Transcontinetal Ins. v. W. G. Samuels Co.

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 03-2564
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Transcontinental Insurance Company, *
*
Plaintiff - Appellee, *
* Appeal from the United States
v. * District Court for the Western
* District of Missouri.
W.G. Samuels Company, Inc., a *
Kansas Corporation, *
*
Defendant - Appellant, *
*
Excelsior Springs School District, *
District No. 40, *
*
Defendant. *
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Submitted: January 14, 2004
Filed: June 4, 2004
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Before BYE, SMITH, and COLLOTON, Circuit Judges.
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COLLOTON, Circuit Judge.
W.G. Samuels Company, Inc. ("Samuels") appeals from the district court's1
grant of summary judgment in favor of Transcontinental Insurance Company ("TIC").
TIC filed this declaratory judgment action to determine whether it had a duty under
an insurance policy to defend and indemnify Samuels in its underlying lawsuit with
Excelsior Springs School District, District No. 40 ("ESSD"). Because we conclude
that the alleged property damage did not occur during the relevant policy period, we
affirm.
I.
Samuels, a company in the business of supplying and installing carpet and
other floor coverings, purchased a commercial general liability ("CGL") insurance
policy from TIC. The coverage period of the policy was from October 19, 1995, to
October 19, 1996.
The underlying lawsuit between Samuels and ESSD arose out of Samuels's
installation of carpeting at Excelsior Springs Middle School. On July 5, 1995,
Samuels and ESSD entered into a contract providing that Samuels would install
carpeting at the middle school. Samuels began the installation project on April 11,
1996, and finished it on June 1, 1996.
Several years later, on December 18, 2000, the school district discovered that
the carpet had become unattached to the floor in several highly trafficked areas
throughout the school. The school district filed a lawsuit in state court against
Samuels, alleging faulty installation of the carpet. Specifically, the complaint alleged
that Samuels failed properly to clean the surface prior to installing the carpet, failed
to install the carpet pursuant to product recommendations and manufacturer's
1
The Honorable Gary A. Fenner, United States District Judge for the Western
District of Missouri.
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instructions, and failed properly to apply the carpet adhesive. The school district
sought damages to repair and replace the carpet based on theories of breach of
contract, breach of express warranty, breach of implied warranties, and negligence.
The negligence count also claimed that the school district was entitled to damages
arising out of the diminution of value to the school.
In this action between TIC and Samuels, TIC filed a motion for summary
judgment, seeking a declaration that it had no duty to defend or indemnify Samuels
in its lawsuit with ESSD. The district court found that the school district's complaint
stated claims for "property damage" caused by an "occurrence" within the meaning
of the insurance policy. The district court granted the motion for summary judgment,
however, based on its conclusion that the alleged property damage did not occur
during the coverage period from October 19, 1995, to October 19, 1996.
Alternatively, the district court held that coverage was unavailable as a result of
Exclusion (m) of the policy, commonly referred to as the "business risk" exclusion.
On both of these grounds, the district court held that TIC was not required to defend
or indemnify Samuels in its underlying lawsuit with the school district.
II.
Summary judgment is appropriate when there is no genuine issue of material
fact for trial. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23
(1986). We review de novo the district court's interpretation of provisions in an
insurance contract, as well as its ultimate decision to grant summary judgment.
Norwalk Ready Mixed Concrete, Inc. v. Travelers Ins. Cos., 246 F.3d 1132, 1135-36
(8th Cir. 2001).
The parties do not dispute the district court's conclusion that Kansas law
governs this diversity action. Under Kansas law, insurance policies should be
construed to give effect to the intention of the parties, and courts will apply the plain,
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ordinary, and popular meaning of unambiguous language in a policy. Atchison,
Topeka & Santa Fe Ry. Co. v. Stonewall Ins. Co., 71 P.3d 1097, 1120 (Kan. 2003);
O'Bryan v. Columbia Ins. Group, 56 P.3d 789, 792 (Kan. 2002). Where there is
ambiguity in policy language, Kansas law applies the rule that "the construction most
favorable to the insured must prevail." O'Bryan, 56 P.3d at 792.
