Lexington Ins. Co. v. Western Roofing Co., Inc.

Citations: 316 F. Supp. 2d 1142; 2004 U.S. Dist. LEXIS 8205; 2004 WL 1045800Docket: 03-2036-JWL

Court: District Court, D. Kansas; May 7, 2004; Federal District Court

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In the case of Lexington Insurance Company v. Western Roofing Company, the plaintiff, Lexington Insurance, seeks to recover costs related to a roof collapse at an office/warehouse building owned by Westroads Limited Partnership. The building was occupied by a tenant, Schlage Lock, and managed by Mid-America Management Company under a management agreement that required Mid-America to handle insurance matters. Western Roofing, which installed the original roof in 1980, did not design the roof or install the original downspouts. The architect's design did not include overflow scuppers, which could have mitigated water backup issues.

From 1998 to 2000, management observed recurring problems with downspouts becoming clogged by dead pigeons, leading to water backing up but not pooling on the roof. Initial attempts to address the issue were ineffective. In June 2000, Western Roofing removed and cleaned the downspouts, reinstalling them with wire screens to prevent pigeons from entering. These modifications successfully mitigated the clogging issue. The court granted summary judgment in favor of Western Roofing regarding Lexington's tort claim but denied it concerning the contract and warranty claims.

Mr. Lanning testified that he hired Western Roofing to address a leak issue linked to dead pigeons, asserting that he did not discuss specific solutions with them. He viewed Mr. Manson as his primary roofing expert, granting him authority for necessary work within budget limits. Lanning only became aware of Western Roofing’s installation of screens over the scuppers during a roof inspection months later. Western Roofing was aware that the screens could trap debris but did not inform CB Richard Ellis about potential issues during installation. CB Richard Ellis's maintenance employee, Jim Woosley, was responsible for checking the screens for debris at least monthly, but not weekly. In October 2000, Western Roofing was called to inspect a leak and identified that debris was blocking the screens, which hindered drainage. Following a heavy storm on May 3, 2001, Woosley found that the Schlage Lock building's roof partially collapsed due to completely clogged downspouts, attributed to cottonwood seeds. He noted that his last inspection of the downspouts occurred about one to two weeks before the collapse. Lexington's insurance policy names Mid-America as the insured and seeks reimbursement from Western Roofing for payments made under the policy. The subrogation clause allows Lexington to pursue claims against liable parties. Lexington, as subrogee for Mid-America, is asserting claims against Western Roofing for negligence, breach of contract, and breach of warranty. Western Roofing seeks summary judgment, arguing it has no legal duty to Lexington, is protected under the Kansas Products Liability Act and the economic loss doctrine, and asserts that Lexington's claims are invalid due to the subrogation clause and lack of third-party beneficiary status. Additionally, Western Roofing contends that any damages should be reduced by the amount paid by Lexington to Mid-America.

Summary judgment is appropriate when the moving party shows there are no genuine issues of material fact and is entitled to judgment as a matter of law, as per Fed. R. Civ. P. 56(c). The court must view evidence favorably towards the nonmoving party. A "material" fact is essential to resolving the claim, while a "genuine" issue exists if sufficient evidence allows a rational trier of fact to decide the issue either way. The moving party initially must demonstrate the absence of such issues and entitlement to judgment, after which the burden shifts to the nonmoving party to present specific facts indicating a genuine issue for trial. The nonmoving party cannot rely solely on pleadings but must provide admissible evidence, identifiable through affidavits, deposition transcripts, or specific exhibits. Summary judgment is a procedural tool aimed at achieving a just, speedy, and inexpensive resolution of cases.

In the analysis section, the court determines that Lexington's negligence claim is barred by the economic loss doctrine, but there are genuine issues regarding its breach of contract and warranty claims. It confirms that Mid-America was in privity of contract with Western Roofing, allowing Lexington, as subrogee, to pursue claims without needing a third-party beneficiary theory. The court finds Western Roofing's argument regarding the subrogation clause unfounded, as no evidence indicates that Mid-America waived its claims. Furthermore, Lexington's claims are not affected by the insurance benefits it provided to Mid-America, as the claims are based on subrogation rights.

The Kansas Court of Appeals has established the economic loss doctrine, which restricts buyers of defective products from pursuing tort claims when the damage is solely to the goods themselves. However, recovery is permitted for physical damage to "other property." The court utilizes the integrated system approach from the Restatement (Third) of Torts: Products Liability to determine whether damages pertain to the defective product or to other property. If a defective product is part of an integrated system where components are indistinguishable from the final product, the damage does not qualify as affecting "other property."

