Penthouse Owners Association v. Certain Underwriters at Lloyds

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Penthouse Owners Association v. Certain Underwriters at Lloyds

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Case: 09-60652

Document: 00511174274

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Date Filed: 07/15/2010

IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
July 15, 2010 N o . 09-60652 Lyle W. Cayce Clerk

P E N T H O U S E OWNERS ASSOCIATION, INC., P la in t iff - Appellee v. C E R T A I N UNDERWRITERS AT LLOYDS, LONDON, D e fe n d a n t - Appellant

A p p e a l from the United States District Court fo r the Southern District of Mississippi

B e fo r e JOLLY, SMITH, and OWEN, Circuit Judges. E . GRADY JOLLY, Circuit Judge: T h is appeal arises from a claim for insurance coverage for damage caused b y Hurricane Katrina. The district court interpreted a windstorm deductible e n d o r s e m e n t in the appellee's insurance policy to require coverage for the d e s t r u c t io n of the insured's buildings by Katrina's storm surge. Based on

p r in c ip le s of insurance contract interpretation, under Mississippi law, we c o n c lu d e that the deductible endorsement at issue here did not render the policy a m b ig u o u s or otherwise expand coverage to include losses excluded elsewhere in the policy. Accordingly, we vacate the district court's certified orders and r e m a n d for consideration of the Underwriters' summary judgment motion.

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Case: 09-60652

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Date Filed: 07/15/2010

No. 09-60652 I A p p e lle e Penthouse Owner's Association, Inc. ("Penthouse") owns a c o m p le x of condominiums in Pass Christian, Mississippi, that are insured under a Lloyd's, London ("the Underwriters") all-risk policy ("Policy") with a policy lim it of $3,568,000. The Policy excludes water damage, including "flood, surface w a t e r , waves, tides, tidal waves, overflow of any body of water, or their spray, a ll whether driven by wind or not." It also contains an "anti-concurrent c a u s a t io n " clause (ACC clause), which states that "such [water] loss or damage is excluded regardless of any other cause of loss or event that contributes c o n c u r r e n tly or in any sequence to the loss." (emphasis added). In addition, the p o lic y includes an endorsement that defines a "Windstorm or Hail Deductible" (" W in d s t o r m Deductible"). The Deductible is set at 5%, and the endorsement s t a t e s , in relevant part: T h e Windstorm or Hail Deductible, as shown in the Schedule, a p p lie s to loss or damage to Covered Property caused directly or in d ir e c t ly by windstorm or hail, regardless of any other cause or e v e n t that contributes concurrently or in any sequence to the loss or d a m a g e . If loss or damage from a covered weather condition other t h a n windstorm or hail occurs, and that loss or damage would not h a v e occurred but for the windstorm or hail, such loss or damage s h a ll be considered to be caused by windstorm or hail and therefore p a r t of the windstorm or hail occurrence. ... The Windstorm or Hail Deductible applies whenever there is an o c c u r r e n c e of windstorm or hail. H u r r ic a n e Katrina completely destroyed Penthouse's property, leaving o n ly the slab. Penthouse recovered the policy limit ($3,610,000) from its flood in s u r e r , and made a claim under the Underwriters' policy. The Underwriters d e n ie d the claim, citing the Policy's flood exclusion and ACC clause and the

