Detroit Water Team Joint Venture v. Agricultural Insurance Company, an Ohio Corporation

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2004 FED App. 0177P (6th Cir.)
File Name: 04a0177p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
DETROIT WATER TEAM JOINT
VENTURE,
Plaintiff-Appellee/
Cross-Appellant,
v.
AGRICULTURAL INSURANCE
COMPANY, an Ohio
Corporation,
Defendant-Appellee,
AMERICAN NATIONAL FIRE
INSURANCE COMPANY, an
Ohio Corporation,
Defendant-Appellant/
Cross-Appellee.
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Nos. 02-1324/1419
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 00-73239—Robert H. Cleland, District Judge.
Argued: October 23, 2003
Decided and Filed: June 11, 2004
Before: KEITH, MARTIN, and SUTTON, Circuit Judges.
2 Detroit Water Team v.
Agricultural Ins. Co., et al.
Nos. 02-1324/1419
_________________
COUNSEL
ARGUED: Ann E. Erickson Gault, COLLINS, EINHORN,
FARRELL & ULANOFF, Southfield, Michigan, for
Appellant. Raymond A. Fylstra, KUBASIAK, FYLSTRA,
REIZEN & ROTUNNO, Chicago, Illinois, Thomas B.
Orlando, FORAN, GLENNON, PALANDECH & PONZI,
Chicago, Illinois, for Appellees. ON BRIEF: J. Mark
Cooney, COLLINS, EINHORN, FARRELL & ULANOFF,
Southfield, Michigan, for Appellant. Raymond A. Fylstra,
John C. Anderson, KUBASIAK, FYLSTRA, REIZEN &
ROTUNNO, Chicago, Illinois, Stephen J. Pokoj, FILDEW,
HINKS, GILBRIDE, MILLER & TODD, Detroit, Michigan,
Thomas B. Orlando, Matthew S. Ponzi, FORAN,
GLENNON, PALANDECH & PONZI, Chicago, Illinois,
Daniel J. Seymour, NAGI, BAXTER & SEYMOUR, Detroit,
Michigan, for Appellees.
_________________
OPINION
_________________
BOYCE F. MARTIN, JR., Circuit Judge. In these
consolidated cases, Detroit Water Team Joint Venture seeks
insurance coverage under an American National Fire
Insurance Company commercial general liability policy and
an Agricultural Insurance Company builder’s risk policy for
a loss incurred during the course of its renovation of a City of
Detroit water plant. The district court held that coverage was
available under the American National policy, but not under
the Agricultural policy. American National appeals the
district court’s award of summary judgment in favor of
Detroit Water Team with respect to coverage under the
commercial general liability policy, and Detroit Water Team
appeals the award of summary judgment in favor of

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Nos. 02-1324/1419 Detroit Water Team v.
Agricultural Ins. Co., et al.
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Agricultural with respect to coverage under the builder’s risk
policy. For the reasons discussed below, the district court’s
judgment is affirmed in part and reversed in part.
I. BACKGROUND
Detroit Water Team entered into a “design/build” contract
with the City of Detroit to renovate the City’s water plant. In
connection with that project, Detroit Water Team procured
two insurance policies: (1) a commercial general liability
policy issued by American National, which covered Detroit
Water Team and one of its subcontractors, Adamo Demolition
Company; and (2) a builder’s risk policy issued by
Agricultural, which covered Detroit Water Team, all of its
subcontractors and other identified parties.
The water plant renovation project called for demolition of
a portion of an old reservoir. Detroit Water Team hired
Adamo, a demolition subcontractor, to perform this
demolition work. Connected to one wall of the reservoir was
a semi-circular manhole structure. The reservoir and the
manhole structure shared one common wall that was made of
concrete; the rest of the manhole structure was made of
masonry. The manhole structure contained an electrical
system comprised of live wires, feeds and tubes, which
provided power and air to the functioning water plant. The
City and Detroit Water Team agreed that this electrical
system, along with the manhole structure that housed it,
would remain entirely intact throughout the renovation
project so that the water plant could continue to operate
during that time. Nevertheless, in the course of demolishing
the reservoir, Adamo also tore down the concrete wall that the
reservoir shared with the manhole, which caused the entire
manhole structure to collapse and the electrical system within
to sustain considerable damage.
