Court Opinion

ID: 3058065
Source: CourtListenerOpinion
Date Created: 2015-10-14 00:21:54.024021+00
Date Added: 2024-06-11T11:49:31.120838
License: Public Domain

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                        IN THE UNITED STATES COURT OF APPEALS

                               FOR THE ELEVENTH CIRCUIT           FILED
                                ________________________ U.S. COURT OF APPEALS
                                                                 ELEVENTH CIRCUIT
                                       No. 10-13012                APRIL 16, 2012
                                 ________________________            JOHN LEY
                                                                      CLERK
                          D.C. Docket No. 2:07-cv-01041-MHT-CSC

AUTO-OWNERS INSURANCE COMPANY,

lllllllllllllllllllll                                               Plaintiff - Appellee,

                                           versus

L. THOMAS DEVELOPMENT, INC., et al.,

lllllllllllllllllll                                                         Defendants,

BRENDA MCQUEEN,
ALVIN MCQUEEN,

lllllllllllllllllllll                                          Defendants - Appellants.

                                ________________________

                          Appeal from the United States District Court
                              for the Middle District of Alabama
                                ________________________

                                       (April 16, 2012)
Before EDMONDSON and PRYOR, Circuit Judges, and HOPKINS,* District Judge.

PER CURIAM:

       The issue in this appeal is whether Auto-Owners Insurance Company had no

duty, under the terms of a general commercial liability insurance policy, to

indemnify L. Thomas Development, Inc., for an arbitration award against

Development and its owner, Lowell Thomas, based on the negligent construction

of a home for Alvin and Brenda McQueen. The district court entered a judgment

in favor of Auto-Owners on the ground that a work-product exclusion in the policy

relieved Auto-Owners of its duty to indemnify Development for the entire award.

       The district court erred in two ways. First, the district court did not consider

the applicability of an exception to the work-product exclusion for work

performed by subcontractors. Second, the district court applied the work-product

exclusion, which concerns only “property damage,” to the entire award, which is

for both “property damage” and “bodily injury.” We vacate the judgment in favor

of Auto-Owners and remand for further proceedings.

       *
      Honorable Virginia E. Hopkins, United States District Judge for the Northern District of
Alabama, sitting by designation.

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                                I. BACKGROUND

      In 2004, Alvin and Brenda McQueen hired L. Thomas Development, Inc., to

construct a home in Montgomery County, Alabama. Development has one

employee, Lowell Thomas, who testified that Development subcontracted “one

hundred percent of [its] work.” The McQueens paid Thomas $440,000 for the

home at a closing in June 2004.

      Development maintained a general commercial liability insurance policy

with Auto-Owners Insurance Company with a term that began on June 10, 2003,

and ended on June 10, 2004. Subject to several exclusions, the policy provided

coverage for “those sums that the insured becomes legally obligated to pay as

damages because of ‘bodily injury’ or ‘property damage,’” which must be “caused

by an ‘occurrence’ that takes place in the ‘coverage territory’ . . . during the policy

period.” The policy defined “bodily injury” as “bodily injury, sickness or disease

sustained by a person, including death resulting from any of these at any one

time.” The policy defined “property damage” as “[p]hysical injury to tangible

property, including all resulting loss of use of that property” and “[l]oss of use of

tangible property that is not physically injured.” The policy defined an

“occurrence” as “an accident, including continuous or repeated exposure to

substantially the same general harmful conditions.”

                                           3
      The policy also provided a work-product exclusion:

      This insurance does not apply to:
      ....
      l. “Property damage” to “[the insured’s] work” arising out of it or any
      part of it and including in the “products-completed operations hazard”.
      This exclusion does not apply if the damaged work or the work out of
      which the damage arises was performed on [the insured’s] behalf by a
      subcontractor.

      The policy defined “[the insured’s] work” as “[w]ork or operations

performed by [the insured] or on [the insured’s] behalf[] and . . . [m]aterials, parts

or equipment furnished in connection with such work or operations,” as well as

“[w]arranties or representations made at any time with respect to the fitness,

quality, durability, performance or use of ‘[the insured’s] work.’” The policy also

stated that the “products-completed operations hazard” encompasses “all . . .

‘property damage’ occurring away from premises [the insured] own[s] or rent[s]

and arising out of . . . ‘[the insured’s] work’ except: (1) [p]roducts that are still in

[the insured’s] physical possession; or (2) [w]ork that has not yet been completed

or abandoned.”

      Development began construction of the McQueens’ home before it received

a soil report, and the type of fill material it used for the foundation was unsuitable.

Fluctuations in moisture underneath the home caused the foundation to move,

which caused “extensive cracking of the interior walls, cracking of the exterior

                                            4
brick, warped structural beams, and malfunctioning of the septic system,”

      The McQueens filed a complaint against Thomas, Development, and other

parties in state court. The complaint asserted claims for fraudulent inducement,

fraudulent suppression, conspiracy to commit fraud, breach of contract, breach of

warranty, and rescission. The McQueens later amended their complaint to add a

claim for negligent construction. Auto-Owners provided counsel for Development

in the state action under a reservation of rights, and intervened in July 2005 to

determine the extent of its duty to indemnify Development under the policy. The

state court dismissed the action in favor of arbitration.

      Auto-Owners filed a declaratory judgment action against Development,

Thomas, and the McQueens in the district court. The McQueens moved to stay the

federal action pending the outcome of a mediation in the state court arbitration,

and the district court granted that motion. The McQueens reached a mediated

settlement with several of the defendants in the state court action, but not

Development or Thomas.

      An arbitrator entered an award in favor of the McQueens and against

Development and Thomas, jointly and severally, in the amount of $600,000.

