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Interpreting policy language: Which state’s law governs?

Interpreting policy language: Which state’s law governs?

December 08
13:56 2016

Interpreting policy language: Which state’s law governs?

Kentucky Bluegrass Contracting LLC (KBC), a construction company, pursuant to a subcontract with PPR Lyons Pride Construction (PPR), agreed to perform “electrical connection work, exterior cladding and interior finishes” at a federal construction project for barracks and officers’ quarters at Fort Sill, Oklahoma, in 2008. To obtain laborers for the project, KBC contracted with CLP Resources, Inc. (CLP).

On some unknown date, PPR rejected KBC’s work for “failure to complete the work as required.” Because PPR’s charges for completion and/or repair of KBC’s defective work exceeded the amount due KBC under the subcontract, it “could not afford to pay CLP for the labor services.”

Seeking payment under its contract, CLP sued KBC in the U.S. District Court of the Western District of Oklahoma (federal case). KBC subsequently filed a third-party petition against PPR, several subcontractors, and the general contractor on the Fort Sill project.

In June 2009, one third-party defendant in the case, Morgan Building & Spas, Inc., together with its surety, Travelers Casualty & Surety Company of America, filed an answer to CLP’s first amended petition joined with a cross-claim against KBC. Morgan raised the affirmative defenses of KBC’s “first and prior breach of contract,” accord and satisfaction, and payment.

In Morgan’s cross-claim, it alleged that KBC was responsible for “supervising and paying for any contract labor employed by it in the performance of such work” and for “the completion of certain work to PPR’s satisfactory inspection,” which work PPR rejected and declined to certify “based on failure to complete the work as required.” Morgan further alleged that “[t]o the extent that [KBC] wrongfully, maliciously, recklessly or in bad faith failed to pay,” Morgan was seeking to be “indemnified, reimbursed and held harmless for all losses, expenses and damages incurred by [it] relating thereto, including, without limitation, costs and reasonable attorneys’ fees.” Morgan sought judgment in its favor, recovery of damages in the amount shown by the evidence, and all other relief to which it was entitled.

In December 2009, KBC submitted a claim to its commercial general liability insurer, Cincinnati Insurance Company, seeking coverage and a defense in the federal case. The insurer denied the claim on the basis that there were no claims that would constitute an “occurrence” and based on the policy’s “Expected or Intended Injury” and “Contractual Liability” exclusions.

In October 2011, KBC filed a petition for breach of contract and bad faith against Cincinnati in Comanche County District Court (state case). KBC alleged the insurer had unreasonably denied and failed to properly investigate KBC’s requests in January 2010 to defend against Morgan’s cross-claim and to indemnify KBC from any loss incurred as a result of the cross-claim. As a consequence, KBC alleged it had incurred defense costs in the federal case in excess of $75,000 and was subjected to damage, contraction of its business, and loss of operating funds, and was required to incur indebtedness to continue operations during the pendency of that case.

In June 2012, Cincinnati filed an answer in the state case, admitting its duty to provide a defense to any civil lawsuit filed against KBC for damages resulting from an “occurrence.” However, the insurer specifically and generally denied that the cause of action asserted against KBC in the federal case raised any duty on the part of Cincinnati to provide a defense to KBC.

Over a year later, Cincinnati moved for summary judgment in the state case, arguing that Kentucky law should be applied to interpret the policy that had been issued in that state. The insurer argued there was no potential for coverage under the policy for Morgan’s cross-claim, because the policy limited coverage to property damage caused by an “occurrence” and did not extend to allegations relating to the failure to pay or complete work in connection with the project at Fort Sill. On this basis, Cincinnati argued that it was under no duty to defend and/or to indemnify KBC and that no bad faith existed.

KBC opposed summary adjudication, arguing that a choice of law analysis was unnecessary for lack of a conflict between Oklahoma and Kentucky law at the time Cincinnati denied its claim, and even if the latter were to govern, Cincinnati’s authority was distinguishable on the facts.

KBC also argued that the term “occurrence” in the policy was ambiguous and that several facts precluded summary judgment.

In December 2013, the court sustained Cincinnati’s motion for summary judgment, and KBC appealed.

On appeal, Cincinnati argued that because KBC’s policy was issued in Kentucky, Kentucky law should apply to interpretation of the policy, rather than the law of Ohio, where the insurer is domiciled. KBC contended that this fact was immaterial.

The court found that Cincinnati had carried its burden for asserting Kentucky law, but held that, based

on case law, Cincinnati had failed to demonstrate an actual conflict of law between Kentucky and Ohio. Cincinnati had the burden to demonstrate that the policy did not identify where it was to be performed; i.e., lacked a choice of provision and/or Cincinnati and KBC did not otherwise agree to or indicate a place of performance. The court upheld the trial court’s granting of summary judgment in favor of Cincinnati.

The court concluded that the contractual liability exclusion applied to remove coverage for the contract-based claims alleged against KBC in the federal case unless such coverage was reserved by one of its two exceptions. KBC, the court said, had failed to make any argument that would support reservation of coverage.

Accordingly, the court held that the trial court had erred in ruling that Kentucky law governed the interpretation of the policy issued to KBC. Applying Oklahoma case law, the court found there was no potential for liability under the policy for the cross-claim asserted against KBC in the federal case, in which cause of action and property damages were clearly “contract based.” Consequently, Cincinnati had no duty to defend the cross-claim or to indemnify KBC’s losses. Although based on other grounds, the court affirmed the trial court’s summary judgment in favor of the insurer.

Kentucky Bluegrass Contracting, LLC , vs. Cincinnati Insurance Company-Court of Civil Appeals of Oklahoma, Division No. 3-June 24, 2015-No. 112,464.

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