Kemper Nat. Ins. v. Heaven Hill, 2000-SC-0982-DG.

• Decision Date: 22 August 2002
• Docket Number: No. 2000-SC-0982-DG.,2000-SC-0982-DG.
• Citation: 82 S.W.3d 869
• Parties: KEMPER NATIONAL INSURANCE COMPANIES and American Motorists Insurance Company, Appellants, v. HEAVEN HILL DISTILLERIES, INC., Appellee.
• Court: United States State Supreme Court — District of Kentucky

82 S.W.3d 869

KEMPER NATIONAL INSURANCE COMPANIES and American Motorists Insurance Company, Appellants, v. HEAVEN HILL DISTILLERIES, INC., Appellee.

No. 2000-SC-0982-DG.

Supreme Court of Kentucky.

August 22, 2002.

J. Denis Ogburn, Alber Crafton, PLLC, Louisville, for Appellants.

Kenneth Gregory Haynes, Merrill S. Schell, Wyatt, Tarrant & Combs, Louisville, for Appellee.

JOHNSTONE, Justice.

On November 7, 1996, a fire ravaged the Heaven Hill facility located in Nelson County, Kentucky. The fire destroyed seven warehouses containing bourbon whiskey. Heaven Hill had already sold the bourbon to various customers and was merely storing it while it aged, prior to bottling. The owners of the bourbon, through their insurance companies as subrogees, sued Heaven Hill claiming negligence. Most of the litigation was consolidated in the Jefferson Circuit Court in Frank Linn Distilled Products Limited, et al. v. Heaven Hill Distilleries, Inc., Civil Action No. 97-CI-2057. As a result of that litigation, Heaven Hill paid several million dollars in damages to its customers. In turn, Heaven Hill made a demand for coverage under the commercial general liability policy it purchased from American Motorists Insurance Company, a subsidiary of Kemper.

Kemper denied the claim for coverage and declined to defend the Frank Linn litigation under a reservation of rights. Kemper then filed a declaration of rights action in Jefferson Circuit Court. That court granted Kemper's motion for summary judgment. Heaven Hill appealed to the Court of Appeals, which reversed. Now Kemper appeals to this Court and, after careful consideration, we reverse the Court of Appeals' decision and reinstate the circuit court's summary judgment order.

SUMMARY JUDGMENT

Summary judgment is proper when there exists no material issue of fact and the movant is entitled to judgment as a matter of law. Steelvest, Inc., v. Scansteel Service Center, Inc., Ky., 807 S.W.2d 476 (1991). CR 56.03. Interpretation and construction of an insurance contract is a matter of law for the court. See Morgan, field National Bank v. Damien Elder & Sons, Ky., 836 S.W.2d 893, 895 (1992); Stone v. Kentucky Farm Bureau Mutual Insurance Company, Ky.App., 34 S.W.3d 809, 810 (2000).

THE POLICY

The first step in resolving this issue is to examine the language of the insurance policy. The policy was drafted in such a way that the insuring agreement affords coverage in broad-brush fashion:

SECTION I — COVERAGES COVERAGE A — BODILY INJURY AND PROPERTY DAMAGE LIABILITY

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages.... (Emphasis added).

The policy defines "property damage" as follows:

SECTION V — DEFINITIONS

. . . .

15. "Property damage" means:

a. Physical injury to tangible property, including all resulting loss of use of that property....

b. Loss of use of tangible property that is not physically injured....

But the policy contains numerous exclusions, "whose function it is to restrict and shape the coverage otherwise afforded." Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788, 790 (1979). We focus our attention on two of those exclusions: the Pollution Exclusion and the Care, Custody or Control Exclusion. The Pollution Exclusion is modified by an endorsement, which Heaven Hill purchased after the original policy. The Pollution Exclusion reads as follows:

2. Exclusions [to the Insuring Agreement]

This insurance does not apply to:

. . . .

f. Pollution

1) "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants:

a) At or from any premises, site or location which is or was at any time owned or occupied by or rented or loaned to, any insured;

. . . .

Subparagraph[] a) ... do[es] not apply to "bodily injury" or "property damage" arising out of heat, smoke or fumes from a hostile fire.

As used in this exclusion, a hostile fire means one which becomes uncontrollable or breaks out from where it was intended to be.

. . . .

Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed. (Emphasis added).

Heaven Hill purchased the following endorsement, which is an exception to the Pollution Exclusion of the original policy:

EXCEPTION TO POLLUTION EXCLUSION — LIMITED ON-PREMISES COVERAGE

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.

