CAPITOL REPRODUCTION, INC., a Michigan corporation, and
Capitol Air Surveys, Inc., a Division of Capitol
Reproductions, Inc., Plaintiffs-Appellees,
v.
HARTFORD INSURANCE COMPANY, Defendant-Appellant.
No. 84-1040.
United States Court of Appeals,
Sixth Circuit.
Argued Sept. 23, 1985.
Decided Sept. 10, 1986.
Maureen Holahan, argued, Holahan, Malloy, Maybaugh, Monnich, Troy, Mich., for defendant-appellant.
Ralph Sosin, argued, Birmingham, Mich., for plaintiffs-appellees.
Before ENGEL and MILBURN, Circuit Judges, and WISEMAN,* District Judge.
ENGEL, Circuit Judge.
Hartford Insurance Company appeals from a judgment entered against it and in favor of plaintiff Capitol Reproductions, Inc., holding it obligated to indemnify Capitol for the sum of $62,500 in settlement costs and $1,065.60 attorney fees incurred in settling a third party action against Capitol. The district court held that an umbrella insurance policy which Capitol had taken out with Hartford covered the loss in question, that Hartford had wrongfully failed to defend the third-party action brought against Capitol, and that, in addition, because of the failure to defend, Hartford was not entitled to a $25,000.00 retained liability benefit under the umbrella policy. We affirm.
The legal questions under Michigan law regarding the insurance policies in this diversity case are most easily understood if the facts underlying the actual loss are first briefly described.
I.
In March, 1972, Linard Building Company, a Michigan corporation engaged in residential construction, purchased 46.78 acres of vacant land in the City of Troy, Oakland County, Michigan, intending to develop the premises into two platted residential subdivisions. To that end, it engaged the services of Giffels-Webster Engineers, Inc., and entered into a contract whereby the latter would serve as Linard's professional engineering representative in connection with the development of the land, and would provide engineering and surveying services related to the plats, storm drainage, sanitary sewage, draining, paving, retention areas, and other like developmental services. In connection with these services, Giffels-Webster obtained from plaintiff here, Capitol Reproductions, Inc., an aerial topographical survey of the property in question. In reliance upon the accuracy of the survey, Giffels-Webster commenced development of the property. It was ultimately discovered that the survey was incorrect, and that in consequence Giffels-Webster had placed sewer lines in the subdivisions three to four feet above their appropriate depth. Accordingly, Linard brought an action in the Oakland County Circuit Court alleging improper performance of its contract by Giffels-Webster, and seeking as part of the damages the cost of digging, trucking and spreading 130,000 yards of fill dirt which had been needed to raise the level of the subdivision by an average of three feet to assure that the sewer lines were at the appropriate level. Linard also claimed that it would incur additional costs in constructing the subdivision on the uncompacted fill dirt which had to be trucked in. It also claimed losses to the value of the subdivision lots themselves due to death of trees which were destroyed by the additional fill, and also a loss of aesthetic value due to the increased visibility of a main thoroughfare which was located near the subdivision.
In March, 1976, Giffels-Webster added Capitol Reproductions as a third-party defendant and sought indemnification from it on the basis that its defective survey had caused the loss for which Giffels-Webster was liable to Linard.
Capitol Reproductions at the time was covered by two separate policies of liability insurance with Hartford Insurance Company. A comprehensive general liability insurance policy with Hartford provided general coverage against liability for personal injury and property damages with limits of liability for property damage of $50,000 for each occurrence and with a $50,000 aggregate. While the comprehensive policy generally insured against property damage caused by any occurrences during the term of the policy and called upon Hartford to defend any suits, even if they were groundless, exclusion (k) of the policy provided:
This insurance does not apply:
to bodily injury or property damage resulting from the failure of the named insured's products or work completed by or for the named insured to perform the function or serve the purpose intended by the named insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specifications, advertising material or printed instructions prepared or developed by any insured; but this exclusion does not apply to bodily injury or property damage resulting from the active malfunctioning of such products or work;
Hartford also provided Capitol with an umbrella liability policy for accidental property damage which carried an occurrence limit of $1,000,000, but with a retained limit of $25,000.1 This policy contained no equivalent to exclusion (k) of the comprehensive general liability policy. This policy did require Hartford to defend Capitol against any suit that alleged liability within the terms of the umbrella policy which was not covered by one of the underlying policies. Included among the schedule of underlying insurance policies for which the umbrella policy provided excess coverage, was the comprehensive general liability policy earlier referred to.
Upon being added as a third-party defendant in the Oakland County suit, Capitol called upon the Hartford to defend it, or otherwise to honor its obligation under the comprehensive and umbrella policies then in effect. After an investigation, Hartford concluded that the claim did not come within the coverage of either policy and declined either to defend Capitol or to participate in any negotiations for the settlement of Capitol's potential liability. Capitol thereupon proceeded to settle its liability by the payment of the sum of $62,500 and in the course thereof incurred legal expenses of $1,065.60. It then brought this action against Hartford which was removed on the basis of diversity to the United States District Court for the Eastern District of Michigan.
