F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
December 13, 2006
UNITED STATES COURT OF APPEALS Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
ADVANTAGE HOMEBUILDING,
LLC.,
Plaintiff-Appellant,
ASSURANCE COMPANY OF
AMERICA,
Defendant,
v. No. 05-3200
MARYLAND CASUALTY COMPANY,
Defendant-Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
(D.C. No. 03-CV-2426-KHV)
Eric G. Kraft, Duggan, Shadwick, Doerr & Kurlbaum, Overland Park, Kansas,
for Plaintiff-Appellant.
Craig N. Johnson, Kutak Rock LLP, Denver, Colorado (Bradley J. Baumgart and Michael
E. Brown, Kutak Rock LLP, Kansas City, Missouri, with him on the brief),
for Defendant-Appellee.
Before KELLY, McKAY, and BRISCOE, Circuit Judges.
BRISCOE, Circuit Judge.
Plaintiff Advantage Homebuilding, Inc. (Advantage) filed this action against
defendant Maryland Casualty Company (Maryland) seeking a declaratory judgment that
Maryland had a duty, under a commercial general liability insurance policy, to defend
Advantage in a lawsuit brought against Advantage in Kansas state court. The district
court entered judgment in favor of Maryland. Advantage now appeals. We exercise
jurisdiction pursuant to 28 U.S.C. § 1291 and affirm.
I.
Advantage is a limited liability company organized and existing under the laws of
the State of Kansas, and engaged in the business of homebuilding. From August 28,
2002, until August 28, 2003, Advantage was covered under a commercial general liability
insurance policy issued by Maryland (the Policy). The Policy provided, in pertinent part,
as follows:
SECTION I - COVERAGES
COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE
LIABILITY
1. Insuring Agreement.
a. We [Maryland] will pay those sums that the insured becomes legally
obligated to pay as damages because of . . . “property damage” to which
this insurance applies. We will have the right and duty to defend the
insured against any “suit” seeking those damages. * * * We may, at our
discretion, investigate any “occurrence” and settle any claim or “suit” that
may result.
***
b. This insurance applies to . . . “property damage” only if:
(a) The . . . “property damage” is caused by an “occurrence” that
takes place in the “coverage territory”; and
(b) The . . . “property damage” occurs during the policy period.
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***
2. Exclusions
This insurance does not apply to:
***
j. Damage to Property
“Property damage” to:
***
(5) That particular part of real property on which you or any
contractors or subcontractors working on your behalf are performing
operations, if the “property damage” arises out of those operations;
or
(6) That particular part of any property that must be restored,
repaired or replaced because “your work” was incorrectly performed
on it.
***
Paragraph (6) of this exclusion does not apply to “property damage”
included in the “products-completed operations hazard”.
***
SECTION V - DEFINITIONS
***
13. “Occurrence” means an accident, including continuous or repeated
exposure to substantially the same general harmful conditions.
***
16. “Products-completed operations hazard”:
a. Includes all “bodily injury” and “property damage” occurring
away from premises you own or rent and arising out of “your
product” or “your work” except:
(1) Products that are still in your physical possession; or
(2) Work that has not yet been completed or abandoned.
However, “your work” will be deemed completed at the
earliest of the following times:
(a) When all of the work called for in your contract has been
completed.
(b) When all of the work to be done at the job site has
been completed if your contract calls for work at more
than one job site.
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(c) When that part of the work done at a job site has
been put to its intended use by any person or
organization other than another contractor or
subcontractor working on the same project.
Work that may need service, maintenance, correction, repair
or replacement, but which is otherwise complete, will be
treated as completed.
17. “Property damage” means:
a. Physical injury to tangible property including all resulting loss of
use of that property. All such loss of use shall be deemed to occur at
the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All
such loss of use shall be deemed to occur at the time of the
“occurrence” that caused it.
***
21. “Your product” means:
a. Any goods or products, other than real property, manufactured,
sold, handled, distributed or disposed of by:
(1) You . . .
22. “Your work” means:
a. Work or operations performed by you or on your behalf, but does
not include work or operations performed by another entity which
joined with you to form a partnership or joint venture not shown as a
Named Insured in the Declarations, which terminated or ended prior
to the effective date of this policy; and
b. Materials, parts or equipment furnished in connection with such
work or operations.
