Hanover Ins. Co. v. American Engineering Co.

Decision Date15 September 1994
Docket Number93-5442,Nos. 93-5440,s. 93-5440
Citation33 F.3d 727
PartiesHANOVER INSURANCE COMPANY, Plaintiff-Appellee, Intervening Defendant-Appellee, Security Insurance Company Of Hartford (93-5442), Intervening Plaintiff-Appellant, v. AMERICAN ENGINEERING COMPANY; Mahan Corporation; American Engineering Company d/b/a Amtex Engineering Company, Texas; American Engineering Company, in Virginia and North Carolina; Adams Engineering Company; E.B. Gaither; Homer M. Walker; Henry C. Rogers; D. Martin VanMeter; Stephen L. Mulloy; James David Sigler; James F. Adams; W. Wayne Roggenkamp; Richard L. Peck; Douglas L. Locker (93-5440), Defendants-Appellants.
CourtU.S. Court of Appeals — Sixth Circuit

Larry Deener (argued), J. Denis Ogburn (briefed), Landrum & Shouse, Lexington, KY, for plaintiff-appellee.

J. Stephen McDonald, Newberry, Hargrove & Rambicure, D. Duane Cook (argued and briefed), Lexington, KY, for defendants-appellants.

Robert M. Brooks (argued), James P. Grohmann (briefed), Boehl, Stopher & Graves, Louisville, KY, for intervenor-appellant.

Before: RYAN and NORRIS, Circuit Judges; and KRUPANSKY, Senior Circuit Judge.

KRUPANSKY, Senior Circuit Judge.

This diversity action concerned the scope of insurance coverage afforded by commercial general liability policy no. ZDL 278 88 76 ("the CGLP") issued by appellee Hanover Insurance Company ("Hanover") to appellant American Engineering Company ("American"). Hanover sought judicial reformation of the CGLP policy to incorporate an allegedly erroneously omitted rider (ISO Form CG 22 43 11 85) ("the rider" or "the endorsement") which would purportedly exclude coverage for any professional negligence claim made against American. Appellant Security Insurance Company of Hartford ("Security"), American's professional liability insurance carrier, initiated a cross-complaint in intervention against Hanover which prayed for reimbursement of certain amounts paid in settlement of certain tort claims against American, as well as a judicial determination of priority of coverage. The district court, on cross motions for summary judgment, reformed the CGLP to include the pertinent rider and accordingly dismissed the entire action on the theory that the rider precluded coverage for the types of claims against American at issue in this case.

At all relevant times, American was a partnership engaged in the business of providing professional engineering services. In 1987, both its Maryland Casualty Co. general liability policy and its Fireman's Fund umbrella policy expired. Through an insurance broker, William F. Cowgill, Jr. ("Cowgill"), American acquired replacement policies underwritten by Hanover. Although Cowgill had not sought professional negligence coverage for American, the $1 million Hanover CGLP in fact contained no professional liability exclusion. 1 The policy was renewed in this form for additional annual periods in 1988 and 1989.

At the time of American's acquisition of the Hanover CGLP in 1987, American participated in the construction of a bridge as a subcontractor under a master contract between the state of Kentucky and Florence & Hutchinson, Inc. ("FHI"). FHI served as the general engineering consultant respecting a large state-sponsored highway and bridge construction project. American, as FHI's subcontractor, assumed general engineering consultant responsibilities respecting the construction of a bridge on AA Highway at Twelve Mile Creek in Campbell County. American devised the bridge and in turn subcontracted Janssen Spaans & Associates ("JSA") to design concrete beams and girders for the bridge, and hired Prestress Services, Inc. ("PSI") to fabricate those concrete beams and girders.

Also in 1987, on an unrelated project, the Illinois Tollway Authority predicated the award of work to American upon its attainment of a specialized professional errors and omissions policy. American accordingly obtained such professional negligence coverage in the amount of $1 million from a division of Security (DPIC Companies/Orion Group). That policy insured solely against professional liability; it expressly excluded general liability coverage.

On June 22, 1989, Campbell County bridge concrete beam no. 201 failed, tragically killing two workmen and injuring three others. Subsequently, effective October 1, 1989, Hanover amended the CGLP to integrate the rider. 2 Between late 1989 and early 1993, four tort damages actions were initiated in Kentucky state court against, inter alia, FHI, PSI, JSA, and American, which sought multimillion dollar recoveries. Those complaints generally averred, inter alia, that American acted negligently, either through its own actions or through the conduct of other defendants with which it acted in concert, respecting the design of bridge beam no. 201.

