KEMPER NATIONAL INSURANCE COMPANIES AND AMERICAN MOTORISTS INSURANCE COMPANY V. HEAVEN HILL DISTILLERIES, INC.
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RENDERED: AUGUST 22,2002
TO BE PUBLISHED
2000-SC-0982-DG
KEMPER NATIONAL INSURANCE COMPANIES
AND AMERICAN MOTORISTS INSURANCE
COMPANY
V.
APPELLANTS
ON REVIEW FROM COURT OF APPEALS
1999-CA- 1779-MR
JEFFERSON CIRCUIT COURT NO. 1997-Cl-5120
HEAVEN HILL DISTILLERIES, INC.
APPELLEE
OPINION OF THE COURT BY JUSTICE JOHNSTONE
REVERSING
On November 7, 1996, a fire ravaged the Heaven Hill facility located in Nelson
County, Kentucky. The fire destroyed seven warehouses containing bourbon whiskey.
Heaven Hill had already sold the bourbon to various customers and was merely storing
it while it aged, prior to bottling. The owners of the bourbon, through their insurance
companies as subrogees, sued Heaven Hill claiming negligence. Most of the litigation
was consolidated in the Jefferson Circuit Court in Frank Linn Distilled Products Limited,
et al. v. Heaven Hill Distilleries, Inc., Civil Action No. 97-Cl-2057. As a result of that
litigation, Heaven Hill paid several million dollars in damages to its customers. In turn,
Heaven Hill made a demand for coverage under the commercial general liability policy
it purchased from American Motorists Insurance Company, a subsidiary of Kemper.
Kemper denied the claim for coverage and declined to defend the Frank Linn
litigation under a reservation of rights. Kemper then filed a declaration of rights action
in Jefferson Circuit Court. That court granted Kemper’s motion for summary judgment.
Heaven Hill appealed to the Court of Appeals, which reversed. Now Kemper appeals
to this Court and, after careful consideration, we reverse the Court of Appeals’ decision
and reinstate the circuit court’s summary judgment order.
SUMMARY JUDGMENT
Summary judgment is proper when there exists no material issue of fact and the
movant is entitled to judgment as a matter of law. Steelvest, Inc., v. Scansteel Service
Center, Inc., Ky., 807 S.W.2d 476 (1991). CR 56.03. Interpretation and construction of
an insurance contract is a matter of law for the court. See Moroanfield National Bank v.
Damien Elder & Sons, Ky., 836 S.W.2d 893, 895 (1992); Stone v. Kentuckv Farm
Bureau Mutual Insurance Companv, Ky. App., 34 S.W.3d 809, 810 (2000).
THE POLICY
The first step in resolving this issue is to examine the language of the insurance
policy. The policy was drafted in such a way that the insuring agreement affords
coverage in broad-brush fashion:
SECTION I - COVERAGES
COVERAGE A - BODILY INJURY AND PROPERTY DAMAGE LIABILITY
1.
Insuring Agreement
a.
We will pay those sums that the insured becomes legally
obligated to pay as damages because of “bodily injury” or
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“property
damage” to which this insurance applies. We will
have the right and duty to defend any “suit” seeking those
damages. . . . (Emphasis added).
The policy defines “property damage” as follows:
SECTION V - DEFINITIONS
15.
“Property damage” means:
a.
Physical injury to tangible property, including all
resulting loss of use of that property. . . .
b.
Loss of use of tangible property that is not physically
injured. . . .
But the policy contains numerous exclusions, “whose function it is to restrict and
shape the coverage otherwise afforded.” Weedo v. Stone-E-Brick, Inc., 405 A.2d 788,
790 (N.J. 1979). We focus our attention on two of those exclusions: the Pollution
Exclusion and the Care, Custody or Control Exclusion. The Pollution Exclusion is
modified by an endorsement, which Heaven Hill purchased after the original policy.
The Pollution Exclusion reads as follows:
2.
Exclusions [to the Insuring Agreement]
This insurance does not apply to:
f.
Pollution
1)
“Bodily injury” or “property damage” arising out of the
actual, alleged or threatened discharge, dispersal,
seepage, migration, release or escape of pollutants:
a)
At or from any premises, site or location which
is or was at any time owned or occupied by or
rented or loaned to, any insured;
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Subparagraph[] a) . . . do[es] not apply to “bodily
injury” or “propertv damage” arising out of heat,
smoke or fumes from a hostile fire.
As used in this exclusion, a hostile fire means one
which becomes uncontrollable or breaks out from
where it was intended to be.
