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Black & Veatch Corp. v. Aspen Insurance (UK) Ltd.

United States Court of Appeals, Tenth Circuit

February 13, 2018

BLACK & VEATCH CORPORATION, Plaintiff - Appellant,
ASPEN INSURANCE (UK) LTD; LLOYD'S SYNDICATE 2003, Defendants - Appellees.

          Appeal from the United States District Court for the District of Kansas (D.C. No. 2:12-CV-02350-SAC)

          David T. Dekker of Pillsbury Winthrop Shaw Pittman LLP, Washington, D.C. (David L. Beck of Pillsbury Winthrop Shaw Pittman LLC, Washington, D.C., and Roy Bash of Polsinelli PC, Denver, Colorado, with him on the brief) for Plaintiff - Appellant.

          Robert J. Franco (Andrew C. Patton and Scott O. Reed with him on the brief), of Franco & Moroney, LLC, Chicago, Illinois, for Defendants - Appellees.

          Before BRISCOE, MATHESON, and PHILLIPS, Circuit Judges.

          MATHESON, Circuit Judge.

         This case is an insurance coverage dispute between Plaintiff-Appellant Black & Veatch Corporation ("B&V") and Defendants-Appellees Aspen Insurance (UK) Ltd. and Lloyd's Syndicate 2003 (collectively, "Aspen"). The issue is whether Aspen must reimburse B&V for the costs B&V incurred due to damaged equipment that its subcontractor constructed at power plants in Ohio and Indiana. The district court held that Aspen need not pay B&V's claim under its commercial general liability ("CGL") insurance policy (the "Policy") because B&V's expenses arose from property damages that were not covered "occurrences" under the Policy. Because the only damages involved here were to B&V's own work product arising from its subcontractor's faulty workmanship, the court concluded that the Policy did not provide coverage and granted Aspen's motion for partial summary judgment. B&V appealed.

         The district court had diversity jurisdiction under 28 U.S.C. § 1332. We exercise appellate jurisdiction under 28 U.S.C. § 1291. Because we predict that the New York Court of Appeals would decide that the damages here constitute an "occurrence" under the Policy, we vacate the court's summary judgment decision and remand for further consideration in light of this opinion.

         I. BACKGROUND

         A. Factual Background

         B&V is a global engineering, consulting, and construction company. A portion of its work involves "EPC contracts." "EPC" stands for engineering, procurement, and construction. Under an EPC contract, B&V delivers services under a single contract. It supervises the project and typically subcontracts most-if not all-of the actual procurement and construction work.

         1. Underlying Claim Against B&V for Property Damages

          In 2005, B&V entered into EPC contracts with American Electric Power Service Corporation ("AEP") to engineer, procure, and construct several jet bubbling reactors ("JBRs"), which eliminate contaminants from the exhaust emitted by coal-fired power plants.[1] For at least seven of these JBRs, which were located at four different power plants in Ohio and Indiana, B&V subcontracted the engineering and construction of the internal components to Midwest Towers, Inc. ("MTI"). Deficiencies in the components procured by MTI and constructed by MTI's subcontractors caused internal components of the JBRs to deform, crack, and sometimes collapse.

         After work on three of the JBRs was completed, and while construction of four others was ongoing, AEP alerted B&V to the property damage arising from MTI's negligent construction. AEP and B&V entered into settlement agreements resolving their disputes relating to the JBRs at issue here. Under the agreements, B&V was obligated to pay more than $225 million in costs associated with repairing and replacing the internal components of the seven JBRs. 2. The B&V-Aspen CGL Policy

         B&V had obtained several insurance policies to cover its work on these JBRs.[2]Zurich American Insurance Company ("Zurich") provided the primary layer of coverage for up to $4 million for damage to completed work. Under the CGL Policy at issue here, Aspen provides the first layer of coverage for claims exceeding the Zurich policy's limits.[3] The Policy limits coverage up to $25 million per occurrence and $25 million in the aggregate. The structure of the Policy consists of (a) a basic insuring agreement defining the general scope of coverage, (b) exclusions from coverage, and (c) exceptions to the exclusions.

         a. Basic insuring agreement

The Policy's basic insuring agreement reads:
We [the Insurer] will pay on behalf of the "Insured" those sums in excess of the [liability limit provided by other insurance policies] which the "Insured" by reason of liability imposed by law, or assumed by the "Insured" under contract prior to the "Occurrence", shall become legally obligated to pay as damages for:
(a) "Bodily Injury" or "Property Damage" . . . caused by an "Occurrence" . . .

ROA, Vol. 1 at 68.

