Spirco Environmental v. American International Special

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________

No. 07-2487
___________

Spirco Environmental, Inc., formerly *
known as Spirco Services, Inc., *
*
Plaintiff - Appellee, *
* Appeal from the United States
v. * District Court for the Eastern
* District of Missouri.
American International Specialty Lines *
Insurance Company, *
*
Defendant - Appellant. *
___________

Submitted: December 14, 2007
Filed: February 3, 2009
___________

Before BYE, ARNOLD, and MELLOY, Circuit Judges.
___________

MELLOY, Circuit Judge.

Defendant American International Specialty Lines Insurance Company
(“American”) appeals an adverse grant of summary judgment in which the district
court1 held American must provide coverage to Plaintiff Spirco Environmental, Inc.

1
The Honorable David D. Noce, United States Magistrate Judge for the Eastern
District of Missouri, sitting by consent of the parties in accordance with 28 U.S.C. §
636(c).
(“Spirco”), for a separate judgment in which the same court held Spirco and others
were liable to pay a surety’s attorney and expert witness fees. We affirm.

I. Background

Relevant background information is provided in our separate opinion in Case
No. 07-1547. That case involved a claim by a surety against a group of contractors
for payment of the surety’s attorney and expert witness fees under an indemnity
agreement. In Case No. 07-1547 we affirmed the district court’s holding that the
contractor-indemnitors were liable to the surety for approximately $800,000 in fees
incurred in the defense of a $4 million claim by a New Jersey property owner. The
surety incurred these substantial attorney and expert witness fees in a protracted
arbitration proceeding focused on the alleged release and spread of asbestos by one
of the contractor-indemnitors, Spirco. The present case involves a claim by Spirco
against its general casualty and pollution insurer, American, for coverage of the fee
award.

We incorporate by reference the facts set forth in Case No. 07-1547 and also
set forth the following, additional facts. When the property owner asserted its
counterclaims in the arbitration, the property owner labeled the claims as breach of
contract counterclaims. During the course of arbitration, when counsel for Spirco sent
a letter to the surety simultaneously advocating an aggressive defense and
complaining about the surety’s participation in the arbitration, counsel for Spirco
described the property owner’s claims as follows:

My review to date reflects that many of the claims being presented
would fall into the category of property damage rather than non-
performance of work. [The property owner’s] own mediation position
paper reflects this fact:

-2-
 The lion’s share of the contamination, as well as the cost of
the second remediation, however, resulted from Spirco’s
negligent work practices that permitted [Asbestos
Containing Material] to contaminate areas in the Building
that did not contain asbestos and should have been
protected.

As discussed in Case No. 07-1547, the arbitrators’ findings also demonstrate
that the nature of the alleged harm stemmed from property damage rather than breach
of contract. Specifically, the arbitrators held that Spirco performed under the contract
and, after Spirco left the site, other parties damaged the property owner’s building by
exposing asbestos and causing its spread throughout the site.

When the surety later asserted a claim for fees against Spirco and the other
indemnitors, Spirco sought coverage and a defense from American. American
provided a defense under a reservation of rights, but, ultimately denied coverage.2
Spirco then brought the present declaratory judgment action seeking resolution of the
coverage issue.

American argued below that the fee award was in the context of a dispute
having its roots in contract—the fees were due under an indemnity agreement, and the
underlying arbitration dispute between the property owner and Spirco involved the
alleged breach of a remediation contract between Spirco and the property owner.
Spirco argued that the fee award had its roots in a claim of property damage—the
property owner alleged not only that Spirco breached a remediation contract, but that
Spirco spread asbestos to previously uncontaminated areas of the property, requiring

2
Spirco argues on appeal that American’s reservation of rights was only partial
and that American’s failure to more fully reserve its right to deny coverage precludes
American from adopting its current position. We have reviewed American’s
reservation of rights and find Spirco’s argument to be without merit. At any rate, our
resolution of this appeal in Spirco’s favor moots this point.

-3-
the property owner to undertake a second, more expensive remediation of the
building.