After the parties stipulated to the facts, United States District Judge Anna Diggs Taylor held that exclusion (k) of the comprehensive policy effectively relieved Hartford of any obligation under that policy. Capitol does not appeal that holding. She entered a summary judgment in favor of Capitol Reproductions and against Hartford, though, on the umbrella policy in the sums sought. She further found that because Hartford had refused to honor its obligation to defend Capitol, it was not entitled to the $25,000 retained liability which had been reserved in the umbrella policy. Hartford appeals.
II.
Under Michigan law an insurer's duty to defend its insured depends upon the allegations in the underlying complaint and is not limited to meritorious suits.
"The duty of the insurer to defend the insured depends upon the allegations in the complaint of the third party in his or her action against the insured. This duty is not limited to meritorious suits and may even extend to actions which are groundless, false, or fraudulent, so long as the allegations against the insured even arguably come within the policy coverage. An insurer has a duty to defend, despite theories of liability asserted against any insured which are not covered under the policy, if there are any theories of recovery that fall within the policy. Dochod v Central Mutual Ins Co,
Western Cas. & Sur. Group v. Coloma Twp.,
VI Defense, Settlement:
With respect to any occurrence not covered by the underlying policies listed in item 7 of the Declarations or any other underlying insurance collectible by the insured, but covered by the terms and conditions of this policy except for the amount of retained limit specified in item 4 of the Declarations, the company shall:
(a) defend any suit against the insured alleging such an occurrence and seeking damages on account thereof, even if such suit is groundless, false or fraudulent;
Hartford was therefore obligated to defend any action that alleged liability within the terms of the umbrella policy.
III.
The premise of Linard's and Giffels-Webster's claims, and consequently of Capitol's claim against Hartford, was that the land on which Linard proposed to build a subdivision was damaged by the improper installation of sewage lines. Hartford contends that these claims did not fall within the umbrella policy's coverage because there was neither property damage nor an accident within the meaning of the policy and consequently no occurrence within the meaning of the policy.
Hartford first contends that the claims on which Capitol seeks indemnification do not state a claim for "injury to or destruction of tangible property" and consequently do not allege property damage. Hartford, instead, characterizes the claim as one for the loss of use of the property.
Generally, to constitute property damage, the damage need not itself be physical or tangible, although in this case it seems that the misplacement of the pipes could well be characterized as physical or tangible damage to the land. In Bundy Tubing Co. v. Royal Indem. Co.,
In our opinion, property was damaged by the installation of defective tubing in a radiant heating system which caused the system to fail and become useless. A homeowner would never have such equipment installed if he knew that it would last only a very short time. A home with a heating system which did not function would certainly not be suitable for living quarters in the wintertime. The market for its sale would be seriously affected.
In Bundy this court thus applied a market value definition for property damage that was subsequently adopted by the Michigan Court of Appeals in Economy Mills of Elwell v. Motorists Mut. Ins. Co.,
It appears to this Court that Bundy, supra, supports plaintiff instead of defendant in the instant case. Defendant, Motorists Mutual Insurance Company, herein asserts that the land of the claimants was not injured or destroyed just as Royal asserted in Bundy, supra, that the old concrete was not injured or destroyed. The court in Bundy, supra, decided that the accident caused a loss in market value of the home and this was sufficient. In our case, it may be said that the market value of the fields in which the defective seeds were planted for the season in question was seriously affected by the accident and therefore constituted injury to property.
Other states have also adopted a market value test for property damage. See Elco Ind. Inc. v. Liberty Mut. Ins. Co.,
Following the view adopted by Michigan and a majority of the states, in the present case it is irrelevant whether the injury which caused a diminution of the land's value is characterized as a tangible injury to the land or as an intangible injury to its intended use. The sole matter of concern under this view is whether the property suffered a loss in value because of the improper placement of sewage lines.2 Linard and Giffels-Webster alleged that expensive restorative measures were necessary to compensate for the shallow pipes and that the land would never be completely restored to its former utility. Linard did not claim damages for its loss of productive value of the land during the period of repairs, but rather for the expense of restoring the land and for the permanent loss of the land's productive value, to the extent that it could not be restored to its former usefulness. These allegations were sufficient under Michigan law to raise a claim of injury to tangible property, and hence, of property damage.3
Hartford also contends that there was no "accident" within the meaning of the policy and therefore no "occurrence" which would give rise to a duty to defend Capitol. The policy does not define the word "accident" but Hartford argues that an accident must be a sudden or instant happening and that there was no sudden or instant happening alleged.
The Michigan Supreme Court has defined accident without reference to suddenness in a case where the insured trailer manufacturer had been found liable for illness caused by defects in the trailer.
"An 'accident,' within the meaning of policies of accident insurance, may be anything that begins to be, that happens, or that is a result which is not anticipated and is unforeseen and unexpected by the person injured or affected thereby--that is, takes place without the insured's foresight or expectation and without design or intentional causation on his part. In other words, an accident is an undesigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected."
