Opinion
Civil Action No. 98-3326 SECTION "K"(5)
December 20, 2000
ORDER AND REASONS
Before the Court are cross motions for summary judgment filed by IC RailMarine Terminal (ICRMT) and Lexington Insurance Company, Westchester Fire Insurance Company, Westchester Surplus Lines Insurance and General Star Indemnity Co. (collectively referred to as the "property insurers"). The Court heard oral argument on December 1, 2000 and has considered the pleadings, memoranda, policy language and relevant law and finds for the reasons that follow.
I. Background
Lexington Insurance Company (policy #8533564) and Westchester Surplus Lines (policy #WXA 643121) issued primary property policies to Illinois Central Corporation and its subsidiary companies, including ICRMT. Westchester Fire Insurance Company (policy # 393822) and General Star Indemnity Co. (Policy # IPG357920) issued first excess layer property policies to Illinois Central Corporation and its subsidiaries, including ICRMT. Except for coverage limits, the primary policies contain identical terms and conditions; the first excess layer policies incorporate the terms, conditions and exclusions of the primary policies.
On June 11, 1998 a gantry unloader crane cartwheeled into the Mississippi River during overload testing. ICRMT sought to recover losses under the policy for the costs of purchasing a replacement crane, repairing the damage to ICRMT's dock, leasing a temporary replacement crane, purchasing buckets and a hopper to use with the replacement crane, removing debris from the dock and the river, unloading cargo that was waiting at the ICRMT dock at the time of the crane accident, midstreaming subsequent cargo shipments, and using self-unloading vessels until the temporary replacement crane was ready. Litigation ensued and the property insurers denied coverage stating that the crane was not covered property at the time of the loss, and that even if the crane is covered property, there is no coverage based on exclusions F and J of the policy.
II. Standard for Motion for Summary Judgment
Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment should be granted "if 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). The party moving for summary judgment bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the record which it believes demonstrate the absence of a genuine issue of material fact."Stults v. Conoco, 76 F.3d 651, 656, (5th Cir. 1996), (citing Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 912-13 (5th Cir. 1992) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. The nonmoving party must come forward with "specific facts showing that there is a genuine issue for trial." Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986); Tubacex, Inc. v. M/V Risan, 45 F.3d 951, 954 (5th Cir. 1995). Thus, where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no "genuine issue for trial." Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986). The court notes that the substantive law determines materiality of facts and only "facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Where the opposing party bears the burden of proof at trial, the moving party need not submit evidentiary documents to properly support its motion, but need only point out the absence of evidence supporting the essential elements of the opposing party's case. See Saunders v. Michelin Tire Corp., 942 F.2d 299, 301 (5th Cir. 1991)
III. Rules of Policy Construction
As the Court is bound by Louisiana's substantive law in interpreting the relevant policy provisions, a brief overview of the relevant canons is required. In Peterson v. Schimek, 729 So.2d 1024, 1028-29 (La. 1999) the Louisiana Supreme Court has set forth a comprehensive review of insurance policy interpretation. The court stated:
An insurance policy is a conventional obligation that constitutes the law between the insured and insurer, and the agreement govern's the nature of their relationship. La.Civ. Code art. 1983. As such, courts are guided by certain principles of construction and should interpret insurance policies the same way they do other contracts by using the general rules of contract interpretation as set forth in our Civil Code. Ledbetter v. Concord Gen. Corp., 95-0809 (La. 1/6/96); 665 So.2d 1166, 1169; Crabtree v. State Farm Ins. Co., 93-0509 (La. 2/28/94), 632 So.2d 736. . . . The extent of coverage is determined from the intent of the parties as reflected by the words of the insurance policy. Ledbetter, 665 So.2d at 1169.
