Brazas Sporting Arms, v. American Empire Surplus Lines Ins.

• Decision Date: 13 July 2000
• Docket Number: No. 99-2055,99-2055
• Citation: 220 F.3d 1
• Parties: (1st Cir. 2000) BRAZAS SPORTING ARMS, INC., Plaintiff, Appellant, v. AMERICAN EMPIRE SURPLUS LINES INSURANCE COMPANY, Defendant, Appellee. . Heard Apirl 4, 2000
• Court: U.S. Court of Appeals — First Circuit

Page 1

220 F.3d 1 (1st Cir. 2000)

BRAZAS SPORTING ARMS, INC., Plaintiff, Appellant, v. AMERICAN EMPIRE SURPLUS LINES INSURANCE COMPANY, Defendant, Appellee.

No. 99-2055.

United States Court of Appeals, For the First Circuit.

Heard Apirl 4, 2000.

Decided July 13, 2000.

John G. Bagley, with whom Egan, Flanagan and Cohen, P.C. was on brief, for appellant.

James F. Kavanaugh, Jr., with whom Conn, Kavanaugh, Rosenthal, Peisch & Ford, L.L.P. was on brief, for appellee.

Before: Torruella, Chief Judge, Lynch and Lipez, Circuit Judges.

TORRUELLA, Chief Judge.

This is primarily a declaratory judgment action in which a firearms distributor sought a determination that it was entitled to defense and/or indemnity from its insurance carrier under its general liability policies for civil actions brought by or on behalf of gunshot victims on a general theory that several firearm distributors had negligently, willfully, knowingly, and recklessly flooded the firearms market. The district court granted summary judgment in favor of the insurance carrier holding that the "products-completed operations hazard" exclusion provision applied to the civil actions, thereby precluding coverage. See Brazas Sporting Arms, Inc. v. American Empire Surplus Lines Ins. Co., 59 F. Supp. 2d 223, 225-26 (D. Mass. 1999). Because we agree with the district court's interpretation of the exclusion provision, and for the additional reasons discussed below, we affirm the grant of summary judgment.

BACKGROUND

Between 1992 and 1997, appellee American Empire Surplus Lines Insurance Company, a Delaware corporation, issued three identical "commercial general liability" policies to appellant Brazas Sporting Arms, Inc., a Massachusetts corporation. Brazas's policies contained the following endorsement that altered the standard policy agreement: "This insurance does not apply to 'bodily injury' or 'property damage' included within the 'products-completed operations hazard.'" Products-completed operations hazard includes "all 'bodily injury' and 'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work' except: (1) Products that are still in your physical possession; or (2) Work that had not yet been completed or abandoned." "Your product" is defined as,

a. Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:

(1) You;

(2) Others trading under your name; or

(3) A person or organization whose business or assets you have acquired . . . .

. . .

'Your Product' includes:

a. Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of 'your product'; and

b. The providing of or failure to provide warnings or instructions."

"Your work" means:

a. Work or operations performed by you or on your behalf . . . .

. . .

'Your work' includes:

a. Warranties or representations made at any time with respect to the fairness, quality, durability, performance or use of 'your work'; and

b. The providing of or failure to provide warnings or instructions.

In 1995, Brazas discovered that it had been named as a defendant in litigation pending in the Eastern District of New York. It subsequently learned that it was named as a defendant in an additional law suit. Both lawsuits charged Brazas and various other manufacturers and dealers of handguns, as well as industry trade groups, with liability for contributing to market overflow. Specifically, the lawsuits alleged that:

Defendants have knowingly produced and distributed handguns in excess of the reasonable demand by responsible consumers in the lawful national handgun market, and they have knowingly failed or refused to take any meaningful steps to regulate and control the distribution and sale of their guns by retail dealers. Their willfully negligent conduct - individually and as an industry - has created and supplied an unlawful national market in firearms, the source of the handguns that killed and wounded plaintiffs and their loved ones.

Notably, the lawsuits did not identify any particular guns sold by Brazas as the cause of injury to any particular plaintiffs. By the time the district court entered judgment, one of the cases had gone to trial, and Brazas had eventually been dismissed. See Hamilton v. Accu-Tek, No. C.V. 95-0049 (E.D.N.Y. 1995). Brazas has incurred in excess of $75,000 in defense costs in connection with the litigation.

At least some of the claims alleged in the lawsuits occurred during the effective period of the American Empire policies. However, upon notice, American Empire denied coverage and refused to defend Brazas. As a result, Brazas brought this declaratory judgment action in the United States District Court for the District of Massachusetts under that court's diversity jurisdiction pursuant to 28 U.S.C. § 1332. Brazas also brought a claim under the Massachusetts consumer protection statute, Mass. Gen. Laws ch. 93A, § 11. The parties filed cross motions for summary judgment. Brazas appeals from the district court's grant of summary judgment for American Empire and the denial of Brazas's motion for partial summary judgment on its duty to defend claim.

