Midwest Family Mutual Insurance Company v. Justkyle, Inc.

Background

Midwest Family Mutual Insurance Company brought this federal declaratory-judgment action to determine whether its insurance policy required it to defend or indemnify Justkyle, Inc. in an underlying Minnesota state-court action. The underlying case arose from a remodeling project at Eric and Barbara Grutzner’s home. The Grutzners alleged that a contractor, M.A. Peterson Designbuild, Inc., and Mark Peterson discovered asbestos during earlier remodeling, concealed it, and failed to notify them. M.A. Peterson brought third-party claims for contribution and indemnification against Justkyle and another contractor, alleging that the third-party defendants were responsible for disturbing asbestos.

Midwest Family insured Justkyle and Nicholas Guettler under an artisan contractor policy. The policy covered sums the insured became legally obligated to pay as damages because of bodily injury or property damage caused by an “occurrence,” defined as an accident, and required the insurer to defend suits seeking covered damages. An asbestos endorsement excluded certain property damage connected to the discharge or release of asbestos and property damage arising from the actual, alleged, threatened, or suspected contact with, exposure to, existence of, or presence of asbestos.

Jurisdiction and joinder

Guettler argued that he was not properly part of the federal case because he was not named in the underlying state-court action and had not asked Midwest Family to defend or indemnify him. The court concluded that Midwest Family had standing to sue Justkyle because Justkyle was named in the underlying action and was generally covered by the policy. It also concluded that joining Guettler was proper under the federal rule allowing defendants to be joined when claims arise from the same transaction or occurrence and share common legal or factual questions.

Duty to defend

Applying Minnesota law, the court explained that an insurer’s duty to defend is broader than its duty to indemnify. The insurer must defend any claim that arguably falls within coverage and must establish that all parts of the underlying claims clearly fall outside coverage. The court compares the allegations in the underlying complaint with the policy language, without deciding whether the underlying claims will ultimately succeed.

The court found that Justkyle had made an initial showing of coverage because the underlying pleadings alleged property damage caused, among other things, by negligence. Midwest Family therefore had the burden of proving that the asbestos exclusion clearly eliminated coverage for all parts of the claims.

The court agreed that the exclusion would apply to damage resulting from an alleged disturbance or release of asbestos. But the underlying allegations also involved the alleged concealment of asbestos. The court reasoned that the mere presence of asbestos would not itself create liability; the alleged disturbance and concealment were the conduct said to create liability. Disturbance could be a natural and reasonable consequence of asbestos being present, but concealment was an independent act that could have been alleged even without focusing on the asbestos itself. Midwest Family therefore had not shown that the concealment allegations clearly involved property damage arising from the presence of asbestos.

Ruling

Chief Judge John R. Tunheim denied Midwest Family’s Motion for Summary Judgment. The court did not decide whether Midwest Family would ultimately have to indemnify Justkyle if Justkyle were found liable, explaining that the parties had not separately briefed that issue and that liability appeared unlikely after the state court’s summary-judgment ruling.