Netherlands Ins. Co. v. Phusion Projects, Inc.

• Decision Date: 16 December 2013
• Docket Number: No. 12–1355.,12–1355.
• Citation: 737 F.3d 1174
• Parties: NETHERLANDS INSURANCE COMPANY, et al., Plaintiffs–Appellees, v. PHUSION PROJECTS, INCORPORATED, et al., Defendants–Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

737 F.3d 1174

NETHERLANDS INSURANCE COMPANY, et al., Plaintiffs–Appellees,

v.PHUSION PROJECTS, INCORPORATED, et al., Defendants–Appellants.

No. 12–1355.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 23, 2013.

Decided Dec. 16, 2013.

David S. Osborne, Christopher J. Pickett, Joseph P. Postel, Lindsay, Rappaport & Postel, Chicago, IL, for Plaintiffs–Appellees.

John S. Vishneski, III, Reed Smith LLP, Chicago, IL, for Defendants–Appellants.

Before BAUER, KANNE, and HAMILTON, Circuit Judges.

BAUER, Circuit Judge.

Phusion Projects, Inc. and Phusion Projects, LLC are the business entities responsible for the manufacturing and distribution of an alcoholic beverage called “Four Loko.” In addition to alcohol, the original Four Loko formula contained energy stimulants, such as caffeine, guarana, taurine, and wormwood.

Phusion purchased a commercial general liability insurance policy from the Netherlands Insurance Company and a commercial umbrella liability insurance policy from Indiana Insurance Company. Both insurance companies are members of the Liberty Mutual Group and will be collectively referred to as “Liberty” herein. Both policies include identical Liquor Liability provisions, which exclude coverage for bodily injury or property damage when Phusion “may be held liable by reason of: (1) causing or contributing to the intoxication of any person.”

Five plaintiffs sued Phusion in separate state court actions: the Keiran complaint, the McCarroll complaint, the Rivera complaint, the Rupp complaint, and the Mustica complaint. All five plaintiffs alleged that the consumption of Four Loko caused their injury, in whole or in part. Phusion notified Liberty, who then filed in federal court for a declaratory judgment regarding the scope of its insurance coverage. Liberty contended that the Liquor Liability Exclusion in Phusion's insurance policies excluded coverage for the five underlying liability claims because each lawsuit involved injury by reason of intoxication. Phusion filed a counterclaim, contending that the Liquor Liability Exclusion did not apply and that Liberty owed a duty to defend and indemnify. Each side moved for summary judgment.

The first lawsuit involved Jason Keiran, who accidentally shot and killed himself after drinking Four Loko. The Keiran complaint alleges that after consuming several cans of Four Loko, Keiran was intoxicated but could not fall asleep. After being awake for 30 hours, Keiran, his friend, and Keiran's roommate decided to fire a Walther P22 handgun in the backyard of their rental house. Keiran experimented with the gun and accidentally shot himself in the head, dying later that evening. The complaint includes two claims against Phusion; a Negligence/Products Liability claim and a Strict Liability/Products Liability claim.

The plaintiff in the second lawsuit is Briana McCarroll, who was injured as a passenger in a car accident caused by a friend who drove recklessly after drinking Four Loko. McCarroll alleges that the consumption of Four Loko caused her friend Danielle Joseph to drive aggressively, carelessly, and at speeds over 100 miles per hour. Joseph struck another car, Joseph's car flipped, and McCarroll was ejected. The complaint includes two counts against Phusion; a Negligence claim and a Strict Liability claim. Under the Negligence claim, McCarroll lists eleven different theories on how Phusion breached its duty of care, and the Strict Liability claim lists twelve theories.

The third lawsuit was filed by Janice Rivera. Rivera was also injured as a passenger in the car driven by Joseph. The allegations in Rivera's complaint arise from the same set of facts in the McCarroll case. The Rivera complaint includes five claims against Phusion, based on Strict Liability, Failure to Warn, Design Defect, Negligence, and the Florida Deceptive and Unfair Trade Practices Act (FDUTPA).

The fourth lawsuit involved John Rupp III, who experienced some sort of paranoid episode after drinking Four Loko. The Rupp complaint alleges that Rupp drank two cans of Four Loko before attending a concert, causing Rupp to exhibit unusual behavior that led the concert staff to contact his parents and request that he be picked up. Once home, Rupp fled the supervision of his parents and ran out into a busy highway where he was struck and killed by oncoming traffic. There are five claims against Phusion in the complaint, including a defective product claim, a violation of the Wrongful Death Act claim, a general wrongful death claim, a general negligence claim, and a violation of the Family Expense Act.

