, 172 P.3d at 197. “In

construing an ambiguity or uncertainty against the insurer and in favor of the insured,

Oklahoma looks to the objectively reasonable expectations of the insured to fashion a

remedy.” Id. Further, “an interpretation which makes a contract fair and reasonable

is selected over that which yields a harsh or unreasonable result.” Max True

Plastering Co. v. U.S. Fid. & Guar. Co., 912 P.2d 861, 865 (Okla. 1996). In this

case, interpreting “that particular part” to refer to the distinct components upon which

work is performed best comports with these rules of interpretation.

       Even under this definition, determining the “particular part” on which an

insured works “will vary with the facts and circumstances of each particular case.”

Vinsant Elec. Contractors v. Aetna Cas. & Sur. Co., 530 S.W.2d 76, 77 (Tenn. 1975).

In some instances, a larger unit will properly be considered the particular part. See,

                                           9
e.g., Jet Line Servs., 537 N.E.2d at 111 (concluding exclusion j(5) barred coverage

for entire fuel tank rather than only the bottom portion of the tank because insured

“was retained to clean the entire tank, and it was the entire tank on which operations

were being performed within the meaning of the policy language”). In some cases,

an entire structure may qualify. For example, several cases have held that the

exclusions so apply when an insured was hired to raise the entire structure. See, e.g.,

Lafayette Ins. Co. v. Peerboom, 813 F. Supp. 2d 823, 834 (S.D. Miss. 2011); Grinnell

Mut. Reinsurance Co. v. Lynne, 686 N.W.2d 118, 125 (N.D. 2004).

      As applied to the facts of this case, we conclude the “particular part” on which

MTI was “performing operations” and upon which work “was incorrectly performed”

should reasonably be understood as the anchor bolts. Those bolts constitute “distinct

component parts” of the tower, analogous to items like “interior drywall, stud

framing, electrical wiring, and wood flooring.” Mid-Continent, 557 F.3d at 217.

MTI performed work incorrectly by removing them without promptly replacing them

or bracing the structure. We further conclude it is objectively reasonable that MTI

would expect coverage for the cost of replacing the entire tower, including all of its

operational elements, given the ambiguous language of exclusions j(5) and j(6).

                                           C

      Contrary to Wausau’s assertion, interpreting the Policy in this manner does not

convert it into a performance bond. See generally Black & Veatch Corp. v. Aspen

Ins. (Uk) Ltd, 882 F.3d 952, 969 (10th Cir. 2018) (“Both insurance policies and

performance bonds are used to spread risk, but they differ in fundamental ways. An

                                          10
insurance policy spreads the contractor’s risk. A performance bond guarantees

completion of the contract upon the contractor’s default.”). In Dodson, the

Oklahoma Supreme Court, interpreting a different policy provision, noted that it

would be inappropriate to “effectively convert [a] policy into a performance bond or

guarantee of contractual performance” by reading a policy to cover “the repair and

replacement of the insured’s own faulty workmanship.” 812 P.2d at 378 (quotation

omitted). But that concern is not at issue here. MTI is not requesting that Wausau

cover the cost of replacing the anchor bolts, which would be the heart of any faulty

workmanship claim. The Dodson decision recognized this distinction, stating that a

policy would provide coverage if the insured’s faulty workmanship “results in

damage to property other than the insured’s work or product.” Id. (quotation

omitted). The monetary values at issue underline this point. MTI agreed to complete

certain work for $46,273. A performance bond for such a project would not likely

result in liability of over $1.4 million.

       Similarly, we are not persuaded by Wausau’s argument that the Policy

contains an implied “business risk exclusion” that would otherwise override the

express language. Absent a violation of public policy, businesses are free to contract

to their preferred degree of risk embodied by the precise terms by which they choose

to articulate the insurance relationship. See generally Siloam Springs Hotel, LLC v.

Century Sur. Co., 392 P.3d 262, 268 (Okla. 2017). Oklahoma courts do not, as a

matter of course, read broad business risk exclusions into contracts, and this court

will not do so when it would override the express language of the contract. See Mid-

                                            11
Continent, 557 F.3d at 216 (dismissing similar argument because “whether there is

coverage in a particular case depends on the language contained in the policy at

issue”).

       Finally, we reject Wausau’s contention that this court has previously decided

the issue presented. Our court has considered these exclusions, albeit under Kansas

law. See Advantage Homebuilding, LLC v. Maryland Cas. Co., 470 F.3d 1003 (10th

Cir. 2006). In that case, we held that exclusions j(5) and j(6) apply when property

damage occurs while the insured’s work is ongoing regardless of when the damage is

discovered. Id. at 1010-12. Wausau focuses on two sentences of that opinion. We

stated that exclusion j(5) applies “whenever property damage arises out of the work

of the insured, its contractors, or its subcontractors while performing operations.” Id.

at 1011 (quotation and italics omitted). We also stated that exclusion j(6) “was

intended to exclude ‘property damage’ that directly or consequentially occurs from

the faulty workmanship of the insured.” Id. at 1012.

       But Advantage did not address the meaning of the phrase “that particular part.”

It had no occasion to do so because the insured there contracted to build entire

homes. Id. at 1009. Accordingly, any statement made in Advantage as to that

question would constitute dicta. And as we have previously noted, dicta, “being

peripheral, may not have received the full and careful consideration of the court that

uttered it.” OXY USA, Inc. v. Babbitt, 230 F.3d 1178, 1184 (10th Cir. 2000)

(quotation omitted). Further, Wausau’s argument based on Advantage plainly goes

too far. If, for example, portions of Tower 1 broke free during the windstorm and

                                          12
destroyed nearby homes, that damage would fit within the description offered in

Advantage. 470 F.3d at 1011, 1012. But there is no argument to be made that nearby

homes would qualify as “that particular part” of the property on which MTI was

working.

                                        III

      For the forgoing reasons, we REVERSE the district court’s grant of summary

judgment in favor of Wausau and remand for further proceedings construing the

ambiguous exclusions in favor of MTI.

                                         13