Otis Elevator Co. v. Factory Mut. Ins. Co.

• Decision Date: 25 January 2005
• Docket Number: Civil No. 3:03cv1231(JBA).
• Citation: 353 F.Supp.2d 274
• Court: U.S. District Court — District of Connecticut
• Parties: OTIS ELEVATOR CO., Plaintiff, v. FACTORY MUTUAL INSURANCE CO., Defendant.

353 F.Supp.2d 274

OTIS ELEVATOR CO., Plaintiff, v. FACTORY MUTUAL INSURANCE CO., Defendant.

Civil No. 3:03cv1231(JBA).

United States District Court, D. Connecticut.

January 25, 2005.

Daniel L. FitzMaurice, Deborah Skelley Russo, Maureen O'Connor, Day, Berry & Howard, Hartford, CT, for Plaintiffs.

Christopher R. Paar, Mark J. Feinberg, Thomas B. Caswell, Zelle, Hofman, Voelbel, Mason & Gette, Minneapolis, MN, Erik Loftus, Law Offices of Stuart G. Blackburn, Justin J. Donnelly, Sr., Stuart G. Blackburn, Windsor Locks, CT, for Defendants.

RULING ON CROSS-MOTIONS FOR SUMMARY JUDGMENT [DOCS.#56, 61]

ARTERTON, District Judge.

The parties to this insurance lawsuit dispute whether coverage is due to Plaintiff Otis Elevator Company (Otis) under a Factory Mutual (FM) insurance contract for property damage that resulted from an accident at the Minneapolis-St. Paul airport during installation of an automated people mover. This Court's diversity jurisdiction has been invoked under 28 U.S.C. § 1332. Otis's two-count complaint claims (1) breach of the insurance contract and (2) breach of the covenant of good faith and fair dealing. See Complaint [doc. # 1] ¶¶ 37-42.¹ FM's motion for summary judgment addresses both counts [doc. # 56] and Otis's cross-motion for summary judgment is directed to its breach of contract count [doc. # 61]. Oral argument on both motions was held on January 18, 2005. For the reasons that follow, Factory Mutual's motion is granted as to the bad faith count (Count Two) and denied as to the breach of contract count (Count One). Otis's motion for summary judgment on Count One is granted.

I. FACTUAL BACKGROUND

The material facts of this case are undisputed. Otis is a New Jersey corporation with its principal place of business in Farmington, Connecticut. FM is a Rhode Island corporation with its principal place of business in Johnston, Rhode Island.

In 1999, Otis entered into a contract with the Metropolitan Airport Commission (MAC) to build an Automated People Mover (APM) along the length of the new "C" Concourse at the Minneapolis-St. Paul Airport, also known as the "Green" Concourse. The APM is a two-way tram system, with each tram composed of two cars pulled along on a moving cable.

A. The Collision

By July 2002, the cars had been custom manufactured off site and delivered to the airport, and Otis was installing the APM system. Otis subcontracted some of the installation and testing work to GE Fanuc Automation Company, which employed a Programming Services Engineer named Jeffrey Miller. See FM L.R. 56(a) Stmt. Ex. 3. On July 22, 2002, Miller was testing the brakes of the APM system pursuant to an Otis protocol that required monitoring the stopping distances of the APM cars in "over load" conditions, simulated by placing barrels of water in the tram cars until they were at 150% of maximum operating capacity. The tram system has two sets of brakes, primary and secondary. The goal of the tests was to ensure that the brakes would stop the APM within specified distances at certain speeds. The brakes are not on the tram cars themselves, but on the drive motor that pulls the cable to which the cars are attached. Before the collision, the brakes already had been tested independently, without the tram cars, to ensure they would slow the motor.

Miller successfully conducted the first "over travel" tests at varying speeds, confirming that both the primary and secondary brakes were functioning correctly near the east tram stations. When the system was being tested at higher speeds near the second-most westerly station, however, the primary braking system did not stop within the required distance, and the APM's computer system activated the secondary brakes. To eliminate the assistance being provided by the secondary brakes, Miller changed the computer program and disabled them, contrary to the protocol.

Further tests confirmed that the primary brakes were not functioning as expected, testing of them was suspended, and testing of the secondary brakes was begun. Miller disabled the primary brakes and, according to the test protocol, the secondary brakes should have been engaged at that point. However, Miller neglected to reprogram the computer from his previous test to engage the secondary brakes. As a result, the tram had no working brakes.

