Unpublished Dispositionwilliam E. Brock, Secretary of Labor, United Statesdepartment of Labor, Plaintiff-appellant, v. Ken-lick and Tip Top Coal, Inc., Defendant and Third-party Plaintiff, v. Liberty Mutual Insurance Company, Third-party Defendant-appellee, 912 F.2d 465 (6th Cir. 1990)

The Secretary of Labor, defendant/third-party plaintiff appeals the district court's order granting summary judgment for the third-party defendants in this black lung insurance case. Subsequent to the district court's decision, Kenlick & Tip Top filed for bankruptcy. By motion granted by this court on December 27, 1989, the Secretary of Labor was permitted to substitute for Kenlick & Tip Top as appellant and real party of interest in this case. For the following reasons we affirm and reverse in part.

Clyde Minix worked as a miner for the Kenlick and Tip Top Coal Co. (Tip Top), from May 1959 until April 1973. He worked for Middle States Coal Company (Middle States) from August 1973 until October 1973. During the course of his employment he contracted black lung disease. Liberty Mutual Insurance Co. (Liberty) issued an insurance policy for Tip Top effective September 1, 1972 through September 1, 1973. Because the policy expired in 1973, Liberty claims that it has been unable to locate the actual policy and states that the policy probably has been destroyed. Thus, since Liberty has not produced the actual policy, the exact policy provisions were not examined by the district court and are still in dispute.

General Accident Fire and Life Assurance Corporation, Ltd. (General), who is not party to this appeal, issued an insurance policy for Tip Top effective September 1, 1973 through September 1, 1974. The parties agree that the policy states that coverage applies

... only to injury (1) by accident during the policy period, or (2) by disease caused or aggravated by exposure of which the last day of the last exposure, in the employment of the insured, to conditions causing the disease occurs during the policy period.

J.App. at 21 (emphasis added). The policy further provides that General will pay

... on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury by accident or disease, including death at any time resulting therefrom ...

Id. Finally, the policy excludes from coverage

any obligation for which the insured or any carrier as his insurer may be held liable under the workmen's compensation or occupational disease law of [Kentucky,] any other workmen's compensation or occupational disease law, any unemployment compensation or disability benefits law, or under any similar law.

Id. at 21-22 (emphasis added).

On May 13, 1974, Minix filed a claim with the Office of Workers' Compensation Programs (OWCP) for federal black lung benefits. In May 1979, the OWCP ruled that Minix was eligible for benefits. By this time, Middle States had been declared the responsible operator under Kentucky law and thus was required to pay the Kentucky state disability benefits. Thereafter, the OWCP informed Tip Top that it was the responsible operator under federal black lung law and was required to pay federal black lung benefits to Minix which began to accrue as of May 1, 1974. The OWCP also stated that if Tip Top failed to respond (or had good cause not to respond) to this initial finding within 30 days, the OWCP would deem this failure as a waiver of the right to contest Minix' claim.

On April 10, 1979, Tip Top told the OWCP that if it was the responsible operator, the responsible insurance carrier would be General (rather than its current carrier, Old Republic Insurance Company) because Minix filed his claim during the effective period of General's insurance policy. At this point, Tip Top had not properly responded to the OWCP's notice of initial finding. On May 17, 1979, General told Tip Top that it would not cover Minix's claim because Minix's injury was caused by injuries which occurred before the effective date of General's policy and because Minix stopped working for Tip Top before General's policy became effective. J.App. at 77. General also told Tip Top that it should request "an extension of time within which to file the Operator's Controversion Form" to prevent the order from becoming final. Id. While it does not appear that Liberty had yet been notified of Minix's claim, Tip Top claims that on May 21, 1979 it sent Minix' claim file to Liberty and cites as proof a United States Postal Service return receipt. See id. at 78.

On July 17, 1979, the OWCP sent Tip Top a proposed order awarding black lung benefits to Minix and holding Tip Top liable because Tip Top failed to respond to the March 1979 notice of initial finding. J.App. at 48. When Tip Top failed to respond to the July 1979 order, the OWCP informed Tip Top in August 1979 that the order was now final and that it should begin paying Minix' benefits immediately. On September 1, 1979, Tip Top's attorney finally responded to the OWCP and stated that it was seeking reimbursement from Liberty since General had refused coverage.

