Opinion
No. C 98-0021 MJM
July 19, 1999
ORDER OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT
This insurance coverage dispute is before the Court on Plaintiffs' motions for summary judgment.
Beginning in 1983, Defendant Benchmark Inc./Taylor and Associates ("Benchmark") managed and supervised the installation of roofs at a number of Sears Roebuck and Company ("Sears") department stores across the country. When Sears found the roofs to be defective, it filed suit against Benchmark and other parties engaged in the project in the Circuit Court of Cook County, Illinois. (Doc. 1, Ex. 1.) During the time Benchmark supervised the roofing project, Benchmark had six different Comprehensive General Liability (CGL) insurance carriers. The CGL carriers relevant to this dispute include Hartford Casualty Insurance Company ("Hartford"), Westfield Companies ("Westfield"), Regent Insurance Company ("Regent"), Cincinnati Insurance Company ("Cincinnati"), and Maryland Casualty Company ("Maryland").
On February 2, 1998, Plaintiff Hartford filed this Declaratory Judgment Act (DJA) action pursuant to 28 U.S.C. § 2201 (1998) against Benchmark. In the first count of its complaint, Hartford urges the Court to declare that the CGL policy it issued to Benchmark does not provide liability coverage to Benchmark in the dispute between Benchmark and Sears. Hartford maintains that an exclusion in the language of the policy, discussed at length in this Order, precludes coverage.
Section 2201 states, in pertinent part: "In an actual controversy within its jurisdiction, . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such."
In the second count of the complaint, Hartford alleges that Benchmark fraudulently failed to disclose any relevant losses or claims pending against Benchmark when Benchmark signed the Commercial Insurance Application for the policy. Hartford seeks a declaration that Benchmark's failure to disclose relevant pending claims and occurrences also precludes liability coverage.
Intervenor Plaintiff Westfield and Intervenor Plaintiff Regent joined the litigation soon after Hartford filed its initial complaint. Westfield and Regent issued substantially similar CGL policies with identical exclusions that covered different time periods.
Hartford insured Benchmark under a CGL policy from January 1, 1994 until January 1, 1996. Westfield insured Benchmak under a CGL policy from January 1, 1996 until October 10, 1996. (Doc. 33, at 6.) Regent insured Benchmark from October 1, 1996 until October 1, 1997. (Doc. 71, at 4.)
In a parallel proceeding, Plaintiff Cincinnati initiated a separate DJA action against Benchmark. The Court consolidated the two lawsuits on December 29, 1998. (Doc. 46.) Maryland filed a similar declaratory judgment action in the Iowa District Court for Linn County in Cedar Rapids, Iowa. (Doc. 37, at 3.)
Cincinnati's original case number was 98-122. (Doc. 46.)
On October 15, 1998, Regent, Hartford, and Westfield moved for summary judgment. Benchmark then moved to dismiss or stay the case in order to allow Maryland's parallel action to proceed in Iowa state court. After oral argument, the Court denied Benchmark's motion to stay or dismiss. (Doc. 57.) On May 17, 1999, Benchmark filed a resistance to the motions for summary judgment and requested oral argument. (Doc. 61.) The Court heard oral argument on June 21, 1999.
Regent filed its motion separately from Hartford and Westfield. (Doc. 30.) Hartford and Westfield filed a joint motion. (Doc. 32.).
The Court determined that it would entertain the dispositive motion in the case because the federal actions were filed first and the federal action had progressed to the point that it would be the most efficient use of judicial resources to decide the motion. The Court also stated that it would entertain a renewed motion to stay or dismiss if the Court denied the motions for summary judgment.
II. Analysis
Summary judgment is appropriate if the record shows that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Berryhill v. Schriro, 137 F.3d 1073, 1075 (8th Cir. 1998) (citing Fed.R.Civ.P. 56(c)). "[S]ummary judgment is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed `to secure the just, speedy and inexpensive determination of every action.'" Wabun-Inini v. Sessions, 900 F.2d 1234, 1238 (8th Cir. 1990) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986)).
