Busch Properties, Inc. v. National Union Fire Insurance

United States Court of Appeals
For the Eighth Circuit
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No. 14-3699
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Busch Properties, Inc.
lllllllllllllllllllll Plaintiff - Appellant
v.
National Union Fire Insurance Company of Pittsburgh, PA.
lllllllllllllllllllll Defendant - Appellee
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Appeal from United States District Court
for the Eastern District of Missouri - St. Louis
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Submitted: September 24, 2015
Filed: February 24, 2016
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Before MURPHY, MELLOY, and SMITH, Circuit Judges.
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SMITH, Circuit Judge.
Busch Properties, Inc. ("Busch") sued National Union Fire Insurance Company
("National Union") after National Union denied coverage for Busch's expenditures
to remediate mold in the Kingsmill Resort condominium complex that it managed.
National Union denied coverage because it concluded that Busch had not become
legally obligated to make the repairs. This case requires us to determine, under
Missouri law, whether National Union could lawfully deny coverage under the
policies that provide coverage if Busch "become[s] legally obligated to pay as
damages for liability imposed upon the Insured by law," "becomes legally obligated
to pay by reason of liability imposed by law," or incurs "liability assumed by the
Insured under contract." The district court1 concluded that there was no coverage for
the remediation payments. Busch appeals, arguing that National Union should pay the
cost of mold removal. We affirm.
I. Background
The Kingsmill Resort condominiums are located near Williamsburg, Virginia.
Although the condominiums are privately owned, Busch acts as property manager and
rental agent for the condominium owners. Busch's management duties arise from two
contracts: the first with each unit owner and the second with each condominium
association. Under these agreements, Busch is obligated to pay for all required labor
and materials in the upkeep of the complex. In return, Busch receives a large portion
of the rental revenues.
As property manager, Busch installed vinyl wallpaper in the units.
Unfortunately, in the early 2000s, it became apparent that vinyl wallpaper, like that
used by Busch, trapped moisture inside walls, providing a fertile environment for
mold. The Kingsmill Resort was no exception. Busch employees discovered mold in
mid-2003, and by October of that year, Busch concluded that the entire resort
required remediation.
Busch immediately notified unit owners of its findings and set out a plan
whereby Busch would close the resort and remediate the mold at its own expense.
The remediation project required Busch to empty the units of all personal property,
1
The Honorable Stephen N. Limbaugh, Jr., United States District Judge for the
Eastern District of Missouri.
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remove or clean all affected building materials, and restore the units to a livable
condition. Given the scale of the project and its certain inconvenience to the property
owners, Busch sought express consent from unit owners to proceed as planned. Busch
drafted a consent form, which it distributed to the owners. The consent form
acknowledged that Busch would pay the entire cost for the mold abatement and
property repair. But it also provided that Busch admitted no liability for the presence
of the mold and was not required to proceed with the remediation if it chose not to.
The consent form did not purport to release any claims that unit owners may have had
against Busch.
Prior to the mold discovery, Busch began renovating the complex. The updated
units could be rented out at a higher rate and would thus provide more rental revenue.
When Busch determined that the entire resort required remediation, it concluded that
the post-abatement rebuild provided a logical opportunity to update the units during
the process. Busch therefore sought financial contribution from unit owners to update
their units. Busch asked owners for the additional financial contribution required in
the consent form.
Busch received each owner's consent based on the consent form and decided
to proceed. While two unit owners and a condominium association had expressed
some concerns, no one asserted any claims or filed any lawsuits against Busch. Thus,
apart from the consent form, Busch did not enter into any agreements with unit
owners or condominium associations to settle the matter and proceed. Busch began
remediation by November 25, 2003, and it was substantially completed by June or
July of 2004.
After the remediation project was underway, Busch notified National Union,
its umbrella liability insurance carrier, that it had discovered the mold and had begun
remediation at its own expense. National Union had issued two general commercial
liability policies to Busch, one covering the period from September 1, 1994, to July
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1, 2003, and another covering the period from July 1, 2003, to July 1, 2004. After a
long-delayed investigation, in June 2008, National Union questioned whether its
policies covered the remediation undertaken by Busch. National Union sent Busch
a letter that explained that National Union did not have evidence that Busch was
legally obligated to pay damages or had incurred liability imposed by law in
connection with the mold remediation, as was required by both policies. Busch filed
this suit in December 2012, claiming breach of contract and vexatious refusal to pay.
