Court Opinion

ID: 4540320
Source: CourtListenerOpinion
Date Created: 2020-06-10 16:01:29.218881+00
Date Added: 2024-06-11T12:46:41.886138
License: Public Domain

FILED
                                                                    United States Court of Appeals
                      UNITED STATES COURT OF APPEALS                        Tenth Circuit

                             FOR THE TENTH CIRCUIT                         June 10, 2020
                         _________________________________
                                                                       Christopher M. Wolpert
                                                                           Clerk of Court
 MJH PROPERTIES LLC,

       Plaintiff - Appellant,

 v.                                                        No. 20-6002
                                                   (D.C. No. 5:19-CV-00577-HE)
 WESTCHESTER SURPLUS LINES                                 (W.D. Okla.)
 INSURANCE COMPANY,

       Defendant - Appellee.
                      _________________________________

                             ORDER AND JUDGMENT*
                         _________________________________

Before MATHESON, KELLY, and EID, Circuit Judges.
                  _________________________________

      MJH Properties, LLC (“MJH”) sued its insurer, Westchester Surplus Lines

Insurance Company (“Westchester”) in federal court, invoking diversity jurisdiction

under 28 U.S.C. § 1332. It sought damages for Westchester’s refusal to defend MJH

in an underlying lawsuit brought in state court. In the underlying lawsuit, two

      *
        After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist in the determination of
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and collateral
estoppel. It may be cited, however, for its persuasive value consistent with
Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
individuals sued MJH for spraying pesticides that allegedly caused them substantial

bodily injury.

      The district court granted Westchester’s motion to dismiss MJH’s breach of

contract and bad faith claims. It determined that the incident in the underlying

lawsuit fell under an express coverage exclusion in the policy, and Westchester

therefore did not breach any duty to defend or act in good faith. MJH appealed.

Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.

                                 I. BACKGROUND

                               A. Underlying Lawsuit

      The plaintiffs in the underlying lawsuit—also described as third-party

claimants—alleged that on June 21, 2017, an MJH employee sprayed their work

premises with pest control pesticides that released toxic chemicals and caused them

substantial bodily injury. They contended that test samples of MJH’s spray showed it

contained Essentria IC3, piperonyl butoxide, and permethrins. They sued MJH for

various claims, including negligence and vicarious liability.

                                 B. Insurance Policy

      At the time of the underlying incident, MJH was covered by a general

commercial liability policy from Westchester (the “Policy”). The Policy obligated

Westchester to defend MJH against suits seeking damages due to “bodily injury” or

“property damage,” but disclaimed a duty to defend against suits “to which this

insurance does not apply.” App., Vol. I at 240. The Policy expressly excluded from

                                              2
coverage “‘[b]odily injury’ or ‘property damage’ which would not have occurred in

whole or part but for the actual, alleged or threatened discharge, dispersal, seepage,

migration, release or escape of ‘pollutants’ at any time” (the “Total Pollution

Exclusion”). Id. at 262. The Policy also expressly defined “pollutants.”1

                                      C. Instant Action

      MJH asked Westchester to defend it against the underlying lawsuit.

Westchester refused, explaining in its insurance appraiser’s letter that the Total

Pollution Exclusion precluded coverage because the plaintiffs alleged that

“pollutants” caused their injuries.

      MJH sued Westchester, seeking damages for Westchester’s refusal to defend

under the Policy and alleging that Westchester had (1) breached the Policy by

refusing to defend MJH in the underlying lawsuit and (2) acted in bad faith.2 MJH

also alleged that its employee did not use “pollutants,” as defined in the Policy,

because the pest control pesticides contained only Essentria, which consists of “40%

      1
        The Policy defined “pollutants” as including “any solid, liquid, gaseous or
thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis,
chemicals and waste. Waste includes materials to be recycled, reconditioned or
reclaimed.” App., Vol. I at 254.
      2
         MJH also sued Chubb North American Claims (“CNAC”) in its original
complaint but not in its amended complaint. MJH requested CNAC’s dismissal in
the joint status report, Dist. Ct. Doc. 20 at 2, and the district court dismissed CNAC,
App., Vol. II at 15 n.1. MJH has not appealed CNAC’s dismissal.
                                                 3
mineral oil, 37% wintergreen oil, 10% rosemary oil and 13% other ingredients.” Id.

at 185.

