Thommes v. Milwaukee Ins. Co.
| Decision Date | 18 April 2002 |
| Docket Number | No. C9-00-1393.,C9-00-1393. |
| Citation | 641 N.W.2d 877 |
| Parties | John THOMMES, individually and d/b/a Thommes & Thomas Land Clearing, Respondent, v. MILWAUKEE INSURANCE COMPANY, Petitioner, Appellant. |
| Court | Minnesota Supreme Court |
Jeanne H. Unger, Paul B. Kohls, Rider, Bennett, Egan & Arundel, LLP, Minneapolis, for Appellant.
William R. Joyce, Katherine A. Golden, Faegre & Benson, LLP, Minneapolis, for Respondent.
Heard, considered, and decided by the court en banc.
Thommes & Thomas Land Clearing (Thommes) is a partnership engaged in the business of clearing and grubbing land for construction projects. In September 1996, Thommes entered into a subcontract to clear and grub land for a commercial development owned by Dean Morlock, Charles Vig, and HHA Development, Inc. (collectively, HHA). Adjacent to the HHA property was land owned by Morlock's sister and her husband, Donna and John Krajewski (collectively, the Krajewskis). Complying with Morlock's instructions as to the area to be cleared and grubbed, Thommes cleared and grubbed approximately one-half acre of the Krajewskis' land, damaging grass and a number of their trees, shrubs, and other plants. That land was not a part of the HHA property and the Krajewskis did not consent to it being cleared and grubbed. The Krajewskis brought an action against Thommes, among others, for the damage done to their property. Thommes tendered defense of the Krajewskis' lawsuit to its commercial general liability (CGL) insurance carrier, Milwaukee Insurance Company (Milwaukee). Milwaukee declined to either defend or indemnify Thommes, contending that exclusions 2j(5) and 2j(6) of Thommes's CGL policy excluded the damage to the Krajewskis' property from coverage.
Thommes then initiated this action, seeking a declaratory judgment that Milwaukee had a duty to defend and indemnify under Thommes's CGL policy. The parties filed cross-motions for summary judgment, and the district court granted summary judgment in favor of Milwaukee. The court of appeals, relying on the "business risk doctrine," reversed and granted summary judgment in favor of Thommes. Thommes v. Milwaukee Mut. Ins. Co., 622 N.W.2d 155, 160 (Minn.App.2001). We granted Milwaukee's petition for review. Based on our conclusion that exclusions 2j(5) and 2j(6) of Thommes's CGL policy do not bar coverage of the damage to the Krajewskis' property, we affirm.
On review of a summary judgment, this court determines whether there are any genuine issues of material fact and whether the district court correctly applied the law. Burlington N. R.R. v. Comm'r of Revenue, 606 N.W.2d 54, 57 (Minn.2000); Wartnick v. Moss & Barnett, 490 N.W.2d 108, 112 (Minn.1992). The parties in this case agree as to the material facts, but disagree with respect to the proper interpretation of Thommes's CGL policy. The interpretation of an insurance policy is a question of law reviewed de novo. Am. Family Ins. Co. v. Walser, 628 N.W.2d 605, 609 (Minn.2001); Haarstad v. Graff, 517 N.W.2d 582, 584 (Minn.1994). The question of whether an insurer has a duty to defend or indemnify is also a legal question subject to de novo review. Metro. Prop. & Cas. Ins. Co. v. Miller, 589 N.W.2d 297, 299 (Minn.1999); Franklin v. W. Nat'l Mut. Ins. Co., 574 N.W.2d 405, 406 (Minn.1998).
It is well-established that general contract principles govern the construction of insurance policies, and that insurance policies are to be interpreted to give effect to the intent of the parties. Nathe Bros. v. Am. Nat'l Fire Ins. Co., 615 N.W.2d 341, 344 (Minn.2000). When the language of an insurance contract is unambiguous, it must be given its plain and ordinary meaning. Medica, Inc. v. Atl. Mut. Ins. Co., 566 N.W.2d 74, 77 (Minn.1997); Henning Nelson Constr. Co. v. Fireman's Fund Am. Life Ins. Co., 383 N.W.2d 645, 652 (Minn. 1986). "Because most insurance policies are presented as preprinted forms, which a potential insured must usually accept or reject as a whole, ambiguities in a policy are generally resolved in favor of the insured." Nathe Bros.,615 N.W.2d at 344 (citing Atwater Creamery Co. v. W. Nat'l Mut. Ins. Co., 366 N.W.2d 271, 277 (Minn. 1985)).