App. at 73, 75, 85, 87, 88.
On November 14, 2002, three couples for whom Advantage had built homes sued
Advantage in the District Court of Johnson County, Kansas, seeking compensatory
damages for windows on each of their homes that were allegedly damaged by Advantage.
The homeowners alleged claims for negligence, breach of contract/warranty, and
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violations of the Kansas Consumer Protection Act. After learning of the homeowners’
suit, Advantage submitted a claim of loss to Maryland under the Policy. Maryland
refused to provide Advantage with a defense, and likewise denied coverage, based upon
exclusions contained within the Policy.
The homeowners’ suit proceeded to trial and the state district court determined that
the damage to the windows was caused by McGarrah Masonry (McGarrah), a
subcontractor hired by Advantage. The state district court entered judgment in the
homeowners’ favor and against Advantage in the amount of $32,411.00 on the claims of
negligence and breach of contract/warranty. With respect to the homeowners’ claims
under the Kansas Consumer Protection Act, the state district court entered judgment in
favor of Advantage. The state district court also entered judgment in favor of Advantage
on its cross-claim for indemnification against McGarrah. McGarrah subsequently paid
this judgment in full.
Advantage filed this action against Maryland for declaratory judgment on August
7, 2003, in the District Court of Johnson County, Kansas. Maryland removed the action
to federal district court based upon diversity of citizenship and the amount in controversy.
Advantage subsequently amended its complaint and moved for judgment on the
pleadings. Maryland filed its own motion for judgment on the pleadings or, in the
alternative, for summary judgment. The district court conducted a telephonic hearing
during which the parties agreed that the stipulated facts contained in the pretrial order
constituted the entire body of evidence that would be presented if the case were to
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proceed to trial. On April 13, 2005, the district court issued a memorandum and order
granting Maryland’s motion for judgment on the pleadings and denying Advantage’s
similar motion as moot. Judgment was entered in favor of Maryland on that same date.
Advantage subsequently filed a timely notice of appeal.
II.
We review de novo the district court’s grant of a motion for judgment on the
pleadings. Park Univ. Enterp., Inc. v. American Cas. Co., 442 F.3d 1239, 1244 (10th Cir.
2006). “Judgment on the pleadings should not be granted unless the moving party has
clearly established that no material issue of fact remains to be resolved and the party is
entitled to judgment as a matter of law.” Id. (internal quotation marks omitted).
Because this is a diversity action, we “apply the substantive law of the forum state,
including its choice of law rules.” Pepsi-Cola Bottling Co. of Pittsburg, Inc. v. Pepsico,
Inc., 431 F.3d 1241, 1255 (10th Cir. 2005). Kansas is the forum state in this appeal.
Under Kansas choice-of-law rules, an insurance contract is governed by the law of the
state where the contract was entered into. U.S. Fidelity and Guar. Co. v. Federated Rural
Elec. Ins. Co., 286 F.3d 1216, 1218 (10th Cir. 2002) (citing Safeco Ins. Co. of Am. v.
Allen, 941 P.2d 1365, 1372 (Kan. 1997)). Although the record on appeal does not
indicate where the insurance contract at issue was entered into, the parties agree that
Kansas law controls (and thus, presumably, the contract was entered into in Kansas). As
McGarrah has paid the underlying state court judgment, the only issue remaining is
whether Maryland had a duty to defend Advantage.
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Under Kansas law, “insurers have a duty to defend if there is a potential for
liability” under the policy at issue. South Central Kansas Health Ins. Group v. Harden &
Co. Ins. Servs., Inc., 97 P.3d 1031, 1035 (Kan. 2004). More specifically, an “insurer has
a duty to defend if, based on the pleadings and any facts brought to the insurer’s attention
or reasonably discoverable during the insurance investigation, there is a potential for
liability.” Id. at 1034 (citing Spruill Motors Inc. v. Univ. Underwriters Ins. Co., 512 P.2d
403 (Kan. 1973)). “When there is no coverage under the insurance policy” at issue,
“there is no duty to defend.” Id. at 1035. In applying these principles, the result is that
“[t]he duty to defend and whether the policy provides coverage are not necessarily
coextensive.” Spivey v. Safeco Ins. Co., 865 P.2d 182, 188 (Kan. 1993). That is, because
the duty to defend hinges on the “potential for liability,” rather than actual liability, an
insurer may have a duty to defend even if it is ultimately determined that the policy does
not provide coverage.
