XL Specialty Insurance Company v. Bollinger Shipyards, Inc. et al

Filing 59

ORDER AND REASONS granting 26 Motion for Partial Summary Judgment. Signed by Chief Judge Sarah S. Vance on 6/24/13. (Reference: 12-2098)(jjs, )

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
XL SPECIALTY INSURANCE CO.

CIVIL ACTION

VERSUS

NO: 12-2071
CONSOL. W/ 12-2098

BOLLINGER SHIPYARDS, INC., ET AL.

SECTION: R(5)

ORDER AND REASONS
Before the Court is defendant Continental Insurance
Company’s motion for partial summary judgment on the bad faith
claims under Louisiana Revised Statutes §§ 22:1892 and 22:1973
brought against them by Bollinger Shipyards, Inc., Bollinger
Shipyards Lockport, L.L.C., and Halter-Bollinger Joint Venture,
L.L.C. (collectively “Bollinger”) under La. Rev. Stat. Ann. §
22:1892 and La. Rev. Stat. Ann. § 22:1973. For the following
reasons, the Court GRANTS defendant’s motion and dismisses
Bollinger's claims that Continental is liable to pay bad faith
penalties under Louisiana Revised Statutes §§ 22:1892 and
22:1973.

I Background
In a previous suit, the United States sued Bollinger in
connection with the failure of eight Coast Guard vessels that
Bollinger converted from 110-foot patrol boats to 123-foot patrol

boats between 2000 and 2006.1 The United States alleged the
following causes of action in that suit: violation of the False
Claims Act (FCA), common law fraud, negligent misrepresentation,
and unjust enrichment. The claims were based on allegations that
Bollinger knowingly manipulated structural calculations regarding
the strength of the hulls to induce the Coast Guard to proceed
with the program to convert the vessels from 110 feet to 123
feet. The suit sought over $200 million in damages. On January
30, 2013, the Court dismissed the complaint in that suit, and
granted the United States leave to amend its False Claims Act and
fraud claims. The United States has filed a motion to reconsider
the Court's order on the motion to dismiss and Bollinger has
filed a motion to dismiss the United States' amended complaint.
Both motions are pending before the Court.
The issue in the present case is the extent to which
Bollinger’s defense and potential liability in the underlying
suit are covered under insurance policies issued by the defendant
insurance companies. From 2000 to 2008 Bollinger carried primary
general liability insurance provided by XL Specialty Insurance
Company. From 2000 to 2004 and 2009 to 2010 Bollinger also
carried excess general liability coverage provided by
Continental. Neither party disputes that there is $26 million in

1

Civil Action No. 12-cv-0920 pending before this court.
2

underlying primary insurance beneath Continental’s excess
policies.
In July 2011, Bollinger placed Continental, as well as other
insurers, on notice of the government’s claims in Civil Action
No. 12-cv-0920. Continental issued a reservation of rights letter
to Bollinger on August 22, 2011. Continental notified Bollinger’s
agent that it was premature to ask Continental to provide a
defense to Bollinger since the primary limit of $26 million had
not been exhausted. Continental said it could not take a coverage
position until the position of the primary carrier, XL Specialty,
was known.
XL initiated this action on August 13, 2012, seeking a
declaration as to whether its policies afforded coverage to
Bollinger for the allegations made by the United States. On
August 15, 2012, an action that Bollinger had filed against XL
and Continental in the 17th Judicial District Court for the
Parish of Lafrouche, seeking coverage and bad faith damages, was
removed to this Court and consolidated with the suit initiated by
XL. Bollinger’s petition alleged that Continental was liable to
cover certain claims that exceeded the insurance limits of
primary carriers and that Continental had refused to accept
coverage. Bollinger alleged that it was entitled to the full
amount due under the policy, as well as to penalties under
Louisiana Revised Statutes §§ 22:1892 and 22:1973 for

3

Continental’s failure to pay Bollinger’s claims in a timely
manner without good cause. Continental filed an answer denying
the allegations made by Bollinger and counterclaimed seeking a
declaration as to whether its policies afforded coverage to
Bollinger based on the allegations made by the United States.
Continental then filed a motion for partial summary judgment on
the bad faith claims under Louisiana Revised Statutes §§ 22:1892
and 22:1973.

