Irons Home Builders, Inc. v. Auto-Owners Ins. Co., Civ. A. No. 92-77318.

• Decision Date: 22 December 1993
• Docket Number: Civ. A. No. 92-77318.
• Citation: 839 F. Supp. 1260
• Parties: IRONS HOME BUILDERS, INC. and Thomas G. Irons, Plaintiffs, v. AUTO-OWNERS INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Western District of Michigan

839 F. Supp. 1260

IRONS HOME BUILDERS, INC. and Thomas G. Irons, Plaintiffs, v. AUTO-OWNERS INSURANCE COMPANY, Defendant.

Civ. A. No. 92-77318.

United States District Court, E.D. Michigan, S.D.

December 22, 1993.

Ernest I. Gifford, Theresa A. Orr, Ellen S. Cogen, Gifford, Groh, Sprinkle, Anderson & Patmore, P.C., Birmingham, MI, for plaintiffs.

Gary W. Caravas, Caravas & Hildinger, Troy, MI, for defendant.

MEMORANDUM OPINION AND ORDER

GADOLA, District Judge.

Plaintiffs Irons Home Builders, Inc. and Thomas Irons brought this breach of contract action against defendant Auto-Owners Insurance Company based on the court's diversity jurisdiction. Plaintiffs seek damages for defendant's failure to defend and indemnify them in a lawsuit allegedly covered by the liability insurance policy that they purchased from defendant. Before the court are the parties' cross motions for summary judgment.

I. Background

Plaintiff Irons Home Builders ("Irons") is a Florida corporation that designs and builds single family homes. Plaintiff Thomas Irons is the president of the company. Defendant Auto-Owners is a Michigan insurance company. Irons purchased two consecutive policies of liability insurance from defendant. The first policy covered bodily injury or property damage, and was effective from August 8, 1987 to August 8, 1988.¹ The second insurance policy, the subject of this suit, covered liability for personal or advertising injury. It was effective from August 8, 1988 to August 8, 1989. The policy defines advertising injury as follows:

"Advertising injury" means injury arising out of one or more of the following offenses:

a. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

b. Oral or written publication of material that violates a person's right of privacy;

c. Misappropriation of advertising ideas or style of doing business; or

d. Infringement of copyright, title or slogan.

The policy only applied to advertising injury, if the injury was caused by an offense committed in the course of advertising the insured's goods, products, or services.

The 1988-1989 policy also provided for certain exclusions. The insurance did not apply to advertising injury "arising out of oral or written publication of material whose first publication took place before the beginning of the policy period." In addition, the insurance did not apply in cases where the advertising injury arose "out of the willful violation of a penal statute or ordinance committed by or with the consent of the insured."

On April 21, 1989, Star Construction of Port Charlotte, Inc. ("Star"), a Florida construction company, brought a copyright infringement action against Irons in the United States District Court for the Middle District of Florida, alleging that Irons had copied a set of house plans and then built three houses based upon those plans. Star alleged that an individual by the name of C.B. Arthur visited a model of Star's "Caribbean" style copyrighted home. At some point before May 31, 1988, Arthur then asked Irons to draft plans for and build a house for him just like Star's model. The complaint alleges that at a date prior to July 2, 1988, the Charlotte County Building Department approved construction of the Arthur home based upon an application and plans submitted by Irons. The complaint also cites the construction of two additional houses on Great Falls Avenue that utilized the Caribbean design. Approval was granted for the construction of these two homes sometime before November 30, 1988. The design and construction of the three Caribbean homes by Irons was the basis for Star's complaint, which sought relief for infringement of copyright and unfair trade practices.

On June 20, 1990, more than a year after Star filed its complaint, Irons notified Auto-Owners of the pending lawsuit.² One week later, Auto-Owners informed Irons that it would investigate Star's lawsuit in order to determine if it was covered by either of the 1987-1988 or 1988-1989 policies. On August 22, 1990, Auto-Owners informed Irons that it believed that it had no duty to defend the lawsuit and that notice of the suit was late.

Trial began the next month on September 27, 1990. After Star presented its case, Irons made a settlement offer of $17,500 which was accepted. On February 5, 1991, the district court in Florida entered a final judgment signed by both Star and Irons. Based on a joint motion, the court found that Irons had infringed Star's copyright by making copies of Star's house plan and then using the copied plans to construct three-houses.