Where, as here, an insured files suit against its insurer seeking coverage under a
policy of insurance, the insured has the “burden of proving he or she falls within the
coverage provisions” of the policy. Brumley v. Lee, 963 P.2d 1224, 1232 (Kan. 1998).
More specifically, “the insured has the burden of proof to establish the nature and extent
of any loss and that the loss claimed was caused by one of the perils insured against
(‘covered’) by the policy.” Kansas Farm Bureau Ins. Co. v. Reynolds, 823 P.2d 216, 218
(Kan. App. 1991) (internal quotation marks omitted). Assuming the insured can satisfy
this burden, the insurer then has the burden of proving that any exclusionary clauses
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within the policy apply to preclude coverage. Exploration Place, Inc. v. Midwest Drywall
Co., 89 P.3d 536, 541 (Kan. 2004).
Did the district court err in concluding that Advantage failed to meet its
initial burden of showing that coverage existed under the policy at issue?
In its first issue on appeal, Advantage contends the district court erred in
concluding that Advantage failed to meet its burden of showing a possibility of coverage
under the Policy. According to Advantage, it “fully briefed the reasons why the damages
claimed in the Underlying Action fell within the general provisions of the insurance
policy and Maryland waived this argument by not responding . . . .” Aplt. Br. at 26. In
particular, Advantage contends that (a) “the parties stipulated that the submission of th[e]
claim was timely,” (b) “the property damage alleged to have occurred was caused by an
occurrence which took place in the coverage territory during the applicable policy
period,” and (c) “Maryland never refuted the veracity of any of these elements . . . .” Id.
at 27. Thus, Advantage asserts, it necessarily satisfied its burden of establishing the
possibility of coverage.
We reject Advantage’s arguments for two reasons. First, it is far from clear that
the district court intended to conclude that Advantage failed to satisfy its initial burden of
establishing that the claims asserted against it in the underlying action fell within the
coverage provisions of the policy. Rather, it appears that the district court’s order focused
on the ultimate question of whether, taking into account the Policy’s exclusionary
provisions, Advantage was entitled to coverage under the Policy. Second, even assuming
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the district court did err in concluding that Advantage failed to satisfy its initial burden,
that error is harmless because we apply a de novo standard of review in determining
whether Maryland was entitled to judgment in its favor.
Did the district court err in concluding that the claims asserted in the
underlying action fell within the scope of policy exclusions?
Advantage next contends the district court erred in concluding that the claims
asserted in the underlying action fell within the scope of policy exclusions. More
specifically, Advantage contends the district court “failed to recognize that . . . Maryland
possessed the burden of proving that an exception to coverage applied,” and instead
placed the burden on Advantage to prove that an exception to coverage did not apply.
Aplt. Br. at 28. Advantage further contends that, in any event, “it is clear that” the two
exclusions cited by the district court “do not apply to exclude coverage” and “cannot
justify Maryland’s refusal to defend Advantage . . . .” Id. at 30.
Advantage’s first argument is easily disposed of. A review of the record on appeal
clearly establishes that the district court did not shift the burden to Advantage to prove the
inapplicability of the two policy exclusions cited by the district court. Moreover, the
argument is immaterial because, as we have noted, we apply a de novo standard of review
in determining whether Maryland was entitled to judgment in its favor.
