James River Insurance Company v. Fortress Systems, LLC

Case: 13-10564 Date Filed: 06/24/2014 Page: 1 of 11
[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
_________________________
No. 13-10564
_________________________
D.C. Docket No: 0:11-cv-60558-JIC
JAMES RIVER INSURANCE COMPANY,
Plaintiff-Counter Defendant-Appellee,
versus
FORTRESS SYSTEMS, LLC,
Defendant-Appellant,
BODYWELL NUTRITION, LLC,
Defendant-Counter Claimant-Appellant.
________________________
Appeal from the United States District Court
for the Southern District of Florida
_______________________
(June 24, 2014)
Before MARCUS, Circuit Judge, and PROCTOR * and EVANS, ** District Judges.
*
The Honorable R. David Proctor, United States District Judge for the Northern District
of Alabama, sitting by designation.
**
The Honorable Orinda D. Evans, United States Senior District Judge, for the Northern
District of Georgia, sitting by designation.
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PER CURIAM:
This is an appeal from a final judgment under Federal Rule of Civil
Procedure 56 in favor of James River Insurance Company on its claim for
declaratory relief seeking a determination that it has no obligation to defend or
indemnify its insured, Fortress Systems, LLC (“FSI”), in an underlying lawsuit,
Bodywell Nutrition LLC v. Fortress Systems, LLC, filed in the Southern District of
Florida (the “underlying case”). We are called upon to address the effect of an
Auto, Aircraft, and Watercraft Exclusion (otherwise known as the “Absolute Auto
Exclusion”) contained in the parties’ Commercial General Liability policy. After
careful review and with the benefit of oral argument, we affirm.
I. BACKGROUND
As this appeal involves a coverage question, we begin by reviewing the
relevant facts of the underlying case. Bodywell is a sports nutrition and dietary
supplement company. It contracted with FSI, a dietary supplement manufacturer,
to manufacture a powder-form drink called First Order, which is designed to be
soluble in liquid. They agreed that FSI would not only manufacture the product,
First Order, but also arrange to ship the product to Bodywell’s distributors. Upon
its delivery, however, it was discovered that the product made and shipped by FSI
was defective because the powder clumped together and was insoluble. FSI had
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contracted out the delivery of the product to certain shipping companies, but those
companies used vehicles without proper cooling systems.
Bodywell filed suit against FSI and made claims for breach of express
warranty, breach of implied warranty of fitness for a particular purpose, and breach
of implied warranty of merchantability. Bodywell later amended its complaint to
add an additional claim for negligent shipping/transport of First Order by FSI’s
subcontractors. As part of that claim, Bodywell asserted that FSI’s shippers “either
used transport vehicles that were not temperature-controlled or did not use any
temperature-controlling capabilities that were available in those vehicles.”
FSI had previously been issued a Commercial General Liability Insurance
(“CGL”) Policy with James River. FSI tendered the suit to James River for a
defense under the CGL policy; however, James River denied coverage.
After James River denied coverage for Bodywell’s lawsuit against FSI,
Bodywell and FSI entered into a settlement agreement in the underlying case
which provided, among other things, that: (1) the parties would file a stipulation of
settlement and joint motion for entry of final judgment requesting that the court
enter a final judgment in Bodywell’s favor only on the negligent shipping/transport
claim, in the amount of $10,450,000; (2) Bodywell would dismiss with prejudice
its remaining claims against FSI; and (3) FSI would assign its right to pursue its
claim under the James River CGL policy to Bodywell.
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Thereafter, James River filed this action against both FSI and Bodywell
(hereinafter “the Insureds”) which, among other things, 1 sought a declaration that
James River did not owe coverage to FSI under the insurance policy. James River
moved for summary judgment. James River argued that there is no coverage for
the claims against FSI because they fall within several coverage exclusions in the
CGL policy. The Insureds also filed their own motion for summary judgment
seeking a determination that James River had a duty to defend and indemnify FSI
in the underlying lawsuit. They argued that none of the exclusions applied and that
the claims against FSI were covered under a “products-completed operations
hazard” (“PCOH”) provision in the policy. The District Court granted summary
judgment for James River concluding, among other things, that the damage to the
product, First Order, fell within the Absolute Auto Exclusion. It further held that
the PCOH definition did not provide coverage, nor did it create any ambiguity in
the policy.
On appeal, Bodywell and FSI make a number of arguments, including their
contention that the Absolute Auto Exclusion is ambiguous and, therefore,
unenforceable in light of the PCOH provision.
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James River’s complaint also alleged that the claimed damages fell within several
exclusions to coverage, FSI is not covered because it breached the cooperation clause of the
policy, and asked the court to find, in the alternative, that coverage is limited by certain
amendments to the policy. In light of our holding on the Absolute Auto Exclusion, we need not
address these additional issues.
