VBF Inc. et al. v. Chubb Group Of Ins. Companies, 99-5223

• Decision Date: 28 August 2001
• Docket Number: No. 99-5223,99-5223
• Citation: 263 F.3d 1226
• Parties: (10th Cir. 2001) VBF, INC.; an Oklahoma corporation; VERNON LAWSON; BILL CODAY; FRED SMITH, Plaintiffs-Appellants, v. CHUBB GROUP OF INSURANCE COMPANIES, Defendant, GREAT NORTHERN INSURANCE COMPANY; FEDERAL INSURANCE COMPANY; CHUBB & SON, INC., Defendants-Appellees
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1226

263 F.3d 1226 (10th Cir. 2001)

VBF, INC.; an Oklahoma corporation; VERNON LAWSON; BILL CODAY; FRED SMITH, Plaintiffs-Appellants, v. CHUBB GROUP OF INSURANCE COMPANIES, Defendant, GREAT NORTHERN INSURANCE COMPANY; FEDERAL INSURANCE COMPANY; CHUBB & SON, INC., Defendants-Appellees.

No. 99-5223

UNITED STATES COURT OF APPEALS TENTH CIRCUIT

August 28, 2001

Appeal from the United States District Court for the Northern District of Oklahoma. (D.C. No. 97-CV-535-H) [Copyrighted Material Omitted]

[Copyrighted Material Omitted] Bill V. Wilkinson, (Andrew P. DeCann, with him on the briefs), Wilkinson Law Firm, Tulsa, Oklahoma, for Plaintiffs-Appellants.

John H. Tucker, (Kerry R. Lewis, with him on the brief), Rhodes, Heironymus, Jones, Tucker & Gable, Tulsa, Oklahoma, for Defendants-Appellees.

Before EBEL, ANDERSON, and MURPHY, Circuit Judges.

MURPHY, Circuit Judge.

I. INTRODUCTION

Plaintiff VBF, Inc. ("VBF") filed suit against Defendants, various insurance companies, in the United States District Court for the Northern District of Oklahoma.¹ Jurisdiction was based on diversity of citizenship under 28 U.S.C. 1332. VBF sought a judgment declaring that two insurance policies issued by Defendants required Defendants to defend and indemnify VBF from a lawsuit filed against VBF by a third party. VBF later amended its complaint to also allege that Defendants had violated the duty of good faith and fair dealing. Both VBF and Defendants filed motions for summary judgment. The district court concluded that Defendants had no duty to defend or indemnify because VBF's insurance claim fell within an exclusion in the policies; the district court thus granted Defendants' motion for summary judgment and denied VBF's motion. VBF has appealed the grant of Defendants' motion; jurisdiction to consider the appeal arises under 28 U.S.C. 1291. Because VBF's insurance claim was not covered under one policy and excluded under the other policy, this court affirms the district court's grant of Defendants' motion for summary judgment.

II. FACTS AND PROCEDURAL HISTORY

The district court found the following facts undisputed, and neither party contests them on appeal. VBF contracted with Foster Wheeler USA Corp. ("Foster Wheeler") to sell electrical equipment for a Foster Wheeler job in China. After VBF manufactured the electrical equipment, it was packaged by Brand Export Packing of Oklahoma, Inc. ("Brand Export"), who was a subcontractor of VBF.² The electrical equipment was then shipped to China.

During shipment, however, the electrical equipment was damaged because of the containers provided by Brand Export. As a result of the damage, Foster Wheeler had to replace the electrical equipment. Foster Wheeler filed a lawsuit against VBF to recover its costs in replacing the electrical equipment, asserting claims for breach of contract and breach of express and implied warranties.

VBF filed a timely insurance claim with Defendants requesting that Defendants defend VBF in the Foster Wheeler lawsuit pursuant to two insurance policies issued by Defendants to VBF. Defendants denied VBF's claim, giving two reasons. First, Defendants maintained that VBF was not entitled to coverage because the Foster Wheeler lawsuit was for breach of contract and thus not covered under the policies. Second, Defendants claimed that VBF's claim fell under a coverage exclusion for "Damage To Your Product." After Defendants rejected VBF's claim, Foster Wheeler amended its complaint against VBF to assert a claim for negligently failing to follow contract specifications. In light of Foster Wheeler's amended complaint, VBF renewed its request to have Defendants defend and indemnify VBF in its suit against Foster Wheeler. Defendants, however, have continued to reject VBF's claim.

VBF filed suit in district court seeking (1) a declaration that VBF's claim for indemnity and defense in the Foster Wheeler lawsuit is covered under the insurance policies provided to VBF by Defendants and (2) an award for the costs of defending the Foster Wheeler lawsuit and the costs of bringing the present lawsuit. VBF later amended its suit to also seek actual and punitive damages because of Defendants' alleged bad faith. Both parties filed motions for summary judgment. The district court granted Defendants' motion for summary judgment and entered judgment in favor of Defendants. The district court determined that Defendants had no duty under the policies to defend VBF in the Foster Wheeler lawsuit because the recovery sought by Foster Wheeler from VBF is excluded from coverage by reason of the "Damage To Your Product" exclusion.