That leaves Advantage’s second argument, i.e., that the two policy exclusions cited
by the district court were inapplicable. In assessing the applicability of the policy
exclusions asserted by Maryland and relied upon by the district court, we begin by
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reviewing the factual allegations asserted in the underlying lawsuit. According to the
complaint in the underlying lawsuit, each of the three plaintiff couples contracted with
Advantage “for the construction and purchase of . . . new home[s] . . . .” Id. at 222. The
complaint further alleged that, after the homes were completed by Advantage and the
couples moved in, the couples each discovered extensive damage to the windows of their
homes. Id. at 223-24. Count I of the complaint, which asserted claims for negligence,
alleged that Advantage owed the plaintiffs a duty “to install all window units in the
home[s] in a professional, workmanlike manner and without any material defects or
damage to any of the windows,” but breached those duties “by providing homes to
plaintiffs with significant damage to the window units.” Id. at 225. Count II of the
complaint, which asserted claims for breach of contract/warranty, alleged that Advantage
“breached its contracts with plaintiffs by failing to construct their homes in a professional
and workmanlike manner and without any material defects.” Id. at 226. Count III of the
complaint, which asserted claims under the Kansas Consumer Protection Act, alleged that
Advantage “fail[ed] to disclose . . . material defects in plaintiffs’ homes . . . .” Id. at 227.
Maryland contends, and the district court agreed, that two exclusionary provisions
of the policy applied to preclude coverage and, in turn, any duty to defend. These two
provisions, hereinafter referred to as j(5) and j(6), provide as follows:
2. Exclusions.
This insurance does not apply to:
***
j. Damage to Property
“Property damage” to:
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***
(5) That particular part of real property on which you or any
contractors or subcontractors working directly or indirectly on
your behalf are performing operations, if the “property
damage” arises out of those operations; or
(6) That particular part of any property that must be restored,
repaired or replaced because “your work” was incorrectly
performed on it.
***
Paragraph (6) of this exclusion does not apply to “property
damage” included in the “products-completed operations
hazard”.
App. at 75.
Exclusion j(5)
The district court interpreted exclusion j(5) as applying to any property damage
that occurred while the work on the house was ongoing. Armed with that interpretation,
the district court concluded that the key question was “whether McGarrah Masonry was
performing its work when the damage occurred.” Id. at 83. After reviewing the record,
the district court concluded that “the property damage occurred concurrently with the
negligent acts of the Advantage subcontractor – the windows were scratched when the
subcontractor dropped mortar on them,” and there was “no[] dispute that the work was in
progress when the subcontractor damaged the windows.” Id. Thus, the district court
concluded that exclusion j(5) applied and Maryland “had no duty to indemnify Advantage
for the damages assessed against it in the underlying suit.” Id.
Advantage disputes the district court’s conclusions. As it did below, Advantage
argues that exclusion j(5) must be interpreted to apply only at the time an actual “claim”
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arises, and not merely at the time damage occurs, during the performance of the insured’s
work. Accordingly, Advantage argues, exclusion j(5) is inapplicable here because “there
is no reasonable dispute that no one was ‘performing operations’ at the time that the
claims of the underlying lawsuit arose.” Aplt. Br. at 32.
We reject Advantage’s interpretation of exclusion j(5). The language of exclusion
j(5) unambiguously focuses on when the “property damage” at issue occurs, not, as
suggested by Advantage, when a legal claim accrues against the insured. More
specifically, the language of exclusion j(5) refers to “property damage” (defined under the
Policy as physical injury to, or loss of use of, tangible property) occurring to real property
during the course of the insured’s work. See Emy Poulad Grotell, Understanding The
Basics of Commercial General Liability Policies, 652 PLI/Lit 63, (Practising Law
Institute, Litigation and Administrative Practice Course Handbook Series, 2001) (noting
that “[s]ome commentators indicate that the exclusion only applies to the extent that the
damage occurred while the insured was performing and to the extent that the damage
occurred after the operations have ceased the exclusion would not apply”). No mention
whatsoever is made in the policy in question of a “claim” accruing against the insured
during the performance of the work.
We likewise reject the principal case relied upon by Advantage in support of its
interpretation, American States Insurance Company v. Powers, 262 F. Supp. 2d 1245 (D.
Kan. 2003). In American States, a commercial general liability insurer, American States,
filed suit seeking a declaratory judgment that it had no obligation to defend its insured,
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Garold Powers, against a lawsuit filed against him alleging that he “breached [a] contract
. . . and was negligent in failing to construct [a] building in a workmanlike and safe
manner, in failing to construct the building according to the agreed specifications; in
failing to construct the building in the timeframe agreed to; in failing to meet building
codes for structural design; and failing to stay within the contract price.” Id. at 1247.
