Court Opinion

ID: 220565
Source: CourtListenerOpinion
Date Created: 2011-07-08 13:42:44+00
Date Added: 2024-06-11T17:28:45.753924
License: Public Domain

RECOMMENDED FOR FULL-TEXT PUBLICATION
                         Pursuant to Sixth Circuit Rule 206
                              File Name: 11a0183p.06

             UNITED STATES COURT OF APPEALS
                           FOR THE SIXTH CIRCUIT
                             _________________

                                               X
                                                -
 FEDERAL-MOGUL U.S. ASBESTOS PERSONAL

                         Plaintiff-Appellant, --
 INJURY TRUST,

                                                -
                                                    No. 10-1290

                                                ,
                                                 >
                                                -
          v.

                                                -
                                  Defendant, -
 CONTINENTAL CASUALTY COMPANY,
                                                -
                                                -
                                                -
                        Defendant-Appellee. -
 CONTINENTAL INSURANCE COMPANY,
                                                -
                                               N
                 Appeal from the United States District Court
                for the Eastern District of Michigan at Detroit.
               No. 08-14060—Arthur J. Tarnow, District Judge.
                             Argued: June 10, 2011
                        Decided and Filed: July 8, 2011
           Before: COLE, McKEAGUE, and GRIFFIN, Circuit Judges.

                              _________________

                                  COUNSEL
ARGUED: Andrea Kay Hopkins, GILBERT LLP, Washington, D.C., for Appellant.
Steven M. Crane, BERKES CRANE ROBINSON & SEAL LLP, Los Angeles,
California, for Appellee. ON BRIEF: Barry Buchman, GILBERT LLP, Washington,
D.C., Cynthia M. Filipovich, CLARK HILL PLC, Detroit, Michigan, for Appellant.
Steven M. Crane, BERKES CRANE ROBINSON & SEAL LLP, Los Angeles,
California, David J. Bloss, BLOSS BETZ, Grand Rapids, Michigan, for Appellee.

                                        1
No. 10-1290        Federal-Mogul v. Continental Casualty Company                   Page 2

                                 _________________

                                       OPINION
                                 _________________

       COLE, Circuit Judge.           This is an insurance duty-to-defend case.
Plaintiff-Appellant Federal-Mogul U.S. Asbestos Personal Injury Trust filed a complaint
in the district court seeking declaratory relief. The Trust holds an umbrella insurance
policy issued by Defendant-Appellee Continental Insurance Company and claims that
pursuant to that policy, Continental is now required to defend the Trust against certain
claims. Continental, contending it is under no duty to defend, moved to dismiss the
complaint for failure to state a claim. The district court agreed and dismissed the
complaint. Because the declaratory relief sought by the Trust is precluded by the facts
alleged, we AFFIRM the judgment of the district court.

                                 I. BACKGROUND

       Federal-Mogul U.S. Asbestos Personal Injury Trust (“Trust”) is a trust created
by the Chapter 11 bankruptcy plan of the Federal-Mogul Corporation. From 1965 to
1981, a division of the Federal-Mogul Corporation, the Vellumoid Company,
manufactured and sold automotive products containing asbestos.             Subsequently,
numerous lawsuits were filed against the Federal-Mogul Corporation for asbestos-related
injuries arising from Vellumoid’s products (“Vellumoid claims”). Federal-Mogul
Corporation’s bankruptcy plan established that the Trust bears liability for these claims.
In addition, the plan assigned the Trust the right to insurance proceeds and coverage
under the insurance policies held by the Federal-Mogul Corporation.

       The Trust holds three primary-level general insurance policies that cover it for
both liability and defense costs arising out of the Vellumoid claims, one each from
Travelers Indemnity Company, Globe Indemnity Company, and Liberty Mutual
Insurance Company. The Trust alleged that the limits of the Travelers Policy have been
exhausted, but the other two primary policies are currently defending the Trust against
the Vellumoid claims. The policy held by the Trust at issue here is Continental’s
No. 10-1290          Federal-Mogul v. Continental Casualty Company                   Page 3

umbrella policy SRU 3196774 (“Policy”). The only primary policy covering the
Vellumoid claims that is listed in the umbrella Policy’s Underlying Insurance Schedule
is the Travelers Policy.