On March 25, 1991, Irons notified Auto-Owners of the final judgment and requested payment for the $17,500 judgment and the $34,779.91 that it spent for its own defense. On April 10, 1991, Auto-Owners refused coverage for either the costs of the defense or the final judgment.

Irons then filed this suit for breach of contract and bad faith dealing. It seeks indemnification of the $17,500 judgment and recovery of the attorney fees expended in the Star action as well as those expended in this action. Because Irons claims that Auto-Owners' refusal to defend was done in bad faith, it is also asking for punitive damages.

Auto-Owners argues that its denial of coverage was done in good faith. Furthermore, it argues that denial was proper because the allegations in Star's complaint did not trigger coverage under either insurance policy. Finally, the judgment that was eventually entered in the Star case is expressly excluded from coverage by the insurance policy because the first instance of copyright infringement occurred before the policy covering such conduct came into effect. Both parties have presented motions for summary judgment.

II. Standard of Review

Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment may be granted "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." "A fact is `material' and precludes grant of summary judgment if proof of that fact would have the effect of establishing or refuting one of the essential elements of the cause of action or defense asserted by the parties, and would necessarily affect the application of appropriate principles of law to the rights and obligations of the parties." Kendall v. Hoover Co., 751 F.2d 171, 174 (6th Cir.1984) (citation omitted) (quoting Black's Law Dictionary 881 (6th ed. 1979)). The court must view the evidence in a light most favorable to the nonmovant as well as draw all reasonable inferences in the nonmovant's favor. See United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 993, 8 L.Ed.2d 176 (1962); Bender v. Southland Corp., 749 F.2d 1205, 1210-11 (6th Cir.1984).

The movant bears the burden of demonstrating the absence of all genuine issues of material fact. See Gregg v. Allen-Bradley Co., 801 F.2d 859, 861 (6th Cir.1986). The initial burden on the movant is not as formidable as some decisions have indicated. The moving party need not produce evidence showing the absence of a genuine issue of material fact. Rather, "the burden on the moving party may be discharged by `showing—that is, pointing out to the district court—that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986). Once the moving party discharges that burden, the burden shifts to the nonmoving party to set forth specific facts showing a genuine triable issue. Fed.R.Civ.P. 56(e); Gregg, 801 F.2d at 861.

To create a genuine issue of material fact, however, the nonmovant must do more than present some evidence on a disputed issue. As the United States Supreme Court stated in Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986),

There is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the nonmovant's evidence is merely colorable, or is not significantly probative, summary judgment may be granted.

(Citations omitted). See Catrett, 477 U.S. at 322-23, 106 S.Ct. at 2552-53; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986). The standard for summary judgment mirrors the standard for a directed verdict under Fed.R.Civ.P. 50(a). Anderson, 477 U.S. at 250, 106 S.Ct. at 2511. Consequently, a nonmovant must do more than raise some doubt as to the existence of a fact; the nonmovant must produce evidence that would be sufficient to require submission to the jury of the dispute over the fact. Lucas v. Leaseway Multi Transp. Serv., Inc., 738 F.Supp. 214, 217 (E.D.Mich.1990), aff'd, 929 F.2d 701 (6th Cir.1991). The evidence itself need not be the sort admissible at trial. Ashbrook v. Block, 917 F.2d 918, 921 (6th Cir.1990). However, the evidence must be more than the nonmovant's own pleadings and affidavits. Id.

III. Applicable Law

When jurisdiction is based on diversity of citizenship, as it is in this case, a federal court must apply the choice of law rules of the state in which it sits. Klaxon v. Stentor Elec. Mfg., Inc., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Mahne v. Ford Motor Co., 900 F.2d 83, 85 (6th Cir.), cert. denied, 498 U.S. 941, 111 S.Ct. 349, 112 L.Ed.2d 313 (1990). In cases involving the construction of an insurance contract, Michigan law requires the court to apply the law of the state where the insurance policy was issued. Insurance Co. of North Am. v. Forty-Eight Insulations, Inc., 451 F.Supp. 1230, 1237 (E.D.Mich.1978), aff'd, 633 F.2d 1212 (6th Cir.1980); Chrysler Corp. v. Insurance Corp. of North Am., 328 F.Supp. 445 (E.D.Mich.1971). In this...