American Guarantee & Liability Insurance Co. v. Environmental Materials LLC

          OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT

          MARCIA S. KRIEGER SENIOR UNITED STATES DISTRICT JUDGE.

         THIS MATTER comes before the Court pursuant to the Plaintiff's Motion for Summary Judgment (# 79) and the Third-Party Defendant's Motion for Partial Summary Judgment (# 80). The Court also has reviewed the opposition and supporting reply briefing thereto (#81, #82, #87, #88). For the reasons that follow, the Plaintiff's Motion is granted, in part, and the Third-Party Defendant's Motion is denied.

         I. JURISDICTION

         The Court has jurisdiction under 28 U.S.C. § 1332.

         II. BACKGROUND^[1]

         Defendant Environmental Materials LLC (Environmental) is a manufacturer and installer of stone veneer. It purchased multiple Commercial Umbrella Liability Policies from Plaintiff American Guarantee & Liability Insurance Co. (AGLIC) for the 2006-07, 2007-08, and 2008- 09 policy periods. Each Umbrella Policy provided excess coverage in accordance with an underlying commercial general liability (CGL) insurance policy issued by Employers Insurance Company of Wausau.^[2] Coverage under the Umbrella Policy was triggered when the limits of the Wausau Policy were exhausted.

         Before the policy periods at issue, the Wausau Policy provided for “Defense Outside Limits”, which meant that costs of defense were not applied against its policy limits. For the relevant time periods (2006 to 2009), however, the Wausau Policy provided for “Defense Within Limits”, which meant that costs of defense were applied against policy limits.^[3] Although the underlying Wausau CGL coverage changed from “Defense Outside limits” to “Defense Within Limits” in the 2006-07 policy period, terms of the Umbrella Policy did not change. Indeed, all the Umbrella Policies are based on the Wausau Policy providing “Defense Outside Limits” coverage.

         To procure insurance, Environmental used the services of Third-Party Defendant Moody Insurance Agency (Moody), a retail insurance broker.^[4] Moody worked with Eydent Insurance Brokers LLC (Eydent), a wholesale insurance broker that contracted with AGLIC and its parent company, Zurich Insurance Group. Each year there were several exchanges of information between Environmental and Moody, and then between Moody and Eydent about Environmental's policy needs. This exchange resulted in policy applications and quote letters from Wausau, the primary CGL insurance broker, involving the underlying Wausau Policy itself.

         In early 2016, Environmental notified AGLIC that it was involved in a lawsuit in New Jersey, and that the Wausau Policy limits were on the verge of exhaustion for one or more of the 2006 to 2009 policy periods. The New Jersey matter was settled with AGLIC contributing approximately $500, 000 to the settlement. In March 2016, Environmental advised AGLIC that the Wausau Policy limits had been exhausted, and requested that AGLIC undertake its defense in an ongoing lawsuit in Pennsylvania. Upon investigation, AGLIC learned that the Wausau Policy limits had been exhausted, in part, by application of more than $900, 000 of defense costs. Under AGLIC's interpretation of the Umbrella Policy - which was premised on an underlying CGL policy that provided Defense Outside Limits - coverage and a duty to defend were not triggered.

         In addition, exhaustion of the limits of the Wausau Policy resulted from application of a settlement payment made in accordance with a “wrap-up” program.^[5] AGLIC's view was that, because the payment was excluded from coverage under the Umbrella Policy, application of the payment to the Wausau Policy limits did not trigger Umbrella Policy coverage.

