Certain Underwriters v. Sunbelt Rentals, Inc.

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 19a0549n.06

No. 18-5617

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

CERTAIN UNDERWRITERS AT ) FILED
LLOYD’S, LONDON, Subscribing to ) Oct 30, 2019
Policy Number 13-000093, ) DEBORAH S. HUNT, Clerk
)
Plaintiff-Appellee, )
) ON APPEAL FROM THE
v. ) UNITED STATES DISTRICT
) COURT FOR THE MIDDLE
SUNBELT RENTALS, INC., ) DISTRICT OF TENNESSEE
)
Defendant-Appellant. )
)

Before: NORRIS, STRANCH, and LARSEN, Circuit Judges.

PER CURIAM. Certain Underwriters at Lloyd’s, London (“Lloyd’s” or the “Company”)

insured FCA-Demonbreun, LLC and Faison & Associates, LLC (the “Named Insured” or

“Owner”) through an all-risk builder’s policy (the “Policy”) covering a large construction project

(the “Project”). Lloyd’s paid a claim under the Policy for water damage, allegedly caused when a

heater supplied by defendant Sunbelt Rentals, Inc. (“Sunbelt”) malfunctioned and activated the

building’s sprinkler system.

Lloyd’s filed suit in federal court, seeking a declaration that it could recover its claim

payments through subrogation against Sunbelt. But Sunbelt argued that the Policy precluded the

subrogation. The district court sided with Lloyd’s, and Sunbelt appealed. After careful review of

the Policy’s relevant provisions, we conclude that the Policy is ambiguous as to whether Lloyd’s
No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

can sue Sunbelt. Because Tennessee law requires that we construe this ambiguity against the

insurer, Lloyd’s, we thus resolve the question in Sunbelt’s favor and REVERSE the district court.

I.

The Project involved construction of a 209-unit residential building located in Nashville,

Tennessee. The Named Insured purchased the Policy from Lloyd’s to insure against any direct

physical loss or damage to the Project. The Named Insured then contracted with Balfour Beatty

Construction, LLC (“Balfour”) to serve as the general construction contractor. Eventually, Balfour

subcontracted with Sunbelt to provide several torpedo heaters for the Project. During construction,

a sprinkler head on the fourth floor of the Project activated, allegedly due to a malfunctioning

Sunbelt torpedo heater.

Lloyd’s reimbursed the Named Insured for the resulting water damage, totaling $976,201

net of a $10,000 deductible. Lloyd’s then sought reimbursement from Sunbelt through

subrogation. Lloyd’s sued Sunbelt in federal court, seeking a declaration that it could pursue

subrogation under the Policy. Both parties moved for summary judgment. Lloyd’s argued that it

could sue Sunbelt for the claimed losses because Sunbelt does not qualify as an “Additional

Insured” under the Policy, and even if Sunbelt is an Additional Insured, that status is limited to the

value of its equipment used in the Project. For its part, Sunbelt asserted that it does qualify as an

Additional Insured, and that Lloyd’s expressly waived its subrogation rights via the Policy’s

subrogation provision.

The Policy defines Additional Insured in this way:

To the extent required by any contract or subcontract, and then only as their
respective interests may appear, any individual(s) or entity(ies) specified in such
contract or subcontract are recognized as Additional Insured. As respects
Architects, Engineers, Manufacturers and Suppliers, the foregoing is limited to
their site activities only precluding coverage respectively under policies for
Professional Liability and Products Liability and Warranty coverage as applicable.

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No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

Section 11 of Part D of the Policy (General Conditions) confers broad subrogation rights

in favor of Lloyd’s in the event of a covered claim. However, it also contains certain limitations

directly at issue in this appeal:

If the Company pays a claim under this policy, it will be subrogated, to the extent
of such payment, to all the Insured’s rights of recovery from other persons,
organizations and entities. The Insured will execute and deliver instruments and
papers and do whatever else is necessary to secure such rights.

