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Evanston Insurance Co. v. A&S Roofing, LLC

United States District Court, W.D. Oklahoma

August 22, 2019

EVANSTON INSURANCE COMPANY, an Illinois corporation, as successor by merger with Essex Insurance Company, Plaintiff,
A&S ROOFING, LLC, an Oklahoma limited liability company, et al., Defendants.



         Before the Court is Plaintiff Evanston Insurance Company's Motion for Summary Judgment and Brief in Support [Doc. Nos. 44-45]. Defendant A&S Roofing Company has responded [Doc. No. 56] and Plaintiff has replied [Doc. No. 62].[1] The matter is fully briefed and ready for decision. For the reasons set forth, the Court grants summary judgment in favor of Plaintiff.[2]

         I. Introduction

         In this declaratory judgment action, Plaintiff, Evanston Insurance Company (Evanston), contends that two Commercial General Liability (CGL) insurance policies issued to Defendant, A&S Roofing Company (A&S), by Essex Insurance Company (Essex)[3] do not provide coverage for the claims raised in an underlying lawsuit styled Oklahoma Property Investors, III, LLC v. A&S Roofing, LLC and Jason P. Lakin, No. CJ-2017-4548, District Court of Oklahoma County, State of Oklahoma (the OPI Lawsuit).[4]Alternatively, Evanston argues that multiple exclusions apply that eliminate coverage. Evanston seeks a declaratory judgment that it has no duty to defend or indemnify A&S under the CGL policies.

         II. Standard Governing Summary Judgment

         “The 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). In deciding whether summary judgment is proper, the court does not weigh the evidence and determine the truth of the matter asserted, but determines only whether there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see also Birch v. Polaris Indus., Inc., 812 F.3d 1238, 1251 (10th Cir. 2015). An issue is “genuine” if there is sufficient evidence on each side so that a rational trier of fact could resolve the issue either way. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998). An issue of fact is “material” if under the substantive law it is essential to the proper disposition of the claim. Id. In evaluating a motion for summary judgment, a district court must consider the evidence in the light most favorable to the nonmoving party and draw all reasonable inferences from those facts in favor of that party. Sylvia v. Wisler, 875 F.3d 1307, 1328 (10th Cir. 2017).

         III. Undisputed Facts

         Essex issued two CGL policies to A&S. Essex Policy I had a policy period extending coverage from September 16, 2010 to September 16, 2011. Essex Policy II had a policy period extending coverage from September 16, 2011 to September 16, 2012. See CGL policies [Doc. Nos. 45-1 and 45-2].

         A. Applicable Provisions of the CGL Policies

         The coverage language of the two CGL policies is virtually identical.[5] Essex agreed to provide coverage for “those sums that the insured becomes legally obligated to pay as damages because of . . . ‘property damage' to which this insurance applies.” See CGL policies at 19, Section I, Coverages, ¶ 1(a). The insurance applies only to “property damage” that is “caused by an ‘occurrence.'” Id., ¶ 1(b). “Property damage” is defined as “[p]hysical injury to tangible property, including all resulting loss of use of that property . . . .” Id. at 33, Section V, Definitions, ¶ 17. And, “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id. at 32, ¶ 13.

         B. Endorsements

         As relevant here, the CGL policies contain three endorsements: (1) a Combination General Endorsement; a Combination Construction Related Endorsement; and a Roofing Endorsement. See CGL policies at 9-10, 12-13 and 16, respectively. The terms of the endorsements are more fully set forth below.

         C. Exclusions

         The CGL policies contain multiple exclusions. Evanston relies on the following exclusions to defeat any coverage under the CGL policies: (1) Exclusion 2.j6 - the faulty workmanship exclusion; (2) Exclusion 2.k - the “your product” exclusion; (3) Exclusion 2.l - the “your work” exclusion; (4) Exclusion 2.m - the “impaired property” exclusion; (5) the Combination General Endorsement exclusion for claims arising out of breach of contract; and (6) the exclusions for operations involving heat applications and membrane roofing set forth in the Combination Construction Related Endorsement and the Roofing Endorsement. The exclusions are addressed more fully below.

