Race City Fasteners, Inc. v. Selective Insurance

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 07-1528
RACE CITY FASTENERS, INCORPORATED,
Plaintiff - Appellee,
v.
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA,
Defendant - Appellant.
Appeal from the United States District Court for the Western
District of North Carolina, at Statesville. Richard L. Voorhees,
District Judge. (5:05!cv-00009)
Argued: March 20, 2008 Decided: May 21, 2008
Before TRAXLER, Circuit Judge, HAMILTON, Senior Circuit Judge, and
David R. HANSEN, Senior Circuit Judge of the United States Court of
Appeals for the Eighth Circuit, sitting by designation.
Affirmed by unpublished per curiam opinion.
ARGUED: Susan K. Burkhart, CRANFILL, SUMNER & HARTZOG, L.L.P.,
Raleigh, North Carolina, for Appellant. Mark A. Michael,
Charlotte, North Carolina, for Appellee. ON BRIEF: Robert C.
Gunst, Sr., GUNST & GUNST, Charlotte, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
Race City Fasteners, Inc. (Race City) filed this declaratory
judgment action seeking a declaration that Selective Insurance
Company of South Carolina (Selective) is required to pay it damages
under a Commercial General Liability Policy (the Selective CGL
Policy or the Policy) issued to Plasfab, Inc. (Plasfab), for a
default judgment in the amount of $714,414.96 obtained by Race City
against Plasfab. On cross-motions for summary judgment, the
district court granted summary judgment in toto in favor of Race
City. This timely appeal followed. We affirm.
I.
Race City, a North Carolina corporation, was formerly in the
business of anodizing engine parts especially designed for Nascar
racing.1 Plasfab is a Rhode Island corporation, which prior to
filing Chapter 7 bankruptcy in February 2004, was in the business
of the design, development, fabrication, and installation of manual
and automated metal finishing systems. Relevant to the present
appeal, Race City purchased an anodizing line from Plasfab to
anodize metal pistons on a mass basis, i.e., at least 1000 per
week, and to certain specifications that would allow the pistons to
1
Although Race City maintains its corporate status, it no
longer operates as an active business.
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be used in racing engines.2 Plasfab installed the anodizing line
in June 2001, at Race City’s facility in Mooresville, North
Carolina. Race City paid Plasfab the contract price of
$290,000.00.
On January 9, 2003, Race City filed a complaint against
Plasfab in the United States District Court for the Western
District of North Carolina (the Underlying Complaint). Relevant to
the issues on appeal, the Underlying Complaint alleged as follows:
6. During the course of discussions and negotiations
which led to Race City’s purchase of an anodizing
line from Plasfab, Race City specifically advised
Plasfab of its requirements for such a line. In
particular, Race City specifically advised Plasfab
that it needed a line to mass produce anodized
pistons, at least 1000 per week, that such pistons
would have to be anodized to specifications such
that they could be used in racing engines and that
any line it purchased would need to be compatible
with a computerized control system offered by
Metalast, a Nevada corporation with which Race City
had ongoing discussions as to the project.
2
“According to testimony provided in the
underlying action by Ron Anderson, consultant
for Race City, ‘Anodizing is an
electrochemical process by which we apply
electricity to an acid bath and it
deliberately rusts the aluminum, changing it
from aluminum to aluminum oxide.’ (8/19/03
Hr’g Tr. at 3.) The [a]nodizing process was
used by Race City to harden the area of the
piston exposed to the most temperature and
heat for engine combustion processes so that
the aluminum of the piston does not stick to
the ring. (Hr’g Tr. at 4-5.).”
(J.A. 626 n.2, District Court’s final Memorandum Opinion and
Order).
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* * *
9. The anodizing line was designed, manufactured and
installed by Plasfab. Race City relied entirely
and specifically on the expertise of Plasfab to
produce a line which would work as specified.
10. The line was installed in June of 2001 by Plasfab
at the Race City facility in Mooresville, North
Carolina, and Race City paid the contract price.
11. Based on the specific representation of Plasfab
that its line would work as required with the
Metalast control system, and in reliance thereon,
Race City entered into a License Agreement with
Metalast for the use of its proprietary control
system.
