Landmark Am. Ins. Co. v. Heco Realty, LLC

• Decision Date: 22 August 2022
• Docket Number: 21-5858
• Parties: LANDMARK AMERICAN INSURANCE COMPANY, Plaintiff-Appellee, v. HECO REALTY, LLC, Defendant, LIBERTY MUTUAL FIRE INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

LANDMARK AMERICAN INSURANCE COMPANY, Plaintiff-Appellee, v. HECO REALTY, LLC, Defendant, LIBERTY MUTUAL FIRE INSURANCE COMPANY, Defendant-Appellant.

No. 21-5858

United States Court of Appeals, Sixth Circuit

August 22, 2022

NOT RECOMMENDED FOR PUBLICATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TENNESSEE

Before: MOORE, WHITE, and BUSH, Circuit Judges.

OPINION

JOHN K. BUSH, CIRCUIT JUDGE

Heckethorn Manufacturing rented commercial property from HECO Realty LLC, in Dyersburg, Tennessee. To comply with its lease Heckethorn bought commercial property insurance from Liberty Mutual Fire Insurance Company. And when Heckethorn's business looked to be on the brink of shutting down, HECO bought insurance of its own from Landmark American Insurance Company. So both Liberty Mutual and Landmark covered the property in late spring 2019, when a company damaged it while removing Heckethorn's equipment. But when presented with HECO's claim for the damages, both insurers claimed that the other had to pay first. We must now decide how the Tennessee Supreme Court would likely resolve Landmark and Liberty Mutual's coverage dispute.

I.

HECO leased its commercial property to Heckethorn for twenty-three years. Their relationship came to an early end when Heckethorn stopped making rent payments. Nevertheless, HECO and Heckethorn's relationship remains central to Landmark and Liberty Mutual's dispute over their respective insurance contracts. So we start with the terms of the 1996 lease itself.

Two aspects of the lease matter most here. The first is Heckethorn's promise to procure insurance coverage. Under the heading "Fire Insurance," Heckethorn agreed to "pay for and maintain insurance against loss or damage by fire and such other risks and hazards as are insurable under present and future standard forms of fire, rent, and extended coverage insurance policies, in an amount sufficient to prevent [HECO] from becoming a co-insurer under the terms of the applicable policies[.]" Lease § 7(a), R 1-4, PageID 38. On top of meeting certain quality and coverage requirements, the policy also had to name HECO an additional insured. Id. § 7(b), PageID 38.

So Heckethorn paid for what it needed by purchasing property insurance coverage from Liberty Mutual. The policy at issue was effective from October 30, 2018, to October 30, 2019. It provided "coverage on a replacement cost basis" for "risks of direct physical loss or damage to" real property or personal property (of the insured and others), and for equipment breakdown, loss of business income, and extra expense. Liberty Mutual Policy, R. 1-7, PageID 204. Including equipment breakdown, Liberty Mutual's real-property liability was limited to $12,252,472. The policy also listed HECO as an additional insured, and Heckethorn assigned its rights under the policy to HECO when their lease agreement terminated.

In another section of the lease-labeled "Liability Insurance &'Hold Harmless' Agreement"-Heckethorn also agreed to maintain "public liability insurance" naming HECO an additional insured. Lease § 8(a)-(c), R. 1-4, PageID 39-40. Heckethorn and HECO further agreed to each "be responsible for, and . . . defend, indemnify, and hold harmless the other party against and from any and all liability, claim of liability, or expense arising out of," among other things, its own negligent, reckless, or intentional conduct. Id. § 8(d), PageID 40. The record does not reflect whether Heckethorn complied with this provision, but neither party argues that Heckethorn bought the Liberty Mutual policy to comply with this part of the lease.^[1]

The second key feature of the lease is a collection of promises by Heckethorn to bear responsibility for certain damages. It accepted that responsibility, by our count, six times:

• A clause providing that any recovery under Heckethorn's above-mentioned insurance policy would be paid to HECO. Lease § 7(b)(A), R. 1-4, PageID 38.

• A section prohibiting certain uses of the premises and requiring that Heckethorn indemnify HECO for any losses resulting from a prohibited use. Id. § 11(b), PageID 43.

• A clause specifying that Heckethorn "shall be responsible for 100 % of the repair, replacement, and maintenance of the Premises, whether structural or non-structural." Id. § 13(a), PageID 45-46.

• A section absolving HECO of "any duty to replace, repair, maintain, alter, [or] to take any other action with respect to the premises" and expressly disclaiming HECO's liability for damages caused by "any acts or omissions" of Heckethorn or other occupants, "losses by theft," and "the criminal acts, if any, of third parties to, in, or near the Premises." Id. § 13(b), PageID 46.

