Corn Plus Co-Op. v. Continental Cas. Co.

• Decision Date: 07 February 2008
• Docket Number: No. 07-1305.,07-1305.
• Citation: 516 F.3d 674
• Parties: CORN PLUS COOPERATIVE, Plaintiff-Appellant, v. CONTINENTAL CASUALTY COMPNY, and Lumbermens Mutual Casualty Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

516 F.3d 674

CORN PLUS COOPERATIVE, Plaintiff-Appellant, v. CONTINENTAL CASUALTY COMPNY, and Lumbermens Mutual Casualty Company, Defendants-Appellees.

No. 07-1305.

United States Court of Appeals, Eighth Circuit.

Submitted: November 13, 2007.

Filed: February 7, 2008.

Kay Nord Hunt, argued, Minneapolis, MN, Jane Volz, Lakeville, MN, on the brief, for appellant.

Jerome B. Abrams, argued, Minneapolis, MN, Kevin R. Lewis, Minneapolis, on the brief, for appellee Continental Casualty Company.

Jeanne H. Unger, argued, Minneapolis, MN, Patrick E. Maloney and Dale R. . . Kurth, Chicago, IL, on the brief, for appellee Lurmens Mutual Casualty Company.

Before MURPHY, HANSEN, and GRUENDER, Circuit Judges.

MURPHY, Circuit Judge.

Corn Plus Cooperative ("Corn Plus") brought this declaratory judgment claim against Continental Casualty Company ("Continental") and Lumbermens Mutual Casualty Company ("Lumbermens") to enforce a settlement it had reached with its mechanical contractor who was insured by appellees. The district court¹ determined that the insurance policies did not cover all of appellant's claims and thereafter granted summary judgment to the insurers, concluding that the settlement was unreasonable because it had failed to allocate between covered and noncovered damages. The court also refused to enforce an addendum to the settlement agreement for public policy reasons. Corn Plus appeals, and we affirm.

Corn Plus is a Minnesota cooperative which operates an ethanol processing facility. In January 2001 Corn Plus hired Wanzek Construction, Inc. ("Wanzek"), a general mechanical contractor, to perform welding work in an expansion of its ethanol facility in Winnebago, MN. Under their contract Wanzek was responsible for welding the pipes that carry the corn mash used to produce ethanol. While Wanzek substantially completed its work, it did not meet the project specifications due to incomplete weld penetration, which resulted in bacterial contamination of the corn mash as it lodged in cavities caused by the incomplete welds. Corn Plus asserts that the bacterial contamination has led to decreased ethanol production and cannot be permanently eliminated, although it can be alleviated with antibiotics. For these reasons Corn Plus claims that repairs of the defective welds are necessary to avoid the risk of structural damage to the piping system.

In January 2002 Wanzek brought a mechanic's lien foreclosure action against Corn Plus in Minnesota state court arguing that Corn Plus owed it $1.4 million for its welding work under the contract. Corn Plus counterclaimed on a number of grounds, including breach of contract and negligence, and alleged damages as a result of Wanzek's defective welding of the pipes.

Wanzek carried commercial general liability insurance of up to $1 million with Continental and excess coverage insurance with Lumbermens. Wanzek tendered Corn Plus's counterclaims to Continental, its primary insurer. Continental and Lumbermens both denied coverage, contending that their policies excluded coverage for repairing Wanzek's faulty work. Nevertheless Continental agreed to defend Wanzek against the counterclaim subject to "a reservation of its rights to contest coverage. In May 2003 Continental brought a declaratory judgment action against Wanzek in state court submitting that it had no duty to defend or indemnify Wanzek for the counterclaims that resulted from the defective welding. Lumbermens was not party to this declaratory judgment action.

After Corn Plus and Wanzek failed in an initial attempt to mediate, a second effort was undertaken in December 2003. Corn Plus submitted a mediation brief itemizing its alleged damages from the faulty welding, which amounted to approximately $7.6 million. Corn Plus made a $2.5 million cash settlement offer which Wanzek rejected. Instead, Wanzek proposed a Miller-Shugart² settlement in the same amount. Corn Plus and Wanzek informed Continental and Lumbermens that they were negotiating a Miller-Shugart settlement, but neither insurer chose to participate in the negotiations or to provide settlement funds.

