Cross v. Lexington Ins. Co., 09-30178.
| Decision Date | 17 August 2010 |
| Docket Number | No. 09-30178.,09-30178. |
| Citation | 616 F.3d 422 |
| Parties | CONSOLIDATED COMPANIES, INC., Plaintiff-Appellee Cross-Appellant, v. LEXINGTON INSURANCE COMPANY, Defendant-Appellant Cross-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
616 F.3d 422
CONSOLIDATED COMPANIES, INC., Plaintiff-Appellee Cross-Appellant,
v.
LEXINGTON INSURANCE COMPANY, Defendant-Appellant Cross-Appellee.
No. 09-30178.
United States Court of Appeals,Fifth Circuit.
Aug. 17, 2010.
COPYRIGHT MATERIAL OMITTED.
Alan Harry Goodman (argued), William R. Forrester, Jr., Lemle & Kelleher, L.L.P., New Orleans, LA, for Consolidated Companies, Inc.
Daniel Winthrop Nelson (argued), Scott Payne Martin, Gibson, Dunn & Crutcher, L.L.P., Washington, DC, John E.W. Baay, II, Robert I. Siegel, Gieger, Laborde & Laperouse, L.L.C., New Orleans, LA, for Lexington Ins. Co.
Appeals from the United States District Court for the Eastern District of Louisiana.
Before BENAVIDES, STEWART and SOUTHWICK, Circuit Judges.
LESLIE H. SOUTHWICK, Circuit Judge:
A warehouse located in Harahan, Louisiana, was damaged by Hurricane Katrina. The warehouse owner filed suit against its commercial-property insurer due to the parties' disagreement over the amount owed under the policy. After a jury trial, a substantial amount above what the insurer offered was awarded. Statutory damages and penalties were also imposed. Judgment was entered accordingly. The insurer appealed.
We disagree with the district court's interpretation of “charges and expenses” in the business-interruption loss provision. We VACATE that portion of the award. We also VACATE the award of statutory damages and penalties. We REMAND on those issues. We AFFIRM the judgment in all other respects.
On August 28, 2005, Lexington Insurance Company issued a commercial-property insurance policy to Consolidated Companies, Inc. (“Conco”). The policy insured up to $25 million in losses from interruption of business, extra expenses, and damage to Conco's property. The next day, Hurricane Katrina-undisputably a covered peril-damaged Conco's property and equipment.
Conco resumed partial operations within ten days. During the 15-month period before complete restoration of operations, Conco earned $205,840,489 in revenues and incurred $205,561,483 in expenses for a small net profit.
Lexington initially advanced Conco $3 million under the policy. After adjusting the claim, it determined Conco's total loss was $3,247,070. Conco, believing this payment insufficient, refused Lexington's check for the $247,070 difference. By the time of trial, Conco claimed $24,970,551 in losses under the policy. This included $19,379,642 in business-interruption loss, consisting of $7,071,120 for lost profits and $12,308,522 for “charges and expenses.” The meaning of “charges and expenses” is a central dispute in this appeal.
Conco filed this action alleging Lexington breached the insurance contract. Conco also alleged that Lexington violated Louisiana's insurance bad-faith statutes by failing to pay the full amount of Conco's damages within the statutes' prescribed time periods. See La.Rev.Stat. §§ 22:1220 & 22:658. 1
Throughout the controversy, Lexington and Conco have disagreed on the proper interpretation of the policy's business-interruption provision. The difference in the interpretation is whether certain charges and expenses, which the parties agree amount to about $12 million, should be paid in full or reduced to the extent they were offset by income during the 15 months. Under the latter interpretation, which is the one we adopt, the income completely offset them.
The jury awarded Conco $19,586,239 for business-interruption loss, a figure later slightly reduced by the district court. 2 It also found that Lexington violated the Louisiana bad-faith statutes by withholding payment arbitrarily, capriciously, or without probable cause. This resulted in statutory damages of $2.5 million under Section 22:1220 and a statutory penalty of $5,365,797.50 under Section 22:658. 3 The jury also assessed $2.5 million in penalties (in addition to $2.5 million in damages) under Section 22:1220. The district court set aside this $2.5 million penalty, and Conco does not challenge the ruling.
