Opinion ID: 2831778
Heading Depth: 2
Heading Rank: 1

Heading: XL Specialty

Text: The underlying complaint contained five causes of action: two FCA claims, common-law fraud, unjust enrichment, and negligent misrepresentation. Under the eight-corners rule XL is obliged to defend Bollinger unless all of the claims in the underlying suit are excluded from policy coverage. The district court concluded that all five claims in the underlying complaint fit into either Exclusion 28 or Exclusion 32, but it rejected XL’s argument that other exclusions applied. 3 We agree that Exclusions 28 and 32 exempt all claims.
Exclusion 28 of Bollinger’s insurance contract with XL provides that it shall not apply to . . . [t]he failure of your products to meet any predetermined level of fitness or performance and/or guarantee of 3 We do not reach other coverage issues raised in XL’s brief and cross-appeal. 5 Case: 14-31283 Document: 00513172762 Page: 6 Date Filed: 08/27/2015 No. 14-31283 such fitness or level of performance and/or any consequential loss arising therefrom. On appeal, Bollinger makes two arguments in support of its contention that this provision does not apply. First, Bollinger argues that Exclusion 28 does not preclude coverage for the claims in the underlying suit because the United States was seeking damages for the entire value of the vessels, not only the “work product” for which Bollinger was responsible. Second, Bollinger argues that the underlying suit did not allege a failure to meet a “predetermined level of fitness.” We conclude, however, that Exclusion 28 applies to the government’s unjust enrichment and negligent misrepresentation claims. The precedent on which Bollinger relies for its first argument is inapposite. In OSCA, for example, the contractor “had only been hired to set a bridge plug inside of an already constructed well, and the allegedly faulty work damaged not only the plug but the entire well[.]” Underwriters at Lloyd’s London v. OSCA, Inc., No. 03-20398, 2006 WL 941794 (5th Cir. Apr. 12, 2006) (per curiam) (unpublished). The insurance policy at issue excluded coverage for claims arising out of the failure of any Insured’s Products or of work . . . by or on behalf of any Insured to meet any warranty or representation by any Insured as to the level of performance, quality, fitness or durability or extent that such liability is for the diminished value or utility of Insured’s Products or work by or on behalf of any Insured[.] Id. at . Such “work product exclusions” typically restrict coverage on the basis of “the well-settled principle that liability policies are not intended to serve as performance bonds.” Rivnor Properties v. Herbert O’Donnell, Inc., 633 So. 2d 735, 751 (La. Ct. App. 1994); see also Old River Terminal Co-op v. Davco Corp. of Tenn., 431 So. 2d 1068 (La. Ct. App. 1983). But work product exclusions do not apply in cases like Hendrix Electric Co. v. Casualty Reciprocal Exchange, 297 So. 2d 470 (La. Ct. App. 1974), in which 6 Case: 14-31283 Document: 00513172762 Page: 7 Date Filed: 08/27/2015 No. 14-31283 [t]he job involved running an underground electrical cable to an existing power distribution panel and installing a new circuit breaker in the panel. An employee accidentally dropped a metal strip and thereby caused a short which started a fire and destroyed the entire panel. The court held that the “damage was not to any ‘work performed on or on behalf of the named insured.’ The damage was to existing property of the Government, that is the panel and attached circuit breakers.” Thus, the court found that the exclusion clearly did not apply. OSCA, 2006 WL 941794, at  (citations omitted) (citing Hendrix Elec., 297 So. 2d at 472); see also Todd Shipyards Corp. v. Turbine Serv., Inc., 674 F.2d 401 (5th Cir. 1982) (distinguishing cases in which “[w]hat was lost to use in those cases was the insured’s own product”). Bollinger argues that this is a case like OSCA and Hendrix because the United States is not seeking damages for Bollinger’s work or product alone, but for the entirety of the eight vessels that all unexpectedly failed. Because the damage for which the United States seeks to recover is “the result of something” other than its work product, “Exclusion 28 was not triggered.” This argument cannot succeed. As the district court noted, the policy exclusions in those cases did not exempt the insurer from coverage for “consequential damages” arising from the failure of the insured’s work. See, e.g., OSCA, 2006 WL 941794, at . Exclusion 28, by its own terms, exempts claims for damage not only to the insured’s work product but also to things other than the insured’s product. Bollinger’s second argument, that the underlying suit did not allege a failure to meet a “predetermined level of fitness,” relies in part on the district court’s previous dismissal of the underlying suit because the complaint did not, in the court’s words, “allege what the program and contract requirements were for the converted vessels.” See United States v. Bollinger Shipyards, Inc., No. CIV. A. 12-920, 2013 WL 393037, at  (E.D. La. Jan. 30, 2013)). But just before that, the district court wrote, “The United States alleges that one of the 7 Case: 14-31283 Document: 00513172762 Page: 8 Date Filed: 08/27/2015 No. 14-31283 requirements was that Bollinger provide the Coast Guard with a Hull Load and Strength Analysis (‘HLSA’) in order to verify that the modified vessels met the program and contract requirements.” Id. (emphases added). Moreover, the district court was assessing whether the complaint met the FCA’s materiality requirement as codified at 31 U.S.C. § 3729(a)(1)(B). In contrast, the issue in regard to this exclusion is not the FCA claims at all but the unjust enrichment and negligent misrepresentation claims. The United States pled