Riley Stoker Corp. v. Fidelity and Guar. Ins. Underwriters, Inc.

• Decision Date: 22 July 1994
• Docket Number: Nos. 92-3960,93-3359,93-3360 and 93-3397,s. 92-3960
• Citation: 26 F.3d 581
• Parties: RILEY STOKER CORPORATION, Plaintiff-Appellant Cross-Appellee, v. FIDELITY AND GUARANTY INSURANCE UNDERWRITERS, INC., et al., Defendants-Appellees Cross-Appellants. RILEY STOKER CORP., Plaintiff, v. FIDELITY AND GUARANTY INSURANCE UNDERWRITERS, INC., et al., Defendants. FIDELITY & GUARANTY INSURANCE UNDERWRITERS, INC. and United States Fidelity and Guaranty Company, Defendants-Third Party Plaintiffs-Appellants, v. BEAIRD INDUSTRIES, INC., and Ashland Oil, Inc., Third Party Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 581

26 F.3d 581

RILEY STOKER CORPORATION, Plaintiff-Appellant Cross-Appellee, v. FIDELITY AND GUARANTY INSURANCE UNDERWRITERS, INC., et al.,

Defendants-Appellees Cross-Appellants.

RILEY STOKER CORP., Plaintiff, v. FIDELITY AND GUARANTY INSURANCE UNDERWRITERS, INC., et al.,

Defendants.

FIDELITY & GUARANTY INSURANCE UNDERWRITERS, INC. and United

States Fidelity and Guaranty Company, Defendants-Third Party Plaintiffs-Appellants, v. BEAIRD INDUSTRIES, INC., and Ashland Oil, Inc., Third Party

Defendants-Appellees.

Nos. 92-3960, 93-3359, 93-3360 and 93-3397.

United States Court of Appeals Fifth Circuit.

July 22, 1994.

Reuben L. Hedlund, Hedlund & Hanley, Chicago, IL, Tom F. Phillips, W. Shelby McKenzie, Taylor, Porter, Brooks & Phillips, Baton Rouge, LA, for appellant in No. 92-3960.

Judith R. Atkinson, Thomas Balhoff, Daniel R. Atkinson, Mathews, Atkinson, Guglielmo, Marks & Day, Baton Rouge, LA, for appellees.

Phillip A. Wittmann, C. Lawrence Orlansky, New Orleans, LA, for Fidelity and Guar. Ins.

Judith R.E. Atkinson, Thomas E. Balhoff, Daniel R. Atkinson, Sr., Mathews, Atkinson, Guglielmo, Marks & Day, Baton Rouge, LA, Phillip A. Wittmann, C. Lawrence Orlansky, Marc D. Winsberg, Stone, Pigman, Walther, Wittmann & Hutchinson, New Orleans, LA, for appellants in Nos. 93-3359, 93-3360 and 93-3397.

Glenn L. Langley, Cook, Yancey, King & Galloway, Shreveport, LA, for Beaird.

Reuben L. Hedlund, Hedlund & Hanley, Chicago, IL, Tom F. Phillips, W. Shelby McKenzie, Taylor, Porter, Brooks & Phillips, Baton Rouge, LA, for Ashland Oil Co.

Appeals from the United States District Court for the Middle District of Louisiana.

Before WOOD, ¹ SMITH and DUHE, Circuit Judges.

DUHE, Circuit Judge.

This is an insurance coverage dispute in which a contractor seeks to hold its insurer liable under primary and excess comprehensive general liability policies for damage caused by the contractor's defective work. For the most part we agree with the district court's decision. We, however, find error in some aspects of it so we affirm in part, reverse in part, and remand.

BACKGROUND

In 1975, Riley Stoker Corporation ("Riley Stoker") and Cajun Electric Power Cooperative, Inc. ("Cajun") entered into a contract ("G2-2 Contract") in which Riley Stoker agreed to construct two coal-fired steam generators for Units 1 and 2 of the Big Cajun No. 2 power plant near New Roads, Louisiana. Each generator would include a boiler and furnace and four coal pulverizers ("ball tube mills"). Riley Stoker then contracted with its affiliate, Beaird Industries, Inc. ("Riley Beaird"), to design and build the ball tube mills.

After Cajun began initial operation of Units 1 and 2, the Riley Stoker steam generators, particularly the ball tube mills, began to exhibit serious defects. A fire and several explosions occurred in 1980 and 1981. Tire cracking, thrusting problems, and gear reducing problems appeared during the same time period. Because of this, and construction delays, Cajun did not take the project out of the construction phase and declare commercial operation until June 30, 1981, even though the G2-2 Contract called for commercial operation on Units 1 and 2 by July 1979 and July 1980, respectively. After the declaration of commercial operation, the mechanical breakdowns continued to occur, and eventually, all of the ball tube mills required repair and replacement.

