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DAKOTA GASIFICATION COMPANY, Plaintiff, v. SURE STEEL, INC., Defendant,
Sure Steel, Inc., Third-Party Plaintiff, v. Robertson-Ceco Corporation, d/b/a Garco Building Systems, Steel Concepts, LLC, and Rice Lake Contracting Corporation, d/b/a Ric Lake Construction Group, Third-Party Defendants.
ORDER GRANTING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT
Before the Court are cross motions for partial summary judgment filed by Plaintiff Dakota Gasification Company 1 (“DGC”) and Defendant Sure Steel, Inc. (“Sure Steel”). Doc. Nos. 42 and 47. DGC filed its partial summary judgment motion on June 21, 2019. Doc. No. 42. Sure Steel cross moved for partial summary judgment on June 28, 2019 (Doc. No. 47) and also filed a response to DGC's motion on July 11, 2019. Doc. No. 51. DGC correspondingly filed its reply to its own motion on July 23, 2019 (Doc. No. 57) and filed a response to Sure Steel's motion on July 17, 2019. Doc. No. 55. Sure Steel filed its final reply in support of its motion on July 30, 2019. Doc. No. 58.
The dispute at issue in these motions concerns insurance coverage and the applicability of the anti-subrogation rule. DGC asks for a declaration that Sure Steel is not an insured, additional insured, coinsured, or intended beneficiary under a Factory Mutual Insurance Company 2 (“FMIC”) builder's risk policy, and as such, DGC's partial subrogation claim against Sure Steel is not barred by the anti-subrogation rule. Sure Steel asks for the reverse – a declaration that it is an implied coinsured or intended beneficiary under the FMIC Policy, and as such, DGC's partial subrogation claim against Sure Steel is barred by the anti-subrogation rule. For the reasons below, DGC's motion for partial summary judgment is granted, and Sure Steel's motion is denied.
The essential facts at issue in these cross motions for summary judgment are largely undisputed. In 2014, DGC began construction of a production facility for urea, a granular fertilizer commonly used in agricultural operations, at its Great Plains Synfuels Plant located near Beulah, North Dakota (the “Project”). Doc. No. 1, ¶ 7. The Project included construction of a large urea storage building. Id. ¶ 8.
In April 2015, DGC contracted with Sure Steel to design, furnish, and construct the urea storage building (the “Building”) pursuant to a Construction Contract (Doc. No. 45-1) with an effective date of April 22, 2015 (the “Construction Contract”). Id. ¶ 9. The terms of the Construction Contract required Sure Steel to perform all work in connection with “designing, furnishing, and installation of the Building” at a cost of $6,803,843.00. Doc. No. 45-1. Notably, the Construction Contract did not require Sure Steel to obtain builder's risk insurance coverage for the Building during construction, and Sure Steel did not obtain builder's risk coverage for the Building. Also absent from the Construction Contract is any provision requiring DGC to obtain any insurance or to name Sure Steel as an additional insured under any of its insurance policies. Id.
DGC did, however, have a builder's risk insurance policy in place to cover the Project and the Building. On August 31, 2015, FMIC issued a Mutual Corporation Non-Assessable Policy (the builder's risk insurance policy, and hereinafter, the “Policy”) to Basin Electric for the Project. Doc. No. 44-1. The term of the Policy was September 1, 2015 to March 27, 2017. Id. The first page of the Policy clearly identifies the “Insured” – in all caps and bold formatting – as Basin Electric Power Cooperative, AECOM. Id. Moreover, Declaration 1 of the Policy identifies the “Named Insured” as follows:
Basin Electric Power Cooperative, AECOM and any subsidiary, and Basin Electric Power Cooperative's interest in any partnership or joint venture in which Basin Electric Power Cooperative has management control or ownership as now constituted or hereafter is acquired, as the respective interest of each may appeal; all hereafter referred to as the “Insured,” including legal representatives.
Id. The parties agree that Sure Steel is not a Named Insured under the Policy.
The Policy also contains a loss adjustment provision that allows additional insureds to be added and named as loss payees, generally by obtaining a certificate of insurance. Id. The parties agree that DGC did not add Sure Steel as an additional insured to the Policy, and the parties also agree that Sure Steel was never issued a certificate of insurance or other evidence of insurance under the Policy.