The district court's judgment disagreed with the verdict in other ways. A remittitur was ordered, reducing the jury verdict by $3 million to account for an alleged failure by jurors to deduct the amount Lexington had advanced to Conco. Second, the business-interruption award was reduced by $206,597 based on the conclusion that the jury improperly included inventory mark-ups and discounts in computing the loss. Third, the district court proportionately reduced the penalties to reflect the reductions.
Final judgment awarded $21,463,190 in compensatory damages, $5,365,797.50 in statutory penalties under Section 22:658, and $2,500,000 in statutory damages under Section 22:1220. Lexington timely appealed.
Lexington asserts the district court erred by not instructing the jury to reduce Conco's “charges and expenses” by revenues Conco earned during its 15 months of partially resumed operations. Conco maintains the district court correctly interpreted the policy, and therefore the jury correctly awarded $12,308,522 for business-interruption loss. 4
The district court's interpretation of an insurance contract is a question of law that we review de novo. Admiral Ins. Co. v. Ford, 607 F.3d 420, 422 (5th Cir.2010). Because this diversity case involves “the interpretation of insurance policies issued in Louisiana for property located in Louisiana,” that state's substantive
law controls. In re Katrina Canal Breaches Litig., 495 F.3d 191, 206 (5th Cir.2007).
We will start our de novo review by explaining Louisiana principles of contract construction. We then quote the policy language. After examining the district court's interpretation of that language, we will analyze it as well.
The Louisiana Civil Code provides that a contract should be interpreted to effect the “common intent of the parties,” id. (quoting La. Civ.Code Ann. art. 2045), and an insurance policy must be “construed according to the entirety of its terms and conditions as set forth in the policy ....” Id. (quoting La.Rev.Stat. Ann. § 22:654). Louisiana has established rules of analysis for interpreting a policy that contains potentially ambiguous language:
The words of a contract must be given their generally prevailing meaning. When 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. If the policy wording at issue is clear and unambiguously expresses the parties' intent, the insurance contract must be enforced as written.
Where, however, an insurance policy includes ambiguous provisions, the ambiguity must be resolved by construing the policy as a whole; one policy provision is not to be construed separately at the expense of disregarding other policy provisions. Words susceptible of different meanings must be interpreted as having the meaning that best conforms to the object of the contract. A provision susceptible of different meanings must be interpreted with a meaning that renders it effective and not with one that renders it ineffective.
Ambiguity may also be resolved through the use of the reasonable-expectations doctrine-i.e., by ascertaining how a reasonable insurance policy purchaser would construe the clause at the time the insurance contract was entered. The court should construe the policy to fulfill the reasonable expectations of the parties in light of the customs and usages of the industry. A doubtful provision must be interpreted in light of the nature of the contract, equity, usages, the conduct of the parties before and after the formation of the contract, and of other contracts of a like nature between the same parties.
Id. at 207 (citations, quotation marks, and alterations omitted).
These interpretive rules reveal that Louisiana recognizes two levels of ambiguity. If an ambiguity is perceived, then various tools of construction are applied that do not initially include construing the term against the drafter. “If after applying the other general 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 insured.” Id. (quoting La. Ins. Guar. Ass'n v. Interstate Fire & Cas. Co., 630 So.2d 759, 764 (La.1994)). Further, that last principle applies only if “equivocal provisions” seek to “narrow an insurer's obligation,” and only where “an ambiguous policy provision is susceptible to two or more reasonable interpretations.” Id. (quoting Cadwallader v. Allstate Ins., 848 So.2d 577, 580 (La.2003) (emphasis in original)).
We will need to apply these rules to the business-interruption provision. We will quote only the relevant parts. It begins with something of a definition.
Business interruption means loss resulting from necessary interruption of business conducted by the insured and
caused by direct physical loss or damage by any of the perils covered herein during the term of this policy to Real and/or Personal Property as covered herein.
This is fairly straight-forward. It has a few terms of art, but nothing about them are central to the dispute. The next paragraph, though, is key:
If such loss occurs during the term of this policy, it shall be adjusted on the basis of the actual loss sustained by the Insured, during the period of restoration, consisting of the net profit (or loss) which is thereby prevented from being earned and of all charges and expenses (excluding ordinary payroll), but only to the extent that they must necessarily continue during the interruption of business, and only to the extent to which they would have been incurred had no loss occurred.
Some important terms are here. The “period of restoration” was much in dispute in the district court, as it established the period for which the business interruption was compensable. It is...
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