Spirco Environ. v. American Intern. Special. Lines

• Decision Date: 03 February 2009
• Docket Number: No. 07-2487.,07-2487.
• Citation: 555 F.3d 637
• Parties: SPIRCO ENVIRONMENTAL, INC., formerly known as Spirco Services, Inc., Plaintiff-Appellee, v. AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

555 F.3d 637

SPIRCO ENVIRONMENTAL, INC., formerly known as Spirco Services, Inc., Plaintiff-Appellee, v. AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY, Defendant-Appellant.

No. 07-2487.

United States Court of Appeals, Eighth Circuit.

Submitted: December 14, 2007.

Filed: February 3, 2009.

Daniel G. Litchfield, argued, Stephanie W. Tipton, on the brief, Chicago, IL, for Defendant-Appellant.

Timothy E. Hayes, argued, Daniel Robert Schramm, Thomas M. Payne, III, on the brief, St. Louis, MO, for Plaintiff-Appellee.

Before BYE, ARNOLD, and MELLOY, Circuit Judges.

MELLOY, Circuit Judge.

Defendant American International Specialty Lines Insurance Company ("American") appeals an adverse grant of summary judgment in which the district court¹ held American must provide coverage to Plaintiff Spirco Environmental, Inc. ("Spirco"), for a separate judgment in which the same court held Spirco and others were liable to pay a surety's attorney and expert witness fees. We affirm.

I. Background

Relevant background information is provided in our separate opinion in Case No. 07-1547. That case involved a claim by a surety against a group of contractors for payment of the surety's attorney and expert witness fees under an indemnity agreement. In Case No. 07-1547 we affirmed the district court's holding that the contractor-indemnitors were liable to the surety for approximately $800,000 in fees incurred in the defense of a $4 million claim by a New Jersey property owner. The surety incurred these substantial attorney and expert witness fees in a protracted arbitration proceeding focused on the alleged release and spread of asbestos by one of the contractor-indemnitors, Spirco. The present case involves a claim by Spirco against its general casualty and pollution insurer, American, for coverage of the fee award.

We incorporate by reference the facts set forth in Case No. 07-1547 and also set forth the following, additional facts. When the property owner asserted its counterclaims in the arbitration, the property owner labeled the claims as breach of contract counterclaims. During the course of arbitration, when counsel for Spirco sent a letter to the surety simultaneously advocating an aggressive defense and complaining about the surety's participation in the arbitration, counsel for Spirco described the property owner's claims as follows:

My review to date reflects that many of the claims being presented would fall into the category of property damage rather than nonperformance of work. [The property owner's] own mediation position paper reflects this fact:

The lion's share of the contamination, as well as the cost of the second remediation, however, resulted from Spirco's negligent work practices that permitted [Asbestos Containing Material] to contaminate areas in the Building that did not contain asbestos and should have been protected.

As discussed in Case No. 07-1547, the arbitrators' findings also demonstrate that the nature of the alleged harm stemmed from property damage rather than breach of contract. Specifically, the arbitrators held that Spirco performed under the contract and, after Spirco left the site, other parties damaged the property owner's building by exposing asbestos and causing its spread throughout the site.

When the surety later asserted a claim for fees against Spirco and the other indemnitors, Spirco sought coverage and a defense from American. American provided a defense under a reservation of rights, but, ultimately denied coverage.² Spirco then brought the present declaratory judgment action seeking resolution of the coverage issue.

American argued below that the fee award was in the context of a dispute having its roots in contract—the fees were due under an indemnity agreement, and the underlying arbitration dispute between the property owner and Spirco involved the alleged breach of a remediation contract between Spirco and the property owner. Spirco argued that the fee award had its roots in a claim of property damage—the property owner alleged not only that Spirco breached a remediation contract, but that Spirco spread asbestos to previously uncontaminated areas of the property, requiring the property owner to undertake a second, more expensive remediation of the building.

American argued in the alternative that even if the court were to accept Spirco's characterization of the underlying dispute between the property owner and Spirco as one involving property damage, the indemnity award should not be covered by the American policy because: (1) the contractual indemnity award was too attenuated from the alleged property damage; (2) the indemnity award was economic loss rather than property damage; and (3) certain exclusions would prevent coverage even if American's policy were otherwise found to apply.

