Opinion ID: 2807848
Heading Depth: 2
Heading Rank: 3

Heading: Coverage Analysis

Text: Now for the parties' arguments on appeal. In pursuit of its coverage claim, AJC does not take the position that the Policy is ambiguous. Instead, it relies on the Policy's plain language to say that the Equipment Breakdown Endorsement deleted the Mechanical Breakdown Exclusion found in the original Policy. It pins this argument on Section B.1(a)(i) of the Equipment Breakdown Endorsement, which states that [a]ll exclusions and limitations apply except for certain specifically-enumerated ones -- including the Mechanical Breakdown Exclusion -- listed immediately after. AJC urges us to find that this contractual language deletes those exclusions from the original Policy. And with the exclusion deleted, AJC reasons, coverage is then found in the Policy's main body (the Personal Property of Others provisions), not the -13- Endorsement.7 AJC goes on to say that this means the $500,000 coverage limit for Personal Property of Others (which is set forth in the Declarations) is available to satisfy its claims.8 Not surprisingly, Triple-S disagrees with AJC, telling us that the clear and unambiguous terms of the Triple-S Policy provide a $25,000 sub-limit for spoilage of 'perishable goods' caused by or resulting from equipment breakdown. Appellee Br. at 18. Thanks to the Policy's exclusion of losses caused by mechanical breakdown (as happened here), Triple-S says, instead of $500,000 being available for loss to the Personal Property of Others, $0 is. In other words, the main body of the Policy provides no coverage for AJC's loss. But, Triple-S explains, the Equipment Breakdown Endorsement added coverage for losses stemming from equipment breakdown back to the Policy, including situations 7 As AJC puts it, coverage is pursuant to Section A. of the Building and Personal Property Coverage Form. Appellant Br. at 20. 8 AJC further posits that, [i]f, in fact, the $500,000.00 coverage limit in the Triple-S Policy is not available for a loss caused by or resulting from a mechanical breakdown of frozen food products owned by a client of the insured (Economy), then this coverage limit is illusory. Appellant Br. at 22. While the Court is familiar with the concept of illusory coverage, AJC does not explain what it means by an illusory coverage limit. And even if we presume that what AJC actually means to say is that the coverage itself is what's illusory, AJC fails to tell us how this can be so when both parties agree that there is coverage for AJC's loss. Any argument along the lines of illusory coverage or an illusory coverage limit (whatever that might be) has been waived for failure to develop it on appeal. See United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990). -14- like here where an equipment breakdown results in loss of perishable goods. Furthermore, Triple-S argues that the Endorsement's Spoilage Coverage comes with its own $25,000 limit, which caps AJC's recovery at $25,000.9
Now that we've laid out the applicable law, Policy provisions, and the parties' arguments, we can get to the bottom of this dispute. Because neither party contends the Policy or its Mechanical Breakdown Exclusion is ambiguous, we will not go out of our way to find ambiguity. In the absence of claimed ambiguity, our job under Puerto Rico law is to simply apply the provisions as written. We begin, as we must, with the plain language.