Importantly, the Policy contains, in relevant part, the following language concerning “Property Insured”:
1. PROPERTY INSURED
This Policy insures the following property, unless otherwise excluded elsewhere in this Policy, located at an insured location or within 1,000 feet/300 meters (sic) thereof, to the extent of the interest of the Insured in such property.
A. Real Property, including new buildings and additions under construction, in which the Insured has an insurable interest.
B. Personal Property:
4) of others in the Insured's custody to the extent the Insured is under obligation to keep insured for physical loss or damage insured by this Policy.
5) of others in the Insured's custody to the extent of the Insured's legal liability for insured physical loss or damage to Personal Property. The Company will defend that portion of any suit against the Insured that alleges such liability and seeks damages for such insured physical loss or damage. The Company may, without prejudice, investigate, negotiate and settle any claim or suit as the Company deems expedient.
This Policy also insures the interest of contractors and subcontractors in insured property during construction at an insured location or within 1,000 feet/300 meters thereof, to the extent of the Insured's legal liability for insured physical loss or damage to such property. Such interest of contractors and subcontractors is limited to the property for which they have been hired to perform work and such interest will not extend to any TIME ELEMENT coverage provided under this Policy.
Doc. No. 44-1, p. 15. The Policy also contains several exclusions, including an exclusion for design defects or faulty workmanship.
On July 3, 2016, the Building collapsed during a high wind storm. Doc. No. 1. The collapse resulted in, among other things, damage to the Building and its foundation, a delay in completion of the Building, and a reconstruction of the Building and its foundation. Id. DGC and Basin Electric submitted a claim to FMIC for damage to the Building, and FMIC determined what was recoverable under the Policy. Id.
As a part of the claims review process, FMIC determined that Sure Steel did not have an insurable interest in the Building. Doc. No. 49-2, Cook Deposition, pp.54-55. According to the record, FMIC determined that Sure Steel was not a named insured or an additional insured, and that DGC had no legal liability to Sure Steel for the loss of the Building. Id., pp. 23-24.
Ultimately, after investigation, FMIC paid DGC approximately $11 million for damages incurred in connection with the Building's collapse. In addition to the $11 million in damages paid by FMIC, DGC claims it incurred additional losses of $4 million as a result of the Building collapse.
On November 5, 2018, DGC commenced this action against Sure Steel to recover its damages. Doc. No. 1. As noted above, a portion of the damages claimed by DGC are amounts paid by FMIC under the Policy. Id. DGC alleges, among other things, that Sure Steel was negligent in constructing and bracing the Building and that Sure Steel breached the Construction Contract with DGC.3 Id. Sure Steel filed an amended answer and counterclaim against DGC on March 19, 2019 (Doc. No. 35), asserting an affirmative defense and seeking declaratory relief that DGC (and FMIC) is barred from pursuing subrogation against Sure Steel, as Sure Steel is an implied co-insured under the Policy. Thus, the Court must resolve two issues – first, whether Sure Steel is an implied co-insured or has an insurable interest under the terms of the Policy, and second, if Sure Steel has an insurable interest, whether the anti-subrogation rule bars any claim by DGC (and FMIC) against Sure Steel.
“In a case of actual controversy within its jurisdiction,” a federal court “may declare the rights and other legal relations of any interested party seeking such declaration.” 28 U.S.C. § 2201(a). Summary judgment is required “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). “An issue is ‘genuine’ if the evidence is sufficient to persuade a reasonable jury to return a verdict for the nonmoving party.” Schilf v. Eli Lilly & Co., 687 F.3d 947, 948 (8th Cir. 2012) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). “A fact is material if it ‘might affect the outcome of the suit.’ ” Dick v. Dickinson State Univ., 826 F.3d 1054, 1061 (8th Cir. 2016) (quoting Anderson, 477 U.S. at 248, 106 S.Ct. 2505). Courts must afford “the nonmoving party the benefit of all reasonable inferences which may be drawn without resorting to speculation.” TCF Nat'l Bank v. Mkt. Intelligence, Inc., 812 F.3d 701, 707 (8th Cir. 2016) (quoting Johnson v. Securitas Sec. Servs. USA, Inc., 769 F.3d 605, 611 (8th Cir. 2014)). “At summary judgment, the court's function is not to weigh the evidence and determine the truth of the matter itself, but to determine whether there is a genuine issue for trial.” Nunn v. Noodles & Co., 674 F.3d 910, 914 (8th Cir. 2012) (citing Anderson, 477 U.S. at 249, 106 S.Ct. 2505).