       The Trust filed this action seeking declaratory relief in the district court, claiming
that the Policy requires Continental to defend the Trust against the Vellumoid claims.
Continental moved to dismiss the complaint under Federal Rule of Civil Procedure
12(b)(6). At a hearing, the district court orally granted Continental’s motion to dismiss.
The Trust appeals.

                                    II. ANALYSIS

       A. Standard of Review

       We review the grant of a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6) de novo, see Harbin-Bey v. Rutter, 420 F.3d 571, 575 (6th Cir.
2005), and may “affirm the district court’s dismissal of a plaintiff’s claims on any
grounds, including grounds not relied upon by the district court,” Hensley Mfg. v.
ProPride Inc., 579 F.3d 603, 609 (6th Cir. 2009). In determining whether a party has
failed to state a claim, we construe the complaint in the light most favorable to the
non-moving party and accept all factual allegations as true. See Harbin-Bey, 420 F.3d
at 575. To survive a Rule 12(b)(6) motion to dismiss, a complaint “need contain only
‘enough facts to state a claim to relief that is plausible on its face.’” Paige v. Coyner,
614 F.3d 273, 277 (6th Cir. 2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007)).

       B. Legal Framework

       Because this is a diversity case, we apply substantive state law. See Anton v.
Nat’l Union Fire Ins. Co., 634 F.3d 364, 367 (6th Cir. 2011). The parties agree that
Michigan law applies. An insurer’s duty to defend is “defined by policy language,”
Frankenmuth Mut. Ins. Co. v. Cont’l Ins. Co., 537 N.W.2d 879, 880 (Mich. 1995), and
“the policy language is most important in our analysis,” Bosco v. Bauermeister, 571
N.W.2d 509, 513 (Mich. 1997). Interpretation of the policy is a question of law, see
No. 10-1290        Federal-Mogul v. Continental Casualty Company                   Page 4

Minges Creek, L.L.C. v. Royal Ins. Co. of Am., 442 F.3d 953, 956 (6th Cir. 2006) (citing
Schmalfeldt v. N. Pointe Ins. Co., 670 N.W.2d 651, 653 (Mich. 2003)), and Michigan
courts “look to the language of the insurance policy and interpret the terms therein in
accordance with Michigan’s well-established principles of contract construction,”
Citizens Ins. Co. v. Pro-Seal Serv. Group, Inc., 730 N.W.2d 682, 685 (Mich. 2007)
(quoting Henderson v. State Farm Fire & Cas. Co., 596 N.W.2d 190, 193-94 (Mich.
1999)). These principles include:

       First, an insurance contract must be enforced in accordance with its
       terms. A court must not hold an insurance company liable for a risk that
       it did not assume. Second, a court should not create ambiguity in an
       insurance policy where the terms of the contract are clear and precise.
       Thus, the terms of a contract must be enforced as written where there is
       no ambiguity.

Id. (quoting Henderson, 596 N.W.2d at 193-94). We must view the policy as a whole,
striving to give meaning to each of its terms and avoid redundancy or surplusage.
Cincinnati Ins. Co. v. Zen Design Group, Ltd., 329 F.3d 546, 553 (6th Cir. 2003)
(interpreting Michigan law). Any ambiguities should be construed against the insurer
and in favor of the insured. Id.