12. Race City also incurred substantial other expenses
in connection with the line, including the salary
of an employee hired to operate the line, the cost
of chemicals and other supplies, the cost of
unfinished pistons purchased to be anodized, and
various other items as the evidence will show.
13. While the line was being developed, manufactured,
installed and tested, Race City contacted numerous
prospective customers for the piston anodizing
services. The response of these prospective
customers was uniformly positive, and some of these
prospective customers actually sent pistons to Race
City to be anodized on a test basis. . . .
14. All of these efforts and expenses came to nothing.
The line furnished by Plasfab does not work as
promised and, on information and belief, cannot be
made to work as promised. Although the line is
capable of anodizing pistons, it can do so only on
an extremely limited basis.
15. After the line was installed and set up, Race City
employees, working with Metalast and Plasfab
personnel, spent months attempting to make the line
work as promised. Despite all these efforts, the
line has never successfully mass produced anodized
pistons. In fact, the highest number of pistons
which met specifications for any one anodizing
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cycle and which could be sold by Race City has been
two, as opposed to the promised 1000 per week.
(J.A. 319-21).
Based upon these allegations, Race City alleged four claims in
the Underlying Complaint: (1) breach of contract; (2) breach of
express warranty; (3) breach of implied warranties; and (4)
negligent design and manufacture. With respect to the negligence
claim, the Underlying Complaint alleged:
As a direct and proximate result of this negligence, Race
City has suffered damages including the contract price,
installation and operating expenses and the cost of
supplies and unfinished pistons. As noted above, pistons
furnished by third parties were anodized and made useless
and of no value using the Plasfab line.
(J.A. 321) (emphasis added).
On the afternoon of February 24, 2003, Plasfab tendered the
Underlying Complaint to Selective for defense under the Selective
CGL Policy. On the morning of February 26, 2003, Selective denied
Plasfab a defense and disclaimed any coverage under the Policy. At
the conclusion of default judgment proceedings before the district
court, on August 26, 2003, the district court entered a default
judgment against Plasfab in the amount of $714,414.96 (the
Underlying Action).3
Plasfab filed for Chapter 7 bankruptcy in February 2004. Race
City, standing in the shoes of Plasfab, subsequently filed the
3
The same district court judge who presided in the Underlying
Action also presided over the present declaratory judgment action.
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present declaratory judgment action against Selective, seeking a
declaration that Selective is required to satisfy the $714,414.96
default judgment pursuant to the Selective CGL Policy.
At this point, we set forth certain language of the Selective
CGL Policy, which is at issue on appeal.4 The initial coverage
clause provides, in relevant part:
We will pay those sums that the insured becomes legally
obligated to pay as damages because of . . . “property
damage” to which this insurance applies. We will have
the right and duty to defend the insured against any
“suit” seeking those damages. However, we will have no
duty to defend the insured against any “suit” seeking
damages for . . . “property damage” to which this
insurance does not apply.
(J.A. 210). The Policy only affords coverage for property damage
caused by an “occurrence” that takes place in the coverage
territory and during the policy period. Id.
The Policy defines “occurrence” as “an accident, including
continuous or repeated exposure to substantially the same general
harmful conditions.” (J.A. 222). The Policy Defines “property
damage” as:
a. Physical injury to tangible property, including all
resulting loss of use of that property. All such
loss of use shall be deemed to occur at the time of
the physical injury that caused it; or
4
The Selective CGL Policy is a standard 1994 commercial
general liability policy form drafted by the Insurance Services
Office, Incorporated (ISO). ISO forms are widely used in the
insurance industry. See French v. Assurance Co. of Am., 448 F.3d
693, 697 (4th Cir. 2006).
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b. Loss of use of tangible property that is not
physically injured. All such loss of use shall be
deemed to occur at the time of the “occurrence”
that caused it.
(J.A. 223).
