Swire Pacific Holdings Inc. v. Zurich Ins. Co.

Citation284 F.3d 1228
Decision Date07 March 2002
Docket NumberNo. 01-12597.,01-12597.
PartiesSWIRE PACIFIC HOLDINGS INC., Plaintiff-Appellant, v. ZURICH INSURANCE CO., Defendant, Zurich American Insurance Company, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)

Elliot B. Kula, Elliot H. Scherker, Marlene K. Silverman, Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., Miami, FL, for Plaintiff-Appellant.

Janet L. Brown, Boehm, Brown, Rigdon, Seacrest & Fischer, P.A., Maitland, FL, Thomas W. Brunner, Wiley, Rein & Fielding Washington, DC, for Defendant-Appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before CARNES, BARKETT and KRAVITCH, Circuit Judges.

CARNES, Circuit Judge:

This diversity case involves an insurance coverage dispute between Swire Pacific Holdings, the owner and developer of a high-rise condominium in Florida, and Zurich American Insurance Company as successor in interest to Zurich Insurance Company, under a Builder's Risk Policy. Swire sued Zurich seeking to recover under the policy the costs it had incurred in correcting design defects in the condominium. The district court granted summary judgment in favor of Zurich, and Swire appeals.

Some or all of the following questions are presented: (1) whether the policy's Design Defect Exclusion Clause bars coverage for Swire's loss; (2) whether the policy's Sue and Labor Clause applies only in the case of an actual, covered loss; and (3) whether the policy's Sue and Labor Clause, if it applies, covers the cost of repairing the structural deficiencies in the condominium building. Each of these questions involves issues of Florida law for which the answer is unclear, and Zurich has indicated to us that these policy provisions are commonplace and can be found in thousands of builder's risk policies issued for projects in the State of Florida. That is why we are going to certify the controlling questions of law to the Florida Supreme Court.

I. BACKGROUND
A. FACTS

Swire purchased from Zurich a builder's risk policy, effective February 24, 1997 through February 24, 1999, which was drafted in relevant part by Zurich. The policy insured the Two Tequesta Point Condominium Project, located in Miami, Florida. Swire is one of the insureds under the policy.

In March of 1998, the City of Miami's Building Department informed Swire that Richard Klein, the structural engineer on the condominium project, was being investigated in connection with certain design projects for failure to comply with appropriate governmental building codes and ordinances. Swire's agent, CHM Consulting Engineers, performed a peer review of Klein's structural work on the project and the potential claim of damage arising from that structural work. While the peer review was underway, the City of Miami halted the issuance of a certificate of occupancy. The peer review revealed numerous errors and omissions in the project that had to be corrected.

As a result of the design defects, Swire altered the plans and construction to bring the building into compliance with appropriate governmental building codes. Swire spent approximately $4.5 million in costs to correct the structural deficiencies and filed a claim with Zurich under its builder's risk policy seeking coverage for those costs. Zurich denied coverage on the ground that Swire's claim dealt "with the cost of correcting a design defect and not any physical loss or damage resulting from the defect."

The relevant provisions of the policy at issue are the Insuring Agreement, the Design Defect Exclusion Clause, and the Sue and Labor Clause. The Insuring Agreement, set forth in the policy's "Coverage" section, provides:

Subject to the limitations, exclusions, terms and conditions contained herein this Policy insures, in respect of occurrences happening during the term of this Policy, against:

Physical loss or damage to the property insured, except as excluded hereunder.

The Design Defect Exclusion Clause, set forth in the "Exclusions and Limitations" section of the policy, excludes:

Loss or damage caused by fault, defect, error or omission in design, plan or specification, but this exclusion shall not apply to physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification.

The Sue and Labor Clause, set forth in the policy's "Conditions" section, provides:

In case of loss or damage, it shall be lawful and necessary for the INSURED... to sue, labor and travel for, in and about the defense, safeguard and recovery of the insured property hereunder or any part thereof without prejudice to this insurance, nor shall the acts of the INSURED or the Company, in recovering, saving, and preserving the property INSURED in case of loss or damage be considered a waiver or an acceptance of abandonment. The expenses so incurred shall be borne by the INSURED and the Company, proportionately to the extent of their respective interests.