Procedurally, the moving party bears the initial responsibility of informing the district court of the basis for its motion and identifying the portions of the record which show a lack of a genuine issue. Hartnagel v. Norman, 953 F.2d 394, 395 (8th Cir. 1992) (quoting Celotex, 477 U.S. at 323). When the movant has carried its burden under Rule 56(c), "its opponent must do more than simply show there is some metaphysical doubt as to the material facts." Id. (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)). The facts and circumstances that the nonmoving party relies upon "must attain the dignity of substantial evidence and must not be such as merely to create a suspicion." Metge v. Baehler, 762 F.2d 621, 625 (8th Cir. 1985).
Interpretation of an insurance policy, including the resolution of a coverage dispute, is a question of law suitable for resolution on a motion for summary judgment. Newyear v. Church Ins. Co., 155 F.3d 1041, 1042 (8th Cir. 1998). When the Court is presented with the question of whether an insurance policy provides liability coverage for a particular claim at the summary judgment stage, the central material facts are ordinarily the terms of the written contract and the plaintiff's allegations in the underlying litigation. Erie Ins. Group v. Alliance Environmental, Inc., 921 F. Supp. 537, 539 (S.D. Ind. 1996), aff'd sub nom. Erie Ins. Group v. Sear Group, 102 F.3d 889 (7th Cir. 1996).
A. The Declaratory Judgment Act
In the insurance coverage context, the DJA provides a useful procedural device for adjudicating disputes. Allstate Ins. Co. v. Green, 825 F.2d 1061, 1064 (6th Cir. 1987). The DJA is frequently used by parties to determine the duties imposed under an insurance contract, including the applicability of exclusion clauses. RLI Ins. Co. v. Drollinger, 97 F.3d 230, 231 (8th Cir. 1996). However, the DJA does not confer jurisdiction upon federal courts, Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671 (1950), so the power to issue declaratory judgments must lie in some independent basis of jurisdiction. Cardtoons, L.C. v. Major League Baseball Players Ass'n, 95 F.3d 959, 964 (10th Cir. 1996); see also Victor Foods v. Crossroads Econ. Dev., 977 F.2d 1224, 1227 (8th Cir. 1992). In this case, the parties base jurisdiction on diversity. 28 U.S.C. § 1332 (1998). Therefore, it is appropriate for the Court, under the DJA, to determine the rights and duties of each of the parties under the CGL policies.
In its complaint, Hartford asserted federal diversity jurisdiction, but failed to aver either the citizenship of the defendants or an amount in controversy. (Doc. 1., at 2.) Intervenor Plaintiff Regent's Complaint for Declaratory Judgment articulated diversity citizenship of all parties, but it failed to state an amount in controversy. (Doc. 11.). Westfield also failed to state an amount in controversy. The Court will not dismiss a complaint for failure to plead an amount in controversy unless "it appears to a legal certainty that the claim is really [for] less than the jurisdictional amount." Larkin v. Brown, 41 F.3d 387, 388 (8th Cir. 1994) (citing St. Paul Indem. Co. v. Red Cab Co., 303 U.S. 283, 289 (1938)) (emphasis provided). In applying the legal certainty test, the Court may resort to matters outside the pleadings in order to amplify the meaning of the complaint's allegations. 15 James Wm. Moore et al., Moore's Federal Practice § 102.107.[3] (3d ed. 1997). Sears Roebuck Co. alleges that Benchmark negligently supervised the installation of a number of roofs on its commercial property across the country. A large commercial dispute such as this would certainly exceed the jurisdictional amount in controversy threshold. Accordingly, the Court has jurisdiction in this case despite a lack of clarity in the pleadings.
