Magnus, Inc. v. Diamond State Insurance Co. , 545 F. App'x 750 ( 2013 )

FILED
United States Court of Appeals
Tenth Circuit
November 1, 2013
UNITED STATES COURT OF APPEALS Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
MAGNUS, INC.,
Plaintiff - Appellant,
v. No. 12-3091
(D.C. No. 6:10-CV-01422-KHV-JPO)
DIAMOND STATE INSURANCE D. Kansas
COMPANY,
Defendant - Appellee.
ORDER AND JUDGMENT *
Before KELLY, MURPHY, and GORSUCH, Circuit Judges.
I. INTRODUCTION
Appellant Magnus, Inc. (“Magnus”) appeals the grant of summary judgment
in favor of Diamond State Insurance Company (“Diamond State”) in this diversity
action. In its federal complaint, Magnus alleged Diamond State breached a
Commercial General Liability (“CGL”) insurance policy it entered into with
Precision Design Products (“Precision”) when it failed to defend and indemnify
*
This order and judgment is not binding precedent except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
Precision in a Kansas state lawsuit. The Kansas suit filed by Magnus contained
allegations Precision violated an implied warranty of fitness, an implied warranty
of merchantablility, and an express warranty when it manufactured a part used in
archery equipment. Magnus and Precision entered into a settlement agreement
wherein Precision assigned its claims against Diamond State to Magnus.
Diamond State moved for summary judgment in the federal action, arguing
there was no coverage under the CGL policy and, thus, no duty to defend or
indemnify. In support of its position, Diamond State asserted the damages
alleged by Magnus in the Kansas suit were caused by Precision’s intentional acts,
not an accident. Thus, Diamond State argued, there was no “occurrence”
triggering coverage. The district court agreed and granted Diamond State’s
motion.
Exercising jurisdiction pursuant to 28 U.S.C. § 1291, this court reverses
the grant of summary judgment and remands the matter for further proceedings.
II. FACTUAL BACKGROUND
Magnus is engaged in the archery products business. Precision
manufactures components for the archery industry. In 2001, Magnus contracted
with Precision to manufacture aluminum adaptors, a component permanently
glued to a broadhead which permits the consumer to attach the broadhead to an
arrow shaft. The record contains conflicting versions of the parties’ agreement,
but construed in the light most favorable to Magnus, it shows that Magnus
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instructed Precision to manufacture the adaptors out of a hard-grade aluminum.
Precision, however, intentionally manufactured the adaptors from a softer grade
of aluminum and did not disclose this to Magnus.
Magnus asserts it began receiving complaints from customers in 2002 or
2003 that broadheads screwed onto arrow shafts using the adaptor supplied by
Precision became permanently affixed to the arrow shaft, preventing removal of
the broadhead. According to Magnus, this damage occurred a “multitude of
times, damaging a multitude of hunting arrows owned by Magnus, Inc.’s
customers and former customers, and rendering their hunting arrows either
worthless or of very little value.” Magnus claims this damage resulted directly
from the soft aluminum used by Precision to manufacture the adaptors.
In February 2008, Magnus sued Precision in Kansas state court, alleging
Precision “violated the implied warranty of fitness, implied warranty of
merchantability and express warranty to the detriment of” Magnus. The state
petition asserted Precision’s failure to manufacture the adaptors to Magnus’s
specifications caused Magnus to suffer “loss of business reputation and loss of
business.” Precision, which had entered into a commercial general liability policy
with Diamond State, notified Diamond State of the lawsuit on August 9, 2009.
Diamond State promptly denied the claim. Precision thereafter confessed
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judgment in the state suit in the amount of $284,519.75 1 and entered into a
settlement agreement with Magnus, assigning its rights under the CGL policy to
Magnus.
Magnus then brought this federal diversity action against Diamond State,
alleging Diamond State breached its obligation to defend and indemnify
Precision. Magnus sought reimbursement of the amount Precision paid to defend
the Kansas state suit and $284,519.75 in damages resulting from Precision’s
adaptors. Diamond State moved for summary judgment, arguing, inter alia, the
CGL policy did not provide coverage for damages flowing from Precision’s use of
the softer aluminum because its actions were intentional. Relying on Maryland
Casualty Co. v. Mike Miller Cos., 715 F. Supp. 321 (D. Kan. 1989), the district
court agreed and granted Diamond State’s motion. The court concluded the
record showed Precision purposefully manufactured the adaptors from softer
grade aluminum. The courted reasoned that the resulting damage alleged by
Magnus, therefore, was not caused by an accident. Thus, there was no occurrence
under the terms of the CGL policy and Diamond State had no duty to defend
Precision against Magnus’s claims. The district court’s ruling also resolved
Magnus’s claim for indemnification. See Glickman, Inc. v. Home Ins. Co., 86
F.3d 997, 1001 (10th Cir. 1996) (noting under Kansas law the duty to defend is
1
According to Magnus’s expert, the past and future loss of earnings
suffered by Magnus totaled $284,519.75.
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broader than the duty to indemnify). Magnus brought this appeal challenging the
grant of summary judgment.