Auto-Owners was not a party to the arbitration. The arbitrator determined that

“the [McQueens] presented evidence in support of their claims for negligent

                                           5
construction of their home and personal injury.” The arbitrator concluded that

Development and Thomas had negligently constructed the McQueens’ home and

caused the McQueens damages in two ways: (1) the McQueens were left with a

valueless, unlivable home; and (2) because the McQueens were within a “zone of

danger” while they inhabited the home and experienced unhappiness, fear, and

embarrassment, they had suffered mental anguish. Neither Development nor

Thomas appealed the arbitration award, and the state court entered the arbitration

award as a final judgment.

      The McQueens filed the arbitration award with the district court. After a

status conference in which the parties agreed to final submissions without oral

argument or trial, the district court ordered the parties to brief the merits of the

controversy. Auto-Owners argued that neither Thomas nor the McQueens could

establish “that any of the damages awarded [fell] within the definitions of

‘property damage’ or ‘bodily injury’” in the policy, that there had been no covered

“occurrence” to support coverage under the policy, and that if there had been a

covered “occurrence,” the work-product exclusion in the policy relieved Auto-

Owners of any duty to indemnify Development for the award. Auto-Owners also

explained that the only plausible apportionment of the award was $440,000 for

“property damage” and $160,000 for “bodily injury.” The McQueens argued that

                                           6
“[t]he entire [a]ward [was] covered under the [p]olicy,” because the arbitrator

“awarded damages for . . . property damage and personal injury, i.e.[,] the exact

things covered by the [p]olicy”. The McQueens also argued that the negligent

construction constituted a covered “occurrence,” and that the work-product

exclusion did not apply because “all of the work on [the McQueens’] home was

performed by subcontractors”.

      The district court determined that Auto-Owners did not have a duty to

indemnify Development for any portion of the arbitration award. The district

court did not decide whether there had been a covered “occurrence,” but instead

based its decision on the work-product exclusion without addressing the exception

to that exclusion for work performed by subcontractors. The district court entered

a final judgment in favor of Auto-Owners.

                         II. STANDARD OF REVIEW

      We review a declaratory judgment de novo where, as here, the district court

adjudicated an issue of law based on its interpretation of an insurance policy. See

Royal Ins. Co. of Am. v. Whitaker Contracting Corp., 242 F.3d 1035, 1040 (11th

Cir. 2001) (“‘The interpretation of an insurance contract is a question of law

subject to de novo review.’”) (quoting Galindo v. ARI Mut. Ins. Co., 203 F.3d

771, 774 (11th Cir. 2000)).

                                         7
                                III. DISCUSSION

      The district court erred in two ways when it granted judgment in favor of

Auto-Owners based on the work-product exclusion. First, the district court did not

address the applicability of the exception to the work-product exclusion for work

performed by subcontractors. Second, the district court did not consider whether

and to what extent Auto-Owners was obligated to indemnify Development for the

portion of the arbitration award that compensated the McQueens for “bodily

injury.” We discuss each of these errors in turn.

      The district court failed to address an exception to the work-product

exclusion that applies when “the damaged work or the work out of which the

damage [arose] was performed on [the insured’s] behalf by a subcontractor.” The

McQueens argued that this exception applies, and Thomas testified that

Development “subcontract[ed] one[-]hundred percent of [its] work.”

      The district court also applied the work-product exclusion, which concerns

coverage for “property damage,” even though the arbitration award compensated

the McQueens for both “property damage” and “bodily injury.” The following

findings by the arbitrator address both the McQueens’ “property damage” and

“bodily injury”:

                                         8
      [O]verwhelming evidence of the problems with the [McQueens’] home
      was presented[,] . . . includ[ing] extensive cracking of the interior walls,
      cracking of the exterior brick, inoperable doors, walls that float from the
      foundation, sludge flowing into bathtubs because of problems with the
      septic system, and warped structural beams in the attic. Moreover, the
      [McQueens] both testified that they suffered because of the problems
      with their home. Mrs. McQueen testified that she feared the home
      would collapse, that she was so embarrassed by the home that she did
      not fill [sic] comfortable having family stay there, and that she, for the
      most part, now resides and works in Georgia because of her unhappiness
      and fear related to her home.

      The arbitrator also found that “[n]ot only was the [McQueens’] home . . .

rendered virtually uninhabitable, but more importantly, because they were residing

in the home, the [McQueens] were within a zone of danger,” which entitled them

to recover damages for mental anguish. Auto-Owners conceded in the district

court that mental anguish constitutes “bodily injury” under Alabama law. “Under

the Full Faith and Credit Act, 28 U.S.C. § 1738, a federal court must ‘give

preclusive effect to a state court judgment to the same extent as would courts of

the state in which the judgment was entered,’” Brown v. R.J. Reynolds Tobacco

Co., 611 F.3d 1324, 1331 (11th Cir. 2010) (quoting Kahn v. Smith Barney

Shearson Inc., 115 F.3d 930, 933 (11th Cir. 1997)), and “[i]n Alabama, as

elsewhere, an arbitration award ‘partakes of the nature of a judgment or decree of

a competent court,’” Old Republic Ins. Co. v. Lanier, 790 So. 2d 922, 928 (Ala.

2000) (quoting Glens Falls Ins. Co. of N.Y. v. Garner, 229 Ala. 39, 41, 155 So.

                                           9
533, 534 (1934)). Because the arbitration award compensated the McQueens for

both “property damage” and “bodily injury” under the policy, the district court

erred when it entered judgment in favor of Auto-Owners on the basis of the work-

product exclusion alone.

                              IV. CONCLUSION

      We VACATE the opinion of the district court and REMAND for further

proceedings.

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