Klenning v. Comm'l Union Insurance Co.
| Decision Date | 25 April 2001 |
| Docket Number | No. 00-5332,00-5332 |
| Citation | 260 F.3d 574 |
| Parties | (6th Cir. 2001) Sandra K. Lenning, Plaintiff-Appellant, v. Commercial Union Insurance Company, Defendant-Appellee. Argued: |
| Court | U.S. Court of Appeals — Sixth Circuit |
Charles G. Middleton III, MIDDLETON & REUTLINGER, Louisville, Kentucky, for Appellant.
Robert P. Johnson, THOMPSON, HINE & FLORY, Cincinnati, Ohio, for Appellee.
Before: BOGGS and CLAY, Circuit Judges; GWIN, District Judge. *
Plaintiff, Sandra Lenning, appeals the district court's order granting summary judgment in favor of Defendant Commercial Union Insurance Company in this diversity action alleging breach of a homeowner's insurance policy and violation of Kentucky consumer protection and insurance statutes. The district court determined that Defendant did not breach the terms of the policy and did not act in bad faith by denying Plaintiff a legal defense against a lawsuit filed against her. The district court further held that Defendant did not violate the Kentucky statutes. We now AFFIRM.
The following account of the facts is adopted from the district court opinion.
Plaintiff is employed by PNC Bank as a Vice President in its private client group, a position she describes as a lender. Plaintiff's fiance, Ed Gatterdam, has worked as a general contractor for residential homes. His own construction business ended with his personal bankruptcy in 1990. In 1996, Plaintiff and Gatterdam agreed to build six homes, using the profits from the sale of each home to finance construction of the next home. According to their plan, Plaintiff would obtain a construction loan to finance the building of each house. Gatterdam would then serve as construction manager and receive a fee paid by Plaintiff. The couple hoped that their plan would generate enough money so that they could retire to Florida. However, Plaintiff now claims that when she purchased the first lot in June of 1996, she intended to build a home for use as her personal residence.
The first house on which Plaintiff and Gatterdam collaborated was built at 5708 Timber Ridge in Prospect, Kentucky. 1 When Gatterdam began clearing the lot and pouring the house's concrete foundation, he erected a sign that read, "E & G Associates--will build to suit." 2 The sign also included Gatterdam's home telephone number, which was assigned to the apartment he shared with Plaintiff. Shortly after Gatterdam poured the foundation, Dennis Tapp, an interior decorator who lived nearby, contacted Plaintiff and Gatterdam by telephone and expressed his interest in purchasing the as yet unbuilt house. Plaintiff believes that Tapp contacted them after seeing the phone number on the sign. Tapp met with Plaintiff and Gatterdam on a Saturday morning to review the house's plans and to suggest design changes. On August 14, 1996, Plaintiff, Gatterdam, and Tapp signed a document titled "Tri-Party Construction Contract," under which Tapp agreed to purchase the home from Plaintiff for $196,000 upon completion.
Although Tapp was the home buyer, Plaintiff obtained the construction loan necessary to finance the building of the house. She personally paid subcontractors and obtained all necessary building licenses and permits. Plaintiff and Gatterdam jointly sent a letter to one subcontractor expressing their displeasure with the installation of the home's "DRYVIT" outer covering. In addition the two jointly signed all change orders. Although the term "Seller" appeared beneath Plaintiff's signature on the change orders, the forms bore the heading " The parties closed on the contract on January 30, 1997, with Plaintiff conveying the property to Tapp by a general warranty deed at a profit of over $ 30,000. Plaintiff never moved into or spent a night at the house.
After purchasing the lot, but before entering the contract with Tapp, Plaintiff obtained a custom homeowner's insurance policy (the "policy") written by the Commercial Union Insurance Company ("CUIC") through an independent agent, the Langan Company ("Langan"). The policy purchased by Plaintiff includes a section entitled "SECTION II - LIABILITY COVERAGES", which sets forth the terms for coverage, including a legal defense for personal liability lawsuits:
COVERAGE E - Personal Liability
If a claim is made or a suit is brought against an "insured" for damages because of "bodily injury" or "property damage" caused by an "occurrence" to which this coverage applies, we will:
1. Pay up to our limit of liability for the damages for which the "insured" is legally liable. Damages include prejudgment interest awarded against the "insured"; and
2. Provide a defense at our expense by counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate. Our duty to settle or defend ends when the amount we pay for damages resulting from the "occurrence" equals our limit of liability.