On June 27, 1989, American tendered its defense to Hanover under the CGLP. In response, Hanover, by letter dated January 10, 1990 from Claims Supervisor John R. Sparks ("Sparks"), denied coverage and refused to defend. The Sparks letter did not reference the omitted rider but instead buttressed the decision by citation to a provision of the CGLP which Hanover later conceded during discovery was irrelevant to the claims. 3

On November 8, 1991, Hanover filed a diversity action in the Eastern District of Kentucky against American requesting reformation of the CGLP, alleging, among other things, that the parties had not intended the policy to cover professional liability and that the appropriate endorsement had been omitted by mutual mistake. On December 9, 1991, American counterclaimed for a declaration that the CGLP covered liability for professional negligence and that the Security policy afforded coverage in excess of the Hanover policy. American also sought recovery of $1,450,000 paid by itself and Security in settlement of American's exposure in the tort suits. On August 7, 1992, Security filed a complaint in intervention against Hanover which advanced an equitable subrogation theory and which sought a declaration that its policy covered only liabilities in excess of those insured by the Hanover CGLP. Security demanded reimbursement of $1,000,000 (the policy limit) advanced by it in partial discharge of American's settlement obligations. On September 18, 1992, American amended its counterclaim against Hanover to incorporate allegations of failure to investigate the claims, refusal to defend, breach of the covenant of good faith and fair dealing and good faith obligations, and use of economic coercion to avoid its contractual commitments.

After completion of discovery, the district court on February 19, 1993 ruled upon the parties' cross-motions for summary judgment. The court granted Hanover's motion to reform the CGLP to include the rider, denied the motions of American and Security, and dismissed the entire action.

Under Federal Rule of Civil Procedure 56(c), "[t]he [summary] judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."

On summary judgment, all reasonable inferences drawn from the evidence must be viewed in the light most favorable to the parties opposing the motion. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-88, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). However, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial.' " Id. The substantive law determines which facts are "material" for summary judgment purposes. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-49, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The same evidentiary standard of proof applies on summary judgment as would apply at trial on the merits. Id. at 252-53, 106 S.Ct. at 2512.

On appeal, the circuit court reviews a grant of summary judgment de novo, using the same Rule 56(c) standard as the district court. Hansard v. Barrett, 980 F.2d 1059, 1061 (6th Cir.1992). However, the denial of a motion for summary judgment is reviewed for abuse of discretion. Pinney Dock and Transport Co. v. Penn Cent. Corp., 838 F.2d 1445, 1472 (6th Cir.), cert. denied, 488 U.S. 880, 109 S.Ct. 196, 102 L.Ed.2d 166 (1988). Reviewing de novo the district court's grant of summary judgment in favor of Hanover, this panel must conclude that summary judgment standards had not been satisfied and therefor the lower court's disposition was erroneous and must be reversed.

Substantive Kentucky law applies in this diversity case. E.g., Miller's Bottled Gas, Inc. v. Borg-Warner Corp., 955 F.2d 1043, 1049 (6th Cir.1992); Nat Harrison Assoc., Inc. v. Louisville Gas & Elec. Co., 512 F.2d 511, 513 (6th Cir.), cert. denied, 421 U.S. 988, 95 S.Ct. 1992, 44 L.Ed.2d 478 (1975). In that state, the construction of insurance contract provisions comprise questions of law for the court, unless disputed facts are involved. Perry's Adm'x v. Inter-Southern Life Ins. Co., 254 Ky. 196, 71 S.W.2d 431, 433 (1934). Under Kentucky law, insurance policies are strictly construed against the insurer, especially where, as here, the insurance company drafted the document in its entirety. Wolford v. Wolford, 662 S.W.2d 835, 838 (Ky.1984). In Kentucky, "exceptions and exclusions should be strictly construed to make insurance effective." Davis v. American States Ins. Co., 562 S.W.2d 653, 655 (Ky. App. 1978).

In the case at bench, in the absence of the rider, the Hanover CGLP on its face clearly included claims against American which germinated from the professional errors or omissions of either itself, or of others such as subcontractors which might give rise to American's vicarious liability, because the policy did not expressly exclude such claims. 4 If the rider,...

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