Hennes Erecting Co. v. National Union Fire Ins. Co. of Pittsburgh, Pa.

• Decision Date: 23 March 1987
• Docket Number: 85-1115,Nos. 85-1095,s. 85-1095
• Citation: 813 F.2d 1074
• Parties: HENNES ERECTING COMPANY, Plaintiff-Appellant/Cross-Appellee, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1074

813 F.2d 1074

HENNES ERECTING COMPANY, Plaintiff-Appellant/Cross-Appellee, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH PENNSYLVANIA, Defendant-Appellee/Cross-Appellant.

Nos. 85-1095, 85-1115.

United States Court of Appeals Tenth Circuit.

March 23, 1987.

Paul H. Niewald, Niewald, Waldeck, Norris & Brown, Overland Park, Kan. (Michael G. Norris and June Clark of the same firm with him on the brief), for plaintiff-appellant/cross-appellee.

Charles R. Tuffley, Denenberg, Tuffley & Bocan, Southfield, Mich. (Susan Tukel of the same firm and Jerome F. Bales, Wallace, Saunders, Austin, Brown & Enoch, Chartered, Overland Park, Kan., with him on the brief), for defendant-appellee/cross-appellant.

Before McKAY, McWILLIAMS and BALDOCK, Circuit Judges.

BALDOCK, Circuit Judge.

In 1980, the Board of Public Utilities of Kansas City, Kansas was building a power plant known as the Nearman Creek Power Station. Appellant contracted to install a Westinghouse 235,000 kw turbine generator in the project. On December 30, 1980, the turbine shaft of the generator was damaged severely during performance testing due to the failure of the number 1 main bearing. The failure was caused by the disconnection of an oil lubricating line servicing that bearing. The total amount of the loss was $373,646.52 with plaintiff-appellant (Hennes) sustaining a direct loss of $221,075.24.

Hennes was insured under an installation floater policy ¹ issued by St. Paul Fire &amp Marine Insurance Co. (St. Paul) with a policy limit of $1 million subject to a $1,000 deductible. Defendant-appellee (National Union) had issued a builder's risk policy ² to the Board of Public Utilities with a policy limit of $50 million subject to a $100,000 deductible during performance testing. By endorsement, contractors and subcontractors (including Hennes) were named as additional insureds on the builder's risk policy issued by National Union.

In January 1981 both St. Paul and National Union were notified of the loss. The loss was investigated and both firms appointed adjusting firms. During this time, representatives of St. Paul and National Union discussed potential liability for the loss. St. Paul issued a loan receipt to its insured for $220,075 and commenced this action against National Union in the name of the insured. After a jury trial, the district court entered judgment in the amount of $101,370.67 against National Union. Both parties appealed.

In this diversity case, we apply the substantive law of Kansas. 28 U.S.C. Sec. 1332; Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The questions which we consider relate to the district court's interpretation and application of state law.

I.

St. Paul contended that National Union was liable for the entire amount of the direct loss sustained by Hennes less the $1,000 deductible. Before trial, the district court granted partial summary judgment in favor of National Union determining that National Union's maximum amount of liability would be $60,537.62 (later changed to $101,370.67) under its policy. The district court determined that under Kansas law both policies provided primary coverage for the loss and the conflicting "other insurance" clauses in each policy were to be disregarded with the loss prorated equally up to the limits of the lower policy.

As noted, two types of insurance policies are involved: an installation floater policy and a builder's risk policy. The distinction between the two has been summarized as follows:

A blanket, compound, or floater policy is written upon a risk as a whole, embracing whatever articles or items are included therein, often changing in its nature, in contravention thereto, a specific policy is one which allocates the amount of the risk in stated values upon the several items embraced in the coverage, or covers property at a designated location for a stated amount or insures against a specific peril.

6 Appleman, Insurance Law and Practice Sec. 3912 (1972) (footnotes omitted). St. Paul suggests that the builder's risk policy issued by National Union provides coverage for risks in connection with the specific construction project for which it was issued, while the installation floater policy issued by St. Paul provides general coverage for risks associated with the installation of turbine generator without regard to location. Under this theory, National Union's policy provides specific coverage while St. Paul's policy provides blanket coverage.