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No. 09-60652 U n d e r w r ite r s ' engineers' determination that the buildings had been destroyed b y flood. Penthouse filed this action on April 24, 2007, to recover under the Policy, a lle g in g breach of contract and negligent and bad faith breach of contract. The c o m p la in t alleged that the winds of Hurricane Katrina destroyed the condos s e v e r a l hours before the storm surge, and that therefore the loss was caused e n tir e ly by wind, not by flood. The Underwriters moved for summary judgment, a r g u in g that Penthouse could not show that wind alone caused damages e x c e e d in g the Policy's windstorm deductible and Penthouse's previous recovery fo r flood damage. The district court denied the motion for summary judgment, a n d later denied the Underwriters' motion for reconsideration and motion for p a r tia l summary judgment; all three orders were based on the court's conclusion t h a t the Windstorm Deductible operated to provide coverage for hurricane d a m a g e regardless of whether the damage was caused by wind or flood. On J a n u a r y 29, 2009, the district court issued a sua sponte "Order of Clarification o n the Issues of Liability and the Measure of Contract Damages," in which the c o u r t granted judgment as a matter of law to Penthouse on the question of the U n d erw rite r s ' liability for all hurricane-related losses, again based on the court's in t e r p r e t a t io n of the Windstorm Deductible. A fte r the case was reassigned to a different judge, the district court c e r t ifie d for appeal, under 28 U.S.C. § 1292(b), the July 2, 2008, order denying t h e Underwriters' motion for summary judgment, as well as the three related o r d e r s : the July 21 order denying the Underwriters' motion for reconsideration; t h e January 16, 2009, order denying the Underwriters' motion for partial s u m m a r y judgment; and the January 29 order granting judgment as a matter o f law to Penthouse on the issue of liability. We granted leave to appeal.

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No. 09-60652 II A. T h is court has jurisdiction to review any issue fairly included in orders c e r t ifie d pursuant to § 1292(b). Yamaha Motor Corp., USA v. Calhoun, 516 U.S. 1 9 9 , 204 (1996). The legal question central to each of the certified orders here is whether, as a matter of contract interpretation, the Windstorm Deductible n e g a t e s the Policy's exclusion of coverage for water loss. We review this question o f law de novo. Performance Autoplex II Ltd. v. Mid-Continent Cas. Co., 322 F.3d 8 4 7 , 853 (5th Cir. 2003). I n Mississippi, when the terms of an insurance policy are unambiguous, t h e y must be enforced as written. Miss. Farm Bureau Cas. Ins. Co. v. Britt, 826 S o . 2d 1261, 1266 (Miss. 2002). However, if the policy is subject to two

r e a s o n a b le interpretations, the interpretation giving greater indemnity to the in s u r e d will prevail. J & W Foods Corp. v. State Farm Mut. Auto. Ins. Co., 723 S o . 2d 550, 552 (Miss. 1998). Exclusions and limitations are reviewed

s t r in g e n t ly ; they must be clear and unambiguous. Id.; see also Corban v. United S v c s . Automobile Ass'n, 20 So. 3d 601, 609 (Miss. 2009) ("Language in e x c lu s io n a r y clauses must be `clear and unmistakable.'") (citations omitted). An in s u r e r "bears the burden of showing that an exclusion applies and that it is not s u b je c t to some other reasonable interpretation that would afford coverage." Delta & Pine Land Co. v. Nationwide Agribusiness Ins. Co., 530 F.3d 395, 402 (5 t h Cir. 2008). B. H e r e , the parties do not dispute that the Policy's exclusion for water losses is unambiguous, nor do they dispute that destruction of a building by a h u r r ic a n e storm surge would fall into the exclusion. See Corban, 20 So. 3d at 611. In fact, the original dispute in the district court was whether the

U n d e r w r ite r s properly concluded that the insured buildings were destroyed by 4

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No. 09-60652 w a t e r rather than wind. Penthouse alleged in its complaint that only wind d e s t r o y e d the buildings, which occurred before the storm surge arrived, im p lic it ly acknowledging that the policy excluded water damage. There was no a lle g a t io n that the Windstorm Deductible somehow expanded the policy's c o v e r a g e to include damage caused by water. The dispute now before us arose w h e n the district court nevertheless concluded that the policy's Windstorm D e d u c t ib le endorsement effectively canceled the policy's exclusion for water lo s s e s . A n endorsement to an insurance policy "`controls the policy insofar as it e n la r g e s , modifies, or restricts the terms' of the policy," and "if there is any c o n flic t between the rider and the policy, `the rider controls in construing the c o n t r a c t expressly where the provisions of the rider are more specific.'" Delta & P in e Land Co., 530 F.3d at 400 (quoting Camden Fire Ins. Ass'n v. New Buena V is ta Hotel Co., 24 So. 2d 848, 850­851 (Miss. 1946)). A court should "look at the p o lic y as a whole, consider all relevant portions together and, whenever possible, g iv e operative effect to every provision in order to reach a reasonable overall r e s u lt ." Corban, 20 So. 3d at 609. T h e district court held that conflict in the Policy here is created by the la n g u a g e in the Windstorm Deductible that explains when the deductible a p p lie s . The deductible "applies to loss or damage . . . caused directly or

