Michael Sullivan, et al., Appellants, vs. American Family Mutual Insurance Company, Respondent, Natural Environments Corporation, et al., Defendants.

Michael Sullivan, et al., Appellants, vs. American Family Mutual Insurance Company, Respondent, Natural Environments Corporation, et al., Defendants. A06-1285, Court of Appeals Unpublished, July 24, 2007.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2006).

 

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A06-1285

 

 

Michael Sullivan, et al.,

Appellants,

 

vs.

 

American Family Mutual Insurance Company,

Respondent,

 

Natural Environments Corporation, et al.,

Defendants,

 

 

Filed July 24, 2007

Affirmed

Toussaint, Chief Judge

 

Hennepin County District Court

File No. 27-CV-05-008027

 

 

 

Robert E. Kuderer, Stacey A. Nilsen, Johnson & Condon, P.A., 7401 Metro Boulevard, Suite 600, Minneapolis, MN  55439-3034; and

 

Teresa M. Thompson, Fredrickson & Byron, P.A., 200 South Sixth Street, Suite 4000, Minneapolis, MN 55402-1425 (for appellants)

 

Jeanne H. Unger, Mark R. Bradford, Jan M. Gunderson, Bassford Remele, 33 South Sixth Street, Suite 3800, Minneapolis, MN 55402; and

 

Diane B. Bratvold, Briggs & Morgan, 2200 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402 (for respondent)

 

            Considered and decided by Minge, Presiding Judge; Toussaint, Chief Judge; and Kalitowski, Judge.

U N P U B L I S H E D   O P I N I O N

TOUSSAINT, Chief Judge

Appellants Michael and Stacy Sullivan challenge the district court's entry of summary judgment in favor of respondent American Family Mutual Insurance Company in a declaratory-judgment action to determine respondent's defense obligations under the parties' insurance contract in relation to an underlying lawsuit brought by a neighboring property owner against appellants.  Because the district court did not err by determining that respondent's duty to defend the appellants did not include bearing certain costs of permanent remediation, including affirmative cross-claims against third parties and attorney fees, we affirm.

D E C I S I O N

            On appeal from summary judgment, we must determine whether there are genuine issues of material fact and whether the district court erred in its application of the law.  State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990).  We view the evidence in the light most favorable to the party against whom judgment was granted.  Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993).  No genuine issue for trial exists "[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party."  DLH, Inc. v. Russ, 566 N.W.2d 60, 69 (Minn. 1997) (alteration in original) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 1356 (1986)).  "[T]he party resisting summary judgment must do more than rest on mere averments."  Id. at 71.  A genuine issue for trial must be established by sufficient evidence to permit reasonable persons to draw different conclusions.  Schroeder v. St. Louis County, 708 N.W.2d 497, 507 (Minn. 2006).  Summary judgment shall be granted if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that either party is entitled to a judgment as a matter of law."  Minn. R. Civ. P. 56.03.

At issue here is the scope of respondent's duty to defend appellants under the parties' insurance contract, and, consequently, whether respondent must reimburse appellants for the costs associated with that defense.  This requires a determination of whether the duty to defend extends to costs incurred in preventing liability for future harm, namely, the costs of implementing permanent remediation benefiting the appellants' own land and pursuing affirmative cross-claims against third parties for indemnity and contribution for those costs.

The interpretation of an insurance policy, including whether an insurer has a legal duty to defend or indemnify its insured, is a question of law, which we review de novo.  Auto-Owners Ins. Co. v. Todd, 547 N.W.2d 696, 698 (Minn. 1996).  "[A]n insurer's duty to defend arises when any part of the claim against the insured is arguably within the scope of protection afforded by the policy."  Franklin v. W. Nat'l Mut. Ins. Co., 574 N.W.2d 405, 40607 (Minn. 1998).  An insurer bears the burden of establishing that "all parts of the cause of action fall clearly outside the scope of coverage" if it wishes to avoid its duty to defend.  Auto-Owners, 547 N.W.2d at 698.  We construe an insurance policy's exclusions strictly against the insurer.  Thommes v. Milwaukee Ins. Co., 641 N.W.2d 877, 880 (Minn. 2002). 

Defense costs are expended to investigate and determine liability.  Westling Mfg. Co. v. W. Nat'l Mut. Ins. Co., 581 N.W.2d 39, 47 (Minn. App. 1998), review denied (Minn. Sept. 22, 1998).  Ordinarily, an insurer does not have a contractual duty to indemnify until the insured's liability for the injury has been established.  Nw. Nat'l Ins. Co. ex rel. Swanberg v. Carlson, 711 N.W.2d 821, 825 (Minn. App. 2006).  The duty to defend does not include bearing the costs associated with an insured's affirmative counterclaims "[t]o the extent it is possible to separate the fees associated with preparing and asserting an affirmative counterclaim from other defensive fees."  St. Paul Fire & Marine Ins. Co. v. Nat'l Computer Sys., Inc., 490 N.W.2d 626, 632 (Minn. App. 1992), review denied (Minn. Nov. 17, 1992). 