The role of the judiciary in interpreting insurance contracts is to ascertain the common intent of the insured and insurer as reflected by the words in the policy. La.Civ. Code art. 2045; Ledbetter, 665 So.2d at 1169. When the words of an insurance contract are clear and explicit and lead to no absurd consequences, courts must enforce the contract as written and may make no further interpretation in search of the parties' intent. La.Civ. Code art. 2046; Central La. Elec. Co. v. Westinghouse Elec. Corp., 579 So.2d 981, 985 (La. 1991).
Words in an insurance contract are to be given their generally prevailing and ordinary meaning, unless they have acquired a technical meaning. La.Civ. Code art. 2047; Schroeder v. Board of Supervisors of La. State Univ., 591 So.2d 342, 345 (La. 1991). Courts lack the authority to alter the terms of insurance contracts under the guise of contractual interpretation when the policy's provisions are couched in unambiguous terms. Louisiana Ins. Guar. Ass'n v. Interstate Fire Cas. Co., 93-0911 (La. 1/14/94), 630 So.2d at 764. An insurance contract is construed as a whole and each provision in the policy must be interpreted in light of the other provisions so that each is given meaning. One portion of the policy should not be construed separately at the expense of disregarding other provisions. La.Civ. Code art. 2050; Central La. Elec. Co., 579 So.2d at 985. An insurance contract, however, should not be interpreted in an unreasonable or strained manner under the guise of contractual interpretation to enlarge or to restrict its provisions beyond what is reasonably contemplated by unambiguous terms or achieve an absurd conclusion. Valentine v. Bonneville Ins. Co., 96-1382 (La. 3/17/97), 691 So.2d 665; Reynolds v. Select Properties, Ltd., 93-1480 (La. 4/11/94), 634 So.2d 1180, 1183. That is, the rules of construction do not authorize a perversion of the words or the exercise of inventive powers to create an ambiguity where none exists or the making of a new contract when the terms express with sufficient clearness the parties' intent. Ledbetter, 665 So.2d at 1169; Reynolds, 634 So.2d at 1183. If, after applying the other general rules of construction, an ambiguity remains, the ambiguous contractual provision is to be construed against the insurer who furnished the policy's text and in favor of the insured finding coverage. La.Civ. Code art. 2056; Crabtree, 632 So.2d at 741. When a contract can be construed from the four corners of the instrument without looking to extrinsic evidence, the question of contractual interpretation is answered as a matter of law and summary judgment is appropriate. Brown v. Drillers, Inc., 93-1019 (La. 1/14/94), 630 So.2d 741.Peterson v. Schimek, 729 So.2d 1024, 1028-29 (La. 1999).
IV. Analysis
A. Is the crane covered property under the policies
The property insurers argue that under its crane contract, ICRMT did not become owner of the crane until acceptance and testing of the crane was completed and that such acceptance never took place because the crane fell into the river before testing could be completed. The property insurers contend that the policies were not intended to insure any property that was insured by the builders risk policy issued to ICRMT by Reliance National. Such an argument overlooks the relevant provision of the property policies. The policies expressly insure
[A]gainst all risks of direct physical loss or damage (except as such property or risks are hereinafter excluded):
All property of every description, real, personal or mixed, wherever located and now or hereinafter owned, leased or used by the Insured, including but not limited to the interest in or liability of the Insured for property belonging in whole or in part to others . . .
The policies broad description of covered property covers the crane at issue here. The words "used" and "leased" are broad enough to cover property that is not owned by ICRMT but that ICRMT has an interest in. Here, ICRMT had paid for 90% of the crane and it was in use on the ICRMT dock at the time of the crash. Thus, the Court finds that at the time of the crane accident, ICRMT had an insurable interest in the crane under the property policies.
B. Exclusions F and J
The "all risk" property policies are subject to approximately 16 exclusions. The property insurers have denied coverage based on Exclusions F and J, which state as follows:
F. [This policy does not insure against] [l]oss or damage or expense caused by or resulting from wear, tear, or gradual deterioration, machinery breakdown, mechanical derangement, and latent defect unless loss not otherwise excluded hereunder ensues and then only for loss or damage caused by the ensuing loss.