         It defines the key terms as follows:

. Occurrence: "an accident, including continuous or repeated exposure to substantially the same general harmful conditions, that results in 'Bodily Injury' or 'Property Damage' that is not expected or not intended by the 'Insured'." Id. at 71.
. Property Damage: "physical injury to tangible property of a 'Third Party', including all resulting loss of use of that property of a 'Third Party' . . . ." Id. at 72.
. Third Party: "any company, entity, or human being other than an 'Insured' or other than a subsidiary, owned or controlled company or entity of an 'Insured'." Id.

         In sum, the Policy covers damages arising from an "occurrence, " which includes an accident causing damage to the property of a third party. It does not define "accident."

         b. Exclusions

         Following the basic insuring agreement, the Policy then scales back coverage through several exclusions, two of which are relevant here. The first, known as the "Your Work" exclusion, or "Exclusion F, " excludes coverage for property damage to B&V's own completed work. It reads:

This policy does not apply to . . . 'Property Damage' to 'Your Work' arising out of it or any part of it and included in the 'Products/Completed Operations Hazard.'

Id. at 74. "Products/Completed Operations Hazard" refers to property damage or bodily injury arising out of completed work. Id. at 72. "Your Work" is defined as "work operations performed by you or on your behalf by a subcontractor. Id. at 73. References to B&V's own work thus include work done by B&V as well as MTI.

         The second exclusion, known as "Endorsement 4, " excludes coverage for property damage to the "particular part of real property" that B&V or its subcontractors were working on when the damage occurred. Id. at 83. This exclusion pertains only to ongoing, rather than completed, work.

         c. Exception

          The "Your Work" exclusion is subject to an exception, thus restoring some coverage. The exception provides that "[the 'Your Work' exclusion] does not apply if the damaged work or the work out of which the damage arises was performed on [B&V's] behalf by a subcontractor." Id. at 74 (emphasis added). In other words, the Policy does not cover property damage to B&V's own completed work unless the damage arises from faulty construction performed by a subcontractor. We refer to this as the "subcontractor exception."

         B. Procedural History

         B&V submitted claims to its liability insurers for a portion of the $225 million it cost to repair and replace the defective components. After B&V recovered $3.5 million from Zurich, its primary insurer, [4] it sought excess recovery from Aspen. Aspen denied coverage. B&V sued Aspen in federal district court for breach of contract and declaratory judgment as to B&V's rights under the Policy. B&V sought coverage for approximately $72 million, a portion of the total loss. On cross-motions for partial summary judgment on the coverage issue, the court sided with Aspen, holding that damage arising from construction defects was not an "occurrence" under the Policy unless the damage occurred to something other than B&V's own work product. Because the damages here occurred only to the B&V's own work product-the JBRs-the court found they were not covered.[5] This appeal followed.


         We begin with our standard of review. We then discuss standard-form CGL policies, relevant New York law regarding CGL policies and insurance contract interpretation, and the relevance of our decision in Greystone Construction, Inc. v. National Fire & Marine Insurance Co., 661 F.3d 1272, 1289 (10th Cir. 2011), which addressed a similar coverage issue. Interpreting the Policy in light of applicable law, we conclude the district court erred in determining that a subcontractor's faulty workmanship causing damage to an insured's own work can never be an "occurrence."

         The threshold and primary question is whether the New York Court of Appeals, the highest court in the State of New York, would hold that the Policy's basic insuring agreement covers the property damage to the JBRs as an "occurrence." Greystone, 661 F.3d at 1282 (explaining that in the absence of a decision by the highest court of a state, we follow a decision by an intermediate court unless we find a convincing reason to do otherwise). We conclude the damages constitute an "occurrence" under the Policy because they were accidental and harmed a third party's property. Further, a contrary reading would render the "subcontractor exception" and "Endorsement 4" mere surplusage, in violation of New York law. The subcontractor exception does not create coverage. Only the basic insuring agreement can do that. But the subcontractor exception informs our understanding of an "occurrence" based on New York's rule that we should read the insurance policy as a whole and avoid interpretations that render provisions meaningless. Applying these analytical tools, we predict the New York Court of Appeals would conclude that the damages at issue here are "occurrences" under the Policy's basic insuring agreement.

