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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
MECHANICAL EQUIPMENT CO MPANY, INC. CIVIL ACTION
VERSUS NO: 08-4705AFFILIATED FM INSURANCE COMPANY SECTION: “C” (4)
ORDER & REASONS
Before the Court is a Motion for Summary Judgment by Defendant Affiliated FM
Insurance Company (“Affiliated”). (Rec. Doc. 26). The motion is before the Court on the briefswithout oral argument. After reviewing the memora nda of the parties, the record in the case, and
the applicable law, the Court GRANTS the motion as set forth below.
I. Background
Mechanical Equipment Company, Inc. (“MECO”) manufactures and sells water
purification systems. At the time Hurricane Katrina struck, August 29, 2005, MECO’smanufacturing facility was located at 3855 France Road along the Industrial Canal in NewOrleans East. At that time, MECO carried flood and property insurance on the France Roadproperty. The property insurance was issued by two separate carriers, Landmark AmericanInsurance Company (“Landmark”) and Affiliated. The Landmark policy provided propertydamage and business interruption coverage up to a policy limit of $1,250,000. The Affiliated
2policy provided property damage and business interruption coverage in excess of $1,250,000 and
up to $42,885,303. The separately issued flood insurance policies provided $49 million in floodproperty and business interruption coverage.
MECO’s France Road property suffered serious damage in Hurricane Katrina. After
adjustment, the flood carriers collectively paid the policy limits of $49 million. Landmark alsopaid its policy limits of $1,250,000. MECO then submitted a claim to Affiliated for$11,445,830.77 for the remaineder of its claimed wind related loss, including both property andbusiness interruption loss. Affiliated denied the claim, and the instant litigation resulted. MECOhas since relocated its operations to Stafford, Te xas, and then Covington, Louisiana. Affiliated
now moves for summary judgment, arguing that coverage is precluded under the terms ofMECO’s insurance policy.
II. Law and Analysis
a. Standard of Review
Summary judgment is only proper when the record indicates that there is not a “genuine
issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” F
ED. R. C IV. P. 56. A genuine issue of fact exists only if the evidence is such that a reasonable
jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc . 477 U.S.
242, 247-48 (1986); see also, Taita Chem. Co. v. Westlake Styrene Corp ., 246 F.3d 377, 385 (5th
Cir. 2001). When considering a motion for summary judgment, this Court “will review the factsdrawing all inferences most favorable to the party opposing the motion.” Reid v. State Farm
Mut. Auto Ins. Co. , 784 F.2d 577, 578 (5th Cir. 1986).
The party moving for summary judgment bears the initial burden of “informing the
3district court of the basis for its motion, and id entifying those portions of [the record] which it
believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett ,
477 U.S. 317, 323 (1986). Once the moving party has met its initial burden, however, “theburden shifts to the non-moving party to produce evidence or designate specific facts showingthe existence of a genuine issue for trial.” Engstrom v. First Nat’l Bank of Eagle Lake , 47 F.3d
1459, 1462 (5th Cir. 1995). In order to satisfy its burden, the non-moving party must put forthcompetent evidence and cannot rely on “unsubstantiated assertions” and “conclusoryallegations.” See Hopper v. Frank , 16 F.3d 92 (5th Cir. 1994); Lujan v. Nat’l. Wildlife Fed’n .,
497 U.S. 871, 871-73 (1990); Donaghey v. Ocean Drilling & Exploration Co. , 974 F.2d 646, 649
(5th Cir. 1992).
b. Interpretation of Insurance Contracts
Louisiana law provides that an insurance policy is a contract between the parties and
should be construed using the general rules of contract interpretation set forth in the LouisianaCivil Code. Bonin v. Westport Ins. Corp ., 930 So.2d 906, 910 (La.2006); see also Coleman v.
Sch. Bd. of Richland Parish , 418 F.3d 511, 516 (5th Cir.2005). As with any contract, the
judiciary's role in interpreting an insurance policy is to ascertain the common intent of theparties. Coleman , 418 F.3d at 516; Bonin , 930 So.2d at 910; see also La. Civ.Code Ann.
art.2045.
The words used in an insurance policy must be given their generally prevailing meaning.