The district court granted summary judgment to National Union, finding that
"[w]ithout a settled claim or a settlement or judgment arising from a lawsuit, [Busch]
cannot show it was 'legally obligated to pay by reason of liability imposed by law.'
As a result, there is no coverage under the insurance policies." Additionally, it found
that Busch's promise to remediate in the consent form did not trigger coverage under
the policy language "'liability assumed by the Insured by contract'" because "[t]he
Consent, which was submitted to the owners, expressly stated it did not obligate
[Busch] to remediate the mold, did not constitute an acknowledgment or admission
of liability, and did not include a release or settlement of any potential claim the
property owner might have against [Busch]." Finally, it found that "[Busch] has not
presented any evidence in support of its claim of equitable estoppel." Busch appeals.
II. Discussion
On appeal, Busch argues that the district court erred in granting summary
judgment on the breach-of-contract claim because it had a legal obligation imposed
by law and, in the alternative, that it had assumed liability under contract.
A. Standard of Review
"'We review de novo a district court's interpretation of an insurance contract
and its decision to grant summary judgment.'" Patterson v. Mut. of Omaha Ins. Co.,
743 F.3d 1160, 1163 (8th Cir. 2014) (quoting Land O' Lakes, Inc. v. Emp'rs Ins. Co.
of Wausau, 728 F.3d 822, 827 (8th Cir. 2013)).
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B. Busch's Legal Obligation Was Not Imposed by Law
There are two insurance policies at issue in this case. National Union issued the
first policy in 1994. The 1994 policy obligates National Union
[t]o pay on behalf of the Insured that portion of the ultimate net loss in
excess of the retained limit as hereinafter defined, which the Insured
shall become legally obligated to pay as damages for liability imposed
upon the Insured by law, or liability assumed by the Insured under
contract because of (i) personal injury, (ii) property damage, or (iii)
advertising liability, as defined herein caused by an occurrence.
(Emphasis added.) In 2003, National Union issued the second policy to Busch. The
2003 policy provided,
We will pay on behalf of the Insured those sums in excess of the
Retained Limit that the Insured becomes legally obligated to pay by
reason of liability imposed by law or assumed by the Insured under an
Insured Contract because of Bodily Injury, Property Damage, Personal
Injury or Advertising Injury that takes place during the Policy Period
and is caused by an Occurrence happening anywhere in the world.
(Emphasis added.) The phrase "become legally obligated to pay as damages for
liability imposed upon the Insured by law" and its successor phrase "becomes legally
obligated to pay by reason of liability imposed by law" are the focus of this case. The
district court held that the words "legally obligated" required Busch to bring forward
either a settlement agreement or a court judgment. Busch has appealed, arguing that
"National Union's policy language nowhere requires a settlement agreement or
judgment as a condition of coverage."
The district court and both parties look to the Missouri Supreme Court's
opinion in D.R. Sherry Construction, Ltd. v. American Family Mutual Insurance Co.,
316 S.W.3d 899 (Mo. 2010) (en banc), as controlling precedent. In that case, a
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construction company, Sherry, built a house that developed serious foundation
problems due to settling. Id. at 901–02. The purchaser of the home discovered the
problem and demanded—including threatening to file a lawsuit—that Sherry
repurchase the home. Id. at 902. Sherry repurchased the home pursuant to a settlement
agreement with the purchaser. Id. When Sherry's insurance company refused to pay
Sherry's claim, Sherry filed suit. Id. The insurance contract upon which Sherry filed
its claim obligated the insurance company to "pay those sums that the insured
becomes legally obligated to pay as damages because of . . . 'property damage.'" Id.
at 903 (quotation omitted).
In analyzing the question of insurance coverage, the court addressed the
insurer's argument that "there is no coverage because Sherry was not 'legally
obligated' to repurchase the home." Id. at 906. First, the court noted that "[a]fter
American Family informed Sherry that it would not undertake further investigation
[of] the claim until the homeowners filed a lawsuit, Sherry repurchased the home
pursuant to a settlement agreement." Id. Then the court held that "[a] settlement
agreement is a contract that creates legally enforceable obligations. Because of the
settlement agreement, Sherry legally was obligated to pay damages to the
homeowners." Id.