The Company will have no rights of subrogation against:

A. Any person or entity, which is a Named Insured or an Additional Insured;

B. Any other person or entity, which the Insured has waived its rights of
subrogation against in writing before the time of loss;

Notwithstanding the foregoing, it is a condition of this policy that the Company
shall be subrogated to all the Insured’s rights of recovery against:

A. Any Architect or Engineer, whether named as an Insured or not, for any loss
or damage arising out of the performance of professional services in their
capacity as such and caused by an error, omission, deficiency or act of the
Architect or Engineer, by any person employed by them or by any others
for whose acts they are legally liable . . . .

Relevant to the waiver of subrogation in subsection B above, the agreement between the

Named Insured and Balfour (the “Balfour Contract”) provided that:

The Owner and Contractor waive all rights against (1) each other and the
Subcontractors, Subcontractors [sic], agents and employees each of the other, and
(2) the Architect and separate contractors, if any, and their subcontractors and sub-
contractors, for all damages caused by fire or other perils to the extent covered by
insurance obtained pursuant to this paragraph 11.3 or any other property insurance
applicable to the Work . . . .

....

Owner will provide All Risk Builders Risk-Completed Form Insurance for
the full value of the Work and will absorb deductible losses not covered by such
insurance, without, however, waiving its rights to proceed against any negligent
party. . . .

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No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

Reviewing these provisions, the district court held that Sunbelt is an Additional Insured

under the Policy but that Sunbelt’s limited insured status permits Lloyd’s subrogation action,

notwithstanding the Policy’s waivers. Only Sunbelt has appealed.1

II.

This court reviews a district court grant of summary judgment de novo. Duncan v. Muzyn,

885 F.3d 422, 424 (6th Cir. 2018). Because federal jurisdiction in this case is premised on diversity

of citizenship, we apply Tennessee law. See Great Am. Ins. Co. v. E.L. Bailey & Co., Inc., 841

F.3d 439, 443 (6th Cir. 2016).

Under Tennessee law, insurance contracts are interpreted using “the same rules of

construction used to interpret other contracts.” Travelers Indem. Co. of Am. v. Moore & Assocs.,

216 S.W.3d 302, 305 (Tenn. 2007) (citation omitted). “An insurance contract ‘must be interpreted

fairly and reasonably, giving the language its usual and ordinary meaning.’” Id. at 306 (quoting

Naifeh v. Valley Forge Life Ins. Co., 204 S.W.3d 758, 768 (Tenn. 2006)). “‘[A]ll provisions in the

contract should be construed in harmony with each other . . . to promote consistency and avoid

repugnancy between the various provisions of a single contract.’” Teter v. Republic Parking Sys.,

Inc., 181 S.W.3d 330, 342 (Tenn. 2005) (quoting Guiliano v. Cleo, Inc., 995 S.W.2d 88, 95 (Tenn.

1999)).

“In addition, contracts of insurance are strictly construed in favor of the insured, and if the

disputed provision is susceptible to more than one plausible meaning, the meaning favorable to

the insured controls.” Garrison v. Bickford, 377 S.W.3d 659, 664 (Tenn. 2012) (citation omitted).

“However, a ‘strained construction may not be placed on the language used to find ambiguity

1
Lloyd’s does not appeal the district court’s determination that Sunbelt qualifies as an Additional
Insured under the Policy.
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No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

where none exists.’” Id. (quoting Farmers–Peoples Bank v. Clemmer, 519 S.W.2d 801, 805 (Tenn.

1975)).

The Policy covered losses incurred by the Named Insured, along with losses incurred by

other contractors and subcontractors as Additional Insureds, “only as their respective interests may

appear.”2 In other words, if something happened to the Project and Sunbelt’s equipment was

destroyed, its coverage under the Policy as an Additional Insured would have been limited to

recovering the value of its equipment (i.e., its “interests”).

With respect to subrogation, the Policy provides that Lloyd’s “will have no rights of

subrogation against . . . [a]ny person or entity, which is . . . an Additional Insured.” Sunbelt argues

that this provision prevents Lloyd’s subrogation action against it. The district court held that “the

undisputed facts establish [Sunbelt] qualifies as an Additional Insured under the Policy.” Certain

Underwriters at Lloyd’s, London v. Sunbelt Rentals, Inc., No. 3:17-CV-00274, 2018 WL 3453927,

at *5 (M.D. Tenn. May 17, 2018).

