                NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 08a0463n.06
                            Filed: August 1, 2008

                                           No. 07-5461


                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT

NAUTILUS INSURANCE COMPANY,

       Plaintiff-Appellee,

v.                                                   ON APPEAL FROM THE UNITED
                                                     STATES DISTRICT COURT FOR THE
GLEN CASSADY; INTERSTATE PROPERTY                    EASTERN DISTRICT OF KENTUCKY
REMEDIATION, INC.,

       Defendants-Appellants.

                                               /




BEFORE:        MERRITT, CLAY, and GILMAN, Circuit Judges.

       CLAY, Circuit Judge. Defendants, Interstate Property Remediation, Inc., and its principal

owner, Glen Cassady, appeal from the district court’s order granting summary judgment to Plaintiff,

Nautilus Insurance Company, with respect to a bad faith action initiated after Nautilus reserved its

right to deny coverage under an insurance policy owned by Cassady and Interstate. For the reasons

that follow, we AFFIRM the judgment of the district court.

                                        BACKGROUND

       The instant appeal arises from a dispute regarding the scope of an insurance policy obtained

by Glen Cassady (“Cassady”) on behalf of Interstate Property Remediation, Inc. (“Interstate”) from
                                           No. 07-5461

Nautilus Insurance Company (“Nautilus”). Cassady obtained commercial liability insurance

coverage from Nautilus after speaking with Pauline Williamson (“Williamson”), an insurance

representative at the Elite Agency, Inc. (“Elite”). During the conversation between Cassady and

Williamson regarding appropriate coverage levels, Cassady informed her that Interstate often did

work for CSX Railroad, which involved mowing grass and clearing right of ways. Cassady also

informed Williamson that he, and by extension Interstate, was “a jack of all trades and master of

none,” apparently to indicate that he engaged in a wide variety of work. (J.A. at 373)

       To complete the process for purchasing a policy, Nautilus required Cassady to complete a

Commercial Application Form. After speaking with Cassady, Williamson filled out the application.

The application required Williamson to answer questions regarding Interstate’s business and

operations. In response to such questions, Williamson answered that Interstate was engaged in the

business of “mowing grass for railroads,” and indicated under a section entitled “Schedule of

Hazards” that Interstate was primarily in the business of “Landscaping-Gardening and drivers” as

well as “mowing grass for Railroads.” (J.A. at 37-42, 420). In response to a series of “yes” or “no”

questions, Williamson responded “no” to a question which asked whether Interstate contemplated

“any demolition exposure . . . .”    (Id.) Cassady signed the application and acknowledged that

Nautilus would rely on the information contained therein to determine whether an insurance policy

would be issued to Interstate.

       Upon receipt of Interstate’s Commercial Application Form, Nautilus issued a general liability

insurance policy with a limit of $1 million to Interstate. The general insurance policy contained the

following provisions:


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                                           No. 07-5461


               SECTION I – COVERAGES
               COVERAGE [OF] 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. We will
                            have the right and duty to defend the insured against any ‘suit’
                            seeking those damages. However, we will have no duty to
                            defend the insured against any ‘suit’ seeking damages for
                            ‘bodily injury’ or ‘property damage’ to which this insurance
                            does not apply. We may, at our discretion, investigate any
                            ‘occurrence’ and settle any claim or ‘suit’ that may result.

(J.A. at 43)

        Additionally, Cassady signed and returned to Nautilus a General Change Endorsement form

which contained the following exclusions:

               DEMOLITION AND BUILDING WRECKING CONDITIONAL
               EXCLUSION

               The following exclusion is added to Paragraph 2. Exclusions under
               SECTION I – COVERAGES, BODILY INJURY AND PROPERTY
               DAMAGE LIABILITY

               This insurance does not apply to ‘bodily injury’ or ‘property damage’ for
        demolition or wrecking of buildings or structures conducted by you unless coverage
        was purchased for ‘Wrecking–buildings or structures’ and designated on the
        Declarations.

