Netherlands Insurance Company v. Phusion Projects, Incorporated , 737 F.3d 1174 ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-1355
NETHERLANDS INSURANCE COMPANY,
et al.,
Plaintiffs-Appellees,
v.
PHUSION PROJECTS, INCORPORATED,
et al.,
Defendants-Appellants.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 11 C 1253 — Matthew F. Kennelly, Judge.
ARGUED SEPTEMBER 23, 2013 — DECIDED DECEMBER 16, 2013
Before BAUER, KANNE, and HAMILTON, Circuit Judges.
BAUER, Circuit Judge. Phusion Projects, Inc. and Phusion
Projects, LLC are the business entities responsible for
the manufacturing and distribution of an alcoholic beverage
called “Four Loko.” In addition to alcohol, the original Four
Loko formula contained energy stimulants, such as caffeine,
guarana, taurine, and wormwood.
2 No. 12-1355
Phusion purchased a commercial general liability insurance
policy from the Netherlands Insurance Company and a
commercial umbrella liability insurance policy from Indiana
Insurance Company. Both insurance companies are members
of the Liberty Mutual Group and will be collectively referred
to as “Liberty” herein. Both policies include identical Liquor
Liability provisions, which exclude coverage for bodily injury
or property damage when Phusion “may be held liable by
reason of: (1) causing or contributing to the intoxication of any
person.”
Five plaintiffs sued Phusion in separate state court actions:
the Keiran complaint, the McCarroll complaint, the Rivera
complaint, the Rupp complaint, and the Mustica complaint. All
five plaintiffs alleged that the consumption of Four Loko
caused their injury, in whole or in part. Phusion notified
Liberty, who then filed in federal court for a declaratory
judgment regarding the scope of its insurance coverage.
Liberty contended that the Liquor Liability Exclusion in
Phusion’s insurance policies excluded coverage for the five
underlying liability claims because each lawsuit involved
injury by reason of intoxication. Phusion filed a counterclaim,
contending that the Liquor Liability Exclusion did not apply
and that Liberty owed a duty to defend and indemnify. Each
side moved for summary judgment.
The first lawsuit involved Jason Keiran, who accidentally
shot and killed himself after drinking Four Loko. The Keiran
complaint alleges that after consuming several cans of Four
Loko, Keiran was intoxicated but could not fall asleep. After
being awake for 30 hours, Keiran, his friend, and Keiran’s
roommate decided to fire a Walther P22 handgun in the
No. 12-1355 3
backyard of their rental house. Keiran experimented with the
gun and accidentally shot himself in the head, dying later that
evening. The complaint includes two claims against Phusion;
a Negligence / Products Liability claim and a Strict Liability /
Products Liability claim.
The plaintiff in the second lawsuit is Briana McCarroll, who
was injured as a passenger in a car accident caused by a friend
who drove recklessly after drinking Four Loko. McCarroll
alleges that the consumption of Four Loko caused her friend
Danielle Joseph to drive aggressively, carelessly, and at speeds
over 100 miles per hour. Joseph struck another car, Joseph’s car
flipped, and McCarroll was ejected. The complaint includes
two counts against Phusion; a Negligence claim and a Strict
Liability claim. Under the Negligence claim, McCarroll lists
eleven different theories on how Phusion breached its duty of
care, and the Strict Liability claim lists twelve theories.
The third lawsuit was filed by Janice Rivera. Rivera was
also injured as a passenger in the car driven by Joseph. The
allegations in Rivera’s complaint arise from the same set of
facts in the McCarroll case. The Rivera complaint includes five
claims against Phusion, based on Strict Liability, Failure to
Warn, Design Defect, Negligence, and the Florida Deceptive
and Unfair Trade Practices Act (FDUTPA).
The fourth lawsuit involved John Rupp III, who experi-
enced some sort of paranoid episode after drinking Four Loko.
The Rupp complaint alleges that Rupp drank two cans of Four
Loko before attending a concert, causing Rupp to exhibit
unusual behavior that led the concert staff to contact his
parents and request that he be picked up. Once home, Rupp
4 No. 12-1355
fled the supervision of his parents and ran out into a busy
highway where he was struck and killed by oncoming traffic.
There are five claims against Phusion in the complaint,
including a defective product claim, a violation of the Wrong-
ful Death Act claim, a general wrongful death claim, a general
negligence claim, and a violation of the Family Expense Act.
The plaintiff of the fifth lawsuit is Michael Mustica, who
awoke with heart troubles after drinking Four Loko the night
before. The district court found that Liberty did have a duty to
defend Phusion in Mustica’s case because Mustica did not
allege an injury arising from intoxication, but alleged that Four
Loko was a dangerous product that led to his heart condition.
