Court Opinion

ID: 4972536
Source: CourtListenerOpinion
Date Created: 2021-09-25 00:00:34.190865+00
Date Added: 2024-06-11T08:16:34.769987
License: Public Domain

Case: 20-30140   Document: 00516029285   Page: 1    Date Filed: 09/24/2021

          United States Court of Appeals
               for the Fifth Circuit                       United States Court of Appeals
                                                                    Fifth Circuit

                                                                  FILED
                                                          September 24, 2021
                            No. 20-30140
                        consolidated with                    Lyle W. Cayce
                            No. 20-30175                          Clerk

   McDonnel Group, L.L.C.,

                                                   Plaintiff—Appellant,

   Jung, L.L.C.,

                                         Intervenor Plaintiff—Appellant,

                                versus

   Starr Surplus Lines Insurance Company;
   Lexington Insurance Company,

                                                 Defendants—Appellees,

   ______________________________

   All Star Electric Incorporated,

                                                   Plaintiff—Appellant,

                                versus

   Starr Surplus Lines Insurance Company;
   Lexington Insurance Company,

                                                 Defendants—Appellees,
Case: 20-30140    Document: 00516029285        Page: 2    Date Filed: 09/24/2021

                                  No. 20-30140
                                c/w No. 20-30175
   ______________________________

   Jung, L.L.C.,

                                                         Plaintiff—Appellant,

                                    versus

   Starr Surplus Lines Insurance Company;
   Lexington Insurance Company,

                                                      Defendants—Appellees,

   ______________________________

   Mechanical Construction Company, L.L.C.,
   now known as Bernhard MCC, L.L.C.,

                                                         Plaintiff—Appellant,

                                    versus

   Starr Surplus Lines Insurance Company;
   Lexington Insurance Company,

                                                      Defendants—Appellees.

                 Appeals from the United States District Court
                     for the Eastern District of Louisiana
                              No. 2:18-CV-1380
                              No. 2:19-CV-10462
                              No. 2:19-CV-2227
                              No. 2:19-CV-2230

                                       2
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                                       No. 20-30140
                                     c/w No. 20-30175

   Before Smith, Clement, and Oldham, Circuit Judges.
   Jerry E. Smith, Circuit Judge:

          The McDonnel Group (“McDonnel”) served as the general contrac-
   tor for the renovation of the Jung Hotel and Residences (“Jung”). McDon-
   nel purchased insurance from the insurer defendants. During the renovation,
   the project flooded, resulting in over three million dollars in damage. The
   insurers denied the claim, contending that the full amount fell below the flood
   deductible.
          McDonnel, its subcontractors, and Jung (together “plaintiffs”) inter-
   pret the deductible differently, contending that most of the damage was cov-
   ered, and sued for declaratory relief and bad-faith damages. The district
   court granted partial summary judgment for the defendants, determining that
   the policy is unambiguous and adopting the defendants’ interpretation. The
   plaintiffs appeal. Because the policy is ambiguous, we reverse the summary
   judgment and remand.

                                             I.
          Beginning in 2014, McDonnel served as the general contractor for the
   renovation and redevelopment of Jung’s property (“the project”). 1 In early
   2015, McDonnel took out insurance from Starr Surplus Lines Company and
   Lexington Insurance Company (jointly, the “insurers”).
          During the spring and summer of 2017, the project suffered a number
   of water intrusions, culminating in a heavy rain that caused extensive damage.
   McDonnel submitted a notice of loss to the insurers, claiming damages of

          1
          The other plaintiffs—Mechanical Construction Co., L.L.C., and All Star Electric,
   Inc.—were subcontractors for McDonnel.

