Mt. Hawley Insurance Company v. Advance Products & , 597 F. App'x 780 ( 2015 )

Case: 14-30068 Document: 00512915035 Page: 1 Date Filed: 01/26/2015
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 14-30068 FILED
Summary Calendar January 26, 2015
Lyle W. Cayce
Clerk
MT. HAWLEY INSURANCE COMPANY,
Plaintiff - Appellant
v.
ADVANCE PRODUCTS & SYSTEMS, INCORPORATED,
Defendant - Appellee
Appeal from the United States District Court
For the Western District of Louisiana
USDC No. 6:12-CV-890
Before HIGGINBOTHAM, JONES, and HIGGINSON, Circuit Judges.
PER CURIAM:*
This appeal requires us to interpret an insurance contract. Mt. Hawley
sold a commercial property insurance policy to Advance Products & Systems
(“APS”) covering its manufacturing facility. That policy included Business
Income and Extra Expense coverage. Ten months after Mt. Hawley issued the
policy, a fire substantially damaged APS’s facility. During the claims-
adjustment process, a dispute arose regarding the amount recoverable for lost
* 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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH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.
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business income. The district court held that the policy was ambiguous and
granted partial summary judgment for APS. Mt. Hawley Ins. Co. v. Advance
Products & Sys., Inc., 972 F. Supp. 2d 900, 910 (W.D. La. 2013). Because we
hold that the contract is unambiguous, we REVERSE the grant of partial
summary judgment 1 and REMAND the case to the district court. 2
BACKGROUND
On November 12, 2009, Mt. Hawley issued a commercial property
insurance policy to APS. The policy included two provisions that are relevant
here. The first is business income coverage which, among other things,
compensates the insured for income lost as a result of a covered accident. The
business income coverage limit is $500,000. The second is a coinsurance clause
which requires the insured to “bear a percentage of certain losses if he has
chosen not to purchase a certain level of coverage.” 3 15 La. Civ. L. Treatise,
Insurance Law & Practice § 10:31 (4th ed.). More simply, if APS is not fully
insured—has not insured the full value of its income—the coinsurance
provision limits the amount it can recover.
Exactly ten months later, on September 12, 2010, a fire damaged APS’s
facility in Scott, Louisiana. APS submitted a claim to Mt. Hawley for lost
business income. According to APS, it lost $723,109.31 of income, but, because
of the coinsurance provision, Mt. Hawley owes it only $484,989.41. Mt. Hawley
argues that it only owes $217,810.21. The parties’ calculations differ because
1 The parties dispute how much money Mt. Hawley has already paid under the
business income coverage. Thus, the district court only granted partial summary judgment.
2 The district court certified its ruling as a final appealable order under rule 54(b).
Mt. Hawley, 972 F. Supp. 2d at 910.
3 A coinsurance clause serves the same purpose as a “deductible”—to require the
insured to bear some loss before the insurer is required to make payment. See 15 La. Civ. L.
Treatise, Insurance Law & Practice § 10:31 (Coinsurance “does not differ substantially from
a ‘deductible’ or a ‘retained amount,’ which serves the same purpose but does so in a stated
dollar amount.”); BLACK’S LAW DICTIONARY 501 (10th ed. 2014) (A deductible is “the portion
of the loss to be borne by the insured before the insurer becomes liable for payment.”).
2
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APS uses actual net income to compute the coinsurance penalty; while Mt.
Hawley uses projected net income.
Unable to come to an agreement, Mt. Hawley sued APS seeking a
declaration that the coinsurance penalty should be calculated using projected,
not actual, net income. Each party moved for summary judgment. The district
court held that the coinsurance provision was ambiguous and that the terms
of insurance contracts are strictly construed against the insurer. Mt. Hawley,
972 F. Supp.2d at 910. The district court granted APS’s motion, holding that
Mt. Hawley must use actual net income to compute the coinsurance penalty.
Id. Now, Mt. Hawley appeals.
STANDARD OF REVIEW
This Court reviews a grant of summary judgment de novo. Bayle v.
Allstate Ins. Co., 615 F.3d 350, 355 (5th Cir. 2010). A district court’s
interpretation of an insurance contract is also a matter of law that we review
de novo. Admiral Ins. Co. v. Ford, 607 F.3d 420, 422 (5th Cir. 2010).