Since the ruling establishing Liberty’s duty to defend, the
Mustica lawsuit settled and is no longer at issue.
The district court found that the Liquor Liability Exclusion
was unambiguous and that Liberty had “no duty to defend any
case arising from Phusion causing a person to become intoxi-
cated.” The district court examined the five underlying cases
in the context of comparable automobile exclusions and ruled
that four of the five cases fell within the Liquor Liability
Exclusion. The district court ruled that Liberty had no duty to
defend the Keiran, McCarroll, Rivera, or Rupp lawsuits. The
district court never reached the issue of Liberty’s duty to
indemnify because it was not ripe for consideration.
Phusion appeals, contending that the district court erred in
two ways. First, Phusion argues that the district court misinter-
preted the Liquor Liability Exclusion by reading the exclusion
too broadly in favor of the insurer. Second, Phusion argues that
the district court misinterpreted the complaints in the underly-
No. 12-1355 5
ing suits by reading the allegations too narrowly, also in favor
of the insurer.
DISCUSSION
In the cross-motions for summary judgment, the parties
agree that factual discrepancies do not exist and the court’s
ruling depends only on the resolution of purely legal issues.
Ace Am. Ins. Co. v. RC2 Corp., Inc., 600 F.3d 763, 766 (7th Cir.
2010); Exelon Corp. v. Dep’t of Revenue, 234 Ill.2d. 266, 285 (2009).
We review the district court’s interpretation of the insurance
policies and the resulting grant of summary judgment de novo.
Ace Am. Ins. Co., 600 F.3d at 766.
Policy Construction
A federal court sitting in diversity “must attempt to resolve
issues in the same manner as would the highest court of the
state that provides the applicable law.” Stephan v. Rocky
Mountain Chocolate Factory, Inc., 129 F.3d 414, 416–17 (7th Cir.
1997). The construction of an insurance policy is a question of
law. Am. States Ins. Co. v. Koloms, 177 Ill.2d 473, 479–80 (1997).
There is no dispute that Illinois law governs the insurance
policies in this case. In the absence of Illinois Supreme Court
precedent, we “must use our best judgment to determine how
that court would construe its own law,” and may consider
the decisions of the Illinois appellate courts, well-reasoned
decisions from other jurisdictions, as well as persuasive
authorities. Stephan, 129 F.3d at 417.
To determine whether an insurance coverage exclusion
applies, Illinois courts interpret insurance policies under the
rules of contract interpretation. Founders Ins. Co. v. Munoz, 237
6 No. 12-1355
Ill.2d 424, 433 (2010). In its interpretation of the insurance
policy, the court’s primary function is to ascertain and give
effect to the intent of the parties as expressed in the contract. Id.If the language of the insurance policy is unambiguous and
does not offend public policy, the provision will be applied as
written. Id. Any ambiguity will be construed liberally in favor
of the insured. Id. The court will find an ambiguity “where the
policy language is susceptible to more than one reasonable
interpretation,” and not simply where the parties disagree as
to the policy’s meaning. Id.The two Liberty insurance policies contain identical Liquor
Liability Exclusions stating:
This insurance does not apply to: …
c. Liquor Liability
“Bodily injury” or “property damage” for which any
insured may be held liable by reason of:
(1) Causing or contributing to the intoxication of any
person;
(2) The furnishing of alcoholic beverages to a person
under the legal drinking age or under the influence
of alcohol; or
(3) Any statute, ordinance or regulation relating to
the sale, gift, distribution, or use of alcoholic bever-
ages.
This exclusion applies only if you are in the business
of manufacturing, distributing, selling, serving, or
furnishing alcoholic beverages.
No. 12-1355 7
Phusion contends that the district court erred in its finding
that “[t]he plain language of [the] exclusion is only susceptible
to one reasonable interpretation: all suits based on allegations
that Phusion’s products caused someone to become intoxi-
cated, leading to personal injury, are excluded under both
policies.” Phusion argues that the district court read the
exclusion too broadly; instead a plain reading of the provision
would lead to the conclusion that it is not applicable in
Phusion’s case.
Liberty, on the other hand, contends that Phusion is
attempting to create a false causation issue by drawing a
distinction between the phrases “arising out of” and “by
reason of.”
