Jung v. Starr Surplus Lines Insurance, et a ( 2021 )

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
Case: 20-30140 Document: 00516029285 Page: 3 Date Filed: 09/24/2021
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.
3
Case: 20-30140 Document: 00516029285 Page: 4 Date Filed: 09/24/2021
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).
4
Case: 20-30140 Document: 00516029285 Page: 5 Date Filed: 09/24/2021
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
5
Case: 20-30140 Document: 00516029285 Page: 6 Date Filed: 09/24/2021
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.
6
Case: 20-30140 Document: 00516029285 Page: 7 Date Filed: 09/24/2021
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.
7
Case: 20-30140 Document: 00516029285 Page: 8 Date Filed: 09/24/2021
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,
8
Case: 20-30140 Document: 00516029285 Page: 9 Date Filed: 09/24/2021
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.”
9
Case: 20-30140 Document: 00516029285 Page: 10 Date Filed: 09/24/2021
No. 20-30140
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.
10
Case: 20-30140 Document: 00516029285 Page: 11 Date Filed: 09/24/2021
No. 20-30140
c/w No. 20-30175
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).
11
Case: 20-30140 Document: 00516029285 Page: 12 Date Filed: 09/24/2021
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)).
12
Case: 20-30140 Document: 00516029285 Page: 13 Date Filed: 09/24/2021
No. 20-30140
c/w No. 20-30175
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).
13
Case: 20-30140 Document: 00516029285 Page: 14 Date Filed: 09/24/2021
No. 20-30140
c/w No. 20-30175
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