         D. A&S Roofing Work

         In 2010, A&S entered into a subcontract agreement with Eagle to replace roofs on three buildings owned by either Oklahoma Property Investors, LLC; Oklahoma Property Investors II, LLC or Oklahoma Property Investors III, LLC (collectively, OPI). The roofing systems installed by Eagle on all three buildings were membrane roofing systems.[6]The roofing installation on the building located at 3700 North Classen Boulevard was substantially completed on August 1, 2010. The roofing installation on the building located at 3800 N. Classen Boulevard was substantially completed on August 5, 2010. Finally, the roofing installation on the building located at 2915 North Classen Boulevard was substantially completed, at the latest, on December 15, 2010.[7]

         E. The OPI Lawsuit

         The OPI Lawsuit filed by OPI against A&S on August 11, 2017, alleges that A&S provided 15-year warranties for the roofing work performed on the three buildings owned by OPI and that A&S “breached each warranty by performing the work in a poor craftsmanship like manner resulting in failures to each of the . . . properties' roofs.” Pet. [Doc. No. 45-3], ¶¶ 2-6.[8] OPI seeks damages including “damages to its properties, damages to the properties of its tenants and costs of repairs to its properties.” Id., ¶ 10.[9]

         The written warranties A&S provided to OPI are virtually identical. Each warranty states that it “covers any failing portion of the roof due to poor craftsmanship during the installation of this roof” and that the warranty is “a labor warranty which covers any and all labor related issues, if any should arise.” See Warranties [Doc. Nos. 45-4, 45-5 and 45-6].

         IV. Governing Law

         Oklahoma law governs the issues presented in this action, where federal subject matter jurisdiction is predicated on diversity of citizenship. See, e.g., Universal Underwriters, Ins. Co. v. Winton, 818 F.3d 1103, 1105-06 (10th Cir. 2016). Neither party disputes that the CGL policies should be interpreted in accordance with Oklahoma law.

         A. Interpretation of Insurance Contracts

         Under Oklahoma law, “[w]hen policy provisions are clear, consistent, and unambiguous, [the court must] look to the plain and ordinary meaning of the policy language to determine and give effect to the parties' intent.” Porter v. Okla. Farm Bureau Mut. Ins. Co., 330 P.3d 511, 515 (Okla. 2014). “The interpretation of an insurance contract and whether it is ambiguous is a matter of law for the Court to determine and resolve accordingly.” Dodson v. St. Paul Ins. Co., 812 P.2d 372, 376 (Okla. 1991). “An insurance contract is ambiguous only if it is susceptible to two constructions on its face from the standpoint of a reasonably prudent layperson, not from that of a lawyer.” Haworth v. Jantzen, 172 P.3d 193, 196 (Okla. 2006). In determining whether a contract is ambiguous, the court “will not indulge in forced or constrained interpretations to create and then construe ambiguities[.]” Id.

         The insured has the burden of showing that a covered loss occurred, while the insurer has the burden of showing that a loss falls within an exclusionary clause of the policy. See Pitman v. Blue Cross & Blue Shield of Okla., 217 F.3d 1291, 1298 (10th Cir. 2000) (Once coverage is established, “the insurer has the burden of showing that a loss falls within an exclusionary clause of the policy.”); McGee v. Equicor-Equitable HCA Corp., 953 F.2d 1192, 1205 (10th Cir. 1992) (“It is a basic rule of insurance law that the insured carries the burden of showing a covered loss has occurred and the insurer must prove facts that bring a loss within an exclusionary clause of the policy.”); Fehring v. Universal Fid. Life Ins. Co., 721 P.2d 796, 799 (Okla. 1986) (insurer bears burden of proving applicability of exclusionary clause). An exclusion is a policy term eliminating coverage where it otherwise would have existed under the general declaration. Dodson, 812 P.2d at 377. “[P]olicy exclusions are read seriatim; each exclusion eliminates coverage and operates independently against the general declaration of insurance coverage and all prior exclusions by specifying other occurrences not covered by the policy . . . In case of doubt, exclusions exempting certain specified risks are construed strictly against the insurer.” Id. at 377 n. 11.

