XL Specialty Insurance v. Bollinger Shipyards Lockport LLC , 76 F. App'x 536 ( 2003 )

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS September 10, 2003
For the Fifth Circuit
Charles R. Fulbruge III
Clerk
No. 02-30387
XL SPECIALTY INSURANCE COMPANY,
Plaintiff-Appellee-Cross-Appellant,
VERSUS
BOLLINGER SHIPYARDS LOCKPORT LLC,
Defendant-Appellant-Cross-Appellee.
NAVIGATORS INSURANCE COMPANY, INC.
Plaintiff-Appellee-Cross-Appellant,
VERSUS
BOLLINGER SHIPYARDS LOCKPORT LLC,
Defendant-Appellant-Cross-Appellee.
Appeals from the United States District Court
For the Eastern District of Louisiana
(01-CV-623)
Before HIGGINBOTHAM, EMILIO M. GARZA, and DENNIS, Circuit Judges.
1
PER CURIAM:*
These consolidated declaratory judgment actions sounding in
diversity were brought by the primary and excess general liability
insurers of a Louisiana shipbuilding company. The insurers seek a
declaration that they are not obliged to pay certain repair costs
or loss of profits or use paid by the shipbuilder to its customers.
In counterclaims, the shipbuilder seeks approximately $7 million in
coverage. The district court granted summary judgment for the
insurers but ordered each party to bear its own costs. All parties
appealed. We now AFFIRM summary judgment, VACATE the denial of
attorney fees and costs, and REMAND for further proceedings
consistent with Part IV of this opinion.
I.
Bollinger Shipyards Lockport, LLC (“Bollinger”), built three
lift boats for Cardinal Services (“Cardinal”) under a “Vessel
Construction Agreement.”1 It built one lift boat for Montco, Inc.
(“Montco”), under a “Construction Contract.” These contracts
warrantied workmanlike performance but limited Bollinger’s
obligation to repair and replace defects to those problems arising
from faulty workmanship discovered within 180 days of delivery and
*
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opinion should not be published and is not precedent except under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.
1
A liftboat is a supply vessel equipped with three or four
hydraulic “jack-up” legs, which can be lowered and secured on the
seabed so that the boat can be raised out of the water.
2
reported to Bollinger within 180 or 210 days of delivery.2 The
agreements expressly disclaimed any obligation on the part of
Bollinger for consequential damages, including loss of profits
and/or use. The Cardinal contract stated that the warranty was “in
lieu of all other express or implied warranties.” The Montco
contract stated that all other warranties by Bollinger were
“expressly excluded and negated.”
The three lift boats that Bollinger built for Cardinal under
the “Vessel Construction Agreement” are the J. HANKINS, the W.
LOPEZ, and the P.G. JONES.3 The boat built for Montco under the
“Construction Contract” is the TAMMY. The TAMMY was completed on
May 15, 1997; the J. HANKINS on June 12, 1997; the W. LOPEZ on
January 15, 1998; and the P.G. JONES on February 27, 1998.4
On July 27, 2000, a crew member of the P.G. JONES noticed
water seeping from one of the vessel’s jack-up legs. The boat was
taken to a Bollinger facility, where further inspection revealed
cracks in each of its legs. Bollinger began repairs on August 1,
2000. The parties do not dispute that it was quickly determined
2
Montco’s contract with Bollinger gave it 180 days to report
defects. Cardinal’s contract gave it 210 days.
3
The J. HANKINS has a benighted history. It was launched as the
D.L. HANSEN, capsized, and was launched again as the J. HANKINS.
During its post-capsize repair, one of its legs was replaced.
4
The parties do not identify the precise dates on which each
vessel was delivered. In the absence of any suggestion to the
contrary, we assume that each vessel was delivered close to the
date of its completion.
3
that Bollinger had performed faulty welds during the original
construction of the vessels; that the defective welding had, at
some point, resulted in cracks in the gear racks attached to the
legs; and that this cracking had propagated into the legs. The W.
LOPEZ, the J. HANKINS, and the TAMMY were subsequently inspected
and discovered to have similar cracks.5 Bollinger began repairs on
the J. HANKINS on August 14, 2000. In a letter dated August 19,
2000, Bollinger informed Cardinal that it was “ready, willing, and
able” to repair “weld cracking” on the W. LOPEZ. Ultimately,
Bollinger replaced a total of ten legs on four vessels, at a cost
of approximately $4.5 million.