         New York state court decisions have not resolved whether subcontractor damages can be deemed an "occurrence" under a CGL policy containing a subcontractor exception. The district court and Aspen contend that New York courts have answered this question, relying heavily on George A. Fuller Co. v. United States Fidelity and Guaranty Co., 613 N.Y.S.2d 152, 153 (N.Y.App.Div. 1994), and other intermediate appellate court decisions. But they ignore a critical distinction between Fuller and the present case. The court in Fuller considered a CGL policy that excluded coverage for damages to an insured's own work, whether the damage was caused by the contractor or a subcontractor. Unsurprisingly, Fuller concluded that the particular policy in that case was not intended to insure against faulty workmanship in the work product itself. Id. at 155. The decision offered no analysis regarding policies, such as the one here, explicitly stating that damages to an insured's own work are covered when a subcontractor, rather than the contractor itself, performed the faulty workmanship. In other words, Fuller does not stand for the proposition that damages caused by a subcontractor's faulty workmanship can never constitute an "occurrence" under a CGL policy. For this and other reasons more fully explained below, Fuller and the cases that rely on it are inapt and distinguishable. We thus reverse the district court's holding that denied coverage and remand for further proceedings in light of this opinion.[6]

         A. Standard of Review

         We review summary judgment de novo and apply the same legal standard as the district court. Cornhusker Cas. Co. v. Skaj, 786 F.3d 842, 849 (10th Cir. 2015). A court "shall grant summary judgment 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); see also Cornhusker, 786 F.3d at 850. We also review legal questions de novo, including the district court's interpretation of New York law, which the parties agree governs here. See Bird v. West Valley City, 832 F.3d 1188, 1199 (10th Cir. 2016). "Where the state's highest court has not addressed the issue presented, the federal court must determine what decision the state court would make if faced with the same facts and issue." Id. (quotations omitted).

         B. Standard-Form CGL Policies

         A CGL policy covers the costs a policyholder incurs due to property damage and bodily injury. See Donald S. Malecki, Commercial General Liability Coverage Guide, The National Underwriter Company at 9 (10th ed. 2013) ("CGL Coverage Guide"). In this section, we describe: (1) the structure and (2) the history and development of CGL policies.

          1. Structure of Standard-Form CGL Policies

         Most CGL policies are drafted using standardized forms developed by the Insurance Services Office, Inc. ("ISO"), an association of insurance carriers. See Hartford Fire Ins. Co. v. California, 509 U.S. 764, 772 (1993). ISO maintains a large portfolio of "endorsements, " language that can be used to amend a standard CGL policy to suit the needs of the insured or insurer. CGL Coverage Guide at 177. Policies that deviate from the standard CGL policy forms and endorsements are called "manuscript" policies. See Gabarick v. Laurin Mar. (Am.), Inc., 650 F.3d 545, 554 (5th Cir. 2011) (explaining that manuscript policies are tailored to the unique coverage needs of the insured); Bangert Bros. Const. Co. v. Americas Ins. Co., 66 F.3d 338, at *2 (10th Cir. 1995) (unpublished table decision).

         The basic structure of standard CGL policies mirrors the three-part structure of the B&V-Aspen Policy described above. CGL policies begin with the "basic insuring agreement" defining the initial scope of coverage. An insured cannot recover for property damages that fall outside this definition. The basic insuring agreement is then subject to exclusions, which narrow the scope of coverage. The exclusions are then subject to exceptions, which restore coverage-but only to the extent coverage was initially included in the basic insuring agreement.

         a. Basic insuring agreement

         CGL policies begin with a broad grant of coverage in the basic insuring agreement. An "occurrence" triggers coverage. CGL policies-including the Policy here-define an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." CGL Coverage Guide, App. K: 2013 Claims-Made Form, at 558. Neither the standard CGL policy nor the Policy in this case defines the term "accident."

         b. Exclusions-and exceptions to exclusions

          i. Overview

         The scope of the basic insuring agreement for damages caused by an "occurrence" is then limited by any exclusions from coverage that the parties include in the policy. In other words, a CGL policy starts with a broad grant of coverage for damages arising from an "occurrence." Exclusions narrow the scope of coverage. For example, CGL policies generally exclude coverage for damages that the insurer "expected or intended." See id. at 543. Exceptions to the exclusions may restore-but do not create-coverage.

         ii. The "Your Work" exclusion and "subcontractor exception"

         One of the standard-form CGL exclusions and its corresponding exception is identical to the "Your Work" exclusion and "subcontractor exception" in the Policy here. See CGL Coverage Guide, App. K: 2013 Claims-Made Form, at 547.[7] In the standard-form CGL policy, this exclusion is listed as "Exclusion L." Id. In the Policy, it is listed as "Exclusion F." For consistency, we refer to this provision as the "Your Work" exclusion.

          As in the Policy and the standard-form CGL policy, the "subcontractor exception" follows the "Your Work" exclusion. This exception provides that the "Your Work" exclusion "does not apply if the damaged work or the work out of which the damage arises was performed ...

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