The Shaw Group Inc et al v. Zurich American Insurance Company et al

Filing 132

Ruling on Motion for Reconsideration. Accordingly, the Court GRANTS 122 NASs motion in part and DENIES it in part, and the Court DENIES 125 Zurichs motion. Signed by Judge James J. Brady on 2/7/2013. (LLH)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA
THE SHAW GROUP, INC., ET AL
CIVIL ACTION
VERSUS
NO. 12-257-JJB
ZURICH AMERICAN INSURANCE
COMPANY, ET AL
RULING ON MOTION FOR RECONSIDERATION
This matter is before the Court on Motions for Reconsideration filed by
Defendants North American Specialty Insurance Company (“NAS”) (Doc. 122) and
Zurich American Insurance Company (“Zurich) (Doc. 131). Plaintiffs The Shaw Group
Inc. and Shaw Process Fabricators, Inc. (collectively “Shaw”) have filed oppositions
(Doc. 124 & Doc. 128, respectively), to which NAS and Zurich have filed replies. (Doc.
127 & Doc. 131, respectively). Oral argument is not necessary. The Court has
jurisdiction pursuant to 28 U.S.C. § 1332. For the reasons herein, the Court GRANTS
NAS’s motion (Doc. 122) in part and DENIES it in part, and the Court DENIES Zurich’s
motion (Doc. 131).
I.
Shaw was sued in the Eastern District of Washington by REC Solar Grade
Silicon LLC (“REC”) for property damages resulting from pipe spools manufactured by
Shaw and used in REC’s manufacturing facility in Washington. At the time of the suit,
Shaw was insured by NAS and Zurich.1 Zurich was the primary insurance carrier and
NAS was the excess insurance carrier. According to the First Amended Complaint (Doc.

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Shaw was also insured by Westchester Fire Insurance Company, but Westchester is no longer a party to this
action.

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11), Shaw alleges that the Insurers informed it that there was no insurance coverage for
REC’s property damages. Zurich told Shaw that it would defend the underlying litigation
in Washington under a “full reservation of rights.” (Doc. 11 at p. 5). Shaw alleges that
Zurich “unreasonably breached its duty to defend by failing to pay for the defense in a
timely manner.” (Id.). Shaw further alleges that NAS sent a letter, stating that there was
no coverage for the underlying litigation under its policy. Finally, Shaw alleges that all of
the Defendants “violated their duty to engage in good faith settlement negotiations of
the Underlying Litigation by refusing indemnity to Plaintiffs herein prior to the July
mediation between Plaintiffs herein and REC.” (Doc. 11 at 8).
In NAS’s motion for reconsideration, NAS argues that this Court recited incorrect
facts by stating that the insurers “denied coverage for REC’s claims and allegedly failed
to properly defend Shaw in the Washington litigation.” (Doc. 122, citing Doc. 119 at 2).
The Court was reciting Shaw’s allegations in Shaw’s memorandum and notes that Shaw
has raised both failure to indemnify and failure to defend claims against the Defendants.
The Court should have specified that the failure to defend claim was specific to Zurich
and not NAS, and will reconsider its findings based on this distinction.
Additionally, NAS argues in its motion that this Court erred in stating that Shaw
“invited the insurers to [a] mediation in Louisiana, but the Insurers did not respond.”
(Doc. 119 at 3). NAS points out that Shaw had invited the Insurers to a meeting in
California, but then uninvited them. NAS further points out that Shaw invited its insurers
to another mediation in Louisiana, which NAS attended. (Doc. 122). In Shaw’s
opposition, Shaw argued that it explained in its memorandum and that the record shows
that it invited the Insurers to a mediation in Louisiana but the Insurers did not participate

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“in any meaningful way.” (Doc. 124 at 9). It appears from the record that NAS did attend
the mediation in Louisiana, and thus the Court erred in finding that NAS did not attend.
Thus, because the Court now finds that the claim against NAS is solely failure to
indemnify and NAS did attend the mediation in Louisiana, the Court will now address
the legal arguments raised by NAS in support of its motion. NAS has asked this Court to
explain why there is no difference between Louisiana law and Washington law
concerning a “your product” exemption and to reconsider its holding that Washington
law should apply to the extra-contractual claim against NAS.
II.
Your Product
NAS has asked this Court to clarify its holding that there was no conflict of law
with respect to the “your product” exclusion. The Court cited the Louisiana case Stewart
Interior Contractors, LLC v. Metalpro Industries, LLC, 2007-0251 (La. App. 4th Cir.
10/10/07); 969 So.2d 653, and the Washington case Mutual of Enumclaw Insurance Co.
v. T&G Construction Inc., 199 P.3d 376 (2008), and found that that there was no
difference between the cases. In Stewart, the court found that the policy precluded
coverage for the “allegedly defective steel studs, all costs related to the replacement of
the steel studs, and for any damage to property attendant to their removal and/or repair,
including any loss of use or profits caused by the delay . . . .” Stewart, 969 So.2d at 668.
Thus, NAS is correct in arguing that Louisiana law interprets the “your product”
exclusion not to cover consequential damages. However, the Stewart court explained
that Louisiana law “has further interpreted the ‘work product’ provisions to exclude
consequential damages directly resulting from defective products, such as costs