Detroit Water Team immediately repaired the damaged
electrical system and notified American National and
4 Detroit Water Team v.
Agricultural Ins. Co., et al.
Nos. 02-1324/1419
1As discussed more fully herein, Detroit W ater T eam argues that it
was obliga ted to repair the electrical system by virtue of its contract with
the City, which required it to “take immediate action to restore” any
interrupted service “within twenty-four (24) hours or less.”
Agricultural of its expenses.1 After both insurers denied
coverage, this lawsuit ensued and all parties moved for
summary judgment. The district court held that coverage was
available under the American National commercial general
liability policy, but not under the Agricultural builder’s risk
policy. American National appeals the award of summary
judgment in favor of Detroit Water Team, and Detroit Water
Team appeals the award of summary judgment in favor of
Agricultural.
II. ANALYSIS
We review de novo a district court’s award of summary
judgment, as well as its interpretation of an insurance
contract. Parameter Driven Software v. Massachusetts Bay
Ins. Co., 25 F.3d 332, 336-37 (6th Cir. 1994). Summary
judgment should be granted when “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 moving party is entitled to
a judgment as a matter of law.” FED. R. CIV. P. 56(c). In
determining whether a genuine issue of material fact exists,
we must draw all reasonable inferences in favor of the
nonmoving party. Bonds v. Cox, 20 F.3d 697, 701 (6th Cir.
1994).
A. American National Policy
Our analysis of whether coverage is available under the
American National policy begins – and ends – with the
policy’s insuring agreement, which provides that American
National “will pay those sums that the Insured becomes

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Nos. 02-1324/1419 Detroit Water Team v.
Agricultural Ins. Co., et al.
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legally obligated to pay as damages because of ‘bodily injury’
or ‘property damage’ to which this insurance applies.” The
district court held that Detroit Water Team was not “legally
obligated” to repair the electrical system, but predicted –
noting the lack of Michigan cases on point – that the
Michigan Supreme Court would nevertheless require
American National to prove that it suffered prejudice as a
result of Detroit Water Team’s actions in order to bar
coverage. Finding that American National had failed to
demonstrate any prejudice, the district court held that
coverage was not barred. For the following reasons, we hold
that the district court was correct in determining that Detroit
Water Team was not “legally obligated” to repair the
electrical system, but incorrect in predicting that the Michigan
Supreme Court would require American National to prove
that it suffered prejudice in order to bar coverage on that
ground.
It is well-established that an insured has the initial burden
of proving that its losses fall within the scope of the policy’s
insuring agreement. See, e.g., Esicorp, Inc. v. Liberty Mut.
Ins. Co., 266 F.3d 859, 864 (8th Cir. 2001); Data Specialties,
Inc. v. Transcont’l Ins. Co., 125 F.3d 909, 911 (5th Cir.
1997). Thus, Detroit Water Team has the burden of proving
that it was “legally obligated” to pay the “sums” that it
incurred in repairing the damaged electrical system. The
phrase “legally obligated” necessitates “more than inchoate or
potential liability.” Aetna Cas. & Sur. Co. v. Dow Chem. Co.,
10 F. Supp. 2d 771, 797 (E.D. Mich. 1998) (citing Ryan v.
Royal Ins. Co. of Am., 916 F.2d 731, 738-43 (1st Cir. 1990)).
Although the Michigan Supreme Court has never expressly
defined the phrase “legally obligated,” decisions from the
Michigan Court of Appeals “imply” – but do not expressly
hold – “that the term ‘legal obligation’ requires either a
judicial determination of liability or a settlement between the
insurer, insured and the claimant . . . .” Coil Anodizers, Inc.
v. Wolverine Ins. Co., 327 N.W.2d 416, 418 (Mich. App.