       Westchester moved to dismiss under Federal Rule of Civil Procedure 12(b)(6)

for failure to state a claim. It again argued that because MJH used pesticides that

were “pollutants,” the Total Pollution Exclusion applied. Id. at 195 (“[T]here was

and is no coverage, no breach of the policy and no basis for a claim for bad faith.”).

       The district court granted the motion. First, it held that MJH failed to state a

breach of contract claim because the petition in the underlying lawsuit showed that

the Total Pollution Exclusion applied and Westchester thus had no duty to defend.

Second, the court held that because Oklahoma law required “an insured [to] show

that he is entitled to coverage to prevail on a bad-faith claim,” MJH had “failed to

state a bad-faith claim.” App., Vol. II at 19 (quotations omitted).

       MJH timely appealed.

                                     II. DISCUSSION

                                  A. Standard of Review

       “We review a district court’s dismissal under Federal Rule of Civil Procedure

12(b)(6) de novo.” Khalik v. United Air Lines, 671 F.3d 1188, 1190 (10th Cir. 2012).

“[T]o withstand a Rule 12(b)(6) motion to dismiss, a complaint must contain enough

allegations of facts, taken as true, ‘to state a claim to relief that is plausible on its

face.’” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

                                                  4
                            B. Pertinent Oklahoma Law

      In this diversity suit brought in the U.S. District Court for the Western District

of Oklahoma, the substantive law of the forum state of Oklahoma applies. Edens v.

The Netherlands Ins. Co., 834 F.3d 1116, 1120 (10th Cir. 2016).

   Contract Law

      “Oklahoma contract law applies to this diversity action.” Automax Hyundai S.,

LLC v. Zurich Am. Ins. Co., 720 F.3d 798, 804 (10th Cir. 2013). Under Oklahoma

law, an insurance policy is a contract and interpreted accordingly. First Bank of

Turley v. Fid. & Deposit Ins. Co. of Md., 928 P.2d 298, 302 (Okla. 1996).3 In the

absence of ambiguous language, Oklahoma courts enforce an insurance contract’s

express terms and take the language’s plain and ordinary meaning. Pitco Prod. Co.

v. Chaparral Energy, Inc., 63 P.3d 541, 546 (Okla. 2003). “The test for ambiguity is

whether the language is susceptible to two interpretations on its face from the

standpoint of a reasonably prudent lay person, not from that of a lawyer.” Am. Econ.

Ins. Co. v. Bogdahn, 89 P.3d 1051, 1054 (Okla. 2004) (quotations and alterations

omitted).

      3
        Under Oklahoma law, “[t]he general declaration of insurance coverage, as
established by the insurance policy and limited by its provisions, normally
determines the insurance carrier’s liability.” Dodson v. St. Paul Ins. Co, 812 P.2d
372, 377 (Okla. 1991). Exclusions are read serially, and each one “eliminates
coverage and operates independently against the general declaration of insurance
coverage and all prior exclusions.” Id.

                                              5
      A liability insurance policy generally contains the insurer’s two basic

contractual duties to the insured: the duty to defend and the duty to indemnify. First

Bank of Turley, 928 P.2d at 302-03. The insurer’s duty to defend is “broader than[]

the duty to indemnify” and applies “whenever [the insurer] ascertains the presence of

facts that give rise to the potential of liability under the policy.” Id. at 303 (emphasis

omitted). This determination must be “measured by the facts that were known and

knowable—by what the insurer knows or by what the insurer was capable of

discovering itself—at the time the insured’s request was tendered.” Id. at 305

(emphasis omitted); see Automax Hyundai, 720 F.3d at 804 (explaining that under

Oklahoma law, “[t]he duty to defend is triggered by the facts reasonably available at

the time the defense is demanded”).