         AGLIC seeks declaratory relief in four claims: (1) a determination that Colorado law is applies for interpretation of the policies, (2) a determination that the Wausau Policy was not exhausted by the defense costs and wrap-up settlement payment based on different Policy provisions, (3) a determination on what AGLIC's drop-down obligations are, and (4) in the event that the wrap-up settlement payment triggered coverage, a reallocation of the settlement payment across multiple policy periods. In its Answer (# 51), Environmental alleges counterclaims against AGLIC for: (1) a declaration of its rights under the Umbrella Policy, (2) breach of contract based on AGLIC's failure to tender a defense and indemnify, (3) negligence and negligent misrepresentation based on AGLIC's breach of its duty of care when selecting and issuing a policy that failed to provide Environmental with the coverage it requested, and (4) that the Umbrella policy be reformed to provide Environmental with the coverage it originally intended to obtain. Environmental also brings third-party claims against Moody for negligence, negligent misrepresentation and breach of contract.

         AGLIC functionally moves for summary judgment all claims and counterclaims (# 79). Moody moves for partial summary judgment on Environmental's breach of contract claim (# 80).

         III. LEGAL STANDARD

         Rule 56 of the Federal Rules of Civil Procedure facilitates the entry of a judgment only if no trial is necessary. See White v. York Int'l Corp., 45 F.3d 357, 360 (10th Cir. 1995). Summary adjudication is authorized when there is no genuine dispute as to any material fact and a party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). Substantive law governs what facts are material and what issues must be determined. It also specifies the elements that must be proved for a given claim or defense, sets the standard of proof, and identifies the party with the burden of proof. See Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248 (1986); Kaiser-Francis Oil Co. v. Producers Gas Co., 870 F.2d 563, 565 (10th Cir. 1989). A factual dispute is “genuine” and summary judgment is precluded if the evidence presented in support of and opposition to the motion is so contradictory that, if presented at trial, a judgment could enter for either party. See Anderson, 477 U.S. at 248. When considering a summary judgment motion, a court views all evidence in the light most favorable to the non-moving party, thereby favoring the right to a trial. See Garrett v. Hewlett Packard Co., 305 F.3d 1210, 1213 (10th Cir. 2002).

         If the movant has the burden of proof on a claim or defense, the movant must establish every element of its claim or defense by sufficient, competent evidence. See Fed. R. Civ. P. 56(c)(1)(A). Once the moving party has met its burden, to avoid summary judgment the responding party must present sufficient, competent, contradictory evidence to establish a genuine factual dispute. See Bacchus Indus. Inc. v. Arvin Indus. Inc., 939 F.2d 887, 891 (10th Cir. 1991); Perry v. Woodward, 199 F.3d 1126, 1131 (10th Cir. 1999). If there is a genuine dispute as to a material fact, a trial is required. If there is no genuine dispute as to any material fact, no trial is required. The court then applies the law to the undisputed facts and enters judgment.

         If the moving party does not have the burden of proof at trial, it must point to an absence of sufficient evidence to establish the claim or defense that the non-movant is obligated to prove. If the respondent comes forward with sufficient competent evidence to establish a prima facie claim or defense, a trial is required. If the respondent fails to produce sufficient competent evidence to establish its claim or defense, then the movant is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

         IV. AGLIC'S MOTION FOR SUMMARY JUDGMENT

         This Motion seeks a determination of AGLIC's and Environmental's rights and obligations under the Umbrella Policy relative to exhaustion of the coverage limits of the underlying Wausau Policy. The two areas of contention are whether payments for defense costs and the settlement payment under the wrap-up program count toward exhaustion of the Wausau Policy and the triggering of the Umbrella Policy. Environmental also seeks a determination of this issue in its first Counterclaim. There are no genuine disputes as to material fact regarding these issues. They can be determined as a matter of law through interpretation of the terms and provisions of the Umbrella Policy.

         AGLIC argues that under the terms of the Umbrella Policy, its coverage was not triggered to the extent the policy limits of the underlying Wausau Policy were exhausted by application of payments for defense costs or a settlement payment made pursuant to a wrap-up program. AGLIC contends that in this regard there was a gap in coverage between the Wausau Policy and the Umbrella Policy for which it is not responsible.

