Standard Fire Ins. Co. v. Chester O'Donley & Associates, Inc.

Page 1

972 S.W.2d 1

STANDARD FIRE INSURANCE COMPANY, Plaintiff/Appellant, v. CHESTER-O'DONLEY & ASSOCIATES, INC., Ohio Casualty Insurance Company, Clark & Associates Architects, Inc., and Highland Rim Constructors, Inc. Defendants/Appellees.

Court of Appeals of Tennessee Middle Section, at Nashville.

Jan. 28, 1998.

Application for Permission to Appeal

Denied by Supreme Court July 6, 1998.

Arthur E. McClellan, McClellan, Powers, Ehmling & Dix, Nashville, for Plaintiff/Appellant.

John B. Link, III, Nashville, for Chester-O'Donley & Associates, Inc.

Lewis B. Hollabaugh, Lawrence B. Hollabaugh, Lawrence B. Hammet, II, Manier, Herod, Hollabaugh & Smith, Nashville, for Ohio Casualty Insurance Company.

Andree Sophia Blumstein, Sherrard & Roe, Nashville, for Clark & Associates Architects, Inc.

C. George Caudle, Baker, Donelson, Bearman & Caldwell, Chattanooga, for Highland Rim Constructors, Inc.

OPINION

KOCH, Judge.

This appeal involves the scope of coverage of a mechanical subcontractor's commercial general liability insurance policy. The general contractor, the project architect, and the subcontractor's bonding company asserted various damage claims against the subcontractor in litigation stemming from the total failure of the subcontractor's work. When the subcontractor called upon the issuer of its commercial general liability policy to defend against these claims, the insurer denied coverage and filed suit in the Circuit Court for Davidson County seeking a declaratory judgment concerning the scope of its policy's coverage and its obligation to defend the subcontractor. In response to the parties' motions for summary judgment, the trial court held that the policy covered the claims asserted by the general contractor, the project architect, and the subcontractor's bonding company. The insurer asserts on this appeal that its policy did not cover these claims. We vacate the trial court's order because the policy covers only one claim asserted by the general contractor and the subcontractor's bonding company.

I.

In March 1988 the State of Tennessee and Austin Peay State University contracted with Highland Rim Constructors, Inc. to construct a new music building on Austin Peay's campus in Clarksville. Clark & Associates Architects, Inc. designed the building and served as the project architect. Highland Rim subcontracted the mechanical portions of the work to Chester-O'Donley & Associates, Inc., and Chester-O'Donley, in turn, subcontracted the installation of the ductwork for the heating, ventilation, and air conditioning system to H & R Mchanical Specialties, Inc. Chester-O'Donley also obtained a performance and payment bond for its portion of the work from Ohio Casualty Company.

The new music building was substantially completed in May 1990. Shortly after Austin Peay occupied the building, serious problems with the HVAC system began to manifest themselves which could not be remedied by fine tuning the HVAC system. Highland Rim determined that the problems were caused by defects in the system's ductwork and terminated its contract with Chester-O'Donley because H & R Mechanical Specialties' work failed to meet the project's specifications. Highland Rim also called upon Ohio Casualty to pay for removing and replacing the entire duct system. Ohio Casualty eventually paid Highland Rim $1,425,835.88.

In August 1991 Chester-O'Donley filed suit in the Circuit Court for Davidson County against Highland Rim, Clark & Associates, H & R Mechanical Specialties, and others alleging various causes of action arising out of the performance of its work. It eventually nonsuited these claims in March 1994, but not before Highland Rim, Ohio Casualty, and Clark & Associates had filed counterclaims seeking damages from Chester-O'Donley. Chester-O'Donley forwarded these claims to Standard Fire Insurance Company, the issuer of its commercial general liability policy, and requested a defense. Standard Fire asserted that its policy did not cover these claims and, in March 1994, filed suit in the Circuit Court for Davidson County seeking a declaratory judgment concerning the scope of its policy's coverage and its obligation to defend Chester-O'Donley. All parties sought summary judgments, and the trial court determined that Standard Fire's policy covered all the pending claims and that Standard Fire was obligated to provide Chester-O'Donley with a defense.

II. THE CHOICE OF SUBSTANTIVE LAW

This case presents a threshold choice of law question. Chester-O'Donley is a Kentucky corporation whose principle place of business is in Paducah, Kentucky. It purchased its commercial general liability policy from Standard Fire in Kentucky, and Standard Fire delivered the policy to Chester-O'Donley in Kentucky. In the absence of an enforceable choice of law clause, Tennessee courts apply the substantive law of the state in which the policy was issued and delivered. See Ohio Cas. Ins. Co. v. Travelers Indem. Co., 493 S.W.2d 465, 467 (Tenn.1973); Kustoff v. Stuyvesant Ins. Co., 160 Tenn. 208, 212-13, 22 S.W.2d 356, 358 (1929); Hutchison v. Tennessee Farmers Mut. Ins. Co., 652 S.W.2d 904, 905 (Tenn.Ct.App.1983). ¹ Accordingly, questions concerning the construction and operation of Chester-O'Donley's commercial general liability policy must be decided using Kentucky law.