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II. THE RELEVANT POLICY PROVISIONS
The CGL policy at issue in this matter contains several sections that are
relevant to the parties’ dispute: Section I - Coverages; Section II - Who is an
Insured; Section III - Limits of Insurance; Section IV - Commercial General
Liability Conditions; Section V - Extended Reporting Periods; and Section VI -
Definitions. Within Section I, there are three types of Coverages: Coverage A,
Bodily Injury and Property Damage; Coverage B, Personal and Advertising Injury
Liability; and Coverage C, Medical Payments. Section A contains certain
Exclusions, one of which is the Absolute Auto Exclusion. The applicable
exclusion at issue in this case is an endorsement which replaces the Absolute Auto
Exclusion in the standard CGL policy and provides as follows:
1. SECTION I - COVERAGES, COVERAGE A.
BODILY INJURY AND PROPERTY DAMAGE
LIABILITY, 2. Exclusions, paragraph g. is deleted and
replaced with the following:
g. Aircraft, Auto Or Watercraft
“Bodily injury” or “property damage” arising out of the
ownership, maintenance, use or entrustment to others of
any aircraft, “auto” or watercraft. Use includes operation
and “loading or unloading” which includes the handling
and placing of persons by an insured into, onto or from
an “auto.”
This exclusion applies even if the claims against any
insured allege negligence or other wrongdoing in the
supervision, hiring, employment, training or monitoring
of others by that insured, if the “occurrence” which
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caused the “bodily injury” or property damage” involved
the ownership, maintenance, use or entrustment to others
of any aircraft, “auto” or watercraft.
By its plain language, the Absolute Auto Exclusion precludes coverage for
damage arising from the use of any auto, without exception. The term “use”
expressly includes not only operation, but also loading or unloading of an auto.
Despite this straight forward language, the Insureds argue that this exclusion is
made ambiguous and unenforceable because it is inconsistent with the PCOH
provision which FSI claims it purchased with a special premium. The PCOH
“provision” is found under Section IV, the “Definitions” section of the CGL
policy. It provides as follows:
16. “Products-completed operations hazard:”
a. Includes all “bodily injury” and “property damage”
occurring away from premises you own or rent and
arising out of “your product” or “your work”
except:
(1) Products that are still in your physical
possession; or
(2) Work that has not yet been completed or
abandoned. However, “your work” will be
deemed completed at the earliest of the
following times:
(a) When all of the work called for in
your contract has been completed.
b. Does not include “bodily injury” or “property
damage” arising out of:
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(1) The transportation of property, unless the
injury or damage arises out of a condition
in or on a vehicle not owned or operated by
you, and that condition was created by the
“loading or unloading” of that vehicle by
any insured . . . .
III. STANDARD OF REVIEW
We review de novo the district court's grant of summary judgment.
Holloman v. Mail–Well Corp., 443 F.3d 832, 836 (11th Cir. 2006). The
interpretation of a provision in an insurance contract is a question of law that is
also reviewed de novo. James River Ins. Co. v. Ground Down Eng'g, Inc., 540 F.3d
1270, 1274 (11th Cir. 2008).
IV. DISCUSSION
The District Court determined (and the parties do not dispute) that, under
Florida’s choice-of-law rules, Nebraska law applies because Florida adheres
strictly to the doctrine of lex loci contractus and the parties’ insurance policy was
executed in Nebraska. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487,
496 (1941) (holding that federal courts apply the choice of law rules of the state in
which they sit); State Farm Mut. Auto. Ins. Co. v. Roach, 945 So.2d 1160, 1163
(Fla. 2006) (explaining that Florida follows the rule of lex loci contractus and
applies the law of the place where the contract was made). Nebraska law holds that
the interpretation of an insurance policy is a question of law to be determined by
the court. See Olson v. Le Mars Mut. Ins. Co., 269 Neb. 800, 805 (Neb. 2005).
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Under Nebraska law, “[a]n insurer is obligated to defend if (1) the
allegations of the complaint, if true, would obligate the insurer to indemnify, or (2)
a reasonable investigation of the actual facts by the insurer would or does disclose
facts that would obligate the insurer to indemnify.” Mortg. Express, Inc. v. Tudor
Ins. Co., 278 Neb. 449, 460 (Neb. 2009). However, the insurer does not have a
duty to defend if the facts as pleaded by the insured and ascertained by the insurer
indicate that the insurer has no potential liability to the insured under the policy.
See Peterson v. Ohio Cas. Group, 272 Neb. 700, 709-10 (Neb. 2006).
