Modern Equipment Co. v. Continental Western Ins.

• Decision Date: 28 January 2004
• Docket Number: No. 02-2119.,02-2119.
• Citation: 355 F.3d 1125
• Parties: MODERN EQUIPMENT COMPANY, a Nebraska Corporation, Appellant, v. CONTINENTAL WESTERN INSURANCE COMPANY, INC., an Iowa Corporation, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

355 F.3d 1125

MODERN EQUIPMENT COMPANY, a Nebraska Corporation, Appellant, v. CONTINENTAL WESTERN INSURANCE COMPANY, INC., an Iowa Corporation, Appellee.

No. 02-2119.

United States Court of Appeals, Eighth Circuit.

Submitted: January 16, 2003.

Filed: January 28, 2004.

Rehearing Denied March 10, 2004.

Thomas E. Johnson, argued, Omaha, NE (Kirk S. Blecha, Omaha, NE, on the brief), for appellant.

James J. Frost, argued, Omaha, NE, for appellee.

Before HANSEN,¹ Chief Judge, BRIGHT and SMITH, Circuit Judges.

SMITH, Circuit Judge.

Modern Equipment Company ("Modern Equipment") appeals from the district court's² grant of summary judgment to Continental Western Insurance Company ("Continental Western") on cross-motions for summary judgment. Modern Equipment sued Continental Western seeking a declaratory judgment establishing Continental Western's duty to defend Modern Equipment in an underlying suit brought by Nebraska Beef Ltd. ("Nebraska Beef") in Nebraska state court. We affirm.

I. Facts

Modern Equipment³ designed a meat storage-rack system that Nebraska Beef purchased for use in its refrigerated warehouse. Three months after installation, two rack sections collapsed. Nebraska Beef was forced to dismantle, remove, and replace the collapsed rack sections. Within months, two more sections of the Modern Equipment storage-rack system collapsed. These sections were also dismantled and removed by Nebraska Beef. Neither collapse caused physical damage to Nebraska Beef's refrigerated warehouse. However, Nebraska Beef replaced the collapsed rack sections with smaller racks, which ultimately diminished the amount of beef product which could be stored in the warehouse. Six sections of the original rack system remained in place for approximately two years, at which time Nebraska Beef completely replaced Modern Equipment's rack system with a new storage system. The new system had a lower total-storage capacity than the Modern Equipment system.

Nebraska Beef sued Modern Equipment in Nebraska state court. In its suit, Nebraska Beef claimed damages for production and shipping costs, spoilage of product, decreased cooler capacity, and loss of sales due to the collapsed racks.⁴ At all relevant times, Continental Western insured Modern Equipment under a commercial general liability policy and a commercial excess policy.⁵ After learning that it had been sued, Modern Equipment tendered its defense to Continental Western and requested an affirmation of coverage.

Continental Western agreed to defend Modern Equipment, but did so under a reservation of rights. Continental Western did not dispute its potential exposure for damage to Nebraska Beef's product-and the resulting spoilation-due to the collapsed rack system, but expressed its intent to deny coverage for the remaining disputed damages.⁶ Modern Equipment then brought the instant action-a declaratory-judgment action seeking a declaration that the Continental Western insurance policies provided coverage for the disputed damages. Following cross-motions for summary judgment, the district court concluded that Continental Western properly excluded coverage for all of the disputed damages and granted summary judgment in its favor.

II. Standard of Review and Legal Standards⁷

A summary judgment is reviewed de novo. Darby v. Bratch, 287 F.3d 673, 678 (8th Cir.2002). Summary judgment is inappropriate if there is a genuine dispute about a material fact. Fed.R.Civ.P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Insurance disputes are particularly well suited for summary judgment because the proper construction of an insurance contract is always an issue of law for the court. Iowa Comprehensive Petroleum Underground Storage Tank Fund Bd. v. Federated Mut. Ins. Co., 596 N.W.2d 546, 550 (Iowa 1999). We do not apply the rules of construction if an insurance contract is unambiguous. Kirwan v. Chicago Title Ins. Co., 9 Neb. App. 372, 612 N.W.2d 515, 523 (2000). When the words of an insurance contract are unambiguous, the intent of the parties is determined by the language of the policy itself. A.Y. McDonald Indus., Inc. v. Ins. Co. North America, 842 F.Supp. 1166, 1170 (N.D.Iowa 1993), aff'd 48 F.3d 1223 (8th Cir.1995). If the terms of an insurance contract are clear, they are to be accorded their plain and ordinary meaning. Farm Bureau Ins. Co. of Nebraska v. Bierschenk, 250 Neb. 146, 548 N.W.2d 322, 324 (1996). These standards apply equally to exclusions. Farm and City Ins. Co. v. Gilmore, 539 N.W.2d 154, 157 (Iowa 1995).

