Liberty Mut. Ins. Co. v. Pella Corp..

• Decision Date: 13 October 2011
• Docket Number: Nos. 10–1933,10–2065.,s. 10–1933
• Citation: 650 F.3d 1161
• Parties: LIBERTY MUTUAL INSURANCE COMPANY, Appellant/Cross–Appellee,v.PELLA CORPORATION; Pella Windows and Doors, Inc., Appellees/Cross–Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

650 F.3d 1161

LIBERTY MUTUAL INSURANCE COMPANY, Appellant/Cross–Appellee,

v.PELLA CORPORATION; Pella Windows and Doors, Inc., Appellees/Cross–Appellants.

Nos. 10–1933

10–2065.

United States Court of Appeals, Eighth Circuit.

Submitted: Feb. 15, 2011.Filed: Aug. 18, 2011.Rehearing and Rehearing En Banc Denied Oct. 13, 2011.*

Jeffrey C. Gerish, argued, Bloomfield Hills, MI, Thomas D. Waterman and Robert V.P. Waterman, Jr., Davenport, IA, Charles W. Browning and Danielle Perez, Bloomfield Hills, MI, on the brief, for appellant/cross-appellee.Keith McKenna, argued, New York, NY, Mark E. Weinhardt and Richard W. Lozier, Jr., Des Moines, IA, Robin L. Cohen and Sheri E. Hametz, New York, NY, on the brief, for appellees/cross-appellants.Before SMITH, GRUENDER, and BENTON, Circuit Judges.SMITH, Circuit Judge.

Liberty Mutual Insurance Company (“Liberty Mutual”) sued Pella Corporation and Pella Windows and Doors, Inc. (collectively, “Pella”) in the district court for declaratory judgment. The suit sought to determine the scope of Liberty Mutual's obligation, under general commercial liability (GCL) policies (collectively, “Policies”) issued to Pella, to reimburse Pella's defense costs in two underlying lawsuits. Liberty Mutual appeals the district court's entry of summary judgments in favor of Pella. The court concluded that Liberty Mutual owed Pella a duty to reimburse Pella's defense costs in the pending litigation.

In addition, Pella cross-appeals the district court's entry of summary judgment on its counterclaim for a bad-faith denial of coverage. Pella also challenges the court's calculation of the amount of defense costs Pella could recover under the Policies. For the reasons set forth below, we affirm in part, reverse in part, and remand with instructions to enter declaratory judgment in favor of Liberty Mutual.

I. Background

The present coverage dispute concerns Pella's right to coverage under the Policies for claims asserted against Pella in two class-action lawsuits in Illinois state and federal courts. In each case, the plaintiffs alleged that Pella sold them defective windows that allowed water to leak through the windows' aluminum cladding. During the times relevant to those class actions, Pella was insured under policies issued by several different insurance carriers. Pella did not, however, have any other insurance in effect at the same time as its Policies with Liberty Mutual (September 1, 2000 to September 1, 2006). In response to the two underlying lawsuits, these other insurers agreed to pay a share of Pella's defense costs in the two class actions.

A. The Pappas Suit

The first class action, Pappas v. Pella Corporation and Pella Windows & Doors, No. 02–L–14558 (“ Pappas Suit”), was filed in 2002 in the Circuit Court of Cook County, Illinois. The initial complaint alleged that Pella defectively designed and manufactured windows that the Pappas family purchased and that the defect caused damage to their windows and their home. The complaint alleged a breach of the implied warranty of merchantability, a breach of the implied warranty of fitness for a particular purpose, and strict liability. The Pappas plaintiffs subsequently filed an “Amended Class Action Complaint,” seeking class certification and alleging counts of negligence and strict liability. The Pappas plaintiffs amended their complaint three more times in the next several years.

In 2004, Pella entered into a confidential agreement with Liberty Mutual and its pre–2001 insurance carriers (“ Pappas Agreement”), in which each insurance carrier agreed to pay a share of Pella's past and future defense costs for the Pappas suit, subject to a complete reservation of rights.

Subsequently, in 2007, the plaintiffs filed their most recent complaint, the “Fourth Amended Class Action Complaint.” This complaint continued to allege that Pella's windows were defectively designed and manufactured, allowing water to enter and remain behind the windows' aluminum cladding, resulting in “premature wood rot and deterioration” that “caus[ed] damage.” The complaint alleged that Pella knew about the defective windows but willfully, “with knowledge and/or intent to deceive,” concealed, suppressed, or omitted this material fact from purchasers of its windows. As a result, the complaint alleged only one count: a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 Illinois Compiled Statutes 505/1 et seq. In its prayer for relief, the plaintiffs requested, among other things, damages “sufficient to remediate and repair damage to Plaintiffs' and class members' homes which resulted from water intrusion.”