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                                     No. 20-30140
                                   c/w No. 20-30175
   $3,226,164.30.
          The parties’ divergent views on the proper deductible give rise to the
   dispute. The plaintiffs assert that the correct flood deductible is $500,000
   and that the insurers should therefore pay a claim of $2,726,164.30—the
   flood damage less $500,000. The insurers contend that the proper deduc-
   tible is $3,443,475. Thus, the claim, in their view, fell $217,310.70 below the
   deductible, entitling the plaintiffs to nothing under the policy.
          McDonnel sued in February 2018. The plaintiffs moved for partial
   summary judgment, requesting that the district court adopt their interpreta-
   tion of the flood deductible amount, and the insurers filed an opposition and
   a cross-motion for summary judgment. On February 11, 2020, the court
   granted the insurers’ cross-motion and denied the plaintiffs’ motions. The
   court determined that the policy language was “clear and unambiguous”
   regarding the flood deductible and adopted the insurers’ interpretation.
          The plaintiffs moved for certification of interlocutory appeal under
   28 U.S.C. § 1292(b), an entry of final judgment under Federal Rule of Civil
   Procedure 54(b), and a motion to continue trial. The district court granted
   the motion, giving rise to this appeal.

                                          II.
                                          A.
          We review a summary judgment de novo. See, e.g., Bayou Steel Corp. v.
   Nat’l Union Fire Ins. Co. of Pittsburgh, 642 F.3d 506, 509 (5th Cir. 2011).
   Moreover, “[b]ecause the proper interpretation of an insurance policy pre-
   sents a legal question, not a factual one, the district court’s interpretations of
   the [p]olicy are also reviewed de novo.” Naquin v. Elevating Boats, L.L.C.,
   817 F.3d 235, 238 (5th Cir. 2016).

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                                          No. 20-30140
                                        c/w No. 20-30175
                                                 B.
           The parties agree that the policy is governed by Louisiana law. There-
   fore, we look to the decisions of the Supreme Court of Louisiana, and, in the
   absence of on-point caselaw, “must make an Erie guess.” Six Flags, Inc. v.
   Westchester Surplus Lines Ins. Co., 565 F.3d 948, 954 (5th Cir. 2009).
           Under Louisiana law, an “insurance policy is a contract between the
   parties and should be construed by using the general rules of interpretation
   of contracts set forth in the Louisiana Civil Code.” Cadwallader v. Allstate
   Ins. Co., 848 So. 2d 577, 580 (La. 2003). The insured party bears the burden
   “to prove the incident falls within the policy’s terms.” Doerr v. Mobil Oil
   Corp., 774 So. 2d 119, 124 (La. 2000).
           Words in a contract are normally interpreted according to their “gen-
   erally prevailing meaning,” but “[w]ords of art and technical terms” are
   given their “technical meaning when the contract involves a technical mat-
   ter.” La. Civ. Code art. 2047 (2021); see also Cadwallader, 848 So. 2d
   at 580 (stating that article 2047 applies to insurance policies). “An insurance
   policy . . . should not be interpreted in an unreasonable or strained manner so
   as to enlarge or to restrict its provisions beyond what is reasonably contem-
   plated by its terms or so as to achieve an absurd conclusion.” Whitehead v.
   Curole, 277 So. 3d 409, 414 (La. Ct. App. 2019).
           Where a policy is ambiguous, it is “generally construed against the
   insurer and in favor of coverage.” Cadwallader, 848 So. 2d at 580 (citing La.
   Civ. Code art. 2056 (2021)). 2 A policy provision is ambiguous only if it “is

           2
              See also Pioneer Expl., L.L.C. v. Steadfast Ins. Co., 767 F.3d 503, 512–13 (5th Cir.
   2014) (“If the insurance contract terms are ambiguous, these ambiguities are generally
   strictly construed against the insurer and in favor of coverage.”); La. Ins. Guar. Ass’n v.
   Interstate Fire & Cas. Co., 630 So. 2d 759, 764 (La. 1994) (“If after applying the other gen-
   eral rules of construction an ambiguity remains, the ambiguous contractual provision is to
   be construed against the drafter, or, as originating in the insurance context, in favor of the

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                                         No. 20-30140
                                       c/w No. 20-30175
   susceptible to two or more reasonable interpretations.” Id. Courts may not
   “authorize a perversion of the words or the exercise of inventive powers to
   create an ambiguity where none exists . . . when the terms express with
   sufficient clearness the parties’ intent.” Whitehead, 277 So. 3d at 414–15.
           Where “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.” Sims v. Mulhearn Funeral
   Home, Inc., 956 So. 2d 583, 590 (La. 2007). Where there is an ambiguity in
   the policy, however, “the court may look to extrinsic evidence to determine
   the parties’ intent.” Doerr, 774 So. 2d at 124. “Each provision . . . must be
   interpreted in light of the other provisions so that each is given the meaning
   suggested by the contract as a whole.” La. Civ. Code art. 2050 (2021).

