Auto-Owners Insurance Company v. Brenda McQueen

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 10-13012 APRIL 16, 2012
________________________ JOHN LEY
CLERK
D.C. Docket No. 2:07-cv-01041-MHT-CSC
AUTO-OWNERS INSURANCE COMPANY,
lllllllllllllllllllll Plaintiff - Appellee,
versus
L. THOMAS DEVELOPMENT, INC., et al.,
lllllllllllllllllll Defendants,
BRENDA MCQUEEN,
ALVIN MCQUEEN,
lllllllllllllllllllll Defendants - Appellants.
________________________
Appeal from the United States District Court
for the Middle District of Alabama
________________________
(April 16, 2012)
Before EDMONDSON and PRYOR, Circuit Judges, and HOPKINS,* District Judge.
PER CURIAM:
The issue in this appeal is whether Auto-Owners Insurance Company had no
duty, under the terms of a general commercial liability insurance policy, to
indemnify L. Thomas Development, Inc., for an arbitration award against
Development and its owner, Lowell Thomas, based on the negligent construction
of a home for Alvin and Brenda McQueen. The district court entered a judgment
in favor of Auto-Owners on the ground that a work-product exclusion in the policy
relieved Auto-Owners of its duty to indemnify Development for the entire award.
The district court erred in two ways. First, the district court did not consider
the applicability of an exception to the work-product exclusion for work
performed by subcontractors. Second, the district court applied the work-product
exclusion, which concerns only “property damage,” to the entire award, which is
for both “property damage” and “bodily injury.” We vacate the judgment in favor
of Auto-Owners and remand for further proceedings.
*
Honorable Virginia E. Hopkins, United States District Judge for the Northern District of
Alabama, sitting by designation.
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I. BACKGROUND
In 2004, Alvin and Brenda McQueen hired L. Thomas Development, Inc., to
construct a home in Montgomery County, Alabama. Development has one
employee, Lowell Thomas, who testified that Development subcontracted “one
hundred percent of [its] work.” The McQueens paid Thomas $440,000 for the
home at a closing in June 2004.
Development maintained a general commercial liability insurance policy
with Auto-Owners Insurance Company with a term that began on June 10, 2003,
and ended on June 10, 2004. Subject to several exclusions, the policy provided
coverage for “those sums that the insured becomes legally obligated to pay as
damages because of ‘bodily injury’ or ‘property damage,’” which must be “caused
by an ‘occurrence’ that takes place in the ‘coverage territory’ . . . during the policy
period.” The policy defined “bodily injury” as “bodily injury, sickness or disease
sustained by a person, including death resulting from any of these at any one
time.” The policy defined “property damage” as “[p]hysical injury to tangible
property, including all resulting loss of use of that property” and “[l]oss of use of
tangible property that is not physically injured.” The policy defined an
“occurrence” as “an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.”
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The policy also provided a work-product exclusion:
This insurance does not apply to:
....
l. “Property damage” to “[the insured’s] work” arising out of it or any
part of it and including in the “products-completed operations hazard”.
This exclusion does not apply if the damaged work or the work out of
which the damage arises was performed on [the insured’s] behalf by a
subcontractor.
The policy defined “[the insured’s] work” as “[w]ork or operations
performed by [the insured] or on [the insured’s] behalf[] and . . . [m]aterials, parts
or equipment furnished in connection with such work or operations,” as well as
“[w]arranties or representations made at any time with respect to the fitness,
quality, durability, performance or use of ‘[the insured’s] work.’” The policy also
stated that the “products-completed operations hazard” encompasses “all . . .
‘property damage’ occurring away from premises [the insured] own[s] or rent[s]
and arising out of . . . ‘[the insured’s] work’ except: (1) [p]roducts that are still in
[the insured’s] physical possession; or (2) [w]ork that has not yet been completed
or abandoned.”
Development began construction of the McQueens’ home before it received
a soil report, and the type of fill material it used for the foundation was unsuitable.
Fluctuations in moisture underneath the home caused the foundation to move,
which caused “extensive cracking of the interior walls, cracking of the exterior
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brick, warped structural beams, and malfunctioning of the septic system,”
The McQueens filed a complaint against Thomas, Development, and other
parties in state court. The complaint asserted claims for fraudulent inducement,
fraudulent suppression, conspiracy to commit fraud, breach of contract, breach of
warranty, and rescission. The McQueens later amended their complaint to add a
claim for negligent construction. Auto-Owners provided counsel for Development
in the state action under a reservation of rights, and intervened in July 2005 to
determine the extent of its duty to indemnify Development under the policy. The
state court dismissed the action in favor of arbitration.
Auto-Owners filed a declaratory judgment action against Development,
Thomas, and the McQueens in the district court. The McQueens moved to stay the
federal action pending the outcome of a mediation in the state court arbitration,
and the district court granted that motion. The McQueens reached a mediated
settlement with several of the defendants in the state court action, but not
Development or Thomas.
An arbitrator entered an award in favor of the McQueens and against
Development and Thomas, jointly and severally, in the amount of $600,000.