Even if there might be some difference between “arising out
of” and “by reason of” in some instances, Phusion has failed to
articulate how the phrase “by reason of” would limit the scope
of the Liquor Liability Exclusion in this case. By Phusion’s
contention, the phrase “arising out of” is “both broad and
vague,” Burlington Northern R.R. Co. v. Illinois Emcasco Ins., 511
N.E.2d 776, 779 (Ill. App. 1987), whereas, “by reason of,” as
written in Liberty’s insurance policies, requires a “direct,
causal relationship” between Phusion’s products and the
personal injury, Crum and Forster Managers Corp. v. Resolution
Trust Corp., 156 Ill.2d 384, 393 (1993). We are not persuaded
that the Illinois courts have recognized such a difference. The
two cases, Burlington Northern R.R. and Crum and Forster
Managers used different language to describe the effects of
those phrases, but neither case actually confronted both phrases
and found a meaningful difference. Like the district court, we
8 No. 12-1355
find that the language of the exclusion is clear and unambigu-
ous.
Duty to Defend
The Illinois Supreme Court has established a general
guideline for determining whether an insurer has a duty to
defend its insured. Northbrook Prop. and Cas. Co. v. Transp. Joint
Agreement, 194 Ill.2d 96, 97 (2000). Reversing the appellate
court, the Illinois Supreme Court interpreted the scope of an
automobile exclusion in a commercial general liability policy
to hold that an insurer had no duty to defend against numer-
ous lawsuits arising from a collision between a train and a
school bus. Id. The court explained that:
To determine an insurer’s duty to defend its insured,
a court must look to the allegations of the underly-
ing complaints. If the underlying complaints allege
facts within or potentially within policy coverage,
the insurer is obliged to defend its insured even if
the allegations are groundless, false, or fraudulent.
An insurer may not justifiably refuse to defend an
action against its insured unless it is clear from the
face of the underlying complaints that the allega-
tions fail to state facts which bring the case within,
or potentially within, the policy’s coverage.
Id. at 98 (citations omitted). The Northbrook court emphasized
that for the automobile exclusion to not apply, and the insured
to be within policy coverage, the underlying complaint must
allege facts that are “wholly independent” from the event that
led to the injury. Id. at 99. Allegations of inadequate planning,
inadequate inspection, and failure to warn were “nothing more
No. 12-1355 9
than rephrasings of the fact” that students’ injuries arose from
the operation of a motor vehicle. Id. The Illinois Supreme Court
has never considered the applicability or scope of a liquor
liability exclusion as applied to a liquor manufacturer. We
think the Illinois Supreme Court would likely extend the
reasoning of Northbrook to this issue and would reject
Phusion’s efforts to disguise the role that intoxication allegedly
played in the underlying cases.
We are not persuaded by Phusion’s argument that its
additional wrongdoing of adding energy stimulants to its
drinks somehow invokes Liberty’s duty to defend. For this
proposition, Phusion relies on several “dram shop” cases that
interpreted similar liquor liability exclusions. See, e.g., Beukema
v. Yomac Inc., 284 Ill.App.3d 790, 791 (1996). But, the reasoning
in the dram shop cases does not apply here for a couple
reasons. First, Phusion does not face dram shop exposure; it
sells through third party distributors and does not directly
serve alcohol to patrons. 235 ILCS 5/6-21 (2006). Second, dram
shop cases in which courts have not applied the exclusion
involve a separate negligent action performed by an agent of
the insured after the furnishing of alcohol. Penn-America Ins. v.
Peccadillos Inc., 27 A.3d 259 (Pa. Super. Ct. 2011) (en banc);
Dennis v. Finish Line, Inc., 636 So. 2d 944 (La. App. 1994).
Phusion’s act of adding stimulants to Four Loko occurred
before the product was ever consumed.
We find that Colony Ins. Co. v. Events Plus, Inc., 585 F. Supp.
2d 1148 (D. Ariz. 2008) is particularly instructive for Phusion’s
circumstances. The Colony court found that an insurer did not
have a duty to defend against a negligence action in which the
insured hosted a “Flugtag” event where Red Bull and vodka
10 No. 12-1355
cocktails were served. Id. at 1158. The insured was one of a
number of entities that organized, hosted, and supervised the
event, but the complaint did not include any allegations that
the insured directly served any alcohol. Id. at 1150. The
underlying lawsuit arose when Mr. Fahlman, who attended the
event, was “served numerous Red Bull/Vodka cocktails …
became severely intoxicated, proceeded to leave the event by
car, drove his Ford Mustang through a red light at the intersec-
tion of Apache Boulevard and Price Road, and collided with a
motorcycle driven by Officer Targosz.” Id. The insured’s
commercial general liability policy included a liquor liability
exclusion verbatim to the language used in Phusion’s policies.