Because Tip Top failed to pay any black lung benefits to the OWCP, on October 10, 1979 the OWCP paid Minix interim benefits from the Black Lung Disability Trust Fund. Although the OWCP issued another proposed decision and order in November 1979 which awarded benefits to Minix and held Tip Top liable, neither Tip Top nor Liberty responded to this order. Consequently, this decision and order became final in December 1979.

In August 1980, Liberty informed the OWCP that it was not liable for Minix's claim because the claim was filed in May 1974, eight months after Liberty's policy had expired. On January 28, 1981, OWCP told Liberty that it was released from liability because, according to OWCP records, it was not the insurance carrier on the date Minix filed his disability claim. J.App. at 46. On May 13, 1981, Tip Top contacted Liberty and requested that Liberty contact General to determine which of them was responsible for paying Minix' claim. Id. at 82. On May 19, 1981, Liberty notified Tip Top that it was not liable for Minix' benefits because it had been released from liability by the OWCP and because Tip Top delayed in sending notice of Minix' claim. On September 9, 1981, General reasserted that it was not responsible for paying Minix' claim because its state worker's compensation policy did not provide coverage for federal black lung benefits. J.App. at 154.

On February 14, 1985, the OWCP served Tip Top with its final demand letter and informed Tip Top that if it failed to respond, the OWCP would institute enforcement proceedings. Because Tip Top failed to respond to this letter and because neither Tip Top, Liberty nor General made any payments to Minix or the OWCP, on July 29, 1985, the Secretary filed a complaint for enforcement in the district court. On September 5, 1985, Tip Top impleaded Liberty and General as third-party defendants. Tip Top maintained that Liberty was responsible for coverage because (1) Liberty induced it to rely on representations that Liberty provided full insurance coverage and (2) Liberty failed to inform Tip Top that Liberty did not cover federal black lung benefits. Tip Top maintained that General also failed to inform Tip Top that General did not provide black lung coverage and that General failed to issue a policy in accordance with Tip Top's insurance needs. On December 23, 1985, the Secretary filed a motion for summary judgment against Tip Top and alleged, in part, that the district court should not deny enforcement of its order based on the dispute between Tip Top and the two insurance carriers. Thereafter, General and Liberty filed motions for summary judgment against Tip Top raising essentially the same claims raised in previous pleadings to the court.

On July 2, 1986, the Magistrate issued a Report and Recommendation which noted that Tip Top's good faith belief that it was insured does not exempt it from liability under the Federal Mine Safety and Health Act of 1977, 30 U.S.C. § 932(a) (1988). Accordingly, the Magistrate recommended that the district court grant the Secretary's motion for summary judgment. In addition, the Magistrate recommended that the district court grant summary judgment for General because the policy covered only state worker's compensation claims and the exclusion provision in the policy "clearly sets forth exclusion of coverage for federal black lung benefits." J.App. at 22. The Magistrate further stated that whether "General Accident had a duty to inform or warn [Tip Top] of the risk of liability for federal black lung benefits under its policy" is irrelevant because General's "policy would not have protected [Tip Top] from a risk encountered before the policy period, such as [Minix's] award of federal black lung benefits." Id. With respect to Tip Top's claims against Liberty, the Magistrate noted that "a genuine issue of material fact exists as to Liberty Mutual's coverage" of Tip Top's liability for Minix's claim and that there was still a "question of Liberty Mutual's duty to inform or warn [Tip Top] of its risk of liability, in case the contract does not cover federal black lung claims." J.App. at 24. On August 28, 1986, the district court adopted all of the Magistrate's recommendations and accordingly granted summary judgment for the Secretary and General. The court refused to grant summary judgment for Liberty or Tip Top and noted that there were genuine issues of material fact with respect to whether state or federal law applies to black lung insurance coverage issues and whether, in light of Liberty's inability to produce the insurance policy, Liberty owed Tip Top a duty to insure against Minix' claim.

