Hanover Insurance Company, Intervening Security Insurance Company of Hartford (93-5442), Intervening v. American Engineering Company Mahan Corporation American Engineering Company D/B/A Amtex Engineering Company, Texas American Engineering Company, in Virginia and North Carolina Adams Engineering Company E.B. Gaither Homer M. Walker Henry C. Rogers D. Martin Vanmeter Stephen L. Mulloy James David Sigler James F. Adams W. Wayne Roggenkamp Richard L. Peck Douglas L. Locker (93-5440)

Citations: 33 F.3d 727; 1994 U.S. App. LEXIS 25422Docket: 93-5440

Court: Court of Appeals for the Sixth Circuit; September 15, 1994; Federal Appellate Court

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The case involves Hanover Insurance Company (plaintiff-appellee) seeking to reform a commercial general liability policy (CGLP) issued to American Engineering Company (appellant) to include a rider that excludes coverage for professional negligence claims. Security Insurance Company of Hartford (intervening plaintiff-appellant), which provided American with professional liability insurance, filed a cross-complaint against Hanover for reimbursement of settlement amounts and a judicial determination of coverage priority. The district court granted summary judgment in favor of Hanover, reforming the policy to include the rider and dismissing the case based on the exclusion of coverage for certain claims against American.

American, a partnership offering professional engineering services, acquired the Hanover CGLP in 1987 without an exclusion for professional liability, despite not requesting such coverage through its broker. Concurrently, American had obtained a separate professional negligence policy from Security, specifically covering professional liability but excluding general liability. The case emphasizes the complexities of insurance coverage and the implications of policy exclusions in professional liability contexts, particularly in relation to American's engineering work on a state-sponsored bridge project while simultaneously holding various insurance policies.

On June 22, 1989, a concrete beam failure in Campbell County resulted in the deaths of two workmen and injuries to three others. Following this incident, Hanover amended the Commercial General Liability Policy (CGLP) effective October 1, 1989. Between late 1989 and early 1993, multiple tort actions were filed in Kentucky against American and other defendants, alleging negligence in the design of the bridge beam. American tendered its defense to Hanover on June 27, 1989, but coverage was denied by Hanover in a letter dated January 10, 1990, which cited an irrelevant provision of the CGLP.

On November 8, 1991, Hanover initiated a diversity action in the Eastern District of Kentucky, seeking reformation of the CGLP to exclude professional liability coverage due to an alleged mutual mistake. American counterclaimed for a declaration of coverage under the CGLP for professional negligence and sought reimbursement for $1,450,000 paid in settlements. Security intervened, claiming its policy covered only liabilities exceeding those of Hanover and sought reimbursement of $1,000,000 it had advanced.

On February 19, 1993, after discovery, the court granted Hanover's motion to reform the CGLP to include the omitted rider and denied the motions from American and Security, dismissing the action. The summary judgment standard under Federal Rule of Civil Procedure 56(c) dictates that judgment is appropriate if there are no genuine issues of material fact, and the evidence must be viewed favorably for the non-moving party. The court referenced relevant case law to emphasize the standards applicable to summary judgment and the determination of material facts.

The circuit court conducts a de novo review of summary judgment grants using the Rule 56(c) standard, while denials are reviewed for abuse of discretion. Upon reviewing the district court's summary judgment in favor of Hanover, the panel determined that the standards for summary judgment were not met, leading to a conclusion that the lower court's decision was erroneous and must be reversed. In this diversity case, substantive Kentucky law governs, which stipulates that the interpretation of insurance contract provisions is a legal question for the court unless factual disputes exist. Under Kentucky law, insurance policies are strictly construed against the insurer, particularly when the insurer drafted the policy. Exclusions and exceptions in insurance policies should be interpreted to maximize coverage.

In this case, without the rider, the Hanover CGLP included claims against American arising from professional errors or omissions, as the policy did not explicitly exclude such claims. If the rider is considered a part of the policy through reformation, it would exclude those claims. For reformation to be granted, the party must demonstrate a 'mutual mistake' by clear and convincing evidence. Hanover must prove that both parties intended to include a specific professional liability exclusion in the insurance agreement and that American was aware of this intention. Additionally, Hanover must establish that American knew or should have known the exact terms of the rider, including its implications on vicarious liability for subcontractors’ professional negligence.

The court reviewed the summary judgment de novo and found that the standard for granting it had not been met regarding Hanover's intent to include a professional liability exclusion rider in the Commercial General Liability Policy (CGLP) purchased by American. Evidence suggested that the omission of the endorsement might have been inadvertent, yet reasonable inferences countered this claim, necessitating 'clear and convincing' proof from Hanover. The customary practice of having such restrictions in a separate rider indicated that Hanover may not have intended to exclude professional liability coverage in all its policies. Hanover renewed the policy without the endorsement, despite the predecessor policy having an exclusion, and only sought to amend it after tort claims were asserted. Upon American's request for defense against these claims, Hanover did not cite the omission of the endorsement as a reason for denial but referenced a different policy term, which it later acknowledged was not applicable.

Viewing the evidence favorably for American, it was unclear whether American was aware that Hanover intended to include a professional liability exclusion. Testimonies from American's partners indicated they believed the policy covered all professional liability or at least the negligence of subcontractors. Insurance brokers for American expressed that while they did not expect the policy to cover American's professional negligence, they believed it protected against subcontractor negligence. Prior to American's defense tender, Hanover representatives never communicated the need for a professional liability exclusion in the CGLP. The inclusion of the rider in the Hanover umbrella policy did not definitively indicate that the CGLP was meant to exclude professional liability, leaving room for multiple reasonable interpretations regarding the insured's understanding of coverage.

The trier of fact must evaluate the evidence supporting American and Security against the conflicting evidence favoring Hanover, considering the totality of the circumstances. The district judge improperly reformed the Hanover CGLP policy to Hanover's benefit during summary judgment by weighing disputed evidence and making credibility determinations, functions reserved for a trial. Although the court incorrectly awarded summary judgment to Hanover, it did not abuse its discretion in denying American's and Security's cross motions for summary judgment. Consequently, the district court's summary judgment in favor of Hanover is reversed, and the case is remanded for trial on all claims.

The Hanover CGLP policy lacks a professional liability endorsement that was present in the previous Maryland Casualty policy, which excluded coverage for bodily injury or property damage from professional services. A similar exclusion appears in the Hanover umbrella policy, but coverage under that policy is not contested in this appeal. The CGLP's endorsement, amended in 1989, uses "and" instead of "or" for exclusions related to professional services. A letter from Sparks indicates that Hanover contends its general liability policy should not cover the litigation due to the nature of the allegations against American Engineering, which are tied to professional duties. Elizabeth Hunt, an underwriter, stated that a specific exclusion regarding contractual liability was irrelevant to American's claims, and Sparks acknowledged no contractual liability was asserted against American by the tort claimants.

The CGLP insured American against bodily injury and property damage claims arising from occurrences during the policy period, with specific exclusions noted, including professional services liability. Evidence from expert reports indicated that American was not actively negligent in the design of the bridge beam related to a catastrophic accident. The reports attributed the beam's failure primarily to negligent construction and inadequate inspection, not to design flaws by American. Testimonies from American's executives suggested a belief that the CGLP covered professional liability, including subcontractor errors, despite conflicting opinions on the policy's scope. The excerpt emphasizes that credibility assessments and evidence weighing are for the jury, not the judge, during summary judgment considerations, as established in Anderson v. Liberty Lobby.