Pollutants means any solid, liquid, gaseous or thermal
irritant or contaminant, including smoke, vapor, soot, fumes,
acids, alkalis, chemicals and waste. Waste includes
materials to be recycled, reconditioned or reclaimed.
(Emphasis added).
Heaven Hill purchased the following endorsement, which is an exception to the
Pollution Exclusion of the original policy:
EXCEPTION TO POLLUTION EXCLUSION LIMITED ON-PREMISES COVERAGE
THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT
CAREFULLY.
This endorsement modifies insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE FORM
Subparagraph[] 1) a) . . . of Exclusion f. . . . doles1 not applv to “bodily
injury” or damage to personal property of others, including all resulting
loss of use of such property, occurring on any premises, site or location
which is owned by or rented to any insured, resulting from the sudden and
accidental discharge, dispersal, release or escape of pollutants on such
premises, site or location. (Emphasis added).
EXCLUSION CONFUSION
Heaven Hill first argues that the fire that destroyed the warehouses resulted from
“pollutants” as defined in the policy, and the Endorsement, which specifically refers to
“damage to the personal property of others,” covers that damage. Initially, we note that
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we are not convinced that the Pollution Exclusion applies to this case because there
was arguably no “pollutant.” See Motorists Mutual Insurance Company v. RSJ, Inc.,
Ky. App., 926 S.W.2d 679, 682 (1996). Assuming, arguendo, that the Pollution
Exclusion does apply, Heaven Hill’s argument still fails.
It is elementary that the Pollution Exclusion denies coverage because “exclusion
clauses do not grant coverage; rather, they subtract from it.” Harrison Plumbing &
Heatinq, Inc. v. New Hampshire Insurance Group, 681 P.2d 875, 880 (Wash. App.
1984); see also Stillwater Condominium Association v. American Home Assurance
Company, 508 F. Supp. 1075, 1079 (D. Mont. 1981). Heaven Hill, however, argues
that the language of the Endorsement affirmatively grants coverage. But the
Endorsement has no effect apart from the Pollution Exclusion because the language
employed in the Endorsement refers back to the Exclusion only: “Subparaoraphfl 1) a)
. . . of Exclusion f. . . . doles1 not applv to ‘bodily injury’ or damage to personal property
of others . . . . ” (Emphasis added).
Heaven Hill also suggests that the title of the Endorsement, “EXCEPTION TO
POLLUTION EXCLUSION - LIMITED ON-PREMISES COVERAGE,” demonstrates
affirmative coverage. But Professor Couch dispels this notion: “The caption or title of
an endorsement cannot override the provisions below it and, if those provisions
unambiguously show the intent of the parties, then the ambiguity of the caption is
resolved.” See 2 Couch on Insurance 2d 5 4:38. The language of the Endorsement
unquestionably refers back to the Pollution Exclusion and nowhere grants affirmative
coverage. Because an exclusion cannot grant coverage, the Pollution Endorsement,
which simply modifies the Pollution Exclusion, likewise cannot grant coverage. The
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proper interpretation is that the Endorsement removes “damage to personal property of
others” from the Exclusion, which thereby restores that property to the broad coverage
of the Insuring Agreement. In other words, “the coverage supposedly ‘granted’ by the
exception to [the] exclusion [] has already been granted in the insuring provision.”
Stillwater, 508 F. Supp. at 1079.
With “damage to the personal property of others” (in the context of a pollution
event) restored to the Insuring Agreement, it appears as if the bourbon might be
covered; thus, we examine whether any other exclusions apply. Kemper claims that the
Care, Custody or Control Exclusion applies, and we agree. That exclusion reads as
follows:
2.
Exclusions
This insurance does not apply to:
. . . .
j.
Damage to Property
“Property damage”. to:
....
4)
Personal property in the care, custody or control of the
insured;
There is no dispute that the Care, Custody or Control Exclusion, read in
isolation, applies to the facts of this case. Heaven Hill sold the bourbon destroyed in
the fire to its customers, making it the personal property of others. Heaven Hill also
stored the bourbon in its warehouses, which were located on its premises and
controlled by its employees, so the bourbon was in Heaven Hill’s care, custody or
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control. Whatever the effect of other provisions, the exclusion covers the bourbon that
was destroyed in the fire.