1982) (citing Giffels v. Home Ins. Co., 172 N.W.2d 540
6 Detroit Water Team v.
Agricultural Ins. Co., et al.
Nos. 02-1324/1419
(Mich. App. 1969); MacDonald v. State Farm Mut. Auto. Ins.
Co., 165 N.W.2d 665 (Mich. App. 1968)). In this case, it is
undisputed that there has been no judicial determination or
settlement establishing Detroit Water Team’s liability.
Detroit Water Team argues that its legal obligation to repair
the electrical system derives from two sources: general tort
principles and its contract with the City. We disagree on both
fronts. In an effort to establish tort liability, Detroit Water
Team argues that “[t]here is a well settled princip[le] in
Michigan, as well as other jurisdictions, that a duty of
ordinary care arises from the performance of a contractual
obligation.” Chamberlain v. Bissell, 547 F. Supp. 1067, 1081
(W.D. Mich. 1982). Detroit Water Team contends that, by
virtue of its design/build contract with the City, it had a
contractual obligation “to exercise ordinary care to protect the
[City]’s property from damage resulting from [Detroit Water
Team’s] demolition activities,” and that Detroit Water Team’s
negligent performance of that contractual obligation was
actionable in tort. Detroit Water Team Br. at 41.
Detroit Water Team’s argument misconstrues the identity
of the negligent party, if any, in this case. As the parties have
stipulated, it was Adamo, not Detroit Water Team, whose
demolition activities proximately caused the damage to the
electrical system. There is no evidence that Detroit Water
Team has committed any negligence whatsoever. Detroit
Water Team apparently assumes that it is liable for Adamo’s
negligence, but the general rule under Michigan law is that a
general contractor is not liable for the negligence of its
subcontractor. Candelaria v. B.C. Gen. Contractors, Inc.,
600 N.W.2d 348, 352 (Mich. App. 1999). While several
exceptions to this general rule exist, id., Detroit Water Team
has not argued that any apply here, and our independent
review of the record confirms that none of the exceptions
applies under the facts of this case. Therefore, Detroit Water
Team has failed to carry its burden of proving that it was
“legally obligated” in tort to repair the electrical system.

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Nos. 02-1324/1419 Detroit Water Team v.
Agricultural Ins. Co., et al.
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2Detroit W ater Team seems to suggest that this provision requires
any interrupted service to be completely restored within twenty-four hours
of the interruptio n. In fact, however, we rea d the p rovision as merely
requiring that “immediate action” aimed at restoring the service be taken
within twenty-four ho urs.
Detroit Water Team also argues that it was “legally
obligated” to make the repairs by virtue of its contract with
the City, which required it to “take immediate action” to
restore any interrupted service within twenty-four hours.2
There is some dispute as to whether contractual liability, as
opposed to tort liability, can ever constitute a “legal[]
obligat[ion]” within the meaning of the policy’s insuring
agreement. Compare 1 Lee R. Russ & Thomas F. Segalla,
Couch in Insurance § 103:14 (3d ed. 2003) (“While the
phrase ‘legal liability’ includes liability assumed by contract,
the phrases ‘liability imposed by law,’ and ‘legally obligated
to pay as damages’ do not.”), and Hartford Accident &
Indem. Co. v. Reale, 644 N.Y.S.2d 442, 443 (App. Div. 1996)
(“the purpose of a commercial general liability policy . . . is
to provide coverage for tort liability for physical damage to
others and not for contractual liability of the insured for
economic loss”), and Action Ads, Inc. v. Great Am. Ins. Co.,
685 P.2d 42, 45 (Wyo. 1984) (liability insurance
“encompasses liability which the law imposes on all insureds
for their tortious conduct and not on the liability which a
particular insured may choose to assume pursuant to
contract”), with Vandenburg v. Superior Court, 982 P.2d 229,
243-46 (Cal. 1999) (holding that it is “incorrect” to
“distinguish[] contract from tort liability for purposes of the
CGL insurance coverage phrase ‘legally obligated to pay as
damages[]’”).
