Michigan Millers Mut. Ins. Co. v. Dg & G Co., Inc.

Decision Date01 July 2009
Docket NumberNo. 08-2699.,08-2699.
Citation569 F.3d 807
PartiesMICHIGAN MILLERS MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. DG & G COMPANY, INC., Defendant-Appellant,
CourtU.S. Court of Appeals — Eighth Circuit

Mark Douglas Paulson, argued, Amy R. Paulus, Chicago, IL, Lisa Larkin, Julie Ann Owens, St. Louis, MO, on the brief, for Plaintiff-Appellee.

Joseph C. Blanton, Jr., argued, Thomas W. Collins, III, Shaun D. Hanschen, on the brief, Sikeston, MO, for Defendant-Appellant.

Before LOKEN, Chief Judge, WOLLMAN and SHEPHERD, Circuit Judges.

LOKEN, Chief Judge.

DG & G Company operates a cotton gin in Parma, Missouri. After it ginned some 50,000 bales for eastern Missouri producers in the fall of 2005, and delivered the cotton to warehouses operated by Federal Compress & Warehouse Company, cotton brokers and purchasers asserted claims against DG & G for losses caused by mold, mildew, and hard spots found in many bales. DG & G's liability and property insurer, Michigan Millers Mutual Insurance Company, commenced this action seeking a declaratory judgment that it has no duty to defend or indemnify DG & G for these claims. In separate orders resolving coverage issues under liability and property policies, the district court1 granted summary judgment in favor of Michigan Millers. DG & G appeals both rulings. Reviewing the grant of summary judgment and the interpretation of the policies de novo, we affirm. Stan Koch & Sons Trucking, Inc. v. Great West Cas. Co., 517 F.3d 1032, 1039 (8th Cir.2008) (standard of review).

I. Background

When DG & G received the cotton from various producers for ginning, the producers retained title, using the cotton as collateral for Commodity Credit Corporation (CCC) loans. DG & G dried and then remoisturized the cotton during the ginning process, packaged the finished bales in polyethylene bags supplied by Federal Compress, and delivered the bales to Federal Compress warehouses. Federal Compress employees testified that the cotton showed no damage when it arrived at the warehouses. It was "great-looking" and "pretty, white, [and] clean." Federal Compress issued negotiable warehouse receipts to the producers, who sold the bales to cotton brokers, subject to the CCC loans. The brokers planned to redeem the loans and sell the bales to mills.

In late December 2005, Federal Compress employees noticed mold, mildew, and hardened spots on a substantial number of bales. A cotton broker's employee inspected the bales and observed "obvious moisture and water." Moisture testing at both warehouses revealed that DG & G-ginned bales had an average moisture content of 12.6-12.8%, well in excess of the industry standard. The Memphis Cotton Exchange's Trading Rules provide that "unmerchantable cotton" includes cotton "containing moisture in excess of 7.5%." DG & G acknowledged that the National Cotton Council of America recommends no more than 7.5% moisture. An expert in the lawsuit underlying this declaratory judgment action testified that the damaged cotton was "unmerchantable" due to its high moisture content because, in his experience, a moisture level in excess of 9-10% renders cotton unmerchantable.

In late January 2006, DG & G learned that the CCC planned to call the loans because the damaged cotton did not meet federal loan requirements. This action could bar producers from future participation in the CCC loan program. Several cotton brokers who held title to the bales also demanded payment from DG & G. When Michigan Millers declined DG & G's request to pay, DG & G paid $3.4 million to redeem the damaged cotton from the loan program and another $2.1 million to settle the claims of three cotton brokers.

Meanwhile, two other brokers, Staple Cotton Cooperative Association and Beltwide Cotton Cooperative, filed the underlying lawsuit in the Eastern District of Missouri, naming as defendants DG & G, Federal Compress, and the individual producers. As relevant here, plaintiffs alleged that DG & G added excess moisture during ginning that rendered the cotton unmerchantable. DG & G joined as third-party defendants the suppliers of the device DG & G used to apply water during the ginning process (the Lewis Moisture System) and the device that measured the amount of water being applied (the Vomax device). DG & G also asserted a cross-claim against Federal Compress, alleging that it supplied packaging bags unsuitable for moisture-enhanced cotton. Michigan Millers agreed to defend DG & G under a reservation of rights and filed this suit for declaratory relief. DG & G counterclaimed for breach of contract and vexatious refusal to pay both the claims asserted in the underlying lawsuit and DG & G's expenses in settling the other claims.