Traditionally, a blanket policy provides excess coverage over and above specific insurance and is not effective until the specific insurance is exhausted. Jorski Mill & Elevator Co. v. Farmers Elevator Mutual Insurance Co., 404 F.2d 143, 146 (10th Cir.1968). Based on this distinction, St. Paul contends that it is not liable for the loss in question; rather National Union is and in full. In this case, however, each insurer's liability is not determined with reference to the traditional rule because of conflicting "other insurance" clauses in each policy. ³ An "other insurance" clause is designed "to limit, reduce or avoid an insurer's loss in those cases where there is multiple coverage." Carriers Insurance Co. v. American Policyholders' Insurance Co., 404 A.2d 216, 218 (Me.1979). Here each policy insures against property damage and contains an "other insurance" clause of the excess variety. An excess "other insurance" clause provides that the insurer's liability will only be in excess of amounts due under other policies. There is not a problem so long as only one policy contains an excess "other insurance" clause. When more than one policy contains the clause, a court must construe such provisions to allocate liability.

Kansas has followed the majority rule and determined that conflicting "other insurance" excess coverage provisions are mutually repugnant and are to be disregarded. Western Casualty & Surety Co. v. Universal Underwriters Co., 232 Kan. 606, 657 P.2d 576, 580 (1983); see also Note, Insurance: Apportionment of Loss Between Conflicting Excess "Other Insurance" Clauses in Automobile Liability Cases, 23 Washburn L.J. 195 (1983). In such circumstances, liability is to be prorated equally between the two policies up to the limit of the lower policy; thereafter, the higher policy is available. Western Casualty, 657 P.2d at 582.

St. Paul suggests that the "other insurance" clause in National Union's policy is of no effect because the two policies are not concurrent, have no identity of interest in the same property, the same risk, or in the name of or for the benefit of the same insured. We must disagree with this characterization of the policies. The record reveals that both policies were in effect at the date of the loss and provided coverage for property damage to the turbine generator. Hennes was a named insured on both policies. The two policies need not be identical for the excess "other insurance" clauses to apply.

The district court was correct in its decision to disregard the conflicting "other insurance" clauses. This meant that each policy was then "considered as affording dual primary coverage" with the amount of any loss covered by both policies to be prorated between the two insurers. Western Casualty, 657 P.2d at 580.

II.

National Union denied the claim of Hennes in writing on April 30, 1981, based on the "other insurance" clause in the National Union policy. At trial, National Union relied on the following exclusion:

11. PERILS EXCLUDED: This insurance does not insure

* * * (j) Loss or damage covered under any guarantee or warranty (expressed or implied) by any contractor, manufacturer or supplier whether or not such contractor, manufacturer or supplier is an insured under this policy.

National Union's theory was that the loss was covered by express warranties in the contract between Hennes and the Board of Public Utilities which provided:

MATERIALS AND WORKMANSHIP: ... All materials and workmanship shall be first-class in every respect. All labor shall be performed by skilled workmen, duly qualified to do their respective jobs to the satisfaction of the Owner and the Engineer.

REPAIR AND/OR REPLACEMENT OF DEFECTIVE PORTIONS:

* * *

The Contractor warrants to the Purchaser that the work of this Contract will be free from defects in material, workmanship and title and will meet the specifications contained in the Contract of Sale.

CORRESPONDENCE:

* * *

The Contractor warrants to the Purchaser that the work of this Contract will be free from defects in material, workmanship and title and will meet the specifications contained in the Contract of Sale.

Contract at D-15 and E-8; see also Contract at G-1 & G-2 (Purchaser and Contractor agree that the Contractor shall, "in good substantial and workmanlike manner and in accordance with the provisions of this Contract Document, execute and complete all work included in and covered by the Purchaser's official award of this Contract to the said Contractor."); Contract at F-3 (Purchaser may withhold payments due to the Contractor for "[w]ork that is defective or guarantees that have not been met and that remain uncorrected.") National Union also maintained that the loss was covered under the implied warranty to do a workmanlike job and use appropriate and reasonable care and skill. Crabb v. Swindler, 184 Kan. 501, 337 P.2d 986, 989 (1959). The warranty to perform in a workmanlike and reasonable manner is specified in the contract. Moreover, an implied warranty exists in the absence of an express provision concerning workmanship. Belger Cartage Service Inc. v. Holland Construction Co., 224 Kan. 320, 582 P.2d 1111, 1122 (1978); Gilley v. Farmer, 207 Kan. 536, 485 P.2d 1284, 1289 (1971).

Hennes contended that National Union had waived its right to rely upon any exclusion in the policy because such an exclusion was not mentioned when National Union rejected Hennes' claim in April 1981. On appeal, National Union...