Assuming – without deciding – that contractual liability
can, in appropriate cases, constitute a legal obligation within
the meaning of the policy’s insuring agreement, the question
becomes whether this is such an appropriate case. The
8 Detroit Water Team v.
Agricultural Ins. Co., et al.
Nos. 02-1324/1419
answer to that question would generally depend upon whether
Detroit Water Team’s risks in dealing with the City –
specifically, the risk that it would have to take immediate
action to restore an interrupted service – aligned with the risks
that Detroit Water Team and American National agreed
would be insured under the policy. While we do not believe
that these risks aligned, we need not definitively decide that
issue given that coverage would be barred in any event
because Detroit Water Team’s contractual obligation to make
the repairs was not sufficiently definite as to constitute a legal
obligation for which the insuring agreement provides
coverage.
In determining whether a particular loss falls within the
scope of an insuring agreement, it is necessary to focus upon
“[t]he nature of the damage and the risk involved . . . .”
Vandenburg, 982 P.2d at 244. The nature of the damage in
this case is that during the course of its demolition work,
Adamo caused property damage to the electrical system that
was running the City’s water plant. Adamo was a named
insured under the American National policy that was issued
to Detroit Water Team, and the risk of Adamo causing such
property damage was precisely the “nature” of the “risk” for
which Adamo was insured under that policy. If any party was
“legally obligated” to pay any “sums” because of this
incident, it was Adamo. Notably, had Detroit Water Team
not rushed to repair the damage, the City presumably would
have sought damages from Adamo, in which case coverage
likely would have been available under the American
National policy. Detroit Water Team’s anticipatory actions,
however, thwarted that process from occurring. Although
Detroit Water Team did undertake certain contractual
obligations to restore interrupted service, any legal liability
that Detroit Water Team may have incurred on the basis of
that contract is entirely speculative. There was certainly no
judicial determination or settlement establishing Detroit
Water Team’s liability in this regard, nor any other reason to
believe that its liability was anything more than merely

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Agricultural Ins. Co., et al.
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“inchoate” or “potential.” Aetna, 10 F. Supp. 2d at 797
(citing Ryan, 916 F.2d at 738-43). Therefore, Detroit Water
Team has failed to carry its burden of proving that it was
“legally obligated” by contract to repair the electrical system.
Having concluded that Detroit Water Team was not
“legally obligated” to repair the electrical system, we must
next address the district court’s prediction that the Michigan
Supreme Court would require insurers like American National
to prove that they suffered prejudice in order to bar coverage
for a loss that does not fall within the policy’s insuring
agreement. The district court’s prediction was based upon its
view that the purpose of the “legally obligated” language is
analogous to the purpose of “notice” and “cooperation”
provisions – i.e., to prevent collusion between the insured and
the claimant – and that because insurers generally must prove
prejudice in order to bar coverage in reliance upon an
insured’s breach of a “notice” or “cooperation” provision, a
similar prejudice requirement should apply to the “legally
obligated” language in the insuring agreement. Notably,
however, the district court cited no cases – from Michigan or
any other jurisdiction – that recognize or impose such a
requirement.
We begin by noting that not even Detroit Water Team
attempts to defend the district court’s imposition of the
prejudice requirement, and our independent research leads us
to conclude that the imposition of such a requirement is
indefensible. The critical flaw in the district court’s reasoning
is that it overlooks a significant distinction between the
“legally obligated” language and the “notice” and
“cooperation” provisions: the “legally obligated” language
appears in the policy’s insuring agreement, whereas the other
provisions appear in the policy’s exclusions. By requiring an
insurer to prove that it suffered prejudice as a result of having
to provide coverage for a loss that does not even fall within
the insuring agreement, the district court has not only
sanctioned an absurd result, it has relieved the insured of its
10 Detroit Water Team v.
Agricultural Ins. Co., et al.
