Joslyn Mfg. Co. v. Liberty Mut. Ins. Co. ( 1994 )

United States Court of Appeals,
Fifth Circuit.
No. 93-5563.
JOSLYN MANUFACTURING COMPANY, Plaintiff-Appellant,
v.
LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Appellee.
Sept. 2, 1994.
Appeal from the United States District Court for the Western
District of Louisiana.
Before REYNALDO G. GARZA, SMITH and PARKER, Circuit Judges.
REYNALDO G. GARZA, Circuit Judge:
Joslyn Manufacturing Company ("Joslyn") filed this action for
declaratory judgment seeking to enforce an insurance policy with
Liberty Mutual Insurance Company ("Liberty"). The policy would
obligate Liberty to defend and indemnify Joslyn against Louisiana
Department of Environmental Quality ("DEQ") Compliance Orders
directing Joslyn to investigate and remediate environmental damage
at Joslyn's former wood treatment plant in Bossier City, Louisiana.
Joslyn seeks reimbursement for its past defense costs, indemnity of
its past clean-up costs, and a declaration that Liberty must pay
Joslyn's future defense and clean-up costs. For the following
reasons, we affirm the district court.
FACTS
Joslyn purchased the Lincoln Creosoting Plant in Bossier City
on July 24, 1950, where it treated wood with creosote. It operated
the facility until 1969 when it sold the plant to Koppers, Inc. on
December 1, 1969. Joslyn has been a Liberty Mutual insured since
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1945. From 1962 through 1969 the creosote plant was an insured
location under Joslyn's policies with Liberty. Neither party can
locate any of the pre-1962 liability policies between Joslyn and
Liberty.
In 1985, the DEQ began studying the old Lincoln Creosoting
Plant site. On October 14, 1985, a report was issued to the DEQ
that found the soil at the site, as well as an extremely high
probability of the groundwater, to be contaminated. On December 6,
1985, the DEQ sent Joslyn an information request concerning the
site, and Joslyn responded on February 7, 1986. On August 2, 1986,
the DEQ issued a compliance order finding that Joslyn and twelve
other parties were subject to liability for clean-up and remedial
costs, and ordered the parties to submit an approved clean-up plan
for the site. This order was stayed because of requests for a
hearing. The August 2, 1986 DEQ Compliance Order was amended on
December 17, 1987.
Joslyn first advised Liberty of the DEQ's actions on May 19,
1987, and on June 23, 1987. Liberty denied coverage by letter of
March 30, 1989. This suit seeking declaratory judgment ensued.
On July 8, 1993, United States District Judge Tom Stagg issued
a Memorandum Ruling, 836 F. Supp. 1273. In it the court found that
Liberty had no duty to indemnify Joslyn because Joslyn failed to
comply with the "immediate notice" condition precedent by waiting
nine months before giving notice of an August 2, 1986 DEQ
Compliance Order asking Joslyn to submit a letter to the DEQ
stating whether it would voluntarily investigate and remediate the
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contamination at the property. The court further held that Liberty
had no duty to defend Joslyn because the Compliance Order directing
Joslyn to investigate and clean up the property was not a "suit."
Finally, the court struck the affidavit of Philip Gehrke, Joslyn's
Risk Manager from 1947 to 1983, regarding the missing insurance
policies for 1950 to 1962. Joslyn has timely appealed.
DISCUSSION
This case is subject to a de novo review by this court.
Fritiofson v. Alexander, 772 F.2d 1225, 1239 (5th Cir.1985). The
pertinent portions of the insurance contract provided:
As respects the insurance afforded by the other terms of this
policy the company shall:
(a) defend any suit against the insured alleging such injury,
sickness, disease or destruction and seeking damages on
account thereof, even if such suit is groundless, false
or fraudulent.
The "Conditions" section of the Liberty policies stated:
NOTICE OF CLAIM OR SUIT If claim is made or suit is brought
against the insured, the insured shall immediately forward to
the company every demand, notice summons or other process
received by him or his representative.
ACTION AGAINST COMPANY No action shall lie against the
company unless, as a condition precedent thereto, the insured
shall have fully complied with all the terms of this policy,
nor until the amount of the insured's obligation to pay shall
have been finally determined either by judgment against the
insured after actual trial or by written agreement of the
insured, the claimant and the company.1
Appellant Joslyn argues that the trial court erred in ruling
1
This language is from a 1962 policy issued to Joslyn.
Liberty Mutual has stated that the language used in the 1962
policy is similar to the language in the 1963-1969 policies,
unless specifically noted. See Liberty Mutual's post-trial brief
at p. 6, fn. 2. Joslyn has not contested this statement.