Here, the failure of a newly constructed retaining wall on appellants' property resulted in a landslide that damaged a neighboring property.  Appellants' insurance policy provides personal-liability coverage for "compensatory damages for which an insured is legally liable because of bodily injury or property damage caused by an occurrence covered by this policy."  It obligates respondent to "defend any suit or settle any claim for damages payable under this policy as [it] think[s] proper," but specifically excludes personal liability coverage for "property owned by any insured[.]"  Respondent retained attorney David Oskie to defend appellants in the suit brought by the neighboring property owner against the appellants.  Oskie filed an answer and a cross-claim against Natural Environments Corporation, the company hired to design and construct the retaining wall, requesting indemnity or contribution for the neighboring property owners' claims and to further recover damages arising from the failure of the hillside, including costs of repair. 

Appellants argue that respondent breached its duty to defend them because the costs associated with permanent remediation of the hillside, including affirmative cross-claims for indemnity and contribution, prevented future liability and were within the scope of the defense protections afforded by the policy.  Respondent, conversely, argues that these costs were not expended to determine whether appellants were legally liable in the underlying action, but, rather, to determine potential indemnity obligations, which are not included in respondent's duty to defend. 

The district court, relying on Aetna Ins. Co. v. Aaron, 685 A.2d 858, 865, 867 (Md. Ct. App. 1996), found that remediation expenses incurred in connection with the insured's own property are covered when (1) the insured property already caused damage to the property owned by a third party and (2) the insured is legally or contractually obligated to remediate the hazard.  It further concluded that respondent did not wrongfully limit its defense by bearing the costs of temporary repairs to the hillside that are necessary to avoid harm to the neighboring property but not the costs that served to uniquely benefit appellants' own land, including the cost of appellants' affirmative cross-claims.  We review for legal error the district court's determination of the scope of respondent's defense obligations.  Auto-Owners, 547 N.W.2d at 698.  

Appellants cite Domtar, Inc. v. Niagara Fire Ins. Co. in support of their argument that all expenses intended to minimize an insured's liability are considered part of an insurer's defense obligation.  563 N.W.2d 724, 738 (Minn. 1997).  In that case, Domtar sought a declaration that its insurers had a duty to defend Domtar by funding an investigation of a contamination site and a "clean-up plan" requiring removal of contaminants from the soil and continuous monitoring of groundwater.  Id. at 729.  Although the insurer argued that these were indemnity, rather than defense, costs the supreme court held that "the fact that otherwise allowable defense costs serve the dual purpose of complying with the [remediation plans] does not, in our estimation, render such costs indemnity costs."  Id. at 737-38.  Therefore, not only were those costs incurred to defeat liability-defense costs, but they were also incurred in an attempt to minimize the scope or magnitude of liability.  Id. at 738.

Domtar is distinguishable, however, because appellants did not contend that the costs for permanent remediation were necessary to defeat or minimize their current liability for damages to the neighboring property owner's property.  Rather, appellants made expenditures for permanent remediation to the hillside when their current liability for those damages had not been established.  The City of Minneapolis ordered that appellants retain an engineer to perform tests, obtain permits, and make the necessary repairs to the hillside.  Respondent hired GME Consultants, Inc., on behalf of appellants to provide recommendations for stabilization of the hillside.  GME outlined temporary remedial solutions, but also recognized that permanent stabilization would be needed.  Respondent agreed to bear costs associated with GME's construction of a temporary solution to prevent additional immediate harm to the neighboring property, but did not contribute toward the engineering and construction of permanent remediation uniquely benefiting appellants' own land.  Because appellants settled the underlying litigation brought by the neighboring property owner, there was no determination of whether appellants' remediation costs were incurred to cover future legal liability.  Respondent is not obligated to indemnify or pay damages until appellants' liability for the damage has been established.  See Carlson, 711 N.W.2d at 825.  Therefore, the district court's separation of the costs of the repairs necessary to avoid harm to the neighboring properties from the costs of permanent remediation uniquely benefiting appellants' own land was a proper determination under the law.

And because respondent's duty to defend appellants did not include permanent remediation to their property to prevent future harm to the neighboring property, the fees incurred as a result of appellants' affirmative cross-claims are also not included in this defense.  Prosecuting claims for contribution and indemnity for damages unique to appellants' own property did not reduce appellants' current liability.  Therefore, the district court did not err in its application of the law by determining that respondent was not responsible for funding the affirmative cross-claims.     

            Appellants also argue that they are entitled to attorney fees in this action and the underlying litigation.  We will not reverse a district court's decision on attorney fees absent an abuse of discretion.  Indep. Sch. Dist. No. 404 v. Castor, 670 N.W.2d 758, 763 (Minn. App. 2003).  Generally, attorney fees are not recoverable unless allowed by statutory authority.  Morrison v. Swenson, 274 Minn. 127, 137, 142 N.W.2d 640, 647 (1966).  An exception applies to attorney fees incurred in bringing a declaratory judgment action for an insurer's failure to defend.  Am. Standard Ins. Co. v. Le, 551 N.W.2d 923, 926 (Minn. 1996).  But fees are not recoverable where, as here, the insurer has not breached the insurance contract in some respect.  Id. Thus, because respondent did not breach its duty to defend appellants under the insurance contract, the district court's decision to deny them attorney fees is an exercise of sound discretion.

            Affirmed.