Regarding the "attenuation" argument, the American policy provided coverage for a "Loss as a result of Claims for ... Property Damage." The policy defined Loss in relevant part as "1. Monetary awards or settlements of compensatory damages arising from ... Property Damage; 2. Clean-Up costs; or 3. Claim Expenses." American argued that the operative causation language in the coverage provision, "as a result of," demanded a narrow construction that looked only to the immediate cause of the alleged expense.³ According to American, this immediate cause was a contract claim on the indemnity agreement, and there was no coverage for contract claims. Spirco argued that the operative causation language "as a result of" merited a broader construction and that it was permissible to look behind the contractual indemnity right to examine the facts of the underlying dispute between the New Jersey property owner and Spirco that gave rise to the expenses covered by the indemnity agreement. According to Spirco, the underlying dispute was a claim for property damage.

The district court held: (1) the underlying dispute was a property damage dispute; (2) the indemnification award was not too attenuated from the property damage claim to trigger coverage; and (3) no policy exclusions applied. Accordingly, the district court ordered American to provide coverage. American appeals.

II. Discussion

A. Coverage

i. Nature of the Underlying Dispute

The property owner characterized its arbitration counterclaim against Spirco as a breach of contract claim, but the substance of the property owner's claim was an allegation of property damage. The property-damage nature of the counter-claim was apparent to Spirco's attorney at the outset of the arbitration, apparent from the nature of the arguments presented in arbitration, and apparent from the arbitrators' findings. The arbitrators found that Spirco had completed the remediation contract and left the site in a clean condition. The arbitrators found further that the property owner's allegations related to asbestos not exposed by Spirco during Spirco's remediation of the site. Rather, the arbitrators found that other contractors accessed the site after Spirco left and that these other contractors were responsible for the asbestos contamination. The alleged damages of $4 million that the property owner sought from Spirco included the purported cost of clean-up, remediation, or destruction for a section of the property outside the scope of the original contract with Spirco. Ultimately, the property owner's claim was not simply a breach of contract claim limited to the task of finishing a job commensurate in scope with the original contract between Spirco and the property owner; it was a claim for property damages shown to be unrelated to the work under the contract.

Further, we note that the property owner dismissed a separate bad-faith failure to pay claim against the surety before the surety incurred the bulk of its attorney and expert witness fees. Accordingly, the only claim against the surety that survived into the expensive and protracted arbitration was derivative of the property owner's claim against Spirco. It was not an independent bad-faith claim that might be viewed as more attenuated from the property damage claim.

We believe that for coverage purposes in the instant case, then, the district court properly characterized the underlying arbitration claim as a claim for property damage. This conclusion is based on the property owner's factual assertions, the substance of the property owner's claims, and the arbitrators' findings rather than the label, "breach of contract," that the property owner elected to attach to its claim. See Mo. Terrazzo Co. v. Iowa Nat'l Mut. Ins. Co., 740 F.2d 647, 650 (8th Cir. 1984) (applying Missouri law and looking to the facts behind a claim (property damage) rather than the label attached to a claim (diminution in value) to determine that insurance coverage existed for the claim); see also Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 15 (Tex.2007) (stating that the duty to defend is not determined "by the labels attached to the underlying claims"); Cont'l Ins. Co. v. Bones, 596 N.W.2d 552, 559 (Iowa 1999) ("We start with the observation that coverage is controlled by the actual claim asserted against the insured, not the label the claimant chooses to put on his or her claim."); Auto-Owners Ins. Co. v. Toole, 947 F.Supp. 1557, 1564 (M.D.Ala.1996) ("Nevertheless, this court declines to adopt any broad holding that claims sounding in contract are not occurrences. Rather, the court agrees with the Supreme Court of Vermont that, in determining whether there is coverage, the court should look to the specific `kind of ... claim' being asserted, regardless as to whether it is labeled a contract claim, a tort claim, or whatever, and the `purpose of the general liability policy' from which coverage is sought." (quoting City of Burlington v. Nat'l Union Fire Ins. Co., 163 Vt. 124, 655 A.2d 719, 722 (1994))); First Wyo. Bank, N.A., Jackson Hole v. Cont'l Ins. Co., 860 P.2d 1094, 1099-1101 (Wyo 1993) (reject...