As noted above, the material facts are largely undisputed by both parties. The sole issue before the Court on these cross motions for summary judgment is a question of insurance policy interpretation; the Court must determine Sure Steel's interest, if any, under the Policy and determine what impact, if any, that interest has on DGC's ability to bring a subrogation claim. The parties agree that North Dakota law governs this question. Accordingly, the Court will apply North Dakota Supreme Court precedent and attempt to predict how that court would decide any state-law questions it has yet to resolve. See Stuart C. Irby Co., Inc. v. Tipton, 796 F.3d 918, 922 (8th Cir. 2015).
“Insurance policy interpretation is a question of law.” Forsman v. Blues, Brews & Bar-B-Ques, Inc., 2017 ND 266, ¶ 10, 903 N.W.2d 524 (citing K & L Homes, Inc. v. Am. Family Mut. Ins. Co., 2013 ND 57, ¶ 8, 829 N.W.2d 724). The North Dakota Supreme Court has consistently explained its approach to interpreting insurance policies this way:
We look first to the language of the insurance contract, and if the policy language is clear on its face, there is no room for construction. If coverage hinges on an undefined term, we apply the plain, ordinary meaning of the term in interpreting the contract. While we regard insurance policies as adhesion contracts and resolve ambiguities in favor of the insured, we will not rewrite a contract to impose liability on an insurer if the policy unambiguously precludes coverage. We will not strain the definition of an undefined term to provide coverage for the insured. We construe insurance contracts as a whole to give meaning and effect to each clause, if possible. The whole of a contract is to be taken together to give effect to every part, and each clause is to help interpret the others.
Borsheim Builders Supply, Inc. v. Manger Ins., Inc., 2018 ND 218, ¶ 8, 917 N.W.2d 504 (citation omitted).
A. Sure Steel's Insured Interest
The first issue the Court must resolve is what, if any, insured interest Sure Steel has under the terms of the Policy. DGC argues that Sure Steel is not an insured, named insured, additional insured, co-insured, or third-party beneficiary. Sure Steel contends the plain language of the Policy makes it an implied co-insured, entitled to blanket subrogation immunity.
As an initial matter, the parties agree Sure Steel is not a named insured; this is clear from the plain language of the Policy. The parties also agree that Sure Steel is not an additional insured, as no certificate of insurance or other evidence of insurance was issued to Sure Steel for coverage under the Policy. Thus, the Court is left to determine whether Sure Steel is an implied co-insured or third-party beneficiary.
The United States District Court for the Western District of Washington has previously interpreted the same FMIC policy language in similar construction-related cases. In Optimus Industries, LLC v. Factory Mutual Insurance Company, 2015 WL 12159153, 2015 U.S. Dist. Lexis 79341, 3:15-cv-05149 (W.D. Wash. June 18, 2015), the court was asked to resolve the question of whether Chaunte Manufacturing Company, a subcontractor, had standing as a co-insured to bring a declaratory action against FMIC. The builder's risk policy at issue in Optimus contained the same policy language at issue here. In Optimus, the court concluded that, while Chaunte was not a co-insured, the “Policy plainly created an insurable interest for subcontractors” and that Chaunte was a third-party beneficiary under the policy. Ultimately, the court held that Chaunte had standing to pursue a declaratory action against FMIC. In Factory Sales and Engineering, Inc. v. Factory Mutual Insurance Company, 2015 WL 3797216, 2015 U.S. Dist. Lexis 79413, 3:15-cv-5131 (W.D. Wash. June 18, 2015), a companion case to Optimus, the court, following the same analysis, reached the same conclusion.