II. STANDARD
A. Summary Judgment Standard
Summary judgment is warranted when “the movant shows that
there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed.R.Civ.P.
56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986);
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994).
When assessing whether a dispute as to any material fact exists,
the Court considers “all of the evidence in the record but
refrains from making credibility determinations or weighing the
evidence.” Delta & Pine Land Co. v. Nationwide Agribusiness Ins.
Co., 530 F.3d 395, 398 (5th Cir. 2008). All reasonable inferences
are drawn in favor of the nonmoving party, but “unsupported
allegations or affidavits setting forth ‘ultimate or conclusory
facts and conclusions of law’ are insufficient to either support
4

or defeat a motion for summary judgment.” Galindo v. Precision
Am. Corp., 754 F.2d 1212, 1216 (5th Cir. 1985) (quoting Wright &
Miller, Fed. Prac. and Proc. Civ.2d § 2738 (1983)).
If the dispositive issue is one on which the moving party
will bear the burden of proof at trial, the moving party “must
come forward with evidence which would ‘entitle it to a directed
verdict if the evidence went uncontroverted at trial.’” Int'l
Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1263–64 (5th
Cir. 1991). The nonmoving party can then defeat the motion by
either countering with sufficient evidence of its own, or
“showing that the moving party's evidence is so sheer that it may
not persuade the reasonable fact-finder to return a verdict in
favor of the moving party.” Id. at 1265.
If the dispositive issue is one on which the nonmoving party
will bear the burden of proof at trial, the moving party may
satisfy its burden by merely pointing out that the evidence in
the record is insufficient with respect to an essential element
of the nonmoving party's claim. See Celotex, 477 U.S. at 325. The
burden then shifts to the nonmoving party, who must, by
submitting or referring to evidence, set out specific facts
showing that a genuine issue exists. See id. at 324. The
nonmovant may not rest upon the pleadings, but must identify
specific facts that establish a genuine issue for trial. Id. at
325; see also Little, 37 F.3d at 1075 (“Rule 56 ‘mandates the

5

entry of summary judgment, after adequate time for discovery and
upon motion, against a party who fails to make a showing
sufficient to establish the existence of an element essential to
that party's case, and on which that party will bear the burden
of proof at trial.’”) (quoting Celotex, 477 U.S. at 332).

B. Penalties for Failing to Pay Insurance Claims
Louisiana law authorizes the recovery of bad faith penalties
from insurers who fail to pay legitimate claims under two nearly
identical provisions. Under La.Rev.Stat. Ann. § 22:1892(A)(1),
“all insurers ... shall pay the amount of any claim due any
insured within thirty days after receipt of satisfactory proofs
of loss from the insured.” If an insurer refuses to pay a claim
within 30 days of receiving satisfactory proof of loss, and its
failure to do so is found to be "arbitrary, capricious, or
without probable cause,” then section 22:1892(B)(1) provides that
the insurer is subject to pay a penalty equal to 50% of the loss,
or one thousand dollars, whichever is greater. In addition,
section 22:1973 requires insurers to act in good faith and
provides for penalties if an insurer fails to pay a claim within
sixty days after receipt of satisfactory proof of loss when “such
failure is arbitrary, capricious, or without probable cause.” §
22:1973(B)(5). Both Section 22:1892 and Section 22:1973 cover an
insurer's duty to defend an insured if required under the terms

6

of a policy. See Sanders v. Wysocki, 631 So. 2d 1330, 1335 (La.
Ct. App. 1994) writ denied, 637 So. 2d 156 (La. 1994) (Section
22:1892); Credeur v. McCullough, 702 So. 2d 985, 987 (La. App. 3
Cir. 1997) (Section 22:1973). "A plaintiff may be awarded
penalties under only one of the two statutes, whichever is
greater." Dickerson v. Lexington Insurance Co., 556 F.3d 290, 297
(5th Cir.2009). Nonetheless, a plaintiff may recover attorneys'
fees under section 22:1892 while seeking damages and penalties
under section 22:1973. Id.
A party seeking relief under either statute has the burden
of establishing three things: (1) the insurer received a
satisfactory proof of loss; (2) the insurer failed to pay the
claim within the applicable statutory period (thirty or sixty
days); and (3) the insurer's failure to pay the claim was
arbitrary and capricious. Id.; see also Talbert v. State Farm
Fire & Cas. Ins. Co., 971 So.2d 1206, 1212 (La. App. 4th Cir.
November, 14, 2007). An insurer is charged with receiving a
satisfactory proof of loss when the insurer has adequate
knowledge of the loss. Cotton Bros. Banking Co. v. Indus. Risk
Insurers, 941 F.2d 380, 386 (5th Cir. 1991). The phrase
"arbitrary and capricious" means a "vexatious refusal to pay,"
"without reasonable or probable cause or excuse." Dickerson, 556
F.3d at 300. An insurer has not acted arbitrarily and
capriciously "when it withholds payment based on a genuine (good
7

faith) dispute about the amount of a loss or the applicability of
coverage." Id. “Whether or not a refusal to pay is arbitrary,
capricious, or without probable cause depends on the facts known
to the insurer at the time of its action.” Reed v. State Farm
Mut. Auto. Ins. Co., 857 So. 2d 1012, 1021 (La. October 21,
2003).