       C. Interpretation of the Policy

       Both parties agree that the Policy is an umbrella policy. An umbrella policy
serves two functions: “1) to provide for a higher limit of liability for those losses
typically covered by liability insurance-general liability . . . ; [and] 2) to provide for
some coverage of those less common losses not typically covered by liability insurance
. . . .” Am. Special Risk Ins. Co. v. A-Best Prods., Inc., 975 F. Supp. 1019, 1022 (N.D.
Ohio) (quoting Garmany v. Mission Ins. Co., 785 F.2d 941, 948 (11th Cir. 1986)), aff’d,
166 F.3d 1213 (6th Cir. 1998). The first scenario is typically referred to as vertical
coverage and the latter as horizontal. Id.; see also Yaffe Cos. v. Great Am. Ins. Co., 499
F.3d 1182, 1188 (10th Cir. 2007) (“Umbrella policies differ from standard excess
policies in that they are designed to fill gaps in coverage both vertically (by providing
No. 10-1290         Federal-Mogul v. Continental Casualty Company                       Page 5

excess coverage) and horizontally (by providing primary coverage).” (quoting
Commercial Union Ins. Co. v. Walbrook Ins. Co., 7 F.3d 1047, 1053 (1st Cir. 1993))).

        The Policy’s Insuring Agreement states that Continental must “pay on behalf of
the insured the ultimate net loss, in excess of the applicable underlying or retained limit,
which the insured shall become obligated to pay . . . .” (Policy, Dist. Ct. Docket No. 24,
at 12.) “Ultimate net loss” is defined to exclude “all loss expenses and legal expenses
(including attorney’s fees. . . ),” and provides that “[e]xcept as set forth in the Defense,
Settlement, Supplementary Payments Insuring Agreement, this policy shall not apply to
defense, investigation, or legal expenses covered by underlying insurance.” (Id.) The
Defense, Settlement, Supplementary Payments Insuring Agreement (“DSSP”) provides:

                When underlying insurance exists, the company shall have the
        right but not the obligation to participate at any time in the defense of any
        suit against the insured.
                When an occurrence is not covered by the underlying insurance
        listed in the underlying insurance schedule or any other underlying
        insurance collectible by the insured, but covered by the terms of this
        policy, without regard to the retained limit contained herein, the company
        in addition to the applicable limits of liability shall: (a) defend any suit
        against the insured . . . .

(Id.) The Travelers Policy is the only primary insurance policy covering the Vellumoid
claims that is listed in the Policy’s Underlying Insurance Schedule, (see Policy, Dist. Ct.
Docket No. 24, at 9); the other two primary policies covering the Vellumoid claims,
issued by Liberty Mutual and Globe Indemnity, are not listed in the schedule.

        The Trust argues that exhaustion of the Travelers Policy triggers Continental’s
duty to defend under the DSSP and another provision of the Policy, Condition 3. Each
of these is discussed in turn.

        Under the Policy’s DSSP provision, Continental must defend any suit against the
Trust “[w]hen an occurrence is not covered by the underlying insurance listed in the
underlying insurance schedule or any other underlying insurance collectible by the
insured, but covered by the terms of this policy, without regard to the retained limit
No. 10-1290            Federal-Mogul v. Continental Casualty Company                                Page 6

contained herein.”1 (Policy, Dist. Ct. Docket No. 24, at 12.) Continental contends that
because other underlying primary insurance policies are defending the Vellumoid claims,
their duty to defend under the DSSP is not yet triggered. We agree.

         In its complaint, the Trust alleged that the Vellumoid claims “fall within the
scope of coverage,” (First Am. Compl., Dist. Ct. Docket No. 23, at 3), of not only the
Travelers Policy, but also the other two primary insurance policies held by the Trust.
The complaint further alleged that “[t]hose primary insurers are defending the Trust with
respect to Vellumoid asbestos-related bodily injury claims.” (Id. at 3-4 (emphasis
added).) These allegations are dispositive of the issue before us, for the plain language
of the DSSP provides that Continental must defend only where an occurrence is not
covered by the underlying insurance listed in the schedule (the Travelers Policy), “or any
other underlying insurance collectible by the insured.” (Policy, Dist. Ct. Docket No. 24,
at 12 (emphasis added).) The Trust’s claim that exhaustion of only the Travelers Policy
triggers Continental’s duty to defend under the DSSP is untenable because it ignores the
words “or any other underlying insurance collectible by the insured.”

