Seahawk Liquidating Trust v. Certain Underwriters at Lloyds London

• Decision Date: 19 January 2016
• Docket Number: No. 15–30324.,15–30324.
• Citation: 810 F.3d 986
• Parties: SEAHAWK LIQUIDATING TRUST, as Trustee of Seahawk Drilling, Incorporated, Plaintiff–Appellant, v. CERTAIN UNDERWRITERS AT LLOYDS LONDON; Ace European Group Limited; National Union Fire Insurance Company of Pittsburgh, Pennsylvania; Axis Specialty Europe, Limited ; Lancashire Insurance Company, Limited ; Swiss Re International SE; Aspen Insurance U.K. Limited ; Berkley Insurance Company; Arch Insurance Company; International Insurance Company of Hannover, Limited; Hudson Specialty Insurance Company ; Navigators Insurance Company; New York Marine & General Insurance Company; Torus Insurance, Defendants–Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

810 F.3d 986

SEAHAWK LIQUIDATING TRUST, as Trustee of Seahawk Drilling, Incorporated, Plaintiff–Appellant,

v.CERTAIN UNDERWRITERS AT LLOYDS LONDON; Ace European Group Limited; National Union Fire Insurance Company of Pittsburgh, Pennsylvania; Axis Specialty Europe, Limited ; Lancashire Insurance Company, Limited ; Swiss Re International SE; Aspen Insurance U.K. Limited ; Berkley Insurance Company; Arch Insurance Company; International Insurance Company of Hannover, Limited; Hudson Specialty Insurance Company ; Navigators Insurance Company; New York Marine & General Insurance Company; Torus Insurance, Defendants–Appellees.

No. 15–30324.

United States Court of Appeals, Fifth Circuit.

Jan. 19, 2016.

James M. Garner, Esq., Peter L. Hilbert, Jr., Esq., Kevin Michael McGlone (argued), Sher Garner Cahill Richter Klein & Hilbert, L.L.C., New Orleans, LA, for Plaintiff–Appellant.

Harold Kemler Watson (argued), Chaffe McCall, L.L.P., Houston, TX, for Defendant–Appellee.

Before SMITH, WIENER, and GRAVES, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

This appeal follows a bench trial and judgment for the defendant insurers on the claims of Seahawk Liquidating Trust ("Seahawk") for payment of insurance proceeds. There is no error, so we affirm.

I.

Seahawk¹ operated a fleet of drilling rigs, one of which was the J/U SEAHAWK 3000 (the "Rig"), a three-legged, mat-supported jack-up drilling rig with 375–foot legs used to perform drilling contracts in the Gulf of Mexico beginning in 1974.² In February 2010, while moving between drilling locations, the Rig encountered severe weather and jacked up out of the water for several days to avoid the harsh seas. Despite those efforts, the rough seas still caused the legs to become misaligned.

Between February and April, Seahawk repaired the hydraulic-jacking system on several occasions, actions that were consistent with the Rig's history: It had had consistent wear-and-tear problems with, and required repairs to, its hydraulic-jacking system for more than twenty years. In April, the Rig traveled to perform a drilling contract for Hilcorp Drilling Company ("Hilcorp"), but Seahawk still did not know that the legs were misaligned. The Rig failed to jack up to a sufficient height to perform the Hilcorp contract because of other problems with the hydraulic-jacking system, leading Hilcorp to request that Seahawk provide a replacement rig, which it did at a cost of $1,092,000.

Though Seahawk brought in a replacement, the Rig became stuck for several days at the Hilcorp location after an incident during the jacking-down process caused further damage to the hydraulic-jacking system. That incident required temporary repairs to the jacking system while the Rig was stuck and further such repairs once it successfully jacked down and moved to a dry dock. At some point in May, while the Rig was in dry dock, Seahawk learned the legs were misaligned but did not fix them because doing so would be too expensive.

After that dry-dock period, the Rig departed in early July to perform another drilling contract, which it completed in calm weather, though the crew used an unorthodox method to jack it up—the Rig essentially jacked up one side of the hull at a time, rather than jacking up the entire hull uniformly. Seahawk's expert, Crane Zumwalt, testified that the crew developed that procedure to compensate for the misaligned legs and that the Rig always succeeded in jacking up if—as with this drilling contract—the weather and seas were calm.

On July 21, 2010, the weather and seas were not calm as the Rig arrived to perform a drilling contract at East Cameron Island. In those conditions, the Rig's operating manual forbade its crew from jacking it into or out of the water, but the crew attempted to jack it out of the water nonetheless. The hydraulic-jacking system became disengaged when the Rig attempted to jack up, causing the hull to slide down the legs and float in the sea. The crew, before evacuating, attempted to jack the Rig back up to no avail, and the Rig floated in the rough seas, sustaining further damage, for nearly thirty hours. Zumwalt testified that the Rig would have been able to jack up—and jack back up after sliding down—without incident if the weather had been calm.