Modern Equipment does not claim, and we do not find, that either the policy's definitions or its exclusions are ambiguous. Hence, we will not resort to rules of construction. Farm & City Ins. Co. v. Anderson, 509 N.W.2d 487, 490-91 (Iowa 1993). Accordingly, Modern Equipment is not entitled to have the policy construed in its favor. Rather, we will attempt to ascertain the intention of the parties from the plain meaning of the policy. Ploen v. Union Ins. Co., 253 Neb. 867, 573 N.W.2d 436, 442 (1998).

III. Policy Language

To establish its claim against Continental Western, Modern Equipment has the initial burden of proving that Nebraska Beef's disputed claims are "comprehended by the policy's general coverage provisions." A.Y. McDonald, 842 F.Supp. at 1171. Once this burden is met, Continental Western must in turn prove the "applicability of any exclusion which allegedly precludes coverage." Id. The burden then shifts back to Modern Equipment to prove, if applicable, any exception to the exclusion. Id.

To begin our analysis we consider the language contained in the commercial general liability policy⁸ issued by Continental Western. The policy states in relevant part:

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of ... "property damage"⁹ to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence"¹⁰ and settle any claim or "suit" that may result.

It is undisputed that physical injury occurred to tangible property (the Nebraska Beef food products stored on the racks) when several sections of Modern Equipment's storage-rack system collapsed. Continental Western concedes coverage for that injury, but does not concede the amount of the damage incurred. Modern Equipment bases its further coverage claim on the conclusion that the diminished use of Nebraska Beef's warehouse constitutes property damage within the meaning of the policy. We agree with this conclusion, and find that Modern Equipment has satisfied its initial burden of establishing that Nebraska Beef incurred "property damage." The burden now shifts to Continental Western to establish that a policy exclusion applies.

Continental Western limited its coverage by two relevant exclusions: Exclusion (k)-titled "Damage to Your Product"-and Exclusion (m)-titled "Damage to Impaired Property or Property Not Physically Injured." Continental Western bases its coverage denial on Exclusion (k). Exclusion (k) prohibits recovery for "property damage" to "`[the insured's] product' arising out of it or any part of it." Essentially, this exclusion prevents coverage for harm occurring to the rack system itself, because of its own defects or performance deficiencies. According to the policy, "warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of [Modern Equipment's storage-rack system]" are a part of the insured's "product." This exclusion also eliminates coverage for any "loss of use" of the racks.

A separate exclusion-Exclusion (m)-extinguishes coverage for "property damage to `impaired property' or property that has not been physically injured arising out of: (1) A defect, deficiency, inadequacy or dangerous condition" in Modern Equipment's storage-rack system. However, Exclusion (m) does not apply if the property damage is a result of "sudden and accidental physical injury to `[the insured's] product' or `[the insured's] work' after it has been put to its intended use."

Thus, Exclusion (k)'s effect is to exclude coverage for damages to Modern Equipment's rack system caused by its own defects including any damages for the loss of use of the rack system. Exclusion (m)'s effect is to exclude damages for the loss of use of property-other than the insured's product-that is less useful because of a defect in the insured's product, except when the loss of use is caused by a sudden accident after the insured's product is put to its intended use. In sum, any damages flowing from a loss of use of Modern Equipment's storage-rack system are not covered, but any loss of use of Nebraska Beef's warehouse (attributable to the collapse of the rack system) is covered. This conclusion is consistent with the purpose of a commercial general liability policy, which is to provide coverage for tort liability for physical damage to others, and not to insulate an insured from economic losses flowing from breach of its contractual duties.

IV. Analysis

Continental Western's duty to defend depends upon the cause of the disputed damages. If the damages flow from the loss of the use of Modern's rack system due to the inadequacy of the rack system designed by Modern Equipment then coverage is excluded. If the claimed damages instead flow from Nebraska Beef's inability to use the interior space of its warehouse, coverage exists, and Continental must defend Modern Equipment. Predictably, Continental Western argues that the damages arise solely from the failed rack system and are thereby-under the language of Exclusion (k)-excluded from coverage. Modern Equipment responds that the damages flow from an impairment to the warehouse, and thus the claim should be analyzed under Exclusion (m), as opposed to Exclusion (k). Specifically, Modern Equipment argues that the damages are covered...