         A materially similar provision was construed in the same way by one of our sister
circuits. In Castronovo v. National Union Fire Insurance Co., 571 F.3d 667, 671 (7th
Cir. 2009), the insured was covered by two underlying insurers, Travelers and Owners.
The insured also held an umbrella policy, which listed only the Travelers Policy in the
schedule of underlying insurance. Id. at 669. The insured brought an action against the
umbrella insurer and made the same argument that the Trust makes here, that the
exhaustion of the Travelers Policy triggered the umbrella insurer’s duty to defend. Id.

         1
          The Policy does not define the term “underlying insurance.” However,“[t]he fact that a policy
does not define a relevant term does not render the policy ambiguous[;] . . . reviewing courts must interpret
the contract in accordance with their commonly used meanings.” Henderson, 596 N.W.2d at 194.
“Underlying” is commonly used to mean “lying under or beneath,” see Oxford English Dictionary (online
ver. May 2011). In its brief, the Trust explains that it purchased multiple layers of insurance: the first
consisting of the primary policies (Globe Indemnity, Liberty Mutual, and Travelers Indemnity) and the
next or second layer is Continental’s Policy. The Trust does not contend that the term “underlying” as
used in the Policy is ambiguous or contest Continental’s assertion that all three primary policies are
properly considered “underlying insurance.” Therefore, the term “underlying insurance” in the Policy
includes all primary insurance policies.
No. 10-1290            Federal-Mogul v. Continental Casualty Company                              Page 7

The Seventh Circuit rejected this argument because, just as here, the other underlying
insurer was providing defense.2 Id. at 671-72.

         Additionally, as noted by Continental, the Trust’s interpretation would essentially
read another provision, Condition 5, out of the policy. Condition 5 provides that “[i]f
underlying insurance is exhausted by any accident or occurrence,” Continental must
assume settlement or defense duties for “any proceeding against the insured resulting
from the same accident or occurrence.” (Policy, Dist. Ct. Docket No. 24, at 14
(emphasis added).) The Trust admits that the Travelers Policy was exhausted through
payment of claims other than the Vellumoid claims, and that therefore Condition 5 does
not create a duty to defend here. Condition 5 would be superfluous if the DSSP allowed
exhaustion of the Travelers Policy through payment of losses resulting from a different
occurrence to also trigger Continental’s duty to defend the Vellumoid claims.
Accordingly, the Trust’s interpretation of the DSSP not only strains the provision’s plain
language, but is contrary to an axiomatic principle of contract interpretation not unique
to Michigan law: “[C]ourt[s] must look at the contract as a whole and give meaning to
all terms . . . .” Auto-Owners Ins. Co. v. Churchman, 489 N.W.2d 431, 434 (Mich.
1992); see also Klaap v. United Ins. Group Agency, Inc., 663 N.W.2d 447, 453 (Mich.
2003) (“[C]ourt[s] must also give effect to every word, phrase and clause in a contract
and avoid an interpretation that would render any part of the contract surplusage or
nugatory.”).

         The language of the DSSP is not ambiguous. For Continental’s duty to defend
to arise, the Vellumoid claims must not be covered by either Travelers or any other
underlying insurance collectible by the Trust. The Trust alleged that the defense of those
claims is currently covered by both Liberty Mutual and Globe Indemnity; therefore,
Continental’s duty to defend under the DSSP has not yet been triggered. For this reason,
we need not reach the disputed issue of whether the term “not covered” only refers to the

         2
          The umbrella policy provision at issue in Castronovo stated, “[w]e shall have the right and duty
to defend any claim or suit . . . [when damages sought are] covered by this policy but not covered by any
underlying insurance listed in the Schedule of Underlying Insurance or any other underlying insurance
providing coverage to the Insured.” Castronovo, 571 F.3d at 671.
No. 10-1290        Federal-Mogul v. Continental Casualty Company                     Page 8

scope of the underlying policy (Continental’s position), or the collectability of the
underlying policy (the Trust’s position). Under either definition of the term, the
requirements necessary to trigger Continental’s duty to defend under the DSSP are not
yet met.