American argued in the alternative that even if the court were to accept Spirco’s
characterization of the underlying dispute between the property owner and Spirco as
one involving property damage, the indemnity award should not be covered by the
American policy because: (1) the contractual indemnity award was too attenuated
from the alleged property damage; (2) the indemnity award was economic loss rather
than property damage; and (3) certain exclusions would prevent coverage even if
American’s policy were otherwise found to apply.

Regarding the “attenuation” argument, the American policy provided coverage
for a “Loss as a result of Claims for . . . Property Damage.” The policy defined Loss
in relevant part as “1. Monetary awards or settlements of compensatory damages
arising from . . . Property Damage; 2. Clean-Up costs; or 3. Claim Expenses.”
American argued that the operative causation language in the coverage provision, “as
a result of,” demanded a narrow construction that looked only to the immediate cause
of the alleged expense.3 According to American, this immediate cause was a contract
claim on the indemnity agreement, and there was no coverage for contract claims.
Spirco argued that the operative causation language “as a result of” merited a broader
construction and that it was permissible to look behind the contractual indemnity right
to examine the facts of the underlying dispute between the New Jersey property owner
and Spirco that gave rise to the expenses covered by the indemnity agreement.
According to Spirco, the underlying dispute was a claim for property damage.

3
The parties appear to agree that the operative language in the coverage
provision, “as a result of,” controls. The operative language in part of the definition
of “Loss,” i.e., “arising from,” is broad in scope, and the parties do not assert that this
separate language provides any additional limitation on the operative language from
the coverage provision.

-4-
 The district court held: (1) the underlying dispute was a property damage
dispute; (2) the indemnification award was not too attenuated from the property
damage claim to trigger coverage; and (3) no policy exclusions applied. Accordingly,
the district court ordered American to provide coverage. American appeals.

II. Discussion

A. Coverage

i. Nature of the Underlying Dispute

The property owner characterized its arbitration counterclaim against Spirco as
a breach of contract claim, but the substance of the property owner’s claim was an
allegation of property damage. The property-damage nature of the counter-claim was
apparent to Spirco’s attorney at the outset of the arbitration, apparent from the nature
of the arguments presented in arbitration, and apparent from the arbitrators’ findings.
The arbitrators found that Spirco had completed the remediation contract and left the
site in a clean condition. The arbitrators found further that the property owner’s
allegations related to asbestos not exposed by Spirco during Spirco’s remediation of
the site. Rather, the arbitrators found that other contractors accessed the site after
Spirco left and that these other contractors were responsible for the asbestos
contamination. The alleged damages of $4 million that the property owner sought
from Spirco included the purported cost of clean-up, remediation, or destruction for
a section of the property outside the scope of the original contract with Spirco.
Ultimately, the property owner’s claim was not simply a breach of contract claim
limited to the task of finishing a job commensurate in scope with the original contract
between Spirco and the property owner; it was a claim for property damages shown
to be unrelated to the work under the contract.

-5-
 Further, we note that the property owner dismissed a separate bad-faith failure
to pay claim against the surety before the surety incurred the bulk of its attorney and
expert witness fees. Accordingly, the only claim against the surety that survived into
the expensive and protracted arbitration was derivative of the property owner’s claim
against Spirco. It was not an independent bad-faith claim that might be viewed as
more attenuated from the property damage claim.