         Environmental counters that the Umbrella Policy “followed form”, meaning that its coverage was the same as the Wausau Policy except where the terms of the Umbrella Policy specifically contradicted those of the Wausau Policy. Environmental further argues that no term in the Umbrella Policy expressly contradicted the “Defense Within Limits” provision in the Wausau Policy or application of defense costs and or settlement payments made under a wrap-up program to exhaust the Wausau Policy limits. In this regard there was no gap in coverage because the Umbrella Policy coverage was triggered when the Wausau Policy limits were exhausted in accordance with its terms.

         Both parties agree that Colorado law governs. In interpreting the provisions of the Umbrella Policy, the Court is mindful that Colorado law requires it to give them the meaning given ordinary language under ordinary principles of contract interpretation. See Ace Am. Ins. Co. v. Dish Network LLC, 883 F.3d 881, 887 (10th Cir. 2018); Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299 (Colo. 2003). The Court reads the policy as a whole, does not read its provisions in isolation, and strives to give effect to the intent and reasonable expectations of the parties. See Cyprus Amax, 74 P.3d at 299. Whenever possible, such intent is discerned from the policy itself. See Bengtson v. USAA Property & Cas. Ins., 3 P.3d 1233, 1235 (Colo.App. 2000). The Court generally construes a policy's coverage provisions to provide the broadest possible coverage. See Fire Ins. Exch. v. Bentley, 953 P.2d 1297, 1300 (Colo.App. 1998).

         Unless there is an ambiguity in the language of an insurance policy, the Policy must be enforced as written. Ballow v. PHICO Ins. Co., 875 P.2d 1354, 1359 (Colo. 1993). A mere disagreement between the parties regarding the meaning of a policy term does not create an ambiguity. State Farm Mut. Auto. Ins. Co. v. Stein, 940 P.2d 384, 387 (Colo. 1997). Rather, a provision is ambiguous if it is susceptible to more than one reasonable interpretation. Terranova v. State Farm Mut. Auto. Ins. Co., 800 P.2d 58, 60 (Colo. 1990). If an ambiguity in the insurance policy language is found, and there is no evidence of the parties' mutual intent, the provision should be construed against the drafter - the insurer - in favor of providing coverage to the insured. Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299 (Colo. 2003).

         There is no dispute that the Umbrella Policy is an excess policy, designed to provide coverage when the coverage of an underlying CGL policy, such as the Wausau Policy, is exhausted. Under Colorado law, excess insurance policies presumptively follow form, meaning that the excess policy adopts the terms and conditions of the underlying policy. This presumption can be rebutted only by express language in the policy limiting the coverage. Radil v. Nat'l Union Fire Ins. Co. of Pittsburgh, 233 P.3d 688, 692 (Colo. 2010).

Absent express language defining the coverage endorsed or a disclaimer of particular terms or conditions, the excess insurer's follow-form endorsement . . . tracks the underlying coverage in every respect, thereby incorporating the terms and conditions that define the underlying coverage. Id. at 689 (emphasis added).

         The Court also notes that the Tenth Circuit encountered the issue presented in this case, albeit in the context of Kansas law. Although its holding is not binding precedent, its reasoning provides an analytical template. In Coleman Co. v. California Union Insurance Co., 960 F.2d 1529 (10th Cir. 1992), the question was whether a drop-down defense duty in an excess policy was triggered when the insured reached its self-insured limit (retained limit) of $2.5 million. Like Colorado, Kansas law recognized the presumption that an excess policy follows the form of the underlying policy. The Circuit Court began its analysis with consideration of the excess policy's coverage language to determine whether it contained a follow-form endorsement. Finding that it did, the Court then considered whether there was a clear and specific provision in the excess policy expressing the insurer's intent to deviate from the follow-form presumption. Finding none, the Court held that the exhaustion of the self-insured limit triggered the excess policy's coverage and the insurer's duty to defend.

         With these precepts in mind, the Court begins with the language of the ...