Court Opinion

ID: 2620673
Source: CourtListenerOpinion
Date Created: 2013-11-01 16:08:05.41562+00
Date Added: 2024-06-11T08:23:56.522075
License: Public Domain

FILED
                                                               United States Court of Appeals
                                                                       Tenth Circuit

                                                                    November 1, 2013
                   UNITED STATES COURT OF APPEALS Elisabeth A. Shumaker
                                                                       Clerk of Court
                                TENTH CIRCUIT

 MAGNUS, INC.,

              Plaintiff - Appellant,

 v.                                                     No. 12-3091
                                           (D.C. No. 6:10-CV-01422-KHV-JPO)
 DIAMOND STATE INSURANCE                                 D. Kansas
 COMPANY,

              Defendant - Appellee.

                           ORDER AND JUDGMENT *

Before KELLY, MURPHY, and GORSUCH, Circuit Judges.

I.    INTRODUCTION

      Appellant Magnus, Inc. (“Magnus”) appeals the grant of summary judgment

in favor of Diamond State Insurance Company (“Diamond State”) in this diversity

action. In its federal complaint, Magnus alleged Diamond State breached a

Commercial General Liability (“CGL”) insurance policy it entered into with

Precision Design Products (“Precision”) when it failed to defend and indemnify

      *
        This order and judgment is not binding precedent except under the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.
Precision in a Kansas state lawsuit. The Kansas suit filed by Magnus contained

allegations Precision violated an implied warranty of fitness, an implied warranty

of merchantablility, and an express warranty when it manufactured a part used in

archery equipment. Magnus and Precision entered into a settlement agreement

wherein Precision assigned its claims against Diamond State to Magnus.

      Diamond State moved for summary judgment in the federal action, arguing

there was no coverage under the CGL policy and, thus, no duty to defend or

indemnify. In support of its position, Diamond State asserted the damages

alleged by Magnus in the Kansas suit were caused by Precision’s intentional acts,

not an accident. Thus, Diamond State argued, there was no “occurrence”

triggering coverage. The district court agreed and granted Diamond State’s

motion.

      Exercising jurisdiction pursuant to 28 U.S.C. § 1291, this court reverses

the grant of summary judgment and remands the matter for further proceedings.

II.   FACTUAL BACKGROUND

      Magnus is engaged in the archery products business. Precision

manufactures components for the archery industry. In 2001, Magnus contracted

with Precision to manufacture aluminum adaptors, a component permanently

glued to a broadhead which permits the consumer to attach the broadhead to an

arrow shaft. The record contains conflicting versions of the parties’ agreement,

but construed in the light most favorable to Magnus, it shows that Magnus

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instructed Precision to manufacture the adaptors out of a hard-grade aluminum.

Precision, however, intentionally manufactured the adaptors from a softer grade

of aluminum and did not disclose this to Magnus.

      Magnus asserts it began receiving complaints from customers in 2002 or

2003 that broadheads screwed onto arrow shafts using the adaptor supplied by

Precision became permanently affixed to the arrow shaft, preventing removal of

the broadhead. According to Magnus, this damage occurred a “multitude of

times, damaging a multitude of hunting arrows owned by Magnus, Inc.’s

customers and former customers, and rendering their hunting arrows either

worthless or of very little value.” Magnus claims this damage resulted directly

from the soft aluminum used by Precision to manufacture the adaptors.

      In February 2008, Magnus sued Precision in Kansas state court, alleging

Precision “violated the implied warranty of fitness, implied warranty of

merchantability and express warranty to the detriment of” Magnus. The state

petition asserted Precision’s failure to manufacture the adaptors to Magnus’s

specifications caused Magnus to suffer “loss of business reputation and loss of

business.” Precision, which had entered into a commercial general liability policy

with Diamond State, notified Diamond State of the lawsuit on August 9, 2009.

Diamond State promptly denied the claim. Precision thereafter confessed

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judgment in the state suit in the amount of $284,519.75 1 and entered into a

settlement agreement with Magnus, assigning its rights under the CGL policy to

Magnus.

      Magnus then brought this federal diversity action against Diamond State,

alleging Diamond State breached its obligation to defend and indemnify

Precision. Magnus sought reimbursement of the amount Precision paid to defend

the Kansas state suit and $284,519.75 in damages resulting from Precision’s

adaptors. Diamond State moved for summary judgment, arguing, inter alia, the

CGL policy did not provide coverage for damages flowing from Precision’s use of

the softer aluminum because its actions were intentional. Relying on Maryland

Casualty Co. v. Mike Miller Cos., 715 F. Supp. 321 (D. Kan. 1989), the district

court agreed and granted Diamond State’s motion. The court concluded the

record showed Precision purposefully manufactured the adaptors from softer

grade aluminum. The courted reasoned that the resulting damage alleged by

Magnus, therefore, was not caused by an accident. Thus, there was no occurrence

under the terms of the CGL policy and Diamond State had no duty to defend

Precision against Magnus’s claims. The district court’s ruling also resolved

Magnus’s claim for indemnification. See Glickman, Inc. v. Home Ins. Co., 86
F.3d 997, 1001 (10th Cir. 1996) (noting under Kansas law the duty to defend is

      1
       According to Magnus’s expert, the past and future loss of earnings
suffered by Magnus totaled $284,519.75.

                                        -4-
broader than the duty to indemnify). Magnus brought this appeal challenging the

grant of summary judgment.