Despite finding that Sunbelt was an Additional Insured, the district court held that the

Policy’s subrogation waiver did not obviate Lloyd’s right of subrogation against Sunbelt entirely.

Specifically, the district court found that because Sunbelt is recognized as an Additional Insured

“only as [its] respective interests may appear,” the subrogation waiver only prevented Lloyd’s

from suing Sunbelt for damage to Sunbelt’s equipment—i.e., Sunbelt’s property interest covered

by the Policy. Id. Under the district court’s interpretation, therefore, Lloyd’s could sue Sunbelt

for any damage covered by the Policy except damage to Sunbelt’s own equipment.

2
Generally, an “additional insured” is defined as “Someone who is covered by an insurance policy
but who is not the primary insured.” Black’s Law Dictionary (10th ed. 2014).
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No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

The district court’s interpretation of the Policy’s subrogation waiver is not obviously

correct. If the Policy precluded subrogation against an Additional Insured, it would make sense to

focus on what impact, if any, the coverage limitations inherent in the term “Additional Insured”

would have on subrogation. But that is not what the Policy says. It precludes subrogation against

any entity that qualifies as an Additional Insured. Drafted this way, the question as to whether an

entity qualifies as an Additional Insured is plausibly read as a binary one, requiring only a yes-or-

no answer. Stated another way, one could create a list of persons or entities that qualify as

Additional Insureds under the Policy, and Sunbelt would unequivocally be on that list. The text

of the Policy thus arguably cuts against the district court’s conclusion that the limitation on the

coverage afforded to an Additional Insured under the Policy diminishes Sunbelt’s status as an

entity which is an Additional Insured.

It is also worth noting that insurance policies routinely exclude coverage for losses

stemming from the sole negligence of an additional insured, but no such exclusion was present in

the Policy. See, e.g., Kummer Enters., Inc. v. Valley Forge Ins. Co., No. 1:09-CV-109, 2011 WL

710654, at *4 (W.D. Mich. Feb. 23, 2011) (“Under the Policy, the insurance coverage provided to

an additional insured does not apply to certain damages arising out of the sole negligence of that

additional insured.”). Lloyd’s included specific exceptions under the “no subrogation” provision

of the Policy clarifying that, despite the provision, it may still pursue subrogation rights against

Additional Insureds in certain circumstances (e.g., deficiencies in the work of professional

architects or engineers). If Lloyd’s had intended to retain subrogation rights for damages arising

out of a subcontractor’s sole negligence, it could have done so expressly.

At the same time, because the Policy “recognize[s]” Sunbelt as an Additional Insured

solely insofar as its “interests may appear,” it could also be argued that the agreement only prevents

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No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

Lloyd’s from suing Sunbelt in connection with the specific property interests for which Sunbelt is

“recognized” under the Policy—the heaters it supplied. On this theory, Sunbelt would qualify as

an Additional Insured with respect to its property interest in the heaters but not with respect to its

liability for damage caused to the building. This interpretation finds support in a line of cases

holding that a builder’s risk insurance policy does not preclude subrogation actions against a

subcontractor for damage caused by its own negligence. See Gen. Elec. Co. v. Zurich-Am. Ins.

Co., 952 F. Supp. 18, 20–21 (D. Me. 1996) (citing cases). Indeed, some courts have allowed

subrogation under insurance policies nearly identical to this one. See Turner Const. Co. v. John

B. Kelly Co., 442 F. Supp. 551, 555 (E.D. Pa. 1976) (concluding that subcontractor was additional

insured but not for liability purposes). In Turner, the subcontractor argued, as Sunbelt does here,

that a policy’s express subrogation waiver against “any person, firm or corporation insured

hereunder” should preclude any recovery by the insurer for the subcontractor’s negligence. Id.

But the Turner court rejected this argument, explaining that “[t]he waiver clause does not

extend . . . to relieving a subcontractor for its negligence in causing damage to property owned by

the general contractor. For liability purposes, [the subcontractor] was not an ‘insured hereunder.’”