III. Discussion
It is undisputed that Continental has failed to participate
in the defense of claims against Bollinger or to pay any claims
against Bollinger. It is also undisputed that the primary
insurers have not paid their limits or, indeed, paid any claims
asserted by the United States against Bollinger. Indeed, there
has been no finding of liability against Bollinger in the suit by
the United States. Because there has been no finding of liability
and primary insurance has not been exhausted, Continental has no
duty to indemnify claims against Bollinger. The sole issues are
whether Continental owed a duty to defend and, if so, whether its
failure to defend was arbitrary and capricious.

A. The policies do not impose a duty to defend on Continental.
The Court must begin the inquiry into Continental's duty by
interpreting the policies at issue. Both parties agree that
Louisiana law governs the interpretation of Continental's
8

insurance policy. An insurance policy is a contract between the
parties and should be construed using the general rules of
interpretation of contracts under Louisiana law, “which requires
judicial determination of the common intent of the parties to the
contract.” Thermo Terratech v. GDC Enviro–Solutions, Inc., 265
F.3d 329, 334 (5th Cir.2001) (citing Louisiana Ins. Guar. Ass'n
v. Interstate Fire & Cas. Co.,

630 So.2d 759, 763 (La. 1994); In

re Katrina Canal Breaches Litig., 495 F.3d 191, 206 (5th
Cir.2007) (quoting Cadwallader v. Allstate Ins. Co., 848 So.2d
577, 580 (La. 2003)). “The parties' intent is to be determined in
accordance with the general, ordinary, plain and popular meaning
of the words used in the policy, unless the words have a
technical meaning.” Louisiana Ins. Guar. Ass'n, 630 So.2d at 763.
"An insurance contract must be 'construed according to the
entirety of its terms and conditions as set forth in the policy
and as modified by any endorsement made a part of the policy.'"
In re Katrina Canal Breaches Litig., 495 F.3d at 206 (quoting
La.Rev.Stat. § 22:654 (2004)). An insurance contract should not
be interpreted “in an unreasonable or strained manner under the
guise of contractual interpretation to enlarge or restrict its
provisions beyond what is reasonably contemplated by unambiguous
terms or [to] achieve an absurd conclusion.” Id. (quoting
Cadwallader, 848 So.2d at 580). “If the words of an insurance
policy are clear and explicit and lead to no absurd consequences,

9

no further interpretation may be made in search of the party's
intent and the agreement must be enforced as written.” Good Hope
Baptist Church v. ICT Ins. Agency, Inc., 41 So.3d 1229, 1232
(La.App. 3d Cir. 2010) (citing La. Civ. Code. Art. 2046).
Nevertheless, “[i]f any ambiguity remains after applying the
general rules of contract interpretation, the ambiguous insurance
policy provision is construed against the insurer.” Berry v. Paul
Revere Life Ins. Co., 21 So.3d 385, 390 (La. 1 Cir. July 9,
2009); Westerfield v. LaFleur, 493 So.2d 600, 605 (La .1986). The
“[i]nterpretation of an insurance policy usually involves a legal
question which can be properly resolved by a motion for summary
judgment.” Cutsinger v. Redfern, 12 So.3d 945, 949 (La. May 22,
2009) (citing Bonin v. Westport Ins. Corp., 930 So.2d 906, 910
(La. 2006).
The terms of the policies indicate that as an excess
provider, Continental is not liable to pay claims until the
primary insurance has been exhausted and does not owe a duty to
defend. The Excess Bumbershoot Liability provision indicates that
Continental’s duty to indemnify is not triggered unless
Bollinger’s liability exceeds the amount covered under the
primary policies:
EXCESS BUMBERSHOOT LIABILITY
These Underwriters agree to indemnify the Assured for
all liability, loss, damage or expense insured against
under the excess policies described in the Schedule of
Underlying Insurances, ... but this insurance is
10

