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Northland Casualty Co. v. Mulroy

United States District Court, D. Montana, Missoula Division

January 11, 2019

NORTHLAND CASUALTY COMPANY, a Connecticut Corporation, Plaintiff and Counter-Defendant,
GLACIER INSURANCE OF LIBBY, INC., a Montana Corporation, Third-Party Defendant.


          Dana L. Christensen, Chief Judge United States District Court.

         Before the Court are the parties' cross-motions for summary judgment (Docs. 128 & 131) and the Defendants' motion to supplement the record (Doc. 138).


         In 2006, Defendant and Counterclaimant Joseph S. Mulroy hired Duane Keim's company, Northwest Log Homes, LLC, [1] to build a log home near Trego, Montana. Among other responsibilities, Keim was to build and stain the log component of the home. He also partially remodeled a guest home using logs. Keim purchased logs from a log broker, and he did not treat the logs for insects. Several years later, Mulroy noticed signs of an active wood-boring powderpost beetle infestation in both the main home and the remodeled guest home. The infestation caused substantial damage to both structures, and it remains ongoing.

         Mulroy asserted a claim for damages against Keim, and Keim tendered the claim to his insurer, Plaintiff and Counter-defendant Northland Casualty Company ("Northland"). Northland notified Keim of its position that the operative commercial general liability ("CGL") policy did not cover Mulroy's damages. Mulroy proceeded to file a complaint in state court, and Northland provided a defense under a reservation of rights. Without Northland's consent, Mulroy and Keim settled the claim. Keim admitted liability and assigned any rights under the CGL policy to Mulroy. Following a damages hearing, which Keim did not attend, the state court awarded $208, 824.58 in damages for remediation costs and $120, 000 for loss of value, for a total of $328, 824.58, plus interest and costs.

         Legal Standard

         A party is entitled to summary judgment if it can demonstrate 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). Summary judgment is warranted where the documentary evidence produced by the parties permits only one conclusion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-51 (1986). Only disputes over facts that might affect the outcome of the lawsuit will preclude entry of summary judgment; factual disputes that are irrelevant or unnecessary to the outcome are not considered. Id. at 248. In ruling on a motion for summary judgment, a court must view the evidence "in the light most favorable to the opposing party." Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). "[T]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Anderson, 477 U.S. at 255.


         The sole question before the Court is whether Northland has a duty to indemnify Keim for the damages suffered by Mulroy. Northland relies on three of the CGL policy's business risk exclusions to support its position that coverage cannot be found: (1) exclusion j(6), [2] which excludes coverage for certain property damage arising from the insured's work on the damaged property; (2) exclusion k, excluding coverage for damages to the insured's "product"; and (3) exclusion 1, which bars coverage for certain property damage to the insured's work arising from that work. Mulroy argues that the exclusions do not apply, either unambiguously or because they are ambiguous and accordingly must be construed in favor of coverage. If those arguments fail, Mulroy nonetheless contends that the reasonable expectations doctrine operates to create coverage.

         The Court looks to Montana law for the "rules of decision." 28 U.S.C. § 1652. "The interpretation of an insurance contract is a question of law." Babcock v. Farmers Ins. Exck, 999 P.2d 347, 348 (Mont. 2000). "If the language of a policy is clear and explicit, the policy must be enforced as written." Nat'l Farmers Union Prop. & Cos. Co. v. George, 963 P.2d 1259, 1261 (Mont. 1998). "Ambiguities are construed against the insurer and exclusions from coverage are construed narrowly because they are contrary to the fundamental protective purpose of insurance policies." Id. Further, "because exclusions are contrary to the fundamental purpose of the policy, such exclusions are frequently subject to challenge for ambiguity or inconsistency." Newman v. Scottsdale Ins. Co., 301 P.3d 348, 355 (Mont. 2013).

         Under the terms of the policy, Mulroy suffered "property damage"- "[p]hysical injury to tangible property." (Doc. 26-1 at 34.) This Court previously found that the initial grant of coverage did not extend to Mulroy's claim for property damage because Keim's defective construction did not constitute an "occurrence." The Ninth Circuit reversed, applying Employers Mutual Casualty Co. v. Fisher Builders, Inc., 371 P.3d 375 (Mont. 2016). On remand, Northland does not contend that there was no occurrence, relying instead on the policy's exclusions. Northland bears the burden of demonstrating the applicability of an exclusionary clause. Travelers Cas. & Sur. Co. v. Ribi Immunochem Research, Inc., 108 P.3d 469, 476 (Mont. 2005). If Northland meets its burden, Mulroy has the burden of proving that an exception to the exclusion applies. Id.

         I. Exclusion j(6)

         Exclusion j(6) excludes coverage for "property damage" to "[t]hat particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." (Doc. 26-1 at 24.) For its part, "your work" is defined to include:

(1) Work or operations performed by you or on your behalf; and
(2) Materials, parts or equipment furnished in connection with such work or operation.

         "Your work" also includes "warranties or representations" regarding the work, as well as the provision or omission of warnings or instructions. (Doc. 26-1 at 35.)[3]

         That said, exclusion j (6) does not exclude coverage if the "property damage" falls under the "products-completed operations hazard." In relevant part, the "products-completed operations hazard" ("PCOH"):

a. Includes all... "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" ...

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