We believe that for coverage purposes in the instant case, then, the district court
properly characterized the underlying arbitration claim as a claim for property
damage. This conclusion is based on the property owner’s factual assertions, the
substance of the property owner’s claims, and the arbitrators’ findings rather than the
label, “breach of contract,” that the property owner elected to attach to its claim. See
Mo. Terrazzo Co. v. Iowa Nat’l Mut. Ins. Co., 740 F.2d 647, 650 (8th Cir. 1984)
(applying Missouri law and looking to the facts behind a claim (property damage)
rather than the label attached to a claim (diminution in value) to determine that
insurance coverage existed for the claim); see also Lamar Homes, Inc. v. Mid-
Continent Cas. Co., 242 S.W.3d 1, 15 (Tex. 2007) (stating that the duty to defend is
not determined “by the labels attached to the underlying claims”); Cont’l Ins. Co. v.
Bones, 596 N.W.2d 552, 559 (Iowa 1999) (“We start with the observation that
coverage is controlled by the actual claim asserted against the insured, not the label
the claimant chooses to put on his or her claim.”); Auto-Owners Ins. Co. v. Toole, 947
F. Supp. 1557, 1564 (M.D. Ala. 1996) (“Nevertheless, this court declines to adopt any
broad holding that claims sounding in contract are not occurrences. Rather, the court
agrees with the Supreme Court of Vermont that, in determining whether there is
coverage, the court should look to the specific ‘kind of . . . claim’ being asserted,
regardless as to whether it is labeled a contract claim, a tort claim, or whatever, and
the ‘purpose of the general liability policy’ from which coverage is sought.” (quoting
City of Burlington v. Nat’l Union Fire Ins. Co., 655 A.2d 719, 722 (Vt. 1994))); First
Wyo. Bank, N.A., Jackson Hole v. Cont’l Ins. Co., 860 P.2d 1094, 1099-1101 (Wyo
1993) (rejecting a duty to defend based on the substance rather than the label of claims

-6-
and stating, “Although there is a claim in the complaints labeled ‘NEGLIGENCE,’ the
facts in the complaint do not demonstrate alleged loss resulting from negligence or
alleged loss ‘caused by an occurrence,’ but instead demonstrate alleged losses
resulting from a breach of contract”).

ii. Interpretation of the Operative Language in the Policy

Because we agree with the district court that it is appropriate to characterize the
underlying dispute as one involving a claim for property damage, it is necessary to
examine the operative, coverage-triggering language of the American policy. The
specific question we face is whether the loss, a contractual indemnity award for a
surety’s fees incurred in defense of the property damage claim, falls within the scope
of the policy’s definition of “Loss.” Spirco urges us to answer this question in the
positive, while American argues the loss is too attenuated from the alleged property
damage to justify coverage. The parties agree that Missouri law applies to our
interpretation of the American policy. The parties also agree that the operative
language at issue in this case is “as a result of,” such that coverage exists for a “Loss”
that occurred “as a result of” property damage. Finally, the parties agree that there is
no Missouri precedent exactly on point to provide clear guidance as to the scope of
the operative language “as a result of.”

There are, however, several cases involving a similar phrase, “resulting from.”
Finding no convincing authority describing a meaningful basis to distinguish between
the terms “as a result of” and “resulting from,” we presume that Missouri would apply
the same interpretation to both phrases.

In Poage v. State Farm Fire & Casualty Co., 203 S.W.3d 781, 785–88 (Mo. Ct.
App. 2006), the court interpreted causation language in a liability policy covering a
recreational pontoon boat. The policy language at issue in Poage was “resulting
from.” The court in Poage noted that the Missouri Supreme Court previously had

-7-
interpreted this language more narrowly than the phrase “arising out of.” Id. at 785;
see also Spirtas Co. v. Fed. Ins. Co., 521 F.3d 833, 835–36 (8th Cir. 2008) (affirming
a broad construction of the insurance policy language “arising from”). In an effort to
better articulate the causal relationship described by the phrase “resulting from,” the
court in Poage reviewed the facts and policy language in several cases. The court held
that the language “resulting from” was more narrow than the language “arising out
of,” but was not so limited as to be synonymous with proximate or immediate
causation. Poage, 203 S.W.3d at 785–86. Rather, the Poage court held that the
language “resulting from” required the causative link between a harm and a covered
occurrence or event to be “reasonably apparent” such that the harm could be
considered a “natural and reasonable incident or consequence of” the covered event
or occurrence. Id. at 787.

In reviewing the earlier cases, the Poage court described application of the
“resulting from” language in several unique and unusual circumstances. Read in light
of Poage, this collection of cases serves to illustrate the “reasonably apparent” or
“natural and reasonable incident or consequence” test. Typically, such a collection
of cases would serve as a helpful tool for drawing the fine distinctions necessary to
distinguish harms that are “reasonably apparent” from harms that are not.
Unfortunately, because the facts of Poage and the cases cited therein differ
dramatically from one another, the cases do not lend themselves to meaningful
comparisons, and these important distinctions remain unclear.