In its Memorandum Opinion and Order granting summary judgment
in favor of Race City, the district court’s analysis went as
follows: (1) Rhode Island law applied to resolve the substantive
legal issues in the case; (2) along with other allegations
providing context, the allegation of the negligence claim set forth
in the Underlying Complaint that “pistons furnished by third
parties were anodized and made useless and of no value using the
Plasfab line,” (J.A. 321), alleged property damage, specifically
physical injury, caused by an occurrence within the Policy
language; (3) because the Underlying Complaint included allegations
that alerted Selective that one of the claims asserted might
potentially fall within the Policy coverage, Selective breached its
duty under the Policy to defend Plasfab in the Underlying Action;
(4) under Conanicut Marine Servs., Inc. v. Ins. Co. of North Am.,
511 A.2d 967 (R.I. 1986), Selective’s breach of its duty to defend
makes it liable for the full amount of the default judgment; and
(5) under Lavender v. State Farm Mut. Auto. Ins. Co., 450 S.E.2d 34
(N.C. Ct. App. 1994), and the third-party beneficiary doctrine,
Race City possessed the very same rights under the Policy as
Plasfab, and therefore, Race City may assert an estoppel defense
against Selective. Although the district court held that Rhode
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Island law governed the substantive legal issues in the case, it
stated that “[i]t appears there is no difference on any substantive
point of law between North Carolina and Rhode Island law. The
Court also looks to North Carolina law for guidance.” (J.A. 629
n.3, District Court’s final Memorandum Opinion and Order).
This timely appeal by Selective followed.
II.
We review de novo the district court’s grant of summary
judgment in favor of Race City, applying the same standard as did
the district court and construing the facts in the light most
favorable to Selective, the nonmoving party. See Holland v.
Washington Homes, Inc., 487 F.3d 208, 213 (4th Cir. 2007). Summary
judgment is appropriate when the evidence demonstrates that no
genuine issue of material fact exists and that the moving party is
entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c).
III.
The first issue on appeal is whether the Underlying Complaint
contained allegations triggering a duty to defend on the part of
Selective under the Policy. The parties agree that Rhode Island
law controls the substantive legal issues in this case. Under
Rhode Island law, an insurer’s duty to defend under a liability
policy is broader than its duty to indemnify. Mellow v. Medical
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Malpractice Joint Underwriting Assn. of R.I., 567 A.2d 367, 368
(R.I. 1989). Under Rhode Island law, it is well established that
an insurer’s duty to defend under a liability policy is triggered
when factual allegations contained in the underlying complaint
raise a reasonable possibility of coverage, regardless of whether
the plaintiff in the underlying tort action prevails on the merits.
Hingham Mut. Fire Ins. Co. v. Heroux, 549 A.2d 265, 266 (R.I. 1988)
(“As a general principle, this court will find that a duty to
defend arises when the complaint in the underlying tort action
contains facts sufficient to bring the case within or potentially
within the coverage of the policy, regardless of whether the
plaintiffs in the tort action will prevail on the merits.”). Any
doubts as to whether the underlying complaint alleges an event
covered under the policy must be resolved in favor of the insured.
Allstate Ins. Co. v. Russo, 641 A.2d 1304, 1306 (R.I. 1994).
As previously stated, the district court held that along with
other allegations providing context, the allegation of the
negligence claim set forth in the Underlying Complaint that
“pistons furnished by third parties were anodized and made useless
and of no value using the Plasfab line,” (J.A. 321), alleged
property damage (specifically physical injury to the pistons
furnished by the third parties) caused by an occurrence, within the
Policy language.
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In challenge to this holding, Selective primarily argues that,
while the Underlying Complaint alleged that the customers’ pistons
were made useless, the Underlying Complaint never directly alleges
that the customers’ pistons were physically damaged nor that the
pistons failed to meet contract specifications. Race City responds
that anodizing metal is a physical process, and therefore, when the
Underlying Complaint alleges that the “pistons furnished by third
parties were anodized and made useless and of no value using the
Plasfab line,” (J.A. 321), the Underlying Complaint is alleging
physical injury to tangible property of third parties.