As noted in Optimus and Factory Sales, the plain language of the Policy states:
This Policy also insures the interest of contractors and subcontractors in insured property during construction at an insured location or within 1,000 feet/300 meters thereof, to the extent of the Insured's legal liability for insured physical loss or damage to such property. Such interest of contractors and subcontractors is limited to the property for which they have been hired to perform work and such interest will not extent to any TIME ELEMENT coverage provided under this Policy.
Doc. No. 44-1 (emphasis added). The Court agrees with the analysis in Optimus and Factory Sales – the plain language of the Policy creates a limited, third-party beneficiary interest for contractors and subcontractors. However, Optimus and Factory Sales did not address the precise question at issue here, which is whether that limited, third-party beneficiary interest turns the beneficiary into an implied co-insured under the Policy.
While the plain language of the Policy unquestionably creates a limited interest for contractors and subcontractors, that same interest is qualified and limited by the language “to the extent of the Insured's [Owner's] legal liability for insured physical loss or damage to such property.” Thus, the Policy states that contractors and subcontractors have an interest in insured property during construction at an insured location, but such interest is limited and is a direct result of the insured's (owner's) legal liability for insured physical loss or damage. Said another way, contractors and subcontractors have an insured interest if the insured (owner) is legally liable for the loss claimed by the contractor and/or subcontractor.
This interpretation is consistent with the purpose of the Policy – DGC, as the owner of the Building, purchased and exclusively paid the premiums for the Policy. As such, DGC paid FMIC premiums in exchange for indemnification from FMIC for certain losses. Sure Steel did not pay premiums, partial or otherwise, under the Policy. Similarly, Sure Steel did not include language in the Construction Contract requiring DGC to add Sure Steel as a named insured, additional insured, and/or loss payee. While these facts, in isolation, are not necessarily dispositive of the question of insurance policy interpretation, these facts do support the Court's interpretation of the Policy per its plain language. The Policy was purchased by DGC, as the owner, from FMIC in exchange for indemnification from FMIC for certain losses. While the Policy creates a limited, third-party beneficiary benefit for contractors and subcontractors under one scenario – where the owner is legally liable for the loss – the Policy does not extend blanket coverage for all losses to contractors and subcontractors.
B. Applicability of Anti-Subrogation Rule
Having concluded the Policy creates a limited, third-party beneficiary interest for Sure Steel, the next question is whether the anti-subrogation rule bars DGC from suing Sure Steel.
The North Dakota Supreme Court addressed the anti-subrogation rule in Tri-State Insurance Company of Minnesota v. Commercial Group West, LLC, 2005 ND 114, 698 N.W.2d 483 (N.D. 2005). In Tri-State, the North Dakota Supreme Court stated:
Subrogation is an equitable remedy which provides for an adjustment between parties to secure the ultimate discharge of a debt by the person who, in equity and good conscience, ought to pay for it. Generally, when an insurer pays its insured for a loss, the insurer is subrogated to the insured's right of action against any third party responsible for the loss. However, an insurer is not entitled to subrogation from its own insured for a claim arising from the very risk for which the insured was covered. American National Fire Ins. Co. v. Hughes, 2003 ND 43, ¶ 8, 658 N.W.2d 330 (citations omitted). An insurer is not entitled to subrogation from entities named as insureds in the insurance policy, or entities deemed to be additional insureds under the policy.” Id. This insurance principle is called the antisubrogation rule. Black's Law Dictionary 104 (8th ed. 2004). An entity not named as an insured in an insurance policy is considered an additional insured when, under the circumstances, the insurer is attempting to recover from the insured on the risk the insurer had agreed to take upon payment of premiums. Hughes, at ¶ 8.
Tri-State, ¶ 10, 698 N.W.2d at 487.
The issue in Tri-State was whether a property owner could bring a subrogation action against a subcontractor under a builder's risk policy. The district court granted summary judgment in favor of the subcontractor, but the North Dakota Supreme Court reversed. In reaching its decision, the North Dakota Supreme Court noted that two prior decisions involving questions of implied insureds and anti-subrogation, Community Credit Union of New Rockford v. Homelvig, 487 N.W.2d 602 (N.D. 1992) and Hughes, 2003 ND 43, 658 N.W.2d 330, were distinguishable. In Community Credit Union, the North Dakota Supreme Court concluded a tenant is an implied co-insured because of the tenant's privity under the lease and the commercial realities under which lessors insure leased premises and pass on the premium costs in rent. Community Credit Union, 487 N.W.2d at 603-04. And in Hughes, the North Dakota Supreme Court concluded an insurance company could not bring a subrogation claim against an employee of a closely-held corporation. Hughes, 2003 ND 43, 658 N.W.2d 330. As in Tri-State, Community Credit Union and Hughes are distinguishable from this case. Neither case would allow the Court to extend the anti-subrogation rule to the circumstances here.
