Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not *

be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

R. 47.5.4.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 08-30064

DANRIK CONSTRUCTION INC

Plaintiff-Appellee

v.

AMERICAN CASUALTY COMPANY OF READING PENNSYLVANIA;

TRANSCONTINENTAL INSURANCE CO

Defendants-Appellants

Appeal from the United States District Court 

for the Western District of Louisiana

USDC No. 6:05-cv-1940

Before GARWOOD, DENNIS, and PRADO, Circuit Judges.

PER CURIAM:*

This appeal presents a dispute between a construction company and two

insurers. Plaintiff-Appellee Danrik Construction, Inc. (“Danrik”) asserts that

Defendants-Appellants American Casualty Company of Reading, Pennsylvania

(“ACC”) and Transcontinental Insurance Company (“TIC”) (collectively,

“Insurers”) breached their fiduciary duty to Danrik by failing to pay several

claims under Danrik’s commercial general liability policy (“CGL policy”). After

United States Court of Appeals

Fifth Circuit

F I L E D

March 16, 2009

Charles R. Fulbruge III

Clerk
No. 08-30064

2

a bench trial, the district court ruled in favor of Danrik. We reverse and render

judgment in favor of Insurers.

I. FACTUAL AND PROCEDURAL BACKGROUND

Danrik is a construction subcontractor that installs underground conduits

and communication cables. Danrik obtained CGL policy coverage from ACC, and

TIC renewed this policy, for the time periods relevant to this appeal.

Danrik worked on four projects during the policy periods in which it

alleges it incurred covered liabilities. In particular, Danrik’s negligent work on

projects for Grady Crawford Construction Co. (“Grady Crawford Construction”)

and BellSouth Telecommunications, Inc. (“BellSouth”) led to various damages

for both entities as well as for another contractor, Stelly Construction, Inc.

(“SCI”), who had originally installed a sewer line that Danrik damaged. Danrik

reported these claims to Insurers, asking them to pay Grady Crawford

Construction, BellSouth, and SCI for its claims. For each of the losses, Insurers

began their adjustment procedure and sought an independent evaluation from

an engineering expert on whether the amounts of the claimed damages were

reasonable and necessary. Based on the engineering reports, Insurers offered

Grady Crawford Construction, BellSouth, and SCI amounts that were slightly

lower than the original claims. All three entities refused the settlement offers.

Danrik later paid these entities the full amounts of their claims in an attempt

to continue doing business with them. Importantly, Danrik did not obtain

Insurers’ consent before settling the underlying claims. In fact, Insurers

stipulate that they were willing at all material times to pay the settlement

amounts they had offered to the three entities and have Danrik pay the

difference. Instead of agreeing to this arrangement, however, Danrik

unilaterally chose to settle the claims.

Danrik then filed suit against Insurers, claiming that Insurers breached

their fiduciary duty to timely pay the claims in full and caused Danrik to suffer
No. 08-30064

3

lost future profits based on BellSouth’s and Grady Crawford Construction’s

ultimate decision to cease doing business with Danrik. In particular, Danrik

claimed that Insurers purposely delayed taking any action on the claims until

the underlying tort claims prescribed under Louisiana law, knowing that Danrik

would remain contractually liable based on Danrik’s indemnity contracts with

these entities. 

The district court first denied Insurers’ motion for summary judgment

without written explanation. The court then conducted a bench trial. At the

conclusion of the bench trial, it ruled that Danrik had not met its burden of

proving lost profits, especially because Grady Crawford Construction continued

doing business with Danrik for some time after these claims arose and BellSouth

did not have any business opportunities for Danrik. Danrik does not challenge

these findings on appeal. The court also ruled that Insurers had breached their

fiduciary duty by not paying three of the four underlying claims and awarded

Danrik damages in the amount of the cost of the claims ($33,486.03) plus a

statutory penalty of the same amount, for a total of $66,972.06. Insurers appeal.

II. JURISDICTION AND STANDARD OF REVIEW

The district court, which had diversity jurisdiction, issued a final

judgment, meaning that this court has jurisdiction under 28 U.S.C. § 1291.

