West Bend Mut. Ins. Co. v. Willmez Plumbing, Inc.

Decision Date26 April 2012
Docket Number1:09-cv-832-TAB-TWP
PartiesWEST BEND MUTUAL INSURANCE CO., Plaintiff, v. WILLMEZ PLUMBING, INC. and ARBOR HOMES, LLC, Defendants.
CourtUnited States District Courts. 7th Circuit. United States District Court (Southern District of Indiana)
ORDER ON WEST BEND'S MOTION
FOR SUMMARY JUDGMENT AGAINST ARBOR HOMES
I. Introduction

This case involves raw sewage that discharged into the crawl space of a new home for weeks. The insurance company involved denied coverage, prompting the home builder to believe it got a raw deal. This insurance coverage dispute resulted.

The home builder, Arbor Homes, hired Willmez Plumbing to complete the plumbing work on the new home. Willmez failed to connect the home's sewage line to the main sewage line. Raw sewage discharged for several weeks into the home's crawl space until the homeowners noticed a "horrific smell" and "began feeling ill." Arbor acted quickly to remedy the problem by decontaminating the home and entering into a settlement agreement with the homeowners. But when Arbor—an additional insured on Willmez's insurance policies—turned to West Bend for coverage, it was denied.

While Arbor acted commendably in responding to a messy situation, Arbor entered into asettlement agreement without the consent of West Bend in violation of the insurance policy's voluntary-payments provision. Additionally, the insurance policy contains a fungi and bacteria exclusion that excludes property damage caused by Escherichia coli ("E. coli") bacteria contained in the raw sewage. For these reasons, West Bend's motion for summary judgment [Docket No. 113] is granted, and West Bend has no duty to indemnify or defend any of the entities involved.

II. Background

Arbor constructs single family residential dwellings. [Docket No. 80, Ex. A.] On February 28, 2005, Arbor hired Willmez to perform plumbing work at a home on Ferrell Drive in Westfield, Indiana. [Docket No. 80 at 2; Docket No. 118 at 2.] Pursuant to the contractors' agreement between Willmez and Arbor, Willmez obtained a general commercial liability insurance policy and an umbrella insurance liability policy from West Bend.1 [Docket No. 80 at 8; Docket No. 118 at 2.] Willmez then subcontracted the plumbing work to Oscar Alarcon of A & M Plumbing Company. [Docket No. 1 at 3; Docket No. 114, Ex. 2 at 3.]

On March 8, 2007, Kurt and Jay Lorch closed on the purchase of the home on Ferrell Drive. [Docket No. 1 at 3; Docket No. 80 at 3.] In April 2007, the Lorches notified Arbor that there was a "horrific smell within the home" and "they began feeling ill." [Docket No. 1 at 4; Docket No. 80 at 4, 9; Docket No. 81 at 3; Docket No. 114, Ex. 2 at 5, 7-9.] After investigating,Arbor discovered that the home's sewage line was not connected to the main sewage line, and raw sewage was being discharged into the crawl space. [Docket No. 1 at 4; Docket No. 80 at 4, 9; Docket No. 81 at 3; Docket No. 114, Ex. 2 at 5, 7-9.] Willmez returned to the home and connected the home's sewage line to the main line. [Docket No. 114, Ex. 2 at 8.] Arbor then hired ACT Environmental Services to conduct an environmental contamination investigation for fecal bacteria. [Docket No. 118 at 5; Docket No. 121 at 5.] The test results came back positive for E. coli bacteria. [Docket No. 118 at 5; Docket No. 121 at 5.] Following ACT's recommendation, Arbor hired several contractors to decontaminate the home. [Docket No. 118 at 5; Docket No. 121 at 5-6.]

"By correspondence dated April 18, 2007, the Lorches asserted a claim against Arbor Homes in connection with the '25 days of raw sewage discharged into our crawl space.'" [Docket No. 118 at 7; Docket No. 121 at 5.] Along with the claim, the Lorches made several requests, including that Arbor purchase their home and construct a new home. [Docket No. 118 at 7; Docket No. 121 at 5.] In April and May 2007, Arbor and Willmez began discussing a potential resolution with the Lorches. [Docket No. 121 at 6.] In June 2007, Arbor entered into a settlement agreement with the Lorches agreeing to buy their home, construct a new home, and cover the expenses associated with decontaminating the home and temporarily relocating the Lorches. [Docket No. 115, Ex. 2.]