The meaning of an insurance policy is a question of law, and when
reviewing a question of law an appellate court has an obligation to reach its own
conclusions independently of the determination made by the lower court. Poulton
v. State Farm Fire & Cas. Cos., 267 Neb. 569, 675 N.W.2d 665 (2004). The
Absolute Auto Exclusion at issue excludes coverage for “‘property damage’
arising out of the . . . use . . . of any . . . ‘auto.’” Nebraska courts hold that, in order
for an injury to “arise out of” the use of an auto, there must be “some causal
relationship between the injury and the use of the vehicle.” Farmers Union Coop.
Ins. v. Allied Prop. & Cas., 569 N.W.2d 436, 439 (Neb. 1997). As part of its
negligent shipping/ transport claim, Bodywell alleged that FSI’s shippers “either
used transport vehicles that were not temperature-controlled or did not use any
temperature-controlling capabilities that were available in those vehicles” and that
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it was this negligence that caused damage to the product. There is no factual
dispute about this allegation. Thus, we agree with the District Court that there was
a clear causal connection between the use of the shippers’ vehicles and the
subsequent property damage. That is, the damage arose out of the use of an
“auto,” and the Insureds’ coverage claim falls squarely within the Absolute Auto
Exclusion.
The Insureds argue that the District Court erred by ignoring what they
characterize as a conflict between the Absolute Auto Exclusion and the PCOH
“coverage.” They argue that this conflict created an ambiguity that should have
been resolved in favor of finding coverage. To the contrary, James River contends
that the PCOH provision is merely a definition as opposed to a coverage grant.
Thus, the dispositive question on appeal is whether there is tension between the
PCOH provision and the Absolute Auto Exclusion of the policy.
The court has not found, and the parties have not directed the court to, any
cases applying Nebraska law and which consider the interplay between a PCOH
provision and an Absolute Auto Exclusion. However, James River has cited a
decision from the Southern District of Florida which analyzed policy provisions
identical to the ones currently before the court. See Sparta Ins. Co. v. Colareta,
2014 WL 31986, *7 (S.D. Fla. 2014).
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In Sparta, Judge Rosenbaum held that a PCOH provision in an insurance
policy is not a free-standing form of coverage, but rather is only a definition which
applied to certain coverage under the policy (Coverage A), to which the Absolute
Auto Exclusion also applied. Sparta Ins. Co., 2014 WL 31986 at *7.
Because the Court has already determined that the products-completed
operations hazard does not provide separate coverage, the Court need
not address Defendants’ argument concerning the interplay between
the products-completed operations hazard and the Auto Exclusion.
The products-completed operations hazard is relevant only with
respect to Sparta’s limit of liability under the CGL. As a result, if
Defendants’ claims are otherwise subject to exclusion under Coverage
A, it matters not whether the claims fall under the products-completed
operations hazard, as coverage will have already been deemed
precluded.
Id.; accord Ash v. Gainsco, Inc., 23 Fed.Appx. 797, 798 (9th Cir. 2001); see also
Pennsylvania Nat. Mut. Cas. Ins. Co. v. Snider, 2014 WL 535651, *11 (M.D. Ala.
2014) (“Products-completed operations hazard” is listed in the Definitions section
of the Policy only and is not designated as a separate type of coverage.”)
James River has also cited Erickson v. LeRoy Carhart, Farm Bureau
Insurance Company, 1996 WL 674334 (Neb. App. 1996) for the proposition that a
PCOH provision is subject to the general exclusions in the policy. There, the
Nebraska Court of Civil Appeals concluded, consistent with the analysis of the
courts in Sparta and Pennsylvania National, that a PCOH provision is merely a
definition applicable to only one section of the policy, while exclusions are
applicable to the entire policy. Erickson, 1996 WL 674334 at *7.
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After careful review, we agree with the District Court that, under the plain
language of the CGL policy, there is no coverage available here because the
Absolute Auto Exclusion excludes that coverage. The PCOH provision in the
policy does not change this analysis. Because we find that the Absolute Auto
Exclusion applies as a matter of law, and that this issue is dispositive of this
appeal, we need not address the parties’ other arguments. 2
V. CONCLUSION
Based upon the plain language of the policy, Bodywell’s claims against FSI
are subject to the Absolute Auto Exclusion under Coverage A. The PCOH
definition does not operate to create an ambiguity in light of such a clear exclusion.
Therefore, the decision of the District Court is AFFIRMED.
2
For example, it is unnecessary for the court to address the Insureds’ argument that the
District Court erred in granting James River’s Motion for judicial estoppel. Even accepting the
Insureds’ argument that FSI’s negligence in loading caused the spoilage of First Order product,
the Absolute Auto Exclusion still applies because the loading relates to the use of an “auto.”
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