For example, in Poage itself, the question at issue in the coverage dispute was
whether a liability policy for a pontoon boat covered injuries to a person who had
been an occupant of the insured boat, but who was swimming in open water about
twenty-five feet from the insured boat when a different, passing boat struck her. Id.
at 782. The Missouri Court of Appeals in Poage held that the personal injury resulting
from the collision between the passing boat and the swimmer was “a natural and
reasonable incident or consequence” of the use of the insured boat. Id. at 787–88.

-8-
The result obtained in Poage, therefore, sets forth a seemingly broad construction of
the “reasonably apparent” test.

In reaching this conclusion, the Poage court cited State Farm Mut. Auto. Ins.
Co. v. Flanary, 879 S.W.2d 720 (Mo. Ct. App. 1994), State Farm Mut. Auto. Ins. Co.
v. Whitehead, 711 S.W.2d 198 (Mo. Ct. App. 1986), and Fidelity and Cas. Co. of New
York v. Wrather, 652 S.W.2d 245 (Mo. Ct. App. 1983). In all three cases, the
operative causation language was “resulting from.” Whitehead and Wrather, like
Poage, suggest a fairly broad meaning for the term “resulting from”; Flanary does not.
In Flanary the court found no coverage. Flanery, 879 S.W.2d at 724. The policy at
issue in Flanary was a liability policy insuring a truck. Id. at 721. The policy insured
against “bodily injury to others . . . caused by accident resulting from the ownership,
maintenance or use of [the insured truck].” Id. The owner of truck had driven the
truck to a construction site carrying a portable welder. At the site, the owner parked
the truck next to a crane and operated the portable welder to fabricate a boom for a
crane. The portable welder was not attached to the insured truck’s power supply at
the time of its use. During construction of the boom, the crane collapsed and injured
another person. The court held the causal relationship between the injury and “the
ownership, maintenance or use of” the insured truck was too attenuated to justify
coverage under the operative “resulting from” language. Id. at 724.

In Wrather, policy language that was materially the same as in Flanary resulted
in a finding of coverage. Wrather, 652 S.W.2d at 247. There, a farmer used an
insured automobile to drag a burning tire through a field in an effort to light the field
on fire to burn off vegetation. Id. Smoke from the resulting fire blew across a nearby
highway, decreased visibility, and led to an accident and injury not involving the
insured vehicle. Id. Similarly, in Whitehead, the court found coverage under an
automobile liability policy. Whitehead, 711 S.W.2d at 201. There, one passenger in
an insured vehicle shot another passenger. The court in Whitehead found coverage
emphasizing that the vehicle was not simply the situs of the shooting, but that the

-9-
vehicle was being used to transport the shooter and the victim at the time of the
shooting. Id. at 199–200.

While these cases clearly establish a causal nexus somewhere short of
proximate cause, it is not clear how the causal nexus in each case can be said to be
“reasonably apparent.” In Poage, the insured boat had carried the injured swimmer
to the general area where the collision occurred between the swimmer and an entirely
separate vessel, and there was coverage. In Flanary, the insured truck carried the
welder and welding equipment to the general area where the construction accident
occurred, but there was no coverage. In Whitehead, one passenger in a vehicle shot
another passenger, and there was coverage. In Wrather, the insured vehicle was
merely a tool for pulling a burning tire, but injuries causally related to the smoke from
that fire were found to be covered. Flanary is difficult to reconcile with the three other
cases, but Whitehead, Wrather, and Poage collectively suggest a broad construction
for the term “reasonably apparent” under Missouri law.