As noted, the parties agree on the essential facts: AJC's perishable goods spoiled while in Economy's care, resulting in financial loss to AJC. They agree the spoilage resulted from a mechanical breakdown of Economy's freezers, and that AJC's goods, as Personal Property of Others, fall under the Policy's definition of Covered Property. Turning to the Policy itself, we see that Triple-S agreed it would pay for direct physical loss of or damage to Covered 9 Triple-S raises a few other arguments, but we do not need to reach them to decide this appeal. -15- Property . . . caused by or resulting from any Covered Cause of Loss. Policy, Building and Personal Property Coverage Form, § A. This type of policy, called, in insurance lingo, an 'all risks policy' -- covers all physical loss to the [specified] property unless 'caused by or resulting from' an excluded peril. Stor/Gard, 717 F.3d at 244. The Equipment Breakdown Exclusion then precludes coverage for losses caused by or resulting from the peril of mechanical breakdown. Policy, Causes of Loss - Special Form, § B.(2)(6). Significantly, though, the Policy is individualized so as to contain the Equipment Breakdown Endorsement, which adds Equipment Breakdown Coverage back to the Policy. Under this coverage, Triple-S agreed to pay for certain losses caused by or resulting from an 'accident' to 'covered equipment.' Policy, Equipment Breakdown Endorsement (Endorsement) § A.(2). The Endorsement also explicitly adds coverage for a loss of 'perishable goods' due to spoilage, id. at § A.(2)(c)(i), which is what we've been calling Spoilage Coverage. In light of the agreed upon facts, it is clear from the Endorsement's plain language that Spoilage Coverage applies to AJC's loss. There is no dispute about this. The question is, just how much coverage is available? The Spoilage Coverage itself, setting forth its own Sublimit, suggests an answer: The most we -16- will pay for loss or damage under this coverage is $25,000 unless otherwise shown in a Schedule. Id. at § A.(5)(c).10 AJC raises a couple of arguments as to why we should interpret the Policy and Equipment Breakdown Endorsement as providing $500,000 of coverage for its loss. Neither, we believe, has merit. 2. Deletion of the Mechanical Breakdown Exclusion We start with AJC's contention that the Equipment Breakdown Endorsement expressly deleted the Mechanical Breakdown Exclusion altogether. AJC relies (almost exclusively) on our opinion in Fidelity Co-Operative Bank v. Nova Casualty Co., 726 F.3d 31 (1st Cir. 2013), to say that we have already decided language similar to that in the Endorsement deletes an exclusion. Although AJC makes Fidelity the centerpiece of its argument, it is of no assistance. The long and short of it is that the policy and endorsement at issue there involved quite different language than appears in the Triple-S Policy. In Fidelity, an amendatory endorsement provided simply that certain [e]xclusions are deleted. 726 F.3d at 37 (emphasis added). This clear text, we found, resulted in the deletion of the entire exclusion at issue there. Id. at 37 n.2. 10 AJC does not argue that any Schedule applies to increase the $25,000 Spoilage Sublimit. -17- The contractual language here is not even close to what we had before us in Fidelity. Most obviously, the Equipment Breakdown Endorsement does not say that it deletes the Mechanical Breakdown Exclusion. It provides instead that [a]ll exclusions and limitations apply except for those specifically designated, including the Mechanical Breakdown Exclusion. And, per the plain language, the exceptions referred to are inapplicable only insofar as the reestablished additional coverage provided by the Endorsement is concerned.11 Far from deleting that Exclusion from the original Policy, the Equipment Breakdown Endorsement simply renders it inapplicable to certain coverage situations, like when perishable goods spoil as a result of an 'accident' to 'covered equipment.' See Endorsement § A.(2). In sum, Fidelity's dissimilar contract language does not support AJC's proposition that the Equipment Breakdown Endorsement's language in Economy's policy deleted the Mechanical Breakdown Exclusion. Having disposed of its Fidelity-based argument, AJC is left with the bald assertion that the Endorsement expressly deleted the [M]echanical [B]reakdown [E]xclusion. Appellant Br. at 18. Beyond citing to Fidelity, AJC does not explain how the Endorsement does so. Since nowhere does the Endorsement state that 11 Further, use of the word apply presupposes the continuing existence of the Mechanical Breakdown Exclusion. After all, it would be nonsensical to say that something which no longer exists in the world (having been deleted) does or does not apply in a particular situation. -18- it deletes the Exclusion, this omission is practically enough on its own to doom AJC's position. And