Nos. 02-1324/1419
burden of proving the applicability of the insuring agreement,
see supra Esicorp, 266 F.3d at 864; Data Specialties, 125
F.3d at 911, and has shifted that burden onto the insurer. We
do not believe that the Michigan Supreme Court would adopt
a rule that would lead to these consequences, particularly in
light of the conspicuous lack of authority supporting such a
rule.
In sum, we hold that because Detroit Water Team was not
“legally obligated” to pay for the repairs to the electrical
system, American National properly denied coverage on that
ground – regardless of whether it suffered prejudice as a result
of Detroit Water Team’s actions.
B. Agricultural Builder’s Risk Policy
The only issue regarding the Agricultural builder’s risk
policy concerns the applicability of “Exclusion M,” which
bars coverage for:
[l]oss or damage to property in existence at the
commencement of this policy which [1] is not a part of
the construction operations insured hereunder and/or
[2] for which the value is not included in the total insured
value shown in the schedule attached to this policy.
Detroit Water Team appeals the district court’s determination
that this exclusion bars coverage for the loss at issue in this
case.
It is undisputed that the electrical system was “property in
existence at the commencement of th[e] policy.” Detroit
Water Team asserts that the phrase “and/or” is ambiguous
and, therefore, that the exclusion should be read to apply only
if both conditions are satisfied – i.e., if both the property “is
not a part of the construction operations insured hereunder”
and the “value [of the property] is not included in the total
insured value shown in the schedule attached to this policy.”

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Nos. 02-1324/1419 Detroit Water Team v.
Agricultural Ins. Co., et al.
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Detroit Water Team also asserts that, regardless of how
“and/or” is interpreted, neither condition specified in
exclusion M is satisfied in this case. We find both assertions
unpersuasive.
First, we hold that the use of the “and/or” language in
exclusion M unambiguously means that the exclusion applies
if either or both of the two specified conditions are met. See,
e.g., Michigan Pub. Serv. Co. v. City of Sheboygan, 37
N.W.2d 116, 129 (Mich. 1949) (“There are occasions where
intent may properly be expressed by ‘and/or,’ indicating
‘both, or either.’”); Local Div. 589, Amalgamated Transit
Union, AFL-CIO, CLC v. Commonwealth, 666 F.2d 618, 627
(1st Cir. 1981) (“the words ‘and/or’ commonly mean ‘the one
or the other or both’”).
Second, we hold that the second condition specified in
exclusion M has been satisfied – i.e., the “value” of the
electrical system was “not included in the total insured value
shown in the schedule attached to th[e] policy.” The schedule
attached to the policy provides as follows:
(a) Estimated Contract Price . . . . . . . . . . $214,542,000
(b) Soft Costs . . . . . . . . . . . . . . . . . . . . . . . .$2,500,000
(c) Value of Owner Furnished Material . . . .$ Included
(d) Total Insured Value . . . . . . . . . . . . . . $217,042,000
The record reveals that the “Total Insured Value” figure is
equivalent to the amount of the actual cash replacement value
of the insurable work, or the amount that would be necessary
to redo the entire project if everything were somehow
destroyed. The undisputed deposition testimony of David
May, Vice President and General Counsel of Walsh
Construction Company of Illinois – a general contractor that
participated in the joint venture with Detroit Water Team in
12 Detroit Water Team v.
Agricultural Ins. Co., et al.
Nos. 02-1324/1419
this case – indicates that the “Total Insured Value” does not
include the value of the electrical system contained within the
manhole.
Because the value of the electrical system was “not
included in the total insured value shown in the schedule
attached to th[e] policy,” the district court properly held that
exclusion M bars coverage under the Agricultural policy.
III. CONCLUSION
For all the foregoing reasons, we REVERSE the district
court’s award of summary judgment in favor of Detroit Water
Team and REMAND this case to the district court with
instructions to award summary judgment in favor of
American National, and we AFFIRM the district court’s
award of summary judgment in favor of Agricultural.

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