At the end of the day, it is not clear in the present case what result must flow
from application of Missouri’s “reasonably apparent” or “natural and reasonable
incident or consequence of” test. Missouri, however, applies a general rule of
construction requiring courts to interpret ambiguities in an insurance policy in favor
of coverage and against the insurer. Poage, 203 S.W.3d at 783–84 (“It is important
to note that insurance policies are designed to provide protection and will be liberally
interpreted to grant, rather than deny, coverage. . . . If there is an ambiguity, it will
be construed in favor of the insured.”). Given this state of the law in Missouri, and
given the general rule that we must resolve ambiguities in favor of coverage, we
believe it is necessary to view the present harm as “reasonably apparent” under Poage
such that there is coverage.

Rarely will construction, demolition, or remediation projects that are substantial
in scope not involve sureties, and rarely will surety bonds not be dependent on

-10-
indemnification of the surety by the bond purchaser. In fact, surety law, even in the
absence of an express indemnification agreement, may in many circumstances imply
this duty of indemnification. See, e.g., U.S. Fid. & Guar. Co. v. Centropolis Bank of
Kansas City, Mo., 17 F.2d 913, 916 (8th Cir. 1927) (applying Missouri law and
recognizing a common law duty to indemnify a surety); 23 Williston on Contracts §
61:59 (Richard A. Lord 4th ed. 2008) (“[E]ven in the absence of any express contract
of indemnity, the principal obligor is impliedly bound to indemnify the surety and
make it whole.”). Without such a duty, the surety would be more akin to an insurer
with subrogation rights only as against third parties rather than a guarantor who may
look to the contracting party itself for satisfaction. Against this backdrop, the surety’s
defense costs were “reasonably apparent” and a “natural and reasonable incident or
consequence of” the underlying property damage claim. As such, we believe the
district court correctly held that the judgment against Spirco for the surety’s fees fell
within the policy’s coverage provision.

American cites our decision in Esicorp, Inc. v. Liberty Mutual Insurance Co.,
266 F.3d 859 (8th Cir. 2001), in support of its position that there should be no
coverage for the surety fees at issue in the present case. Esicorp was a coverage
dispute involving a commercial general liability policy that contained the causative-
language phrase “because of . . . property damage.” Id. at 861. American appears to
argue that we accorded a narrow meaning to this policy language, excluding coverage
for any direct or indirect consequential costs that do not, in and of themselves, satisfy
the policy definition for “property damage.” In fact, American’s argument, if correct,
would appear to accord no breadth whatsoever to the phrase “because of” and
effectively eliminate any coverage for damages that are in any degree attenuated from
damages that are conceded or proven to be “property damage.”

We disagree. We find two holdings in Esicorp. Esicorp holds first that, when
a contractor installs faulty material and must destroy or tear apart a structure to reach
and replace the faulty material in order to properly complete a job, the tear-out and

-11-
rebuilding costs are not “property damage” as that term generally is used in standard
commercial general liability policies. In fact, we distinguished this situation from a
situation where faulty materials or faulty parts actually fail and cause harm in some
other way:

It is significant that the defectively welded pipe sections did not collapse
or burst or otherwise cause accidental injury to surrounding property as
a result of SLT's negligent inspection. Instead, Esicorp argues that the
incorporation of the defectively welded pipe sections into the partially
completed pipe system was covered property damage, and therefore all
direct and consequential costs resulting from that damage are covered
losses.

Id. at 862. In rejecting the contractor’s theory, which we labeled an “incorporation
theory,” we made clear that we were examining the meaning of the policy term
“Property Damage,” and we made no reference to the language “because of.” In fact,
we analyzed the definition of the term “Property Damage” in standard, pre-1973
commercial general liability policies and in different, standard, post-1973 policies.
In neither examination did we focus on the causative language “because of.”
Maintaining our focus on the definition of “property damage,” we held:

After careful review of this more recent line of cases, we conclude the
Supreme Court of Missouri would reject Esicorp's incorporation theory
and hold that there is no “property damage” unless and until the
incorporation of a defective product or component results in “physical
injury to tangible property” in at least some part of the system.

Id. at 863.