warranted free from claim hereunder unless such
liability in respect of the same accident ... exceeds
the Limits of Liability of the Primary Policies in
which event these Underwriters shall be liable only
from the amount by which such liability exceeds such
underlying Limits of Liability, but in no event for
more than the Limit of Liability of this insurance.2
The policies also provide that Bollinger has the right to
participate in Bollinger's defense but has no obligation to do
so. Each policy contains the following General Condition:
These Underwriters shall not be called upon to assume
charge of the settlement or defense of any claim made
or suit brought or proceeding instituted against the
Assured, but these Underwriters shall have the right
and shall be given the opportunity ... to associate
with the Assured or the underwriters on the Primary
Policies, or both, in defense and control of any
claim, suit or proceeding which involves or appears
likely to involve these Underwriters...3
The Fifth Circuit has interpreted a nearly identical provision
as "unambiguously excluding a defense obligation under Louisiana
law," even when the claim appears likely to involve the excess
carrier. See Inst. of London Underwriters v. First Horizon Ins.
Co., 972 F.2d 125, 126 (5th Cir. 1992) (citing Hartford Accident
& Indem. Co. v. United Gen. Ins. Co., 855 F.2d 228, 231 (5th
Cir. 1988)). That case held that the clause "imposes no
affirmative duty on [the excess insurer] to co-operate in the
defense if the claim is likely to involve" the excess insurer,
but rather, the "provision leaves [the excess insurer] with the

2

Id.

3

Exhibit 3, at CON-0344.
11

option–the 'right and opportunity'–to associate in the defense
of claims involving or likely to involve" it. Inst. of London
Underwriters, 972 F.2d at 127. "The decision whether to
associate in the defense of the assured still rests" with the
excess insurer. See Id. Bollinger has cited no case indicating
that the Fifth Circuit's ruling in Inst. of London Underwriters
does not apply in this case. Indeed, it does not even cite this
case.
Instead, Bollinger contends that other provisions in the
policies indicate that Continental owed a duty to defend because
the total damages in the government’s suit could exhaust primary
coverage. It points to Endorsement No. 8, which provides:
It is agreed that this policy shall not apply to
any obligation to pay fines, penalties or
exemplary, or punitive damages including treble
damages, or any other damages resulting from the
multiplication of compensatory damages. If a suit
shall have been brought against the insured for
claim insured by this policy seeking both
compensatory and punitive or exemplary damages,
then this company will afford a defense to such
action. The Company, however, shall not have an
obligation to pay for any costs, interest, or
damages attributable to fines, punitive or
exemplary damages.4
Although Endorsement No. 8, when read in isolation, suggests
that Continental had a duty to defend and insure against
compensatory damages, it must be read in light of the other
provisions stating that Continental's coverage begins only when

4

Exhibit 3, at CON-0355.
12

the coverage provided by primary insurers has been exhausted.
See In re Katrina Canal Breaches Litig., 495 F.3d at 206 ("An
insurance contract must be construed according to the entirety
of its terms and conditions as set forth in the policy"). In
this same vein, the endorsement kicks in only if a suit is
brought against the insured for a "claim [insured by] this
policy." Because a claim is not insured under the excess policy
until the liability of the insured exceeds the underlying
limits, the endorsement does not create a defense obligation
before the underlying limits are exhausted. Moreover, this
endorsement is designed as an exclusion of fines, penalties, and
exemplary or punitive damages. Finally, even if this endorsement
could be read as negating the discretion of the excess insurer
to participate in the defense granted in the General Condition
quoted above, it does not create a clear duty to pay defense
costs now before the primary insurance is exhausted.
Bollinger also refers to Endorsement No. 5:
These underwriters agree to pay on behalf of the
Assured for all liability, loss, damage or expense
insured against under the policies described in the
Schedule of Underlying Insurance (hereinafter referred
to in this section and in the General Conditions as the
"Primary Policies"), but this insurance is warranted
free from claim hereunder unless such liability in
respect to the same accident (or occurrence if the
limits of liability of the primary policies are written
on an occurrence basis) exceeds the Limits of Liability
of the Primary policies in which event these
underwriters shall be liable only for the amount by
which such liability exceeds such Underlying Limits of
13

Liability, but in no event for more than the Limit of
Liability of this Insurance.5
Contrary to Bollinger’s interpretation, Endorsement No. 5
confirms Continental’s view of the policies that Continental is
liable to indemnify only if “such liability exceeds such
Underlying Limits of Liability.” Bollinger is unable to point
to any other provision indicating that Continental has a duty
to defend when the primary insurance policy has not been
exhausted.
Bollinger relies on a dictum in Edwards v. Daugherty, 883
So. 2d 932, 946 n. 18 (La. 2004), to support its position that
Continental has breached in bad faith a duty to defend
Bollinger. In a footnote, Edwards said that the Louisiana
Supreme Court "has held that while the primary insurer has the
primary duty to defend, if a claim is within the limits of the
excess insurance, there is also a duty of the excess insurer to
defend." Id. (citing American Home Assurance Company v.
Czarniecki, 255 La. 251, 230 So.2d 253 (1969)). The issue
involved in Edwards was the extent to which a surplus lines
insurer which had elected to defend a claim it was not
obligated to defend could deduct defense costs from its policy
limits. See Id. at 945-46. Its holding does not support a