Below, the district court construed Sherry to hold that "Missouri law . . .
recognizes a claim and a settlement agreement as sufficient to establish that an
insured is 'legally obligated to pay damages.'" We agree. But Busch has not asserted
the existence of a settlement agreement in this case. The question thus arises whether
Busch's obligations to the unit owners and condominium associations constitute a
"legal obligation to pay" "as damages for liability imposed upon the Insured by law"
or "by reason of liability imposed by law" as required by the insurance policies at
issue. The district court concluded that Busch was, at a minimum, required to present
a settlement agreement to trigger coverage.
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On appeal, Busch argues that "coverage exists because it undertook
remediation efforts based upon its existing legal obligations sounding in contract and
tort" and that "[t]he fact that these obligations were not reduced to a settlement
agreement or judgment rendered them no less obligatory or enforceable." In short,
Busch asserts that "[w]hat matters is not the form of settlement or judgment but rather
whether Busch Properties faced liability to unit owners and the associations 'for the
damage it caused.'" We need not resolve this interesting question of Missouri law,
however, because Busch cannot satisfy even the standard that it advances. Busch
asserts that it had—and fulfilled—a preexisting legal obligation when it initiated the
mold remediation. If Busch acted to satisfy a preexisting contractual duty, then its
remediation efforts did not truly spring from "liability imposed by law" but from a
duty it voluntarily assumed.
Both insurance policies limit coverage to legal obligations based upon "liability
imposed by law." (Emphasis added.) This phrase suggests that the insured's legal
obligation has been placed upon it not by assent but by declaration of law. See
Impose, Black's Law Dictionary (10th ed. 2014) (defining "impose" as "[t]o levy or
exact (a tax or duty)"); Impose, Merriam-Webster's Collegiate Dictionary (11th ed.
2012) (including the definitions "to establish or apply by authority" such as "a tax,"
"new restrictions," or "penalties" and "to establish or bring about as if by force"). Tort
liability exemplifies a legal obligation that is "imposed by law." Tort, Black's Law
Dictionary (10th ed. 2014) (including the definition "[a] civil wrong, other than
breach of contract, for which a remedy may be obtained, [usually] in the form of
damages; a breach of a duty that the law imposes on persons who stand in a particular
relation to one another"); Tortious Liability, Black's Law Dictionary (10th ed. 2014)
(including the definition "[l]iability that arises from the breach of a duty that (1) is
fixed by the law"). And an involuntary legal obligation may be manifest in a
judgment or voluntarily recognized in a settlement agreement. See D.R. Sherry,
316 S.W.3d at 906.
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In contrast, other forms of legal obligation are not imposed by law; instead,
they are voluntarily incurred and recognized by law, such as a contract. Contract,
Black's Law Dictionary (10th ed. 2014) (including the definitions "[a]n agreement
between two or more parties creating obligations that are enforceable or otherwise
recognizable at law" and "[b]roadly, any legal duty . . . not imposed by the law of
tort"). As the First Circuit has observed, to hold otherwise would convert a
commercial liability insurance policy into a contract performance bond. See Lopez &
Medina Corp. v. Marsh USA, Inc., 667 F.3d 58, 65–70 (1st Cir. 2012) (surveying case
law from several circuit and district courts, along with insurance treatises, and
concluding that "the phrase, 'legally obligated to pay as damages,' in a CGL
provision . . . applies to tort and not contractual liability"). Thus, because Busch's
asserted legal obligation was not "liability imposed by law," it is not covered under
either insurance policy.
In this case, before the discovery of the mold, Busch secured two classes of
contractual agreements that obligated it to maintain the resort in exchange for a
substantial portion of rental revenues. First, the rental agreement between Busch and
each unit owner required Busch "to provide maintenance services . . . including labor,
parts and materials." Indeed, as Busch's president testified, "[e]verything that had to
do with the maintenance of the interior of the condominium units was managed by
Busch Properties," including cleaning mold found within the units and replacing the
wallcovering." Thus, when Busch discovered extensive mold-related property damage
affecting almost every unit in the resort, it could not turn a blind eye because "Busch
Properties was the responsible party for the units.'"
