J-McDaniel Construction Co v. Mid-Continent Casualty Company

United States Court of Appeals
For the Eighth Circuit
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No. 13-2673
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J-McDaniel Construction Co., Inc.
lllllllllllllllllllll Plaintiff - Appellant
v.
Mid-Continent Casualty Company; Oklahoma Surety Company; John Does, 1-40
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the Eastern District of Arkansas - Little Rock
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Submitted: April 16, 2014
Filed: August 4, 2014 (Corrected 8/4/2014)
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Before SMITH, COLLOTON, and GRUENDER, Circuit Judges.
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SMITH, Circuit Judge.
In 2011, J-McDaniel Construction Co. ("J-McDaniel") settled a lawsuit arising
from subcontractors's faulty workmanship during construction of an Arkansas home.
J-McDaniel sought coverage for the damages to be paid in the settlement from Mid-
Continent Casualty Co. ("Mid-Continent") under its Commercial General Liability
Insurance (CGL) policy. Mid-Continent denied coverage, asserting that the terms of
the policy did not include faulty workmanship or subcontractor negligence. J-
McDaniel sued, alleging that Mid-Continent breached the insurance contract. Sitting
in diversity jurisdiction, the district court1 dismissed the claim. The court found that
the policy excluded coverage for subcontractor negligence and that under Arkansas
law the CGL policy did not cover faulty workmanship. We affirm.
I. Background
J-McDaniel is a residential construction general contractor. It employs
subcontractors for every portion of construction. J-McDaniel purchased a CGL policy
from Mid-Continent in 2005; the policy was in force at all times relevant to this
litigation. The CGL policy provided coverage for "property damage" caused by an
"occurrence" as defined in the policy. An "occurrence" was defined as "an accident,
including continuous or repeated exposure to substantially the same general harmful
conditions." The policy also includes an endorsement excluding coverage for damage
arising from the work of subcontractors.
David and Susan Conrad sued J-McDaniel for defects in the construction of
their home in 2006, allegedly resulting from faulty workmanship on the part of the
subcontractors. J-McDaniel and the Conrads ultimately settled. Mid-Continent refused
to defend or indemnify J-McDaniel. Mid-Continent agreed that the defects in the
Conrad home constituted "property damage," but argued that the damage did not arise
from an "occurrence" as defined by the policy.
J-McDaniel sued Mid-Continent, asserting alternative claims of breach of
contract, unconscionability, and negligence under Arkansas law. The breach-of-
contract claim turned on whether the faulty workmanship on the Conrad home was an
"occurrence" within the meaning of the policy. The district court dismissed the claim
pursuant to Essex Ins. Co. v. Holder, 261 S.W.3d 456, 460 (Ark. 2008). In Essex, the
1
The Honorable Brian S. Miller, United States District Judge for the Eastern
District of Arkansas.
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Arkansas Supreme Court held that "defective workmanship standing alone—resulting
in damages only to the work product itself—is not an occurrence" as defined in a
similar CGL policy.2 The district court dismissed the negligence claim as time-barred.
Finally, the court dismissed the unconscionability claim because it amounted to no
more than "mere conclusory statements [that] fail to state a claim for relief."
J-McDaniel moved for leave to file an amended complaint, which would have
added an estoppel claim. This claim asserted that Mid-Continent should be estopped
from denying coverage because it based its premiums on the cost of subcontractor
work. J-McDaniel contended that Mid-Continent's tying its premium to contractor cost
led purchasers to assume that coverage included the work of the subcontractors
notwithstanding an endorsement excluding coverage for subcontractor work. The
district court denied the motion on grounds of futility. The court found that the
amendment would not withstand a motion to dismiss under Harasyn v. St. Paul
Guardian Ins. Co., 75 S.W.3d 696, 702 (Ark. 2002). In Harasyn, the Arkansas
Supreme Court held that "coverage in a contract of insurance cannot be extended by
waiver or estoppel."
II. Discussion
J-McDaniel appeals the district court's dismissal of its breach of contract claim
and the court's denial of its motion to amend.
A. Breach of Contract
"This court reviews de novo the grant of a motion to dismiss, taking all facts
alleged in the complaint as true. Dismissal is proper where the plaintiffs' complaint
2
Interestingly, the Arkansas legislature has overruled Essex by statute,
see Arkansas Code Annotated § 23-79-155, since the construction of the Conrad
home. However, the district court found that Arkansas law barred retroactive
application of the statute based on Arkansas Department of Human Services v.
Walters, 866 S.W.2d 823, 825 (Ark. 1993).
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fails to state a claim upon which relief can be granted." Charles Brooks Co. v.