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that they forfeited their insurance coverage because they failed to
immediately notify Liberty of the August 2, 1986 DEQ Compliance
Order, as was required by the insurance contract. Joslyn asserts
that the August 2, 1986 DEQ order was not a claim or suit which
triggers their duty to provide immediate notice to Liberty.2
Appellant states that the DEQ Compliance Order asked it only to
submit a letter stating whether it would voluntarily address the
contamination. Joslyn and the other respondents declined and
exercised their right to request a hearing. On May 19, 1987,
Joslyn gave notice of the potential "future claim" when it was
unclear what the DEQ would do. They then gave notice again on June
23, 1987, when it expected the DEQ to enter an amended Compliance
Order directing the work to begin. When the DEQ served Joslyn with
the amended order on December 17, 1987, Joslyn promptly sent it to
Liberty on December 31, 1987. Therefore, Joslyn contends that it
was only this amended letter that triggered their duty to notify
Liberty, of which Joslyn gave timely notice, and that the district
court erred in finding that the notice was late. We disagree.
The August 2, 1986 Compliance Order stated that Joslyn was
subject to liability for clean-up and remedial costs, and ordered
2
The district court notes the incongruent position advanced
in the early stages of the trial, where Joslyn admitted that the
August 2, 1986 order was a claim when attempting to engage
Liberty's duty to defend (as well as reimburse any expenses
already incurred). See Memorandum Ruling p. 7 fn. 2. Joslyn has
apparently restructured its argument to allege that the August 2,
1986 DEQ Order was not a claim or suit which would trigger the
duty to defend, and asserts that no claim or suit occurred until
the Amended Compliance Order of December 17, 1987, of which
Liberty was immediately notified.
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it to submit an approved clean-up plan for the site. The August 2,
1986 Compliance order is substantially equivalent to the Amended
Compliance Order dated December 17, 1987, which Joslyn agrees is a
claim. This court concludes that this order was, at least, a claim
which triggers Joslyn's contractual obligation to provide Liberty
with immediate notice thereof as an express condition precedent to
coverage. Joslyn waited nine months before providing Liberty with
the requisite notice, thereby committing a material breach of a
condition precedent to coverage under the policy. We next address
the consequences of this late notice on the rights and liabilities
of the parties to the contract.
Joslyn suggests that, even if they were late in providing
Liberty with notice, Louisiana law interprets this clause to
require "reasonable" notice to allow the insurer to adequately
prepare a defense. Joslyn claims that they were reasonable in
their conduct. Furthermore, Joslyn asserts that Liberty suffered
no prejudice from any delay, and therefore should not be relieved
from extending coverage to Joslyn. Appellant claims that Liberty
had a full opportunity to participate in Joslyn's defense and to
protect itself, but chose to do nothing and let Joslyn bear the
costs of the defense.3
In holding that prejudice was not a factor to consider in
policies where notice was a condition precedent to coverage, the
3
Moreover, Joslyn points out, Liberty never claimed
prejudice in its reasons for claim denial, and should be barred
under waiver principles from raising this defense on appeal.
Liberty Mutual did not waive this defense, as it properly raised
it in its answer.
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district court relied on three relatively recent Fifth Circuit
opinions: Peavey Co. v. Zurich Insurance Company, 971 F.2d 1168
(5th Cir.1992); Auster Oil & Gas, Inc. v. Stream, 891 F.2d 570
(5th Cir.1990); and MGIC Indemn. Corp. v. Central Bank of Monroe,
La., 838 F.2d 1382 (5th Cir.1988). "The rule in Louisiana is that
where the requirement of timely notice is not an express condition
precedent, the insurer must demonstrate that it was sufficiently
prejudiced by the insured's late notice." Peavey, 971 F.2d at
1173. But where prompt notice of a covered occurrence is a
"condition precedent" to recovery under an insurance policy, and
the insured fails to give such notice, the claim is no longer
covered by the policy, regardless of whether the insurer can
demonstrate prejudice. MGIC, 838 F.2d at 1385-87. In the present
case, timely notice was an express condition precedent to coverage.
In MGIC, we held that the words "condition precedent" mean exactly
what they say, and failure to comply with the provision precludes
coverage. Id. at 1385.
Notably, this court's decision in MGIC neglected to discuss
a Louisiana Supreme Court opinion disposing of a substantially
similar issue. The Louisiana Supreme Court has rejected the view
that a non-prejudicial delay in notice breaches a "condition
precedent" on similar facts to those presented here. In Jackson v.
State Farm Mut. Auto. Ins. Co., 211 La. 19, 29 So. 2d 177 (1946),
the court reversed an intermediate appellate court decision which
relieved an insurer of its obligations under a "condition
precedent" analysis even though the insurer received notice soon
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enough to defend the claim. The Louisiana Supreme Court held that
all the facts and circumstances must be considered in "balancing
the equities" in late notice cases, including "what prejudice to
the insurance company's defense has been caused by the delay...."
Id., 29 So.2d at 179.