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incurred as a result of the delay in a construction project during the repair and
replacement process.” Id. at n. 24 (emphasis added). Stewart referenced two Louisiana
cases, McMath Constr. Co., Inc. v. Dupuy, 03-1413 (La.App. 1 Cir. 11/17/04), 897
So.2d 677 and Gaylord Chem. Corp. v. ProPump, Inc., 1998-2367 (La. App. 1 Cir.
2/18/00), 753 So.2d 349, in which the courts both found that the exclusion of
consequential damages did not necessarily exclude damages to other property. See
McMath, 897 So.2d at 683 (“damage to property other than the insured’s work or
product may not be unambiguously excluded”) and Gaylord, 753 So.2d at 356
(“damages to other property would not be excluded by the ‘work’ and ‘product’
exclusions.”). In other words, when the consequential damages are those “directly
resulting from defects in the insured’s ‘work’ or ‘product’ itself, such as damages for
inconvenience, engineering fees, and repair costs,” these damages are excluded.
Gaylord, 753 So.2d at 355-56. However, if the consequential damages are damages to
other property, then these are not necessarily excluded. Id.
In Mutual of Enumclaw Insurance Co. v. T&G Construction Inc., the Washington
Supreme Court found that there was “no coverage for the removal and replacement of
the siding.” T&G, 199 P.3d at 385. However, if the siding needed to be removed to
“repair damage caused by T&G to the surfaces and interior walls underneath the siding,
then there is coverage for the cost of the removal and replacement.” Id. Similarly, the
Western District of Washington addressed the scope of coverage for consequential
damages. Riverfront Landing Phase II Owners' Ass'n v. Assurance Co. of America,
2009 WL 1952002 (W.D. Wash. 2009). In Riverfront, the court cited T&G, explaining
that “to the extent that removal and repair of [the insured’s] work was necessary to get

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to and repair the resultant damage to the work of another, those consequential
damages are covered losses.” Id. at *6. However, the insurance company is “not
responsible for the costs of removing and repairing [the insured’s] work to uncover and
repair property damage that is not covered by the policy, including [the insured’s] own
faulty work.” Id.
Thus, the Court does not see a discernible difference between the two states’
laws and their interpretations of a “your work” exclusion. Both states appear to interpret
a “your work” exclusion to exclude damages directly caused by the insured’s work and
consequential damages that directly result from the work. However, both states also
appear to interpret this exclusion as not necessarily excluding coverage for damages to
other’s work caused by the insured’s work. Therefore, there does not appear to be a
conflict of laws, and thus, Washington law shall apply.
III.
Law Governing Extra-Contractual Claim Against NAS
As a threshold matter, NAS does not argue that Washington’s conflict of laws
rules should not apply and the Court sees no reason to upset that finding. NAS does
argue that it was error for this Court to rely on a Washington case, Newmont USA Ltd.
v. American Home Assur. Co., 676 F.Supp.2d 1146 (E.D. Wash. 2009) to decide that
Washington law applied to the extra-contractual claims against NAS because Newmont
was a duty to defend case, not a duty to indemnify. Shaw objects to this argument,
noting that this Court did not cite Newmont as the basis for its ruling, and instead, relied
on the Restatement (Second) Conflict of Laws § 145, which governs torts, to make its
decision. While the Court did use the factors in section 145 to make its decision, upon

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reconsideration, the Court finds that its application was erroneous, and that Louisiana
law should apply.
Because “Washington courts follow Restatement section 145 to determine which
state’s laws governs tort . . . claims,” this Court will apply the factors in the Restatement
to determine whether Louisiana law or Washington law applies. Tilden-Coil
Constructors, Inc. v. Landmark Am. Ins. Co., 721 F. Supp. 2d 1007, 1016 (W.D. Wash.
2010). The Restatement (Second) of Conflict of Laws § 145 provides

(1) The rights and liabilities of the parties with respect to an
issue in tort are determined by the local law of the state
which, with respect to that issue, has the most significant
relationship to the occurrence and the parties under the
principles stated in § 6.
(2) Contacts to be taken into account in applying the
principles of § 6 to determine the law applicable to an issue
include:
(a) the place where the injury occurred,
(b) the place where the conduct causing the injury
occurred,
(c) the domicil, residence, nationality, place of
incorporation and place of business of the parties,
and
(d) the place where the relationship, if any, between
the parties is centered.
These contacts are to be evaluated according to their
relative importance with respect to the particular issue.