that “Bollinger . . . was responsible for the . . . performance requirements” of the modified boats. Other “requirements” referenced in the complaint include “the required section modulus,” a requirement to comply with American Bureau of Shipping standards, and a requirement to provide a hull strength analysis, which itself was used to determine conformity with “program and contract requirements.” Even if the United States had not alleged sufficient facts to show materiality under the FCA—a determination this court reversed—that would not mean that the complaint did not allege liability because Bollinger’s work failed to meet performance requirements. Citing dictionaries, Bollinger also contends that its “representations” cannot amount to a “predetermination.” The argument is that “representations” are unilateral and “predeterminations” imply bilateral agreement. But “predetermined” means only “established, decided upon, or decreed beforehand.” OED Online, http://www.oed.com/view/Entry/149830. It implies nothing about how a determination comes about, or who has the authority to determine. A single party can “determine” something, and can do so in advance: there is nothing inherently bilateral about predetermination. And even if there were, the complaint lays out straightforwardly that Bollinger failed to meet a requirement that the parties together determined in advance. The Deepwater contract required the vendor to submit a hull strength analysis, which stated the required longitudinal strength that Bollinger’s work 8 Case: 14-31283 Document: 00513172762 Page: 9 Date Filed: 08/27/2015 No. 14-31283 failed to meet. As the district court noted, “the complaint makes plain that Bollinger, the party responsible for ‘performance requirements,’ recognized and communicated from the earliest stages of the project that the ‘ABS required section modulus’ was 3113 cubic inches.” Bollinger Shipyards, 57 F. Supp. 3d at 755 (footnotes omitted). Thus, however many parties were involved in the predetermination, this was a predetermined level of fitness. 4
With the factual basis for the unjust enrichment and fraudulent misrepresentation claims excluded under Exclusion 28, only the FCA and common law fraud claims remain. These fall out under Exclusion 32, which absolves XL from covering: e. Actual or alleged liability arising out of or incidental to any alleged violation(s) of any federal or state law regulating, controlling, and governing antitrust or the prohibition of monopolies, activities in restraint of trade, unfair methods of competition or deceptive acts and practices in trade and commerce, including, without limitation, the Sherman Act, the Clayton Act, the Robinson-Patman Act, the Federal Trade Commission Act and the Hart-Scott-Rodino Antitrust Improvements Act; or f. Actual or alleged liability arising out of or contributed to by [Bollinger’s] dishonesty or infidelity. In the district court, Bollinger “rightfully concede[d] that these exclusions, by their plain terms, preclude coverage for the United States’ common law fraud claims and its claims under the False Claims Act.” Bollinger Shipyards, 4 Bollinger also suggests that the district court’s reading of the work-products exclusion is overly broad, as it poses a hypothetical scenario in which “a Bollinger employee [] negligently left tools in a place that caused an innocent third party to trip and injure himself[.]” On this reading, XL could “deny coverage, even though the injury had nothing whatsoever to do with the predetermined level of fitness of Bollinger’s work or product[.]” This hypothetical is nonsense: in such a situation, the complaint would not allege that the injury stemmed from Bollinger’s work failing to meet a predetermined requirement, which is the first precondition of Exclusion 28. 9 Case: 14-31283 Document: 00513172762 Page: 10 Date Filed: 08/27/2015 No. 14-31283 57 F. Supp. 3d at 757. Bollinger has changed its position following this court’s reversal of the district court’s FCA materiality decision, in which we focused on “reckless disregard” as the basis of an FCA claim. See Bollinger Shipyards, 775 F.3d at 260. Bollinger continues to concede, however, that Exclusion 32.f “may” exempt the underlying fraud claim. Of course it does. We need not decide whether “reckless disregard for the truth” qualifies as “dishonesty or infidelity” under 32.f, since the FCA claims clearly fall under Exclusion 32.e. It is irrelevant that the FCA is not listed among the statutes excluded, since the FCA is a “federal law . . . regulating . . . deceptive acts and practices in trade and commerce[.]” Bollinger itself cites authority holding that the FCA is the legal tool by which the Government seeks recompense for “deceptive practices directed at the public purse.” Cook Cnty., Ill. v. U.S. ex rel. Chandler, 538 U.S. 119, 130-31, 123 S. Ct. 1239, 1247 (2003) (quoting United States v. Halper, 490 U.S. 435, 445, 109 S. Ct. 1892, 1900 (1989), abrogated on other grounds by Hudson v. United States, 522 U.S. 93, 118 S. Ct. 488 (1997)). Moreover, the alleged FCA violation need not itself be “deceptive.” The plain language of Exclusion 32.e embraces laws that regulate deceptive acts, not allegations of deceptive acts. 5 5 Bollinger also argues that XL acted with bad faith in denying coverage, violating Louisiana Revised Statutes §§ 22:1892 & 22:1973. The fact that coverage was excluded pretermits this claim. Cf. Cartwright v. Cuna Mut. Ins. Soc’y, 476 So. 2d 915, 918 (La. App. 1985) (“an insurer's refusal to pay contested benefits is not without just and reasonable cause where that refusal is based on a reasonable interpretation of policy language which has not been construed to the contrary by the courts of this state”). 10 Case: 14-31283 Document: 00513172762 Page: 11 Date Filed: 08/27/2015 No. 14-31283