In response to the court's denial of its motion for summary judgment, Liberty produced a copy of a form entitled "Federal Mine Health and Safety Act Endorsement" which it issued to Tip Top on October 1, 1973. The endorsement indicates that it is effective only from July 1 through September 1, 1973 (the endorsement period) and provides that:

2. With respect to such insurance as is afforded by this endorsement,

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(b) Insuring Agreement IV(2), is amended to read "by disease caused or aggravated by exposure of which the last day of the last exposure, in the employment of the insured, to conditions causing the disease occurred during the policy period, or occurred prior to 7/1/73, and claim based on such disease is first filed against the insured during the policy period."

J.App. at 53 (emphasis added). On December 15, 1986, Tip Top filed another motion for summary judgment based on the newly supplied endorsement. Tip Top claimed that the first clause of the second paragraph of the endorsement covers its liability for Minix's federal black lung disability claim since his last exposure was during the policy period (i.e., April 1973). Thus, Tip Top asserted that Liberty is required to pay Minix's claim even though he did not file his claim during the three-month endorsement period (i.e., July to September 1973). Tip Top claimed in the alternative that if the court determined that the language in the policy is ambiguous, Kentucky law requires that all ambiguities in insurance policies be construed in favor of the insured. In response to Tip Top's motion for summary judgment, Liberty maintained that the endorsement did not cover Minix's claim because Minix terminated his employment with Tip Top before the effective date of the endorsement period (i.e., July 1, 1973), and he filed his disability claim after the policy terminated in September 1, 1973. In addition, Liberty asserted that Tip Top was estopped from asserting any claim against Liberty because it failed to timely notify Liberty of Minix's federal claim.

On April 27, 1987, the Magistrate issued a Report and Recommendation to determine "whether the insurance contract issued by Liberty to Tip Top covered Tip Top's liability for Federal Black Lung Benefits to Clyde Minix, whose employment with Liberty ceased in April 1973." J.App. at 87-88. The Magistrate initially stated that "if a provision in an insurance policy is ambiguous, the construction favoring coverage must be adopted...." Id. (citations omitted). In interpreting Liberty's endorsement, the Magistrate reasoned that

Paragraph 2(b) of the endorsement consists of two clauses connected by the disjunctive particle "or." The first clause provides for coverage, if the last exposure occurs during the "policy period."

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By use of the disjunctive work "or," the second clause provides an alternative to the first clause. It provides coverage for an injury caused by a last exposure which occurs prior to July 1, 1973, but by use of the conjunctive work "and," in addition that the "claim based on such disease is first filed against the insured during the policy period." By reading paragraph 2(b) of the endorsement as a whole and considering both clauses together, it seems clear and without any ambiguity that coverage was provided if the last exposure occurred during the endorsement period and further, as an alternative, if the last exposure occurred prior to July 1, 1973, there was also coverage, provided that in addition the claim was filed during the endorsement period of July 1, 1973 to September 1, 1973.

Id. at 89. Based on this interpretation of the endorsement, the Magistrate recommended that the district court grant Liberty's motion for summary judgment. On July 23, 1987, the district court granted summary judgment in favor of Liberty based on the Magistrate's Report and Recommendation. This timely appeal followed.

Fed. R. Civ. P. 56 provides that a court may enter summary judgment on a claim if "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Although the moving party has the burden of proving the absence of any genuine issue of material fact, the nonmoving party must "make a showing sufficient to establish the existence of an element essential" to her case and for which she will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). While the nonmoving party is not required to "produce evidence in a form that would be admissible at trial in order to avoid summary judgment," summary judgment motions "must be construed with due regard not only for the rights of persons asserting claims and defenses that are adequately based in fact to have those claims and defenses tried to a jury, but also for the rights of persons opposing such claims and defenses to demonstrate ... prior to trial, that the claims and defenses have no factual basis." Id. at 324-327. Finally, "there is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party" and if the disputed evidence "is merely colorable ... or is not significantly probative ... summary judgment may be granted." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986) (citations omitted). "Contract interpretation ... is a question law" and a "trial court's conclusions of law are freely reviewable by the court of appeals." Weimer v. Kurz-Kasch, Inc., 773 F.2d 669, 671 (6th Cir. 1985).

The primary issue before this court is whether the district court misconstrued the exclusion provisions of General's policy and misinterpreted Liberty's endorsement. The Secretary maintains that the district court was required by law to interpret the policy provisions by referring to Kentucky contract law and the black lung regulations promulgated by the Secretary. Tip Top and the Secretary maintain that, properly construed, General and Liberty's policies covers Tip Top's black lung liability. Tip Top and the Secretary also assert that if we determine that the contracts are ambiguous, Kentucky law requires that any ambiguity in an insurance contract be resolved in favor of providing coverage.