In October 2007, Arbor requested insurance coverage from West Bend, but was denied coverage pursuant to a fungi and bacteria exclusion, a voluntary-payments provision, and acompleted-operations provision.2 [Docket No. 121 at 8; see also Docket No. 115 at 2, 10-11; Docket No. 115, Ex. 5; Docket No. 115, Ex. 6; Docket No. 116 at 1; Docket No. 116, Ex. 2.] Also in October 2007, Arbor filed a complaint against Willmez in state court alleging (1) negligence for failure to meet the requisite standard of care in performing plumbing work, (2) breach of contract for failure to perform plumbing in accordance with the terms of their contracting agreement, (3) breach of settlement for failure to fulfill the settlement reached on May 3, 2007, (4) slander of title due to Willmez's filing of a mechanics lien on properties owned by Arbor, (5) breach of contract because Willmez was not a licensed plumber pursuant to the contractors' agreement, and (6) fraud and constructive fraud based on Willmez's misrepresentation that it was a licensed plumber. [Docket No. 1, Ex. 10.]

These events prompted West Bend to file a complaint with this Court seeking a declaratory judgment that it has no obligation to defend or indemnify Arbor or Willmez under the insurance and umbrella policies. [Docket No. 1.] On December 13, 2011, West Bend moved for summary judgment against Arbor [Docket No. 113], arguing that it has no obligation to defend or indemnify Arbor based on a fungi and bacteria exclusion, a voluntary-payments provision, and a completed-operations provision.3 [Docket No. 118.] The Court held oralargument on March 15, 2012 [Docket No. 126], and the parties appeared by counsel and presented argument on West Bend's motion for summary judgment. [Docket No. 130.] At oral argument, Arbor informed the Court that it mistakenly failed to file a cross motion for summary judgment on its breach of contract counterclaim.4

III. Discussion
A. Fungi and bacteria exclusion

West Bend contends that property damage associated with E. coli contamination is excluded from coverage under the fungi and bacteria exclusion. [Docket No. 118 at 29-30.] The fungi and bacteria exclusion excludes coverage for "property damage":

which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, or presence of, any "fungi" or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.

[Docket No. 55 at 20.] The exclusion also excludes coverage for:

[a]ny loss, cost or expense arising out of the abating, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of, or in any way responding to, or assessing the effects of "fungi" or bacteria, by any insured or by any other person or entity.

[Id.] Arbor claims that the exclusion renders the policy illusory because "[i]t defies logic that West Bend could sell an insurance policy to a plumber—whose business operations obviously include the installation of, or service upon, underground pipes carrying human waste—but then exclude coverage for claims related to human waste simply because a bacterium such as E. Coli." [Docket No. 121 at 15.]

Under Indiana law, only if an insurance provision is illusory, will it be enforced to satisfy the reasonable expectations of the insured. Argonaut Ins. Co. v. Jones, 953 N.E.2d 608, 623 (Ind. Ct. App. 2011); Monticello Ins. Co. v. Mike's Speedway Lounge, Inc., 949 F. Supp. 694, 699 (S.D. Ind. 1996). A provision is illusory if "a premium was paid for coverage which would not pay benefits under any reasonably expected set of circumstances." Schwartz v. State Farm Mut. Auto. Ins. Co., 174 F.3d 875, 879 (7th Cir. 1999); Lexington Ins. Co. v. Am. Healthcare Providers, 621 N.E.2d 332, 339 (Ind. Ct. App. 1993). There are several factors that indicate a provision is illusory. For example, the broader the exclusion, the more likely the exclusion is illusory. Cincinnati Ins. Co. v. Eastern Atl. Ins. Co., 260 F.3d 742, 746 (7th Cir. 2001); Monticello, 949 F. Supp. at 702. Additionally, when a "provision in an insurance policy negates the very coverage that the policy purports to provide in the circumstances where the person is liable," it is also likely to be illusory. Empire Fire & Marine Ins. Co. v. Sargent, No. 1:04-CV-0021-JDT-TAB, 2005 WL 2476203, at *4 n.2 (S.D. Ind. Oct. 6, 2005). However, if the policy "covers some risk reasonably anticipated by the parties, it is not illusory." Schwartz, 174 F.3d at 879; Neighborhood Hous. Sevs. of Am., Inc. v. Turner-Ridley, 742 F. Supp. 2d 964, 972-73 (N.D. Ind. 2010).

Although it may be illogical to some extent for a plumber to exclude coverage for bacteria contained in sewage, the policy is not illusory because it provides coverage under several other circumstances. For example, the policy covers improper installation of hot and cold water pipe lines that leak, damaging the home's walls, ceilings, floors, and furniture; improper connection of lines to sinks and tubs, causing similar damage; installing water lines without proper installation, resulting in freezing and busting pipes and related damage; installinga sewer pipe with inadequate bracing that collapses and damages the work of another trade working on construction of the home; or improper installation of a gas water heater that causes an explosion that kills the home's occupants and destroys the home and its contents. [See Docket No. 124 at 7-8 (listing several additional scenarios where insurance coverage applies).] Arbor does not dispute that these scenarios would be covered under the insurance policies. And because the insurance policies...

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