III.   DISCUSSION

       A.     Standard of Review

       This court reviews a grant of summary judgment de novo, applying the

same standard as the district court. Welding v. Bios Corp., 353 F.3d 1214, 1217

(10th Cir. 2004). Summary judgment is appropriate “if the movant shows that

there is no genuine dispute as to any material fact and the movant is entitled to

judgment as a matter of law.” Fed. R. Civ. P. 56(a). When determining whether

a genuine dispute as to a material fact exists, all “justifiable inferences” are

drawn in favor of the non-moving party. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 255 (1986). Summary judgment is appropriate, however, if the non-

moving party “fails to make a showing sufficient to establish the existence of an

element essential to that party’s case.” Celotex Corp. v. Catrett, 477 U.S. 317,

322 (1986).

       B.     Occurrence Under The CGL Policy

       The parties agree that Magnus’s claims are governed by the terms of the

CGL policy and Kansas law. The CGL policy at issue here provides coverage,

subject to various limitations and exclusions, for property damage or bodily

injury which occurs during the policy period. Property damage must arise from

an occurrence. An occurrence is defined as “an accident, including continuous or

                                          -5-
repeated exposure to substantially the same general harmful conditions.” The

policy does not define the term “accident.” Diamond State successfully argued

before the district court that Magnus’s damages arose from Precision’s willful

actions and, thus, there was no duty to defend because no accident triggered

coverage under the CGL policy.

      The problem with Diamond State’s argument and the district court’s ruling

is that Kansas law is to the contrary. “In determining for insurance purposes

whether the damages resulting from an insured’s acts were accidental and

therefore an occurrence under a policy,” Kansas follows the rule that there is a

duty to defend if an intentional act results in an unintended injury. Park Univ.

Enters. v. Am. Cas. Co., 442 F.3d 1239, 1245 (10th Cir. 2006); see also Thomas v.

Benchmark Ins. Co., 179 P.3d 421, 425 (Kan. 2008) (“Kansas recognizes, for

example that an intentional act may nevertheless result in unintended injury.”).

Thus, the district court erred by concluding there was no occurrence under the

CGL policy because the record shows Precision purposefully manufactured the

adaptors from soft aluminum. The court failed to evaluate whether Precision’s

willful conduct resulted in an unintended injury.

      Prior to 2008, Diamond State had no duty under the CGL policy to defend

Precision in the Kansas state suit if Magnus’s injuries were the natural and

probable consequence of Precision’s breach. See Park Univ. Enters., 442 F.3d at

1245. Kansas, however, no longer follows the natural and probable consequences

                                         -6-
test. Thomas, 179 P.3d at 427-31 (Kan. 2008). Seeking to more closely align

Kansas with the majority view, the Kansas Supreme Court adopted a “revised test

for intentional injury.” Id. at 431. Under this revised test, 2 “[t]he insured must

have intended both the act and to cause some kind of injury or damage. Intent to

cause the injury or damage can be actual or it can be inferred from the nature of

the act when the consequences are substantially certain to result from the act.”

Id. (emphasis added). The district court did not address whether the record

demonstrates that Precision’s intentional acts led to intended or unintended

injuries under either the natural and probable consequences test or the substantial

certainty test and the parties do not discuss the issue in their appellate briefs. See

Vaughn v. Murray, 521 P.2d 262, 269 (Kan. 1974) (identifying factors used by

courts to determine whether to apply a judicial decision retroactively). Thus,

remand is necessary so the court can either conduct this analysis in the first

instance or consider the other bases on which Diamond State asserts it was not

required to defend or indemnify Precision. 3

      2
        Although the Kansas Supreme Court in Thomas v. Benchmark Insurance
Co., adopted the revised test in the context of an intentional act exclusion clause,
the test is also applicable when determining if coverage exists. See Park Univ.
Enters. v. Am. Cas. Co., 442 F.3d 1239, 1245 (10th Cir. 2006) (applying the
former “natural and probable consequences” test to a claim there was no duty to
defend because the insured’s acts were intentional); Harris v. Richards, 867 P.2d
325, 327-29 (Kan. 1994) (same).
      3
       Although we do not consider the issue in this appeal because the parties do
not present it, a serious argument could be made that Diamond State had no duty
                                                                     (continued...)

                                          -7-
IV.   CONCLUSION

      The order of the district court granting summary judgment in favor of

Diamond State is reversed and the matter remanded for further proceedings not

inconsistent with this opinion.

                                         ENTERED FOR THE COURT

                                         Michael R. Murphy
                                         Circuit Judge

      3
       (...continued)
to defend Precision because the CGL policy does not cover any of the damages
claimed by Magnus in the Kansas state lawsuit. Property damage is defined in the
policy to mean “physical injury to tangible property, including all resulting loss
of use of that property” (emphasis added). Although Magnus asserts the adaptors
caused property damage because they impaired the functionality of customers’
arrows, it did not seek to recover such damages in the Kansas lawsuit. Instead,
Magnus only sought to recover damages arising from “loss of business reputation
and loss of business,” which are damages to intangible property. See Hamilton
Die Cast, Inc., v. U.S. Fid. & Guar. Co., 508 F.2d 417, 419 (7th Cir. 1975)
(concluding a CGL policy insuring against property damage caused by an
occurrence did not cover damages to business reputation because those are
“damages for injury to intangible property”).

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