Kentucky law provides little substantive guidance in this case. We have been unable to find any reported Kentucky cases construing commercial general liability policy provisions similar to the ones at issue in this case. Nonetheless, we can apply Kentucky's canons for construing insurance policies, and we may also inform our judgment by reviewing decisions from other jurisdictions construing similar policy provisions. See Norton-Children's Hosp., Inc. v. First Ky. Trust Co., 557 S.W.2d 895, 898 (Ky.Ct.App.1977); Collins v. Kentucky Tax Comm'n, 261 S.W.2d 303, 305 (Ky.Ct.App.1953).

III. THE USE OF A SUMMARY JUDGMENT TO RESOLVE COVERAGE ISSUES

Tennessee's law governs the procedural aspects of this case even if Kentucky's law governs the substantive issues. See State ex. rel. Smith v. Early, 934 S.W.2d 655, 658 (Tenn.Ct.App.1996); McReynolds v. Cherokee Ins. Co., 815 S.W.2d 208, 211 (Tenn.Ct.App.1991). Questions involving an insurance policy's coverage and an insurer's duty to defend require the interpretation of the insurance policy in light of claims asserted against the insured. See Drexel Chem. Co. v. Bituminous Ins. Co., 933 S.W.2d 471, 480 (Tenn.Ct.App.1996); American Nat'l Property & Cas. Co. v. Gray, 803 S.W.2d 693, 695-96 (Tenn.Ct.App.1990). A declaratory judgment proceeding provides an appropriate vehicle for deciding coverage questions. See Allstate Ins. Co. v. Merritt, 772 S.W.2d 911, 912 (Tenn.Ct.App.1989).

Issues relating to the interpretation of written contracts involve legal rather than factual issues. See Rapp Constr. Co. v. Jay Realty Co., 809 S.W.2d 490, 491 (Tenn.Ct.App.1991); Taylor v. Universal Tire Inc., 672 S.W.2d 775, 777 (Tenn.Ct.App.1984). Accordingly, issues relating to the scope of coverage and an insurer's duty to defend likewise present questions of law. See Pile v. Carpenter, 118 Tenn. 288, 296, 99 S.W. 360, 362 (1907); Pennsylvania Lumbermens Mut. Fire Ins. Co. v. Holt, 32 Tenn.App. 559, 566, 223 S.W.2d 203, 206 (1949). These essentially legal questions can be resolved using a summary judgment when the relevant facts are not in dispute. See St. Paul Fire & Marine Ins. Co. v. Torpoco, 879 S.W.2d 831, 834 (Tenn.1994); Rainey v. Stansell, 836 S.W.2d 117, 118 (Tenn.Ct.App.1992).

The trial court's decision to grant the motions for summary judgment is not entitled to a presumption of correctness on appeal. See McClung v. Delta Square Ltd. Partnership, 937 S.W.2d 891, 894 (Tenn.1996); Carvell v. Bottoms, 900 S.W.2d 23, 26 (Tenn.1995). Rather, we must make a fresh determination concerning whether the requirements of Tenn. R. Civ. P. 56 have been met. See Mason v. Seaton, 942 S.W.2d 470, 472 (Tenn.1997); Hembree v. State, 925 S.W.2d 513, 515 (Tenn.1996). A summary judgment is warranted only when there are no genuine, material factual disputes with regard to the claim or defense asserted in the motion and when the moving party is entitled to a judgment as a matter of law. See Bain v. Wells, 936 S.W.2d 618, 622 (Tenn.1997); McCall v. Wilder, 913 S.W.2d 150, 153 (Tenn.1995).

The insurance policy that Standard Fire issued to Chester-O'Donley is in the record, as are the counterclaims against Chester-O'Donley filed by Highland Rim, Clark & Associates, and Ohio Casualty. There are no factual disputes concerning the contents of these documents; accordingly, their interpretation presents questions of law. The summary judgment in this case can stand only if these documents establish as a matter of law that Standard Fire's commercial general liability policy covers the asserted claims as a matter of law.

IV. COMMERCIAL GENERAL LIABILITY INSURANCE POLICIES

Commercial general liability insurance policies are designed to protect the insured against losses arising out of business operations. ² These policies have been in use for over fifty years, ³ and their provisions have become relatively standard over the years through refinements by casualty ratings bureaus. ⁴ In order to prevent overlapping coverage and to minimize gaps in coverage, ⁵ they combine several historic forms of coverage into an integrated whole with coverage being broadly stated in a single insuring agreement and exclusions circumscribing the broad grant of coverage. ⁶

General liability polices are not "all-risk" policies. See Diamond Heights Homeowners Ass'n v. National Am. Ins. Co., 227 Cal.App.3d 563, 277 Cal.Rptr. 906, 910 (1991); Bausch & Lomb, Inc. v. Utica Mut. Ins. Co., 330 Md. 758, 625 A.2d 1021, 1033 (1993). They provide an insured with indemnification for damages up to policy limits for which the insured becomes liable as a result of tort liability to a third party. See Weedo v....