The Secretary contends that the district court was required, as a matter of law, to apply federal black lung law to determine coal mine owner's black lung liability as well as the scope of the insurance carriers' liability to a coal mine operator. As an operator of a coal mine, Tip Top was required to "secure the payment of benefits ... by ... qualifying as a self-insurer ... or ... insuring and keeping insured the payment of such benefits" with an insurance company or state fund. 30 U.S.C. 933(a). In addition, section 933 requires that all coal mine operators obtain insurance which contains "a provision to pay benefits required under [the Federal Coal Mine Health and Safety Act of 1969], ... notwithstanding the provisions of the State workmen's compensation law which may provide for lesser payments.... a provision that insolvency or bankruptcy of the operator ... shall not relieve the carrier from liability for such payments; and ... such other provisions as the Secretary, by regulation, may require." 30 U.S.C. 933(b). Finally, section 933 provides that " [a]ny employer required to secure the payment of benefits under this section who fails to secure such benefits shall be subject to a civil penalty assessed by the Secretary...." 30 U.S.C. 933(d) (1).

Although section 933 clearly states the owner's obligations with respect to obtaining adequate insurance coverage, neither the Secretary nor Tip Top have cited cases which have held that insurance carriers are bound by the provisions in section 933 or by the Code of Federal Regulations' provisions concerning the black lung liability of coal mine operators. However, the Secretary has cited one provision, 20 C.F.R. 726.210 (1989), which directly supports this position. This provision states that

Every carrier seeking to write insurance under the provisions of this Act shall be deemed to have agreed that the acceptance by the Office of a report of the issuance or renewal of a policy of insurance ... shall bind the carrier to full liability for the obligations under this Act of the operator named in said report.

In addition, another regulation, 20 C.F.R. 726.203 (1988), indirectly supports the Secretary's position and contains an endorsement with language virtually identical to the language used in Liberty's endorsement. The CFR endorsement provides that:

(a) The following form of endorsement shall be attached and applicable to the standard workmen's compensation and employer's liability policy ... affording coverage under the Federal Coal Mine Health and Safety Act of 1969, as amended:

It is agreed that:

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(2) with respect to such insurance as is afforded by this endorsement ...

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(b) Insuring Agreement IV(2) is amended to read "by disease caused or aggravated by exposure of which the last day of the last exposure, in the employment of the insured, to conditions causing the disease occurs during the policy period, or occurred prior to (effective date) and claim based on such disease is first filed against the insured during the policy period."

(b) The term "effective date" as used in paragraph (a) of this section shall be construed to mean the effective date of the first policy or contract of insurance procured by an operator for purposes of meeting the obligations imposed on such operator ...

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(c) (6) ... paragraph a of this section shall, to the fullest extent possible, be construed to bring any policy or contract of insurance entered into by an operator for the purpose of insuring such operator's liability ... into conformity with the legal requirements placed upon such operator....

(Emphasis added). The only differences between Liberty's endorsement and the CFR model endorsement is Liberty's endorsement uses the past tense "occurred" rather than "occurs" in subsection (a) (2) (b), fills in July 1, 1973 for the "effective date" in subsection (b) and places a comma before the word "and" in the last clause of subsection (b). Thus, with respect to Liberty's liability, although the district court may not have been bound to apply the federal regulations in deciding Liberty's liability, the regulations provide persuasive evidence that Liberty's endorsement should be construed to provide black lung coverage for the entire policy period rather than the three month endorsement period.