DISCUSSION

I. The Policy Coverage Claim

We review de novo the district court's interpretation of the insurance contracts. See Fed. R. Civ. P. 56; Merchants Ins. Co. of New Hampshire, Inc. v. United States Fidelity & Guar. Co., 143 F.3d 5, 6-8 (1st Cir. 1998); GRE Ins. Group v. Metropolitan Boston Hous. Partnership, Inc., 61 F.3d 79, 81 (1st Cir. 1995). Under Massachusetts law, we construe an insurance policy under the general rules of contract interpretation. See Merchants, 143 F.3d at 8 (citing Hakim v. Massachusetts Insurers' Insolvency Fund, 675 N.E.2d 1161, 1164 (Mass. 1997)). We begin with the actual language of the policies, given its plain and ordinary meaning. See GRE Ins. Group, 61 F.3d at 81 (citing cases). In so doing, we "consider 'what an objectively reasonable insured, reading the relevant policy language, would expect to be covered.'" Id. (quoting Trustees of Tufts Univ. v. Commercial Union Ins. Co., 616 N.E.2d 68, 72 (Mass. 1993)).

As a liability insurer in Massachusetts, American Empire has a duty to defend Brazas if the allegations in the New York litigation are "reasonably susceptible" to an interpretation that they state a claim covered by Brazas's policy. Merchants, 143 F.3d at 8 (quoting New England Mut. Life Ins. Co. v. Liberty Mut. Ins. Co., 667 N.E.2d 295, 297 (Mass. App. Ct. 1996) (internal quotations omitted)); see also Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 18 (1st Cir. 1997) (quoting Sterilite Corp. v. Continental Cas. Co., 458 N.E.2d 338 (Mass. App. Ct. 1983)). Under Massachusetts law, the duty to defend is broader than, and independent of, the duty to indemnify. See Merchants, 143 F.3d at 8 (citing Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 545 N.E.2d 1156, 1158 (Mass. 1989)); Millipore Corp. v. Travelers Indem. Co., 115 F.3d 21, 35 (1st Cir. 1997) (citing same). That is, the obligation to defend turns on the facts alleged in the complaint rather than the facts proven at trial. See Millipore, 115 F.3d at 35; see also GRE Ins. Group, 61 F.3d at 81.

A liability insurer has no duty to defend a claim that is specifically excluded from coverage, but the insurer bears the burden of establishing the applicability of any exclusion. See Mt. Airy, 127 F.3d at 19 (citing Great Southwest Fire Ins. Co. v. Hercules Bldg. & Wrecking Co., 619 N.E.2d 353 (Mass. App. Ct. 1993)); GRE Ins. Group, 61 F.3d at 81 (citing Camp Dresser & McKee, Inc. v. Home Ins. Co., 568 N.E.2d 631, 633 (Mass. App. Ct. 1991)). Consistent with the Massachusetts general rule favoring insureds in policy interpretation, any ambiguities in the exclusion provision are strictly construed against the insurer. See Mt. Airy, 127 F.3d at 19 (citing Sterilite, 458 N.E.2d 338); GRE Ins. Group, 61 F.3d at 81; see also Hakim, 675 N.E.2d at 1165 (holding that "[t]his rule of construction applies with particular force to exclusionary provisions"). Ambiguity exists when the policy language is susceptible to more than one rational interpretation. SeeMerchants, 143 F.3d at 8 (citing Boston Symphony Orchestra, 545 N.E.2d at 1169); Mt. Airy, 127 F.3d at 19 (citing Jefferson Ins. Co. of New York v. Holyoke, 503 N.E.2d 474 (Mass. App. Ct. 1987)). But it does not follow that ambiguity exists solely because the parties disagree as to the provision's meaning. See Continental Cas. Co. v. Canadian Universal Ins. Co., 924 F.2d 370, 374 (1st Cir. 1991).

Before the district court, and on appeal, American Empire's position is that the products-completed operations hazard exclusion excludes coverage for all injuries arising from Brazas's products, off premises, regardless of the circumstances. Brazas contends that such a reading of the exclusion provision would render the general liability policy meaningless. Brazas challenged summary judgment on two grounds: (1) the products-completed operations hazard exclusion was intended to apply to defective products only, and (2) the New York civil actions do not actually allege injuries from Brazas's products, but rather injuries caused by the company's business management and strategy, thereby rendering the exclusion provision inapplicable.

The district court rejected the appellant's arguments. The court held that the language of the exclusion provision did not support a reading that would limit the exclusion to injuries from defective products. Additionally, the court concluded that "[o]nly by a distortion of language and logic can plaintiff suggest that the injuries sued upon do not 'arise from' the distribution of Brazas products, off Brazas premises." Brazas, 59 F. Supp. 2d at 226. We take up each of the appellant's arguments in turn.

A. Defective Products

The appellant posits that the "pivotal issue" of the case is "whether the...