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Selective Insurance Co. v. Erie Insurance Exchange

Court of Appeals of Indiana

July 30, 2014

SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA and 500 RANGELINE ROAD, LLC, Appellants-Defendants,
v.
ERIE INSURANCE EXCHANGE, Appellee-Plaintiff, WELCH & WILSON PROPERTIES, LLC d/b/a HAMMONS STORAGE, ALLIANZ GLOBAL RISKS U.S. INSURANCE COMPANY, Appellees-Defendants

Page 106

APPEAL FROM THE SHELBY SUPERIOR COURT. The Honorable Charles D. O'Connor, Special Judge. Cause No. 73D01-1109-PL-33.

ATTORNEYS FOR APPELLANT: JAMES H. AUSTEN, SHANNON G. STARR, Starr Austen & Miller, LLP, Logansport, Indiana.

ATTORNEYS FOR APPELLEE ERIE INSURANCE EXCHANGE: JAMES P. STRENSKI, ANNA M. MALLON, Cantrell Strenski & Mehringer, LLP, Indianapolis, Indiana.

ATTORNEY FOR APPELLEE ALLIANZ GLOBAL RISKS U.S. INSURANCE COMPANY: GINNY L. PETERSON, Kightlinger & Gray, LLP, Indianapolis, Indiana.

BROWN, Judge. BARNES, J., concurs. ROBB, J., dissents with opinion.

OPINION

Page 107

OPINION - FOR PUBLICATION

BROWN, Judge

Selective Insurance Company of South Carolina (" Selective" ) and 500 Rangeline, LLC (" Rangeline," and collectively with Selective, " Appellants" ) appeal the trial court's order granting the cross-motion for partial summary judgment filed by Erie Insurance Exchange (" Erie" ) and denying the Appellants' motion for partial summary judgment. Additionally, Allianz Global Risks U.S. Insurance Company (" Allianz" ) has filed an appellee's brief in this matter as an interested party after intervening below. The Appellants raise one issue which we revise and restate as whether the court erred in granting partial summary judgment in favor of Erie and denying the Appellants' motion for partial summary judgment. We reverse and remand.

FACTS AND PROCEDURAL HISTORY

Rangeline purchased a warehouse in late 2006 or early 2007. At the time of the purchase, the principals of Rangeline were Jon Smith, Greg Heuer, and Travis May. Rangeline did not have any other employees who managed the warehouse or actively participated in the business affairs of Rangeline other than Smith, Heuer, and May. Selective provided commercial general liability coverage for Rangeline's warehouse beginning on July 1, 2007. In August 2007, Doug Ewing, a Safety Management Specialist with Selective, visited the warehouse to conduct a risk evaluation survey, and, based on recommendations made by Ewing, May retained Gardner Fire Protection to inspect the sprinkler system at the warehouse. On October 1, 2007, Jason Gardner from Gardner Fire Protection wrote a letter to May regarding his findings and identified a number of " serious issues, including but not limited to the fact that the system had no functioning alarms," and May later asked Gardner to provide an estimate of what the cost would be to repair the issues Gardner had identified. Appellants' Appendix at 355. Gardner Fire Protection was never hired to make repairs to the sprinkler system. Selective renewed the policy with Rangeline for the period of July 1, 2008 through July 1, 2009.

On April 30, 2008, Welch & Wilson Properties, LLC d/b/a Hammons Storage, (" Hammons" ) and Rangeline entered into a lease of the warehouse for the purpose of storing insulation manufactured by Knauf Insulation KnbH, (" Knauf" ). By this time, Rangeline's owners were Smith and Heuer, although May remained active in

Page 108

the company and negotiated the lease with Hammons on behalf of Rangeline. Hammons prepared the first draft of the lease and sent it to Rangeline. The executed lease contains the following relevant provisions:

J. INSURANCE AND INDEMNIFICATION . . .
3. TENANT'S PUBLIC LIABILITY INSURANCE:

Tenant shall, at its own cost and expense, keep and maintain in full force during the Lease term, as policy or policies of comprehensive commercial general liability insurance on an occurrence basis, insuring Tenant's activities in or about the Leased Premises against loss, damage or liability for personal injury or death of any person or loss or damage to property occurring in, upon or about the Leased Premises during the Lease term, with $1.00 Million in combined single limit coverage. Landlord, its successors, assigns and any mortgagee shall be named as additional insureds under each policy maintained by Tenant. Tenant also shall maintain worker's compensation coverage to the extent required by law.

* * * *
5. WAIVER OF SUBROGATION:

Any policy of property insurance maintained by either party shall include a clause or endorsement denying the insurer any rights of subrogation against the other party to the extent rights have been waived by the insured prior to the occurrence of injury or loss. Landlord and Tenant waive any rights of recovery against the other for damage or loss due to hazards covered by insurance containing such a waiver of subrogation clause or endorsement to the extent of the damage or loss covered thereby. Notwithstanding anything to the contrary contained in this provision or elsewhere in this Lease, neither party shall be deemed to have released or waived any claim against the other for damages to property within the deductible amount of such party's insurance policy.