If, after a full evidentiary hearing, Tip Top can prove that it relied on Liberty's or General's assurances that their policies covered black lung benefits, Tip Top may have a separate breach of contract claim against Liberty and General. (See e.g., Plaza Bottle Shop v. Al Torstrick Ins. Agency, Inc., 712 S.W.2d 349 (Ky.Ct.App.1986) (where an insured relied exclusively upon an insurance agent "for its liability coverage needs and for placement with appropriate carriers of such coverages," the insured can bring a cause of action upon the insurance contract against the agency for its negligence in failing to procure insurance coverage); see also Long Is. Lighting Co. v. Steel Derrick Barge FSC 99, 725 F.2d 839, 841 (2d Cir. 1984) ("Under New York law, a party who has engaged a person to act as an insurance broker to procure adequate insurance is entitled to recover damages from the broker if the policy obtained does not cover a loss for which the broker contracted to provide insurance, and the insurance company refuses to cover the loss.") (citations omitted); Cincinnati Ins. Co. v. Vance, 730 S.W.2d 521, 522 (Ky.1987) ("We hold that the insurance company, at its own peril, may elect not to defend the original action against a putative insured, although thereafter it may be liable for the judgment if it is judicially determined that the policy did in fact provide coverage in the circumstances."). Regardless of whether Tip Top has a breach of contract claim against General, even if the district court had applied the federal regulations, Tip Top would still lose its claim against General. If the court had applied the regulations to Tip Top's claim against Liberty, Tip Top would probably win this claim. However, Tip Top's dispute with General and Liberty seems to be a breach of an insurance contract rather than a black lung liability claim. Since Tip Top can bring a separate breach of contract claim against Liberty and General, and, since Liberty's potential liability in this action can be resolved on much narrower grounds (as will be discussed in the next section), it is not necessary for this court to determine whether district courts are required by law to decide insurance carriers' black lung liability by referring to federal law.

Although the district court found that General's policy and Liberty's endorsement were unambiguous, both parties agree that the contract provisions reasonably could be interpreted in more than one way. Under Kentucky law, if a "contract has two constructions, the one most favorable to the insured must be adopted." Wolford v. Wolford, 662 S.W.2d 835, 838 (Ky.1984). In addition, " [i]f contract language is ambiguous, it must be liberally construed to resolve any doubts in favor of the insured." Id.

In William C. Roney & Co. v. Federal Ins. Co., 674 F.2d 587 (6th Cir. 1982), this court examined an ambiguous exclusion clause in an insurance contract. While we noted that "an exclusion clause in a policy of insurance must be strictly construed against the insurer if it is ambiguous," we stressed that our "paramount responsibility is to construe a contract so as to effectuate the intent of the parties, if ascertainable." Id. at 590. We declined "to make the rule of strict construction against the drafter paramount to the rule of practical construction" because doing so "would be imposing a per se penalty upon the drafter of ambiguous written terms, regardless of whether the ambiguity has been resolved by a mutually agreed upon subsequent course of conduct." Id. In addition, in Manley v. Plasti-Line, Inc., 808 F.2d 468 (6th Cir. 1987), this court again examined ambiguous language in an insurance contract. While we noted that "the reasonable expectation of the parties ... should be given effect," we ruled that summary judgment was inappropriate because the district court "looked beyond the express language of the ... agreement" and relied "on parol evidence." Id. at 471. We stressed that unless the evidence proved that there was only "one reasonable and intended meaning of the contractual language," determining the scope of the ambiguous language warrants a factual inquiry. Id. at 471, n. 5.

Turning to the instant action, there is not sufficient evidence in the record to determine whether Liberty told Tip Top that they would provide black lung coverage even though the policies issued appear to exclude such coverage. A difficulty posed by this case is the fact that during the periods involved in this dispute, Congress changed the method of paying black lung benefits from a federal program to a program which would be administered under the state workers' compensation systems. Black Lung Benefits Act of 1972, Pub. L. No. 92-303, 86 Stat. 153 (1972). It is therefore likely that, when Tip Top contracted with Liberty and General for insurance, it communicated to the carriers its need to have the coverage required by the new law. Thus, with respect to Liberty's endorsement, based on the similarity between the language used in that endorsement and the language used in the CFR endorsement, it is likely that the endorsement was issued in an attempt to provide federal black lung coverage in accordance with the newly changed law. In addition, because Liberty's policy has not yet been located, there is still a genuine dispute concerning Liberty's coverage under the entire policy. Because it is impossible to determine, based on the record before us, the true intent of the parties, and because it is not clear whether Liberty's endorsement provides black lung coverage for the entire policy period or just the three month endorsement period, the district court should not have granted summary judgment for Liberty.

For the above stated reasons, we REVERSE the district court's order granting summary judgment for Liberty and remand for trial.