Exclusion j(5) of the policy issued by American States to Powers was worded identically
to exclusion j(5) of the policy at issue in this case. Reviewing that exclusion, the court in
American States stated that “[t]he vast majority of commentators that have addressed
exclusion j(5) have recognized that the exclusion is intended to ‘bar coverage for the
work being done by a contractor when claims arise at the time the work is being
performed.’” Id. at 1250 (quoting Robert J. Francis, Insurance Coverage for Faulty
Workmanship Claims Under Commercial General Liability Policies, 30 Tort & Ins. L.J.
785, 796 (Spring 1995)). “In other words,” the court stated, “exclusion j(5) applies to
damages involving ‘works in progress’ and does not apply to completed operations.” Id.
(quoting Patrick J. O’Connor, Jr., Insurance Law & Construction, 19-APR Construction
Law. 5, 8 (April 1999)). The court then noted that “[t]he uncontroverted facts
demonstrate[d] that Mr. Powers’ work was not ‘in progress’ at the time the . . . claim[s]
[against him] arose,” id., and that, instead, the claims against him were filed “more than
one year” after he completed his performance. Id. at 1251. “Thus,” the court concluded,
“because the damage did not occur while Mr. Powers was working on the project,
exclusion j(5) has no application here.” Id.
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The problem with the American States decision is that it fails to properly
distinguish between “damage” and “claims.” Indeed, the decision itself is conflicting, at
times referring to “claims” arising during the performance of the insured’s work, at other
times referring to “damage” occurring during the performance of the insured’s work, and
ultimately focusing on when the claims against Powers were filed (rather than when the
damage occurred or the claims accrued).
We conclude the better reasoned view is that exclusion j(5) applies whenever
property damage “arise[s] out of the work of the insured, its contractors, or its
subcontractors while ‘performing operations.’” F. Malcolm Cunningham, Jr. & Amy L.
Fischer, Insurance Coverage in Construction – The Unanswered Question, 33 Tort & Ins.
L.J. 1063, 1093 (Summer 1998). “Hence, the exclusion applies only to damage from
ongoing work, and not damage after completion.” Id.; see Robert J. Franco, Insurance
Coverage For Faulty Workmanship Claims Under Commercial General Liability Policies,
30 Tort & Ins. L.J. 785, 796 (Spring 1995) (“Exclusion j(5) . . . bar[s] coverage for
damage to the work being done by the insured at the time of the damage.”); e.g., McMath
Constr. Co. v. Dupuy, 897 So. 2d 677, 682 (La. App. 2004) (concluding that identical
exclusionary language was not applicable “because [the insured’s] work was not being
performed when the damage occurred, but was complete”).
In conclusion, we agree with the district court that, given exclusion j(5), Maryland
had no duty to indemnify Advantage for the losses alleged by plaintiffs because the
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Johnson County District Court ultimately found that the physical damage to the windows
occurred during the course of McGarrah’s work on the homes.
Exclusion j(6)
The district court characterized exclusion j(6) “as a faulty workmanship
provision,” App. at 84, and interpreted it as “exclud[ing] coverage for that part of any
property which had to be restored, repaired or replaced because Advantage’s work was
incorrectly performed on it.” Id. at 83-84. Further, the district court concluded that the
“products-completed operations hazard” exception to exclusion j(6), though “inartfully
drafted,” “does not reach work which is in progress at the time of the property damage.”
Id. at 84. Because “[t]he order of the Johnson County District Court [in the underlying
lawsuit] makes clear that . . . the damage [at issue] occurred before Advantage completed
its work,” the district court concluded, “exclusion j(6) precluded coverage . . . .” Id.
Advantage contends on appeal that exclusion j(6) “does not exclude coverage
under the policy” because Advantage “was no longer working on the property that
suffered the damages claimed by the third-parties in the Underlying Action . . . .” Aplt.
Br. at 35. In other words, Advantage argues that “the exclusion does not apply to claims
arising from defective work that is discovered after the contractor has completed its
work.” Id. Thus, Advantage argues, “the application of the exclusion turns on the
question of whether [its] work on the home was complete at the time the damage was
discovered, in which case the exclusion would not apply.” Id. at 36.