J. [This policy does not insure against] [f]aulty workmanship, material, construction or design from any cause, unless loss not otherwise excluded hereunder ensues and then only for loss or damage caused by the ensuing loss.
As ro exclusion F, the property insurers contend that the crane as a whole suffered from a mechanical derangement, and a latent defect, thus excluding converge for ICRMT's losses. As to exclusion J, the property insurers argue that the careening crane in its entirety was a product of faulty workmanship, also excluded under the policy.
ICRMT, on the other hand, claims that its losses are covered by the exception to the exclusion, ensuing loss. The relevant exclusions each contain a clause providing coverage for ensuing losses caused by the mechanical derangement, latent defect, or faulty workmanship. ICRMT asserts that, even if the accident was caused by mechanical derangement, faulty workmanship or latent defect, that all ensuing losses resulting from such conditions are insured losses. As opposed to the property insurers, who argue that the crane in toto was defective, ICRMT argues that only portions of the crane, i.e. the grossly overweight boom and trolley, were defective and that the actual tumbling and everything that followed, was an ensuing loss.
Without the aid of any definitions in the policy, the Court is forced to determine the meaning of the terms "mechanical derangement" and "latent defect" as found in exclusion F and the terms "faulty workmanship" as found in exclusion J.
The "mechanical derangement" exclusion is found among other excluded conditions, including wear, tear, gradual deterioration and machinery breakdown. Those conditions relate to normal usage or breakdown of equipment. To construe the term "mechanical derangement" as defining catastrophic loss because of an imbalance in the crane is not appropriate for two reasons. First, the placement of an exclusion for catastrophic loss would not be appropriately grouped with exclusions for everyday wear, tear, gradual deterioration and mechanical breakdown. Second, if the catastrophic loss caused by mechanical derangement was excluded, there would be no purpose to the ensuing loss provision of the exclusion. Therefore, the Court finds that such an ambiguous term cannot encompass the falling crane for purposes of exclusion
F.
The latent defect exclusion is likewise inappropriate in that there is no indication of a latent defect in this case. In Louisiana, a latent defect is "a defect which is hidden or concealed from knowledge as well as from sight and which a reasonable customary inspection would not reveal. Walker v. Traveler's Indemnity Co., 289 So.2d 864 (La.App. 4 Cir. 1974); See also 11 Couch on Insurance § 153.88 (3d ed.). As such, ICRMT has put forth credible evidence demonstrating that customary inspections could have determined that the crane was out of balance. For example, the crane could have been weighed at the place of manufacture or electronic or hydraulic load tests could have been done. Again, if the toppling crane were a latent defect, there would appear to be no meaning to the ensuing loss proviso.
As to the faulty workmanship exclusion, it is apparent that the grossly imbalanced crane was the product of faulty workmanship. Thus, the question becomes, what was the faulty workmanship? The property insurers contend that the faulty workmanship was the crane as a whole, while ICRMT argues it was the boom and trolley on the load side of the crane. When certain components of the crane are identifiable as being faulty, there-is no reason to classify the machine as a whole as faulty. Therefore, under exclusion J the faulty workmanship exclusion applies to the overweight components of the crane. As to the damage caused by the toppling crane, the Court must look to the exception to the exclusion, ensuing loss.
The ensuing loss provisions of sections F and J are identical, thus the interpretation of the provision applies equally to each exclusion notwithstanding this Court's determination that the threshold subject matter of exclusion F has not been satisfied. In other words, the determination of whether ICRMT's damages constitute an ensuing loss for purposes of the policy remains the same whether the initial loss is characterized as mechanical derangement, latent defect or faulty workmanship or all three. The issue that must be resolved by the Court, then, is what is an "ensuing loss" for purposes of this policy.