In December 1983, Cajun sued Riley Stoker for damages caused by delay in completing the project, for loss of use of its electric generators, and repair and replacement of Riley Stoker's steam generators. The suit was ultimately resolved through arbitration. In February 1989, the arbitrators awarded Cajun $2,850,390 for financial damages caused by Riley Stoker's failure to complete its work in time to support commercial operation Pursuant to the G2-2 Contract, Cajun obtained comprehensive general liability coverage from Fidelity and Guaranty Insurance Underwriters, Inc. and United States Fidelity and Guaranty Company (collectively "USF & G") on behalf of and for the benefit of Riley Stoker and its subcontractors. The coverage included one primary policy and two consecutive excess policies. Riley Stoker was the named insured under the primary policy, and Cajun and Riley Stoker were named insureds under the two excess policies.

within the contractually required time (paragraph 12 of the arbitration award) and $28,618,184 for other damages caused by defective equipment furnished by or on behalf of Riley Stoker (paragraph 13 of the arbitration award).

In February 1984, Riley Stoker notified USF & G of Cajun's suit and requested defense and indemnity. USF & G denied coverage, stating that Cajun did not allege damages for covered claims. Riley then filed this action. The district court granted summary judgment for USF & G. This Court reversed and remanded, holding that USF & G had a duty to defend Riley Stoker because Cajun alleged damages for potentially covered claims. 886 F.2d 1313.

On remand, in 1992, the district court found that the damages awarded by the arbitrators in paragraph 12 were covered, but those in paragraph 13 were not. Accordingly, the court awarded $2.85 million for indemnity. With regard to "defense costs" incurred by Riley Stoker in defending the Cajun action, the court awarded $9.5 million of the $17.3 million Riley Stoker claimed. The court also awarded prejudgment interest but denied Riley Stoker's request for penalties and attorney's fees. Both Riley Stoker and USF & G appeal.

Riley Stoker appeals the following: (1) the ruling that the policies do not cover the paragraph 13 award; (2) the reduction of its claimed "defense costs"; and (3) the denial of statutory penalties and fees. USF & G cross appeals the following: (1) the preclusion of its notice defense; (2) the ruling that the policies provide coverage for the paragraph 12 award; (3) the failure to apportion "defense costs" between covered and uncovered claims; (4) the award of prejudgment interest on the defense cost portion of the judgment; (5) the dismissal of its third-party complaint; and (6) the denial of its motion for leave to amend its third-party complaint. ²

DISCUSSION

I. The Preclusion of USF & G's Untimely Notice Defense

USF & G contends that Riley Stoker failed to give it timely notice of the events at Cajun as required by the policy and that this policy breach relieved USF & G of its indemnity and defense obligations. USF & G further contends that the district court erred in finding that it waived this defense by failing to assert it until years after it had denied coverage on other grounds. The district court's decision correctly states the Louisiana law of waiver of lack of notice. In Wheeler v. London Guar. & Accident Co., 180 La. 366, 156 So. 420 (1934), the Louisiana Supreme Court stated:

If the insurer receives notice and proofs of the insured's claim after the expiration of the time stipulated in the policy for the giving of such notice and then plants its defense solely upon a ground not relating to the time for giving notice, the insured has reason to believe that the insurer intends to waive its right to defend on the ground that timely notice of the accident was not given. And in case the insured brings an action under the policy and incurs expenses incident to the suit, the insurer cannot be heard to say in its answer for the time that timely notice was not given.

156 So. at 422. Thus, the district court properly found that USF & G had waived its delayed notice defense.

II. Liability for the Arbitration Award

A. Occurrences

The insurance policies provide that the insurer will pay on behalf of the insured all sums that the insured becomes legally obligated to pay as damages because of "property damage" caused by an "occurrence." The primary policy defines occurrence as an "accident, including continuous or repeated exposure to conditions, which results in ... property damage neither expected nor intended from the standpoint of the Insured." The first excess policy defines occurrence as "an accident, including continuous or repeated exposure to conditions which results in ... property damage." And the second excess policy defines occurrence as "an accident or unexpected event, including continuous or repeated exposure to substantially the same general conditions, which results in ... property damage." USF & G argues that Riley Stoker did not prove the happening of occurrences, and therefore, the district court erred in ruling that damages awarded in paragraph 12 by the arbitrators were covered.

After a thorough review of the record, we have no difficulty in finding that Riley Stoker met its burden of proving that the damages suffered by Cajun were caused by occurrences as defined in the policies. The record supports the finding that the ball tube mills, and their components, suddenly and unexpectedly broke down, causing physical damage to the steam generating facility, on numerous occasions. USF & G points out, however, that Louisiana courts have applied a judicial gloss on the definition of occurrence. "In cases involving insurance policies with identical or substantially similar definitions of occurrence, Louisiana Courts have found no occurrence where the liability of a contractor is based solely on [its] improper construction or defective workmanship." Rivnor Properties v. Herbert O'Donnell, Inc., 633 So.2d 735, 751 (La.Ct.App. 5th Cir.1994). USF & G argues that because Cajun's claims were all grounded in Riley Stoker's construction delay and faulty design, manufacture, and installation of the ball tube mills, Cajun's damages were not caused by occurrences.

USF & G has interpreted the cases too broadly. What the Louisiana courts have actually done is define occurrence by reference to the exclusions typically found in a comprehensive general liability policy. ³ If there is a conflict between Louisiana's judicial gloss on the definition of occurrences and USF & G...