       The Trust also contends that because the Travelers Policy has been exhausted,
Continental is required to “continue as underlying insurance” pursuant to Condition 3,
and that such duty includes defending against the Vellumoid claims. Continental argues
that Condition 3 concerns only its duty to indemnify and does not provide a duty to
defend. The parties’ arguments thus primarily concern whether “continue as underlying
insurance” includes defense duties or only speaks to coverage for settlements and
judgments. But even assuming arguendo that the Trust is correct, and “continue as
underlying insurance” requires Continental to defend as underlying insurance, the
Trust’s argument suffers from the same infirmity it did with respect to the DSSP
provision: Condition 3’s unambiguous language requires exhaustion of all underlying
policies as a prerequisite to Continental’s duty to “continue as underlying insurance.”

       Condition 3 states, in relevant part, that “[w]here the aggregate limits of liability
under said underlying policies of insurance are . . . exhausted by reason of losses paid
thereunder, this policy shall . . . continue as underlying insurance.” (Policy, Dist. Ct.
Docket No. 24, at 14.) Taken out of context, the words “said underlying policies” could
be ambiguous. But undefined terms should be interpreted “in accordance with their
commonly used meanings.” Henderson, 596 N.W.2d at 194. The word “said” is
commonly understood to mean “named or mentioned before.”                  Oxford English
Dictionary (online ver. May 2011). Considering Condition 3 as a whole crystallizes
what “said underlying policies” refers to. Prior language in Condition 3 states that
Continental’s liability “shall only be for the ultimate net loss in excess of . . . the
underlying limits of liability of the underlying insurance policies as stated and described
in the declarations and those of any underlying insurance collectible by the insured.”
(Policy, Dist. Ct. Docket No. 24, at 14.) Thus, the shorthand reference “said underlying
policies” refers to the two categories of previously named policies: (1) “the underlying
No. 10-1290        Federal-Mogul v. Continental Casualty Company                     Page 9

insurance policies stated in the declarations,” and (2) “any underlying insurance
collectible by the insured.” (Id.) In context then, Condition 3 requires exhaustion of all
underlying policies before Continental’s obligation to “continue as underlying
insurance” is owed.

       The Trust’s Rule 28(j) submission does not alter this conclusion. The Trust
contends that United States Fidelity & Guaranty Co. v. Continental Insurance Co., Nos.
CV-04-29-BLG-RFC, CV-08-29-BLG-RFC, 2010 WL 3632457 (D. Mont. Sept. 10,
2010), is on all fours with this case in regard to Condition 3. In Fidelity, the court
looked to the same language as that here (in a provision also entitled Condition 3 Limits
of Liability), and concluded that it “make[s] clear that it imposes a duty to defend once
the underlying primary policies are exhausted.” Id. at *1. However, this statement by
the court in Fidelity is consistent with the reading of Condition 3 explained above.
Under the facts alleged by the Trust, all of the underlying primary policies covering the
Vellumoid claims are not exhausted, and thus the predicate to Continental’s obligation
to continue as underlying insurance has yet to occur.

       Lastly, we find the Trust’s argument that it is entitled to discovery on the parties’
intent unavailing. “Michigan permits the use of extrinsic evidence to dispose of a
potential ambiguity, to prove the existence of a potential ambiguity, or to indicate the
actual intent of the parties where an actual ambiguity exists.” Wonderland Shopping
Ctr. Venture Ltd. P’ship v. CDC Mortg. Capital Inc., 274 F.3d 1085, 1095 (6th Cir.
2001). But courts cannot “look to extrinsic testimony to determine [parties’] intent when
the words used by them are clear and unambiguous and have a definite meaning.” Id.
at 1095-96. The provisions relied upon by the Trust are unambiguous for the reasons
explained above.      Accordingly, extrinsic evidence is inadmissible and remand
unnecessary.

                                 III. CONCLUSION

       Because the Trust has failed to state a claim upon which relief may be granted,
we AFFIRM the district court’s dismissal.