ARM Properties Management Grp v. RSUI Indemnity Company

Filing

UNPUBLISHED OPINION FILED. [09-50653 Reversed and Remanded ] Judge: EGJ , Judge: HRD , Judge: JLD Mandate pull date is 11/29/2010 [09-50653]

ARM Properties Management Grp v. RSUI Indemnity Company Case: 09-50653 Document: 00511286527

Page: 1 Date Filed: 11/05/2010

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IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
November 5, 2010 N o . 09-50653 Lyle W. Cayce Clerk

A R M PROPERTIES MANAGEMENT GROUP, P la in t iff ­ Appellee v. R S U I INDEMNITY COMPANY, D e fe n d a n t ­ Appellant

A p p e a l from the United States District Court fo r the Western District of Texas (1 :0 7 -C V -7 1 8 )

B e fo r e JOLLY, DEMOSS, and DENNIS, Circuit Judges. P E R CURIAM:* T h is appeal involves a dispute between an insured, ARM Properties M a n a g e m e n t Group (ARM), and one of its insurance carriers, RSUI Indemnity C o m p a n y (RSUI). At issue is the second-layer excess insurance policy issued by R S U I (the RSUI Policy) under which ARM claims $5,500,587.03. The parties r a is e the following issues: (1) whether the RSUI Policy incorporates the antic o n c u r r e n t causation clause (the ACC Clause) and the water exclusion (the W a t e r Exclusion) from the primary insurance policy; (2) whether RSUI's liability
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
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No. 09-50653 h a s attached under the RSUI Policy; (3) whether the RSUI Policy incorporates t h e flood deductible from the primary insurance policy; (4) whether the RSUI P o lic y 's scheduled limit of liability provision requires that coverage sub-limits b e determined on an aggregate basis; and (5) whether RSUI waived the RSUI P o l i c y 's anti-assignment clause and/or the insurable interest requirement. Because we hold that the ACC Clause and Water Exclusion were incorporated b y the RSUI Policy, a threshold issue resolved in RSUI's favor, we do not reach t h e remaining issues. We therefore reverse and remand. F a c t s and Background A R M is in the business of purchasing property insurance for hundreds of a p a r t m e n t complexes. By grouping separate properties together under a single p o lic y , ARM is able to obtain better insurance rates for the property owners. When Hurricane Katrina struck the Mississippi Gulf Coast in August 2005, nine o f ARM's covered properties sustained damage. Each of the properties had three " la y e r s " of insurance coverage. Westchester Surplus Lines Insurance Company is s u e d the primary insurance policy (the Primary Policy) with a $20 million c o v e r a g e limit, including a $7.5 million flood damage sub-limit. Essex Insurance C o m p a n y issued a first-layer excess insurance policy (the First-Layer Policy) w it h a $10 million coverage limit for damage amounts that exceed the Primary P o lic y limit. RSUI issued the RSUI Policy, a second-layer excess insurance p o lic y with a $470 million coverage limit for damage amounts that exceed the c o m b in e d primary and first-layer excess coverage limit of $30 million. T h e Primary Policy and First-Layer Policy paid the combined liability l i m i t of $30 million. RSUI has not paid any of ARM's claims. ARM contends t h a t $5,500,587.03 in combined wind and water damage should be paid under t h e RSUI Policy. RSUI responds that no payment is due because such windw a t e r damage is excluded under the Primary Policy. The parties filed a Joint S t ip u la tio n of Facts in Lieu of Trial (the Joint Stipulation) with the district 2

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No. 09-50653 c o u r t, and on July 16, 2009, the district court issued an order finding in favor of A R M . The district court found that (i) the Primary Policy's ACC Clause and W a t e r Exclusion were not incorporated by the RSUI Policy; (ii) RSUI's liability h a d attached under the RSUI Policy; (iii) the Primary Policy's flood deductible w a s not incorporated by the RSUI Policy; (iv) the RSUI Policy's scheduled limit o f liability applies on an aggregate basis; (v) the RSUI Policy's anti-assignment p r o v is io n voided certain property owners' assignments of their claims to ARM; a n d (vi) ARM lacked an insurable interest but RSUI waived that requirement. The district court awarded ARM its full claim of $5,500,587.03, plus interest and a t t o r n e y s ' fees. This appeal followed. D is c u s s io n T h e district court decided this case on cross motions for judgment based o n the Joint Stipulation, which is essentially a summary judgment proceeding. See Bank of La. v. Aetna U.S. Healthcare, Inc., 571 F. Supp. 2d 728, 729 n.1 (E .D . La. 2008), aff'd, 326 F. App'x 321 (5th Cir. 2009); see also More v. Intelcom S u p p o r t Servs., Inc., 960 F.2d 466, 469 (5th Cir. 1992). Our review is de novo, a p p ly in g the same standards as would the district court. Babcock v. Hartmarx C o r p ., 182 F.3d 336, 338 (5th Cir. 1999). I n the Joint Stipulation, the parties agreed that if the RSUI Policy in c o r p o r a t e s the Primary Policy's ACC Clause and Water Exclusion, "the total o f the losses in question in this case will not reach RSUI's coverage layer, i.e., t h e covered losses will total less than $30 million, and thus ARM cannot recover u n d e r the RSUI policy." We address this threshold issue first and find that the A C C Clause and Water Exclusion were incorporated by the RSUI Policy. T h e parties agree that Texas law governs the interpretation of the in s u r a n c e policies. Under Texas law, the construction of an insurance policy is a question of law. See State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (T e x . 1995). We apply the same rules to the interpretation of insurance policies 3