The plaintiff of the fifth lawsuit is Michael Mustica, who awoke with heart troubles after drinking Four Loko the night before. The district court found that Liberty did have a duty to defend Phusion in Mustica's case because Mustica did not allege an injury arising from intoxication, but alleged that Four Loko was a dangerous product that led to his heart condition. Since the ruling establishing Liberty's duty to defend, the Mustica lawsuit settled and is no longer at issue.

The district court found that the Liquor Liability Exclusion was unambiguous and that Liberty had “no duty to defend any case arising from Phusion causing a person to become intoxicated.” The district court examined the five underlying cases in the context of comparable automobile exclusions and ruled that four of the five cases fell within the Liquor Liability Exclusion. The district court ruled that Liberty had no duty to defend the Keiran, McCarroll, Rivera, or Rupp lawsuits. The district court never reached the issue of Liberty's duty to indemnify because it was not ripe for consideration.

Phusion appeals, contending that the district court erred in two ways. First, Phusion argues that the district court misinterpreted the Liquor Liability Exclusion by reading the exclusion too broadly in favor of the insurer. Second, Phusion argues that the district court misinterpreted the complaints in the underlying suits by reading the allegations too narrowly, also in favor of the insurer.

DISCUSSION

In the cross-motions for summary judgment, the parties agree that factual discrepancies do not exist and the court's ruling depends only on the resolution of purely legal issues. Ace Am. Ins. Co. v. RC2 Corp., Inc., 600 F.3d 763, 766 (7th Cir.2010); Exelon Corp. v. Dep't of Revenue, 234 Ill.2d 266, 285, 334 Ill.Dec. 824, 917 N.E.2d 899 (2009). We review the district court's interpretation of the insurance policies and the resulting grant of summary judgment de novo. Ace Am. Ins. Co., 600 F.3d at 766.

Policy Construction

A federal court sitting in diversity “must attempt to resolve issues in the same manner as would the highest court of the state that provides the applicable law.” Stephan v. Rocky Mountain Chocolate Factory, Inc., 129 F.3d 414, 416–17 (7th Cir.1997). The construction of an insurance policy is a question of law. Am. States Ins. Co. v. Koloms, 177 Ill.2d 473, 479–80, 227 Ill.Dec. 149, 687 N.E.2d 72 (1997). There is no dispute that Illinois law governs the insurance policies in this case. In the absence of Illinois Supreme Court precedent, we “must use our best judgment to determine how that court would construe its own law,” and may consider the decisions of the Illinois appellate courts, well-reasoned decisions from other jurisdictions, as well as persuasive authorities. Stephan, 129 F.3d at 417.

To determine whether an insurance coverage exclusion applies, Illinois courts interpret insurance policies under the rules of contract interpretation. Founders Ins. Co. v. Munoz, 237 Ill.2d 424, 433, 341 Ill.Dec. 485, 930 N.E.2d 999 (2010). In its interpretation of the insurance policy, the court's primary function is to ascertain and give effect to the intent of the parties as expressed in the contract. Id. If the language of the insurance policy is unambiguous and does not offend public policy, the provision will be applied as written. Id. Any ambiguity will be construed liberally in favor of the insured. Id. The court will find an ambiguity “where the policy language is susceptible to more than one reasonable interpretation,” and not simply where the parties disagree as to the policy's meaning. Id.

The two Liberty insurance policies contain identical Liquor Liability Exclusions stating:

This insurance does not apply to: ...

c. Liquor Liability

“Bodily injury” or “property damage” for which any insured may be held liable by reason of:

(1) Causing or contributing to the intoxication of any person;

(2) The furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or

(3) Any statute, ordinance or regulation relating to the sale, gift, distribution, or use of alcoholic beverages.

This exclusion applies only if you are in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.

Phusion contends that the district court erred in its finding that “[t]he plain language of [the] exclusion is only susceptible to one reasonable interpretation: all suits based on allegations that Phusion's products caused someone to become intoxicated, leading to personal injury, are excluded under both policies.” Phusion argues that the district court read the exclusion too broadly; instead a plain reading of the provision would lead to the conclusion that it is not applicable in Phusion's case.

Liberty, on the other hand, contends that Phusion is attempting to create a false causation issue by drawing a distinction between the phrases “arising out of” and “by reason of.”

Even if there might be some difference between “arising out of” and “by reason of” in some instances, Phusion has failed to articulate how the phrase “by reason of” would limit the scope of the Liquor Liability Exclusion in this case. By Phusion's contention, the phrase “arising out of” is “both broad and vague,” Burlington Northern R.R. Co. v. Illinois Emcasco Ins., 158...