Court Opinion

ID: 65109
Source: CourtListenerOpinion
Date Created: 2010-04-26 05:42:47+00
Date Added: 2024-06-11T17:20:36.685851
License: Public Domain

IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                 FILED
                                                                           March 16, 2009

                                       No. 08-30064                    Charles R. Fulbruge III
                                                                               Clerk

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

       *
         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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .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.
                                  No. 08-30064

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

                                           2
                                 No. 08-30064

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).

                                       3
                                  No. 08-30064

                               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 consent-
to-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

                                         4
                                       No. 08-30064

        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

        1
         Danrik did not cite Babst or raise this issue in connection with Insurers’ consent-to-
settle argument, and therefore it is arguably waived. Regardless, this case is dissimilar to
Babst, as we discuss.

                                              5
                                       No. 08-30064

the claims and attempted to settle them, and Danrik did not have any
immediate risk of losing money if it did not settle.2 Danrik concedes that the
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

       2
         Indeed, Danrik presented little evidence to suggest that it had to act quickly to avoid
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
                                  No. 08-30064

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.

                                        7