Ardente v. Standard Fire Insurance Co. , 744 F.3d 815 ( 2014 )


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  •           United States Court of Appeals
    For the First Circuit
    No. 13-2000
    EVAN ARDENTE,
    Plaintiff, Appellee,
    v.
    THE STANDARD FIRE INSURANCE COMPANY,
    Defendant, Appellant.
    APPEAL FROM THE UNITED STATES DISTRICT COURT
    FOR THE DISTRICT OF RHODE ISLAND
    [Hon. William E. Smith, U.S. District Judge]
    Before
    Torruella, Circuit Judge,
    Souter,* Associate Justice,
    and Selya, Circuit Judge.
    Daniel F. Sullivan, with whom Wystan M. Ackerman, Dana M.
    Horton and Robinson & Cole LLP, were on brief for appellant.
    Kurt T. Kalberer II, with whom Christopher E. Hultquist and
    DarrowEverett, LLP, were on brief for appellee.
    March 12, 2014
    *
    Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
    Court of the United States, sitting by designation.
    TORRUELLA,   Circuit   Judge.    Standard   Fire   Insurance
    Company appeals from a district court order awarding Evan Ardente
    summary judgment on his claim for breach of a yacht insurance
    policy. Because the policy does not cover the type of damage
    sustained by Ardente's yacht, we reverse.
    I. Background
    Standard Fire insured Ardente's yacht. At some point
    after purchasing the boat, Ardente noticed that its top speed had
    decreased and that it was not navigating properly.       The parties
    agree that these were symptoms of water damage to the yacht's hull.
    They also agree about how water was getting into the hull.          A
    ship's hull has holes for the installation of fixtures, such as
    port lights. Normally, the material surrounding these so-called
    "installation holes" is solid laminate, which is waterproof.      But
    in Ardente's yacht, the installation holes are surrounded by balsa
    wood, which is not waterproof.    Water seeping into the balsa wood
    around the installation holes then spread throughout the hull.
    Ardente presented a claim to Standard Fire, which denied
    coverage on the ground that the claim fell within an exclusion for
    manufacturing defects.    Ardente sued in state court, alleging,
    among other claims, breach of contract, whereafter Standard Fire
    removed the case to federal court.     The parties then filed cross
    motions for summary judgment.
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    The district court granted summary judgment in favor of
    Standard Fire on all of Ardente's claims except for the breach of
    contract allegation.      Ardente v. Standard Fire Ins. Co., 906 F.
    Supp. 2d 22 (D.R.I. 2012).          On that claim, the district court
    granted   Ardente    summary    judgment   with   respect   to   liability,
    interpreting the policy in such a way that the damage fell within
    an exception to the exclusion for manufacturing defects. The issue
    of damages was reserved for trial, but the parties reached a
    stipulation with respect to damages, and the district court entered
    judgment.   Standard Fire appealed.
    II. Discussion
    We review de novo both the district court's grant of
    summary judgment and its interpretation of the insurance policy.
    Penn-Am. Ins. Co. v. Lavigne, 
    617 F.3d 82
    , 84 (1st Cir. 2010).
    Summary judgment is appropriate when the record, viewed in the
    light most favorable to the nonmovant, reveals no genuine issue of
    material fact and that the movant is entitled to judgment as a
    matter of law.      See 
    id. This case
    presents no factual issues and
    asks only whether Ardente's loss is covered by the policy, a legal
    question properly resolved by summary judgment. See Littlefield v.
    Acadia Ins. Co., 
    392 F.3d 1
    , 6 (1st Cir. 2004).
    The parties agree that Rhode Island law governs the
    interpretation of the policy. Under Rhode Island law, if the terms
    of an insurance policy are unambiguous, there is no further need
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    for judicial construction.      Amica Mut. Ins. Co. v. Streicker, 
    583 A.2d 550
    , 551 (R.I. 1990).      To determine whether ambiguity exists,
    the policy must be viewed in its entirety and the language must be
    given its plain, everyday meaning.        
    Id. at 552.
      Where a policy is
    ambiguous, it will be construed against the insurer.           
    Id. But "[a]
    policy is not to be described as ambiguous because a word is viewed
    in isolation or a phrase is taken out of context.            A court should
    not, through an effort to seek out ambiguity when there is no
    ambiguity, make an insurer assume a liability not imposed by the
    policy."    McGowan v. Conn. Gen. Life Ins. Co., 
    289 A.2d 428
    , 429
    (R.I. 1972).
    Ardente's   Standard   Fire   policy   explicitly     disclaims
    coverage for "loss or damage caused by or resulting from . . .
    [d]efects   in   manufacture,    including   defects    in    construction,
    workmanship and design other than latent defects as defined in the
    policy" (emphasis added).       This provision is referred to as the
    "manufacture-defect exclusion," and the emphasized exception to
    that exclusion is referred to as the "latent-defect exception."