In Esicorp, there was a second holding, but this second holding, like the first,
did not require our court to define the phrase “because of” or determine what degree
of attenuation this phrase encompassed. The insurer in Esicorp had conceded that

-12-
about $11,000 of damages, in fact, comprised property damage. That amount was a
minute fraction of the overall, asserted loss of over $3 million. We did not reach the
question of what fraction of the $3 million could be deemed covered damages as
falling within the policy’s “because of” language. Rather, we noted that the insured
bore the burden of proving coverage but had failed to present evidence or arguments
attempting to apportion the $3 million between damages not covered by the policy and
covered damages that existed “because of” the conceded $11,000 in property damage.
We stated:

It is apparent from Esicorp's damage evidence that the vast bulk of the
$3,046,709 loss allegedly attributable to SLT's negligent inspection were
the costs of repairing the defective welds in the field and the
consequential damages caused by the need to undertake those repairs.
Esicorp made no attempt to apportion either its total loss or the
settlement amount between these direct and consequential repair costs,
which were not covered property damage, and the direct and
consequential costs resulting from the limited damages Liberty Mutual
concedes were covered. Esicorp, in suing as assignee of SLT, had the
insured's burden to prove that its losses fell within the policy's insuring
agreement.

Id. at 864. Because we decided Esicorp based on a failure of proof, and because we
did not reach the hard question of defining the degree of attenuation described by the
policy in question, we reject American’s argument that Esicorp stands for the general
proposition that direct and consequential damages can never be covered under policy
language like that used in Esicorp.

Finally, even if we were to view Esicorp as setting forth a strictly limiting
standard for the scope of insurance coverage, American’s argument would appear to
force us to choose between two lines of authority: cases interpreting the phrase
“because of,” on the one hand, and cases interpreting the phrase “resulting from,” on
the other. As explained above, the “resulting from” cases are the source for the

-13-
“reasonably apparent” or “natural and reasonable incident or consequence of” test.
Poage, 203 S.W.3d at 787. Neither line of authority directly discusses the actual
policy language at issue in our case, so the question becomes whether one phrase is
more analogous to the present policy’s phrase “as a result of” than the other.

We believe it is a close question whether the ambiguous and untested language
of the present policy—“as a result of”—is more closely analogous to the phrase
“because of” as argued by American or the phrase “resulting from” as addressed in
Poage, 203 S.W.3d at 785-88, and in the several cases cited therein. Given the above-
stated rule that we must resolve ambiguities in favor of coverage, our search for
analogous language naturally should lead us to accept comparisons between phrases
more likely to result in coverage rather than phrases likely to defeat coverage. If one
of the causative language phrases from insurance policies addressed by prior Missouri
cases unambiguously stood out as more akin to the present policy language, there
would be no need for application of this general rule of interpretation. No such clarity
exists in the present case, however, so there is no compelling reason to conclude that
American’s favored phrase should guide our analysis.

B. Economic Loss

Regarding American’s characterization of the indemnity award as an un-
recoverable economic loss, there is no language in the policy excluding economic loss
or economic harm from the definition of “Loss.” American cites American States Ins.
Co. v. Mathis, 974 S.W.2d 647 (Mo. Ct. App. 1998), in support of the proposition that
economic loss must be excluded notwithstanding the absence of policy language
mandating such a result. Mathis, however, did not involve a refusal to extend property
damage coverage to an economic loss causally related to a claim of property damage.
Rather, the court in Mathis held that the underlying claim itself was a straightforward
breach of contract claim and that the resulting loss was an economic loss causally

-14-
related to the underlying breach of contract claim rather than a property damage claim.
Id. at 650.

In the present case, as explained above, the indemnification award for the
surety’s fees was “reasonably apparent” and a “natural and reasonable incident or
consequence” of the underlying property damage claim. As such, American’s
economic-loss theory in this case is simply an extension of its causation argument:
American would have us terminate the chain of causation at the indemnity agreement
and not look behind the indemnification award to determine the nature of the
underlying arbitration claim. We have already rejected this limited approach to
defining the causal-nexus requirement under the present policy.

C. Exclusions

Finally, American argues that even if coverage would otherwise exist, the
following exclusion applies:

This policy does not provide coverage and the company will not pay
Loss for: Any Claim based upon or arising out of liability of others
assumed by the Insured under any contract or agreement.