what's more, we find that AJC's take doesn't jibe with the Policy's overall structure or plain language. First, by setting forth new Additional Coverages previously unknown to the Policy (including Spoilage Coverage), the Endorsement acts as a sort of mini-policy. Like the Policy itself, the Endorsement sets forth an insuring agreement complete with its own definitions, detailed conditions, and deductible. The Endorsement even has something to say about exclusions. As we have seen, it specifies that certain existing exclusions do not apply to the Endorsement's coverage, it modifies other exclusions, and it adds still others that are only applicable to the Endorsement's brand of Equipment Breakdown Coverage.12 Against this backdrop, it is clear that the Equipment Breakdown Endorsement is meant to do much more than simply delete an exclusion. Furthermore, and perhaps most telling of all, the Endorsement does explicitly delete a portion of one of the original 12 For example, the Endorsement excludes things like foundations, cabinets, insulating material, sewer pipes, water pipes, excavation or construction equipment, and equipment mounted on a vehicle from its definition of covered equipment. Endorsement § B.(3)(a). And among other causes of loss, it excludes coverage for loss or damage caused by or resulting from a hydrostatic, pneumatic or gas pressure test of any boiler or pressure vessel, along with loss caused by or resulting from an insulation breakdown test of any type of electrical equipment. Id. at § B.(3)(b)(iii). -19- exclusions in certain situations. And -- unlike the policy we construed in Fidelity -- the Endorsement explicitly limits the effect of that deletion to coverage under the Endorsement itself. Specifically, the Endorsement states that [i]f the Causes of Loss-- Special Form applies, as respects this endorsement only, the last paragraph of Exclusion B.2.d.13 is deleted and replaced with the following: But if loss or damage by an accident results, we will pay for that resulting loss or damage. Endorsement § B.(2)(c) (emphasis added).14 Had Triple-S intended to delete the Mechanical Breakdown Exclusion, surely it would have used the word delete to say so. Instead, it made the Mechanical Breakdown Exclusion inapplicable solely to the Endorsement's coverage. That Triple-S chose not to use simple language deleting the Mechanical Breakdown Exclusion, when it obviously knew how to do so, further demonstrates that the Equipment Breakdown Endorsement did not delete the Exclusion from the Policy. 13 The referenced paragraph appears immediately after seven specific exclusions (including the Mechanical Breakdown Exclusion) in the original Policy and states, [b]ut if loss or damage by the 'specified causes of loss' or building glass breakage results, we will pay for that resulting loss or damage. Causes of Loss - Special Form, § B.(2)(d). Specified Causes of Loss, in turn, is itself defined in the Endorsement as [f]ire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage. Id. at § F. 14 Although each party set forth this particular policy language in its brief, neither makes any argument based upon it. -20- In essence, AJC's position that the Endorsement deleted the Exclusion effectively asks us to redraft the Policy's clear and unambiguous language. Accepting this invitation would contravene the well-established tenets of Puerto Rico's insurance law requiring us to interpret and apply unambiguous provisions of an insurance contract as they are written. We, therefore, reject AJC's argument that the Equipment Breakdown Endorsement deletes the Mechanical Breakdown Exclusion. Let's take stock of what this means for coverage. The Mechanical Breakdown Exclusion continues to exist in the Policy. And the only coverage to which the Exclusion does not apply is that additional coverage set forth in the Equipment Breakdown Endorsement. So, coverage for AJC's loss must flow from that Endorsement because any potential alternative source of coverage falls prey to the Mechanical Breakdown Exclusion. Thus, the only coverage available for AJC's loss is provided by the Spoilage Coverage, as set forth in the Equipment Breakdown Endorsement. 3. $25,000 Spoilage Coverage Limit This brings us to AJC's final argument. As we mentioned, the Endorsement's Spoilage Coverage comes with its own $25,000 Spoilage Sublimit. See Endorsement § A.