Bollinger owned a comprehensive general liability (“CGL”)
policy issued by XL Specialty Insurance (“XL Specialty”) that
provided coverage between July 1, 2000, and October 1, 2001. The
policy provided primary liability coverage for sums that Bollinger
became “legally obligated to pay as damages” because of “property
damage” that was caused by an “occurrence” during the policy
period. It further provided that XL Specialty had “the right and
duty to defend any ‘suit’ seeking these damages,” defining “suit”
as “a civil proceeding in which damage because of ‘bodily injury,’
‘property damage,’ ‘personal injury’ or ‘advertising injury’ to
which this insurance applies are alleged.”
5
The cracks in the J. HANKINS were discovered on August 13,
2000; those in the W. LOPEZ on August 18, 2000; and those in the
TAMMY on September 18, 2000.
4
Bollinger also purchased $25 million worth of excess CGL
coverage for the policy period October 1, 1999, to October 1, 2001.
The excess coverage was subscribed to by XL Specialty, Navigators
Insurance Company, Inc. (“Navigators”), and National Union Fire
Insurance Company.6 This umbrella policy also covered sums that
Bollinger became “legally liable to pay.” Its terms were
essentially identical to those of the primary coverage.
On August 18, 2000, Bollinger’s insurance agent, Willis of
Louisiana, Inc. (“Willis”), notified XL Specialty’s managing
general partner, Trident Marine Managers, Inc. (“Trident”), of a
new CGL claim involving vessels Bollinger had built for Cardinal
and Montco. On August 30, 2000, Willis sent a notice of loss to
Trident. The notice stated that four vessels built by Bollinger
had “sustained cracks in some of the legs” sometime “after
10/1/98.” It did not identify any related claims, demands, or
suits. On August 31, 2000, Willis informed Trident that Bollinger
had begun to repair the vessels because it believed it bore
responsibility for the damages: “Bollinger has investigated the
matter and . . . feels responsible for the damages.”
On September 18, 2000, Cardinal issued a written demand to
Bollinger relating to Bollinger’s “breach of its vessel
construction contracts.” The demand letter specifically stated
6
Navigators provided 50% of the excess coverage; XL Specialty
provided 30%; and National Union provided 20%. National Union is
not a part of these proceedings.
5
that Cardinal’s remedies against Bollinger lay “in contract rather
than in tort.”
At some point, Montco’s president told Bollinger’s chairman
that his company expected the shipbuilder to pay for repairs to the
TAMMY, as well as for its downtime. According to the testimony of
Montco’s president, Bollinger’s chairman agreed to the demand, even
though he questioned his company’s obligation to do so under the
terms of the Construction Contract.
On September 19, 2000, Trident acknowledged its receipt of the
loss notice sent by Willis on August 30. Following additional
correspondence, Trident sent Bollinger a reservation of rights
letter on September 25, 2000, reserving the insurers’ right to
contest coverage.
On November 2, 2000, Bollinger notified Cardinal that it would
pay up to $1.5 million to cover loss of use of the W. LOPEZ, the J.
HANKINS, and the P.G. JONES, in the event that its insurers denied
coverage. On February 13, 2001, Bollinger notified Montco that it
would pay $875,000 to cover loss of use of the TAMMY, in the event
that its insurers denied coverage. Bollinger and Montco entered
into a formal settlement agreement on June 28, 2001. Bollinger and
Cardinal entered into such an agreement on July 25, 2001.
Subsequently, Bollinger entered into new agreements with both
Cardinal and Montco to build additional vessels. Those agreements
6
were worth approximately $33 million.7
On March 9, 2001, XL Specialty filed suit seeking a
declaration of its rights and obligations. On March 13, 2001, it
denied Bollinger’s claim. Bollinger filed a counterclaim seeking
coverage and bad faith damages. Navigators also filed a
declaratory judgment action contesting coverage, in response to
which Bollinger filed a counterclaim. The suits were consolidated.
All parties moved for summary judgment. The district court granted
summary judgment for the insurers but denied costs.
Bollinger appeals from the court’s judgment finding a lack of
coverage. The insurers appeal from the court’s order that the
parties bear their own costs.
II.
We review a grant of summary judgment de novo, applying the
same standard as the district court.8 We likewise review matters
of contract interpretation de novo.9 Summary judgment is
appropriate if the movant demonstrates that there are no genuine
issues of material fact and that it is entitled to a judgment as a
7
The insurers believe that Bollinger was eager to pay for
Cardinal’s and Montco’s repairs and down time in order to preserve
such future sales.
8
GeoSouthern Energy Corp. v. Chesapeake Operating Inc., 274 F.3d
1017, 1020 (5th Cir. 2001).
9
T.L. James & Co. v. Traylor Bros. Inc., 294 F.3d 743, 746 (5th
Cir. 2002).
7
matter of law.10 Thus, “summary judgment is appropriate if the
nonmovant fails to establish facts supporting an essential element
of his prima facie claim.”11
III.