Id.

Notwithstanding decisions like Turner, “[o]ther courts have held that a builder’s risk

insurance policy includes a named insured’s negligence as an insurable interest, even if the policy

contains the limiting language ‘as [the insured’s] interests may appear.’” Zurich-Am. Ins. Co., 952

F. Supp. at 21; Baugh-Belarde Const. Co. v. Coll. Utilities Corp., 561 P.2d 1211, 1216 (Alaska

1977) (holding that an “insurer could not recover through subrogation from a subcontractor which

was insured under its builder’s risk policy,” even for damages caused by the subcontractor’s

negligence). The jurisdictions adhering to the Baugh-Belarde approach sometimes rely on what

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No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

is known as the anti-subrogation rule, which generally prevents insurers from pursuing subrogation

against additional insureds. See Miller v. Russell, 674 S.W.2d 290, 291–92 (Tenn. Ct. App. 1983)

(explaining the provenance of the anti-subrogation rule).

In sum, jurisdictions differ in how they would interpret the provisions at issue here. In the

jurisdictions following Turner, Lloyd’s could sue Sunbelt for its negligence. In those following

Baugh-Belarde, Sunbelt would escape liability. Not surprisingly, the parties each cite authorities

from the jurisdictions that support their respective legal positions. Yet Tennessee courts have not

expressly addressed this issue. Although there is some evidence that Tennessee favors an

expansive application of the anti-subrogation rule, see Miller, 674 S.W.2d at 292 (commenting

favorably on the approach taken in Baugh-Belarde and similar cases), Tennessee courts have not

addressed or rejected Turner’s approach. And given the conflicting authorities, the Policy’s

subrogation waiver can reasonably be understood in two ways—the right way would depend on

which line of cases Tennessee decides to follow.

We encountered the same problem in American Insurance Co. v. L.H. Sowles Co., 628 F.2d

967 (6th Cir. 1980). There, as here, we addressed whether a builder’s risk policy precluded

subrogation by an insurer against an insured subcontractor with respect to damage done to the

property of other subcontractors. Id. at 968. Because the “the courts of Ohio ha[d] not yet

addressed the problem,” and the parties relied on “authorities from other jurisdictions,” we

concluded that the policy could “reasonably be understood in two ways.” Id. As Ohio law

required, we construed the ambiguous language “in the manner most favorable to the insured,”

thereby preventing the insurer from pursuing subrogation against the subcontractor. Id. at 969.

Like Ohio, Tennessee requires that courts construe ambiguous terms in an insurance policy

against the insurer. See, e.g., Lammert v. Auto-Owners (Mut.) Ins. Co., 572 S.W.3d 170, 179

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No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

(Tenn. 2019); Naifeh, 204 S.W.3d at 770. Here, the Policy’s subrogation waiver is ambiguous

regarding whether Lloyd’s can sue Sunbelt for damage caused by Sunbelt’s negligence. Under

Tennessee law, we resolve that question in Sunbelt’s favor. Lloyd’s suit against Sunbelt, therefore,

fails, and Sunbelt is entitled to summary judgment.3

III.

For these reasons, we REVERSE the district court’s judgment denying Sunbelt’s motion

for summary judgment and granting Lloyd’s motion for summary judgment.

3
Sunbelt also argues that Lloyd’s gave up its right to bring this subrogation action when, through
the Policy, it waived its rights against “[a]ny other person or entity, which the Insured has waived
its rights of subrogation against in writing before the time of loss.” But because our holding
resolves the appeal, we need not decide whether this additional limitation on subrogation would
also prevent Lloyd’s from suing Sunbelt.
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No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

NORRIS, Circuit Judge, concurring. I agree that the district court judgment must be

reversed and that summary judgment in favor of Sunbelt is proper. I write separately because

I believe the policy language unambiguously dictates that result.

As noted above, Tennessee courts indeed require ambiguous insurance policies to be

construed against the insurer (here Lloyd’s). See, e.g., Lammert v. Auto-Owners (Mut.) Life Ins.