   Duty to Defend

      Under Oklahoma law, “[t]he insurer’s defense duty is determined on the basis

of information gleaned from the [underlying suit’s] petition (and other pleadings),

from the insured and from other sources available to the insurer at the time the

defense is demanded.” First Bank of Turley, 928 P.2d at 303 (emphasis omitted).

Although the insured bears the initial burden to request a defense, once the request is

made, the insurer bears the burden to investigate the underlying facts and determine

whether they trigger coverage. Id. at 304.4 In determining whether an insured has

      4
        “[W]hen presented with a claim by its insured, an insurer must conduct an
investigation reasonably appropriate under the circumstances . . . .” Newport v.
                                             6
stated a plausible claim for breach of a duty to defend, the court may consider, in

addition to the breach complaint, the petition in the underlying action. See Smith v.

United States, 561 F.3d 1090, 1098 (10th Cir. 2009).5

      In Bituminous Cas. Corp. v. Cowen Constr., Inc., 55 P.3d 1030, 1035 (Okla.

2002), the Oklahoma Supreme Court upheld as “clear and unambiguous” a total

pollution exclusion provision nearly identical to the one here.6 Because the provision

was not limited to environmental pollutants, the Bituminous court determined it

USAA, 11 P.3d 190, 195 (Okla. 2000) (quotations omitted). “Under Oklahoma law,
an insurer’s investigation need only be reasonable, not perfect.” Shotts v. GEICO
Gen. Ins. Co., 943 F.3d 1304, 1317 (10th Cir. 2019) (quotations and alterations
omitted).
      5
         To survive a motion to dismiss, the insured party must state a plausible claim
showing the insurer’s duty to defend. In evaluating a Rule 12(b)(6) motion to
dismiss, we may consider the petition in the underlying case. See Smith, 561 F.3d at
1098 (“In evaluating a Rule 12(b)(6) motion to dismiss, courts may consider not only
the complaint itself, but also attached exhibits, and documents incorporated into the
complaint by reference[,] . . . [and] documents referred to in the complaint if the
documents are central to the plaintiff’s claim and the parties do not dispute the
documents’ authenticity.” (quotations and citations omitted)). MJH’s amended
complaint references the underlying petition, which, under First Bank of Turley, is
central to whether Westchester had a duty to defend. 928 P.2d at 303.
      6
         In Bituminous, the total pollution exclusion provision exempted from
coverage third-party actions for “[b]odily injury or property damage arising out of the
actual, alleged or threatened discharge, dispersal, release or escape of pollutants.”
55 P.3d at 1031 n.1. It defined “pollutants” as “any solid, liquid, gaseous or thermal
irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals
and waste.” Id.

                                              7
excluded the third-party claimant’s lead poisoning claims against the insured from

coverage. Id.7

   Good Faith

      Under Oklahoma law, “[a]n insurer has an implied-in-law duty to act in good

faith and deal fairly with the insured to ensure that the policy benefits are received.”

Badillo v. Mid Century Ins. Co., 121 P.3d 1080, 1093 (Okla. 2005) (quotations

omitted). A plaintiff seeking damages for the insurer’s alleged bad faith conduct

must prove insurance coverage for its claim. See id. at 1093-94 (finding district court

did not erroneously dismiss plaintiff’s bad faith claim where plaintiff failed to show

entitlement to insurance coverage); Edens, 834 F.3d at 1129 (“Under Oklahoma law,

an insured must show that he is entitled to coverage to prevail on a bad-faith claim.”).

                                      C. Analysis

      Based on our review of relevant Oklahoma law, the terms of the Policy and

Total Pollution Exclusion, and the petition in the underlying state court action, we

affirm the district court’s determination that MJH has failed to state a breach of

contract or bad faith claim.