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We again reject Advantage’s interpretation. Although exclusion j(6) is, as noted
by the district court, “inartfully drafted,” we nevertheless conclude that it was intended to
exclude coverage for the cost of restoring, repairing or replacing faulty workmanship on
the part of the insured, its contractors, and subcontractors. More specifically, we
conclude it was intended to exclude “property damage” that directly or consequentially
occurs from the faulty workmanship of the insured and its contractors/subcontractors (i.e.,
work that “was incorrectly performed”) while the work is ongoing. See Franco, supra, at
796 (“Exclusion j(6) . . . is intended to bar defective workmanship claims.”). The express
exception to exclusion j(6), though, allows an insured to recover consequential damages
that arise out of his or her faulty workmanship after the completion of the work. For
example,
assume that a contractor is building a home. The contractor first erects the
walls and completes the roof and then begins finishing the interior.
Unfortunately, the roofing was poorly installed and later leaks, thereby
damaging partially completed parquet floors. The damage to the floors
[which was a consequence of the faulty workmanship that occurred after the
work was complete] would be covered, but replacement of the poorly
constructed roof [which was a direct result of faulty workmanship that
occurred while the work was ongoing] would be excluded.
Id. at 797.
The district court was therefore correct in concluding that exclusion j(6) precluded
liability on the part of Maryland for the damages alleged in the underlying lawsuit. That
is, because the Johnson County District Court essentially found that McGarrah performed
its work on the windows improperly, exclusion j(6) operated to preclude coverage for the
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cost of repairing or replacing McGarrah’s faulty workmanship. Farmington Cas. Co. v.
Duggan, 417 F.3d 1141, 1143 (10th Cir. 2005) (concluding that, under Colorado law,
identical exclusionary language in commercial general liability policy excluded coverage
for “property damage resulting from shoddy work . . . .”); see id. at 1142 (“Damage to an
insured’s own work resulting from his faulty workmanship on it is usually covered by a
performance bond, not a commercial general liability policy.”).
Did Maryland have a duty to defend?
Although Maryland had no duty to indemnify Advantage for the losses alleged in
the underlying lawsuit, the question remains whether Maryland had a duty to defend
Advantage against the claims asserted against it in the underlying lawsuit. Under Kansas
law, “[t]he insurer determines if there is a potential of liability under the policy by
examining the allegations in the complaint or petition and considering any facts brought
to its attention or which it could reasonably discover.” Allied Mut. Ins. Co. v. Moeder, 48
P.3d 1, 4 (Kan. App. 2002).
In deciding this question, the district court noted that “[t]he record on this issue
includes only the insurance policy and the petition in the underlying lawsuit, which
alleged that ‘a number of windows that were installed in new homes built by plaintiff
were scratched because of the negligence of a particular subcontractor.’” App. at 85.
Based upon this “scant” record, the district court concluded “that a factual investigation
would have caused Maryland . . . to conclude what the Johnson County court concluded:
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that the windows were damaged by a subcontractor who was performing work on the
homes at the time of the damage.” Id.
The district court’s characterization of the information available to Maryland in
making its determination is substantially, but not entirely, accurate. It is true that the
record contains only a copy of the complaint filed against Advantage in the underlying
lawsuit, and Advantage makes no assertion that Maryland could or reasonably should
have been aware of any additional information (indeed, Advantage argues in its appeal
that the policy required Maryland to decide whether it had a duty to defend based solely
on the allegations in the underlying lawsuit). Where the district court is slightly
inaccurate, however, is in suggesting that the complaint in the underlying action
mentioned “scratched” windows.1 Instead, the complaint more generally alleged that the
windows in each of the couples’ houses were damaged. Although that general allegation
does not indicate, or even suggest, how the damage occurred, a review of the specific
claims asserted against Advantage is more telling. The complaint filed against Advantage
alleged claims for negligence, breach of contract/warranty, and for violation of the
Kansas Consumer Protection Act. Turning first to the negligence claim, it alleged that
Advantage breached a duty it “owed . . . to plaintiffs to install all window units in the
1
In making this determination, the district court relied on the parties’ stipulations
in the pretrial order, which stated, in pertinent part: “The homeowners in the [underlying]
case alleged that a number of windows that were installed in new homes built by plaintiff
were scratched because of the negligence of a particular subcontractor.” App. at 275.