A.
The policies at issue limited coverage to those sums that
Bollinger was “legally obligated to pay as damages.”12 Because the
record does not reasonably support the finding of a factual basis
upon which Bollinger could potentially be liable to Cardinal or
Montco, we conclude that there was no coverage under the policies.13
The contracts under which Bollinger constructed the lift boats
included express warranty provisions limiting Bollinger’s
obligation to repair and replace defects to those problems
discovered and reported within 180 or 210 days of delivery. The
lift boats were completed and delivered in 1997 and 1998, and the
defective welds were discovered between July 27, 2000, and
10
Fed. R. Civ. P. 56(c).
11
GeoSouthern Energy, 274 F.3d at 1020.
12
Bollinger contends that the insurers merely attempt to “re-
litigate the underlying claims between Bollinger, on the one hand,
and Cardinal and Montco, on the other, by arguing that Bollinger
could not have been found liable had the case proceeded to trial.”
Because neither Cardinal nor Montco ever filed a lawsuit against
Bollinger, however, no case between the parties existed; none was
litigated; none could have proceeded to trial; and none can be
“relitigated.”
13
For this reason, we need not consider the other triggers to
coverage—whether there was “property damage” that was caused by an
“occurrence” during the policy period.
8
September 18, 2000. Hence, the express warranties had expired
before the cracking in the jack-up legs was discovered and
reported. Furthermore, the construction contracts expressly
precluded any obligation by Bollinger for consequential damages,
including loss of profits and use. Because the warranty
limitations included in the contracts were allowable under
Louisiana law,14 neither Cardinal nor Montco had a valid warranty
claim against Bollinger. Accordingly, Bollinger faced no potential
liability in contract.
Bollinger argues that it was subject to potential liability
for breach of the implied warranty against redhibitory vices and
defects. We disagree. Under the Louisiana Civil Code, redhibition
is the rescission of a sale on account of a defect in the
manufacture or design of a thing sold:
The seller warrants the buyer against redhibitory
defects, or vices, in the things sold.
A defect is redhibitory when it renders the thing
useless, or its use so inconvenient that it must be
presumed that a buyer would not have bought the thing had
he known of the defect. The existence of such a defect
gives a buyer the right to obtain rescission of the
sale.15
Because redhibition is the avoidance of a sale, there can be no
14
See FMC Corp. v. Continental Grain Co., 355 So. 2d 953, 957-58
(La. App. 4th Cir. 1977).
15
La. Civ. Code art. 2520; see also Patin v. Thoroughbred Power
Boats Inc., 294 F.3d 640, 655 (5th Cir. 2002); see generally Saúl
Litvinoff, Sale and Lease in Louisiana Jurisprudence 439-40 (4th
ed. 1997) (discussing the general principles of the warranty
against redhibitory vices and defects).
9
redhibition in the absence of a contract of sale.16
We find that there is no genuine issue of material fact about
the nature of the contracts under which Bollinger built the lift
boats for Cardinal and Montco. They were contracts to build. The
record unequivocally shows that the vessels were built to the
specifications of Cardinal and Montco; that both contracts were
negotiated; and that Bollinger supplied the skill, labor, and
materials.17 Because the contracts between Bollinger and both
Cardinal and Montco were contracts to build rather than contracts
of sale, and because redhibition is not applicable to construction
contracts, Bollinger faced no potential liability for a breach of
16
Airco Refrigeration Serv., Inc. v. Fink, 134 So. 2d 880, 883
(La. 1961) (explaining that Article 2520 applies only to contracts
of sale); Hebert v. McDaniel, 479 So. 2d 1029, 1033 (La. App. 3d
Cir. 1985) (“[T]he law in Louisiana is that redhibition applies
only to contracts of sale and not to contracts to build.”); Duhon
v. Three Friends Homebuilders Corp., 396 So. 2d 559, 560 (La. App.
3d Cir. 1981) (same, citing La. Civ. Code art. 2520).
17
See La. Civ. Code art. 2756 (“To build by a plot, or to work
by the job, is to undertake a building or a work for a certain
stipulated price.”); Airco Refrigeration, 134 So. 2d at 882 (citing
art. 2756); Hebert, 479 So. 2d at 1032 (“Three major factors are
used to determine whether or not a contract is one of sale or one
to build: (1) The buyer has some control over the specifications of
the object, (2) the negotiations generally take place before the
object is constructed, and (3) the parties contemplate that one of
them will supply the materials and his skill and labor in order the
construct the specified object.”); Duhon, 396 So. 2d at 561 (same);
see generally Swope v. Columbian Chems. Co., 281 F.3d 185, 202-04
(5th Cir. 2002) (explaining that under Louisiana law “[t]he
distinction between obligations to give, e.g., sales, and
obligations to do, e.g., building constructions, is material to the
judicial determination of questions involving . . . remedies”).