Exclusions contained in an insurance policy are as much a part of the insurance contract as any other part, and must be given the same consideration in determining what the policy covers. Lobeck v. State Farm Mut. Auto. Ins. Co., 582 N.W.2d 246, 249 (Minn.1998). The language of an exclusionary provision in an insurance policy is to be interpreted in accordance with the expectations of the insured. Walser, 628 N.W.2d at 613; Am. Family Mut. Ins. Co. v. Peterson, 405 N.W.2d 418, 422 (Minn.1987). Insurance contract exclusions are construed strictly against the insurer. Walser, 628 N.W.2d at 613; SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305, 314 (Minn.1995).
Milwaukee argues that the court of appeals improperly based its decision on the business risk doctrine and largely ignored the actual language contained in Thommes's CGL policy. In reaching its decision, the court of appeals, instead of applying our rules for construing insurance contract exclusions, focused its analysis on the so-called "business risk doctrine." The court of appeals stated that the "business risk doctrine is the expression of a public policy applied to the insurance coverage provided under commercial general liability policies." Thommes, 622 N.W.2d at 158. Explaining that doctrine, the court of appeals stated that "the risk that an insured's product will not meet contractual standards is a business risk not covered by a general liability policy." Id. at 158-59. In contrast, the court of appeals continued, "harm to the property of a third party caused by the insured's defective work is not excluded from coverage." Id. at 159. The court of appeals read exclusions 2j(5) and 2j(6) as "the embodiment" of the business risk doctrine and, significantly, rejected Milwaukee's argument that business risk doctrine principles do not apply if the policy contains express exclusions barring coverage. Id. at 159-60.
We have discussed the intersection of business risk principles and the coverage provided by a contractor's CGL1 policy in two cases. See Knutson Constr. Co. v. St. Paul Fire & Marine Ins. Co., 396 N.W.2d 229 (Minn.1986); Bor-Son Bldg. Corp. v. Employers Commercial Union Ins. Co., 323 N.W.2d 58 (Minn.1982). In both cases, we used business risk principles as a means of illuminating the underlying purpose of CGL insurance. Notably absent from Bor-Son and Knutson is any indication that these principles serve as the foundation for a separate "business risk doctrine" that operates to override the express language of policy exclusions. In Bor-Son, the owner of two apartment buildings brought an action against the building contractor after the buildings developed water leakage problems. 323 N.W.2d at 60. After the owner and contractor settled the claim, the contractor brought an action against its CGL insurer seeking a declaratory judgment that the insurer was obligated to defend and indemnify. Id. at 61.
In resolving this issue, we analyzed the risks intended to be covered by CGL policies. As part of the analysis, we identified two types of risk undertaken by an insured-contractor. The first, termed a "business risk," is the risk that the insured "may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity." Id. at 63 (quoting Roger C. Henderson, Insurance Protection for Products Liability and Completed Operations—What Every Lawyer Should Know, 50 Neb. L.Rev. 415, 441 (1971)). The court concluded that this type of risk was not what the contractor's CGL policy was "designed to protect against." Id. (quoting Henderson, 50 Neb. L.Rev. at 441).
The second type of risk faced by a contractor is the risk that its work or product will cause bodily injury or property damage to other property. Id. at 63-64. We observed that it was this type of risk, which may give rise to tort liability to third parties, that CGL policies are intended to insure against. Id.
Applying these principles, the court held that the owner's damages flowed from the contractor's breach of contract, that the damages were the result of the contractor's faulty workmanship, and that such liability on the part of the contractor was not within the coverage provided by its CGL policy. Id. at 63.
In Knutson, the owner of an apartment complex brought suit against a general contractor to recover the cost of repairing structural damage to the complex. 396 N.W.2d at 230-31. The general contractor then brought an insurance coverage action against its CGL insurance carriers. Id. at 230. In upholding summary judgment for the insurers, we reaffirmed our holding in Bor-Son that a CGL policy "does not provide coverage for claims of defective materials and workmanship giving rise to a claim for damage to the property itself which is the subject matter of the construction project." Knutson, 396 N.W.2d at 235. Knutson, like Bor-Son, outlined the distinction between excluded contractual business risks and the covered risk of tort liability to third parties. Knutson, 396 N.W.2d at 234-35. Applying the language of the policy exclusions before it, the court concluded that coverage was properly denied. Id. at 235.
Our review of Bor-Son and Knutson reveals that the distinction between uncovered business risks arising from contractual liability for defective materials and workmanship and covered risks arising from tort liability to third parties is helpful as a means of informing our understanding of the risks intended to be covered by CGL policies. Other jurisdictions have also found this distinction useful. See, e.g., Hartford Accident & Indem. Co. v. Pac. Mut. Life Ins. Co., 861 F.2d 250, 253 (10th Cir.1988); Bangert Bros. Constr. Co. v. Ams. Ins. Co., 888 F.Supp. 1069, 1073 (D.Colo.),aff'd, 66 F.3d 338 (...
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