B. PROCEDURAL HISTORY

In October of 1999, Swire filed a two-count lawsuit against Zurich. Count I sought declaratory and monetary relief to determine Swire's rights to insurance coverage under the Builder's Risk Policy. Count II sought recovery of money damages arising out of Zurich's failure to provide coverage for loss incurred in correcting the structural deficiencies of the building. Zurich filed an answer containing affirmative defenses. The fourth one asserted that Swire's loss was specifically excluded from coverage due to the Design Defect Exclusion Clause of the policy.

Swire sought partial summary judgment on Count I of its complaint and on Zurich's fourth affirmative defense, arguing that Swire was entitled as a matter of law to a declaration that the Design Defect Exclusion Clause invoked by Zurich does not apply to costs incurred by Swire under the policy's Sue and Labor Clause. Swire alternatively argued that the Design Defect Exclusion Clause does not exclude any costs for work that necessarily damages or destroys portions of the insured property as a result of required remediation or repair of defective property. Zurich moved for summary judgment in its favor on the grounds that the Design Defect Exclusion Clause bars coverage for Swire's claim, the Design Defect Exclusion Clause applies to sue and labor expenses, and the Sue and Labor Clause at issue applies only to actual, covered loss or damage anyway.

The district court granted summary judgment in favor of Zurich. It concluded that Swire's loss was an excluded loss under the policy's Design Defect Exclusion Clause. The court also held that the policy's Sue and Labor Clause did not provide coverage for otherwise excluded losses. Relying on Southern California Edison Co. v. Harbor Insurance Co., 83 Cal.App.3d 747, 148 Cal.Rptr. 106 (1978), the court reasoned that sue and labor expenses are reimbursable only to the extent that they are incurred for the benefit of the insurer in mitigating or preventing a covered loss. The court held that the answer to the question of whether expenses are incurred for the benefit of the insurer lies not in whether the insured's actions may potentially benefit the insurer in some way, but in whether the insured's actions "correlate to an excluded loss." Because the actions taken by Swire correlated to the excluded loss of repairing design defects the court found that the costs incurred by Swire were not incurred for the benefit of Zurich and thus were not reimbursable under the Sue and Labor Clause. The district court stated that it was unnecessary to reach the issue of whether the Sue and Labor Clause applies only when an actual, covered loss has occurred.

On appeal, Swire contends that the district court erred in holding that the Design Defect Exclusion Clause applies to its loss, and in holding that any loss to which that clause applies is also excluded from coverage under the policy's Sue and Labor Clause. Zurich, as expected, lauds the district court's holding and reasoning, and repeats them as its contentions. Zurich also argues that the Sue and Labor Clause does not apply in the circumstances of this case, anyway, because no covered loss had occurred at the time of the expenditures.

II. DISCUSSION

We review de novo the district court's grant of summary judgment. Squish La Fish, Inc. v. Thomco Specialty Prods., Inc., 149 F.3d 1288, 1290 (11th Cir.1998).

A. THE DESIGN DEFECT EXCLUSION CLAUSE

The policy's Design Defect Exclusion Clause excludes coverage for "[l]oss or damage caused by fault, defect, error, or omission in design, plan or specification." Part of that clause, however, is the "ensuing loss" provision, which states that "physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification" is covered under the policy. Swire asserts that the Design Defect Exclusion Clause considered as a whole is ambiguous and therefore should be construed against Zurich, the insurer and drafter. The district court rejected Swire's argument that the clause is ambiguous and held that Swire's loss fell within the exclusion for "[l]oss or damage caused by [a] ... defect" and not within the "ensuing loss" provision. That conclusion was based upon the undisputed fact that the building had not collapsed at the time of the repairs.

Several decisions support the district court's holding that the Design Defect Exclusion Clause is not ambiguous and that the loss at issue — the cost of correcting of design defects — cannot constitute "physical loss" under the "ensuing loss" provision because it was incurred to correct an excluded peril. See Laquila Constr., Inc. v. Travelers Indem. Co., 66 F.Supp.2d 543, 544-45 (S.D.N.Y.1999) (where builder's risk policy contained an exclusion for the cost of making good faulty workmanship but had an "ensuing loss" provision for physical damage resulting from such faulty workmanship, a claim for cost of repairing defective concrete fell "squarely into the exclusion...

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