L.L.C. v. Fed. Ins. Co.

• Decision Date: 25 August 2010
• Docket Number: No. 09-1542.,09-1542.
• Citation: 619 F.3d 574
• Parties: TMW ENTERPRISES, INC.; Shain Park Associates, L.L.C., Plaintiffs-Appellants, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

619 F.3d 574

TMW ENTERPRISES, INC.; Shain Park Associates, L.L.C., Plaintiffs-Appellants,

v.FEDERAL INSURANCE COMPANY, Defendant-Appellee.

No. 09-1542.

United States Court of Appeals,Sixth Circuit.

Argued: April 20, 2010.

Decided and Filed: Aug. 25, 2010.

Rehearing and Rehearing En Banc Denied Oct. 25, 2010. ^*

ARGUED: Kenneth T. Brooks, Honigman, Miller, Lansing, Michigan, for Appellants. Megan K. Cavanagh, Garan Lucow Miller, P.C., Detroit, Michigan, for Appellee. ON BRIEF: Kenneth T. Brooks, Honigman, Miller, Lansing, Michigan, for Appellants. Megan K. Cavanagh, C. David Miller, Garan Lucow Miller, P.C., Detroit, Michigan, Mark E. Shreve, Garan Lucow Miller, P.C., Troy, Michigan, for Appellee.

Before GUY, COLE and SUTTON, Circuit Judges.

SUTTON, J., delivered the opinion of the court, in which GUY, J., joined. COLE, J. (pp. 580-86), delivered a separate dissenting opinion.

OPINION

SUTTON, Circuit Judge.

In this insurance-coverage dispute, the insured (TMW) appeals the district court's grant of summary judgment in favor of the insurance company (Federal). Because a relevant exclusion to coverage applies, we affirm in part and reverse in part.

I.

On December 29, 2004, TMW, acting through its subsidiary, Shain Park Associates, bought a recently constructed condominium and retail building in Birmingham, Michigan. TMW insured the Birmingham property for $10 million with Federal Insurance.

The insurance policy-an “all-risk” policy-covers any “direct physical loss or damage” to the property unless “caused by or resulting from” an excluded peril. R.65-4 at 21. Among the policy exclusions is this one:

This insurance does not apply to loss or damage (including the costs of correcting or making good) caused by or resulting from any faulty, inadequate or defective:

...

-design, specifications, plans, workmanship, repair, construction, renovation, remodeling, grading, compaction;

...

of part or all of any property on or off the premises shown in the Declarations.

This Planning, Design, Materials Or Maintenance exclusion does not apply to ensuing loss or damage caused by or resulting from a peril not otherwise excluded.

Id. at 35.

In May 2006, contractors hired by TMW began to renovate the building's exterior. They discovered that the original builder had improperly constructed the exterior walls, leaving them vulnerable to water infiltration. And they observed that water had indeed entered the facility, “weakening the structural integrity of the building” by corroding its steel structure. R.69-9 at 1. After further investigation, the contractors confirmed that similar construction and deterioration problems plagued all four exterior walls. They warned TMW that, without proper repair, the building faced “potential mold growth” and “catastrophic” structural failure due to moisture exposure. Id. The repairs required TMW to remove the building's undamaged exterior masonry. TMW estimates that it has spent $3.9 million so far to repair the building.

TMW notified Federal of the damage to the building. After performing its own inspection of the property, Federal denied TMW's claim. Federal attributed the damage to “construction defects” and “wear and tear,” both of which the policy excluded. R.69-16 at 2. TMW filed this lawsuit in federal court, seeking a declaratory judgment that it was entitled to insurance coverage and money damages. After both parties moved for summary judgment, the district court ruled in favor of Federal, deciding that TMW was not entitled to coverage. TMW asks us to take a second look.

II.

This is a diversity case-TMW hails from Delaware, with its principal place of business in Michigan, and Federal hails from Indiana, with its principal place of business in New Jersey-and Michigan law governs our interpretation of the contract. See Shields v. Gov't Employees Hosp. Ass'n, Inc., 490 F.3d 511, 515 (6th Cir.2007). All of the traditional rules for assessing the factual record in a summary judgment motion apply, see Fed.R.Civ.P. 56(c), but so far they have made little difference. No material factual disputes were raised below. What we have instead is a matter of contract interpretation: What does the coverage exclusion mean?