    The parties agree that use of balsa wood instead of solid laminate
    constitutes a manufacturing defect, but they disagree over whether
    the defect falls within the latent-defect exception.
    The policy defines "latent defect" as "a hidden flaw
    inherent in the material existing at the time of the original
    building of the yacht, which is not discoverable by ordinary
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    observation or methods of testing." The parties agree that the use
    of balsa wood was a flaw that existed at the time of the original
    building of the yacht and that it was not discoverable by ordinary
    observation or methods of testing. The only dispute is whether the
    balsa wood constitutes "a hidden flaw inherent in the material."
    Standard Fire claims that the material, in this case the balsa
    wood, was not flawed in any way; that it was perfectly good balsa
    wood, and that it did what balsa wood does -- absorb water.
    Unsurprisingly, Ardente takes the opposite tack and argues that
    while the balsa wood itself was not flawed, the use of balsa wood,
    instead of solid laminate, was certainly a flaw.
    The   district   court   sided   with   Ardente.   It   first
    determined that the phrase, "flaw inherent in the material" -- part
    of the definition of "latent defect" -- contained a contradiction.
    According to the district court:
    The word "inherent" requires that a latent
    defect be characteristic of or intrinsic to
    the material. The word "flaw" imposes the
    exact opposite requirement. It includes
    problems with a specific piece of material,
    but not problems characteristic of the
    material itself. In short, giving the terms
    their plain and reasonable meaning, there can
    be no such thing as an inherent flaw.
    
    Ardente, 906 F. Supp. 2d at 27
    .     Because ambiguity in an insurance
    policy is interpreted against the insurer, the district court
    refused to let this apparent contradiction render the entire
    latent-defect exception meaningless.        Instead, to reflect the
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    reasonable    expectations   of    the    insured,   the   district   court
    interpreted "latent defect" to include the flawed use of unflawed
    material. Said the district court, "The use of balsa wood in these
    areas was a flaw in the construction of the Yacht, even if it was
    not a flaw in the underlying material itself."         
    Id. at 28.
    We fear that the district court committed the error
    against which McGowan warns: deeming a policy ambiguous, and thus
    making an insurer liable, by taking a term out of context and
    viewing it in insolation.         
    See 289 A.2d at 429
    .       The policy's
    definition of "latent defect" -- "a hidden flaw inherent in the
    material existing at the time of the original building of the
    yacht, which is not discoverable by ordinary observation or methods
    of testing" -- while not a model of precision, is not self-
    contradictory.    Viewing the definition in its entirety and giving
    the language its plain, everyday meaning, see 
    Streicker, 583 A.2d at 552
    , the gist is clear.         The phrase refers to flaws in the
    material used to build the boat that were not noticeable.                 A
    quintessential example, we imagine, is a piece of wood with a
    hairline fracture or with an undetectable termite infestation.
    If anything, the definition could be criticized not as
    self-contradictory but as redundant.         It mentions flaws that are
    "hidden" but goes on to add that they must be "not discoverable by
    ordinary observation or methods of testing," which is another way
    of saying "hidden."     Indeed, the word "inherent" is yet a third
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    means of emphasizing this same quality: In this context, inherent
    means "within" and conveys that the flaw must impugn the material
    in a way that evaded observation at the time it was handled.              While
    "inherent"    may   not   have   been    the   best   choice    of   words,   and
    reiterated an already redundant aspect of the definition, the
    district court failed to give that term its everyday meaning by
    reading it to require that the flaw inhere in every piece of the
    type of material under consideration.
    We acknowledge that redundancy may itself be a form of
    ambiguity; indeed, one canon of interpretation urges courts to give
    each word meaning, thereby avoiding surplusage.                See Andrukiewicz
    v. Andrukiewicz, 
    860 A.2d 235
    , 239 (R.I. 2004).                But we offer two
    responses.     First, we note a general point -- colorfully made by
    the Sixth Circuit -- about redundancy in insurance policies:
    [The] label ["redundancy"] surely is not a
    fatal one when it comes to insurance
    contracts . . . where redundancies abound. In
    just this one provision of the 80-page
    insurance contract, there are at least three
    truly redundant phrases . . . : (1) "loss or
    damage"; (2) "caused by or resulting from";
    and (3) "faulty, inadequate or defective." As
    in so many insurance contracts, iteration is
    afoot throughout--from an exclusion for "war
    and military action" to one for "fraudulent,
    dishonest or criminal acts or omissions" to
    one for flooding of "lakes, reservoirs, ponds,
    brooks, rivers, streams, harbors, oceans or
    any other body of water or watercourse" to
    numerous others.
    . . . .
    All of this helps to reveal the limits
    of the interpretive canon . . . that courts
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    must avoid interpreting contracts to contain
    superfluous words. The canon is one among many
    tools for dealing with ambiguity, not a tool
    for creating ambiguity in the first place.
    Where there are two ways to read the text--and
    the one that avoids surplusage makes the text
    ambiguous--applying     the    rule    against
    surplusage is, absent other indications,
    inappropriate.