The DJA is procedural in nature and, therefore, federal law determines whether a district court may properly enter a declaratory judgment in a given case. Britamco Underwriters, Inc., v. C.J.H., Inc., 845 F. Supp. 1090, 1092-93 (E.D. Pa. 1994), aff'd, 37 F.3d 1485 (3d Cir. 1994). However, a federal court sitting in diversity must apply the substantive law of the state in which the cause of action arose. Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938); White v. Consolidated Indus., Inc. v. McGill Manu. Co., Inc., 165 F.3d 1185, 1187 (8th Cir. 1999). Thus, while federal law will control whether the Court has the power to render a declaratory judgment, state law will be applied to the underlying substantive issues. Britamco, 845 F. Supp. at 1092-93. In this case, the relevant policies of insurance were entered into in Iowa, and the parties do not dispute that Iowa law applies to the substantive elements of this dispute. Thus, the Court will apply Iowa contract law.
B. Iowa Contract Law
When interpreting an insurance policy, the Court will give words in the policy their plain and ordinary meaning-not their technical meaning. Plymouth Farmers Mut. Ins. Ass'n v. Armour, 584 N.W.2d 289, 292 (Iowa 1998). The burden of proving an exclusion from coverage falls squarely on the insurer. Id. at 292-92. Liability exclusion clauses must be read in the context of the policy as a whole. Cairns v. Grinnell Mut. Reins. Co., 398 N.W.2d 821, 824 (Iowa 1987).
An insurer's duty to defend "arises whenever there is potential or possible liability to indemnify the insured based on the facts appearing at the outset of the case." Employers Mut. Cas. v. Cedar Rapids TV, 552 N.W.2d 639, 641 (Iowa 1996) (quoting A.Y. McDonald Indus., Inc. v. Ins. Co. of N. Am., 475 N.W.2d 607, 627 (Iowa 1991)). In a declaratory judgment action, the duty to defend rests solely on whether the underlying complaint contains any allegations that arguably or potentially bring the action within the policy coverage. Id.
C. Professional Services Exclusion
The CGL policies issued Hartford, Westfield, and Regent each contained a broadly-framed professional services exclusion. The exclusions are identical in each of the three policies at issue:
Exclusion — Engineers, Architects or Surveyors Professional Liability
This insurance does not apply to "bodily injury," "property damage," "personal injury," or "advertising injury" arising out of the rendering or failure to render any professional services by or for you, including:
1. The preparing, approving, or failing to prepare or approve maps, drawings, opinions, reports, surveys, change orders, designs or specifications; and
2. Supervisory, inspection or engineering services.
(Doc. 33, at 8.)
Benchmark asserts that Sears complaint includes allegations of "run of the mill" negligence as well as allegations of "professional services" negligence. Therefore, Benchmark argues, the exclusion does not apply, and Hartford, Westfield, and Regent owe Benchmark a duty to defend the Illinois lawsuit.
Hartford, Westfield, and Regent maintain that Sears hired Benchmark as a consultant to perform professional services and that all of the allegations in the Sears complaint implicate only Benchmark's performance of professional services. Hartford, Westfield, and Regent maintain that the allegations in the Sears complaint do not stem from the actual installation of the roofs or other general, non-professional negligence. Thus, they argue, Benchmark's conduct falls squarely under the exclusion, and Hartford, Westfield, and Regent do not owe Benchmark a duty to defend the Illinois action.
Courts that have construed professional services exclusion clauses have adopted an expansive definition of the term "professional service." Hurst-Rosche Engineers v. Commercial Union Ins., 51 F.3d 1336, 1343 (7th Cir. 1995) (interpreting an exclusion identical to the Hartford, Westfield, and Regent exclusion). "The term is not limited to services performed by persons who must be licensed by a governmental authority in order to practice their professions. Rather, it refers to any business activity conducted by the insured which involves specialized knowledge, labor, or skill, and is predominantly mental or intellectual as opposed to physical or manual in nature." Id.
Benchmark has submitted to the Court the most recent Sears pleading from the Illinois lawsuit. (Doc. 63, Ex. 1.) In addition to Benchmark, the Sears complaint named two additional defendants: D.C. Taylor ("Taylor") and J.P.S. Elastomerics ("J.P.S."). The complaint delineates the distinct function that each defendant performed in the Sears roofing project.