B. The Saltzman Suit

The second suit, Saltzman, et al. v. Pella Corp. and Pella Windows & Doors, Inc., No. 06–C–4481 (“ Saltzman Suit”), was filed in 2006 in the United States District Court for the Northern District of Illinois. The plaintiffs' amended complaint alleged that Pella's “aluminum-clad windows contain a latent defect that allows water to penetrate and leak behind the aluminum cladding, resulting in premature wood rot and other physical damage to both the window and main structure.” In addition, the plaintiffs alleged that “Pella was aware that its windows contained an inherent defect that permitted leakage” but had concealed this defect from the plaintiffs. These allegations formed the basis for all six claims in the amended Saltzman complaint: (1) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 Illinois Compiled Statutes 505/1 et seq., and “substantially similar laws of certain other states”; (2) violation of “similar uniform deceptive trade practices acts”; (3) common law fraud by omission; (4) breach of the implied warranty of merchantability; (5) unjust enrichment; and (6) declaratory relief.

In 2008, Pella entered into a confidential agreement with its pre–2001 insurance carriers (“ Saltzman Agreement”), in which the insurance carriers agreed to pay a share of Pella's defense costs for the Saltzman Suit, again subject to a complete reservation of rights. Liberty Mutual was not a party to the Saltzman Agreement.

C. The Policies

Liberty Mutual and Pella entered into a series of GCL policies, effective from September 1, 2000, through September 1, 2006. The Policies are expressly labeled as providing “Excess General Commercial Liability Coverage.” Section I.A provides coverage for “excess bodily injury and property damage liability” as follows:

a. We will pay those sums in excess of the “Self–Insured Amount” that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this excess insurance applies. No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for in SECTION V—SUPPLEMENTARY PAYMENTS/ALLOCATED LOSS ADJUSTMENT EXPENSE.... The “bodily injury” or “property damage” must be caused by an “occurrence”.... The amount we will pay for damages is limited as described in SECTION IV—LIMITS OF INSURANCE.

b. We WILL NOT have the duty to defend or investigate any claim or “suit” seeking damages to which this policy may apply.

Section V of the Policies includes one of two versions of an endorsement labeled “SUPPLEMENTARY PAYMENTS/ALLOCATED LOSS ADJUSTMENT EXPENSE” (“ALAE Endorsement”). The ALAE Endorsement provides that Liberty Mutual would reimburse Pella for certain expenses incurred in defending lawsuits that the Policies covered. The ALAE Endorsement in the 2000–2005 versions of the Policies states:

1. “Allocated Loss Adjustment Expenses” paid by the insured will reduce the “self-insured amount”;

2. For each “occurrence” we will reimburse the insured for “Allocated Loss Adjustment Expense” paid by or on behalf of the insured in excess of the “self-insured amount”. Our obligation to reimburse the insured is limited as set forth in the SECTION II—DEFENSE, SETTLEMENT AND INVESTIGATION OF CLAIMS, paragraphs (5) and (6).

The ALAE Endorsement for the 2005–2006 policy uses slightly different language, stating:

1. For each “occurrence”, “Allocated Loss Adjustment Expenses” paid by the insured will reduce the “self-insured amount”.

2. Where the insured controls the defense, we will reimburse the insured for “Allocated Loss Adjustment Expense” incurred by the insured for any “occurrence” after the “Self-insured Amount” has been exhausted by the payment of damages and/or “Allocated Loss Adjustment Expense” by the insured for that “occurrence”....

In Section VI, the Policies state that “[i]nsurance provided under this policy, including all endorsements thereto, is excess over the ‘Self-insured Amount’.” Finally, in Section VII, the Policies contain the following definitions relevant to the present coverage dispute:

2. “Allocated Loss Adjustment Expense” includes but is not limited to:

(a) reasonable attorneys' fees for claims in suit (reasonable attorneys' fees means rates which are actually paid by us to attorneys retained in the ordinary course of business in the defense of similar actions in the community where the claim is being defended)[.]

* * *

10. “Occurrence” means:

(a) an accident, including continuous or repeated exposure to substantially the same general harmful conditions[.]

* * *

11. “Other Insurance” means any other valid and collectible insurance, whether primary, excess, contingent or on any other basis, except any such insurance purchased by the insured specifically to apply in excess of this insurance.

* * *

15. “Self-insured Amount” means:

(a) If the insured has no “other insurance” or has “other insurance” less than the “Self-insured Amount”:

(1) With respect to damages which this policy (including any endorsements(s) thereto) applies on an each “occurrence” basis:

As to each “occurrence”, the amount shown in the Declarations under Item 4, Self–Insured Amount.

* * *

(b) If the insured has “other insurance” greater than or equal to the “Self-insured Amount”:

All...