Enserch Corp. v. Shand Morahan & Co., Inc.

• Decision Date: 14 February 1992
• Docket Number: No. 90-1649,90-1649
• Citation: 952 F.2d 1485
• Parties: ENSERCH CORPORATION and Ebasco Services, Inc., Plaintiffs-Appellees-Appellants, v. SHAND MORAHAN & CO., INC., Defendant, and General Accident Insurance Company of America and Evanston Insurance Company, Defendants-Appellants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1485

952 F.2d 1485

ENSERCH CORPORATION and Ebasco Services, Inc. Plaintiffs-Appellees-Appellants, v. SHAND MORAHAN & CO., INC., Defendant and General Accident Insurance Company of America and Evanston Insurance Company, Defendants-Appellants-Appellees.

No. 90-1649.

United States Court of Appeals Fifth Circuit.

Feb. 14, 1992.

As Clarified on Denial of

Rehearing and Rehearing En

Banc March 9, 1992.

Bobby R. Burchfield, Peter J. Nickles, Steven F. Benz, Covington & Burling, Washington, D.C., for plaintiffs-appellees-appellants.

Robin Hartmann, Noel M. Hensley, Werner A. Powers, Sharon N. Freytag, Haynes & Boone, Dallas, Tex., for General Acc. Ins. Co. and Evanston Ins. Co.

Harry M. Reasoner, Clara L. Meek, Charles W. Schwartz, Marie R. Yeates, David H. Brown, R. Glen Rigby, Jason Kuller, Vinson & Elkins, Houston, Tex., for General Acc. Ins. Co., et al.

Appeals from the United States District Court for the Northern District of Texas.

Before WISDOM, JOLLY, and SMITH, Circuit Judges.

WISDOM, Circuit Judge:

This is an insurance coverage case of great financial magnitude and complexity. Both sides appeal legal decisions made during a long trial, aspects of the jury verdict, and a final judgment and judgment notwithstanding the verdict entered and certified for appeal by the trial court. We AFFIRM some decisions of the trial court, REVERSE others, and REMAND, primarily to allow the parties to show how much of the alleged damages are covered by the insurance policies.

I. Background

The insured parties, the plaintiffs-appellees/cross-appellants, are Enserch Corporation ("Enserch"), a Texas-based engineering firm, and its New York-based subsidiary, Ebasco Services, Inc. ("Ebasco"). ¹ In April 1982 the two companies jointly took out two "claims made, prior acts" policies (covering any claims, including those for acts committed before the policy period, made against the insured during the policy period for "any act, error or omission" in its performance of professional services). One policy was with General Accident Insurance Co. ("GA"), the other was with Evanston Insurance Co. ("Evanston") (collectively, "the insurers"), and each had a maximum recovery per claim of $25 million. The Evanston policy covered "lawyers, accountants, management consultants, risk management consultants, business and economic research consultants, corporate training consultants, and tax consultants". The GA policy covered architectural, engineering, and construction services. The policies had individual deductibles for each claim of $5 million, an amount reduced to $500,000 after the insured had paid a sum of $7.5 million (the "aggregate deductible") for claims made during any policy period. The deductible endorsement of each policy stated that any deductible would apply toward the aggregate deductible of both policies. For the Evanston policy the annual premium was $25,962.50; for the GA policy it was $1,075,000.

The application for insurance asked the insured to state if it knew of any circumstances that might give rise to claims against Ebasco. Ebasco's attorneys had thirty-six of its officers respond to a polling; none of their responses referred to the Washington Public Power Supply System ("WPPSS") project that gave rise, in February 1983, to the lawsuit underlying this case.

In addition to that specific polling, several provisions of each policy either apply to Ebasco's knowledge or representations or may exclude the liability for which it now seeks coverage.

Section I(c) of the GA policy specifically precludes coverage of claims for "any act, error, or omission of which any director, partner, or officer of the company had any knowledge at the effective date of the policy". Under condition VIII of the GA policy the insured agrees that all statements in the application are "agreements, representations and warranties". The GA policy also specifically excludes coverage for "estimates of probable construction cost or cost estimates being exceeded" and for "advising or requiring, or failure to advise or require or failure to maintain or procure any financing for any portion of any project or of services or labor connected with such project". The insurers contend that these exclusions apply to any cost estimates or financial advice regarding the WPPSS project.

Condition 1 of the Evanston policy provides that all statements made in the application are "personal representations ... and that this policy is issued in reliance upon the truth of such representations...." The Evanston policy also specifically excludes claims based on "dishonest, deliberately fraudulent, malicious or knowingly wrongful acts, errors or omissions".