The complaint states that Benchmark engaged in construction management activities, and held itself out as experienced in recommending, selecting, and managing the installation and repair of roofs on commercial and industrial structures. (Doc. 63, Ex. 1, ¶ 4.) The complaint describes Benchmark as a roofing consultant in several different paragraphs. ( Id. at ¶ 11, 21, 34.) Taylor is described as engaged in the business of constructing, installing, and/or repairing roofs. ( Id. at ¶ 3.) Finally, the complaint states that J.P.S. "manufactured, sold, and distributed the roofing materials and roofing systems" installed on the Sears buildings. ( Id. at ¶ 2.)
Throughout the complaint, Sears alleges its damages flowed from Benchmark's failure to properly provide management and consulting services. In Count VII, a negligence claim, Sears states that "Benchmark was a professional expert in the inspection, selection, adaption, application, installation, replacement, and repair of roofing systems. . . and Benchmark breached its duty by . . . (a) failing to select and recommend proper roofing systems; (b) by failing to supervise and inspect the installation of the roofing systems; (c) by failing to ensure that the installation of the roofing systems complied with applicable codes and/or standards at the time in question; and (d) by providing services that fell below the applicable standard of care." ( Id. at ¶ 107.) In Count VIII, a claim that Benchmark breached its fiduciary duties to Sears, Sears states that "Benchmark possessed a high level of expertise in the evaluation of roofing systems and breached its duty by . . . (e) by failing to disclose to Sears, Benchmark's agency relationship with JPS; and (f) by advising and representing JPS on matters that were adverse to the best interests of Sears." Count X (negligent misrepresentation claim), Count XI (breach of contract), Count XII (Consumer Fraud and Deceptive Practices Act), and Count XIII (failure to warn), all contain substantially similar allegations.
Sears does not allege that Benchmark negligently installed the roofs nor does Sears allege that Benchmark sold Sears unsuitable roofing materials, probably because Taylor and J.P.S. performed those duties. Instead, all the allegations against Benchmark rest on Benchmark's alleged failure to provide its specialized knowledge, labor, or skill as a roofing consultant.
To avoid the sweep of the professional services exclusion, Benchmark maintains that since the clause is captioned " Engineers, Architects and Surveyors," the exclusion applies only to engineers, architects, and surveyors. Such a reading disregards the actual language of the clause. The language of the clause excludes all professional services from liability coverage: This insurance policy does cover any injury caused by the "rendering or failure to render any professional services by or for [Benchmark]." (Doc. 33, at 8.)
A contract is to be interpreted as a whole. ASPI v. Board, 586 N.W.2d 325, 335 (Iowa 1998). The heading of a section cannot limit the plain meaning of the text. Searls v. Iowa Dep't of Transp., 405 N.W.2d 808, 810 (Iowa 1987); see also Natural Gas Pipeline Co. of America v. Odom Offshore Surveys, Inc., 697 F. Supp. 921, 928 (E.D. La. 1988), aff'd, 889 F.2d 633 (5th Cir. 1989) (identical professional services exclusion clause). Benchmark cannot rely on the heading of the clause alone and disregard the language of the clause. Moreover, as discussed supra, courts have adopted an expansive definition of the term "professional service." Hurst-Rosche Engineers, 51 F.3d at 1343. Benchmark's duties on the Sears roofing project fall within this expansive definition. Accordingly, Benchmark's first argument that the clause does not apply is without merit.