                The following additional exclusions apply to demolition or wrecking
          operations:
                (1) This insurance does not apply to ‘bodily injury’ or ‘property damage’
               arising out of:
                        (a) The use of cranes, ball and chain, or similar apparatus; or
                        (b) The demolition or wrecking of any building or structure that has
                        an original height in excess of three stories.
(J.A. at 90)


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                                            No. 07-5461

       Following the issuance of this policy, Interstate contracted with CSX to work at a job site in

Johnstown, Pennsylvania. Although the nature of this contract is disputed by the parties, Interstate

was required to clear or tear down several one-story sheds located on the property. Interstate rented

a trackhoe to complete the duties enumerated in the CSX contract. On December 27, 2004, James

West, an employee of Interstate, was sent to the Johnstown site to tear down the sheds. Also present

was James Hale, who accompanied West to Johnstown and was on site while West removed the

sheds. During the CSX project, a track from the trackhoe struck Hale, seriously injuring him. As

a result of these injuries, both of Hale’s legs were amputated.

       Following the accident, Hale filed suit against Interstate in Pennsylvania state court. After

being noticed with the suit, Interstate sought to invoke its insurance policy coverage through

Nautilus. In response, Nautilus sent Cassady a reservation of rights letter. Thereafter, Nautilus filed

suit seeking a declaratory judgment that it had no duty to defend or indemnify Interstate in Hale’s

personal injury suit. Instead, Nautilus claimed that Hale’s injuries arose from conduct that fell

outside of the scope of Interstate’s coverage. In particular, Nautilus asserted that they had no duty

to defend Interstate as a result of exemptions under the policy for bodily injuries resulting from

demolition activities and the exclusion for injuries resulting from the use of mobile equipment.

Additionally, Nautilus alleged that Cassady misrepresented the nature of Interstate’s business and

that the contract should be voided on that basis. Interstate, for its part, asserted a bad faith

counterclaim against Nautilus because of its handling, investigating and adjusting of Hale’s claim.

       Before the district court, Nautilus filed a motion for summary judgment, asserting that it was

not required to extend coverage under Interstate’s policy. Nautilus also moved for summary


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                                           No. 07-5461

judgment with respect to Interstate’s bad faith claim. Interstate moved for cross-summary judgment,

contending that Nautilus had an obligation to defend against Hale’s suit and to cover any resulting

judgment. The district court granted summary judgment in favor of Interstate, finding that the

removal of a one-story shed did not constitute “demolition” under the terms of the insurance policy.

The district court, however, granted Nautilus’ motion for summary judgment with respect to

Interstate’s bad faith claim. The parties settled the claims brought by Nautilus with respect to the

policy exclusions and misrepresentation. Interstate now appeals the district court’s dismissal of its

bad faith claim.

                                          DISCUSSION


       A.      Standard of Review

       This Court reviews a district court’s grant of summary judgment de novo. Monette v.

Electronic Data Sys. Corp., 90 F.3d 1173, 1176 (6th Cir. 1996). Summary judgment is appropriate

if, pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, the pleadings, depositions,

answers to interrogatories, and admissions on file, together with the affidavits, if any, “show that

there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a

matter of law.” Fed.R.Civ.P. 56(c). As the moving parties, Defendants bear the burden of showing

the absence of a genuine issue of material fact as to at least one essential element on each of

Plaintiff’s claims. See Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Plaintiff, as the non-

moving party, must then present sufficient evidence from which a jury could reasonably find for it.

See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). This Court must then determine

“whether the evidence presents a sufficient disagreement to require submission to a jury or whether

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                                            No. 07-5461

it is so one-sided that one party must prevail as a matter of law.” Id. at 251-52. In making this

determination, this Court must draw all reasonable inferences in favor of the non-moving party. See

National Enters., Inc. v. Smith, 114 F.3d 561, 563 (6th Cir. 1997).

       B.      Analysis

       Interstate contends that the district court improperly granted summary judgment in favor of

Nautilus on Interstate’s claim that Nautilus denied coverage in bad faith. Specifically, Interstate

contends that the general liability insurance policy clearly provides coverage for the injuries

sustained by Hale and therefore Nautilus had no reasonable basis for its denial of coverage. We

disagree.