Auto-Owners was not a party to the arbitration. The arbitrator determined that
“the [McQueens] presented evidence in support of their claims for negligent
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construction of their home and personal injury.” The arbitrator concluded that
Development and Thomas had negligently constructed the McQueens’ home and
caused the McQueens damages in two ways: (1) the McQueens were left with a
valueless, unlivable home; and (2) because the McQueens were within a “zone of
danger” while they inhabited the home and experienced unhappiness, fear, and
embarrassment, they had suffered mental anguish. Neither Development nor
Thomas appealed the arbitration award, and the state court entered the arbitration
award as a final judgment.
The McQueens filed the arbitration award with the district court. After a
status conference in which the parties agreed to final submissions without oral
argument or trial, the district court ordered the parties to brief the merits of the
controversy. Auto-Owners argued that neither Thomas nor the McQueens could
establish “that any of the damages awarded [fell] within the definitions of
‘property damage’ or ‘bodily injury’” in the policy, that there had been no covered
“occurrence” to support coverage under the policy, and that if there had been a
covered “occurrence,” the work-product exclusion in the policy relieved Auto-
Owners of any duty to indemnify Development for the award. Auto-Owners also
explained that the only plausible apportionment of the award was $440,000 for
“property damage” and $160,000 for “bodily injury.” The McQueens argued that
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“[t]he entire [a]ward [was] covered under the [p]olicy,” because the arbitrator
“awarded damages for . . . property damage and personal injury, i.e.[,] the exact
things covered by the [p]olicy”. The McQueens also argued that the negligent
construction constituted a covered “occurrence,” and that the work-product
exclusion did not apply because “all of the work on [the McQueens’] home was
performed by subcontractors”.
The district court determined that Auto-Owners did not have a duty to
indemnify Development for any portion of the arbitration award. The district
court did not decide whether there had been a covered “occurrence,” but instead
based its decision on the work-product exclusion without addressing the exception
to that exclusion for work performed by subcontractors. The district court entered
a final judgment in favor of Auto-Owners.
II. STANDARD OF REVIEW
We review a declaratory judgment de novo where, as here, the district court
adjudicated an issue of law based on its interpretation of an insurance policy. See
Royal Ins. Co. of Am. v. Whitaker Contracting Corp., 242 F.3d 1035, 1040 (11th
Cir. 2001) (“‘The interpretation of an insurance contract is a question of law
subject to de novo review.’”) (quoting Galindo v. ARI Mut. Ins. Co., 203 F.3d
771, 774 (11th Cir. 2000)).
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III. DISCUSSION
The district court erred in two ways when it granted judgment in favor of
Auto-Owners based on the work-product exclusion. First, the district court did not
address the applicability of the exception to the work-product exclusion for work
performed by subcontractors. Second, the district court did not consider whether
and to what extent Auto-Owners was obligated to indemnify Development for the
portion of the arbitration award that compensated the McQueens for “bodily
injury.” We discuss each of these errors in turn.
The district court failed to address an exception to the work-product
exclusion that applies when “the damaged work or the work out of which the
damage [arose] was performed on [the insured’s] behalf by a subcontractor.” The
McQueens argued that this exception applies, and Thomas testified that
Development “subcontract[ed] one[-]hundred percent of [its] work.”
The district court also applied the work-product exclusion, which concerns
coverage for “property damage,” even though the arbitration award compensated
the McQueens for both “property damage” and “bodily injury.” The following
findings by the arbitrator address both the McQueens’ “property damage” and
“bodily injury”:
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[O]verwhelming evidence of the problems with the [McQueens’] home
was presented[,] . . . includ[ing] extensive cracking of the interior walls,
cracking of the exterior brick, inoperable doors, walls that float from the
foundation, sludge flowing into bathtubs because of problems with the
septic system, and warped structural beams in the attic. Moreover, the
[McQueens] both testified that they suffered because of the problems
with their home. Mrs. McQueen testified that she feared the home
would collapse, that she was so embarrassed by the home that she did
not fill [sic] comfortable having family stay there, and that she, for the
most part, now resides and works in Georgia because of her unhappiness
and fear related to her home.
The arbitrator also found that “[n]ot only was the [McQueens’] home . . .
rendered virtually uninhabitable, but more importantly, because they were residing
in the home, the [McQueens] were within a zone of danger,” which entitled them
to recover damages for mental anguish. Auto-Owners conceded in the district
court that mental anguish constitutes “bodily injury” under Alabama law. “Under
the Full Faith and Credit Act, 28 U.S.C. § 1738, a federal court must ‘give
preclusive effect to a state court judgment to the same extent as would courts of
the state in which the judgment was entered,’” Brown v. R.J. Reynolds Tobacco
Co., 611 F.3d 1324, 1331 (11th Cir. 2010) (quoting Kahn v. Smith Barney
Shearson Inc., 115 F.3d 930, 933 (11th Cir. 1997)), and “[i]n Alabama, as
elsewhere, an arbitration award ‘partakes of the nature of a judgment or decree of
a competent court,’” Old Republic Ins. Co. v. Lanier, 790 So. 2d 922, 928 (Ala.
2000) (quoting Glens Falls Ins. Co. of N.Y. v. Garner, 229 Ala. 39, 41, 155 So.
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533, 534 (1934)). Because the arbitration award compensated the McQueens for
both “property damage” and “bodily injury” under the policy, the district court
erred when it entered judgment in favor of Auto-Owners on the basis of the work-
product exclusion alone.
IV. CONCLUSION
We VACATE the opinion of the district court and REMAND for further
proceedings.
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