In Alton Ochsner Medical Foundation v. Allendale Mutual Insurance Co., 219 F.3d 501 (5th Cir. 2000), the United States Court of Appeals for the Fifth Circuit interpreted a similar clause. There, a property policy excluded from coverage "faulty workmanship, material, construction, or design from any cause, unless physical damage not excluded by this Policy results, in which event, this Policy will cover only such resulting damage." The policy also contained an exclusion against cracking of foundations, with an identical proviso insuring "resulting damage." InAlton Ochsner, the general contractor informed Ochsner of cracking found in three pile caps that were part of a newly poured foundation. Ochsner studied the situation and found that nine of the caps were cracked but based on the reports of its engineers concluded that the damage was minor. Thus, Ochsner authorized the completion of the first five floors of the new building. More than one year later Ochsner discovered additional cracking in the pile caps, including one that had previously been repaired; it was at this time that Ochsner notified its insurer of the problem. The insurer denied coverage based on the faulty workmanship and cracking exclusions to the policy. Approximately six months later, new cracks were found in ten more pile caps and the cracks in the original nine pile caps widened significantly.
Ochnser attempted to argue that even if the minor cracking fell under the two policy exclusions, the more severe cracking was a material impairment to structural integrity and as such was "resulting physical damage" covered under the policy. The insurer argued that the exception to the exclusion referred to physical damage that was distinct and separable from the excluded damage.
The Fifth Circuit held that "[t]o fall back within coverage as "resulting physical damage," the policy contemplates damage that is different in kind, not merely different in degree." Id. at 506. It found that Ochsner admitted that the minor cracks were excluded by the policy and merely sought coverage when those same cracks widened and caused structural impairment. In other words, the court reasoned that "the minor damage to the foundation does not cause the more severe structural impairment. The cracking is the impairment; they are synonymous." Id. See also Aetna Casualty and Surety Company v. Yates, 344 F.2d 939 (5th Cir. 1965) (ensuing loss exclusion does not apply when rotted wood and water damages are not separable events.).
In Lake Charles Harbor Terminal District v. Imperial Casualty and Indemnity Company, 670 F. Supp. 189 (W.D. La. 1987), a cable broke on a shiploader, causing the shuttle portion of the loader to crash into the interior of the loader, resulting in extensive damage. The insurer denied coverage based on a policy exclusion for "[m]echanical or machinery breakdown; unless an insured peril ensues, and then only for the actual loss or damage caused by such ensuing peril." The plaintiff argued that the damage to the shiploader was an excluded peril. Id. at 193. It considered the that the purpose of an all risk policy "is to keep the insurer in its proper role as bearer of casualties rather than as warrantor or service contractor of the equipment of the insured. Id. at 194. The court held that damages to the ship unloader were covered under the policy, as "[t]he damages to the ship loader were not such as the insured would be expected to bear in the ordinary course of maintenance."Id.
On appeal, the United States Court of Appeals for the Fifth Circuit affirmed, finding the policy language to be so ambiguous that its "words, read literally, are meaningless." Lake Charles Harbor Terminal District v. Imperial Casualty Indemnity Co., 857 F.2d 286 (5th Cir. 1988). The insurers asserted that "because a mechanical breakdown was the but for cause of the accident . . . no insured peril ensued." Id at 287. The Court of Appeals rejected such an interpretation. Examining the policy language, Judge Rubin found that "[w]hatever ensuing peril may mean, nothing in the policies indicates that catastrophic damages to a machine caused by its own mechanical breakdown cannot be included within the term." Id at 288. Thus, the court interpreted the exclusion to find that "the insurance policies covered all risks except those explicitly excluded from coverage, and excluded coverage for mechanical breakdowns only when "no insured peril ensue[d]." Id. at 289.