In a second argument, Benchmark maintains that "the Sears complaint contains numerous claims and allegations that do not involve professional services, . . .including hands-on labor and routine managerial, clerical, and administrative services . . ." (Doc. 63, at 8.) Benchmark contends that because the allegations include non-professional duties, the professional services exclusion is inapplicable. For example, Benchmark points out that since the roofing agreement required Benchmark to inspect the roofs upon completion, it may have removed loose debris, bottles, cans or other materials from the roofs. (Doc. 65, at 14.) However, the allegations in the complaint focus almost exclusively on the services Benchmark provided in its capacity as a consultant. Any physical labor or routine administrative duties that Benchmark performed were incidental to Benchmark's role as a professional consultant on the project. If the Court were to adopt Benchmark's reading of the exclusion, any time a professional consultant performed a duty that did not require "specialized knowledge, labor, or skill" during the course of his professional duties, the exclusion would fail to bar coverage. Benchmark's reading of the clause would render nearly all professional services exclusions inoperative. Such a reading of a standard professional services exclusion is at odds with the law's expansive definition of professional services and with common sense. See Aetna Cas. Sur. Co. v. Dannenfeldt, 778 F. Supp. 484, 495-97 (D. Ariz. 1991) (exclusion applies to act of selling bonds because even if salesmen were untrained, sales were part of the provision of professional services). Sears hired Benchmark to perform professional services. When Sears became dissatisfied with Benchmark's performance, it initiated a lawsuit. Benchmark cannot now "focus down microscopically" on incidental tasks that Benchmark performed to avoid the effect of the professional services exclusion. Dannenfeldt, 778 F. Supp. at 495.
Benchmark points out that it served as the general contractor prior to 1985 and the work of a general contractor is "not a professional service." (Doc. 65, at 12.) Benchmark fails to mention that Benchmark did not serve as the general contractor during the relevant policy periods. Accordingly, such conduct is irrelevant.
The allegations in the Sears complaint allege that Benchmark failed to adequately perform its professional duties. These type of allegations fall within the professional services exclusion. See In re Reinforced Earth Co., 925 F. Supp. 913, 918-19 (D. P.R. 1996) (allegations that defendant's design, engineering, and construction work are deficient fall within the professional services exclusion). The CGL policies Hartford, Westfield, and Regent issued do not cover Benchmark's potential professional liability.
Benchmark's arguments also fail for one additional reason. CGL coverage and professional liability coverage "serve significantly different functions within the insurance industry." Prisco Serena Sturm Architects v. Liberty Mut. Ins. Co., 126 F.3d 886, 893 (7th Cir. 1997). CGL policies like the policies at issue in this case frequently contain professional services exclusions. "A so-called `general' liability insurance policy, is not a substitute for a professional `errors and omissions' policy." Erie, 921 F. Supp. at 549.
Prior to 1985, Benchmark acted as both a construction manager and a general contractor on the Sears project. After 1985, Benchmark performed solely as a roofing consultant, and the roof installer contracted directly with Sears. (Doc. 63, Ex. 1, ¶ 11.) The record reflects that Benchmark signed on to the Sears roofing project during the relevant policy periods (January 1, 1994-October 1, 1997, supra footnote 4) as a professional consultant. Benchmark could not have reasonably believed that the CGL policies provided liability coverage after Benchmark was designated exclusively as a consultant. As one court stated, "If the defendants wanted such coverage, they needed to buy a professional errors and omissions policy." Erie, 921 F. Supp. at 547. The professional services exclusion should have alerted Benchmark that the CGL policy did not cover Benchmark in the performance of its consulting duties.
II. Conclusion
The allegations in the complaint focus on Benchmark's provision of professional services. Under a plain reading of the exclusion, Hartford, Westfield, and Regent are not obligated to defend Benchmark in the Illinois suit. Moreover, the CGL policies at issue are not the type of policy intended to cover professional liability. It was not reasonable for Benchmark to expect Hartford, Westfield, and Regent, under the CGL policies, to defend Benchmark for liability incurred in the performance of professional services. Since the professional services exclusion applies, no potential liability exists under the terms of the three CGL policies. The Court finds that Hartford, Westfield, and Regent have neither a duty to defend nor a duty to indemnify Benchmark.
Since the professional liability exclusion precludes coverage under the policies issued by Hartford, Westfield, and Regent, the Court need not decide whether Benchmark failed to disclose relevant losses or pending claims against Benchmark at the time Benchmark signed the Commercial Insurance Application for the policy (Count II of Hartford's complaint). For the same reason, the Court need not address additional arguments raised by Regent.