(2)(c) (The most we will pay for loss or damage under this coverage is $25,000 unless otherwise shown in a Schedule.). Although it is not particularly clear from its brief (or oral -21- argument), AJC seems to be arguing that even if coverage for its loss is found in the Endorsement's Spoilage Coverage rather than the main Policy, the $500,000 coverage limit in the Declarations nevertheless prevails over the lower Spoilage Sublimit. This is because, in AJC's view, the Sublimit applies only to spoilage of goods owned by the Named Insured, Economy, and not goods owned by Economy's clients. AJC asserts that, since the $25,000 Spoilage Sublimit does not apply to its loss, the $500,000 limit set forth in the Declarations becomes available to it.15 Triple-S, however, tells us that the Spoilage Sublimit applies to Economy's loss of perishable goods no matter who owns those goods. To unravel this question, we return to the Endorsement's language. The relevant part of the Spoilage Coverage provision states the following: We will pay for your loss of 'perishable goods' due to spoilage. Recall that you and your refer only to the Named Insured, Economy. Thus, what this provision says is that Triple-S will pay up to $25,000 for Economy's loss of 'perishable goods' due to spoilage. Since AJC's goods spoiled while in Economy's freezers, this $25,000 Sublimit kicks in to limit AJC's recovery. 15 AJC does not, however, explain why this might be so where the only coverage for spoilage is by way of the Mechanical Breakdown Endorsement, not from the main Policy itself. This turns out to be academic anyway, given our ultimate conclusion. -22- Attempting to get out from under the Spoilage Sublimit, AJC urges us to add a your to the sentence and read it to say that Triple-S will only pay for Economy's loss of Economy's 'perishable goods' due to spoilage. This interpretation simply cannot be squared with the Endorsement's plain and unambiguous language. According to its terms, the $25,000 Sublimit comes into play where Economy is responsible for the spoilage of perishable goods, regardless of who owns them. This comes as no surprise. Economy's business, after all, is storing other companies' perishable goods. So it makes sense that Economy would seek to obtain insurance coverage for those goods.16 This commerciallysensible rationale, along with the explicit Policy language employed by the contracting parties (Economy and Triple-S), work hand-in-hand to convince us that it would be unreasonable for us to read an extra your into the Spoilage Coverage. In the absence of any ambiguity in the Policy language, Puerto Rico law calls for us to apply the Endorsement and its $25,000 Spoilage Sublimit as 16 We note that when the Puerto Rico Supreme Court considers an insurance policy in its entirety, as we do here, it does not hesitate to take into account certain extrinsic elements that may shed light on the intention of the parties. Soc. de Gananciales v. Serrano, 145 P.R. Dec. 394, 400 (1998). These elements may vary according to the circumstances of each particular case, but they generally are: the parties' contracting intention, the premium agreed on, the circumstances surrounding the negotiation and the contract, and the practices and customs established by the insurance industry. Id. at 401. We, too, feel free to consider these factors as necessary. -23- written. We may not judicially redraft the Policy to reflect AJC's wishes. Here, it is uncontested that AJC suffered a loss to its perishable goods as a result of Economy's malfunctioning freezers. We have already determined that coverage for this loss is provided by the Spoilage Coverage set forth in the Equipment Breakdown Endorsement. Thus, pursuant to the clear terms of the Spoilage Sublimit, the most that Triple-S is required to pay out due to this loss is $25,000. Any other conclusion would be contrary to the Endorsement's plain language and run afoul of basic precepts of Puerto Rico insurance law. We, therefore, apply the Endorsement and Spoilage Sublimit as written, and we conclude that the most AJC may recover for Economy's loss of AJC's perishable goods is $25,000.17 17 One last note: AJC's brief includes an allegation that Triple-S has admitted that the coverage under Personal Property of Others and its Limit of $500,000.00 is available for damage caused by an equipment breakdown. Appellant Br. at 22. Although AJC cites the addendum to its brief to support this statement, see id., AJC waited until its reply brief to explain that this admission comes from the parties' proposed pretrial stipulations of fact, see Appellant Reply at 8 n.2. Assuming an argument along these lines hasn't been waived, United States v. Arroyo-Blas, 783 F.3d 361, 366 n.5 (1st Cir. 2015) (recognizing that we need not address arguments that a party saves for its reply brief), and that it is appropriate for us to consider materials submitted in an addendum to a party's brief but not the joint appendix, see Appellee Br. at 4 n.1 (pointing this out), it is unavailing. The proposed stipulation states, Triple-S admits that the coverage under Personal Property of Others and its Limit of $500,000.00 is available for damage caused by an equipment breakdown. Recall that the Equipment Breakdown Endorsement provides more than just Spoilage Coverage. See, e.g., Endorsement, -24-