Opinion
Civil Action No. 01-2666, Section "K" (2).
June 28, 2004
Before the Court is a Motion for Summary Judgment (Rec. Doc. 83) filed by Third Party Defendant Cincinnati Insurance Company. Having reviewed the pleadings, memoranda and relevant law, the Court GRANTS IN PART and DENIES IN PART Cincinnati's motion, for the reasons set forth below.
I. BACKGROUND
Cleveland Construction, Inc. ("Cleveland") commenced this action on August 30, 2001, to recover contract balances allegedly owed in connection with the construction of the Ritz-Carlton Hotel in New Orleans, Louisiana, which took place between 1997 and 2001. Cleveland was the drywall subcontractor and performed pursuant to subcontracts with the general contractor for the project, Metric Constructors, Inc., n.k.a. J.A. Jones Construction ("Jones"). Cleveland named various defendants in the action, including Whitehouse Hotel Limited Partnership, RC Hotel, L.L.C., LTS Suite, L.L.C., MBRG, L.L.C., Whitehouse Hotel, L.L.C., the Ritz-Carlton Hotel Company, L.L.C., WH Holdings, L.L.C., SunAmerica Housing Fund 305, QHR Holdings — New Orleans, Ltd., Whitehouse Hotel Developers, L.L.C., and Central Plant, L.L.C., (collectively "Whitehouse"). Cleveland's claims included unpaid contract balances, extra work, and delay and impact claims. See Rec. Doc. No. 1.
On October 15, 2001, Whitehouse filed its answer, along with various claims, including counterclaims against Cleveland and third-party claims against Cincinnati Insurance Company ("Cincinnati"), as Cleveland's commercial liability insurer. Whitehouse alleged that Cleveland performed defective work on the hotel's toilet exhaust shaft system, and that damage to the hotel was necessary to gain access to and repair the defective shafts, which resulted in additional costs in excess of $3.5 million. Rec. Doc. No. 16, at 45. Whitehouse also alleged that it incurred lost profits and "additional overhead expenses that would have not have been incurred except for the fault of Cleveland" Id., at 46. Cleveland denied that its work was defective, and denied liability for the counterclaims asserted by Whitehouse. Cincinnati answered Whitehouse's third-party complaint asserting no coverage for the alleged damages, based on various policy exclusions. Rec. Doc. No. 83, at 9-10.
Cincinnati issued several insurance policies to Cleveland, including a commercial general liability policy (No. CPP 069 83 42) with an effective policy period of July 31, 2000 to July 31, 2001. Rec. Doc. No. 83, Exhibit A. The limit of liability provided by the policy was $300,000 per occurrence, with a $600,000 products-completed operations aggregate limit. Id. Cincinnati also issued to Cleveland a policy (No. CCC 447 67 62) containing commercial umbrella coverage with liability limits of $10 million per occurrence, and $10 million aggregate. The umbrella policy had the same effective policy period as the commercial general liability policy. Rec. Doc. No. 83, at 10-11.
On January 3, 2002, Whitehouse Hotel Limited Partnership filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Louisiana. RC Hotel, L.L.C., LTS Suites, L.L.C. and MBRG, L.L.C., had previously been merged into Whitehouse Hotel Limited Partnership by an Agreement of Merger dated November 29, 2000, which became effective December 8, 2000. On January 4, 2002, Whitehouse Hotel Limited Partnership filed a Notice of Pendency of Case Under Chapter 11 of the Federal Bankruptcy Code and of Automatic Stay with this court, pursuant to 11 U.S.C. § 362. On January 8, 2002, this case was referred to the United States Bankruptcy Court for the Eastern District of Louisiana, and statistically closed until further order.
On March 18, 2003, this case was reopened by order of this Court. On February 17, 2004, Cincinnati filed the instant motion pursuant to Rule 56 of the Federal Rules of Civil Procedure, moving the Court for an order dismissing with prejudice the third-party complaint of Whitehouse based upon the policy exclusion discussed infra.
II. LAW ANALYSIS
Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment should be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Substantive law determines the materiality of facts, and "[o]nly disputes over facts that might effect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The party moving for summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] . . . which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the movant meets this burden, the burden shifts to the non-movant "to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322. "[M]ere allegations or denials" will not defeat a well-supported motion for summary judgment. Fed.R.Civ.P.56(e). Rather, the non-movant must come forward with "specific facts" that establish an issue for trial. Id.
When deciding a motion for summary judgment, the Court must avoid a "trial on affidavits. Credibility determinations, the weighing of evidence, and the drawing of legitimate inferences from the facts" are tasks for the trier-of-fact. Anderson, 477 U.S. at 255. To that end, the Court must resolve disputes over material facts in the non-movant's favor. "The party opposing a motion for summary judgment, with evidence competent under Rule 56, is to be believed." Leonard v. Dixie Well Service Supply, Inc., 828 F.2d 291, 294 (5th Cir. 1987).