APPLICABLE LAW
Because this is a diversity case, this Court will interpret the contract
using Louisiana law. Guidry v. American Public Life Ins. Co., 512 F.3d 177,
181 (5th Cir. 2007). Under Louisiana law, words and phrases in an insurance
policy “are to be construed using their plain, ordinary and generally prevailing
meaning.” Id. At the same time, courts must construe the contract as a whole
and in light of the other provisions; “[o]ne provision of the contract should not
be construed separately at the expense of disregarding other provisions.” Sims
v. Mulhearn Funeral Home, Inc., 956 So.2d 583, 589 (La. 2007) (internal
citations omitted). If, after applying these principles, the contract’s meaning
is clear and does not lead to an absurd result, then the Court must enforce the
contract as written. Id. But if there is an ambiguity, “the ambiguous
contractual provision is generally construed against the insurer and in favor of
3
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coverage.” Id. at 589-90 (internal citations omitted). “This strict construction
principle applies, however, only if the ambiguous policy provision is susceptible
to two or more reasonable interpretations.” Id. at 590 (emphasis added).
DISCUSSION
The only issue here is whether the contract requires using actual or
projected net income to calculate the coinsurance penalty. APS argues that
the relevant language is ambiguous. Mt. Hawley argues that the contract is
clear: it requires using projected net income. This Court agrees with Mt.
Hawley. The contract is unambiguous because there are not two reasonable
interpretations of the relevant language—Mt. Hawley’s is the only reasonable
one.
A. The Policy’s Terms
To better understand the parties’ arguments, it is necessary to review
the policy’s language. The policy defines several relevant terms. Under the
policy business income is, among other things, the “[n]et [i]ncome . . . that
would have been earned.” And the amount of business income loss—i.e. the
amount of revenue lost as a result of the accident—is defined as “[t]he [n]et
[i]ncome of the business before the direct physical loss or damage occurred”
and “[t]he likely [n]et [i]ncome of the business if no physical loss or damage
had occurred.”
Although the policy limit is $500,000, the policy limits the amount
recoverable by imposing a coinsurance penalty. A coinsurance penalty applies
only if the policy limit (here $500,000) is less than ninety percent (the
coinsurance percentage) of the sum of the net income and operating expenses
“that would have been earned or incurred” over a twelve-month period. 4
4For those mathematically minded: If $500,000 < (.9 x projected net income), then
there is a coinsurance penalty.
4
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If the coinsurance penalty applies, the amount Mt. Hawley pays is
calculated in three steps. The first step is to multiply the “[n]et [i]ncome and
operating expense for the 12 months following the inception or last previous
anniversary date” by the coinsurance percentage. Second, the policy limit is
divided by the result of the first step. Lastly, the result of the second step is
multiplied by the amount of the business loss. Mt. Hawley will pay the result
of the last step or the policy limit, whichever is less.
To clarify any confusion, the contract (thankfully) provides two examples
which calculate the amount Mt. Hawley would pay assuming certain values for
the net income, coinsurance percentage, policy limit, and amount of business
loss. Both examples calculate the coinsurance penalty using net income that
“would have been” received but for the accident.
B. The Policy is Unambiguous
Despite APS’s assertions, the coinsurance provision is unambiguous—it
calls for using projected income. APS argues that the policy is ambiguous
because the three-step calculation only refers to “[n]et [i]ncome,” but the
examples refer to net income “that would have been” received. Such internal
conflict makes the contract “ambiguous as a matter of law.” And because
insurance contracts are strictly construed against the insurer, its
interpretation must govern—i.e. net income means actual net income for
purposes of calculating the coinsurance penalty—so long as it is reasonable.
According to APS, its interpretation is reasonable because it is based on the
coinsurance penalty’s plain text and still results in a modest penalty.
Although APS has a point—the language used in calculating the
coinsurance penalty is imprecise—it does not render the contract ambiguous.
To be ambiguous, the language must be susceptible to two reasonable
interpretations. Cadwallader v. Allstate Ins. Co., 848 So.2d 577, 580 (La.
2003). This language is not. When read as a whole and in light of the purposes
5
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of insurance and coinsurance, no reasonable insurer or purchaser ex ante would
have thought that net income meant actual net income.
When read as a whole, the contract is clear: the coinsurance penalty is
calculated using projected net income. The contract refers to projected net
income four times: in the definition of business income; in the definition of
business income loss; in the determination of whether a coinsurance penalty
applies; and lastly, in the examples. When the coinsurance provision refers to
actual net income, it does so unmistakably—and it happens only once: the
amount of business income loss includes “[t]he [n]et [i]ncome of the business
before the direct physical loss or damage occurred.” At all other times, the
policy refers to projected income. Thus, a reasonable person would assume
that when the policy refers to net income without any subsequent language, it
refers to projected net income. Even if one doubted that reading, the examples
following the supposedly ambiguous language remove any lingering
uncertainty.