The language of the policy in this case is clear. To trigger TIC's duty to defend
or indemnify under the policy in this case, Samuels must establish that the lawsuit by
ESSD involves (1) alleged "property damage" that (2) resulted from an "occurrence"
that (3) happened within the applicable "policy period." In addition, the coverage
sought must not be within the scope of the several exclusions that were negotiated as
part of the policy.
The insurance policy defines "property damage" to include "[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." Samuels argued in the
district court that the carpet itself is "tangible property" that was physically injured
when it peeled away from the adhesive and concrete slab beneath it. The district
court apparently agreed, noting that "the carpet installed by Samuels became
damaged," and concluding that ESSD suffered property damage by "having to replace
the carpet." The district court also found property damage in "the subsequent loss of
use of the building while the carpet was being replaced."
An "occurrence" is defined in the policy as "an accident, including continuous
or repeated exposure to substantially the same general harmful conditions." Citing
the decision of a sister court in Kansas, the district court predicted that the Kansas
Supreme Court would find that "damage that occurs as a result of faulty or negligent
workmanship constitutes an 'occurrence' as long as the insured did not intend for the
damage to occur." Fid. & Deposit Co. of Md. v. Hartford Cas. Ins. Co., 189 F. Supp.
2d 1212, 1218 (D. Kan. 2002) (emphasis added). Because there was no evidence that
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Samuels intended for the carpet adhesive to fail, the district court concluded that the
carpet damage constituted an "occurrence" within the meaning of the policy and
Kansas law.
TIC argues on appeal that the district court erred in concluding that the school
district's allegations constituted "property damage" that resulted from an
"occurrence." Samuels asserts that we have no jurisdiction to consider these
contentions, because TIC did not file a cross-appeal challenging those portions of the
district court's ruling that favored Samuels. We reject Samuels's jurisdictional
argument. We may affirm a judgment on any ground raised in the district court, and
the party that prevailed in the district court need not file a cross-appeal to raise
alternative grounds for affirmance. Johnson v. Enron Corp., 906 F.2d 1234, 1238
(8th Cir. 1990). Nonetheless, for purposes of this appeal, we will assume arguendo
that the district court was correct on these initial points, because we conclude that if
the school district's allegations do implicate property damage caused by an
occurrence, then the property damage did not occur during the relevant policy period.
The Kansas Supreme Court has adopted an injury-in-fact rule for purposes of
determining when coverage is triggered under a CGL policy. Scott v. Keever, 512
P.2d 346 (Kan. 1973). Under this rule, insurance coverage is triggered on the date
when an actual injury and damage occurs, id. at 351-52, even if the injury has not yet
been discovered or become manifest. See Cessna Aircraft Co. v. Hartford Accident
& Indem. Co., 900 F. Supp. 1489, 1503 (D. Kan. 1995) (Kansas law); cf. Am. Home
Prods. Corp. v. Liberty Mut. Ins. Co., 748 F.2d 760, 764 (2d Cir. 1984); Aetna Cas.
& Sur. Co. v. Abbott Lab., Inc., 636 F. Supp. 546, 548-50 (D. Conn. 1986).
In light of these general propositions, the crucial dispute in this case concerns
when the injury occurred. The policy provides that the "insurance applies to . . .
'property damage' only if . . . [the] 'property damage' occurs during the policy period."
Relying on the fact that ESSD's complaint alleges negligence, breach of contract, and
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breach of warranties at the time the carpet was installed in April 1996, Samuels
argues that actual injury and property damage occurred at that time. TIC contends
that no actual injury occurred until December 2000 when the carpet became
unattached from the floor throughout the school.
We agree with the district court that TIC has the better of the argument. The
leading decision of the Kansas Supreme Court in Scott v. Keever is instructive. Scott
involved an injury caused when a plaintiff fell from a defective ladder. 512 P.2d at
348. The applicable insurance policy provided coverage for "accidents which occur
during the policy period." Id. at 349. The case thus turned on whether the plaintiff's
"accident" occurred on the date when he purchased the defective ladder (which was
destined to cause injury) or on the date when he fell from the defective ladder. The
Kansas Supreme Court held that the "accident" occurred on the date of the fall. Id.
at 354.