The insurance policy provides that all physical loss is covered unless an exclusion applies. The key exclusion bars coverage for “loss or damage ... caused by or resulting from ... faulty ... workmanship ... [or] construction.” R.65-4 at 35. Both parties' investigators agree that the original builder improperly constructed the building's exterior. The faulty construction included “haphazardly installed” Tyvek building wrap, missing or improper flashing along the siding's edges and joints and a lack of “weep holes,” which “allow moisture in the wall cavity to drain out.” R.65-12 at 3. The investigators also agree, and the parties do not dispute, that this faulty workmanship caused the water infiltration that damaged the building's structural steel, fireproofing and insulation. Put in terms of the insurance exclusion, the undisputed facts establish that the claimed damage was “caused by or resulting from ... faulty ... workmanship ... [or] construction.” R.65-4 at 35. So far as Federal and the district court are concerned, that is all there is to this dispute: The insurance contract contains an exclusion that directly applies to the loss claim, and accordingly Federal acted well within its rights in denying coverage.

Not so fast, TMW responds. There is more to the faulty workmanship exclusion than the “caused by or resulting from ... faulty ... workmanship ... [or] construction” language. At the end of that exclusion and the other three that go with it, the contract says that all four exclusions do “not apply to ensuing loss or damage caused by or resulting from a peril not otherwise excluded.” R.65-4 at 35. It may be, as TMW acknowledges, that faulty workmanship allowed water to seep into the walls. But the intruding water, it argues, nonetheless amounts to a “peril not otherwise excluded” because the water caused some of the damage, and water-related damage is not otherwise specifically excluded-making it an “ensuing loss” and thus a covered loss.

Instead of carving out an exception to this exclusion, this theory of interpretation would create a virtual, if not complete, exclusion of the exclusion. When a policy excludes “loss or damages ... caused by or resulting from ... faulty ... workmanship ... [or] construction” of a building, it should come as no surprise that the botched construction will permit the elements-water, air, dirt-to enter the structure and inside of the building and eventually cause damage to both. TMW's chain of reasoning-that water technically was the final causative agent of the damage, as opposed to the faulty construction, that “water damage” is not specifically excluded from the policy, that coverage accordingly applies-essentially undoes the exclusion.

As an “all-risk” policy, this insurance policy basically covers everything unless specifically excluded. That means the number of possibilities for last-in-time “but for” causes of damage are limited only by the imagination of the reader. What if a roof contains a flawed design (think Frank Lloyd Wright, see Essex Ins. Co. v. Fidelity & Guar. Ins. Underwriters, Inc., 282 Fed.Appx. 406, 409 (6th Cir.2008)), and it leaks water into the house, which ruins one of the floors? But for the water, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “water.” Coverage? What if faulty construction allows humid summer air to enter the building, which rusts metal fixtures? But for the exposure to the summer air, no damage to the fixtures would have occurred. Yet the contract does not exclude damages caused by “air.” Coverage? What if a poorly constructed ceiling beam falls, smashing the floor below? But for the force of gravity, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “gravity.” Coverage? As in each of these examples, so too here: The very risk raised by the flawed construction of a building came to pass. To say that the risk was not covered because other elements or natural forces were the last causative agents of the damage, though to be sure utterly foreseeable causes of the damages, is to eliminate the exclusion. It is exceedingly strange to “think that a single phenomenon that is clearly an excluded risk under the policy was meant to become compensable because in a philosophical sense it can also be classified as water damage.” Aetna Cas. & Sur. Co. v. Yates, 344 F.2d 939, 941 (5th Cir.1965) (Friendly, J., sitting by designation).

But if the “ensuing loss” clause does not apply here, TMW asks, doesn't that make it superfluous, empty words with no independent function? No. There are two possible functions served by the clause, both sufficient to defeat TMW's argument. One is this: The clause means simply that what is not excluded is covered. The four exclusions spell out when coverage does not apply, and the caveat at the end reminds us that if an exclusion does not apply, then coverage exists. The contract repeats this coverage-off, coverage-on language or slight variations on it in seven other places in the contract, suggesting that it flows from the kind of systematic and formulaic precision, sometimes overdone precision, in which lawyers often seem to take great pleasure. No doubt, as a matter of sheer logic, the coverage-on language is never technically necessary to establish which of two binary options applies. Nor for that matter do traffic lights need a green signal. But the inclusion of the coverage-on language still serves to remind the readers that there are two sides to every coverage issue. Just as all light switches contain an “on” and “off” designation, so it is useful to spell out when coverage applies and does not apply. All contract drafting that involves belts (certain damages are...