    TMW Enterprises, Inc. v. Fed. Ins. Co., 
    619 F.3d 574
    , 577-78 (6th
    Cir. 2010) (Sutton, J.) (citations and internal quotation marks
    omitted).
    Second,   accepting   that       "inherent"   in   the   policy's
    definition is redundant, we fail to see how this redundancy invites
    the reading adopted by the district court and urged by Ardente.
    Granting that ambiguity should be interpreted against the insurer
    and in light of the reasonable expectations of the insured, if
    ambiguity lives in the phrase "inherent flaw," that phrase, and not
    another, should be so construed.        That remedy might, for example,
    entail striking the word "inherent" so that the definition would
    read, "a hidden flaw inherent in the material existing at the time
    of the original building of the yacht, which is not discoverable by
    ordinary observation or methods of testing."          But instead of doing
    that, the district court changed the word "material" to "yacht,"
    such that "latent defect" referred to a "hidden flaw in the yacht."
    This   might   have   been   proper    had    ambiguity   marred     the   word
    "material," but the district court found ambiguity not in that term
    but in the term "inherent flaw."
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    For his part, Ardente does argue that the term "material"
    is ambiguous.   He urges us to interpret "material" to mean not the
    balsa wood, but something like, "all of the stuff that is near the
    installation holes."    Part of that "stuff" is the balsa wood, and
    it is that fact -- the fact that balsa wood makes up some of the
    "stuff" surrounding the installation holes -- that, according to
    Ardente, constitutes the flaw.
    Ardente's interpretation would create surplusage, and not
    that of the relatively benign variety that comes with describing a
    flaw as both "hidden" and "inherent."         His interpretation of the
    word "material" would allow the latent-defect exception to swallow
    the   manufacture-defect      exclusion,     rendering    the   exclusion
    superfluous and doing violence to the policy. The policy expressly
    excludes from coverage damage caused by "[d]efects in manufacture,
    including defects in construction, workmanship, and design other
    than latent defects."   To say that "material" in the definition of
    "latent defect" refers not to an individual raw ingredient used in
    constructing the yacht, but rather to a composite of various raw
    ingredients that appear in close proximity in a particular area of
    the ship, yields the following result: If a carpenter building the
    yacht accidentally affixes balsa wood instead of solid laminate
    around the installation holes, we could refer to the defect as a
    "latent   defect"   instead    of   a     "defect   in   construction   or
    workmanship."   Similarly, if an engineer drawing the blueprints of
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    the yacht accidentally calls for balsa wood instead of solid
    laminate to be placed around the installation holes, we could refer
    to that defect as a "latent defect" instead of a "defect in
    design."   But it is clear that the policy meant to exclude from
    coverage precisely those types of defects.
    As a last ditch effort to support affirmance, Ardente
    makes two arguments based on sources that are irrelevant here.
    First, Ardente argues that the policy's definition of "latent
    defect" guts the term of a broader meaning that it allegedly enjoys
    under Rhode Island common law.     Citing one Rhode Island case and
    Black's Law Dictionary, Ardente contends that, at common law,
    "latent defect" would mean a hidden flaw in the yacht, as opposed
    to a hidden flaw in the balsa wood.     But in the case cited, the
    policy did not define "latent defect," see Neri v. Nationwide Mut.
    Fire Ins. Co., 
    719 A.2d 1150
    , 1153-54 (R.I. 1998), and whatever
    interpretation courts might adopt in the absence of an explicit
    policy definition has no bearing on this case, where Ardente's
    policy defines the term.
    Second, Ardente accuses Standard Fire of defining "latent
    defect" to include flaws that some other insurance policies capture
    with a separate "faulty materials" exception. Ardente cites TRAVCO
    Insurance Co. v. Ward, 
    715 F. Supp. 2d 699
    , 710 (E.D. Va. 2010),
    aff'd, 
    504 F. App'x 251
    (4th Cir. 2013), where, because the policy
    explicitly excluded loss caused by both "latent defects" and
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    "faulty materials," the court avoided surplusage by interpreting
    the undefined term "latent defect" not to include faulty materials.
    
    Id. But Standard
    Fire was free to define "latent defect" to include
    faulty materials and, given that its policy contains no separate
    exclusion for "faulty materials," that seems to be precisely what
    Standard Fire did.
    Because the damage to Ardente's yacht does not fall
    within   the   latent-defect   exception   to   the   manufacture-defect
    exclusion, Standard Fire -- not Ardente -- was entitled to summary
    judgment on the breach of contract claim.             We need not reach
    Standard Fire's alternative arguments supporting reversal.
    III. Conclusion
    For the foregoing reasons, the district court's order
    granting Ardente summary judgment on his breach of contract claim
    is REVERSED, the judgment in favor of Ardente is VACATED, and the
    district court is directed to grant Standard Fire's cross motion
    for summary judgment and to enter judgment in Standard Fire's
    favor.   No costs are awarded.
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