Corn Plus and Wanzek reached a Miller-Shugart agreement in March 2004 to settle their case for $2.5 million. Wanzek stipulated to negligence in its welding resulting in damages to the ethanol manufacturing process and facility. The agreement, which includes a severability provision, did not allocate the $2.5 million into itemized damages. As part of the settlement, Corn Plus agreed to pay Wanzek approximately $400,000 to satisfy Wanzek's $1.4 million demand for breach of contract and mechanic's lien claims. The parties also entered into an addendum which provided that if a court were to find the $2.5 million amount unreasonable, it should determine the largest fair and reasonable amount and substitute that for the $2.5 million. The state trial court approved the settlement between Corn Plus and Wanzek and ordered that judgment be entered pursuant, to the agreement.

In light of the Miller-Shugart agreement Corn Plus moved to intervene as a defendant in the declaratory judgment action between Continental and Wanzek. The state trial court granted the motion and dismissed Wanzek. Because the $2.5 million Miller-Shugart agreement exceeded Continental's $1 million coverage policy, Lumbermens, the excess coverage insurer, intervened as a plaintiff in the declaratory judgment action. The court also realigned the parties, designating Corn Plus as plaintiff and Continental and Lumbermens as defendants.

Lumbermens removed the case to federal district court on diversity of citizenship grounds, and Corn Plus subsequently filed an amended complaint seeking a declaratory judgment that its claims are covered by the insurers' policies and that its Miller-Shugart agreement with Wanzek is enforceable. Corn Plus then moved for partial summary judgment on the coverage issue and argued that the insurers' policies cover not just the contaminated corn mash and its consequential damages, but also the costs to repair Wanzek's defective work and all attendant current and future economic losses. The district court ruled that property damage caused by Wanzek's faulty welding triggered insurance coverage. It identified the covered property damage as the bacterially contaminated corn mash and consequential costs causally related to the contamination, such as antibiotic treatments and disinfection of the mash, cleaning of the pipes, and plant shutdowns required to change cooling lines and address centrifuge issues. The district court also concluded, however, that two policy exclusions (the "damage to your work" exclusion and the "impaired property" exclusion) precluded coverage for repairing the defective welding and its consequential costs, as well as for loss of use of the facility, including decreased ethanol production, caused by its incorporation of the defective welds.

Following the coverage decision, the insurers moved for summary judgment asserting that the Miller-Shugart agreement is unenforceable. The district court granted their motion because the Miller-Shugart agreement had not allocated the damages by type of loss, and the settlement amount thus included covered and noncovered claims. The district court also declined to enforce for public policy reasons the agreement's addendum, which purport ed to empower a court to determine a reasonable settlement amount if it found the agreement unenforceable.

Corn Plus appeals the summary judgment grant in favor of the insurers on several grounds, claiming that the district court incorrectly ruled that the insurance policy exclusions barred coverage for welding repairs and consequential loss of use of the facility. It also argues that the district court erred in finding the Miler-Shugart agreement unreasonable and in refusing to enforce its addendum. Finally, Corn Plus seeks an order to reinstate its underlying litigation with Wanzek if we uphold the district court's rulings. The insurers ask us to affirm, choosing not to appeal the district court's conclusion that the contaminated corn mash and related damages are not excluded from coverage.

We review the district court's interpretation of the terms of the insurance policy and its grant of summary judgment de novo. Macheca Transport Co. v. Philadelphia Indem. Co., 463 F.3d 827, 831 (8th Cir.2006). Summary judgment is appropriate if the record shows no genuine issue of Material fact, entitling the moving party to a judgment as a matter of law. McPherson v. O'Reilly Automotive, Inc., 491 F.3d 726, 730 (8th Cir.2007). Because this case is in federal court based on diversity jurisdiction, Minnesota's substantive law controls our analysis of the insurance policy. See National American Ins. Co. v. W & G, Inc., 439 F.3d 943, 945 (8th Cir. 2006). The extent of a policy's coverage is determined by the specific terms of the insurance contract. Wanzek Construction, Inc. v. Employers Insurance of Wausau, 679 N.W.2d 322, 327 (Minn.2004). While the insured carries the initial burden of showing coverage, the onus is on the insurer to establish policy exclusions. Travelers Indem. Co. v. Bloomington Steel & Supply Co., 718 N.W.2d 888, 894 (Minn. 2006).

The threshold issue before us is whether any of the damages implicated by the $2.5 million settlement were within the scope of Wanzek's insurance policies, which provided coverage for "property damage" caused by an "occurrence." Property damage is defined as "physical injury to tangible property, including all resulting loss of use of that property" or "loss of use of tangible property that is not physically injured." It is undisputed that Wanzek's defective welding constituted an occurrence resulting in property damage, but the insurers contend that two policy exclusions limit their coverage. The damage to your work exclusion precludes coverage for "`property damage' to `your work' arising out of it or any, part of it." "Your work" is defined as, ...