The protocol called for Miller to test the tram's stopping location beginning at a slow speed and then increase the speed for subsequent tests. Instead, Miller began moving the tram at the highest speed.² As a result, the tram, loaded to 150% capacity, operating without functioning brakes and at highest speed, crashed into the restraining buffer at the terminal end of the tracks. The two trams cars, the buffer, and the terminal wall were damaged.

Otis incurred approximately $2 million in property damage expenses to repair the tram and the buffer, and the company also was required to pay liquidated damages of about $1.5 million under the contract with MAC for the consequent delay in completing the project.

B. The MAC Insurance Policy

The Otis-MAC contract required MAC to provide insurance coverage for Otis and the APM project "on an All Risk basis in accordance with the conventional All Risk Builder's risk form currently in use."³ Pollard Aff., 8/17/04, ¶ 4. MAC listed Otis as an additional insured on its All-Risk Policy with Factory Mutual, number FR043. The policy was negotiated between MAC and FM, and the premiums paid, in Minnesota. The policy provides:

This Policy covers property, as described in this Policy, against ALL RISKS OF PHYSICAL LOSS OR DAMAGE, except as hereinafter excluded, while located as described in this Policy.

FM's L.R. 56(a)(1) Stmt. Ex. 9 at 25. It is undisputed that Concourse C, the site of the new APM and the damage, was a covered location under the policy.

On July 29, 2002, approximately one week after the crash, MAC sent FM a notice of potential claim for first party property coverage for the damage to the terminal building, and informed FM that Otis might also file a claim for coverage under the policy. On November 5, 2002, Otis filed its claim, seeking reimbursement for the damage to the APM as well as for its contractual liquidated damages.⁴ FM General Adjuster David Hess, based in Minnesota, conducted an inspection and handled the Otis claim.

After a series of discussions between Hess and Bryan Pollard, Otis's in-house counsel in Connecticut, Hess denied the claim by letter dated April 8, 2003. See FM's L.R. 56(a)(1) Stmt. Ex. 18. The letter cited what the parties call the "C-1" and "C-2" exclusions to the MAC insurance policy:

C. This Policy excludes the following, but if physical damage not excluded by this Policy results, then only that resulting damage is insured:

1) faulty workmanship, material, construction or design from any cause.

2) loss or damage to stock or material attributable to manufacturing or processing operations while such stock or material is being processed, manufactured, tested, or otherwise worked on.

Id., Ex. 9 at 25.

FM took the position that Miller's action in disengaging both sets of brakes on the APM system was "faulty workmanship" excluded under section C-1, and that the damage to the tram cars and buffer were "loss or damage to stock or material attributable to manufacturing or processing operations while such stock or material is being ... tested," as excluded by section C-2. The parties agree that the policy itself does not define "faulty workmanship," "stock," "material," "manufacturing or processing operations," "processed," "manufactured," "tested," or "otherwise worked on."

C. The UTIV Insurance Policy

Otis, which is a subsidiary of United Technologies, also was insured by that company's captive insurer, United Technologies, Inc. of Vermont (UTIV). The UTIV policy has a deductible of $2 million and a limit of liability of $10 million (according to Otis) or $1.5 billion (according to FM). UTIV does not have its own employees and the policy is, coincidently, administered by FM. The UTIV policy has a "faulty workmanship" exclusion, which is essentially the same as that in the FM policy. As administrator of the UTIV policy, FM took the position that the UTIV policy covered the damage to the trams because the policy was meant to broadly cover "testing." Under the UTIV policy, FM found that the "resultant impact damage to the Tram" was recoverable but the cost of fixing any brake problems discovered by the testing would not be recoverable. Pollard Aff. Ex. 5.

Both the UTIV and MAC policies contain "other insurance" clauses, which both parties agree are in conflict, providing that if any other insurance would apply in the absence of the policy, such other insurance would apply first.⁵ FM takes the position that the UTIV policy should apply first, and therefore that no coverage is available to Otis under the "other insurance" provision of the MAC policy, although Hess's denial letter of April 8, 2003 did not cite the "other insurance" clause as a basis for denial. See FM's L.R. 56(a)(1) Stmt. Ex. 18. Otis contends that the structure of the UTIV policy indicates that it was intended to be backup insurance only, and that the MAC policy applies first.

II. STANDARD

Summary judgment is appropriate where "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue of fact is "material" if it "might affect the outcome of the suit under the governing law," and is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

On cross-motions for summary judgment "neither side is barred from asserting that there are issues of fact, sufficient to prevent the entry of judgment, as a matter of law, against it. When faced with cross-motions for summary judgment, a district...