In the case of Northwest Arkansas Masonry, the court ruled that defective cement powder was part of an integrated system, specifically the entire masonry wall, thus barring recovery for repair costs under the economic loss doctrine. The court emphasized that the plaintiff had the responsibility to manage the risk of economic loss, either through insurance or contractual agreements. This principle was further applied in Full Faith Church of Love West, Inc. v. Hoover Treated Wood Products, where the court held that a claim for roof repair damages was barred when the damage was tied to decayed truss lumber treated with a defendant's fire retardant. The court noted that while it did not dismiss claims related to "other property," it had to assume physical damage occurred, as it was addressing a motion to dismiss, leaving the definition of "other property" ambiguous.

In Prendiville v. Contemporary Homes, Inc., the Kansas Court of Appeals examined the "other property" exception to the economic loss doctrine in the context of a residential construction defect involving an artificial stucco product. The homeowner sought damages after flooding in the basement, allegedly due to the stucco defect, specifically for replacing windows and the exterior finish. The defendant contended that damages unrelated to the stucco replacement were barred by the economic loss doctrine. The court determined that the entire house constituted an integrated system, thus barring recovery for damages solely related to the house structure, which did not qualify as "other property."

The court anticipated that the Kansas Supreme Court would also view the entire Schlage Lock building as an integrated system, thereby applying the economic loss doctrine similarly. It noted that the wire mesh screens installed by Western Roofing were integral to the roof drainage system and indistinguishable from the building as a whole. Although the screens were small compared to the entire structure, prior cases established that small components could still be considered part of larger integrated systems.

The economic loss doctrine aims to prevent plaintiffs from bypassing contract law by pursuing tort claims for breaches that are essentially contractual in nature. The court indicated that if CB Richard Ellis desired guarantees regarding Western Roofing's work quality, the parties could have negotiated express warranties. The court declined to adjudicate the terms of their agreement under tort theories. Consequently, Lexington's negligence claim for damages related to building loss and business interruption was found to be barred by the economic loss doctrine. The court's decision aligned with similar case law from federal courts regarding roof defects, particularly referencing the Sixth Circuit's reasoning in Mt. Lebanon Personal Care Home, Inc. v. Hoover Universal, Inc., which emphasized the importance of defining the product in relation to the economic loss rule.

The plaintiff in Mt. Lebanon contended that the relevant product for the economic loss rule should be limited to the treated wood itself. However, the Court rejected this argument, stating that adopting such a definition would blur the lines between contract and tort law, undermining the economic loss rule's purpose. The Court predicted that the Kentucky Supreme Court would maintain this distinction, emphasizing that contract law is better suited for allocating economic risks in complex commercial transactions. Consequently, the Court concluded that the relevant product under the economic loss doctrine includes the entire unit involved in the transaction, in this case, the entire nursing home, since the plaintiff could insure against its losses and negotiate warranties. The Court granted Western Roofing's motion for summary judgment regarding Lexington's negligence claim based on the economic loss doctrine.

In contrast, for Lexington's breach of contract and warranty claims, genuine issues of material fact were identified, leading to the denial of Western Roofing's motion for summary judgment on these claims. Western Roofing claimed its only express warranty was tied to the original roof installation in 1981 and argued that it did not breach any implied warranty of workmanship. Lexington countered that Western Roofing failed to properly address leaks caused by pigeons nesting in the downspouts. The court found that the evidence regarding the contractual obligations was ambiguous. Testimony indicated conflicting views on whether Western Roofing was responsible for determining the method to resolve the pigeon issue, complicating the resolution of the summary judgment motion.

The court finds the evidence surrounding the interactions between CB Richard Ellis and Western Roofing insufficient to determine whether the plaintiff's claims are best categorized as breach of contract or breach of warranties. There are unresolved factual issues regarding Western Roofing's adherence to its contractual duty to address a pigeon problem, raising questions about the appropriateness and workmanship of its methods. While it may be inferred that Western Roofing should not be liable due to pre-existing design flaws in the building, such as the absence of overflow scuppers, and CB Richard Ellis's awareness of maintenance requirements related to debris, a reasonable factfinder could also determine that Western Roofing breached its obligations by choosing a solution that obstructed roof drainage and failing to adequately inform CB Richard Ellis of necessary maintenance. 