Ebasco was the architect-engineer for WPPSS Project 5, the fifth nuclear power generating station in one of the country's largest nuclear construction projects. The bonds that financed WPPSS Projects 4 and 5, unlike those for Projects 1-3, were not backed by the federal government. Rather, 88 cities and utilities in the Northwest guaranteed them through take-or-pay obligations. Because of excessive costs, construction on Project 5 stopped in May 1981 (when the project was only 14% completed), and was terminated permanently in January 1982 (three months before the effective date of the two policies in question). In February 1983 the holders of WPPSS bonds backing Projects 4 and 5 (infamous as the "Whoops" bonds) filed a class action lawsuit (the Multidistrict litigation ["MDL"] lawsuit) against over 100 defendants (including Ebasco) for the $2.25 billion of bonds that had already been issued to fund the two projects.

In connection with its work on Projects 3 and 5, Ebasco had been required to submit a series of letters providing cost estimates and status reports for its work on each project. ² These letters were used to inform underwriters and public bond purchasers of progress on the plant. In fourteen such letters issued between February 1977 and March 1981, Ebasco described the finances and progress of Project 5 in terms that were (for whatever reason) untimely and, at least, overly optimistic. ³ The insurers and the bondholders who sued Ebasco (for violating federal and state securities laws, for common law fraud, negligence and professional malpractice) argued that Ebasco deliberately misrepresented the costs of Project 5 to sell more bonds and to keep the project going. After many of the utility guarantors of the bonds obtained declarations absolving them of contractual obligations to back the bonds, defendants like Ebasco were the only parties remaining to foot the large bill for the failed project.

Although the insurers contend that Ebasco did not originally expect them to provide its defense, the insurers did inform Ebasco that it would issue a reservation of rights letter in providing a defense; no such letter was ever written. In October 1984 Ebasco finally did demand coverage and a defense for the claims in the MDL suit. On May 15, 1985, the insurers, citing Ebasco's non-cooperation, filed a declaratory judgment action in New York to determine their duties under the policies. Ebasco achieved a stay of that action after filing a state court action in Texas (removed by the insurers to federal court) for coverage under the policies.

In February 1989 Ebasco was one of the final defendants to settle claims from the MDL bondholder suit. The two-tier settlement was for $50 million, payable as follows: $7,166,666.67 in cash from Ebasco and $42,833,333.33 from the two insurance companies, which Ebasco obligated itself to sue. The agreement further provides that Ebasco will receive 25% of any recovery on the GA policy and 50% on the Evanston policy until it has recovered the amount of its cash payment, its costs to defend the MDL suit, and its costs to bring this action; Ebasco will keep any costs awarded to it separately in this suit. If the bondholders do not receive at least $3 million from this suit, then Ebasco promised to pay that additional amount in cash. Finally, the MDL plaintiffs and Ebasco agreed to split any costs recovered in its forthcoming action for insurer bad faith. The trial court found this settlement to be reasonable, and approved it under Fed.R.Civ.P. 23(e).

After a 45-day trial on the insured's demand for indemnification of its liability to the MDL plaintiffs, ⁴ the jury reached a verdict (entered as a final judgment on May 18, 1990) in favor of Ebasco, granting it the full $50 million of coverage under both policies; attorney fees of $6,381,186 for defending the MDL suit, $4,190,204 for the trial in this case, $140,000 for pursuing successful post-trial proceedings, and $200,000 for defending a successful appeal to this Court; in-house defense costs incurred in the MDL lawsuit of $2,652,693; and other costs of $1,211,775 incurred in defending the MDL suit.

Judge Robert B. Maloney, the trial judge, later granted the insurers' request for a JNOV, and reduced the verdict in the following ways. First, he released from liability in this stage of the case Shand Morahan, underwriter and managing agent for the policies from liability in this stage of the case. ⁵ Second, he rejected the jury's finding of no mutual mistake and decided that the defendants had proved by clear and convincing evidence that both parties intended to coordinate the two policies (with a maximum recovery of $25 million) if a single claim involved both policies. Third, he decided that a deductible of $7.5 million should be applied against the jury's damages award; he applied it specifically to the outside attorney fees and expenses incurred by Ebasco in defending the MDL lawsuit. Therefore the total of those costs--$7,592,961--was reduced to $92,961. Fourth, he reversed the award of $2,652,693 for in-house legal expenses. Even though the jury found such costs to be reasonable, the court found that the plaintiffs had failed to show that the costs were direct or consequential damages from the insurers'...