Georgia-Pacific, LLC, 552 F.3d 718, 721 (8th Cir. 2009) (citations and quotations
omitted). To state a valid claim for breach of contract in Arkansas, the plaintiff "need
only assert the existence of a valid and enforceable contract between the plaintiff and
defendant, the obligation of defendant thereunder, a violation by the defendant, and
damages resulting to plaintiff from the breach." Perry v. Baptist Health, 189 S.W.3d
54, 58 (Ark. 2004) (citations omitted).
J-McDaniel asserts that Mid-Continent breached the insurance contract by
refusing to defend J-McDaniel against, or indemnify it for, the Conrad suit. J-
McDaniel concedes that under applicable Arkansas law at the time the suit was
filed—the Arkansas Supreme Court's Essex decision—the CGL policy did not cover
faulty workmanship. It contends, however, that the legal landscape is shifting and that
states are trending toward including faulty workmanship within CGL policy coverage.
Furthermore, Arkansas Code § 23-79-155 effectively overruled Essex in 2011. In light
of these developments, J-McDaniel predicts that the Arkansas Supreme Court would
reverse Essex if presented with the issue today. J-McDaniel, therefore, asks this court
to act as though it sat in the place of the Arkansas Supreme Court and overrule Essex,
thus effectively giving retroactive effect to the amended Arkansas statute.
We decline J-McDaniel's invitation to reverse Essex and apply § 23-79-155
retroactively. Arkansas entertains a presumption against retroactive application of
statutes. Steward v. Statler, 266 S.W.3d 710, 713 (Ark. 2007) ("Generally,
retroactivity is a matter of legislative intent, and unless it expressly states otherwise,
we presume the legislature intends for its laws to apply only prospectively."). The
Arkansas Supreme Court specifically held that an "[insuror's] right to deny coverage
under the law then in effect is a substantive right. Legislation which changes
substantive rights does not operate retroactively." Carmichael v. Nationwide Life Ins.
Co., 810 S.W.2d 39, 42 (Ark. 1991) (citation omitted). Furthermore, "an insurance
policy is governed by statutes in effect at the time of its issuance." State Farm Mut.
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Auto. Ins. Co. v. Henderson, 150 S.W.3d 276, 281 (Ark. 2004) (citations omitted).
Arkansas law is clear: we may not retroactively apply § 23-79-155 to the insurance
contract between J-McDaniel and Mid-Continent.
Nor may we simply disregard Essex. For the relevant time period, the Arkansas
Supreme Court definitively answered the question of whether subcontractor work
product is included within the bounds of CGL coverage. We have no authority to
speculate as to how that court would rule if presented with the question again.
Furthermore, the Essex court specifically contemplated the now-majority rule and
found it unpersuasive. See Essex, 261 S.W.3d 456, 460 ("While several jurisdictions
have found CGL policies to be ambiguous and construed the ambiguity against the
drafter, we find these cases unpersuasive.") (citing Lamar Homes, Inc. v. Mid-
Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007). Sitting in diversity jurisdiction, we are
not at liberty to disregard the binding law of the state, nor may we substitute our
judgment for that of the Arkansas Supreme Court. See Erie R. Co. v. Tompkins, 304
U.S. 64, 78 (1938). The district court properly applied binding state law, therefore it
did not err by dismissing J-McDaniel's breach-of-contract claim.
B. Leave to Amend
Federal Rule of Civil Procedure 15(a)(2) provides that a party may amend its
pleading only with the opposing party's consent or the leave of the court and that
"leave to amend should be granted freely when justice so requires." In re Cerner Corp.
Sec. Litig., 425 F.3d 1079, 1086 (8th Cir. 2005) (citations, quotation, and alteration
omitted). "Nevertheless, futility is a valid reason for denial of a motion to amend." Id.
(citation omitted). "Denial of a motion for leave to amend on the basis of futility
means the district court has reached the legal conclusion that the amended complaint
could not withstand a motion to dismiss under Rule 12(b)(6) of the Federal Rules of
Civil Procedure." Zutz v. Nelson, 601 F.3d 842, 850 (8th Cir. 2010) (citation and
quotation omitted). "[W]hen the district court denies leave on the basis of futility we
review the underlying legal conclusions de novo." Id. (citation and quotation omitted).
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J-McDaniel's proposed amended complaint fails to state a claim on which relief
may be granted. In this case, the policy specifically excluded coverage for
subcontractor negligence. As the district court found, under Arkansas law "the
doctrine of waiver or estoppel cannot be given the effect of enlarging or extending the
coverage as defined in the contract." Harasyn, 75 S.W.3d at 702 (citations omitted).
Nor may estoppel "be asserted to extend coverage under a contract in which it was
excluded by specific language." Id. (citation omitted). Because J-McDaniel seeks to
extend coverage to subcontractor negligence through a claim of estoppel, the district
court did not err by denying J-McDaniel leave to amend its complaint.
III. Conclusion
Accordingly, we affirm the judgment of the district court.
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