Guerdon Ind., Inc. v. Fidelity & Cas. Co.,
Hartford contends, though, that liability was excluded from coverage by the umbrella policy under exclusions (d) and (e) of the agreement. Exclusions (d) and (e) provide:
This policy does not apply: ...
(d) to Property Damage to
(1) goods or products (including any container thereof) manufactured, sold, handled or distributed by the named insured, or by others trading under his name, or premises alienated by the named insured, arising out of such goods, products or premises or any part of such goods, products or premises; or
(2) work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith;
(e) to such part of any damages or expenses which represents the cost of inspecting, repairing, replacing, removing, recovering, withdrawing from use or loss of use of, because of any known or suspected defect or deficiency therein, any
(1) goods or products or any part thereof (including any container) manufactured, sold, handled or distributed by the named insured, or by others trading under his name; or
(2) work completed by or for the named insured; or other property of which such goods, products or work completed are a component part or ingredient;"
Hartford argues that exclusions (d) and (e) "negate coverage in suits against a contractor for breach of contract and faulty workmanship on projects where the damages claimed were the cost of correcting the work itself." The truth of this assertion is not questioned. Capitol, though, does not seek indemnification for the cost of correcting the aerial survey, but rather, it seeks indemnification for the damages caused to other property by errors in its aerial survey. It was this risk to property other than the insured's own work that gave rise to the liability for which Capitol seeks indemnification. Exclusions (d) and (e) do not negate coverage in this suit.
We thus conclude that liability for damages to other property from the use of Capitol's aerial survey was not excluded from coverage, and we find it significant that liability for damages or injuries suffered through reliance on an inaccurate map or survey is not uncommon. See Reminga v. United States,
The declarations in the umbrella policy in this regard are typical of most types of business insurance arrangements whereby the insured obtains and keeps in force a number of policies of primary insurance covering risks against which it needs the protection of insurance. These underlying policies generally may be limited in the type of loss covered, and in normal claims the underlying policies are adequate to take care of both the losses described therein and the cost of defending those losses. The umbrella insurance policy on the other hand performs a further service of providing a broader range and a greater dollar-value of coverage in excess of the coverage afforded by the primary insurer. In this way, the costs of the excess insurance can be minimized, and the premium is determined based upon the amount of the limits, but also as influenced by the knowledge that most losses can be adjusted satisfactorily within the limits of the primary insurance policies which the insured has taken out as well. The umbrella policy in this case provided such excess coverage and the defense endorsement of the umbrella policy required Hartford to defend against claims within that excess coverage, i.e., claims not covered by the underlying policies but covered in the umbrella policy. Giffels-Webster's claims fall within the umbrella policy's excess coverage and Hartford should have defended them.
IV.
Hartford finally contends that the district court erred by awarding Capitol the full amount paid in settlement of the claim, along with fees incurred in the settlement, without deducting the $25,000 retained limit of liability provided for in the policy. Under Michigan law, when an insurer fails to fulfill its duty to defend an insured, it becomes liable for the full extent of the judgment against the insured. "If the insurer had an obligation to defend and failed to fulfill that obligation, then, like any other party who fails to perform its contractual obligation, it becomes liable for all foreseeable damages flowing from the breach.... An insurer's duty to defend is independent of its duty to pay, and damages for breach of that duty are not limited to the face amount of the policy." Stockdale v. Jamison,
V.
The thrust of Hartford's claim that its policy of insurance is not applicable is that its liability under the policy is limited to losses which arise from occurrences of property damage, as those terms are defined in the umbrella policy. While this is undoubtedly a correct interpretation as far as it goes, we believe, construing any ambiguities in policy terms against the insurer as we must, Raska v. Farm Bureau Mut. Ins. Co.,
AFFIRMED.
Notes
Honorable Thomas A. Wiseman, Jr., United States District Judge for the Middle District of Tennessee, sitting by designation
The umbrella policy provided:
Coverage: The company will indemnify the insured for all sums which the insured shall become legally obligated to pay as damages and expenses, all as hereinafter defined as included within the terms ultimate net loss, by reason of liability (a) imposed upon the insured by law ... because of ... (ii) property damage caused by ... an occurrence which takes place during the policy period anywhere in the world
The policy defined "occurrence" as:
"Occurrence" means an accident which takes place during the policy period, or that portion within the policy period of a continuous or repeated exposure to conditions, which causes personal injury, property damage or advertising liability neither expected nor intended by the insured.
The policy further defined "property damage" as:
"Property Damage" means injury to or destruction of tangible property, other than property owned by a named insured, and all loss resulting therefrom.
In order to find that a diminution in value constitutes property damage some courts have required direct evidence that the defective component caused a decrease in the end product's value and that this decrease was not solely attributable to the decrease in the value of the defective component. See Pittway Corp. v. American Motorists Ins. Co.,
Without discussing market value, other state courts have found property damage where a defective component has been incorporated into a product. Generally in these cases the defective element, once incorporated, could not be readily separated from the end product. See, e.g., Continental Cas. Co. v. Gilbane Bldg. Co.,
Vacated on other grounds,