We agree with Race City. Under a reasonable reading of the
entire Underlying Complaint, and in particular the allegation just
quoted regarding the pistons having no value, the Underlying
Complaint alleged physical injury to tangible property of third
parties within the language of the Policy. The import of the
allegations is that the anodizing process applied to the pistons
supplied by Race City’s customers was not successful, and
therefore, physically damaged such pistons. The pistons were no
longer in their unanodized state such that they could still be
properly anodized, nor were they in an anodized state to the degree
necessary to be useful. The situation is analogous to the botched
carving of a person’s name and address in a piece of wood intended
to be a sign. If the person’s name is misspelled or the address is
incorrectly stated, the wood is physically damaged and of no use
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for its intended purpose of correctly displaying the person’s name
and address.
Selective also argues that from a fair reading of the
Underlying Complaint, it would have no reason to believe that Race
City had reimbursed its customers for their damaged pistons in the
care, custody and control of Race City, thereby suffering actual
damage itself, since recovery of such reimbursement should be
alleged as a claim for indemnity or contribution. In support,
Selective relies on an unpublished Ninth Circuit case, Seagate
Technology, Inc. v. St. Paul Fire & Marine Ins. Co., 1995 WL 759217
(9th Cir. Dec. 22, 1995) (unpublished).
Selective’s argument is without merit. As long as the
allegations in the Underlying Complaint recite facts bringing the
damages alleged within the coverage of the Policy, Selective had a
duty to defend Plasfab regardless of Plasfab’s ultimate liability
to Race City. Progressive Cas. Ins. Co. v. Narragansett Auto
Sales, 764 A.2d 722, 724 (R.I. 2001) (pleadings test “requires the
trial court to look at the allegations contained in the complaint
and if the pleadings recite facts bringing the injury complained of
within the coverage of the insurance policy, the insurer must
defend irrespective of the insured’s ultimate liability to the
plaintiff”) (internal quotation marks omitted). Cf. American Fam.
Mut. Ins. Co. v. American Girl, Inc., 673 N.W.2d 65, 77 (Wis. 2004)
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(standard CGL policy’s basic coverage language does not distinguish
between losses actionable in tort or actionable in contract).
Of relevance, the negligence claim in the Underlying Complaint
alleged:
As a direct and proximate result of this negligence, Race
City has suffered damages including the contract price,
installation and operating expenses and the cost of
supplies and unfinished pistons. As noted above, pistons
furnished by third parties were anodized and made useless
and of no value using the Plasfab line.
(J.A. 321) (emphasis added). Contrary to Plasfab’s position, from
a fair reading of these allegations, along with other allegations
in the Underlying Complaint, one can reasonably infer that Race
City incurred expenses proximately caused by Plasfab’s negligence
in the form of reimbursing its customers for the cost of the
pistons such customers had put in Race City’s care, custody, and
control for the purpose of being anodized by the new Plasfab
anodizing line, but were nonetheless improperly anodized. This
circumstance materially distinguishes the present case from
Seagate, in which the underlying complaint could not be fairly read
to allege that the underlying plaintiff had actually incurred
expenses in the form of reimbursement to its customers for property
damage caused by the insured. Seagate, 1995 WL 759217 at *2.
In sum, the district court correctly held that, along with
other allegations that provided context, the allegations of the
negligence claim set forth in the Underlying Complaint that
“pistons furnished by third parties were anodized and made useless
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and of no value using the Plasfab line,” (J.A. 321), alleged
property damage caused by an occurrence, within the Policy
language.5
IV.
In the next and final issue on appeal, Selective argues that,
assuming arguendo Plasfab was liable to Race City for its costs in
reimbursing its customers for their damaged pistons used in the
testing process, its (Selective’s) liability should be limited to
$11,601.40.6 In its opening brief “Selective acknowledges that,”
under Conanicut, 511 A.2d at 967, “if an insurer improperly denies
a defense to an insured[,] an insured can recover the costs of a
settlement or judgment as damages for the insurer’s breach of
contract in failing to defend the insured,” but argues that this
5
In its appellate briefing, Selective argued that five
separate coverage exclusions in the Policy independently applied to
bar coverage of any damage to the test pistons provided to Race
City by third parties, and therefore, operated to defeat any duty
to defend Plasfab under the Policy in connection with such
allegedly damaged pistons. However, in response to specific
questioning from the bench at oral argument, counsel for Selective
expressly stated that Selective was only arguing that Exclusion b.,
which excludes coverage for damages “for which the insured is
obligated to pay damages by reason of the assumption of liability
in a contract agreement,” applied to defeat its duty to defend
Plasfab in connection with damage to the test pistons provided to
Race City by its customers. Selective’s argument regarding the
application of Exclusion b. is without merit.