The pretrial order would not have been available to Maryland when it concluded it had no
duty to defend as the pretrial order was filed after that decision was reached.
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home[s] in a professional, workmanlike manner and without any material defects or
damage to any of the windows.” App. at 225. Turning next to the breach of
contract/warranty claim, it alleged that Advantage “breached its contracts with plaintiffs
by failing to construct their homes in a professional and workmanlike manner and without
any material defects.” Id. at 226. Finally, the Consumer Protection Act claim alleged, in
pertinent part, that Advantage “fail[ed] to disclose the material defects in plaintiffs’
homes to plaintiffs . . . .” Id. at 227. Together, these claims alleged that Advantage failed
to properly construct the window portions of the plaintiffs’ homes, i.e., that Advantage
engaged in faulty workmanship.
Considering these allegations in light of the policy language, we conclude that
exclusion j(6), which excludes coverage for the costs of restoring, repairing or replacing
work that was improperly performed by the insured, absolved Maryland from any duty to
defend Advantage in the underlying lawsuit.
Did the district court err in failing to adhere to the requirements of the
Policy, which purportedly limit Maryland’s ability to consider extrinsic
evidence in determining whether it has a duty to defend?
Advantage contends that the district court ignored the fact that the Policy language
limits Maryland’s “ability to consider facts or evidence extraneous to the claims of a
petition filed against its insured” in determining whether it has a duty to defend the
insured. Aplt. Br. at 39. We reject this contention for several reasons. First, Advantage
never asserted this argument below. Indeed, Advantage itself pointed to evidence outside
of the underlying complaint in asserting that Maryland had a duty to defend. Second,
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there is no language in the Policy that limits Maryland’s ability to consider extrinsic
evidence. Third, Kansas law expressly authorizes an insurer to consider extrinsic
evidence in determining whether it has a duty to defend. See Allied Mut., 48 P.3d at 4
(noting that an insurer may “consider[] any facts brought to its attention or which it could
reasonably discover”). Finally, even if Maryland was limited to the language of the
underlying complaint, it is clear, for the reasons already outlined, that it had no duty to
defend Advantage.
Did the district court err in refusing to award Advantage attorneys fees?
In its final argument on appeal, Advantage contends it was entitled to an award of
attorney fees pursuant to Kan. Stat. Ann. §§ 40-256 and 40-908, and the district court
erred in concluding otherwise. “While this court generally reviews a district court’s
award of attorney fees for abuse of discretion, we review the underlying legal analysis de
novo.” Scott’s Liquid Gold, Inc. v. Lexington Ins. Co., 293 F.3d 1180, 1183 (10th Cir.
2002).
The first statute cited by Advantage, § 40-256, provides:
That in all actions hereafter commenced, in which judgment is rendered
against any insurance company . . . on any policy or certificate of any type
or kind of insurance, if it appear from the evidence that such company . . .
has refused without just cause or excuse to pay the full amount of such loss,
the court in rendering such judgment shall allow the plaintiff a reasonable
sum as an attorney’s fee for services in such action, including proceeding
upon appeal, to be recovered and collected as a part of the costs . . . .
Kan. Stat. Ann. § 40-256.
The second statute cited by Advantage, § 40-908, provides:
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That in all actions now pending, or hereafter commenced in which
judgment is rendered against any insurance company on any policy given to
insure any property in this state against loss by fire, tornado, lightning or
hail, the court in rendering such judgment shall allow the plaintiff a
reasonable sum as an attorney’s fee for services in such action including
proceeding upon appeal to be recovered and collected as a part of the costs .
...
Kan. Stat. Ann. § 40-908.
As the language of each statute makes clear, an insured’s entitlement to fees hinges
in pertinent part on judgment being rendered against the insurer. Here, however,
judgment was not rendered against Maryland by the district court. Rather, the district
court entered judgment against Advantage and in favor of Maryland. Thus, the district
court did not err in concluding that Advantage was not entitled to a fee award.
AFFIRMED.
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