363 P.3d 1270
Okla. Civ. App.2015Background
- KBC (Kentucky Bluegrass Contracting), a Kentucky construction company, was sued in federal court after subcontractor CLP alleged KBC failed to pay for labor; KBC filed third‑party and cross‑claims involving PPR and Morgan (a third‑party defendant).
- KBC held a three‑year commercial general liability (CGL) policy issued by Cincinnati Insurance (Insurer) in Kentucky covering property damage caused by an "occurrence" and containing a contractual‑liability exclusion with two narrow exceptions.
- Morgan’s cross‑claim sought indemnity from KBC for costs and attorneys’ fees tied to alleged defective or incomplete contract work and back charges totaling $168,642.25.
- KBC tendered the Morgan cross‑claim to Insurer for defense and indemnity in December 2009; Insurer denied coverage in January 2010, citing no "occurrence" and policy exclusions (expected/intended injury and contractual liability).
- KBC sued Insurer in Oklahoma state court for breach of contract and bad faith; Insurer moved for summary judgment relying on Kentucky precedent that defective workmanship is not an "occurrence." The trial court applied Kentucky law and granted summary judgment for Insurer.
- On appeal, the court held Kentucky law need not govern but affirmed summary judgment on the alternative ground that the contractual‑liability exclusion precluded coverage for the contract‑based claims alleged in Morgan’s cross‑claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Choice of law (which state’s law governs policy interpretation) | KBC: No actual conflict existed at the time of denial (Jan 2010); therefore Oklahoma law applies | Insurer: Policy was issued in Kentucky so Kentucky law governs under lex loci contractus | Court: Trial court erred in applying Kentucky law, but error was harmless because summary judgment affirmed on other grounds |
| Duty to defend — whether Morgan’s cross‑claim alleged property damage caused by an "occurrence" | KBC: Allegations of damage to other subcontractors’ work and back charges raise potential for an "occurrence"; "occurrence" is ambiguous | Insurer: Faulty workmanship/contractual breaches are not an "occurrence" (citing Motorists Mutual) | Court: Declined to resolve split on "occurrence"; assumed arguendo occurrence could exist but found exclusion dispositive |
| Applicability of contractual‑liability exclusion | KBC: Cross‑claim includes negligence and non‑contractual allegations; some contracts may be "insured contracts" | Insurer: Cross‑claim is contract‑based and the exclusion bars coverage; no applicable exception shown | Court: Contractual‑liability exclusion unambiguously excludes the contract‑based claims; KBC failed to show exceptions apply, so no coverage or duty to defend |
| Bad faith / breach of duty to investigate | KBC: Insurer acted unreasonably in denying defense and failed to investigate Morgan’s cross‑claim | Insurer: Denial was reasonable because no potential coverage existed under the policy terms | Court: Because no potential for coverage existed under the policy, insurer had no duty to defend or indemnify; bad‑faith claim fails |
Key Cases Cited
- Carmichael v. Beller, 914 P.2d 1051 (Okla. 1996) (standard of review for summary judgment)
- Dodson v. St. Paul Ins. Co., 812 P.2d 372 (Okla. 1991) (contractual‑liability exclusion bars contract‑based claims)
- Alfalfa Elec. Coop., Inc. v. Mid‑Continent Cas. Co., 350 P.3d 1276 (Okla. Civ. App. 2015) (applies Dodson to exclude contract‑based claims unless exception applies)
- First Bank of Turley v. Fidelity & Deposit Ins. Co. of Md., 928 P.2d 298 (Okla. 1996) (insurer’s duty measured by facts known or discoverable at tender)
- Lewis v. Sac & Fox Tribe of Okla. Hous. Auth., 896 P.2d 503 (Okla. 1994) (burden to invoke foreign law; choice‑of‑law principles)
- Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010) (Kentucky authority holding faulty workmanship alone is not an "occurrence")