“‘The standard of review for a bench trial is well established: findings of

fact are reviewed for clear error and legal issues are reviewed de novo.’” Bd. of

Trs. New Orleans Employers Int’l Longshoremen’s Ass’n v. Gabriel, 529 F.3d 506,

509 (5th Cir. 2008) (quoting Water Craft Mgmt. LLC v. Mercury Marine, 457

F.3d 484, 488 (5th Cir. 2006)). In construing state law in a diversity case, a

federal court must follow the substantive decisions of the state’s highest court,

here the Louisiana Supreme Court. See Erie R.R. Co. v. Tompkins, 304 U.S. 64,

78 (1938); Am. Int’l Specialty Lines Ins. Co. v. Canal Indem. Co., 352 F.3d 254,

260 (5th Cir. 2003).
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III. DISCUSSION

Insurers raise several issues on appeal, but we dispose of this case based

on only one: Danrik cannot recover under the insurance contract because it

unilaterally settled the underlying claims without Insurers’ consent.

The CGL policy in this case provided that there were several conditions to

coverage in the event of an “occurrence, offense, claim or suit.” The policy

specifically stated, “No insured will, except at that insured’s own cost,

voluntarily make a payment, assume any obligation, or incur any expense, other

than for first aid, without our consent.” At trial, one of Danrik’s owners testified

that Danrik had entered into settlement agreements with all of the claimants

for all of the claims and admitted that Danrik took this action without Insurers’

consent or authorization. Insurers assert that this action discharged Insurers

from any obligations under the CGL policy. Insurers also note that they were

willing at all material times to pay the amounts they offered and have Danrik

pay the difference.

The case law supports Insurers’ argument. In Rosenthal v. Security

Insurance Group of New Haven, 205 So. 2d 816 (La. Ct. App. 1967), the plaintiff

paid a claimant for his damages after the insurer denied liability. The plaintiff

then sought to recover from the insurer the amount he paid to settle the claim.

Id. at 817. The Louisiana court held that the plaintiff had breached the consentto-settle language in the insurance policy, precluding him from asserting a claim

against the insurer. Id. The court rejected the plaintiff’s argument that the

consent-to-settle language was contrary to public policy, in that it provides a

disincentive for an insured to pay a claim “to keep his credit name alive in his

community and to avoid civil action against him.” Id. As the court stated,

It is obvious that the company is obligated to pay only those

amounts which the insured is legally liable to pay. This liability

must be determined either by a court or by the claimant, the

company, and the insured jointly. There are no provisions of the
No. 08-30064

 Danrik did not cite Babst or raise this issue in connection with Insurers’ consent-to- 1

settle argument, and therefore it is arguably waived. Regardless, this case is dissimilar to

Babst, as we discuss.

5

policy under which the insured has any right to make any

determination as to his own liability. His fear as to being the

subject of a civil suit is groundless since the company is obligated to

defend any suit filed against him, even though it be frivolous. 

Id. at 817-18.

In another Louisiana Circuit Court of Appeal case, however, the court

noted that a “no action clause [stating that an insured has no action against the

insurer if the insured breaches the terms of the insurance policy] has been held

to be of no effect when an insurer denies coverage where there is coverage, or

unjustifiably delays settlement, forcing the insured to settle separately.” Emile

M. Babst Co. v. Nichols Constr. Corp., 488 So. 2d 699, 703 (La. Ct. App. 1986)

(holding the insurer liable for failing to settle the claim when “time was of the

essence”). Under a broad reading of Danrik’s argument, it is asserting that

Insurers unjustifiably delayed settlement, forcing Danrik to settle on its own.1

The facts of Babst, however, are not at all similar to the present case. In that

case, the insured, a subcontractor, made repairs stemming from an accident

without receiving formal consent from the insurer so as to finish the project on

time. Id. at 703. Before completing the repairs, the subcontractor “fully

cooperat[ed]” with the insurer, kept the insurer “fully informed,” and obtained

the assurance of two insurance agents that the insurer would cover the claim.