5

Page 11 of the first PDF Continental places on its CD of
manual attachments. It is undisputed that the other policies
contain the same endorsement. See R. Doc. 29 at 13.
14

finding that Continental was in bad faith here. Further,
Czarniecki, the case cited in the Edwards footnote, held that
an excess carrier "is liable only where the limits of the
[primary policy] are exceeded." 255 La. at 260. It did not hold
an excess carrier in bad faith on facts such as those presented
here.
B. Continental did not act in bad faith
Even if the Court determined that Continental were
required to pay Bollinger's defense, a finding of bad faith is
inappropriate when, as here, an excess insurer lacks a clear
duty to pay. Bollinger has the burden of establishing that
Continental acted in bad faith. Dickerson, 556 F.3d at 297.
Bollinger fails to meet this burden because, as discussed
above, the policies indicate that Continental did not owe a
clear duty to defend or pay claims before Bollinger had
exhausted its primary coverage. Thus, because Continental
reasonably believed that the primary layer of insurance had not
been exhausted and that Continental did not owe a duty to
defend, Continental did not act in bad faith in refusing to pay
or defend Bollinger's claims. Id. at 300 (insurer does not act
arbitrarily and capriciously "when it withholds payment based
on a genuine (good faith) dispute about the amount of a loss or
the applicability of coverage").

15

Louisiana courts have consistently declined to find bad
faith when doubt existed as to whether the plaintiff was
covered under the defendant's insurance policy. In Howell v.
American Cas. Co., 691 So.2d 715, 727–28. (La. App. 4th Cir.
1997), the court found that the defendant excess insurer was
not arbitrary and capricious in declining to defend a
corporation because the defendant reasonably believed that the
primary layer of insurance had not been exhausted. Even though
it was determined on appeal that the primary layer of insurance
had been exhausted, the court concluded that the defendant did
not act in bad faith in refusing to defend the corporation
because the trial court was uncertain as to whether the primary
layer of insurance had been exhausted. Id. Similarly, in
Lightfoot v. Hartford Fire Ins. Co., CIV.A. 07-4833, 2010 WL
4879175 (E.D. La. Nov. 23, 2010), the court determined that the
defendant excess insurer was not arbitrary and capricious in
declining to pay claims when there was a dispute as to whether
the primary policy had been exhausted by way of a settlement
for less than the full primary coverage. Likewise, in McGrew v.
State Farm Mut. Auto. Ins. Co., 385 So.2d 1276, 1284 (La.
App.1980), the court held that the defendant excess insurer was
not arbitrary and capricious in denying the plaintiff's claim
given that there was a serious dispute as to the amount of the

16

claim and the extent of coverage provided by the two primary
insurers.
Based on the policy terms, Continental reasonably believed
that to the extent its policies covered the government’s
lawsuit against Bollinger, the primary layer of insurance had
not been exhausted. Its decision to withhold payment was not a
"vexatious refusal to pay," and Continental did not act
arbitrarily and capriciously in withholding payment for
Bollinger’s defense. See Howell, 691 So.2d 715, 727–28;
Dickerson, 556 F.3d at 300. Instead, Continental promptly
responded to the claims by notifying Bollinger’s agent that it
was premature to ask Continental to provide a defense to
Bollinger since the primary limit of $26 million had not been
exhausted, and Continental could not take a coverage position
until the position of the primary carrier, XL Specialty, was
known. Because it Continental's duty to pay for Bollinger's
defense was not clear at the time of Bollinger’s claims,
Continental was not in bad faith in refusing to take a coverage
position within the statutory 30 and 60 day deadlines for
paying claims. Reed, 857 So. 2d at 1021 (“Whether or not a
refusal to pay is arbitrary, capricious, or without probable
cause depends on the facts known to the insurer at the time of
its action.”). For these reasons, the Court grants partial
summary judgment in favor of Continental and dismisses

17

Bollinger’s claims under La. Rev. Stat. Ann. § 22:1892 and La.
Rev. Stat. Ann. § 22:1973.

New Orleans, Louisiana, this

24th

day of June, 2013

SARAH S. VANCE
UNITED STATES DISTRICT JUDGE

18