                                               III.
           The sole issue is whether the flood deductible is ambiguous. 3 It is.

                                               A.
           The insurance policy originally valued the project and insured it for
   $76,086,833. That amount was increased, via multiple endorsements, to
   $86,086,833. The deductibles, sub-limits, and term aggregate limits, how-
   ever, remained unchanged from the original policy. As relevant here, the
   policy included a term aggregate limit of liability, confining the amount that

   insured.”).
           3
             McDonnel presents the issues differently, breaking out essentially the same ques-
   tion into three issues: whether the district court erred by concluding that the flood deduc-
   tible was clear and unambiguous; whether the court erred in failing to find that the deduc-
   tible was unambiguous in favor of McDonnel and Jung’s interpretation; and whether the
   court erred by failing to find that the deductible was ambiguous. But those questions boil
   down to a core issue—whether the district court’s determination that the flood deductible
   was unambiguous was correct under Louisiana law.

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                                           No. 20-30140
                                         c/w No. 20-30175
   the insured parties could claim from flood damage to $10,000,000. 4 The
   policy also included a deductible for flood damage of “5% of the total insured
   values at risk at the time and place of loss subject to a $500,000 minimum
   deduction as respects as respects [sic] FLOOD*.”

                                                B.
           The correct deductible amount, and thus the millions of dollars at
   stake, hinge on the correct interpretation of “5% of the total insured values at
   risk.” McDonnel contends that, because of the flood sub-limit, “the maxi-
   mum amount that an insured . . . could ever recover for a claim arising from
   flood damage is $10 million.” Thus, “the total amount insured”—the “total
   insured values at risk”—for flood damage was limited to $10,000,000.
   Under the plaintiffs’ interpretation, 5 therefore, the deductible is $500,000. 6
           The insurers, to the contrary, assert that the deductible is much
   higher. In their view, the term “total insured values” refers to the value of
   the entire project: $68,869,506. 7 Because the deductible for the flood sub-
   limit is 5% of the total insured value, the deductible is $3,443,475. 8
           The difference in interpretations reduces, in large part, to the inter-
   pretation of a key sentence of the flood deductible. Essentially, the plaintiffs
   read the deductible as saying “5% of the total insured values at risk . . . as

           4
              The policy states that “[T]he maximum amount this Company will pay for loss
   or damage . . . in any one policy term shall not exceed the following amounts for loss caused
   by the following perils . . . $10,000,000 by the peril of FLOOD* – Term Aggregate.”
           5
               Jung makes a similar argument regarding the correct deductible.
           6
               $500,000 is both 5% of $10,000,000 and the minimum deductible per the policy.
           7
            The insurers calculate that amount because the entire project value was
   $86,086,883, and the project was 80% complete at the time of the flood. So 80% of
   $86,086,883 is $68,869,506.
           8
               So 5% of $68,860,506 is $3,443,475.

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                                     No. 20-30140
                                   c/w No. 20-30175
   respects FLOOD,” and the insurers read the provision as “5% of the total
   insured values at risk at the time and place of loss, subject to a $500,000 mini-
   mum deduction . . . as respects FLOOD.” In other words, under the
   plaintiffs’ theory, “as respects FLOOD” modifies “total insured values at
   risk.” Under the insurers’ theory, “as respects FLOOD” pertains only to
   the “$500,000 minimum deduction.” Both parties’ interpretations are rea-
   sonable, so the policy is ambiguous. See Cadwallader, 848 So. 2d at 580.