Further, the Care, Custody or Control Exclusion is unambiguous. Where the
terms of an insurance policy are clear and unambiguous, the policy will be enforced as
written. American National Bank and Trust Companv v. Hartford Accident and
lndemnitv Companv, 442 F.2d 995, 999 (6th Cir. 1971) (‘I. . . under Kentucky law
unambiguous and clearly drafted exclusions which are ‘not unreasonable’ are
enforceable.“); see also Masler v. State Farm Automobile Insurance Companv, Ky., 894
S.W.2d 633 (1995). We agree with the court in Diamaco, Inc., v. Aetna Casualtv &
Suretv Companv, 983 P.2d 707 (Wash. Ct. App. 1999):
Because coverage exclusions are “contrary to the fundamental protective
purpose of insurance,” they are “strictly construed against the insurer”
and “will not be extended beyond their clear and unequivocal meaning.”
But that strict construction should not overcome “plain, clear language
resulting in a strained or forced construction.”
(Internal citations omitted). The Care, Custody and Control Exclusion in this case
clearly defines the coverage.
Kemper further asserts that the Pollution Exclusion and Endorsement have no
bearing on property in the care, custody, or control of the insured, regardless of who
owns it. The law supports this claim because “each exclusion refers to the risks
insured against in the coverages and not to the other exclusions.” Harrison, 681 P.2d
at 880. And each exclusion is to be read “independently of every other exclusion.” Id.
Because an exclusion is not an affirmative grant of coverage - and each exclusion is
independent of all others - any applicable exclusion is sufficient to remove coverage.
In other words, “[i]f any one exclusion applies there should be no coverage, regardless
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of inferences that might be argued on the basis of exceptions or qualifications
contained in other exclusions.” Weedo,
405 A.2d at 795, quoting Tinker,
“Comprehensive General Liability Insurance -- Perspective and Overview” 25 Feder.
ins. Coun. Q. 217, 223 (1975).
This result, that the Care, Custody, or Control Exclusion applies in this case, is
further supported by the very purpose of such an exclusion, which the Seventh Circuit
elaborated on in Stewart Warner Corporation v. Burns International Securitv Services,
&, 527 F.2d 1025, 1030 (7th Cir. 1975):
One purpose [served by “care, custody or control” exclusions] is to
prevent the general liability insurer from becoming a guarantor of the
insured’s workmanship in his ordinary operations. Failures of
workmanship are a normal business risk which the insured is in the best
position to prevent. If such risk be transferred to the insurer via general
liability provisions, the cost of general liability coverage will be greater.
The “care, custody or control” exclusion is designed to avoid such result.
(Internal citations omitted).
AMBIGUITY
Heaven Hill next argues that the insurance policy is ambiguous and any
ambiguity should be resolved in its favor according to our decision in St. Paul Fire &
Marine Insurance Companv v. Powell-Walton-Milward, Inc., KY., 870 S.W.2d 223
(1994). Specifically, Heaven Hill claims that the Pollution Endorsement appears to
grant coverage for the claim while the Care, Custody or Control Exclusion appears to
deny coverage, resulting in coverage susceptible of two reasonable interpretations.
Heaven Hill’s reliance on St. Paul is misguided. In that case, we addressed a
conflict between two clauses of an insurance policy, and we found those clauses to be
ambiguous. The coverage language included a claim that was denied by an exclusion.
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Heaven Hill, groping for legal terra firma, seizes upon our holding in that case to
support its argument:
A policy of insurance is to be construed liberally in favor of the insured,
and if, from the language, there is doubt or uncertainty as to its meaning,
and it is susceptible to two interpretations, one favorable to the insured
and the other favorable to the insurer, the former will be adopted.
Id
2 at 227. But St. Paul involved an ambiguity between the insuring agreement and a
single exclusion. The present case, by contrast, involves an alleged ambiguity
between two exclusions. The difference is significant. There can be no ambiguity
between two exclusions because, again, exclusions do not grant coverage and they are
considered independently of each other. The Supreme Court of New York, considering
the same issue in Hartford Accident & lndemnitv Companv v. A.P. Reale & Sons, Inc.,
228 A.D.2d 935, 936 (N.Y. App. 1996), reached the same conclusion:
While we recognize that exclusion (a) seems to be contradicted by
exclusions (n) and (2) (d) (iii), this apparent contradiction is negated by
the application of the principle that policy exclusions are to be read
seriatim [i.e., separately] and, if any one exclusion applies, there is no
coverage since no one exclusion can be regarded as inconsistent with
another (see, Jakobson Shipvard v. Aetna Cas. & Sur. Co., 775 F. Supp.
606, 612-613, aff’d 961 F.2d 387; Rhinebeck Bicycle Shop v. Sterlinq Ins.