in d ir e c t ly by windstorm or hail, regardless of any other cause or event that c o n tr ib u te s concurrently or in any sequence to the loss or damage." (emphasis a d d e d ). The emphasized phrase exactly tracks the language of the ACC clause in the "Exclusions" portion of the policy, which extends the water exclusion to d a m a g e caused directly or indirectly by water, "regardless of any other cause or e v e n t that contributes concurrently or in any sequence to the loss."1 The district
As interpreted by the Mississippi Supreme Court, the ACC clause in practice only excludes loss that was "concurrently" caused by water, not loss that was caused "in any
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No. 09-60652 c o u r t concluded that, "[i]n effect, the . . . [deductible] endorsement operates as a reverse anti-concurrent cause clause." Order of July 2, 2007. That is, the d is t r ic t court held, the deductible does not serve to limit coverage, but expands c o v e r a g e to include any damage caused "concurrently or in any sequence to" w in d s t o r m or hail damage, even if the damage otherwise would not have been c o v e r e d under policy provisions that exclude flood damage. We can acknowledge that some of the language of this

D e d u c t ib le -- " r e g a r d le s s of any other cause or event"--may be misleading, but o n ly if read in virtual isolation. When the Deductible is read in its proper c o n t e x t of the policy as a whole, and with the common understanding of how d e d u c tib le s operate in insurance policies, any ambiguity about the effect of this la n g u a g e on the scope of coverage vanishes. The purpose of a deductible is to s h i f t some of the insurer's risk (that is, covered risk) to the insured, which is a c c o m p lis h e d by setting a limit on the value of covered losses below which the in s u r e r is not obligated to pay. See 12 Couch on Ins. 3d § 178:1 ("A provision c o m m o n ly found in automobile collision policies is the so-called `deductible c la u s e ,' whereby a stated sum is deductible from the amount for which the in s u r e r would otherwise be liable." (emphasis added)); see also WEBSTER'S THIRD N EW INTERNATIONAL DICTIONARY 589 (1993) (defining a "deductible" as "a clause in an insurance policy relieving the insurer of responsibility for an initial s p e c ifie d small loss of the kind insured against." (emphasis added)). As a

m e c h a n is m for shifting risk from the insurer to the insured, a deductible clause c a n only logically be applied after a covered loss has been established, and it is u n n a t u r a l to interpret a deductible clause as a mechanism that increases the

sequence" by water. Corban, 20 So. 3d at 615­16 . In other words, when water and another cause operate indivisibly to create damage, the loss is excluded; but when water and another cause act in sequence, the damage caused by water is excluded and the damage from the other cause is covered. See id.

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No. 09-60652 r is k of the insurer by expanding the scope of coverage. That said, we do not p r e c lu d e the rare possibility that explicit words of coverage in a deductible, in t e r p r e t e d in the context of the policy as a whole, may establish coverage or an a m b ig u it y thereof; but that exception is not this case. Here, the plain language o f the Windstorm Deductible only describes when the deductible applies, and d o e s not purport to describe, or even mention, the scope of the policy's coverage.2 T h e purpose of the broad language, which the district court read as a "reverse a n t i-c o n c u r r e n t cause" clause, is actually to ensure that an insured cannot e s c a p e the applicability of the higher deductible for windstorm and hail damage s im p ly because other weather events (with lower deductibles) contributed to the lo s s . That is, the clause operates only when deciding whether to apply the d e d u c tib le to a loss, after determining that coverage for the loss exists pursuant t o the coverage-defining portions of the policy. The deductible endorsement does n o t create or extend coverage. C. P r e c e d e n t supports the same result we reach under our plain reading of t h e insurance policy.3 Although the Mississippi Supreme Court has not

in t e r p r e t e d a deductible endorsement clause like the one at issue here,4 this

