Clarke Company, Limited v. American Family Mutual Ins. Co

United States Court of Appeals
For the Eighth Circuit
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No. 17-2418
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Clarke Company, Limited
Plaintiff - Appellant
v.
American Family Mutual Insurance Company
Defendant - Appellee
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Appeal from United States District Court
for the Southern District of Iowa - Des Moines
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Submitted: December 11, 2018
Filed: January 28, 2019
[Published]
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Before LOKEN, MELLOY, and ERICKSON, Circuit Judges.
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PER CURIAM.
Clarke Company, Limited (“Clarke”) commenced this lawsuit against its
insurer, American Family Mutual Insurance Company (“American Family”), alleging
American Family wrongfully denied coverage for defense and indemnity of a lawsuit
brought against Clarke in state court. The district court1 granted summary judgment
in favor of American Family. The claims as pled in the underlying state court action
did not give rise to a duty to defend. It follows that no duty to indemnify can exist.
We affirm.
I. Background
The parties submitted a stipulated record to the district court. From
approximately 1996 to 2006, Clarke was the developer and general contractor for
condominium units known as the Druid Hill Townhome Condominiums located in
Des Moines, Iowa. From 1997 until September 1, 2006, American Family insured
Clarke through a “Businessowners Policy.” Between October 2006 and October 7,
2010, Acuity Insurance Company (“Acuity”) insured Clarke.
While the condominium development was underway, Clarke formed the Druid
Hill Townhome Condominium Association (“HOA”). The HOA was responsible for
the exteriors and structures of the buildings Clarke developed. The individual unit
owners owned portions of the HOA and controlled the interior space in their
respective units. Clarke first received complaints of water intrusion from unit owners
in the summer of 2008. Minor repairs, such as caulking, were undertaken. These
repairs did not stop the water intrusion complaints.
Additional and more major repairs began in the spring of 2010. Repairs were
made to the roofs, Exterior Insulation Flashing System, decks and columns, drainage
tile, and around the windows. In June 2010, the HOA commenced an action in Iowa
state court against Clarke for damages resulting from defective construction. The
HOA alleged Clarke’s defective construction was latent until the 2009–2010 winter
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The Honorable Stephanie M. Rose, United States District Judge for the
Southern District of Iowa.
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when defects allowed ice dams to develop and water to infiltrate the units.
Specifically, the petition alleged:
15. Between 1999 and 2007, Clarke constructed and sold a number of
Units at the Druid Hill Development.
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17. During the Winter of 2009–2010, ice dams developed and formed
on the Units. Due to Clarke Company’s defective construction,
this allowed large amounts of water to enter, infiltrate and
accumulate in the Units.
18. The water that infiltrated the Units caused damage to the Units
and also caused mold to grow inside the walls of a number of
Units.
19. Clarke Company’s defective construction was hidden and was not
something that could be previously discovered by the Unit
Owners.
20. Subsequent inspections in 2010 have shown that the damage
sustained was caused by Clarke Company’s defective
construction, including, but not limited to, Clarke Company’s
defective construction of the roofs, the flashing, the Exterior
Insulation Finishing System (“EFIS”), and in numerous other
areas.
Clarke gave American Family notice of the lawsuit and requested a defense and
indemnification. Clarke provided the petition and its answer; 50 photographs
depicting ice damming, snow build-up on the roof, frost and ice in the attic and roof
deck, and water damage to the units; and other emails and correspondence to
American Family. Consistent with the allegations in the petition, a May 2010 expert
report concluded the moisture problems were related to improper positioning of the
EFIS, defective sheathing, and lack of kick-out flashing. Emails from the HOA’s
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attorney indicated problems with drainage tile around the units, the culture stone, and
lack of kick-out flashing.
On December 1, 2010, American Family denied coverage for several reasons,
including its determination that the property damage occurring in the 2009–2010
winter fell outside the policy period. For a period of time, Acuity provided a defense
for Clarke under a reservation of rights. Clarke settled the lawsuit in August 2011.
As part of the settlement, Clarke contributed $525,000 to a trust account, which was
later disbursed to the HOA. Acuity paid $225,000 to partially fund the settlement.