Q., 151 A.D.2d 122, 126; Zandri Constr. Co. v. Firemen’s Ins. Co., 81
A.D.2d 106, 109, aff’d sub nom. Zandri Constr. Co. v. Stanlev H. Calkins,
&, 54 N.Y.2d 999; Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 248).
See also Biebel Brothers, Inc. v. United States Fidelitv & Guaranty Companv., 522 F.2d
1207, 1212 (8th Cir. 1975).
Heaven Hill also contends that “[a]n endorsement is later in time than the
original policy; and it should prevail over any conflicting provisions of the policy.”
Goodin v. General Accident Fire and Life Assurance Corporation, Ky. App., 450
S.W.2d 252, 256 (1970), quoting 1 Couch on Insurance 2d, $j 4:36. This statement is
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correct, as far as it goes. The statement from Couch which precedes it sheds more
light on this case: “The policy and its endorsements validly made a part thereof
together form the contract of insurance, and are to be read together to determine the
contract actually intended by the parties.” - at cj 4:36. The Pollution Endorsement
Id
clearly modifies the Pollution Exclusion alone as is clear from the language employed
in the contract:
This endorsement modifies insurance provided under the following:
Subparagraph[J 1) a) . . . of Exclusion f. [Pollution Exclusion] (emphasis
added).
This language unmistakably demonstrates that the parties did not intend this
endorsement to alter or supersede the Care, Custody or Control Exclusion.
Heaven Hill’s arguments are neither persuasive nor new. The Harrison court
disposed of the same arguments:
Harrison contends that an exception to exclusion (a) of the basic policy
amended the coverage paragraph to extend coverage for the . . . claims
alleged . . . . We disagree.
Exclusion clauses do not grant coverage; rather, they subtract from it. . . .
Harrison nevertheless argues that, because exclusion (a) appeared to
grant coverage and the exclusion discussed above . . . appeared to deny
it, an ambiguity was created which we must construe in Harrison’s favor.
We disagree.
This argument is based on two false assumptions. First, it assumes that
exclusions grant coverage. They do not. Second, it assumes that the
exclusions must be harmonized with each other. This is not true. Each
exclusion refers to the risks insured against in the coverages and not to
the other exclusions. Each exclusion is to be read with the insuring
agreement, independently of each other exclusion. Read in this way,
there is no ambiguity in the policy . . . .
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Harrison, 681 P.2d at 879-80 (internal citations omitted); see also Stillwater, 508 F.
Supp. at 1075 (reaching the same conclusions on the same issues).
We are cognizant of the general principles of insurance contract construction;
specifically, an insurance contract must be construed without disregarding or inserting
words or clauses and “seeming contradictions should be harmonized if reasonably
possible.” 43 Am. Jur. 2d, Insurance, 5 275. Our construction of the Kemper - Heaven
Hill contract complies with these requirements. The Pollution Endorsement returns to
the Insuring Agreement coverage for “damage to personal property of others” if it
occurs within the context of a pollution event. The Care, Custody or Control Exclusion
denies coverage for personal property, irrespective of ownership, if it is in the insured’s
care, custody or control. So, effectively, the Endorsement simply restores to the
Insuring Agreement coverage of personal property of others not in the care, custody or
control of the insured. This construction gives effect to both provisions and avoids any
judicial editing.
The Insuring Agreement states that Kemper will pay damages ‘!to which this
insurance applies.” The Supreme Court of New Jersey aptly described the limiting
effect of this language: “The qualifying phrase, ‘to which this insurance applies’
underscores the basic notion that the premium paid by the insured does not buy
coverage for all property damage but only for that type of damage provided for in the
policy.” Weedo,
405 A.2d at 790. The policy affords broad coverage but contains
numerous exclusions. The Care, Custody or Control Exclusion applies to the facts of
this case; consequently, the fire damage suffered by Heaven Hill was not property to
which this insurance applies.
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Accordingly, we reverse the Court of Appeals and reinstate the summary
judgment of the circuit court.
All concur.
COUNSEL FOR APPELLANTS:
J. Denis Ogburn
Alber Crafton, PLLC
Republic Bank Place, Suite 200
661 S. Hurstbourne Parkway
Louisville, KY 402225079
COUNSEL FOR APPELLEE:
Kenneth Gregory Haynes
Merrill S. Schell
Wyatt, Tarrant & Combs
2600 PNC Plaza
500 W. Jefferson Street
Louisville, KY 40202
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