Smi Owen Steel Co., Inc. v. Marsh Usa, Inc.

• Citation: 520 F.3d 432
• Decision Date: 07 March 2008
• Docket Number: No. 06-41387.,06-41387.
• Parties: SMI OWEN STEEL COMPANY, INC., Plaintiff-Appellee, v. MARSH USA, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

520 F.3d 432

SMI OWEN STEEL COMPANY, INC., Plaintiff-Appellee, v. MARSH USA, INC., Defendant-Appellant.

No. 06-41387.

United States Court of Appeals, Fifth Circuit.

March 7, 2008.

Francis Isadore Spagnoletti, Spagnoletti & Co., Kenneth G. Engerrand (argued), Brown Sims, Houston, TX, for Plaintiff-Appellee.

Roger Dale Townsend (argued), Alexander, Dubose, Jones & Townsend, Houston, TX, for Defendant-Appellant.

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

Before WIENER, DeMOSS, and PRADO, Circuit Judges.

PER CURIAM:

Plaintiff-Appellee SMI Owen Steel Company, Inc. ("SMI"), a subcontractor, sued Defendant-Appellant Marsh USA, Inc. ("Marsh"), an insurance broker, under Nevada law, asserting a tort claim for negligent failure to procure insurance, and two quasi-contractual claims for third-party beneficiary and promissory estoppel. The jury found for SMI on all three claims, and the Magistrate Judge signed a corrected judgment in favor of SMI in the amount of $7,839,131.

On appeal, Marsh argues that the judgment in favor of SMI should be reversed and judgment rendered in its favor, or alternatively that the case should be remanded for a new trial, because (1) SMI failed to prove the causation element of its negligence claim because the insured-versus-insured exclusion would have precluded coverage under the professional liability ("PL") policy issued by St. Paul Fire & Marine Insurance Company ("St. Paul"); (2) SMI's negligence claim is barred by Nevada's economic loss doctrine; and (3) SMI's third-party beneficiary and promissory estoppel claims fail as a matter of law because SMI was not an intended beneficiary of any contract, Marsh made no promise that it would procure PL insurance for SMI, and SMI did not detrimentally rely on any promise allegedly made by Marsh regarding PL insurance.

We hold that SMI's negligence claim is not barred by Nevada's economic loss doctrine. Furthermore, we conclude that there was a legally sufficient evidentiary basis for a reasonable jury to find that SMI proved the causation element of its negligence claim. Because Marsh's two legal challenges to SMI's negligence claim fail, we affirm the jury verdict on that basis. We note that SMI elected to recover on a theory of negligence, and its damages award was proportionately reduced by Nevada's comparative negligence statute. Because SMI's negligence claim supports the jury verdict, we decline to address Marsh's remaining arguments regarding SMI's third-party beneficiary and promissory estoppel claims.

I. Factual & Procedural Background

In 1997, Fluor Daniel, Inc. ("Fluor") contracted with Aladdin Gaming, LLC ("Aladdin") to redesign and rebuild the Aladdin Hotel and Casino in Las Vegas, Nevada ("Aladdin Project"). Fluor, the general contractor, retained Marsh, an insurance broker, to administer the "wrapup" insurance scheme for the Aladdin Project known as a Controlled Insurance Program ("CIP"), which involved procuring different insurance policies covering various participants. As compensation, Marsh received a commission from the insurance companies and a flat fee from Fluor. The insurance provided as part of the CIP scheme consisted of several types of policies, including but not limited to commercial general liability coverage, professional liability coverage, pollution liability coverage, subcontractor default coverage, and excess liability coverage. PL coverage insures against design errors and omissions. Under the contract between Fluor and Aladdin, PL coverage was required for Fluor, Aladdin, and related entities — but not for subcontractors. In May 1998, St. Paul issued a PL policy that listed no subcontractors as additional named insureds.

In December 1997, SMI's winning bid of $38.5 Million enabled it to be retained as a subcontractor to design, engineer, and install the Aladdin Project's structural steel and foundation work. At that time, SMI signed a Letter of Intent with Fluor.

In March 1998, SMI received an Insurance Information Booklet from Marsh stating that enrolled subcontractors of all tiers would be covered by the CIP and provided PL coverage. In June 1998, SMI received the Contractor Handbook, prepared in part by Marsh, which again stated that enrolled subcontractors would be provided PL coverage under the CIP. However, the Handbook cautioned that "if any part of the foregoing is in conflict with a provision of your subcontract agreement, the provisions of the subcontract agreement will govern."