Substantive law pertaining to the interpretation of insurance policies is at issue in this case, and federal courts sitting in diversity must apply the choice of law rules of the forum state in which the court sits. Am. Int'l Specialty Lines Ins. Co. v. Canal Indem. Co., 352 F.3d 254, 260 (5th Cir. 2003) ( citing Kiaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941)). Under Louisiana choice of law rules, "an issue in a case having contacts with other states is governed by the law of the state whose policies would be most seriously impaired if its law were not applied to that issue." LA. Civ. Code art. 3515. In the interpretation of contracts, "the Code instructs courts to assess the strength of the relevant policies of the involved states in light of the place of negotiation, formation, and performance of the contract as well as the location of the object of the contract. Woodfield v. Bowman, 193 F.3d 354, 360 (5th Cir. 1999) ( citing LA. Civ. Code art. 3537). "Applying these principles, Louisiana courts generally choose the law of the state in which the insurance policy in question was issued to govern the interpretation of the terms of the policy." Id. ( citing Anderson v. Oliver, 705 So.2d 301, 305-06 (La.App. 1988); Holcomb v. Universal Ins. Co., 640 So.2d 718, 722 (La.App. 1994)). The insurance policy at issue in the instant motion was issued in the state of Ohio, by an Ohio insurer, to an Ohio insured. Thus, the substantive law of Ohio applies in this case.
Under Ohio law, "insurance policies are generally interpreted by applying rules of construction and interpretation applicable in contract law." Comeans v. Clark, 2004 WL 1073074, at 3 (Ohio App. 2 Dist. 2004) ( citing Gomolka v. State Auto. Mut. Ins., 436 N.E.2d 1347, 1348 (1982)). "If the language of the insurance policy is susceptible to more than one interpretation, the language will be construed strictly against the insurer and liberally in favor of the insured." Id. ( citing Faruque v. Provident Life Acc. Ins. Co., 508 N.E.2d 949 (1987). However, this rule of construction may not be used to create an ambiguity where none exists. Id. ( citing Karabin v. State Auto. Mut. Ins. Co., 462 N.E.2d 403, 406 (Ohio 1984). "If the terms of a policy are clear and unambiguous, a court must enforce the contract as written, giving words used in the contract their plain and ordinary meaning. Id. ( citing Cincinnati Indemn. Co. v. Martin, 710 N.E.2d 677, 679 (Ohio 1999)). Nevertheless, "where exceptions . . . are introduced into an insurance contract, a general presumption arises to the effect that that which is not clearly excluded from the operation of such contract is included in the operation thereof." Andersen v. Highland House Co., 757 N.E.2d 329, 332 (Ohio 2001) ( quoting Home Indemn. Co. of New York v. Plymouth, 64 N.E.2d 248 (Ohio 1945)).
The commercial general liability policy in question states in Section I(A)(1)(a) of the Insuring Agreement that the insurer "will pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage' to which this insurance applies." Section I(A)(1)(b) of the Insuring Agreement notes further that "[t]his insurance applies to `bodily injury' and `property damage' only if: (1) The `bodily injury or `property damage' is caused by an `occurrence. . . .'" Section V(12) of the policy defines an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same harmful conditions." Additionally, Section V(15) defines "property damage" as:
(a) Physical injury to tangible property, including all resulting loss of use of that property. All such loss shall be deemed to occur at the time of the physical injury that caused it; or
(b) Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the `occurrence' that caused it.
The policy issued to Cleveland also contains several exclusions that bear upon the circumstances of this case. Of foremost relevance is Section I(A)(2)(j)(6), which 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." An exception to this exclusion states, however, that it "does not apply to `property damage' included in the `products-completed operations hazard.'" According to Section V(14)(a) of the policy,
`Products-completed operations hazard' includes all `bodily injury' and `property damage' occurring away from premises you own or rent and arising out of `your product' or `your work' except:
(1) Products that are still in your physical possession; or
(2) Work that has not yet been completed or abandoned.
In other words, the exception created by the "products-completed operations hazard" provides coverage for "physical injury to tangible property" "arising out of" the insured's work and caused by an "occurrence."
Cincinnati avers that, based on the "clear and unambiguous terms" of this exclusion, the commercial general liability policy issued to Cleveland affords no coverage for the counterclaims asserted by Whitehouse, because the alleged "damage" to property "necessary to gain access to and correct" the allegedly defective work of Cleveland is part of the restoration, repair or replacement specifically excluded by Section I(A)(2)(j)(6). Accordingly, Cincinnati contends that it is entitled as a matter of law to summary judgment dismissing the Third-Party Demand of Whitehouse.