Ultimately, the Court's holding in Tri-State is controlling – “we decline to extend the anti-subrogation rule to imply that unnamed subcontractors are included under a builder's risk policy issued to the owner of the property.” Tri-State, ¶ 23, 698 N.W.2d 483. Although the Policy at issue in this case does include a limited, third-party beneficiary interest for contractors and subcontractors, such limited interest (that is limited to the owner's legal liability for the loss) does not allow the Court to extend blanket immunity under the anti-subrogation rule to Sure Steel. Once again, the Policy is not intended to benefit the contractors or subcontractors, except under one limited scenario; rather, the Policy, as a whole, is intended to provide coverage and indemnification to DGC. As such, the Court finds that the anti-subrogation rule does not apply to Sure Steel.
C. Subrogation for Value of Work Performed
The final question before the Court is whether FMIC is prohibited from pursuing subrogation against Sure Steel for the value of Sure Steel's property, including materials and supplies that became a permanent part of the Building. See Tri-State, 2005 ND 114, ¶ 29, 698 N.W.2d 483.
Once again, Tri-State is instructive. “A party who is not expressly named as a co-insured under the policy is protected from subrogation only to the extent that the insurance policy expressly covers the party's property.” Id. Unlike the policy in Tri-State, which specifically covered “materials and supplies which will become a permanent part of the buildings or structures[,]” the Policy at issue here does not contain similar language. Indeed, the Policy only insures personal property of others in DGC's custody (1) to the extent DGC was under an obligation to keep the personal property insured for physical loss, or (2) to the extent of DGC's legal liability for insured physical loss or damage to such personal property. The language present in Tri-State, which expressly insured the materials at issue, is absent in this Policy. Rather, per the plain language of the Policy, personal property is only insured to the extent DGC was under an obligation to insure the property, or to the extent DGC is legally liable for any physical loss or damage to such property. As such, consistent with Tri-State and because the Policy does not expressly cover Sure Steel's materials and supplies, the Court declines to prohibit FMIC from pursuing subrogation against Sure Steel for the value of Sure Steel's property.
The Policy creates a limited, third-party beneficiary interest for contractors and subcontractors, including Sure Steel. That interest, however, is limited to the extent of DGC's legal liability for the loss. Here, there have been no allegations that DGC is legally liable for the loss. As such, the plain language of the Policy does not extend coverage to contractors and subcontractors under the facts presented here. And per Tri-State, the anti-subrogation rule does not apply to Sure Steel.
The Court has carefully reviewed the entire record, the parties’ filings, and the relevant case law. For the reasons above, DGC's motion for partial summary judgment (Doc. No. 42) is GRANTED. Sure Steel's motion for partial summary judgment (Doc. No. 47) and motion for hearing (Doc. No. 50) are DENIED.
IT IS SO ORDERED.
1. DGC is a wholly-owned subsidiary of Basin Electric Power Cooperative (“Basin Electric”).
2. DGC's claim is, in part, a subrogation claim against Sure Steel by FMIC in the name of its insured, DGC. Under North Dakota law, where, as here, an insurer has paid only party of the loss by the insured, the insurer may bring suit in the name of the insured. Torske v. Bunn-O-Matic Corp., 216 F.R.D. 475, 478 (D.N.D. 2003); see also Farmers Ins. Exch. v. Arlt, 61 N.W.2d 429, 436 (N.D. 1953).
3. DGC also raises breach of contract and breach of warranty claims.
Peter D. Welte, Chief Judge
Response sent, thank you
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Docket No: Case No. 1:18-cv-226
Decided: March 09, 2020
Court: United States District Court, D. North Dakota.
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