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Northland Casualty Co. v. Mulroy

United States District Court, D. Montana, Missoula Division

July 21, 2015

NORTHLAND CASUALTY COMPANY, a Connecticut Corporation, Plaintiff and Counter-Defendant,
v.
JOSEPH S. MULROY DBA YORLUM RANCH AND YORLUM RANCH LTD, NORTHWEST LOG HOMES LLC, and DUANE KEIM, Defendants, JOSEPH S. MULROY, Counterclaimant and Third-Party Plaintiff,
v.
GLACIER INSURANCE OF LIBBY, INC., a Montana Corporation, Third-Party Defendant.

ORDER

DANA L. CHRISTENSEN, Chief District Judge.

Before the Court are the parties' cross motions for partial summary judgment on the issue of coverage, and Defendants' motion for partial summary judgment on Plaintiff Northland Casualty Company's ("Northland") duty to defend. For the reasons explained below, Defendants' motions for partial summary judgment are denied and Northland's motion is granted.

BACKGROUND

This case arises out of a construction defect claim involving a beetleinfested log home. In June 2006, Defendant Joseph Mulroy ("Mulroy") hired Defendant Duane Keim ("Keim") and Keim's company, Defendant Northwest Log Homes ("Northwest"), to construct a log home on Mulroy's property in Trego, Montana. Northwest was primarily responsible for construction of the "log shell" of the home, while subcontractors were to perform the remaining work to make the structure livable. Northwest purchased the logs to be used in the home from a log broker out of Striker, Montana, who in turn purchased the logs from one or more loggers in the northwest Montana region. The logs were standing dead timber. Northwest processed the logs by peeling, notching, pressure washing, and sorting them, but did not chemically treat the logs with insecticide. Northwest completed the project, which included a remodel of a guest house on the property, in 2008.

Through 2009 and 2010, Mulroy and his wife began noticing insect bore holes and track marks in the logs comprising the shell of the home. Mulroy attempted to treat the logs himself, but was unsuccessful. In 2011, Mulroy brought the infestation issue to Northwest's attention and made a claim to Northwest's insurer, Northland. At the time Mulroy, Keim, and Northwest entered into their construction contract and through the time it took to build the home, Northland insured Northwest under an occurrence-based commercial general liability ("CGL") insurance policy with $1, 000, 000 per occurrence and $2, 000, 000 aggregate limits.

On July 5, 2011, Northland advised Keim and Northwest by letter that there was no coverage under the CGL policy for Mulroy's claims. In this initial letter, Northland indicated that there was no coverage because Mulroy's claims were for "breach of contract and faulty workmanship, " and therefore did "not constitute claims for property damage' caused by an occurrence' as those terms [were] defined by the policy." (Doc. 39-3 at 2.) Northland further identified a number of exclusions contained in the policy which it contended would preclude coverage even if the claims did meet the "occurrence" definition. Northland advised Mulroy of its opinions and conclusions on July 18, 2011. Mulroy responded on October 19, 2011, urging Northland to accept Northwest's tender of a defense for his claims. Northland again declined a defense on November 16, 2011.

On December 16, 2011, Mulroy filed a complaint against Keim and Northwest in the Montana Nineteenth Judicial District Court of Lincoln County. The complaint alleged negligence, negligent misrepresentation, and breach of warranty. Upon receipt of the complaint, Northland accepted defense of the claims under a reservation of rights in a letter dated March 1, 2012. Northland articulated the same coverage concerns in the reservation of rights letter as it had nearly a year before in its initial denial letter.

After nearly nineteen months of litigation in the underlying case, which included a $490, 000 demand from Mulroy, Northland filed this declaratory judgment action on November 15, 2013. The parties then attended a settlement conference ten days later. The parties failed to resolve the case at the conference, and trial was set for January 28, 2014. The state court then granted Mulroy's motion to vacate the trial date, and on January 22, 2014 Northland sent a second reservation of rights letter to Keim and Northwest. The letter contained the same coverage analysis as Northland's previous two letters, and further reminded Northwest that it "may not voluntarily make a payment assume any obligation, or incur any expense... without [Northland's] consent." (Doc. 34-10 at 10.) At this point, Northland had been providing a defense to Northwest for just shy of two years.

On March 19, 2014, with this action pending and without notifying Northland, Mulroy, Keim, and Northwest entered into a "Settlement Agreement and Assignment of Claims, " providing for Northwest's "admission of liability and agreement to hold a hearing on damages in exchange for a covenant not to execute and assignment of all right relating to insurance." (Doc. 34-11 at 1.) Northwest was represented in this settlement and assignment by different counsel than had been provided by Northland since March 2012.

The hearing contemplated in the settlement agreement took place before the state court judge in Lincoln County on August 6, 2014, the same day the parties filed pretrial conference documents in this case. Northwest elected to be represented at this hearing by an attorney from the law firm which Northland had retained to represent the interests of its insured. The parties presented testimony from four witnesses: (1) William Finley, a log home restoration specialist, testified on Mulroy's behalf as to the available course of action for remedying the beetle infestation; (2) Terry Comstock, a real estate broker from Eureka, Montana, testified on Mulroy's behalf regarding the diminution in value of the log home even if remediation was successful in the future; (3) Mulroy himself testified; and

(4) Dr. David Weaver, an entomologist from Montana State University, testified on Northwest's behalf as to the characteristics of the beetle species found in the logs. Notably, Dr. Weaver testified that the beetles "were in the timber when harvested, when it was delivered, and when construction occurred." (Doc. 34-1 at 2.) Keim did not attend the hearing.

This Court conducted a preliminary pretrial conference in this matter on August 13, 2014. The parties agreed that, due to the dispositive nature of the coverage question, it was appropriate to set discovery and motions deadlines as to that issue only. The Court therefore set a fully-briefed coverage motions deadline of April 10, 2015, but did not set this matter for trial.

Shortly after the pretrial conference, the state court judge issued findings of fact and conclusions of law on August 29, 2014. Ultimately, he concluded that Northwest and Keim were liable on all three counts in Mulroy's complaint, as stipulated, and awarded $208, 824.58 in remediation damages ...


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