                                          C.
          The plaintiffs rely heavily on Terra-Adi International Dadeland, LLC
   v. Zurich American Insurance Co., No. 06-22380-CIV-HUCK/SIMONTON,
   2007 WL 675971 (S.D. Fla. Mar. 1, 2007). In Terra-Adi, the district court
   interpretated a policy provision similar to the one here. It included a sub-
   limit of $10,000,000 for damage from windstorms and stated the following
   deductible: “5% of the total insured values at risk at the time and place of loss
   subject to a minimum deduction of $250,000, as respects the peril of
   WINDSTORM.” Id. at *3.
          The court in Terra-Adi determined that the insured’s interpretation
   of the policy was reasonable: Because the $10,000,000 sub-limit was the
   maximum total insured value at risk for windstorms, the correct deductible
   calculation was 5% of $10,000,000 instead of the insured value of the entire
   project. See id. The court observed that the insurer’s contention that the
   term “total insured values at risk” referred to “the aggregate value of physi-
   cal property insured under the [policy]—not merely the value of the property
   insured against the peril of windstorm”—was a “different, but also reasona-
   ble” interpretation. Id. at *4. Florida law, like Louisiana law, commands that
   where “more than one interpretation of a policy provision is possible, [the
   court] must resolve the ambiguity against the insurer who drafted the lan-
   guage of the insurance contract.” Id. at *2 (citing Allstate Ins. Co. v. Swain,

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                                            No. 20-30140
                                          c/w No. 20-30175
   921 So. 2d 717, 719 (Fla. Dist. Ct. App. 2006)). Thus, the court granted
   summary judgment to the insured party. See id. at *5. Interpreting a nearly
   identical deductible, we determine that the language is ambiguous here too.
           The insurers do not contest that Terra-Adi is directly on point and
   supports the plaintiffs’ interpretation. Instead, the insurers minimize the
   import of that ruling, characterizing it as “an unreported opinion from the
   Southern District of Florida handed down over thirteen years ago” and cor-
   rectly noting that it is not binding. Moreover, the insurers contend that
   Terra-Adi is an outlier even within its own jurisdiction, pointing to El-Ad
   Enclave at Miramar Condominium Association Inc. v. Mt. Hawley Insurance Co.,
   752 F. Supp. 2d 1282 (S.D. Fla. 2010). But that case involved policy language
   different from the policy here. 9 Indeed, another opinion highlighted the dif-
   ference between the policy language in Terra-Adi and in El-Ad, observing,
   “Terra-ADI did not involve the same language at issue . . . in El-Ad.” Arbor
   Keys Condo. Ass’n, Inc. v. Mt. Hawley Ins. Co., No. 10-62008-CIV-
   SEITZ/SIMONTON, 2011 WL 13097298, at *8 n.7 (S.D. Fla. Oct. 6, 2011).
           The insurers also point to Castle Oil Corp. v. Ace American Insurance
   Co., 137 A.D.3d 833 (N.Y. App. Div. 2016). In that case, the court also deter-
   mined whether to calculate a policy deductible as a percentage of a sub-limit
   or, instead, of a broader, aggregate amount at risk. See id. at 834–37. The
   policy “provided that ‘2% of the total insurable values at risk per location
   subject to a minimum of $250,000’ would be deducted from each adjusted
   claim arising out of a flood ‘occurrence.’” Id. at 834. The court concluded
   that the deductible should not be calculated based on 2% of the relevant sub-
   limit because “the average insured could have only one reasonable expec-

           9
             In El-Ad Enclave, 752 F. Supp. 2d at 1288, the relevant policy provision stated
   that “the ‘peril deductible’ is $10,000 per occurrence for all ‘covered perils,’ except
   ‘3.00% of total values at risk Per Building . . . at the time of loss for Winstorm [sic] or Hail.”