Restatement (Second) of Conflict of Laws § 145 (1971). In Tilden-Coil, the Western
District of Washington considered whether Washington law or California law should
apply. Tilden-Coil, a California contractor, hired Westec, Industries, Inc., a Washington
corporation, to design and manufacture a belt conveyor system. Tilden-Coil, 721 F.
Supp. 2d at 1011. The system was defective and Tilden-Coil, after removing and
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reinstalling the system, informed Westec that it planned to “seek reimbursement for the
costs that it had incurred in repairing” the system. Id. Westec informed its insurance
carrier, Landmark, about the claim, and Landmark informed Westec that the policy did
not cover the claim. Id. Tilden-Coil sued Westec in California, which was the underlying
lawsuit. Id. Tilden-Coil eventually took an assignment of Westec’s insurance claims
against Landmark, and Tilden-Coil sued Landmark in Washington, adding extracontractual claims, including breach of duty to pay. Id. at 1012.
The Western District of Washington found that, after applying the factors in
Section 145 of the Second Restatement of Conflict of Laws, Washington law applied.
The court noted that neither Westec nor Landmark were California citizens, with Westec
being domiciled in Washington and Landmark being domiciled in Oklahoma and
Georgia. Id. at 1016. Moreover, “the first two contacts—place of injury and place of
conduct—are of less significance where, as here, the alleged injury did not occur in a
single, ascertainable state, as with personal injuries and injuries to tangible things.” Id.
Similarly, in Milgard Manufacturing, Inc. v. Illinois Union Insurance Co., the
Western District of Washington reached the same conclusion. Milgard Mfg., Inc. v.
Illinois Union Ins. Co., 2011 WL 3298912 (W.D. Wash. 2011). In Milgard, Milgard was a
Washington-based manufacturer who sold defective windows to an Oregon-based
company, Baugh. 2011 WL 3298912 at *1. Baugh sued Milgard in Oregon, and
Milgard, in turn, sued IUIC, its insurance carrier, for breach of contract and bad faith. Id.
at *2. The Western District found that Washington law, and not Oregon law, governed
the tort action against IUIC. Id. at 8. First, the court noted that the tort claims “arise out
of IUIC’s duties to Milgard under the contract of insurance.” Id. The court had already

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determined that Washington had the “most significant relationship to the policy” and the
“policy implications of the choice of law for Milgard’s tort claims are consistent with the
analysis for the choice of law of the contract claims.” Id. The court explained that
because Milgard was domiciled in Washington and IUIC was domiciled in Illinois,
Washington, and not Oregon, was the favored law. Id. The fact that the “underlying suit
was brought in Oregon does not change the greater significance of the location of the
insured’s manufacturing facility and the place of purchase of the policy of insurance.” Id.
Here, the Court finds that it was error to apply Washington law to govern the
extra-contractual claim of failure to indemnify against NAS, and finds that Louisiana law
is the appropriate law. Neither NAS nor Shaw are Washington citizens. Additionally, as
the court in Tilden-Coil noted, the “place of injury and place of conduct” were “of less
significance, where, as here, the alleged injury did not occur in a single, ascertainable
state, as with personal injuries and injuries to tangible things.” Tilden-Coil, 721 F. Supp.
2d at 1016. Additionally, following the reasoning in Milgard, the fact that the underlying
suit was brought in Washington does not “change the greater significance of the
location of the insured’s manufacturing facility and the place of purchase of the policy of
insurance.” Milgard, 2011 WL 3298912 at *8. In Milgard, the court found it instructive
that it had already determined that Washington law governed the contract dispute
because the tort claims arose out of the duties under the contract. Id. Thus, it appears
that the factors in Section 188 of the Second Restatement, which govern contract
coverage, are also instructive in determining which law applies to extra-contractual
claims.
Restatement (Second) of Conflict of Laws § 188 provides
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(1) The rights and duties of the parties with respect to an
issue in contract are determined by the local law of the state
which, with respect to that issue, has the most significant
relationship to the transaction and the parties under the
principles stated in § 6.
(2) In the absence of an effective choice of law by the parties
(see § 187), the contacts to be taken into account in applying
the principles of § 6 to determine the law applicable to an
issue include:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract,
and
(e) the domicil, residence, nationality, place of
incorporation and place of business of the parties.
These contacts are to be evaluated according to their
relative importance with respect to the particular issue.
(3) If the place of negotiating the contract and the place of
performance are in the same state, the local law of this state
will usually be applied, except as otherwise provided in §§
189-199 and 203.