After the July 21 storm, the Rig went to dry dock for further repairs until December 2010. The repairs again focused on the hydraulic-jacking system instead of the misaligned legs; Seahawk never repaired the legs. While the Rig was in dry dock, Seahawk submitted a claim to the insurers to cover the cost of repairs, alleged to be $16,969,860. The insurers rejected the claim.

II.

Seahawk sued the insurers for proceeds covering the physical damage to the Rig and the loss on the Hilcorp contract. Seahawk's insurance policy (the "Policy")³ included several key provisions:

• The general-coverage provision: "This insurance is against all risks of direct physical loss of or physical damage to the property insured, subject to the terms, conditions, and exclusions contained herein.... This Insurance covers all the hull and machinery of the drilling unit(s)...."

• The $10,000,000–deductible provision: "For the purpose of this [Deductible] Clause, each occurrence shall be treated separately, but it is agreed that a sequence of losses or damages arising from the same occurrence shall be treated as one occurrence."

• The wear-and-tear exclusion: "There shall be no recovery under this Insurance in respect of ... [the] Cost of repairing or replacing any part which may be lost, damaged or condemned solely due to ... wear and tear...."

• The loss-of-contract provision (the "Contract Provision"): "[C]overage hereunder shall include the loss of charter hire resulting from the termination and/or cancellation of [Seahawk's] drilling contract(s) caused by the insured drilling units being unable to operate following a claim recoverable under [the general-coverage provision] if the deductible were nil."

Seahawk sought to recover the nearly $17 million for repairs made between February and December 2010. After a three-day bench trial, the district court determined that the insurers had properly rejected the claim because they found that there were two occurrences, meaning two $10 million deductibles had to be met, so Seahawk could recover nothing.⁴ There were two occurrences, the court reasoned, because the sequence of losses (i.e., the damages and subsequent repairs) between February and July was proximately caused by the February storm, but the sequence of losses after the July storm was proximately caused by that latter storm. There were two separate proximate causes of two different series of losses, so there were two occurrences.

Seahawk also sought to recover under the Contract Provision. It maintained that the misalignment of the legs caused the Rig to be unable to operate and thereby occasioned the loss of the Hilcorp contract; the misalignment was caused by a severe weather event and would have been recoverable if the deductible were nil; thus, the loss on the Hilcorp contract was recoverable.

The district court found, to the contrary, that the misaligned legs (a theoretically covered loss) at most contributed to the defective hydraulic-jacking system (an excluded loss, as it was caused by wear-and-tear) in causing the loss of the contract. That finding required that the court apply the concurrent-cause doctrine.

III.

The Policy provides that it is governed by Texas law, under which the interpretation of an insurance policy is a question of law, which we review de novo. Ran–Nan Inc. v. Gen. Accident Ins. Co. of Am., 252 F.3d 738, 739 (5th Cir.2001). The parties agree that Texas substantive law applies. We review any underlying factual findings for clear error. Theriot v. United States, 245 F.3d 388, 394–95 (5th Cir.1998). A factual finding, such as a causation determination, is clearly erroneous only "when the appellate court, viewing the evidence in its entirety, is left with the definite and firm conviction that a mistake has been made." Manderson v. Chet Morrison Contractors, Inc., 666 F.3d 373, 376 (5th Cir.2012). "Re-stated, our court may not find clear error if the district court's finding is plausible in light of the record as a whole, even if this court would have weighed the evidence differently." Id. at 376–77 (alterations omitted).

IV.

Because there were two occurrences, the district court properly denied Seahawk's claim for the cost of repairs between February and December 2010. That court's proximate-cause analysis was the correct legal standard for determining the number of occurrences, and the court did not clearly err in finding that the February storm was not the proximate cause of the sequence of losses following the July storm.

A.

Under Texas law, we must construe the Policy according to the general rules of contract construction to give effect to the intent. Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118, 126 (Tex.2010).⁵ We begin with the policy language, giving the terms their "ordinary and generally-accepted meaning unless the policy shows the words are meant in a technical or different sense." Id. When an issue of state law is unclear, a federal court must make an "Erie guess" as to what the state's highest court would decide.⁶

Seahawk's first claim turns entirely on the meaning of "occurrence," which, according to its ordinary and generally-accepted meaning, is "something that occurs"⁷ or "something that takes place; esp: something that happens unexpectedly and without design."⁸ The parties appear not to contest that the February storm was an occurrence; under that ordinary meaning, the July storm would appear to be an occurrence too.

Seahawk, however, contends that the Policy gives "occurrence" a technical meaning by defining it to include "a sequence of losses or damages arising from the same occurrence." The February storm, according to Seahawk, was an occurrence that damaged the Rig's legs and was a but-for cause...