In U.S. Industries, Inc. v. Aetna Casualty Surety Co., 690 F.2d 459 (5th Cir. 1982), a builder contracted to erect a steel cylindrical tower and took out a policy protecting from "all risks of physical loss or damage" with an exclusion for loss or damage caused by or resulting from faulty workmanship. Id. at 460. In the final stages of construction, the builder heated the metal skin of the tower to relieve stresses in the welded plates. Unfortunately the contractor applied too much heat to the tower, causing it to wrinkle and lean; the tower eventually had to be dismantled and rebuilt. Id. at 461. The builder sought to recover the costs rebuilding the tower and was denied coverage based on the faulty workmanship policy exclusion. Judge Tate reasoned that the "defective workmanship in the stress-relieving process . . . that caused the tower to become deformed, while it was in the course of construction, occurred during and before the completion of the tower as an integral part of the (faulty) workmanship in its construction." Id. at 462. To the court, the fact that the stress relieving process was part of the construction process itself distinguished the case at bar from those where "[a]lthough errors in workmanship contributed in the causation, the loss or damage . . . essentially resulted fortuitously from events extraneous to the construction process . . ." Id. Therefore the Court of Appeals held that the defective heat treatment during the final phase of construction and all damages resulting therefrom were excluded pursuant to the "faulty workmanship" exclusion.
Thus, in attempting to glean the meaning of "ensuing loss" in this Circuit, the Court uses the following precepts. First, the damage that falls under the exclusion and the ensuing damage must be separable events in that the damage and the ensuing loss must be different in kind, not just degree. See Alton Ochsner Medical Foundation v. Allendale Mutual Insurance Co., 219 F.3d 501 (5th Cir. 2000); Aetna Casualty and Surety Company v. Yates, 344 F.2d 939 (5th Cir. 1965). Second, the mere fact that an excluded act or event is the "but for" cause of the ensuing loss does not necessarily preclude coverage for the ensuing loss. See Lake Charles Harbor Terminal District v. Imperial Casualty Indemnity Co., 857 F.2d 286 (5th Cir. 1988). Third, catastrophic damages to a machine caused by its own mechanical breakdown may be considered "ensuing loss".See Id. Finally, courts distinguish between damages arising from faulty workmanship during the construction process itself, and damages caused by events extraneous to the construction process. See U.S. Industries. Inc. v. Aetna Casualty Surety Co., 690 F.2d 459 (5th Cir. 1982).
Outside this jurisdiction, courts have grappled with the "ensuing loss" exception. In United Technologies Corp. v American Home Assurance Comp., 989 F. Supp. 128 (D. Conn. 1997), United Technologies Automotive, a manufacturer, argued that chromium contamination of the soil at two of its sites was covered under an ensuing loss provision of an all risk policy. The contamination was caused by a deteriorated sump at one site and a deteriorated tank at another. The policy excluded damage caused by or resulting from "ordinary wear, tear, gradual deterioration or inherent vice unless other loss or damage from a peril insured against herein ensues and then only for loss, damage or business interruption caused by ensuing loss or damage." Id. at 153-54. The insurer argued that the soil contamination was not an ensuing loss because it was the direct result of "gradual deterioration" of UTC's equipment. The manufacturer argued that the escaping chromium was an independent peril, separate from the gradual deterioration and thus covered ensuing perils. Id. at 154. The court held that "the environmental contamination resulting from the deterioration damage to the sump may be deemed a separate, independent [peril] and thus covered under the Policies [notwithstanding the noncoverage for the sump and tank themselves]." Id.
In Vermont Electric Power Company, Inc. v. Hartford Steam Boiler Inspection and Insurance Comp., 72 F. Supp. 441 (D. Vermont 1999) three transformers were improperly designed, which caused overheating and malfunctions in the transformers. The all risks policy had a provision stating that the policy did not insure against design defects, but did not exclude ensuing loss caused by design defects. Id. at 445. The plaintiffs claimed that the damage to the transformers was an ensuing loss caused by defective design. Id. The district court found the loss directly related to the excluded risk and thus also excluded under the policy. Id. It stated that an ensuing loss in the situation before the court would have been "one which occurred subsequent to the overheating of the transformers, for example, fire destruction of the building which housed the transformers." Id.