Restatement (Second) of Conflict of Laws § 188 (1971). In Tilden-Coil, the court found
that the first, second, and fifth contacts2 supported application of Washington law
because Westec was a Washington corporation, it negotiated and purchased its policy
in Washington, and Landmark was not a California corporation, but an Oklahoma and
Georgia corporation. Tilden-Coil, 721 F. Supp. 2d at 1015. The court found that the third
and fourth contacts, “place of performance and location of the contract’s subject matter”
were not as significant. Id. At the time that the contract was entered into, the place of
performance was uncertain because Westec at the time primarily did its work in
Washington and Alaska. Id. Moreover, the “location of the policy’s subject matter was
2

The first, second, and fifth contacts are: the place of contracting, the place of negotiation of the contract, and the
residence of the parties.

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not fixed,” which indicated that it was not a policy that insured “against a localized risk.”
Id. The comments to the Restatement provide that “place of performance can bear little
weight if uncertain or unknown,” and the “situs of the subject matter is significant for
contracts that protect against localized risks.” Id. The court concluded that Washington
had the most significant relationship, and thus, should govern. Id.
Here, the place of contracting and the place of negotiation of the contract were in
Louisiana, satisfying the first and second prong of the contacts analysis. The place of
performance and the location of the subject matter of the contract were unknown at the
time of contracting. However, as the comments to the Restatement provide, the place of
performance “can bear little weight in the choice of applicable law” if it is unknown or
uncertain at the time of contracting. See cmt. e to Restatement (Second) of Conflict of
Laws § 188 (1971). Finally, as previously stated, neither party is a Washington resident.
Thus, the Court finds that Louisiana law governs the extra-contractual claim as to
NAS and vacates its earlier ruling to the extent that it found that Washington law
governed the extra-contractual claim as to NAS.
IV.
Zurich has also filed a motion for reconsideration, requesting that this Court
reconsider the choice of law ruling with respect to the extra-contractual claims Shaw
brought against it. (Doc. 125). This Court found that the claim of breach of duty to
defend should be governed under Washington’s law. In its motion, Zurich argues that
Zurich has already paid over $8,200,000.000 defending Shaw in the underlying
litigation. Additionally, Zurich asserts that it paid $4,000,000.00 after being notified that
Shaw and REC had settled. Zurich argues that the tort alleged by Shaw is that Zurich

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failed to properly defend and indemnify Shaw in the underlying suit, and this conduct did
not occur in Washington. Zurich claims that it sent a reservation of rights letter to
Shaw’s headquarters in Louisiana, and the claim was initially adjusted in Louisiana.
Zurich argues that the injury and the conduct causing the injury were in Louisiana and
not Washington, and thus Louisiana law should apply. Moreover, Zurich argues that this
Court failed to address Zurich’s domicile and place of incorporation when making its
determination, as well as the place where the relationship between the parties was
based.
However, for Shaw’s claim that Zurich breached its duty to defend, the Court
finds that Washington law is the correct law. In Newmont USA Ltd. v. American Home
Assurance Co., the Eastern District of Washington noted that the “alleged injury here is
lack of performance of the duty to defend under the contract.” Newmont USA Ltd. v.
American Home Assurance Co., 676 F.Supp.2d 1146, 1163 (E.D. Wash. 2009). The
court did note that Washington had an interest in “deterring bad faith conduct of insurers
within the state,” and that the plaintiff, Dawn Mining, was a Washington corporation. Id.
The court concluded that Washington law should govern the matter.
In Bethlehem Construction, Inc. v. Transportation Insurance Co., the Eastern
District of Washington considered whether to apply Washington law or California law.
Bethlehem Construction, Inc. v. Transportation Insurance Co., 2006 WL 2818363 *28
(E.D. Wash. 2006). The insured was domiciled in Washington, the policies covered
projects in Washington, and the insurance policies were entered into in Washington. Id.
The underlying litigation occurred in California, the plaintiff maintained an office in
California, the insurance policies “covered the work being performed” in California, and

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the defense attorney was barred in California. Id. The Court concluded that California
had the more significant contacts to the claim.
Upon reconsideration, the Court, in its discretion, has determined that
Washington law shall apply to the duty to defend claim.
V.
Accordingly, the Court GRANTS NAS’s motion (Doc. 122) in part and DENIES it
in part, and the Court DENIES Zurich’s motion (Doc. 131).

Signed in Baton Rouge, Louisiana on February 7th, 2013.





JAMES J. BRADY, DISTRICT JUDGE
MIDDLE DISTRICT OF LOUISIANA

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