The district court found this exclusion did not apply because Spirco did not assume
the liability “of others.” According to the district court, Spirco merely agreed to
indemnify its surety, whose liability as surety was limited to that of Spirco, the
principal. Spirco urges us to adopt the position of the district court. In addition,
Spirco argues that an exception to this exclusion applies. The exception Spirco relies
upon provides, “This exclusion does not apply to liability: . . . 3. That the Insured
would have in the absence of the contract or agreement.”4

4
We note the inconsistency between this argument (that the duty to indemnify
the surety exists as a matter of common law without regard to any contractual duty)

-15-
 If the award at issue were an amount the surety was required to pay, as surety,
to cover an obligation that Spirco owed to a third party (for example, if arbitration had
resulted in an award against Spirco and in favor of the New Jersey Property owner),
the inapplicability of the cited exclusion would be beyond dispute. In such a situation,
the amount paid by the surety unquestionably would have been Spirco’s own liability
paid by the surety, and not a liability “of others.” Here, however, the fees at issue
were amounts the surety reasonably expended to protect itself and Spirco, and it is less
clear that the award of fees and expenses under the indemnity agreements should be
characterized as Spirco’s own liability rather than the liability of “others” assumed by
Spirco.

Although this issue is close, we believe the district court reached the correct
conclusion in rejecting application of the exclusion and finding that the underlying fee
award did not represent a “liability of others assumed by the Insured under any
contract or agreement.” This ambiguity, like that discussed above, must be resolved
in favor of coverage. Killian v. State Farm Fire & Cas. Co., 903 S.W.2d 215, 217
(Mo. Ct. App. 1995) (“When an insurance company relies on a policy exclusion to
assert noncoverage, it has the burden of proving that such an exclusion is applicable,
and we will construe the exclusion clause strictly against the insurer.”). Given the
nature of the insureds’ business, it would have been apparent that surety contracts
were part and parcel of the insureds’ everyday operations. To the extent the surety’s
defense and the Spirco’s defenses were partially aligned in arbitration, the defense
costs were, at least in part, incurred for the protection of Spirco. As such, it was
proper to characterize these fees as Spirco’s own expense. We are unwilling to parse
the nature of the liability more finely in an effort to label some portions as Spirco’s
own liability and other portions as the “liability of others” that Spirco merely assumed
under contract. If American had desired to parse coverage as to liabilities owed to a

and the losing arguments that Spirco and the other indemnitors advanced in today’s
companion case (that no duty to indemnify the surety exists as between the surety and
the indemnitors).

-16-
surety as finely as it now urges, it needed to be explicit in drafting the policy. Given
the need to resolve ambiguities in favor of coverage, we hold that the amounts owed
by the insured to the surety, whether in satisfaction of the surety’s attorney fees or in
satisfaction of an underlying payment on the surety bond, are the insureds’ own
liabilities and not liabilities of another assumed by contract.

In any event, even if the exclusion were otherwise applicable, we conclude that
Spirco is correct in its argument that the exception to the exclusion would apply. The
exception states, “This exclusion does not apply to liability: . . . 3. That the Insured
would have in the absence of the contract or agreement.” Although no Missouri case
has explicitly held that a common law, non-contractual duty to indemnify a surety
extends to reasonable fees and expenses, general surety law provides that the implicit
duty to indemnify a surety extends to those sums required to make the surety whole.
See, e.g., U.S. Fid. & Guar. Co., 17 F.2d at 916 (applying Missouri law and holding
that an “implied contract” of indemnification arises from a contract of suretyship).
We believe that, if faced with this question today, the Missouri Supreme Court would
recognize that the duty to indemnify a surety is a duty to make the surety whole.
Accordingly, we hold in the alternative that Spirco had a duty to indemnify the surety
independent of the duty imposed by the general indemnity agreements such that the
exception to the exclusion applies.

Because there is coverage and no exclusion defeats coverage, we affirm the
judgment of the district court.
______________________________

-17-