In requiring the parties to live by the express terms of the
contract they freely entered, the MGIC court distinguished those
cases which have required a showing of prejudice to balance the
equities where the policy holders were consumers unlikely to be
conversant with all the fine print of their policies. MGIC, 838
F.2d at 1387. This court then reasoned that "strict adherence to
the terms of the notice provision would result too harshly against
unsophisticated consumers and so have required the insurance
companies, in order to bar recovery under the policies, to
demonstrate that prejudice had resulted from the lack of notice."
Id. The equitable rationale does not apply so strongly where both
parties are sophisticated businesses, which are expected to be
conversant with the terms of their contracts. Id.
Our factual scenario requires us to distinguish Jackson and
follow the precedent laid down in MGIC. Unlike the instant case,
the insured in Jackson had reasonable grounds to believe that no
claim would be made until the demand was made upon him. Jackson,
29 So. 2d at 177, 179. Additionally, the insured was only
eighty-two days tardy in providing the necessary notice, id. at
177, as opposed to Joslyn's nine month delay. And finally, the
court in Jackson was painstakingly trying to protect the average
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citizen who purchases a public liability policy without becoming
familiar with its detailed provisions, but simply puts it away
against the day when a claim may be made against him. Id. at 178.
Moreover, the claim in Jackson was brought by an injured third
party against the insurance company. This court adopted the same
prejudice inquiry for claims brought pursuant to the Louisiana
Direct Action Statute. See Auster, 891 F.2d at 578 (holding
non-prejudicial delay in notice could not bar recovery by third
party claimant under statute). Such is not the case before us.
Joslyn is not a third party claimant, but a sophisticated business
entity. Consequently, these equitable exceptions do not weigh in
their favor.
In MGIC this court held that the insurer is not compelled to
prove prejudice where timely notice is a condition precedent to
coverage for a sophisticated business entity:
Much of the debate between [the parties] at both the trial and
appellate level concerns whether this language negates MGIC's
obligation to demonstrate prejudice resulting from lack of
notice. We hold that the language stating that compliance
with this provision is a condition precedent to recovery under
the policy means exactly what it says, and that if Central
failed to comply with this provision by not giving MGIC timely
notice of the claim made, then the claim will not be covered
under the policy, regardless of whether MGIC can demonstrate
prejudice.
MGIC, 838 F.2d at 1386. It is well established under Louisiana law
that:
The courts may not make a contract for the parties. Their
functions and duties consist simply in interpreting and
enforcing the agreement as actually made. It is self-evident
that a failure to restrict the rights of an injured person to
the terms and conditions of the insurance contract would
expose the insurer to liability far and beyond the scope of
the contract.
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... To allow recovery in the absence of compliance of these
provisions of the contract would be unreasonable and
inequitable, and would establish a dangerous precedent,
inviting obvious instances of abuse.
Id. (citing Hallman v. Marquette Cas. Co., 149 So. 2d 131, 135-36
(La.Ct.App.1963)). Under these facts, a nine month delay
constitutes a material breach of the condition precedent of
immediate notice. MGIC instructs us that prejudice need not enter
the calculation.
Appellant asks us to limit MGIC to the facts of that case,
where the notice came after trial had already concluded causing
obvious prejudice to the insurance company. However, this court
enunciated its broad holding in MGIC even after recognizing the
opportunity to limit the decision to the narrow facts before it.
"... Hallman is strong support for the proposition that MGIC was
prejudiced as a matter of law when Central failed to notify it of
the suit until after final judgment. We need not decide the case
before us on that basis, however, since we hold that the express
contractual provision requiring notice as a condition precedent
should be given its full effect." MGIC, 838 F.2d at 1386 n. 2. We
are bound by our precedent in MGIC.
Appellant alleges error committed in the lower court by
holding that the DEQ Compliance Order was not a "suit" which
Liberty was obligated to defend under its policies. Further,
appellant claims that by excluding portions of the affidavit of
Joslyn's former Risk Manager and in concluding that Joslyn failed
to meet its burden in proving the terms and conditions of the
missing liability policies covering Joslyn from 1952 to 1962, the
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district court committed reversible error. However, we need not
reach these subsequent issues since Joslyn did not fully comply
with the express terms of the conditions precedent in the contract.
CONCLUSION
In this case we find that a claim was made, at the latest,
when Joslyn received the August 2, 1986 DEQ Compliance Order.
Timely notice was then due Liberty. Thus, when Joslyn waited nine
months to notify Liberty, it violated the condition precedent of
timely notice, and therefore its untimely claim is not within the
policy's coverage. We will not disregard the express language of
the insurance contract, and ignore the condition precedent notice
requirement to effectively rewrite the contract to expand coverage
for Joslyn. The appellant's motion to certify this question to the
Louisiana Supreme Court is DENIED, and the judgment of the district
court is
AFFIRMED.
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