RK Mech. Inc. v. Travelers Prop. Cas. Co. of Am.

• Decision Date: 01 August 2011
• Docket Number: Civil Action No. 10-cv-02306-WJM-KMT
• Parties: RK MECHANICAL, INC., a Colorado corporation, Plaintiff, v. TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA, a Connecticut corporation, Defendant.
• Court: U.S. District Court — District of Colorado

RK MECHANICAL, INC., a Colorado corporation, Plaintiff,

v.TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA, a Connecticut corporation, Defendant.

Civil Action No. 10-cv-02306-WJM-KMT

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Dated: August 1, 2011

Magistrate Judge Kathleen M. Tafoya

ORDER

This matter is before the court on cross motions for summary judgment by Plaintiff RK Mechanical, Inc. ("RK") (Doc. No. 22 ["RK Mot.]) and Defendant Travelers Property Casualty Company of America ("Travelers") (Doc. No. 21 ["Travelers Mot."]) filed April 15, 2011 and the parties' consent to magistrate jurisdiction for purposes of deciding the cross motions for summary judgment pursuant to 28 U.S.C. § 636(c)(1) (Doc. Nos. 18 & 19).

STATEMENT OF THE CASE

This breach of contract and declaratory judgment action arises out of an insurance coverage dispute involving a builders' risk policy for a residential construction project. The following facts are undisputed for purposes of the present motions. (See Doc. No. 17, Stipulation of Counsel of Undisputed Facts for Use with Cross-Motions for Summary Judgment("Stipulation"); RK Mot. ¶¶ 1-8, 11; Doc. No. 25, Defendant's Response to Plaintiff's Motion for Summary Judgment ("Travelers Resp.") ¶¶ 1-8, 11.) On April 23, 2007, Travelers issued Commercial Inland Marine Policy No. QT-660-9469B749-TIL-07 (Compl. Ex. A-1) ("the Policy") to Spire Denver, LLC (Spire) for a residential construction project called "The Spire Denver" ("the Project"). The policy period was April 23, 2007 through July 23, 2009. J.E. Dunn Rocky Mountain, Inc. ("Dunn") was the general contractor on the Project. On May 24, 2007, Dunn entered into a subcontract with RK pursuant to which RK was to install heating, plumbing, ventilating and air conditioning systems at the Project. The parties agree RK was an additional insured under the Policy.

As part of RK's plumbing work on the Project, RK installed approximately one hundred seventy-one CPVC flanges, which were manufactured by Charlotte Pipe and Foundry Company (the Charlotte flanges). On June 16, 2009, two of the Charlotte flanges located in the Project's upper floor mechanical room cracked (the Flange Failure). Water overflowed, either from a burst pipe caused by a defective flange or directly from one of the cracked flanges, resulting in water damage to the Project. On June 17, 2009, Dunn notified Travelers of the Flange Failure and the ensuing water damage caused by the Charlotte flanges involved. RK responded to the Flange Failure and water damage by removing and replacing the two cracked flanges and engaging in water remediation. Travelers paid Dunn and RK for the costs associated with the water damage associated with the Flange Failure.¹

Following the Flange Failure RK examined all the remaining Charlotte flanges installed at the Project. RK discovered that many of the flanges were cracked and showed signs of potential failure so RK proceeded to remove and replace the cracked flanges with new Charlotte flanges. RK continued to monitor both the new and old Charlotte flanges and ultimately determined that they were all susceptible to failure. Thereafter, RK removed and replaced all the Charlotte flanges with a different manufacturer's flanges that were of a different material configuration and composition. The process of removing and replacing the Charlotte flanges included the removal and replacement of various building components in order to gain access to the Charlotte flanges.

Microbac Laboratories, Inc. prepared a report on behalf of RK concluding that the Flange Failure was due, in part, to an assembly or workmanship defect in addition to manufacturing defects in the flanges. Higgins & Associates prepared a report on behalf of Travelers concluding that the flanges failed due to improper installation. Plastic Failure Labs prepared a report on behalf of the flange manufacturer concluding that the flanges failed due to improper installation by RK.

On December 18, 2009, RK tendered a notice of claim and demand for indemnity to Travelers in connection with the costs to remove and replace the Charlotte flanges, including the two flanges involved in the Flange Failure (Notice & Claim). Less than one month later, onJanuary 13, 2010, Travelers denied RK's claim based on Exclusions B.3.d and B.4.f of the Policy. RK brings suit for breach of insurance contract and declaratory relief.