Michigan Millers insured DG & G under a Commercial Agribusiness Policy that included a variety of coverages in multiple policies. Three policies are at issue— Commercial General ("CGL") and Umbrella liability policies, and an Agribusiness Property and Income policy (the "Agribusiness Policy"). The district court initially ruled that Michigan Millers has no duty to defend or indemnify under the CGL and Umbrella liability policies. Mich. Millers Mut. Ins. Co. v. DG &G Co. (Mich. Millers I), 2007 WL 3120048 (E.D.Mo. Oct. 23, 2007). The court later ruled that Michigan Millers has no duty to defend or indemnify under the Agribusiness Policy and dismissed DG & G's counterclaims as moot. Mich. Millers Mut. Ins. Co. v. DG & G Co. (Mich. Millers II), 2008 WL 1766786 (E.D.Mo. Apr. 14, 2008). DG & G appeals both summary judgment rulings and the dismissal of its counterclaims, arguing that Michigan Millers has a duty to indemnify under each policy.

II. The Liability Policies

As relevant here, Coverage A of the CGL Policy obligated Michigan Millers to pay damages that DG & G is "legally obligated to pay" because of both "property damage" and a covered "occurrence." DG & G claims property damage to the cotton and a covered occurrence, which the policy defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The policy defined "property damage" as:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

The district court held that "property damage" under this definition requires proof of some physical injury to tangible property. See Esicorp, Inc. v. Liberty Mut. Ins. Co., 266 F.3d 859, 862-63 (8th Cir.2001) (applying Missouri law to identical policy term). Rejecting Michigan Millers' argument to the contrary, the court concluded that damage to the cotton from excess moisture is "property damage," like the damage to tomato plants in Ferrell v. West Bend Mut. Ins. Co., 393 F.3d 786, 795 (8th Cir.2005). The court further concluded that plaintiffs in the underlying lawsuit alleged an "occurrence"—DG & G's alleged negligence in adding excess water to the cotton during the ginning and packing process. Neither party appeals these rulings.

Although the district court found sufficient evidence of property damage and an occurrence, it granted summary judgment in favor of Michigan Millers based upon the CGL policy's exclusion for "`[p]roperty damage' to ... [p]ersonal property in the care, custody or control of the insured." The court explained:

In Opies Milk Haulers, Inc. [v. Twin City Fire Ins. Co., 755 S.W.2d 300 (Mo. App.1988)], ... the damage at issue occurred when fructose was loaded into a contaminated tanker.... The court held that there could be no dispute that when loaded into the tanker, the fructose was in the care, custody or control of the insured.... Similarly, if DG & G is liable to the [plaintiffs], it is because the cotton was damaged when it was in DG & G's care, custody, or control. "[T]he decisive factor is control of the [cotton] at the time of the act which ma[kes] [DG & G] liable for its loss...." Harry Winston, Inc. [v. Travelers Indem. Co., 366 F.Supp. 988, 991 (E.D.Mo. 1973)] (alterations added). If the cotton was damaged after it left the [gin], DG & G is not liable.

Mich. Millers I, 2007 WL 3120048, at *4-5.

On appeal, DG & G argues that the district court made an error of fact and an error of law which require reversing the grant of summary judgment on its CGL policy claim. The alleged error of fact is that the property damage occurred, not at DG & G's gin as the district court concluded, but at the Federal Compress warehouses when rot, mildew, and hardening were discovered some months later. The alleged error of law was in relying on the above-quoted portion of Harry Winston, a decision which "runs directly counter to well settled Missouri case law." DG & G contends the correct principle was stated in Kirchner v. Hartford Accident & Indem. Co., 440 S.W.2d 751, 756 (Mo.App. 1969): "the time of the occurrence of an accident within the meaning of an indemnity policy is not the time the alleged wrongful act was committed, but is the time when the complaining party was actually damaged." (Emphasis in original.) Here, DG & G argues, plaintiffs in the underlying lawsuit were damaged when the rot and mildew appeared, not while the cotton was in DG & G's care, custody, and control.

We will address the legal issue first because it is something of a red herring. Harry Winston involved a customer who took a valuable piece of jewelry home for his wife's approval. The wife did not approve, the customer mailed the jewelry back to the jeweler, and the jewelry was lost in the mail. The customer claimed the loss was covered by liability provisions in his homeowner's policy. Applying Missouri law, the federal court rejected the claim. Noting that the purpose of the "care, custody or...

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