• A section requiring Heckethorn to indemnify HECO for roof-leak (or other) damages caused by a "Roof Cut," or "any penetration into the roof[.]" Id. § 14(b), PageID 47.

• And a section tasking Heckethorn with repairing "all such damage to the Premises that arises from or out of the removal of trade fixtures by Tenant" and reimbursing HECO "for all such damage not repaired." Id. § 15(b)(C), PageID 48.

Heckethorn had the option to cover some of the above costs by purchasing renters' insurance for itself. Nothing in the record reveals whether it did so.

Such was the lease at formation and in operation; this dispute arises from events surrounding its untimely termination. The parties ended the lease when Heckethorn could no longer pay its rent. Heckethorn's financial difficulties began in 2017. Those difficulties fluctuated, but by the end of 2018, a manager at HECO knew that "there was a very high likelihood that Heckethorn would, at some point in 2019, cease to be in operations." Mellendick Examination, R. 51-5, PageID 817. He was right. Heckethorn closed shop at the end of April 2019 and was off HECO's property by July 3.

Heckethorn's financial difficulties risked a lapse in insurance coverage for HECO's property. But the "potential . . . headache" of overlapping policies was better than "no insurance at all." Mellendick Examination, R. 62-3, PageID 1122. So HECO procured a commercial property policy of its own from Landmark. That policy covered "direct physical loss of or damage to" three buildings and select personal property within them "caused by or resulting from" a covered loss, along with providing business-income coverage. Landmark Policy, R. 1-6, PageID 153. Altogether, it limited coverage to $12 million for damages to the buildings.

One detail in Landmark's policy matters perhaps most: It kicked in on May 1, 2019- almost six months before Liberty Mutual's policy would lapse. That coverage overlap begot this coverage dispute.

The claims as to which Landmark and Liberty Mutual dispute coverage grew out of Heckethorn's financial troubles. In short, Heckethorn had debts to pay. It relied on a loan from one of its customers, Teneco Automotive Operating Company, to keep "afloat" while it struggled. Mellendick Examination, R. 51-5, PageID 817. As collateral, Heckethorn gave Teneco "all of the personal property and Trade Fixtures" it "now owned or hereafter acquired[.]" Surrender Agreement, R. 51-4, PageID 794-95; see also id. at 803-12 (describing the collateral). So when Heckethorn defaulted on its loan from Teneco, it surrendered all that collateral. Per the surrender agreement, Heckethorn made all of it available to Teneco's hired auctioneers, the Levy Recovery Group, at HECO's property.

Levy Recovery Group conducted the auction. The trade fixtures sold included Heckethorn's equipment. Once sold, that equipment had to be removed from HECO's property. So Levy Recovery Group hired Bulldog Group, a "rigging company," to remove the auctioned-off equipment and "mak[e] the system safe" after the removal. Mellendick Examination, R. 51-5, PageID 820-21. As far as HECO's manager knew, Teneco made clear to Levy Recovery Group that it "was not to remove the entire electrical system" when removing the equipment. Id. at PageID 824.

So HECO was surprised to find "considerable damage to equipment" and missing "cable and wiring[.]" Continental Machinery Report, R. 51-8, PageID 834. HECO had sent its contractor to check the property's electrical system, after the equipment removal in early August 2019, to make sure it could safely operate. It discovered that "hundreds of feet of copper" were missing "from the ceiling[.]" Mellendick Examination, R. 51-5, PageID 819. According to electrical engineering experts that HECO hired from Continental Machinery Company, a theft of that size "would have taken weeks to execute." Id. HECO blamed Bulldog Group-the only actor it says had the time and know-how to pull of such a heist in May or June 2019.

The damage was expensive. It would cost $2,273,563.13 to repair the property, according to Continental Machinery.^[2] HECO submitted claims for that damage to both Landmark and Liberty Mutual in September 2019. Liberty Mutual settled HECO's claim for $1,675,000 and assumed the rights to any payout to HECO from its Landmark policy.

But payment has not come. By the time Liberty Mutual settled with HECO, Landmark had sued seeking a declaration that it had no duty to cover HECO's loss, for six reasons. It alleged that HECO failed to abide by the requirements of its policy, that the property involved was not covered, that damages preexisting Bulldog's alleged theft had to be calculated, that its policy does not cover theft-related damages, that coverage is limited to actual cash value of damages, and, finally, that Liberty Mutual owed primary coverage.

Landmark moved for summary judgment on that last ground-that Liberty Mutual had to pay first. Landmark argued that because Heckethorn agreed to cover certain losses and procure...