III. DISCUSSION
A. Standard of Review
This court reviews a grant of summary judgment de novo, applying the
same standard as the district court. Welding v. Bios Corp., 353 F.3d 1214, 1217
(10th Cir. 2004). 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). When determining whether
a genuine dispute as to a material fact exists, all “justifiable inferences” are
drawn in favor of the non-moving party. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 255 (1986). Summary judgment is appropriate, however, if the non-
moving party “fails to make a showing sufficient to establish the existence of an
element essential to that party’s case.” Celotex Corp. v. Catrett, 477 U.S. 317,
322 (1986).
B. Occurrence Under The CGL Policy
The parties agree that Magnus’s claims are governed by the terms of the
CGL policy and Kansas law. The CGL policy at issue here provides coverage,
subject to various limitations and exclusions, for property damage or bodily
injury which occurs during the policy period. Property damage must arise from
an occurrence. An occurrence is defined as “an accident, including continuous or
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repeated exposure to substantially the same general harmful conditions.” The
policy does not define the term “accident.” Diamond State successfully argued
before the district court that Magnus’s damages arose from Precision’s willful
actions and, thus, there was no duty to defend because no accident triggered
coverage under the CGL policy.
The problem with Diamond State’s argument and the district court’s ruling
is that Kansas law is to the contrary. “In determining for insurance purposes
whether the damages resulting from an insured’s acts were accidental and
therefore an occurrence under a policy,” Kansas follows the rule that there is a
duty to defend if an intentional act results in an unintended injury. Park Univ.
Enters. v. Am. Cas. Co., 442 F.3d 1239, 1245 (10th Cir. 2006); see also Thomas v.
Benchmark Ins. Co., 179 P.3d 421, 425 (Kan. 2008) (“Kansas recognizes, for
example that an intentional act may nevertheless result in unintended injury.”).
Thus, the district court erred by concluding there was no occurrence under the
CGL policy because the record shows Precision purposefully manufactured the
adaptors from soft aluminum. The court failed to evaluate whether Precision’s
willful conduct resulted in an unintended injury.
Prior to 2008, Diamond State had no duty under the CGL policy to defend
Precision in the Kansas state suit if Magnus’s injuries were the natural and
probable consequence of Precision’s breach. See Park Univ. Enters., 442 F.3d at
1245. Kansas, however, no longer follows the natural and probable consequences
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test. Thomas, 179 P.3d at 427-31 (Kan. 2008). Seeking to more closely align
Kansas with the majority view, the Kansas Supreme Court adopted a “revised test
for intentional injury.” Id. at 431. Under this revised test, 2 “[t]he insured must
have intended both the act and to cause some kind of injury or damage. Intent to
cause the injury or damage can be actual or it can be inferred from the nature of
the act when the consequences are substantially certain to result from the act.”
Id. (emphasis added). The district court did not address whether the record
demonstrates that Precision’s intentional acts led to intended or unintended
injuries under either the natural and probable consequences test or the substantial
certainty test and the parties do not discuss the issue in their appellate briefs. See
Vaughn v. Murray, 521 P.2d 262, 269 (Kan. 1974) (identifying factors used by
courts to determine whether to apply a judicial decision retroactively). Thus,
remand is necessary so the court can either conduct this analysis in the first
instance or consider the other bases on which Diamond State asserts it was not
required to defend or indemnify Precision. 3
2
Although the Kansas Supreme Court in Thomas v. Benchmark Insurance
Co., adopted the revised test in the context of an intentional act exclusion clause,
the test is also applicable when determining if coverage exists. See Park Univ.
Enters. v. Am. Cas. Co., 442 F.3d 1239, 1245 (10th Cir. 2006) (applying the
former “natural and probable consequences” test to a claim there was no duty to
defend because the insured’s acts were intentional); Harris v. Richards, 867 P.2d
325, 327-29 (Kan. 1994) (same).
3
Although we do not consider the issue in this appeal because the parties do
not present it, a serious argument could be made that Diamond State had no duty
(continued...)
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IV. CONCLUSION
The order of the district court granting summary judgment in favor of
Diamond State is reversed and the matter remanded for further proceedings not
inconsistent with this opinion.
ENTERED FOR THE COURT
Michael R. Murphy
Circuit Judge
3
(...continued)
to defend Precision because the CGL policy does not cover any of the damages
claimed by Magnus in the Kansas state lawsuit. Property damage is defined in the
policy to mean “physical injury to tangible property, including all resulting loss
of use of that property” (emphasis added). Although Magnus asserts the adaptors
caused property damage because they impaired the functionality of customers’
arrows, it did not seek to recover such damages in the Kansas lawsuit. Instead,
Magnus only sought to recover damages arising from “loss of business reputation
and loss of business,” which are damages to intangible property. See Hamilton
Die Cast, Inc., v. U.S. Fid. & Guar. Co., 508 F.2d 417, 419 (7th Cir. 1975)
(concluding a CGL policy insuring against property damage caused by an
occurrence did not cover damages to business reputation because those are
“damages for injury to intangible property”).
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