Contrary to the district court's conclusion, the phrase "This endorsement changes the policy," found as a header to the Windstorm Deductible endorsement, does not refer to the scope of coverage under the policy. To be sure, this endorsement does indeed "change the policy": it changes the standard deductible (which is $5000 for other types of losses) to 5 % of the total loss when the loss is caused by windstorm or hail. Penthouse has moved to certify the question of interpretation of the Policy to the Mississippi Supreme Court. However, Penthouse chose to file suit in federal, not state, court, and certification would cause significant delay in the resolution of this case. See Tuepker v. State Farm Fire & Cas. Co., 507 F.3d 346, 357 n.12 (5th Cir. 2007). Because we are able to determine the proper interpretation of the Policy under Mississippi law, we deny the motion. Each party contends that the Mississippi Supreme Court has answered the question here to its advantage, but we think neither is correct. The Underwriters argue that the Mississippi court addressed the issue in Corban when it held that a "wind and hail" deductible did not provide coverage for all hurricane-related losses, including water damage. Corban, 20
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No. 09-60652 c o u r t has done so, applying Mississippi law to hold that a hurricane deductible e n d o r s e m e n t did not affect the policy's scope of coverage. See Tuepker v. State F a r m Fire & Cas. Co., 507 F.3d 346, 355 (5th Cir. 2007). "Once a panel of this c o u r t has settled on the state law to be applied in a diversity case, the precedent s h o u ld be followed by other panels without regard to any alleged confusion in s t a t e law, absent a subsequent state court decision or statutory amendment w h ic h makes this court's decision clearly wrong." Hughes v. Tobacco Inst., Inc., 2 7 8 F.3d 417, 425 (5th Cir. 2001) (quoting Lee v. Frozen Food Express, Inc., 592 F .2 d 271, 272 (5th Cir. 1979)). We first addressed a deductible like the one here--but under Louisiana la w -- in In re Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007). I n that case, we concluded that several deductible endorsements similar to the o n e in this case did not render the policies' ACC clauses ambiguous. Those d e d u c t ib le s included the same broad language stating that they applied " r e g a r d le s s of any other cause or event contributing concurrently or in any s e q u e n c e to the loss." We noted that "[n]othing in the language of the

So. 3d at 614 n.21. However, Corban does not provide a definitive answer because the issue in that case was narrower than the one here. The argument the court addressed in Corban was that the mere existence of a "wind and hail" deductible indicated that hurricanes were covered events, such that all hurricane-related losses were covered. Further, the deductible in Corban was not found in an endorsement and did not contain any of the same language as the one here. Penthouse cites U.S.F. & G. v. Martin, 998 So.2d 956 (Miss. 2009), in which the court held that a policy's water exclusion did not exclude certain water damage because of a conflicting clause elsewhere in the policy. There, a clause providing coverage for water damage from "sewer or drain backup" conflicted with the policy's exclusion for water damages, which arguably excluded sewer or drain backup losses. That case is distinguishable, however, because the "Coverage Provided" portion of the policy explicitly stated that sewer or drain backup losses were covered. Id. at 962 ("We will pay for direct physical loss to Covered Property . . . if the loss is caused by water that: (1) backs up through sewers or drains..."). Here, the Windstorm Deductible is not part of the "Coverage" section of the policy and, more importantly, does not explicitly state that the Underwriters will pay for water losses in any circumstances.