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No. 09-50653 a s to any other contract, and "read all parts of each policy together and exercise c a u t io n not to isolate particular sections or provisions from the contract as a w h o le ." Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 216 (Tex. 2 0 0 3 ). "We construe the policy to give effect to each term in the contract and to a v o id rendering any term a nullity." Lynch Props., Inc. v. Potomac Ins. Co. of I ll., 140 F.3d 622, 626 (5th Cir. 1998). Where the policy's language "can be given a definite or certain legal meaning, it is not ambiguous and we construe it as a m a t t e r of law." Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 157 (Tex. 2 0 0 3 ). T w o provisions in the RSUI Policy directly reference the Primary Policy a n d expressly incorporate the Primary Policy's coverage parameters. The first is the "Insuring Clause," which provides: S u b je c t to the limitations, terms and conditions contained in this P o lic y or added hereto, [RSUI] agrees to indemnify [ARM] in respect o f direct physical loss or damage to the property . . . which are also c o v e r e d by and defined in the [Primary Policy]. T h e second is the "Maintenance of Primary Insurance" Clause (collectively with t h e Insuring Clause, the Incorporating Clauses), which provides: I n respect of the perils hereby insured against, this Policy is subject t o the same warranties, terms and conditions . . . as are contained in or as may be added to the [Primary Policy] prior to the happening o f a loss for which claim is made hereunder. T o g e t h e r , the Incorporating Clauses provide that the RSUI Policy covers only d a m a g e also covered by the Primary Policy and excludes any damage excluded b y the Primary Policy. The question, therefore, is whether combined wind-water d a m a g e is covered by the Primary Policy's ACC Clause or is excluded by the P r im a r y Policy's Water Exclusion. T h e Primary Policy's ACC Clause provides: W e will not pay for loss or damage caused directly or indirectly by a n y of the following. Such loss or damage is excluded regardless of

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No. 09-50653 a n y other cause or event that contributes concurrently or in any s e q u e n c e to the loss. T h e Primary Policy's Water Exclusion excludes from coverage certain water d a m a g e as follows: W a t e r . . . Flood, surface water, waves, tides, tidal waves, overflow o f any body of water, or their spray, all whether driven by wind or n o t. T h e district court held that "the ACC clause, as it operates with the Water E x c lu s io n in the [Primary] Policy, does not relate to any peril insured in the R S U I policy and thus is not a provision adopted by that policy." We disagree. Our case Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419 (5th Cir. 2007) (a p p ly in g Mississippi law), considered virtually identical insurance policy c la u s e s as those presented in this case. In Leonard, we found that the ACC C la u s e denied coverage "whenever an excluded peril and a covered peril combine t o damage" the insured property. Id. at 425. The language specifically

" a d d r e s s e s situations in which damage arises from the synergistic action of a c o v e r e d peril, e.g., wind, and an excluded peril, e.g., water." Id. We held in L e o n a r d that T h e clause unambiguously excludes coverage for water damage `e v e n if another peril'--e.g., wind--`contributed concurrently or in a n y sequence to cause the loss.' The plain language of the policy le a v e s the district court no interpretive leeway to conclude that r e c o v e r y can be obtained for wind damage that `occurred c o n c u r r e n t ly or in sequence with the excluded water damage.' . . . The clause is not ambiguous. I d . at 430 (internal citation omitted). The same situation is present in this case. Like Leonard, "[t]he only s p e c ie s of damage covered under the [RSUI Policy] is damage caused exclusively b y wind. But [because] wind and water synergistically caused the same damage, s u c h damage is excluded." Id. (emphasis in original); see Bilbe v. Belsom, 530 F .3 d 314, 317 n.3 (5th Cir. 2008). The plain language of the ACC Clause and 5

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No. 09-50653 W a t e r Exclusion, read together, exclude from coverage any damage caused by a combination of wind and water. Thus, the combined wind-water damage at is s u e here is a peril expressly excluded from coverage by the Primary Policy and t h e ACC Clause and Water Exclusion are therefore expressly incorporated by the R S U I Policy pursuant to the Incorporating Clauses. C o n c lu sio n W e hold that, pursuant to the Joint Stipulation, ARM cannot prove s u ffic ie n t wind-only damage to reach RSUI's insurance layer. Because we

r e s o lv e this threshold issue in favor of RSUI, we do not reach the remaining is s u e s raised on appeal. The district court order is REVERSED and the case is R E M A N D E D for further proceedings consistent with this opinion.

