Federated Mut. Ins. Co. v. Coyle Mech. Supply Inc.

Decision Date22 December 2020
Docket NumberNo. 20-1207,20-1207
Citation983 F.3d 307
Parties FEDERATED MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. COYLE MECHANICAL SUPPLY INC., Defendant-Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

Jeffrey Alan Goldwater, Attorney, Beth Ann Berger Zerman, Attorney, Lewis Brisbois Bisgaard & Smith LLP, Chicago, IL, for Plaintiff-Appellee.

Glenn E. Davis, Attorney, Charles N. Insler, Attorney, Hepler Broom, LLC, St. Louis, MO, for Defendant-Appellant.

Before Kanne, Scudder, and St. Eve, Circuit Judges.

St. Eve, Circuit Judge.

This insurance dispute comes to us in an unusual procedural posture. The plaintiff in this case, Federated Mutual Insurance Company, sued its insured, Coyle Mechanical Supply Inc., seeking a declaration that it had no duty to defend or indemnify Coyle in a separate lawsuit pending against Coyle in state court. After Coyle answered Federated's complaint, Federated moved for judgment on the pleadings. Coyle opposed the motion, and later moved for leave to file two supplemental briefs bringing new facts to the district court's attention. In Coyle's view, these new facts showed that the state-court action potentially fell within Federated's coverage obligations.

The district court denied Coyle's motions to file supplemental briefs and granted Federated's motion for judgment on the pleadings. In granting Federated's motion, however, the court relied on some of the new facts that Coyle had unsuccessfully moved to introduce through supplemental briefs, while ignoring other facts—including facts that worked in Coyle's favor. Coyle now appeals. It points out, correctly, that the district court's handling of the case ran afoul of both local rules and the Federal Rules of Civil Procedure. Worse, the court's errors deprived Coyle of its right to present material factual evidence bearing on the central issue in the case. We reverse and remand so that Coyle may have a full and fair opportunity to defend against Federated's lawsuit.

I. Background
A. State-Court Action Against Coyle

Prairie State Generating Company, LLC sued Coyle in Illinois state court. According to Prairie's complaint, Prairie operates an electric-generation facility that has two units, Unit #1 and Unit #2. Coyle sells, distributes, and represents manufacturers of commercial valves. Prairie requested bids from Coyle for valves for both of its units. Coyle recommended valves manufactured by Copeland Industries. Coyle represented that the valves were "built to last for decades" and were Copeland's best high-pressure steam valves. Prairie purchased 64 valves from Copeland, installed 32 of the valves in Unit #2, and then "began to place Unit #2 back into service." A few days later, the installed valves "began to fail, by, among other things, leaking." Because of the valve failures in Unit #2, Prairie did not install the 32 valves it purchased for Unit #1. Instead, it removed the defective valves from Unit #2 and bought replacement valves for both units. Prairie notified Coyle of the valve failures, but Coyle refused Prairie's demands to "remedy the breach."

Prairie sued Coyle for breach of contract, breach of the implied warranty of merchantability, and breach of the warranty of fitness for a particular purpose. Prairie alleged that it had "incurred damages as a result of Coyle's breach, including but not limited to, costs of replacement valves, costs of removal of the Copeland valves, and costs of installation of the replacement valves."

B. Federated's Declaratory-Judgment Action

After Prairie filed suit, Coyle turned to its insurer, Federated, for defense and indemnification. Federated denied coverage. Following the parties’ continued disagreement over Federated's coverage obligations, Federated filed the present declaratory-judgment action against Coyle and Prairie, seeking a declaration that it had no duty to defend or indemnify Coyle in Prairie's lawsuit. Federated attached Prairie's state-court complaint and the applicable insurance policies to its complaint. Coyle attached the parties’ coverage correspondence to its answer.

1. The Policies

The policies between Federated and Coyle provide, in relevant part, that Federated will "pay those sums" that Coyle becomes "legally obligated to pay as damages because of" "property damage" caused by an "occurrence." They further provide that Federated has "the right and duty to defend the insured against any ‘suit’ seeking those damages." The policies define "property damage" 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." Additionally, the policies define "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

2. Federated's Motion for Judgment on the Pleadings

After Coyle filed its answer, Federated moved for judgment on the pleadings. Federated argued that it had no duty to defend or indemnify Coyle because Prairie's lawsuit did not involve "property damage" or an "occurrence." The next day, Federated moved to stay discovery pending resolution of its motion for judgment on the pleadings. Around the same time, Coyle propounded discovery requests on Federated.