The above cases are consistent with the Louisiana jurisprudence. Much in the same fashion as Alton Ochsner, Vermont Electric maintains that there must be a distinct separation between the excluded loss and the ensuing loss. If the subsequent damage is merely a manifestation or worsening of the original excluded loss, then it must be excluded. United Technologies is similar to Lake Charles Harbor Terminal District in that each rejects the "but for" causation analysis as the sole measuring stick of ensuing loss.
What distinguishes the cases cited by each party from those before this Court is that in the cases discussed above, the parties essentially agreed that the baseline exclusion applied in the first instance and differed only in the determination of whether the consequences of that exclusion qualified as ensuing loss. In Alton Ochsner it was the particular pile caps, in Lake Charles Harbor Terminal District it was the cable, and in U.S. Industries it was the tower as a whole (which was worked on in toto). Here, the parties disagree over the initial defect itself with ICRMT arguing that the boom and trolley were defective, while the property insurers claim that the toppling crane as a whole was the defect.
The Court concludes that the factual basis of this controversy is distinguishable from both Alton Oschner and U.S. Industries. In each of those cases, the damage was to quality of the product itself, i.e. the foundation and the metal covering, and not cross of the entire property. This case is closest to the factual scenario seen in Lake Charles Harbor Terminal District. There the court did not find the loader as a whole to be defective, but only the snapping cable. Moreover, the Court of Appeals found the language "[m]echanical or machinery breakdown; unless an insured peril ensues, and then only for the actual loss or damage caused by such ensuing peril" to be ambiguous and as such, construed the language in favor of the insured. Exclusions F and J employ nearly similar language, and this Court can only agree with Judge Rubin's assessment of such an exclusion, which "[a]t first glance . . . appears to be self contradictory gibberish . . ." by excluding an event from coverage [in that case mechanical breakdowns] but allowing compensation for all risks that ensue from such an event. Lake Charles Harbor Terminal District at 288. The evidence here shows that to the extent there was faulty workmanship it was in the trolley and boom, which were heavier than provided for in the specifications. As such, the relevant exclusions would not insure balancing the defective parts. The loss of the crane is not excluded because the crane was destroyed when it plunged into the river; it was not destroyed solely as a result of the unbalanced parts. This is supported by the fact that the crane remained upright when installed and throughout the 100% load test. The fact that the imbalance may have been a "but for" cause of the toppling during the overload test is of no moment to this determination. See Lake Charles Harbor Terminal District. Consequently, it cannot be said that the toppling and the faulty workmanship were synonymous. As such, the exclusions F and J do not bar coverage for all damages that ensued from the unbalanced crane, including the loss of the crane itself.
The exclusions at issue here are designed to ensure that the property insurers do not become warrantors of the crane's quality. As such, the property policies do not cover worn or broken parts, pay for repairs when a mechanical system or process breaks down, or fix a design problem. In this case, to the extent that there was a flaw or defect in the quality of the crane it would have been that the boom and trolley were significantly heavier than intended in the design of the unloader. Thus had it remained standing, any of the exclusions, if applicable, would have barred from coverage any costs to rebalance or redesign the crane. However, in this case, the unbalance triggered a series of ensuing events that lead to the complete destruction of the crane and other property. The destruction of the crane as a whole is not co-extensive with the defect that put the crane out of balance. Therefore, the relevant exclusion is limited to the cost to rebalance the crane (which is not sought in this case). All damages caused by the falling crane, including the total loss of the crane itself are therefore excepted under the "ensuing loss" proviso. Therefore, this Court holds that neither exclusion F or exclusion J bars coverage for the cost of a replacement crane, the cost of repairing the dock, leasing a temporary replacement crane while the permanent crane was being built, purchasing buckets to use with the temporary crane, removing debris from the dock and river, unloading cargo at an alternate terminal and shipping it back to the ICRMT facility or midstreaming subsequent cargo shipments and using self-unloading vessels until the temporary replacement crane was ready.
Accordingly,
IT IS ORDERED that ICRMT's motion is GRANTED and the property insurers motion is DENIED.