Clarke paid attorneys fees and costs in the amount of $113,167.69.
On July 21, 2015, Clarke commenced this action against American Family for
breach of contract for failure to defend and indemnify it against the HOA claims. In
2016, the HOA retained a construction expert to help identify areas of excessive
moisture around the windows and siding and, if possible, the cause of the moisture
problems. The expert prepared a report in July 2016. The expert opined the original
construction resulted in property damage. The expert further opined that “[t]he
resulting property damage was likely severe and widespread by Summer 2006, even
if it was not observed by the unit owners or the management company.” American
Family stipulated that it was aware of no evidence to contradict the conclusions in the
expert’s report.
II. Discussion
Whether the claims against Clarke are covered under American Family’s policy
requires us to review de novo the district court's interpretation of the insurance
contract, as well as its decision to grant summary judgment. Great W. Cas. Co. v.
Nat'l Cas. Co., 807 F.3d 952, 956 (8th Cir. 2015). Summary judgment is required “if
the movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
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Under Iowa law, which governs this case, an insurer’s “duty to defend arises
‘whenever there is potential or possible liability to indemnify the insured based on the
facts appearing at the outset of the case.’” Employers Mut. Cas. Co. v. Cedar Rapids
Television Co., 552 N.W.2d 639, 641 (Iowa 1996) (quoting A.Y. McDonald Indus.,
Inc. v. Ins. Co. of N. Am., 475 N.W.2d 607, 627 (Iowa 1991)) (emphasis in original).
Stated another way by the Iowa Supreme Court, “the duty to defend rests solely on
whether the petition contains any allegations that arguably or potentially bring the
action within the policy coverage.” Id. (emphasis in original). Although courts are
to look first and primarily at the petition, the scope of inquiry may be expanded when
necessary to “any other admissible and relevant facts in the record.” First Newton
Nat’l Bank v. General Cas. Co., 426 N.W.2d 618, 623 (Iowa 1988).
Additionally, as pointed out by Clarke, under Iowa law, “[i]f any claim alleged
against the insured can rationally be said to fall within such coverage, the insurer must
defend the entire action.” A.Y. McDonald Indus., Inc., 475 N.W.2d at 627. Any
doubt must be resolved in favor of the insured. Id.
The relevant insurance policy provisions contain standard language typically
found in occurrence policies:
SECTION II – LIABILITY
A. Coverages
1. Business Liability
a. 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.
...
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b. This insurance applies:
(1) To . . . ‘property damage’ only if:
(a) The . . . ‘property damage’ is caused by
an ‘occurrence’ that takes place in the
‘coverage territory’;
(b) The . . . ‘property damage’ occurs
during the policy period; and
(c) Prior to the policy period, no insured .
. . and no ‘employee’ authorized by you
to give or receive notice of an
‘occurrence’ or claim, knew that the . .
. ‘property damage’ had occurred, in
whole or in part. . . .
The record plainly demonstrates the HOA sustained property damage for water
infiltration caused by a number of construction defects that were discovered over
several years. The dispute is whether the property damage for which Clarke was held
responsible can be found to have occurred during the policy period.
Despite awareness of the variety of construction defects, the petition in the
underlying state action unambiguously pled claims for damages caused by ice dams
during the 2009–2010 winter. These claims cannot be said to rationally involve
property damage that occurred before the policy period expired on September 1, 2006.
On this record, it is apparent Clarke’s defective construction was widespread, involved
several different problems, was latent for several years, and at least some of the
defects pre-existed the 2009–2010 winter. However, a claim for damages that
occurred before the American Family policy expired was never pled against Clarke
and there was no request to amend the pleading at any time to include such a claim.
Under these circumstances, American Family had no duty to defend Clarke in the
action brought by the HOA in state court.
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In light of our conclusion that American Family had no duty to defend, there
can be no duty to indemnify. Stine Seed Farm, Inc. v. Farm Bureau Mut. Ins. Co., 591
N.W.2d 17, 18 (Iowa 1999) (“[I]f there is no duty to defend, there is no duty to
indemnify” because the duty to defend is broader than the duty to indemnify.).
III. Conclusion
For the foregoing reasons, we affirm the judgment of the district court.
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