Co, 572 S.W.3d 170, 179 (Tenn. 2019). “However, a ‘strained construction may not be placed on

the language used to find ambiguity where none exists.’” Garrison v. Bickford, 377 S.W.3d 659,

664 (Tenn. 2012) (quoting Farmers–Peoples Bank v. Clemmer, 519 S.W.2d 801, 805 (Tenn.

1975)).

Here, the policy states that “[Lloyd’s] will have no rights of subrogation against . . . [a]ny

person or entity, which is a Named Insured or an Additional Insured[.]” It is undisputed on appeal

that Sunbelt is an entity that is an additional insured. Therefore, Lloyd’s has no right of subrogation

against Sunbelt and that should end the inquiry. It is irrelevant that Sunbelt was allegedly at fault

for the loss. An insurer’s right of subrogation arises specifically when a third party is at fault. See

York v. Sevier Cty. Ambulance Auth., 8 S.W.3d 616, 619 (Tenn. 1999) (citation omitted) (noting

that under subrogation a “wrongdoer should compensate the insurer for payments the insurer made

to the insured”). So it is axiomatic that a waiver of all subrogation rights against Sunbelt

necessarily includes losses stemming from events where Sunbelt is alleged to be at fault.

Otherwise, the waiver would have no meaning.

The coverage afforded to Sunbelt and other additional insureds is limited to the extent of

their “interests” in the project. But Sunbelt’s coverage limitations are not relevant to the question

of Lloyd’s subrogation limitations. It is worth noting that the policy language broadly waiving

Lloyd’s subrogation rights is immediately followed by certain exceptions, including an express

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No. 18-5617, Certain Underwriters at Lloyd’s London v. Sunbelt Rentals, Inc.

reservation of Lloyd’s subrogation rights for losses caused by negligent architects or engineers.

This confirms that Lloyd’s understood that it was waiving its subrogation rights, and Lloyd’s was

capable of drafting exceptions to that waiver. None of the policy’s waiver exceptions applies to

Sunbelt.

It is instructive to briefly consider the common-law insurance principle called the anti-

subrogation rule, explained by the Tennessee Court of Appeals this way:

In the situation where a subcontractor negligently causes damage to the structure,
often the insurance company will seek to recover against the subcontractor the
amount paid to the owner or general contractor under the policy. Courts, rather
uniformly, have disallowed such subrogation attempts, determining that the
subcontractor and the owner/general contractor are coinsureds under the policy.
Transamerica Insurance Co. v. Gage Plumbing Co., 433 F.2d 1051 (10th Cir.
1970); J.F. Shea Co. v. Hynds Plumbing Co., 96 Nev. 862, 619 P.2d 1207 (1980);
Board of Education v. Hales, 566 P.2d 1246 (Utah 1977); Baugh-Belarde
Construction Co. v. College Utilities Corp., 561 P.2d 1211 (Alaska 1977); South
Tippecanoe Corp. v. Shambaugh & Son, Inc., 395 N.E.2d 320 (Ind. App. 1979); St.
Paul Fire Insurance Co. v. Murray Plumbing Corp., 65 Cal. App. 3d 66, 135 Cal.
Rptr. 120 (1976); Factory Insurance Association v. Donco Corp., 496 S.W.2d 331
(Mo. App. 1973); United States Fire Insurance Co. v. Beach, 275 So. 2d 473 (La.
App. 1973).

Miller v. Russell, 674 S.W.2d 290, 292 (Tenn. Ct. App. 1983). The anti-subrogation rule is based

on an inherent conflict of interest if an insurer could proceed against one of the policy’s insureds

(including additional insureds). Though some courts have not uniformly applied the anti-

subrogation rule, it is favored in Tennessee and serves as the majority rule in the construction

context. See Construction Project Relationships, 16 Couch on Ins. § 224:32 (collecting cases).

In the end, it is unnecessary to wrestle with whether or how the anti-subrogation rule might

apply in this case because Lloyd’s plainly incorporated the well-known common-law rule into the

text of the insurance policy. There is no public policy or case law that prevents an insurance

company from contracting away its subrogation rights against additional insureds and, in my view,

Lloyd’s has unambiguously done so here.

11