This endorsement modifies insurance provided under the following:

COMMERCIAL GENERAL LIABILITY COVERAGE FORM

Subparagraph[] 1) a) ... of Exclusion f.... do[es] not apply to "bodily injury" or damage to personal property of others, including all resulting loss of use of such property, occurring on any premises, site or location which is owned by or rented to any insured, resulting from the sudden and accidental discharge, dispersal, release or escape of pollutants on such premises, site or location. (Emphasis added).

EXCLUSION CONFUSION

Heaven Hill first argues that the fire that destroyed the warehouses resulted from "pollutants" as defined in the policy, and the Endorsement, which specifically refers to "damage to the personal property of others," covers that damage. Initially, we note that we are not convinced that the Pollution Exclusion applies to this case because there was arguably no "pollutant." See Motorists Mutual Insurance Company v. RSJ, Inc., Ky.App., 926 S.W.2d 679, 682 (1996). Assuming, arguendo, that the Pollution Exclusion does apply, Heaven Hill's argument still fails.

It is elementary that the Pollution Exclusion denies coverage because "exclusion clauses do not grant coverage; rather, they subtract from it." Harrison Plumbing & Heating, Inc. v. New Hampshire Insurance Group, 37 Wash.App. 621, 681 P.2d 875, 880 (1984); see also Stillwater Condominium Association v. American Home Assurance Company, 508 F.Supp. 1075, 1079 (D.Mont.1981). Heaven Hill, however, argues that the language of the Endorsement affirmatively grants coverage. But the Endorsement has no effect apart from the Pollution Exclusion because the language employed in the Endorsement refers back to the Exclusion only: "Subparagraph[] 1) a) ... of Exclusion f.... do[es] not apply to `bodily injury' or damage to personal property of others...." (Emphasis added).

Heaven Hill also suggests that the title of the Endorsement, "EXCEPTION TO POLLUTION EXCLUSION — LIMITED ON-PREMISES COVERAGE," demonstrates affirmative coverage. But Professor Couch dispels this notion: "The caption or title of an endorsement cannot override the provisions below it and, if those provisions unambiguously show the intent of the parties, then the ambiguity of the caption is resolved." See 2 Couch on Insurance 2d § 4:38. The language of the Endorsement unquestionably refers back to the Pollution Exclusion and nowhere grants affirmative coverage. Because an exclusion cannot grant coverage, the Pollution Endorsement, which simply modifies the Pollution Exclusion, likewise cannot grant coverage. The proper interpretation is that the Endorsement removes "damage to personal property of others" from the Exclusion, which thereby restores that property to the broad coverage of the Insuring Agreement. In other words, "the coverage supposedly `granted' by the exception to [the] exclusion [] has already been granted in the insuring provision." Stillwater, 508 F.Supp. at 1079.

With "damage to the personal property of others" (in the context of a pollution event) restored to the Insuring Agreement, it appears as if the bourbon might be covered; thus, we examine whether any other exclusions apply. Kemper claims that the Care, Custody or Control Exclusion applies, and we agree. That exclusion reads as follows:

2. Exclusions

This insurance does not apply to:

. . . .

j. Damage to Property

"Property damage" to:

. . . .

4) Personal property in the care, custody or control of the insured;

There is no dispute that the Care, Custody or Control Exclusion, read in isolation, applies to the facts of this case. Heaven Hill sold the bourbon destroyed in the fire to its customers, making it the personal property of others. Heaven Hill also stored the bourbon in its warehouses, which were located on its premises and controlled by its employees, so the bourbon was in Heaven Hill's care, custody or control. Whatever the effect of other provisions, the exclusion covers the bourbon that was destroyed in the fire.

Further, the Care, Custody or Control Exclusion is unambiguous. Where the terms of an insurance policy are clear and unambiguous, the policy will be enforced as written. American National Bank and Trust Company v. Hartford Accident and Indemnity Company, 442 F.2d 995, 999 (6th Cir.1971) ("... under Kentucky law unambiguous and clearly drafted exclusions which are `not unreasonable' are enforceable."); see also Masser v. State Farm Automobile Insurance Company, Ky., 894 S.W.2d 633 (1995). We agree with the court in Diamaco, Inc.. v. Aetna Casualty & Surety Company, 97 Wash.App. 335, 983 P.2d 707 (1999):

Because coverage exclusions are "contrary to the fundamental protective purpose of insurance," they are "strictly construed against the insurer" and "will not be extended beyond their clear and unequivocal meaning." But that strict construction should not overcome "plain clear language resulting in a strained or forced construction."

(Internal citations omitted). The Care, Custody and Control Exclusion in this case clearly defines the coverage.

Kemper further asserts that the Pollution Exclusion and Endorsement have no bearing on property in the care, custody, or control of the insured, regardless of...