Id. at 58-59. Paragraph K of the lease, titled " UTILITIES AND SERVICES," assigned to Rangeline the duty to pay for certain utilities including the " Heat and/or Gas Service" and the " Fire Sprinkler System." Id. at 59. Also, Paragraph L stated the following:

MAINTENANCE AND REPAIR:

During the Lease term, Tenant shall, at its own cost and expense, maintain in good condition and repair the Leased Premises and every part thereof, except for obligations of Landlord provided for elsewhere in this Lease, ordinary wear and tear, and casualty. Tenant shall not be required to make any roof, foundation or structural alterations, repairs or replacements to the Leased Premises except as otherwise required by this Lease. Landlord shall allow Tenant the use and benefit of each and every warranty to which Landlord is entitled with respect to any items repaired or replaced by Tenant. Landlord shall be responsible for maintaining the roof, exterior walls (except doors, windows and glass), foundation and structural integrity of the building, except for damage caused by the negligence or willful act of tenant or its agents, officers, employees, contractors, licensees or invitees which is not covered or required to be covered under the property insurance to be maintained hereunder. Landlord shall be responsible for major component repairs and/or replacement of the heating,

Page 109

ventilation and air conditioning equipment in the Leased Premises, provided that the need for such repair or replacement is not due to any abuse, misuse, damage or negligence of Tenant or its agents, officers, employees, contractors, licensees, or invitees.

Id.

After the lease was signed and the lease term started, Rangeline conducted some operations in the warehouse for the first month, and after that time Hammons had sole possession of the warehouse. Hammons had seven employees working in the warehouse during the term of the lease including Shawn Mayberry, who was the supervisor of Hammons' operation. According to Hammons' principal, Jeffrey Welch, sometime in October or November of 2008, May told him that Rangeline was going to drain the water in the sprinkler system in the Warehouse and not heat the facility. However, the furnace could be turned on by a switch or thermostat on the wall in the warehouse. Mayberry does not recall the heat being on in the Warehouse while Hammons stored the insulation there, and he never touched the furnace.

On or about December 23, 2008, the pipes of the sprinkler system at the warehouse burst, causing water to escape and damaging the Knauf insulation being stored therein. Origin and cause investigators hired by the insurers involved in this matter concurred that the cause of the loss was that the sprinkler system failed due to freezing temperatures which caused the water from the system to freeze and crack numerous cast iron fittings, causing the failure of the sprinkler heads. The investigators believed that there was no antifreeze in the sprinkler system as well as insufficient heat provided to the warehouse. Erie investigator Patrick Murphy inspected the warehouse on February 17, 2009, and he noted that the gas had been turned off at the regulating system located on the outside of the warehouse. Records from the gas provider indicate that no gas was used at the warehouse between July 29, 2008 and March 24, 2009, although gas was available to the warehouse during this timeframe.

At the time of the sprinkler failure, Erie had in full force and effect an " Ultraflex Package Policy" of insurance issued to Hammons (the " Policy" ), which included commercial property coverage and commercial general liability coverage. Id. at 63. The Policy contains the following language in the commercial general liability coverage form, in pertinent part:

SECTION I - COVERAGES
COVERAGE A BODILY INJURY AND PROPERTY DAMAGE LIABILITY
1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of " bodily injury" or " property damage" to which this insurance applies. . . .
2. Exclusions

This insurance does not apply to: . . .
j. Damage To Property
" Property damage" to: . . .
4) Personal property in the care, custody or control of the insured; . . .
SECTION IV - COMMERCIAL GENERAL LIABILITY CONDITIONS
7. Separation Of Insureds

Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:
a. As if each Named Insured were the only Named Insured; and

Page 110

b. Separately to each insured against whom claim is made or " suit" is brought.

Id. at 108, 110-111, 115-117. Additionally, the Policy contained the following endorsement, titled " ADDITIONAL INSURED -- MANAGERS OR LESSORS OF PREMISES" (the " A/I Endorsement" ), which stated in pertinent part: " WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to you and shown in the Schedule . . . ." Id. at 123. The Policy listed Rangeline as an additional insured in the relevant Schedule.

Erie paid $1,000,000 to Knauf to resolve a claim asserted by Knauf due to the loss, and on February 10, 2010, following Erie's payment to Knauf, Erie filed a subrogation lawsuit against Rangeline seeking to recover the $1,000,000 (the " Underlying Litigation" ). On October 4, 2011, Erie filed, as amended, a Complaint for Declaratory Judgment seeking a determination of whether or not its policy of insurance afforded coverage to Rangeline for the claim Erie asserted in the Underlying Litigation.

Also, on December 23, 2008, Allianz had in full force and effect a policy of insurance issued to Knauf and paid to Knauf $398,266 in addition to the $1,000,000 paid by Erie as a result of the insulation damage. On March 26, 2010, Allianz moved to intervene in the Underlying Litigation to assert a claim against Rangeline for recovery of the amount paid by Allianz to Knauf, and the court granted its motion. Both Allianz and Selective, who had a policy in effect at the time of the ...


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