      7
        Since the 1970s, courts have addressed “the extent to which pollution
exclusions apply to preclude coverage in commercial general liability (CGL)
policies.” Headwaters Res., Inc. v. Illinois Union Ins. Co., 770 F.3d 885, 889 (10th
Cir. 2014). Courts either (1) “apply the pollution exclusions as written because they
find them clear and unmistakable” or (2) “narrow the exclusions to traditional
environmental pollution.” Id. (quotations omitted). Oklahoma falls into the first
camp. See Bituminous, 55 P.3d at 1035.

                                               8
      First, the district court correctly dismissed the breach of contract claim

because MJH failed to show that Westchester had a duty to defend under the Policy.

The underlying lawsuit’s petition alleged that MJH used Essentria IC3, piperonyl

butoxide, and permethrins. See App., Vol. I at 283. MJH does not dispute on appeal

that piperonyl butoxide and permethrins are “pollutants” as defined in the Policy.

Aplt. Br. at 1, 8-9; see Aplt. Reply Br. at 1-2. Although the Oklahoma Supreme

Court did not address these specific substances in Bituminous, it interpreted a nearly

identical total pollution exclusion provision broadly to include non-environmental

pollutants. 55 P.3d at 1035. As in Bituminous, we find no ambiguity here and

conclude the district court did not err in determining that at least one of the

underlying petition’s three alleged substances is a “pollutant” within the defined

term’s plain and ordinary meaning. See Pitco Prod. Co., 63 P.3d at 546.8

      On appeal, MJH argues that its amended complaint (1) alleged that its

employee used only Essentria IC3, which contains non-pollutant substances; (2)

conflicts with the underlying petition; and (3) states a plausible claim. See Aplt. Br.

at 1, 8-9. But under Oklahoma law, the underlying petition’s alleged facts place the

spraying incident squarely in the Policy’s Total Pollution Exclusion provision. MJH

has not alleged that “facts that were known and knowable” by Westchester gave rise

      8
         The plain language of the Total Pollution Exclusion encompasses any
“actual, alleged, or threatened . . . ‘pollutants.’” App., Vol. I at 262 (emphasis
added).

                                               9
to potential liability under the Policy. See First Bank of Turley, 928 P.2d at 303,

305.9

        Second, the district court correctly dismissed MJH’s bad faith claim. MJH has

failed to show coverage under the Policy, which is necessary to prevail on a bad faith

claim. See Badillo, 121 P.3d at 1093-94. On appeal, MJH argues that Westchester

acted in bad faith by failing to defend, reasonably investigate, or properly consider

the test results. See Aplt. Br. at 10-11. These arguments are unresponsive to the

district court’s proper determination that MJH’s bad faith claim fails together with its

breach of contract claim.

        9
         The underlying petition stated that although the MJH employee “initially
advised the Oklahoma Highway Patrol that he only used a spray known as Essentria
IC3 in his spray canister to spray the Leased Premises,” the Highway Patrol’s test
results “indicated that in addition to the Essentria IC3, the spray contained two
additional toxic chemicals: piperonyl butoxide (PBO) and permethrins.” App., Vol.
I at 283 (emphasis added).
       When Westchester denied coverage and a duty to defend, its appraiser’s letter
to MJH explained that it analyzed the Policy, the Total Pollution Exclusion, and the
underlying petition. Id. at 292-93. The record does not show that MJH responded to
the appraiser by identifying facts that Westchester knew or should have known
concerning its duty to defend. In its federal lawsuit, MJH’s sole support for its
allegation that its employee used only Essentria was a one-page attachment from the
Highway Patrol’s report listing Essentria’s ingredients. See Dist. Ct. Doc. 9-1 at 1.
As the underlying petition alleged, this same report disclosed the test results showing
that the spray included toxic chemicals. See App., Vol. I at 283.

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                          III. CONCLUSION

We affirm the district court’s grant of Westchester’s motion to dismiss.

                                    Entered for the Court

                                    Scott M. Matheson, Jr.
                                    Circuit Judge

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