Court: Court of Appeals for the Seventh Circuit; December 17, 2017; Federal Appellate Court
In 2014, the court determined that West Side Salvage, Inc. was solely liable for injuries resulting from a grain-bin explosion and for $3 million in property damage to a bin owned by ConAgra Foods, Inc. West Side held an $11 million excess insurance policy with RSUI Indemnity Company and subsequently sued RSUI for breaching its duty to settle ConAgra’s claim. The district court granted summary judgment to RSUI, and West Side appeals this decision.
The background details that in 2010, ConAgra found a hot grain bin at its Chester, Illinois facility and hired West Side for repairs. The bin exploded during West Side's work, injuring three workers and damaging the bin. The injured workers and ConAgra sued West Side, with ConAgra also filing a cross-claim for property damage. West Side's insurance coverage included a $1 million primary policy with Colony Insurance and the $11 million excess policy with RSUI. Colony withdrew from the case after tendering its limits, while RSUI expressed concerns about potential non-coverage for the property damage in reservation letters.
After a jury trial, West Side was found liable for the property damage, resulting in liability exceeding its insurance coverage. Following this, West Side filed a complaint alleging RSUI failed to settle the claims within policy limits, which the district court initially dismissed without prejudice. After the appeal in Jentz v. ConAgra Foods, Inc. confirmed West Side's liability, a private settlement occurred between West Side and RSUI regarding the workers’ claims, but not for the property-damage claim.
In the current case, RSUI sought summary judgment, arguing primarily that the policy's damage-to-property exclusion applied and, secondarily, that West Side failed to provide evidence of a breach of duty to settle. The court acknowledged the exclusion but focused on the lack of evidence showing that there was a simultaneous offer to settle all claims while a reasonable likelihood of liability exceeding policy limits existed. Consequently, the court granted summary judgment to RSUI, leading to West Side's appeal.
The district court's grant of summary judgment is reviewed de novo, favoring the nonmovant, West Side. RSUI, the appellant, reiterates two arguments for affirmance: the insurance policy excludes ConAgra's property-damage claim and, even with coverage, West Side cannot prove RSUI breached its settlement duty. RSUI claims the damage-to-property exclusion in the policy applies, which is supported by Illinois law, thus relieving RSUI of any duty to settle an uncovered claim. As a federal court in diversity jurisdiction, Illinois law governs the interpretation of the insurance policy. The court engages in a choice-of-law analysis only if a conflict exists that could alter the outcome. West Side posits a conflict between Illinois and Iowa law regarding the exclusion's applicability but fails to demonstrate an outcome-determinative conflict, particularly as the Iowa case cited (Westlake) pertains to completed work, while ConAgra's claim is for ongoing operations. Consequently, Illinois law is applied to assess the damage-to-property exclusion's effect on ConAgra's claim against West Side.
The damage-to-property provision excludes ConAgra's claim against West Side from insurance coverage. Courts must interpret exclusions in favor of the insured unless they are clear, unambiguous, and consistent with public policy. West Side did not contest the clarity of the exclusion. The provision specifically excludes coverage for property damage related to operations performed by the insured or their contractors on that property, and for property needing repair due to the insured’s faulty work. The contract defines 'property damage' as physical injury to tangible property and 'your work' as operations performed by or on behalf of the insured. This exclusion is based on the principle that liability policies are not intended to cover the insured’s own defective workmanship.
The district court misinterpreted this exclusion by applying Missouri law, concluding that it only applied if damage resulted from work on the specific property. This was illustrated in a case where a painter was only liable for damage to the cabinets he was working on, not the entire home. The district court suggested that West Side was not working on the grain bin during the explosion, implying coverage for ConAgra’s claim. However, this interpretation was rejected, affirming that under Illinois law, the exclusion applies broadly to damage from poor workmanship, not limited to the exact location of the work.
After the worker completed the emptying and painting of the pool, heavy rainfall caused the pool to be pushed out of the ground. The homeowners filed a complaint against the worker, claiming that his failure to timely fill the pool led to its damage. Willett’s insurance company sought a declaration that its policy did not cover the homeowners’ claim. The court ruled that the policy's damage-to-property provisions excluded coverage for the claim due to Willett’s improper work. This ruling parallels West Side’s situation, where its insurance policy similarly did not cover damage to a grain bin resulting from West Side’s failure to manage grain temperature properly. The court emphasized that damage-to-property exclusions apply broadly and are not confined to the exact area of the property being worked on if the work was performed poorly. Such exclusions are designed to prevent general liability policies from covering the normal risks of a business's operations. Consequently, since RSUI’s policy did not cover ConAgra’s claim against West Side, RSUI had no obligation to settle it. The duty to act in good faith regarding settlement offers exists only when there is coverage. West Side’s arguments to hold RSUI accountable for failing to settle were rejected, including a claim of an exception to the damage-to-property exclusion and an assertion of estoppel based on RSUI managing the defense. The court noted that an insurer must defend under a reservation of rights if it believes there is no coverage, rather than refusing to defend outright.
RSUI issued reservation letters to West Side before defending the lawsuit, with West Side represented by independent counsel from its primary insurance carrier rather than RSUI. Citing past cases, it was noted that a reservation of rights does not protect an insurer from liability for non-coverage if it prejudices the insured's defense. However, RSUI took adequate steps to avoid prejudicing West Side's defense, allowing it to assert a non-coverage defense without being estopped. West Side claimed RSUI was liable for a $3 million judgment from ConAgra due to RSUI's alleged bad faith in failing to settle claims, even if the property damage claim was uncovered. This claim was dismissed as West Side could not recover damages for a claim it had not brought, having privately settled its claim against RSUI. RSUI successfully argued for summary judgment on the basis that the insurance policy did not cover ConAgra's claim, making further examination of other arguments unnecessary. The court affirmed the summary judgment.