6
Race City does not dispute Selective’s assertion that its
costs in reimbursing its customers for their damaged pistons used
in the testing process amounted to $11,601.40.
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rule does not operate in favor of a stranger to the Policy, such as
Race City.7 (Selective’s Opening Br. at 25). The rationale for
the rule in Conanicut is that the insurance company could have
avoided the entire problem simply by defending its insured under a
reservation of rights or by bringing a declaratory judgment action
against its insured on the question of coverage. Conanicut, 511
A.2d at 971 n.10.
The fatal problem with Selective’s argument that Race City, as
a stranger to the Policy, cannot avail itself of the rule in
Conanicut, is that a specific Rhode Island statute, as construed by
the Rhode Island Supreme Court, grants Race City the right to
proceed directly against Selective as if standing in the shoes of
7
We note that Selective, in its Reply Brief, relies upon
Emhart Indus., Inc. v. Home Ins. Co., 515 F. Supp. 2d 228 (D.R.I.
Sept. 26, 2007), to argue that Conanicut is no longer good law.
Having already expressly acknowledged the continued vitality of
Conanicut in its Opening Brief, Selective cannot be heard to argue
otherwise by raising such argument for the first time in its Reply
Brief. See Fed. R. App. P. 28(a)(9)(“[T]he argument [section of
appellant’s brief] . . . must contain . . . appellant’s contentions
and the reasons for them, with citations to the authorities and
parts of the record on which the appellant relies.”); Yousefi v.
INS, 260 F.3d 318, 326 (4th Cir. 2001) (alien petitioner waived
argument on appeal raised for the first time in his reply brief by
failing to raise it in his opening brief). This is so despite the
fact that Emhart was issued after Selective filed its Opening
Brief, because all of the cases and rationales that the district
court in Emhart relied upon to predict that the Rhode Island
Supreme Court would not apply Conanicut to the facts before it were
available to Selective at the time that Selective filed its Opening
Brief. Accordingly, this is not a situation where a Rhode Island
appellate court cast doubt upon the continued validity of Conanicut
after Selective had filed its opening brief. Moreover, without
going into detail, we note that the facts of Emhart are quite
distinguishable from the case at hand.
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Plasfab. Rhode Island General Laws § 27-7-2 provides, in relevant
part: “The injured party, . . . after having obtained judgment
against the insured alone, may proceed on that judgment in a
separate action against the insurer . . . .” R. I. Gen. L. § 27-7-
2. The Rhode Island Supreme Court has held that, for purposes of
this statute, the injured party (i.e., judgment creditor) stands in
the shoes of the insured (i.e., judgment debtor). Ogunsuada v.
General Acc. Ins. Co. of Am., 695 A.2d 996, 1000 (R.I. 1997).
While Selective argues that Race City, as a third-party
beneficiary of the Policy, is not able to assert any estoppel
rights that Plasfab may have against it (i.e., Selective) and
argues that an antiassignment clause in the Policy operates to
limit Race City to a third-party beneficiary status, the bottom
line is that § 27-7-2 is dispositive on the matter. Rhode Island
General Laws § 27-7-2, as interpreted by the Rhode Island Supreme
Court in Ogunsuada, permits Race City to sue Selective in a
derivative capacity, which means that Race City stands in the shoes
of Plasfab for purposes of the present declaratory judgment action
against Selective. We note that the district court did not rely
upon § 27–7-2 in rejecting Selective’s arguments on this issue, but
instead, relied upon North Carolina case law regarding third-party
beneficiary status. This fact is of no moment, because Selective
expressly agrees that Rhode Island law governs all substantive
legal issues in this case.
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In sum, the district court did not err in granting summary
judgment in favor of Race City.8
V.
In conclusion, we affirm the district court’s entry of
judgment in favor of Race City.
AFFIRMED
8
We note that Selective does not dispute that the default
judgment award of $714,414.96 is within the Policy’s property
damage limit.
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