Regarding the plaintiff's right to pursue contract and warranty claims, the court disagrees with Western Roofing's assertion that Lexington lacks standing as an intended third-party beneficiary. Evidence suggests that CB Richard Ellis acted as an authorized agent of Mid-America when contracting with Western Roofing. Despite the advisory services agreement naming CB Richard Ellis and Westroads, it was actually signed by Mid-America, indicating its role as managing agent for Westroads. According to agency law, contracts made by an agent on behalf of a principal allow the principal to sue, even if not explicitly named. Thus, Mid-America possesses the right to initiate a lawsuit against Western Roofing, establishing privity of contract between them. Consequently, the court concludes that Mid-America is entitled to maintain an action against Western Roofing under the contract.

Western Roofing has misinterpreted Lexington's subrogation rights, which arise from the management agreement between Westroads and Mid-America. Mid-America acted as Westroads' authorized agent in obtaining insurance and settling property damage claims. Lexington, as a subrogee of Mid-America, holds the same rights as Mid-America in pursuing claims against Western Roofing. This relationship grants Lexington privity of contract with Western Roofing, negating the need for a third-party beneficiary theory.

Western Roofing argues that a subrogation clause in the insurance policy waives Lexington’s subrogation rights against them. However, there is no evidence that Mid-America or CB Richard Ellis, acting as Mid-America’s agent, waived these rights. The subrogation receipt indicates that Mid-America specifically subrogated Lexington’s rights against any liable party, including Western Roofing.

Additionally, Western Roofing's claim that insurance benefits received by Mid-America negate Lexington's right to recover is unfounded. They cite King Grain Co. v. Caldwell Manufacturing Co. to argue that damages in breach of contract cases can be reduced by insurance benefits. However, while the collateral source rule typically prevents reduction of damages from independent sources in tort claims, it does not apply to contract claims. Therefore, any insurance benefits received by Mid-America would reduce its potential recovery from Western Roofing, but this does not affect Lexington's right to recover as a subrogee.

Lexington, as a subrogee of Mid-America, is not barred from recovering from Western Roofing despite Western Roofing's claims. The insurer's subrogation rights arise upon payment for a loss, allowing the insurer to pursue the insured's rights against third parties responsible for the loss. Western Roofing's argument that an insured cannot be subrogated in a contract claim against a third party is rejected, as it contradicts the purpose of subrogation, which is to avoid double recovery. There is no evidence that Lexington or Mid-America could unjustly benefit from a double recovery, nor that Western Roofing would face double liability; Western Roofing would only be liable for the actual loss paid to Lexington. The court finds Western Roofing's reliance on the King Grain case misplaced since it involved an insured, not an insurer's subrogation rights. Consequently, the court denies Western Roofing's motion for summary judgment on Lexington's contract and warranty claims, while granting it for the negligence claim. A hearing on Western Roofing's motion to exclude expert testimony will occur on May 18, 2004, with a limine conference set for May 28, 2004, and a jury trial scheduled to begin on June 1, 2004. Western Roofing's argument regarding the management agreement was not considered, as it was raised for the first time in a reply brief, thus deemed waived.

The agreement is between CB Commercial Management Services, identified as a predecessor to CB Richard Ellis, and for clarity, the court will refer to it as CB Richard Ellis. Western Roofing's motion for summary judgment included various arguments, but many are deemed moot because Lexington clarified that it does not allege a breach concerning the original roof installation. Instead, Lexington's claims pertain solely to Western Roofing's efforts to address a leak problem linked to pigeons nesting in the downspouts. The court concluded that Lexington's negligence claim is barred by the economic loss doctrine, rendering Western Roofing's arguments regarding its legal duty and immunity under the KPLA moot as well.

The Kansas Supreme Court has not definitively addressed the application of the economic loss doctrine, so the court aims to predict its potential ruling based on lower court decisions. It must adhere to intermediate state court rulings unless convinced otherwise. Western Roofing failed to provide compelling reasons to deviate from the Kansas Court of Appeals' interpretation of the economic loss doctrine, which aligns with the majority view. Additionally, while a defective product similar to one in a previous case (Full Faith Church of Love) may be implicated, the case of Mt. Lebanon is more relevant for understanding the "other property" exception to the economic loss doctrine.