In reaching that conclusion, the Kansas court clearly distinguished between the
date when a cause of action accrued for breach of warranty against the seller of the
ladder, and the date when injury occurred for purposes of triggering insurance
coverage under the CGL policy: "The fact that the ladder was purchased by Mr. Scott
during the term of the policy and that a cause of action for breach of warranty against
Falco and/or others in the commercial chain accrued at that time is irrelevant to the
coverage afforded by the policy and attached endorsements." Id. at 350 (emphasis
added). Applying the analysis of Scott, we reject Samuels's analogous contention that
the date when the school district accrued causes of action against Samuels is the
relevant date for purposes of identifying an "occurrence" of "property damage" within
the meaning of the insurance policy.
That is not to say that the date of a company's breach of contract or warranty,
or its negligent workmanship, could never be the date when actual injury occurs for
purposes of the insurance policy. If physical injury to tangible property occurred at
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moment of the faulty workmanship, as in Baugh Const. Co. v. Mission Ins. Co., 836
F.2d 1164, 1170 (9th Cir. 1988), such that the insured's work product and other
tangible property affected by the work product were "doomed" and useless
immediately, then the property damage and the negligence or breach of contract and
warranty may be simultaneous.
In this case, however, the undisputed facts show that the alleged property
damage did not occur until December 2000, more than four years after the end of the
policy period. The carpet adhered to the floor when it was installed in 1996, and the
school used it for several years before it peeled away from the floor. Samuels
endorses the district court's conclusion that the alleged "property damage" was the
carpet's separation from the floor and the temporary loss of use of the school building.
These injuries did not occur at the time the carpet was installed. Indeed, intervening
events were necessary before actual injury occurred. Samuels's own expert opined
that the carpet detached only in "higher traffic" areas, where heavy abrasion from foot
traffic and repeated cleaning caused failure of the adhesion. If the school had
experienced less traffic or reduced cleaning, then the carpet may never have detached,
thus averting property damage altogether.
This is not a case, therefore, where property damage occurred at the time of
installation, but remained concealed from the property owner for a period of time. Cf.
Maryland Cas. Co. v. W.R. Grace & Co., 23 F.3d 617, 627-28 (2d Cir. 1993)
(installation of asbestos created hazard and caused immediate property damage).
Rather, the school district's lawsuit fits squarely among those cases involving "a
wrongful act that produces no harm for a period of time and then suddenly manifests
itself in a burst of damage. See, e.g., Travelers Insurance Co. v. C.J. Gayfer's & Co.,
366 So.2d 1199, 1202 (Fla. App. 1979) (faulty roof drainage system finally leaks);
Singsaas v. Diederich, 238 N.W.2d 878, 880 (Minn. 1976) (collapse of negligently
installed manlift); Peerless Insurance Co. v. Clough, 105 N.H. 76, 193 A.2d 444, 446
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(1963) (fire in negligently built chimney)." Mraz v. Canadian Universal Ins. Co., 804
F.2d 1325, 1328 (4th Cir. 1986).
That Samuels's alleged negligence and breaches of contract and warranty in
1996 may have started a chain of events that culminated in the property damage in
2000 is not sufficient to establish injury in 1996. Scott teaches that "[t]o stretch the
scope of 'accident' backward in time to reach the date of the earliest initiation of any
event which might be regarded as having a causal relation to the accident would
introduce ambiguity where none now exists." 512 P.2d at 349. We likewise cannot
stretch the plain language of the insurance policy in this case to find an "occurrence"
or "property damage" in 1996.
We hold that because the property damage allegedly suffered by ESSD
occurred outside the policy period, TIC is not required to defend and indemnify
Samuels against ESSD's lawsuit. Having resolved the dispute on that ground, we
need not address whether Exclusion (m) of the insurance policy applies under the
circumstances of this case. The judgment of the district court is affirmed.
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