         B. Duty to Defend / Indemnify

         Under Oklahoma law, “[a] liability insurance policy generally contains two basic duties - the duty to defend and the duty to indemnify[.]” First Bank of Turley v. Fid. & Deposit Ins. Co. of Md., 928 P.2d 298, 303 (Okla. 1996). “The insurer's primary duty is to provide indemnity for loss or to pay a specified amount upon determinable contingencies.” Id. “The duty to defend is separate from, and broader than, the duty to indemnify.” Id. An insurer has a duty to defend if the facts raise the mere “potential of liability.” Id. “[O]nce an insurer's duty to defend is triggered, it must defend all claims in a lawsuit” even those that are not covered. Automax Hyundai South, L.L.C. v. Zurich Am. Ins. Co., 720 F.3d 798, 806 (10th Cir. 2013) (applying Oklahoma law and noting insurer “offered no authority demonstrating that Oklahoma deviates from this rule and circumscribes the duty to defend if the majority of the conduct alleged in the lawsuit would not be covered under an indemnity provision”).[10]

         V. Discussion

         A. Coverage

         Evanston claims it is entitled to summary judgment because coverage does not exist under the CGL policies. Evanston makes two arguments in support. First, Evanston points to the “legally obligated to pay” language of the CGL policies and argues this language makes clear that coverage only extends to tort-based claims. Evanston contends the OPI Lawsuit does not allege any tort claims, only warranty claims arising from contract. Second, Evanston contends the alleged “poor craftsmanship” giving rise to the claims in the OPI Lawsuit does not constitute an “occurrence” under the CGL policies. The Court addresses each of these arguments in turn.

         1. Legally Obligated to Pay

         First, Evanston argues coverage only extends to property damage for which “the insured becomes legally obligated to pay” because of “property damage” and that the phrase “legally obligated to pay” applies only to claims arising from tort, not claims arising from contract. According to Evanston, the claims in the OPI Lawsuit made by OPI against A&S arise from breach of warranty and under Oklahoma law, warranty claims flow from contract. Therefore, Evanston argues the CGL policies do not extend coverage to those claims. As support, Evanston relies upon VBF, Inc. v. Chubb Group of Ins. Cos., 263 F.3d 1226, 1231 (10th Cir. 2001).

         In VBF, Inc. the insured, VBF, sought a declaration that coverage existed under a CGL policy for claims brought against it by Foster Wheeler USA Corp. (Foster Wheeler). VBF manufactured certain electrical equipment and contracted with Foster Wheeler to sell the equipment to Foster Wheeler for a job in China. A subcontractor of VBF, Brand Export Packing of Oklahoma, Inc. (Brand Export), packaged the equipment.

         During shipment, the electrical equipment was damaged due to the containers provided by Brand Export. As a result, Foster Wheeler had to replace the damaged equipment. Foster Wheeler filed suit against VBF to recover its costs in replacing the equipment and asserted claims for breach of contract and breach of express and implied warranties. Foster Wheeler later amended its complaint and asserted a claim for negligence against VBF for failing to follow contract specifications.

         The CGL policy at issue, like the CGL policies involved in this case, provided that the insurer would “pay damages the insured becomes legally obligated to pay by reason of liability imposed by law . . . .” Id. at 1231. Applying Oklahoma law, the Tenth Circuit held that the phrases “legally obligated to pay” and “liability imposed by law” “refer only to tort claims and not contract claims.” Id. The court found that Foster Wheeler's suit against VBF was based on contract, not tort, as it sought recovery for costs in replacing the defective electrical equipment. Id. Additionally, amendment of the complaint to include a claim for “negligently failing to follow contract specifications” did not alter the “underlying nature of the Foster Wheeler suit.” Id. The court cited, in part, well-established Oklahoma law that “tort products liability suits cannot be brought for damage to the product itself” and that “a consumer is protected from damage to the defective product only by contract law.” Id. (citation omitted).

         Evanston contends that under Oklahoma law, breach of warranty claims arise from contract and, therefore, under the holding of VBF, Inc., no coverage exists. See Pl.'s Br. at 21 (citing, Jaworsky v. Frolich, 850 P.2d 1052, 1054 (Okla. 1992); Waggoner v. Town & Country Mobile Homes, Inc., 808 P.2d 649 (Okla. 1990)).

         In response, A&S does not address (and necessarily, therefore, does not dispute) Evanston's contention that a breach of warranty claim arises from contract. Instead, A&S argues that the “underlying nature of the suit” governs rather than any theory of liability alleged and that OPI's claims “arise[]out of inadequate, improper, faulty or defective construction” and are “not limited to damages to the goods (the roofing system) itself.” See Def.'s Resp. at 19. A&S further relies on the allegation in the OPI Lawsuit pursuant to which OPI seeks ‚Äúdamages to ...

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