Coyle opposed both of Federated's motions. Coyle argued that Federated's motion for judgment on the pleadings was premature because discovery was necessary on the duty-to-defend issue. Even without discovery, Coyle argued that the court should deny Federated's motion for judgment on the pleadings because Prairie's complaint potentially alleged a claim for "property damage" arising from an "occurrence" based on: Prairie losing the use of Unit #2 (which was implied from Prairie's allegation that it had placed "Unit #2 back into service"); leaking fluid; the introduction of potentially hazardous materials; and Prairie's replacement work.

The magistrate judge held a telephonic hearing on Federated's motion to stay discovery. At the hearing, Prairie's counsel clarified that Prairie was not making a claim for loss of use in the state-court action. Instead, Prairie sought damages for the cost of replacing the defective valves and the "intersecting pieces of pipe [that] were damaged." After counsel clarified that the intersecting pipe was Prairie's property, the judge asked, "So you are seeking money for damage to Prairie State property?" Prairie's counsel responded, "Correct." Because there was "an argument to be made that there are damages that fall within or might fall within the purview then of what has been defined as an occurrence or an injury," the magistrate judge permitted discovery for that limited purpose while the motion for judgment on the pleadings was pending.

Following the hearing, Coyle moved for leave to file a supplemental brief in further opposition to Federated's motion for judgment on the pleadings. Coyle sought to introduce the "new facts" about the damage to Prairie's property that had come to light at the discovery hearing. A few months later, while the first motion for leave was still pending, Coyle moved for leave to file a second supplemental brief. This time, Coyle attached an email obtained through discovery. In the email, a representative of Copeland tells a representative of Prairie that the situation related to the defective valves is "a possible emergency" and "a very hazardous situation." The Copeland representative appears to say that, due to a miscommunication, the valves that Copeland provided were not the right type for Prairie's equipment. Nine months later, the district court denied both of Coyle's motions for leave to file supplemental briefs in a two-sentence text-entry order, finding "no exceptional circumstances to justify the filing of reply briefs."

Eventually, the district court granted Federated's motion for judgment on the pleadings. The court ruled that Prairie's complaint did not allege "property damage" or an "occurrence." There was no "property damage" because Prairie only sought damages for the repair and replacement of defective products—purely economic losses. Nor did the court accept Coyle's argument that Prairie must have lost the use of its property because Prairie alleged that it "placed Unit #2 back into service." To the contrary, Prairie's complaint "clearly allege[d] that the valves were faulty/defective" and Prairie's counsel had clarified at the discovery hearing that "Prairie was not making a claim for loss of use but rather for the costs of replacing the allegedly defective valves and the associate piping linking the valves." There was no "occurrence" (i.e., "accident") because the defectiveness of the valves was foreseeable.

Coyle now appeals the district court's grant of judgment on the pleadings to Federated. It attaches two exhibits to its reply brief: (1) Copeland's third-party answer to Coyle's third-party complaint in Prairie's underlying lawsuit; and (2) an excerpt from Prairie's corporate deposition in the underlying lawsuit. Federated moves to strike both exhibits, as well as Coyle's arguments related to them.

II. Discussion

Coyle contends that the district court committed two procedural errors that deprived it of the opportunity to mount a factual and legal defense to Federated's lawsuit. We agree. First, the district court applied the wrong standard when denying Coyle's motions for leave to file supplemental briefs. Second, the district court erroneously considered materials outside the pleadings without converting Federated's motion for judgment on the pleadings into a motion for summary judgment.

Both errors prejudiced Coyle. Coyle's supplemental briefs demonstrated that there were material factual disputes bearing on Federated's duty to defend. As soon as the court learned of these factual disputes, it should have denied Federated's motion for judgment on the pleadings or converted it to a motion for summary judgment. Instead, the court rejected Coyle's attempts to...

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