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                                         c/w No. 20-30175
   tation as to the meaning of the phrase ‘total insurable values at risk,’ namely,
   its own risk of loss and damage.” Id. at 837. The insurers urge the same
   interpretation and outcome here.
           McDonnel, on the other hand, emphasizes that the policy language in
   Castle Oil used the term “total insurable values at risk,” but the policies in
   Terra-Adi and here used the term “total insured values at risk.” McDonnel
   correctly points out that this court has acknowledged that those terms may
   have different meanings.            See Saratoga Res., Inc. v. Lexington Ins. Co.,
   642 F. App’x 359, 362 (5th Cir. 2016) (per curiam). 10 The plain meaning of
   the terms also suggests a difference—“insurable values” is the total value
   that the insurance could have insured, and “insured values” is the total value
   for which the insured actually purchased coverage. 11 Moreover, unlike the
   policy here, the policy in Castle Oil did not include a modifier comparable to
   “as respects flood.” Thus, McDonnel is correct that the present policy is
   meaningfully different from the policy in Castle Oil. 12

           10
             Saratoga Resources suggests, 642 F. App’x at 362, that there may be a difference
   between “total insurable values” and “total insured values.” The court noted that the
   insured asked the court to interpret the terms “insurable” and “insured” as having the
   same meaning. Id. The court “[p]ut[] aside” the question of whether the terms had the
   same meaning, leaving open the possibility that they are meaningfully different. See id.
           11
              Cf. Castle Oil, 137 A.D.3d at 836–37. “[I]n deciding how much coverage to seek,
   a primary concern of the average insured is the value of what is at risk . . . . How much
   insurance the average insured chooses to obtain is not the same as the ‘total insurable values at
   risk.” Id. (emphasis added).
           12
              The insurers also cite Beverly Hills Condominium 1-12, Inc. v. Aspen Specialty
   Insurance Co., No. 06-60980-CIV, 2007 WL 1183939 (S.D. Fla. Feb. 1, 2007). The policy
   in that case is distinguishable for the same reasons as is the policy in Castle Oil, using the
   term “total insurable values.” Id. at *2. Moreover, the policy in Beverly Hills Condominium
   explicitly defined the term “insurable values at risk” to include all the property at risk
   instead of individual units. Id. at *4. The policy here omits such a definition.

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                                               D.
           “An insurance contract is to be construed as a whole and each provi-
   sion in the contract must be interpreted in light of the other provisions.”
   Sims, 956 So. 2d at 589. The rest of the policy sheds little light on the deduc-
   tible in question. Outside of the deductibles provision, the term “total
   insured value” appears only twice. Both times, it refers to the value of the
   project. That lends some credence to the insurers’ interpretation of the
   deductible, although the fact that the “as respects flood” modifier is absent
   in the other uses of the term still leaves the meaning unclear.
           Furthermore, the term “total insured values” is not included in the
   definitions section of the policy. Instead, that section includes a definition
   for the “Total Contract Value”—the “total value of all property insured . . .
   which will become part of or will be expended in the project.” That term, in
   contrast to “total insured values,” appears frequently throughout the policy.
   The predominant use of “Total Contract Value” to denote the value of the
   entire project indicates that the policy, read in its entirety, does not provide
   clarity regarding the term “total insured values at risk . . . as respects flood.”

                                                E.
           Both the plaintiffs and the insurers contend that, unless the deductible
   is read according to their respective interpretation, absurd results would
   ensue. Under Louisiana law, “an insurance policy . . . should not be inter-
   preted in an unreasonable or strained manner . . . so as to achieve an absurd
   conclusion.” Whitehead, 277 So. 3d at 414. 13
           McDonnel asserts that the insurers’ interpretation would lead to

           13
             See also Six Flags, 565 F.3d at 954. Under Louisiana law, where “the words of a
   contract are clear and explicit and lead to no absurd consequences, no further interpretation
   may be made in search of the parties’ intent.” Id. (quoting La. Civ. Code Ann.
   art. 2046) (emphasis added).