Cleveland and Whitehouse disagree with Cincinnati's interpretation and application of Section I(A)(2)(j)(6). Respondents do not dispute that this Section excludes coverage for the restoration, repair or replacement of any property upon which Cleveland may have performed defective work, or for the defective work, itself. They contend, rather, that "damage" to property "necessary to gain access to and correct" the allegedly defective work of Cleveland is not part of the same restoration, repair or replacement excluded by Section I(A)(2)(j)(6). Accordingly, respondents argue that because genuine issues of material fact remain with regard to coverage for property damage other than to "[t]hat particular part of any property" upon which the insured's work was "incorrectly performed," summary judgment is inappropriate and Cincinnati's motion should be denied.
Under Ohio law, "courts have found that such standard exclusions in a business liability policy ensure that `damage resulting from a contractor's own work usually is excluded as liability insurance should not be a warranty or performance bond for general contractors.'" Hahn's Elec. Co. v. Hartford Cas. Co., 2002 WL 31111850, at 7 (Ohio App. 10 Dist. 2002) ( quoting Panzica Constr. Co. v. Ohio Cas. Ins. Co., 1996 WL 257470 (Ohio App. 8 Dist. 1996); see also Erie Ins. Exchange v. Colony Dev. Corp., 136 Ohio App.3d 406, 736 N.E.2d 941 (Ohio App. 1999). "The exclusions generally operate to exclude coverage for damage to the work of the insured, but generally do not exclude coverage for collateral damage to other property." Id. ( citing Panzica Constr. supra). The purpose of this is "to discourage careless work by making general contractors pay for any losses caused by their own work." Id. "Thus, a liability policy does not cover claims for the insured's defective or insufficient work or for the repair or replacement of that work." Id. See Zanco, Inc. v. Michigan Mut. Ins. Co., 11 Ohio St.3d 114, 464 N.E.2d 513 (Ohio 1984); Erie Ins. Exchange at 414, 736 N.E.2d 941; Westfield Ins. Co. v. Riehle, 113 Ohio App.3d 249, 254-55, 680 N.E.2d 1025 (Ohio App. 1996).
The "clear and unambiguous terms" of the commercial general liability policy issued by Cincinnati to Cleveland exclude coverage "for the insured's defective or insufficient work or for the repair or replacement of that work." Hahn's Elec. Co. v. Hartford Cas. Co., 2002 WL 31111850, at 7. Section I(A)(2)(j)(6) specifically excludes "property damage" to "that particular part of any property that must be restored, repaired or replaced because `your work' was incorrectly performed on it." Thus, with respect to Cincinnati's liability for Cleveland's allegedly defective work, or for the restoration, repair or replacement of such defective work, Cincinnati's motion must be granted.
The terms of the general liability policy, however, are not so "clear and unambiguous" regarding Cincinnati's potential liability for harm to property other than that upon which Cleveland worked which was necessary to repair Cleveland's work. The Court finds that genuine issues of material fact remain with regard to coverage for collateral "damage" to property "necessary to gain access to and correct" the allegedly defective work of Cleveland This alleged damage was not to "that particular part of any property that must be restored, repaired or replaced because `[Cleveland's] work' was incorrectly performed on it," which Section I(A)(2)(j)(6) specifically excludes. (Emphasis added). The exclusion in this policy is limited to property on which Cleveland worked. There is a question as to whether the disputed property damage arose out of an occurrence, as defined in the policy. The Court regards these issues as questions of fact. Under Ohio law, "where exceptions . . . are introduced into an insurance contract, a general presumption arises to the effect that that which is not clearly excluded from the operation of such contract is included in the operation thereof." Andersen v. Highland House Co., 757 N.E.2d, at 332 (quoting Home Indemn. Co. of New York v. Plymouth, 64 N.E.2d 248 (Ohio 1945)). Accordingly,
The Court notes, as an aside, that the briefing submitted in support of and opposition to this motion did not thoroughly address the issue of whether damage necessary to gain access to and correct Cleveland's work was covered by the policy. Although the Court researched that issue, it would nevertheless consider additional authority on that topic if either party were to submit such briefing in support of a Rule 59 or Rule 60 motion.
The Court was not illuminated by counsel as to whether the damage at issue arose out of an occurrence or whether it arose out of Cleveland's work, and would consider additional authority on that subject presented along the lines suggested in the above footnote.
IT IS ORDERED that third-party defendant Cincinnati's Motion for Summary Judgment (Rec. Doc. No. 83) is hereby GRANTED IN PART, with respect to Cincinnati's liability for Cleveland's allegedly defective work, or for the restoration, repair or replacement of such defective work.
IT IS FURTHER ORDERED that third-party defendant Cincinnati's Motion for Summary Judgment (Rec. Doc. No. 83) is hereby DENIED IN PART, with respect to Cincinnati's liability for collateral damage to property other than that upon which Cleveland allegedly performed defective work.