In July 1998, SMI enrolled in the CIP and properly completed all enrollment forms. Although Marsh notes that SMI did not request PL coverage in its CIP enrollment forms, SMI argues that it was not required to complete additional forms to obtain the PL coverage.

In August 1998, SMI signed its subcontract, which was retroactively effective to SMI's December 1997 Letter of Intent. An attachment to SMI's subcontract with Fluor described the CIP and stated that coverage for off-site work and "Design Professional Errors and Omissions Insurance" were "Not Included in the CIP." Under an amendment to SMI's subcontract, SMI was required to provide a Certificate of Insurance from McNamara/Salvia, SMI's design consultant, showing that McNamara/Salvia had PL coverage and that SMI and Fluor were additional named insureds. This PL coverage, however, only protected SMI for vicarious liability.

In October 1998, Marsh sent Certificates of Insurance to SMI stating that SMI was an additional named insured on Fluor's PL policy. Unknown to SMI, in December 1998, Marsh's project manager for the Aladdin Project, Phil Luecht, advised his employees to stop sending out certificates for PL coverage to subcontractors and to amend the Contractor Handbook. Despite this warning, in September 1999, Marsh sent yet another inaccurate certificate stating that SMI had PL coverage under the CIP. These two inaccurate certificates each contained a capitalized caveat: "This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below." SMI argues that the Handbook and the two inaccurate certificates led it to detrimentally rely on Marsh to procure PL coverage. Marsh never obtained PL coverage for SMI from St. Paul or any other insurer.

SMI was actually covered by four different insurance policies under the CIP, including a subcontractor default policy. SMI contributed money in the form of bid deductions to purchase this CIP coverage, but SMI never made a bid deduction for PL coverage.

From its inception, the Aladdin Project ran behind schedule. On or about June 1999, several of SMI's subcontractors defaulted, including Black Hawk. As the construction continued, other subcontractors defaulted. SMI's claims for subcontractor default coverage were initially denied by St. Paul, which caused SMI to file a lawsuit against St. Paul and Marsh in federal court in Galveston, Texas ("Galveston Suit").

Because of the multiple defaults of SMI's subcontractors, Aladdin filed claims in an arbitration proceeding against Fluor. Subsequently, Fluor filed a related cross-action in the arbitration proceeding against SMI, alleging that SMI breached its contract, failed to properly design and fabricate its portions of the Aladdin Project, and failed to perform satisfactorily its professional design and construction duties ("Arbitration Proceeding").

St. Paul and SMI eventually reached a settlement in the Galveston Suit. As part of this settlement, SMI released all claims against St. Paul, including claims for coverage under the subcontractor default and PL policies. St. Paul agreed to pay additional amounts if the arbitration among St. Paul, Fluor, and SMI settled. Despite its settlement with St. Paul, SMI continued to pursue its claims against Marsh in the Galveston Suit.

The Arbitration Proceeding eventually settled. SMI's share of the settlement was $3.5 Million paid to Fluor and Aladdin. St. Paul paid $2.25 Million of the amount, and SMI paid the remaining $1.25 Million.

SMI was forced to defend itself against Fluor in the Arbitration Proceeding without any defense or indemnity provided by the PL coverage that SMI believed was provided by the CIP. After SMI settled with St. Paul in the Galveston Suit, SMI amended its complaint to assert tort and quasi-contractual claims based on Marsh's alleged failure to procure PL insurance. SMI argues that if Marsh had secured PL coverage for SMI, then SMI would have been reimbursed for the attorneys' fees incurred by SMI in the Arbitration Proceeding and the $1.25 Million it contributed to the settlement with Fluor and Aladdin. SMI sought an additional $6.6 Million in damages from Marsh because SMI released its claim for the unpaid subcontract value as part of its settlement with Fluor. These damages were not a part of SMI's settlement with St. Paul.

The case was tried by consent before the Magistrate Judge. The court ruled that Nevada substantive law applied, and the parties do not contest that ruling. During the proceedings, Marsh twice moved for judgment as a matter of law, and the court denied both motions. The jury returned a verdict against Marsh on SMI's claims for negligence, and the jury also found that SMI was a third-party beneficiary of the oral contract between Fluor and Marsh and was entitled to recovery under the theory of promissory estoppel.¹ SMI elected to recover on a theory of negligence, and the damages award was proportionately reduced by Nevada's comparative negligence statute. The jury found SMI comparatively negligent for 12% of its damages. On July 31, 2006, SMI was awarded a final judgment of $7,839,131, including interest and costs. The court overruled Marsh's post-judgment motions for judgment as a matter of law and for new trial, and Marsh filed a timely appeal.

II. Analysis

A. Erie Guess

The parties agree that...