10
the warranty against redhibitory vices and defects.18
In sum, we find that there was no coverage of Bollinger’s
claim because it was not potentially obligated to pay the sums it
expended on repairs and paid to Cardinal and Montco for down time.
B.
Bollinger contends that the insurers forfeited their right to
invoke the coverage limitation imposed by the phrase “legally
obligated to pay as damages” because they refused to defend
Bollinger against Cardinal’s and Montco’s claims and then denied
coverage. This argument is meritless. By its terms, the primary
insurance policy required XL Specialty to provide a defense only
for any “suit” seeking damages.19 Because neither Cardinal nor
Montco named Bollinger in a “suit,” defined in the policy as a
“civil proceeding,” there was no duty to defend.20 In any event,
18
Bollinger asserted at oral argument that the replacement leg
used in reconstructing the J. HANKINS was purchased pursuant to a
contract of sale, thus suggesting that Cardinal had a redhibition
claim as to that leg. But because it identifies no record evidence
supporting its assertion, there is no triable issue of such a
redhibition claim. Likewise, the record evidence does not support
Bollinger’s argument that it faced liability for an unnamed tort,
the elements of which it does not articulate.
19
The excess insurers had only a secondary duty to defend. See
American Home Assurance Co. v. Czarniecki, 230 So. 2d 253 (La.
1969); see also William Shelby McKenzie & H. Alston Johnson III, 15
Louisiana Civil Law Treatise: Insurance Law & Practice § 214
(1986).
20
Even if there had been a suit based on Cardinal’s and Montco’s
demands for contract damages, there would not have been a duty to
defend because those demands, construed as the allegations of a
hypothetical legal petition, “unambiguously excluded coverage” for
the reasons stated above. See Cuté-Togs of New Orleans, Inc. v.
11
the wrongful denial of a defense would not have expanded coverage.21
Finally, in response to Bollinger’s assertion that its
settlement was reasonable, we note that Bollinger assumed
responsibility for the damages almost immediately after they were
discovered and negotiated down-time compensation with Cardinal and
Montco long before the insurers denied coverage. Bollinger may
have made an astute business decision in paying for Cardinal’s and
Montco’s losses. But Bollinger cannot transfer costs it was not
legally obligated to pay to the insurers.22
IV.
The insurers complain that the district court erroneously
ordered the parties to bear their own costs. “[C]osts . . . shall
be allowed as of course to the prevailing party unless the court
Louisiana Health Serv. & Indem. Co., 386 So. 2d 87, 89 (La. 1980)
(“[T]he insurer’s duty to defend suits brought against its insured
is determined by the allegations of the injured plaintiff’s
petition, with the insurer being obligated to furnish a defense
unless the petition unambiguously excluded coverage.” (quoting
Czarniecki, 230 So. 2d at 259)).
21
See Enserch Corp. v. Shand Morahan & Co., 952 F.2d 1485, 1493
(5th Cir. 1992) (explaining that even in the face of a breach of
the duty to defend, coverage “cannot be created ex nihilo by
estoppel” (quoting Hartford Cas. Co. v. Cruse, 938 F.2d 601, 605
(5th Cir. 1991)); see also Foster v. Hampton, 352 So. 2d 197, 203
(La. 1979) (stating the basic rule that there can be no liability
on the part of an insurer where there is no liability on the part
of its insured).
22
Because we hold that Bollinger cannot establish coverage, we
need not consider whether it is entitled to damages for the
wrongful denial of coverage.
12
otherwise directs . . . .”23 Our cases recognize that there is a
strong presumption that the prevailing party will be awarded its
costs.24 While the court has wide discretion to award or deny
costs,25 it must provide reasons if it denies costs.26 Because the
district court here did not provide reasons, we vacate that portion
of the judgment ordering each party to bear its own costs and
remand for either an award of costs to the prevailing parties or an
explanation of reasons for the denial of such an award.
V.
For the foregoing reasons, we AFFIRM summary judgment, VACATE
the denial of attorney fees and costs, and REMAND for further
proceedings consistent with Part IV of this opinion.
AFFIRMED in part, VACATED in part, and REMANDED.
23
Fed. R. Civ. P. 54(d)(1).
24
Sheets v. Yahama Motors Corp., USA, 891 F.2d 533, 539 (5th Cir.
1990).
25
Hall v. State Farm Fire & Cas. Co., 937 F.2d 210, 216 (5th Cir.
1991).
26
Sheets, 891 F.2d at 539.
13