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                                          No. 20-30140
                                        c/w No. 20-30175
   absurd results because, although the flood sub-limit was fixed at
   $10,000,000, the total project coverage amount increased 8%, causing the
   flood deductible to increase while the amount covered for floods remained
   static. McDonnel points out that, theoretically, it would be possible for the
   flood deductible to exceed the sub-limit. 14 That result does seem at least
   inequitable, if not absurd. 15
           The insurers, on the other hand, point out that under the plaintiffs’
   interpretation, $500,000 is both the minimum and the maximum deductible
   for flood damage. The insurers aver that that result is problematic because
   the policy states that $500,000 is the minimum deductible. But, because 5%
   of the $10,000,000 sub-limit is also $500,000, that amount is both the mini-
   mum and maximum deductible under the plaintiffs’ theory.
           The insurers’ contention that the deductible is absurd would be
   stronger if the sub-limit were less than $10,000,000 with the plaintiffs con-
   tending that the minimum deductible was higher than any theoretical maxi-
   mum. But setting $500,000 as both the minimum and the maximum deduc-
   tible is not absurd—it merely means that $500,000 is the deductible.
   Moreover, McDonnel points out that, early in the project, there may have
   been less than $10,000,000 in covered property. Thus, it is likely that 5% of
   the total insured values would have been less than the $500,000 minimum
   for some duration of the project.

           14
             That eclipse would occur if the total project coverage reached $200,000,000
   because 5% of $200,000,000 is $10,000,000, the amount of the sub-limit.
           15
               Cf. Penthouse Owners Ass’n v. Certain Underwriters at Lloyds, London, 612 F.3d
   383, 387 (5th Cir. 2010) (“The purpose of a deductible is to shift some of the insurer’s risk
   (that is, covered risk), to the insured, which is accomplished by setting a limit on the value
   of covered losses below which the insurer is not obligated to pay.” (emphases added)).

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                                               IV.
           The parties introduce extrinsic evidence to support their respective
   policy interpretations.

                                               A.
           Extrinsic evidence is admissible to resolve a contractual ambiguity
   under Louisiana law. See Bd. of Supervisors of La. State Univ. v. 2226 Canal
   St., L.L.C., 262 So. 3d 909, 914. (La. Ct. App. 2018). McDonnel points to
   correspondence from its insurance broker informing it “that the deductible
   for flood would be $500,000.00.” Jung points to similar correspondence
   from the broker, both before and after the parties contracted. The insurers,
   on the other hand, introduce three pieces of extrinsic evidence, including
   “Binders” that were issued before the final policy was signed. 16
           The district court determined that the policy was unambiguous and
   did not analyze any extrinsic evidence in interpreting the policy. Thus,
   because we conclude that the policy was ambiguous, we remand for the dis-
   trict court to determine whether extrinsic evidence resolves the ambiguity.
   See, e.g., Six Flags, 565 F.3d at 961 n.16.

                                               B.
           On remand, the district court should also determine whether the pre-
   sumption in favor of coverage in the case of an ambiguity applies here. That
   presumption is not automatic, and “under Louisiana law, the presumption
   [in favor of the insured] does not apply where the insured is a sophisticated
   commercial entity that itself drafts or utilizes its agents to secure desired

           16
              The timing of the extrinsic evidence could be significant: “Parol evidence should
   only be used to determine the intentions of the parties at the time the contract was made,
   not after the fact.” Stewart Enters. v. RSUI Indem. Co., 614 F.3d 117, 124 (5th Cir. 2010)
   (per curiam).

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   policy provisions.” Id. at 958. 17 It is uncertain from the briefing whether the
   plaintiffs fall into that exception to the presumption, and we indicate no view
   on whether their level of sophistication or any involvement in negotiating the
   policy satisfies the exception.

           The policy is ambiguous. The summary judgment is REVERSED
   and REMANDED. We set no limits on what proceedings the district
   court should conduct on remand, and we do not mean to intimate what deci-
   sions it should reach.

           17
              See also Certain Underwriters at Lloyds London v. Perraud, 623 F. App’x 628, 631
   (5th Cir. 2015) (noting that most courts, including courts interpreting Louisiana law, take
   a “middle ground, deeming the exception [to the presumption in favor of the insured]
   triggered where the insured—or a broker acting on the insured’s behalf—actually negoti-
   ates, drafts, or proposes portions of the policy.”).

                                               14