III. DISCUSSION

This court reviews the grant or denial of summary judgment de novo, applying the same legal standard employed by the district court pursuant to Rule 56(c) of the Federal Rules of Civil Procedure. See Cent. Kan. Credit Union v. Mut. Guar. Corp., 102 F.3d 1097, 1102 (10th Cir. 1996). Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). This court construes the evidence in the light most favorable to the nonmoving party, which is VBF. See Cent. Kan. Credit Union, 102 F.3d at 1102.

Under Oklahoma law the duty of the insurer to defend the insured is a contractual obligation. See First Bank of Turley v. Fid. & Deposit Ins. Co. of Md., 928 P.2d 298, 302 (Okla. 1996). Thus, Defendants' duty to defend VBF in the Foster Wheeler lawsuit is controlled by the two insurance policies issued to VBF by Defendants.

Defendants issued to VBF both a commercial general liability policy (the "CGL policy") and a commercial excess umbrella liability policy (the "Umbrella policy") that were in effect at the time of the events underlying this lawsuit. Both parties assume that Defendants' duty under the policies to defend VBF depends on whether Defendants would be required to indemnify VBF for any recovery awarded in the Foster Wheeler suit. Thus, Defendants had a duty to defend if the facts of the Foster Wheeler lawsuit gave rise to the potential of indemnification under the policies. See id. at 303 & nn.13-14.

In interpreting the policies, this court applies Oklahoma rules of construction. Under Oklahoma law, an unambiguous insurance policy is interpreted according to the plain meaning of the language in the policy. See Max True Plastering Co. v. United States Fid. & Guar. Co., 912 P.2d 861, 869 (Okla. 1996). "Insurance contracts are ambiguous only if they are susceptible to two constructions." Id. If a policy is ambiguous, it will be construed against the insurer. See id. at 865. In addition, Oklahoma recognizes the "reasonable expectations doctrine" when the policy is ambiguous or contains "unexpected exclusions arising from technical or obscure language or which are hidden in policy provisions." Id. at 868. In these situations, coverage exists if the insurer or its agent has created a reasonable expectation in the insured that coverage exists. See id. at 864, 870. The interpretation of an insurance policy, including whether the policy is ambiguous, is a matter of law. See id. at 869.

A. The CGL Policy

The CGL policy has the following coverage language:

We will pay damages the insured becomes legally obligated to pay by reason of liability imposed by law or assumed under an insured contract because of:

bodily injury or property damage caused by an occurrence; or personal injury or advertising injury

to which this insurance applies.

This insurance applies:

1. to bodily injury or property damage which occurs during the policy period; and

2. to personal injury or advertising injury only if caused by an offense committed during the policy period.

The phrases "legally obligated to pay" and "liability imposed by law" refer only to tort claims and not contract claims. See Natol Petroleum Corp. v. Aetna Ins. Co., 466 F.2d 38, 39-42 (10th Cir. 1972); Action Ads, Inc. v. Great Am. Ins. Co., 685 P.2d 42, 42-45 (Wyo. 1984); Lee R. Russ & Thomas F. Segalla, 7 Couch on Insurance 103:14 (3rd ed. 2000). Foster Wheeler's suit against VBF was based on contract, not tort. Although Foster Wheeler amended its complaint to assert a claim against VBF for negligently failing to follow contract specifications, this clever drafting does not change the underlying nature of the Foster Wheeler suit. See Waggoner v. Town & Country Mobile Homes, Inc., 808 P.2d 649, 652-53 (Okla. 1990) (reiterating the well-established rule that tort products liability suits cannot be brought for damage to the product itself and explaining that a consumer is protected from damage to the defective product only by contract law); Redevelopment Auth. v. Int'l Ins. Co., 685 A.2d 581, 589 (Pa. Super. Ct. 1996) ("While [the third parties] have employed negligence concepts in drafting their complaint, it cannot be disputed that their claims arise out of and are based upon duties imposed upon the [insured] solely as a result of the contract between [the insured and the third parties].").

Therefore, coverage under the CGL policy exists for the Foster Wheeler claim only if the contract between Foster Wheeler and VBF is an "insured contract" under the policy. The CGL policy defines an "insured contract" as:

1. a lease of premises;

2. a sidetrack agreement;

3. an easement or license agreement in connection with vehicle or pedestrian private railroad crossings at grade;

4. any other easement agreement, except in connection with construction or demolition operations on or within 50 feet of a railroad;

5. an indemnification of a municipality as required by ordinance, except in connection with work for a municipality;

6. an elevator maintenance agreement;

7. that part of any other contract or agreement pertaining to your business under which you...