       Under Kentucky law, to establish bad faith on the part of an insurer, a party must satisfy a

three-pronged test. An insured must prove: (1) that the insurer was obligated to pay; (2) that the

insurer lacked a reasonable basis in law or fact in denying the claim; and (3) that the insurer knew

there was no reasonable basis for denying the claim or acted with reckless disregard for whether such

a basis existed. Empire Fire & Marine Ins. Co. v. Simpsonville Wrecking Service, Inc., 880 S.W.2d

886, 888 (Ky. Ct. App. 1994). In the instant case, Interstate failed to establish a genuine issue of

material fact with respect to Nautilus’ “reasonable basis” for denying the claim. Indeed, we find that

Nautilus challenged Interstate’s coverage based on a debatable or reasonable interpretation of the

demolition exclusion.

       As an initial matter, it is undisputed that Interstate did not purchase the demolition policy.

It is also undisputed that at the time of Hale’s accident, Interstate employees were engaged in a

project that involved the removal or tearing down of a one-story shed. The central dispute, therefore,


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                                              No. 07-5461
is whether Nautilus reasonably determined that the removal of the one-story shed constituted

“demolition” within the meaning of Nautilus’ policy exclusion such that it had no duty to defend

Interstate in Hale’s personal injury suit.1

        The general liability insurance policy contains the following disputed exclusion:

               This insurance does not apply to ‘bodily injury’ or ‘property damage’ for
        demolition or wrecking of buildings or structures conducted by you unless coverage
        was purchased for ‘Wrecking–buildings or structures’ and designated on the
        Declarations.

                       The following additional exclusions apply to demolition or
                wrecking operations:
                       (1) This insurance does not apply to ‘bodily injury’ or
                ‘property damage’ arising out of:
                              (a) The use of cranes, ball and chain, or similar
                              apparatus; or
                              (b) The demolition or wrecking of any building or
                              structure that has an original height in excess of three
                              stories.

(J.A. at 90) (emphasis added). It is clear that the demolition exclusion is not a model of

draftsmanship. Indeed, when read as a whole, the demolition-wrecking exclusion is susceptible to

two reasonable readings and thus, the district court properly granted Nautilus’ motion for summary

judgment.




        1
         Interstate argues that the demolition exclusion is not applicable at all, regardless of this
Court’s interpretation of “demolition.” Instead, Interstate argues that Hale was not injured by the
actual demolition of the sheds on CSX’s property, but rather from the trackhoe that was utilized to
engage in the work in Johnstown. This is a distinction without a difference. The sole purpose of
Interstate’s presence in Johnstown was to remove the sheds, and Interstate rented the trackhoe for
that reason. Thus, whether Hale was injured from falling debris or the trackhoe, either injury would
have resulted from the destruction of the sheds.

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                                           No. 07-5461
       Under one interpretation, as Nautilus notes, the introductory paragraph can be read broadly

to exclude from coverage those bodily injuries resulting from “demolition or wrecking of buildings.”

The following paragraph can then be read as a limitation on policyholders who purchased coverage

for demolition activities. Such an interpretation would exclude from coverage those activities that

require the removal of structures from properties, regardless of the size of the structure. Again, it

is undisputed that Interstate’s contract with CSX required the removal of four one-story sheds from

CSX’s property. (J.A. at 414) (“Contractor will furnish superintendence, labor, equipment, and

materials required to demolish, remove and properly dispose of the buildings and platforms

identified above and as shown on the attached maps.”) Under a second interpretation, however, the

paragraph following the introductory paragraph can be read as limiting, qualifying or defining the

broad term “demolition” to mean the “demolition or removal of structures in excess of three stories.”

Indeed, as Interstate notes, it is plausible that the exclusion was meant to apply to larger scale

demolition activities.

       Whether the policy could plausibly be read to extend coverage to Interstate, however, is not

the test. Indeed, Kentucky courts have held that, absent any misconduct, where a claim is fairly

debatable, “the insurer is entitled to debate that claim regardless of whether the debate concerns a

matter of fact or one of law.” Empire Fire & Marine Ins. Co., 880 S.W.2d at 889-90. In the instant

case, Interstate has put forth no additional evidence of misconduct on the part of Nautilus, beyond

the reservation of rights, to support its bad faith claim. Thus, the district court properly granted

summary judgment in favor of Nautilus on Interstate’s bad faith claim.


                                         CONCLUSION

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                                 No. 07-5461
For the reasons discussed above, we AFFIRM the judgment of the district court.




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