An examination of the consequences of APS’s preferred reading confirms
that net income can only mean projected net income. To see why, consider the
first required calculation—to determine whether there is a penalty at all.
Under APS’s reading, it is possible that a penalty applies, but the amount of
the penalty is zero. 5 APS’s reading, therefore, eliminates the need to
5 To see why consider the following hypothetical: Assume that an insured purchases
$500,000 of business income insurance with a coinsurance percentage of 90%, its projected
net income is $1,000,000, and that the insured suffers a loss six months after Mt. Hawley
issues the policy (i.e. the amount of the loss is $500,000). Here, there should be a coinsurance
penalty because the policy limit ($500,000) is less than 90% of projected net income
($1,000,000 x .9 = $900,000). But the amount of the penalty is zero:
Step 1: $500,000 (actual net income) x .9 (coinsurance percentage) = $450,000
Step 2: $500,000 (policy limit) / $450,000 (result of step 1) = 1.11
Step 3: $500,000 (amount of loss) x 1.11 (result of step 2) = $555,000
6
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determine whether a coinsurance penalty applies before calculating the
amount of the penalty. Because “[o]ne provision of the contract should not be
construed separately at the expense of disregarding other provisions,” Sims,
956 So.2d at 589, APS’s reading is unreasonable.
APS’s reading would also lead to the coinsurance penalty being applied
arbitrarily depending on when the loss occurred. If the loss occurred six
months after Mt. Hawley issued the policy, APS would incur no penalty; but if
the loss occurred ten months after, APS would incur a 33.3% penalty. 6 No
reasonable buyer or insurer would want such a result. For buyers, this result
contravenes the purpose of insurance. Consumers buy insurance to provide
stability by reducing financial uncertainty. APS’s reading doesn’t do that. A
buyer of this insurance has no idea how much of its loss Mt. Hawley would
cover. And a completely random event—when the loss occurs—is the decisive
factor. Insurers would not want this interpretation either. The same
unpredictability illustrated above makes it harder to price the insurance
policy. And such a random application of the coinsurance penalty makes it
completely ineffective. Coinsurance clauses incentivize the insured to
purchase an adequate level of coverage. See 15 La. Civ. L. Treatise, Insurance
Because Mt. Hawley will pay the policy limit or the result of step 3, whichever is less, there
is no penalty—Mt. Hawley will pay $500,000. Therefore, the insured would incur no penalty
and recover the full amount of its loss.
6 Compare supra note 5 with the following example: assume the policy limit is
$500,000 with a 90% coinsurance percentage, and $1,000,000 of projected net income (same
as before). As shown in the previous footnote, if the insured suffers a loss six months after
buying the policy, Mt. Hawley would pay $500,000. See supra note 5. If, however, the loss
occurred ten months after buying the policy, there would be a 33.3% penalty:
Step 1: $833,333 (ten months’ actual income) x .9 (coinsurance percentage) = $750,000
Step 2: $500,000 (policy limit) / $750,000 (result of step 1) = .667
Step 3: $166,667 (amount of loss) x .667 (result of step 2) = $111,166.89
Therefore, Mt. Hawley will pay $111,166.89; ASP will be liable for the rest, or $55,500.11.
7
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Law & Practice § 10:31 (4th ed.) (describing coinsurance as “an effort by
insurers to compel an insured to purchase sufficient coverage . . . .”). If the
application and amount of the penalty is dictated by the timing of the loss,
coinsurance will be ineffective at inducing the insured to purchase adequate
coverage. 7
To reiterate: the policy is unambiguous. When read as a whole and
considering the contract’s purposes, it is apparent that the net income
described in calculating the coinsurance penalty is not actual net income, but
projected net income. As the Louisiana Supreme Court has said “[t]he rules of
contractual interpretation simply do not authorize a perversion of the words or
the exercise of inventive powers to create an ambiguity where none exists.”
Sims, 956 So.2d at 589. APS’s reading would do exactly that.
CONCLUSION
For the reasons stated above, this Court concludes that the policy is
unambiguous and requires using projected net income to calculate the
coinsurance penalty. Accordingly, the district court’s grant of summary
judgment is REVERSED and REMANDED.
7 Under the hypothetical used throughout this opinion, the insured suffers no penalty
until the end of the seventh month of coverage. Accordingly, the odds of him incurring a
penalty at all are less than 50%. Under these circumstances, a savvy consumer may risk a
less than 50% chance of incurring a penalty rather than buy the necessary amount of
insurance.
8