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No. 09-60652 e n d o r s e m e n t s purports to extend coverage for floods or to restrict flood e x c lu s io n s ," and held that the deductibles' plain language "indicates that they d o nothing more than alter the deductible for damage caused by a hurricane." Katrina, 495 F.3d at 220. We adopted the reasoning of Katrina in Tuepker, in which we held that, u n d e r Mississippi law, a hurricane deductible did not affect the scope of a p o lic y 's coverage. After discussing Katrina and citing Paulucci v. Liberty Mut. F ir e Ins. Co., 190 F. Supp. 2d 1312 (M.D. Fla. 2002), both of which involved d e d u c tib le endorsements that were nearly identical to Penthouse's, we concluded t h a t "[l]ike the hurricane deductible at issue in In re Katrina, this clause clearly o n ly applies to the deductible, and does not affect the scope of coverage under the p o lic y ." Tuepker, 507 F.3d at 355. The district court found that the deductible endorsement in Tuepker is m a t e r ia lly distinguishable from the one here. We cannot agree. The Tuepker c la u s e does differ from the Penthouse Deductible in two notable ways, but n e ith e r one alters our conclusion. First, the Tuepker deductible endorsement i n c lu d e d the language "[a]ll other policy provisions apply." However, the

d e d u c tib le endorsement cannot be read in a vacuum--an insurance contract m u s t be read as a whole, J&W Foods Corp., 723 So.2d at 552, and the deductible e n d o r s e m e n t could not function without the other provisions of the policy to d e fin e coverage and all other terms. A statement that "all other policy

p r o v is io n s apply" has no independent meaning because it only states the o b v io u s ; the Policy's coverage provisions, coverage exclusions, and other terms d o not simply disappear if they are not expressly reserved in an endorsement. Failure to include such a provision in the Windstorm Deductible endorsement d o e s not reflect an intent to change other policy provisions. Second, unlike Penthouse's Windstorm Deductible, the Tuepker deductible e x p r e s s ly limited its applicability to certain perils already covered under the 9

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No. 09-60652 t e r m s of the policy, including wind, rain, and hail. But language expressly l i m it in g a deductible's applicability to covered perils is redundant because, as d is c u s s e d above, a deductible by definition only applies to covered perils, and can o n ly sensibly be applied once coverage is determined to exist. It is therefore not r e a s o n a b le to conclude, as the district court did here, that the lack of limiting la n g u a g e operates to effectively expand coverage, especially when other policy t e r m s expressly exclude coverage. Further, the Tuepker court relied in part on t h e holdings in Katrina and Paulucci, in which "[deductible] endorsements [did] n o t extend the scope of the policies to cover floods"; both of those cases addressed d e d u c t i b le s with the same broad language as the one here. See Tuepker, 507 F .3 d at 355. The differences between the Tuepker deductible and the one in this c a s e therefore do not make the Tuepker holding inapplicable. W e therefore conclude that the district court erred in its holding that the W i n d s t o r m Deductible extends the Policy's coverage to include water losses a s s o c ia t e d with windstorms. Accordingly, we vacate the certified order granting ju d g m e n t as a matter of law to Penthouse on the issue of liability. To the extent t h e remaining certified orders contain the same erroneous ruling, we reverse and v a c a t e those orders as well. III T h e Underwriters request that we render judgment in their favor because P e n t h o u s e failed to submit evidence of a covered loss--that is, a loss caused in w h o l e or in part by wind--above the deductible amount. We cannot agree to g r a n t such relief. This argument was the basis for the Underwriters' summary ju d g m e n t motions below, but the district court did not address the issue because t h e court's interpretation of the Policy rendered the Underwriters liable as a m a t t e r of law, regardless of what weather event caused the damage. Because w e have now reversed the district court's ruling and vacated its judgment, we m u s t remand to allow the court to consider such issues as remain in this case, 10

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No. 09-60652 in c lu d in g the unaddressed issues raised by the Underwriters' summary ju d g m e n t motions. IV F o r the foregoing reasons, we REVERSE and VACATE all four certified o r d e r s that are inconsistent with this opinion, and REMAND to the district court fo r its further consideration of all remaining issues. REVER S E D , VACATED, and REMANDED.

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