Id. Had the subcontractor waited for the insurer’s official consent to complete

the work, it would have lost the subcontract amount and would have been liable

under the “hold harmless” clause of the subcontract. Id. Under these

circumstances, the court held that the insurer’s conduct “in indefinitely delaying

settlement when . . . the claim of [the subcontrator] was clearly covered, was a

breach of its duty to its insured.” Id. Here, in contrast, Insurers investigated
No. 08-30064

 Indeed, Danrik presented little evidence to suggest that it had to act quickly to avoid 2

losing business. In fact, the district court found that Grady Crawford Construction continued

to do business with Danrik for a little while after the claims arose and that BellSouth did not

have any business opportunities for Danrik. Danrik does not challenge these findings on

appeal.

6

the claims and attempted to settle them, and Danrik did not have any

immediate risk of losing money if it did not settle. Danrik concedes that the 2

policy required Insurers’ consent prior to settlement but simply asseverates,

without further elaboration, that seeking consent after Insurers already “refused

to settle” would have been useless.

Danrik rests virtually its entire argument for this issue on its contention

that Insurers did not suffer any prejudice from Danrik’s failure to obtain consent

before settling the underlying claims. To the contrary, this court, in construing

Texas law regarding an identical consent-to-settle clause, held that an insurer

suffers prejudice as a matter of law when an insured unilaterally settles a claim:

Assuming without deciding that an insurer must show prejudice to

avoid its obligations under the policy when the insured breaches the

consent-to-settle provision, based on the summary judgment

evidence in this case, we are satisfied that National Union suffered

prejudice as a matter of law. An insurer’s right to participate in the

settlement process is an essential prerequisite to its obligation to

pay a settlement. When, as in this case, the insurer is not consulted

about the settlement, the settlement is not tendered to it and the

insurer has no opportunity to participate in or consent to the

ultimate settlement decision, we conclude that the insurer is

prejudiced as a matter of law. Under these circumstances the

breach of the consent-to-settle provision in the policy precludes this

action.

Motiva Enters., LLC v. St. Paul Fire & Marine Ins. Co., 445 F.3d 381, 386-87

(5th Cir. 2006). Moreover, one of Insurers’ adjusters testified that Danrik’s

voluntary settlement prejudiced Insurers because it eliminated their ability to

investigate the claim or determine a proper percentage of liability. The

representative also stated that a unilateral settlement can subject an insurer to
No. 08-30064

7

double liability, especially if the insured does not obtain a proper release of

claims. Danrik does not refute this testimony.

In sum, Danrik, without Insurers’ consent, paid BellSouth, Grady

Crawford Construction, and SCI to settle the claims. The cases discussed above

suggest that whether a court will excuse a breach of a consent-to-settle clause

depends on the circumstances of the situation. Here, Insurers initially offered

a settlement amount, and after the claimants refused it, Danrik unilaterally

settled the claims. There was no “time is of the essence” situation similar to that

in Babst that might excuse Danrik’s action. Danrik’s suggestion that any

attempt to obtain consent would have been useless or futile is unavailing,

especially given that Insurers stipulate that they would have paid the amount

their expert stated was reasonable and necessary and would not have objected

to Danrik paying the difference. Thus, Danrik’s action discharged Insurers’

responsibility under the insurance policy; put another way, the facts are more

like those in Rosenthal and are dissimilar to the situation in Babst. Under these

facts, Danrik’s unilateral decision to settle the underlying claims precludes its

ability to recover from Insurers. Moreover, this result is particularly

appropriate given that the policy expressly excluded (with some exceptions that

are inapplicable) contractual assumed liability. We therefore reverse the

judgment of the district court and render judgment in favor of Insurers.

IV. CONCLUSION

Because the district court denied Insurers’ summary judgment motion on

this issue without a full written explanation, it is unclear why the court rejected

this argument. Nevertheless, given that Danrik breached the conditions of the

CGL policy by unilaterally settling the underlying claims, it cannot recover from

Insurers. Accordingly, we REVERSE the judgment of the district court and

RENDER judgment in favor of Insurers.

REVERSED AND RENDERED.