(Policy p. 10, J.A. at 215.) 3 According to the "DEFINITIONS" section of the policy,
5."Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the policy period, in:
a. "Bodily injury"; or
b. "Property damage".
(Policy p. 1, J.A. at 206.) Another section of the policy, "SECTION II - EXCLUSIONS", excludes certain types of claims from personal liability coverage:
1.Coverage E - Personal Liability and Coverage F - Medical Payments to Others do not apply to "bodily injury" or "property damage":
a.Which is expected or intended by the "insured";
b.Arising out of or in connection with a "business" engaged in by an "insured". This exclusion applies but is not limited to an act or omission, regardless of its nature or circumstance, involving a service or duty rendered, promised, owed or implied to be provided because of the nature of the "business";
. . .
d. Arising out of the rendering of or failure to render professional services; e.Arising out of a premises:
(1) owned by an "insured"
. . . 2.Coverage E - Personal Liability, does not apply to:
. . . b."Property damage" to property owned by the "insured" ....
(Policy p. 11, J.A. at 216.) 4
The policy names only Plaintiff as an insured party. Langan agent Tom Barrett testified at his deposition that at the time Plaintiff purchased the policy, he believed she intended to use the Timber Ridge home as her personal residence. Yet, neither Plaintiff nor Gatterdam informed Barrett or any other Langan agent that they had entered into a tri-party contract with Tapp or that the house had been sold prior to its completion. Because the homeowner's policy included a builder's risk endorsement which would expire upon the completion of construction, Langan agents periodically contacted Plaintiff or Gatterdam to ascertain the building's progress. Langan's activity log for Plaintiff's account indicates that on January 15, 1997, five months after the tri-party contract was executed and two weeks prior to closing, Plaintiff informed a Langan agent that she would close on the home within a few weeks and would advise the company when she moved into the house.
On February 9, 1998, Tapp sued Plaintiff and Gatterdam in Jefferson County, Kentucky, Circuit Court. Plaintiff submitted a copy of Tapp's complaint and the tri-party contract to Langan for forwarding to CUIC. Although he forwarded the documents to CUIC, Langan agent Tom Barrett advised Plaintiff that the policy did not appear to cover her claim. On February 25, 1998, a CUIC supervisor, Ken Schwartz, sent a handwritten note to senior claims representative Karen Lasch. The note informed Lasch of the Tapp lawsuit and alerted her to a "possible exclusion for business operation unless this is an occasional operation/occupation." Lasch attempted to telephone Plaintiff that day, but reached only Gatterdam. The following morning, Lasch again telephoned Plaintiff and obtained her permission to record their conversation. During the conversation, Plaintiff volunteered the fact that she and Gatterdam had originally intended to build a house and then sell it. 5
On March 2, 1998, CUIC informed Plaintiff that it reserved all rights and defenses under the policy, including its right to pursue a judicial determination that no coverage existed under the policy. On March 26, 1998, Plaintiff's attorney mailed to Lasch several documents relating to Tapp's lawsuit. 6 Plaintiff's attorney requested that CUIC inform him whether it intended to defend Plaintiff in the Tapp litigation. On April17, 1998, Lasch sent a letter to Plaintiff explaining that CUIC would deny a defense for the Tapp lawsuit for two reasons. First, CUIC characterized Tapp's claims as based upon breach of contract, breach of express and implied warranties, and slander of title. CUIC determined that none of these claims qualified as an "occurrence," as defined in the policy, but rather they were business risks assumed by Plaintiff. Second, CUIC explained that even if Tapp's complaint stated a negligence claim for property damage, the policy excluded coverage due to the business risk exclusion. 7
On February 18, 1999, ten months after CUIC issued its letter denying a defense, Plaintiff filed a "Petition for Declaration of Rights" in the Jefferson County, Kentucky, Circuit Court. Plaintiff alleged therein that CUIC's denial of a legal defense breached the terms of her homeowner's insurance policy and constituted bad faith, as well as a violation of Kentucky consumer protection and insurance statutes. After removal to federal court on the basis of diversity jurisdiction, both parties filed motions for summary judgment. On February 17, 2000, the district court issued a Memorandum Opinion and Order granting D...
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