The court reviewed the allegations in the underlying complaint
to determine if there was “a single allegation of tortious
conduct that is divorced from the serving of alcohol.” Id. at
1155. It concluded that there was not. Id. at 1156. The court
stated that the secondary negligence claims such as negligent
hiring and supervision were not distinct from the furnishing
of alcohol, “but were, in fact, inextricably intertwined.” Id. at
1155. Similar to Northbrook, the court emphasized that to “allow
the parties to render such exclusions essentially meaningless
through artful pleadings [] would allow them to circumvent
the terms and intent of the policy and its exclusions.” Id.; see
also Property-Owners Ins. Co. v. Ted’s Tavern, Inc., 853 N.E.2d
973, 983 (Ind. Ct. App. 2006) (creative pleadings cannot procure
coverage when the immediate and efficient cause of the injury
was precipitated by the service of alcohol). This Court is
confident that Illinois would adopt the analysis applied in
Colony.
No. 12-1355 11
Despite the fact that alcohol and stimulants are premixed
in every can of Four Loko, Phusion argues that the underlying
complaints are “stimulant liability cases,” not liquor liability
cases. The thrust of Phusion’s argument is that its choice to
add stimulants to its Four Loko product is an additional
wrongdoing that amounts to a separate allegation outside of
the Liquor Liability Exclusion, and is actually within the
coverage of Liberty’s insurance policies. Liberty contends that
the Liquor Liability Exclusion should apply to Four Loko the
same way that it applies to all other alcoholic beverages and
the addition of stimulants is irrelevant in determining its duty
to defend. We agree with Liberty.
The lack of discussion in Colony regarding the energy
stimulating ingredients of Red Bull is also instructive for the
issue of “stimulant liability.” To make its Four Loko beverage,
Phusion premixes malt liquor with some of the same stimu-
lants found in Red Bull. Allegedly, the original formula of Four
Loko contained the alcohol content equivalent to five or six 12-
ounce cans of beer, the caffeine equivalent to two cups of
coffee, guarana, taurine, wormwood (the active ingredient in
absinthe), carbonation, sugar, and natural and artificial flavors.
The Red Bull and vodka cocktails at issue in Colony were a
mixture of an energy drink and vodka. 585 F. Supp. 2d at 1150.
A can of a Red Bull energy drink contains stimulants such
as caffeine, B-group vitamins, sucrose, glucose, and taurine.
Red Bull, http://energydrink.redbull.com/ingredients-red-bull
(last visited Nov. 13, 2013). The Colony court did not consider
the effects of these stimulants in its decision that the liquor
liability exclusion applied. Four Loko is arguably more potent
and more intoxicating than Red Bull and vodka cocktails.
12 No. 12-1355
Additionally, because of the very nature of the Four Loko
product, the stimulants and alcohol cannot be separated. The
presence of energy stimulants in an alcoholic drink has no legal
effect on the applicability of a liquor liability exclusion. The
supply of alcohol, regardless of what it is mixed with, is the
relevant factor to determine whether an insured caused or
contributed to the intoxication of any person. While Phusion’s
choice of premixing energy stimulants and alcohol to make its
Four Loko product might not have been a very good one, it
does not amount to tortious conduct that is divorced from the
serving of alcohol.
The secondary negligence claims of the four underlying
actions are nothing more than rephrasings, or artful pleadings
that are not wholly independent from Phusion’s furnishing of
alcohol. The McCarroll and Rivera complaints support this
conclusion. The plaintiffs in the two cases were passengers in
the same car involved in the same drunk driving accident.
However, the Rivera complaint has five claims against Phusion,
including the claims of failure to warn and a violation of
FDUTPA, which are more tenuous to the incident. While the
McCarroll complaint only has two causes of action, each claim
has numerous theories of how Phusion breached its standard
of care. Even though the cases arose out of the same incident,
the allegations are very different. To conclude that Liberty has
a duty to defend one case and not the other would be absurd.
Likewise, to allow these claims to stretch into allegations that
are within Liberty’s coverage would circumvent the intent of
the Liquor Liability Exclusion in its policies. In each of the four
underlying complaints, none of the claims against Phusion are
distinct from Phusion’s act of furnishing alcohol. Therefore,
No. 12-1355 13
Liberty does not have the duty to defend Phusion in the Keiran,
McCarroll, Rivera, or Rupp lawsuits.
If Phusion wanted insurance coverage for incidents that
occurred after someone imbibed its alcoholic concoctions, the
time to make that decision was when it purchased insurance.
Phusion could have requested additional liquor liability
coverage and paid additional premiums for it. They did not.
CONCLUSION
The Liquor Liability Exclusions in the Netherlands and
Indiana policies are unambiguous and apply to Phusion. This
Court holds that the allegations of simple negligence raised by
the plaintiffs in the underlying complaints are not sufficiently
independent from the allegations that Phusion caused or
contributed to the intoxication of any person. The Netherlands
Insurance Company and Indiana Insurance Company do not
have the duty to defend Phusion against the four underlying
lawsuits. The district court’s opinion is AFFIRMED.