PROCEDURAL HISTORY

RK initially filed its complaint against Travelers in state court on August 26, 2010. (Doc. No. 1-3.) Travelers removed the action to this Court on September 20, 2010. (Doc. No. 1.) The parties agreed to a cross motions procedure to resolve the discreet insurance coverage dispute at issue. (Doc. No. 15 at ¶ F; Doc. No. 16.) The parties filed cross motions for summary judgment on April 15, 2011 (Doc. Nos. 21 and 22) and response briefs on May 13, 2011. (Doc. Nos. 24 and 25). No reply briefs were allowed. The parties consented to this court's jurisdiction to render a final resolution of these two motions pursuant to 28 U.S.C. § 636(c)(1). (Doc. Nos. 18 and 19.) The motions are ripe for review and ruling.

LEGAL STANDARD

Summary judgment is appropriate if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving party bears the initial burden of showing an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). "Once the moving party meets this burden, the burden shifts to the nonmoving party to demonstrate a genuine issue for trial on a material matter." Concrete Works, Inc. v. City & County of Denver, 36 F.3d 1513, 1518 (10th Cir. 1994) (citing Celotex, 477 U.S. at 325). The nonmoving party may not rest solely on the allegations in the pleadings, but must instead designate "specific facts showing that there is a genuine issue for trial." Celotex, 477 U.S. at 324; see also Fed. R. Civ. P. 56(c). A disputed factis "material" if "under the substantive law it is essential to the proper disposition of the claim." Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir.1998) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). A dispute is "genuine" if the evidence is such that it might lead a reasonable jury to return a verdict for the nonmoving party. Thomas v. Metropolitan Life Ins. Co., 631 F.3d 1153, 1160 (10th Cir. 2011) (citing Anderson, 477 U.S. at 248).

When ruling on a motion for summary judgment, a court may consider only admissible evidence. See Johnson v. Weld County, Colo., 594 F.3d 1202, 1209-10 (10th Cir. 2010). The factual record and reasonable inferences therefrom are viewed in the light most favorable to the party opposing summary judgment. Concrete Works, 36 F.3d at 1517. At the summary judgment stage of litigation, a plaintiff's version of the facts must find support in the record. Thomson v. Salt Lake Cnty., 584 F.3d 1304, 1312 (10th Cir. 2009). "When opposing parties tell two different stories, one of which is blatantly contradicted by the record, so that no reasonable jury could believe it, a court should not adopt that version of the facts for purposes of ruling on a motion for summary judgment." Scott v. Harris, 550 U.S. 372, 380 (2007); Thomson, 584 F.3d at 1312.

ANALYSIS

Travelers removed this action from state court based on diversity jurisdiction. In a case removed to federal court based on diversity jurisdiction, the federal court applies the substantive law of the forum state. Berry & Murphy, P.C. v. Carolina Cas. Ins. Co., 586 F.3d 803, 808 (10th Cir. 2009). Interpretation of an insurance contract is a question of law for the court. USAA Cas. Ins. Co. v. Anglum, 119 P.3d 1058, 1059 (Colo. 2005). Colorado courts construe an insurance policy's terms according to principles of contract interpretation. Berry & Murphy, 586 F.3d at808 (citing Thompson v. Maryland Cas. Co., 84 P.3d 496, 501 (Colo. 2004)). The Colorado Supreme Court has said:

In interpreting a contract, we seek to give effect to the intent and reasonable expectations of the parties. Accordingly, unless the parties intend otherwise, terms in an insurance policy should be assigned their plain and ordinary meaning.

We also recognize that unlike a negotiated contract, an insurance policy is often imposed on a "take-it-or-leave-it" basis. Therefore, we assume a "heightened responsibility" in reviewing insurance policy terms to ensure that they comply with public policy and principles of fairness. Accordingly, ambiguous terms in an insurance policy are construed against the insurer.

Thompson, 84 P.3d at 501-502. See also Bangert Bros. Const. Co., Inc. v. Americas Ins. Co. , 888 F. Supp. 1069, 1072 (D. Colo. 1995).

The issue in this case is whether RK is entitled to indemnity for the costs it incurred investigating potential flange failure, removing and replacing cracked Charlotte flanges and, ultimately, removing and replacing all Charlotte flanges with those of a different manufacturer. RK posits several theories supporting its claim for coverage from Travelers.

A. Waiver and Estoppel

RK contends that by indemnifying Dunn and RK for the costs "associated with the Flange Failure and water damage," Travelers has implicitly conceded that there is coverage under the Policy for mitigation costs. (RK Mot. at 7.) RK claims that Travelers "indemnified its insureds for removal and replacement of the cracked Charlotte Flanges in addition to the damages the Project sustained as a result of the water damage" claiming that Travelers initially paid to replace the two cracked flanges in the mechanical room. (Id.)

Travelers contends that it indemnified and reimbursed Dunn and RK for the costs resulting from the water damage caused by the Flange Failure, but that these costs did not include the cost to remove and replace any of the Charlotte Flanges at the Project, including the two flanges whose failure resulted in the...