Second, as Busch admits, it "had an independent contractual obligation to
maintain the resort's common areas under an enforceable, oral agreement to serve as
property manager for the condominium associations." The common areas included
"all spaces except for the condominium interiors," including the HVAC system, attics,
crawl spaces, interior of shared walls, exterior siding, roofs, awnings, and sidewalks.
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Thus, Busch concedes that when it discovered significant property damage to the
common areas, including the HVAC system, attics, crawlspaces, and inside of the
walls, it "was legally required to fulfill its maintenance obligations or otherwise face
liability for breach." In short, pursuant to maintenance agreements with the unit
owners and the condominium associations, Busch has asserted that it had a
preexisting obligation to remediate the mold that it discovered.
Busch's actions in this case confirm that it considered itself obligated to
remediate the mold under its existing maintenance contracts. When Busch discovered
the mold, it immediately developed a plan to completely pay for mold remediation.
Busch rolled the mold removal into the renovation project that was already underway.
For instance, Busch secured additional, express consent from the unit owners for
Busch's specific mold remediation and renovation plan. Although the consent form
disclaimed Busch's liability for mold removal, it clearly promised to completely pay
for the remediation in its renovation process. Busch's actions are thus consistent with
its understanding that it had a preexisting legal obligation to remove the mold
pursuant to its maintenance agreements.
In sum, the district court correctly concluded that Busch's payments for mold
remediation are not covered under its policy with National Union because its legal
obligation to remediate the mold did not spring from "liability imposed by law."2
C. Busch Did Not Assume Liability Under Contract
The 1994 insurance policy provides coverage for sums that "the Insured shall
become legally obligated to pay as damages for . . . liability assumed by the Insured
under contract." Busch argues that it assumed liability within the meaning of this
2
Because our holding does not require that we decide whether Missouri law
interprets the phrase "legally obligated" to require the existence of a settled claim or
court judgment, we need not address Busch's argument that National Union is
estopped from asserting its position on that issue.
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provision, pointing to its consent agreement with unit owners and its existing
maintenance agreements. National Union responds that this language provides
coverage for indemnity contracts, not contracts like the maintenance or consent
agreements. We agree.
We have not found any Missouri case law interpreting the meaning of this
language. But we have considered similar language in the context of a coverage
exclusion governed by Wisconsin law. In Ferrell v. West Bend Mutual Insurance Co.,
393 F.3d 786 (8th Cir. 2005), we considered a provision excluding coverage when
the insured was liable "'by reason of the assumption of liability in a contract or
agreement.'" Id. at 795 (citation omitted). We concluded that the provision "would
apply only if there were a contract or agreement between [a third party and the
insured] to assume liability for damages." Id. (Am. Family Mut. Ins. Co. v. Am. Girl,
Inc., 673 N.W.2d 65, 79–81 (Wis. 2004)). For support, we cited American Family,
which considered a provision excluding coverage for the "'assumption of liability in
a contract or agreement.'" 673 N.W.2d at 81. In that case, the Wisconsin Supreme
Court concluded that such language would only apply "where the insured has
contractually assumed the liability of a third party, as in an indemnification or hold
harmless agreement; it does not operate to exclude coverage for any and all liabilities
to which the insured is exposed under the terms of the contracts it makes generally."
Id.
The language at issue in this case is substantially similar to the provisions in
Ferrell and American Family. Busch's 1994 policy provides coverage for payments
made "as damages for . . . liability assumed by the Insured under contract." Indeed,
all three provisions include variations of the central operative words: liability,
assumed, and contract. And while Ferrell and American Family dealt with provisions
that excluded coverage and the provision at issue here provides coverage, each
provision uses similar language to define the kind of liability excluded or covered.
In the absence of other interpretive guidance from Missouri case law, Ferrell and
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American Family are helpful in understanding the kind of liability covered by the
provision at issue here.
We therefore conclude that the 1994 policy provides coverage in the context
of an indemnification or hold harmless agreement; it is not a wholesale adoption by
National Union of Busch's contract liability. Busch has not asserted the existence of
any indemnification or hold harmless contract. Accordingly, the district court
correctly concluded that Busch's maintenance or consent agreements do not trigger
coverage under the 1994 policy because those agreements do not constitute a legal
obligation to pay as damages for liability assumed by Busch under contract.
III. Conclusion
Accordingly, we affirm the final judgment of the district court.
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