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No. 09-50653 D E N N IS , Circuit Judge, dissenting. T h e issue is whether the RSUI Excess Coverage Policy (the "Excess P o lic y " ) incorporates the Primary Policy's anti-concurrent causation (ACC) c la u s e and Water Exclusion so as to exclude coverage of perils by the Excess P o l ic y to the same extent as they are excluded from coverage by the Primary P o lic y . In my view, the Excess Policy is ambiguous in this respect and could be r e a s o n a b ly interpreted either way. See Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S .W .3 d 154, 157 (Tex. 2003) (insurance policy provisions are ambiguous where t h e y are "susceptible to two or more reasonable interpretations"). Because Texas la w requires courts to construe ambiguous policy provisions in favor of coverage fo r the insured, see State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 ( T e x . 1995) (ambiguous terms must be construed "against the insurer in a m a n n e r that favors coverage"), the majority's interpretation in favor of the in s u r a n c e company and against coverage is incorrect. T h e Primary Policy's definition of "Covered Causes of Loss" and its " E x c lu s io n s ," which include the ACC clause and the Water Exclusion provisions a r e as follows: A. C o v e r e d Causes Of Loss . . . Covered Causes of Loss means Risks Of Direct Physical L o s s unless the loss is: 1 . Excluded in Section B., Exclusions; or 2 . Limited in Section C., Limitations; t h a t follow .... B. E x c lu sio n s 1. W e will not pay for loss or damage caused directly or in d ir e c t ly by any of the following. Such loss or damage is excluded regardless of any other cause or event that c o n t r ib u t e s concurrently or in any sequence to the loss.

....

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No. 09-50653 g. (1 ) W a ter F lo o d , surface water, waves, tides, tidal waves, o v e r flo w of any body of water, or their spray, all w h e t h e r driven by wind or not . . . .

I agree with the majority that "[t]he plain language of the [Primary P o lic y 's ] ACC Clause and Water Exclusion, read together, exclude from coverage [u n d e r the Primary Policy] any damage caused by a combination of wind and w a t e r ." Majority Op. at 5-6. Our decision in Leonard v. Nationwide Mut. Ins. C o ., 499 F.3d 419 (5th Cir. 2007), so held. However, I disagree with the

m a jo r it y 's subsequent conclusion that the only reasonable interpretation of the E x c e s s Policy is that it incorporates the Primary Policy's coverage exclusions. T h e relevant provisions of the Excess Policy are the Insuring Clause and t h e Maintenance of Primary Insurance clause--what the majority calls "the I n c o r p o r a tin g Clauses"--as well as the "Perils Covered" clause: 3. P e r ils Covered: E a r t h q u a k e [.] A ll R isk [s] E xclu ding F l o o d and

.... I N S U R I N G CLAUSE: S u b j e c t to the limitations, terms and conditions contained in this P o lic y or added hereto, [RSUI] agrees to indemnify [ARM] in respect o f direct physical loss or damage to the [covered] property . . . caused b y any such perils as are set forth in Item 3 of the schedule, and w h ic h are also covered by and defined in the [Primary Policy]. .... M A I N T E N A N C E OF PRIMARY INSURANCE I n respect of the perils hereby insured against, this Policy is subject t o the same warranties, terms and conditions . . . as are contained in or as may be added to the [Primary Policy] prior to the happening o f a loss for which claim is made hereunder . . . . T h e s e three provisions of the Excess Policy are patently ambiguous. They c a n be reasonably read to provide coverage only to the same extent as provided fo r in the Primary Policy. They can also reasonably be read to provide coverage

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No. 09-50653 fo r all perils except flood and earthquake. Under this reasonable interpretation, t h e Excess Policy does not incorporate the Primary Policy's ACC clause and W a t e r Exclusion because they are exclusions from coverage, not covered perils, a n d are related to flood, which is not a peril covered by the Excess Policy.1 T h e majority, however, reads the ambiguous Excess Policy in only one w a y : against coverage and in favor of the insurance company. In this diversity c a s e , Texas law requires that this ambiguity be resolved in favor of coverage and t h e insured. For these reasons, I respectfully dissent.

This latter interpretation is supported by our decision in Wentwood Woodside I, LP v. GMAC Commercial Mortgage Corp., 419 F.3d 310 (5th Cir. 2005), where we confronted a very similar multilayer insurance scheme, with a nearly identical Maintenance of Primary Insurance provision in the top-layer insurance policy. Id. at 312-13, 315. Flood was not a covered peril in the excess insurance policy, and we read the provision in the excess insurance policy that incorporated the terms of the primary policy "[i]n respect of the perils hereby insured against" to preclude incorporation of an Errors and Omissions clause with respect to flood damage because flood was not a covered peril. Id. at 315-16. Here, exactly the same reasoning leads to the reasonable interpretation of the Excess Policy that it does not incorporate the Primary Policy's ACC and Water Exclusion clauses because they are terms relating to flood, a peril that is not covered by the Excess Policy.

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