Coleman , 418 F.3d at 516; Bonin , 930 So.2d at 910; see La. Civ.Code Ann. art.2047. Where
these words are “clear and explicit and lead to no absurd consequences, the [policy's] meaningand the intent of the parties must be sought w ithin the four corners of the document and cannot
4be explained or contradicted by extrinsic evidence.” In re Liljeberg Enters., Inc. , 304 F.3d 410,
440 (5th Cir.2002)( quoting Am. Totalisator Co. v. Fair Grounds Corp. , 3 F.3d 810, 813 (5th
Cir.1993)); Coleman , 418 F.3d at 518 ( quoting La. Ins. Guar. Ass'n v. Interstate Fire & Cas.
Co., 630 So.2d 759, 764 (La.1994) (“[W]hen the ‘language of an insurance policy is clear, courts
lack the authority to change or alter its terms under the guise of interpretation.’”)). Eachprovision of an insurance policy “must be interpreted in light of the other provisions so that eachis given the meaning suggested by the contract as a whole.” Coleman , 418 F.3d at 517; La.
Civ.Code Ann. art.2050.
An insurance policy “should not be interpreted in an unreasonable or a strained manner
so as to enlarge or to restrict its provisions beyond what is reasonably contemplated by its termsor so as to achieve an absurd conclusion.” Bonin , 930 So.2d at 910; Coleman , 418 F.3d at 516.
Should ambiguities remain in an insurance policy after applying the general rules of contractinterpretation, they are to be strictly construed against the insurer and in favor of coverage.Bonin , 930 So.2d at 911; La. Civ.Code Ann. art.2056. However, an insurance policy is
ambiguous only when it is susceptible to two or more interpretations and each of the alternativeinterpretations is reasonable. Id.; Tex. E. Transmission Corp. v. Amerada Hess Corp. , 145 F.3d
737, 741 (5th Cir.1998)( quoting Lloyds of London v. Transcontinental Gas Pipeline Corp. , 101
F.3d 425, 429 (5th Cir.1996)) (“[A] contract is ambiguous, under Louisiana law, ‘when it isuncertain as to the parties' intentions and susceptible to more than one reasonable meaning underthe circumstances. . . .”). An ambiguity is not created simply because one of the parties to aninsurance policy can create a dispute in hindsight. Id.
c. Business Interruption Exclusion
5Affiliated first argues that recovery is excluded by the conjunction of Section F, Group
I(8) of the Property Damage Form and Exclusion 6(a) of the Business Interruption Endorsement..
Section F, Group I(8) reads:
F. PERILS EXCLUDED
GROUP I. This policy excludes loss or damage if one or more of the following
exclusions apply to the loss, regardless of other causes or events that contribute to oraggravate the loss, whether such causes or events act to produce the loss before, at thesame time as, or after the excluded causes or events. . . .
8. Flood, Seepage or Influx of water from natural underground sources below the
surface of the ground. . . .
(Rec. Doc. 26-5 at 26-27).
Exclusion 6(a) of the Business Interruption Endorsement Reads:
6. EXCLUSIONS:
This endorsement does not cover any of the following:
a. Any loss during any period in which goods would not have been produced or inwhich business operations or services, including rental activities, would not havebeen maintained for any reason other than direct physical loss or damage insuredby the policy.
(Rec. Doc. 26-5 at 44).
Affiliated argues that because it is “undisputed that the Affiliated Policy does not insure
against damage from flood” (Rec. Doc 2602 at 11), flood damage is a “reason other than directphysical loss or damage insured by the policy” within the meaning of Exclusion 6(a). Theyreason that the Katrina related flooding damage, which was admittedly more severe than thewind damage, would have prevented MECO from operating for a longer period of time than anywind damage would have prevented MECO from operating. They therefore conclude that
MECO cannot recover for any wind-related business interruption loss.
MECO argues that the 6(a) exclusion does not cover “situations where losses due to both
6covered and excluded perils occurred concurrently.” (Rec. Doc. 32 at 10). They first argue that
the term “reason” in 6(a) is distinguishable from “peril.” Had the exclusion been intended toapply to concurrent perils (such as wind and flood) within the same event, they suggest, it wouldhave clearly said so. (Rec. Doc. 32 at 13). This argument fails. The term “reason” is broaderthan “peril,” and MECO has presented no caselaw suggesting otherwise. By its plain language,the exclusion covers “any reason other than direct physical loss or damage insured by thepolicy.”
MECO next asserts that the exclusion is not as restrictive as Affiliated claims it to be.
They suggest that for Affiliated’s interpretation to apply, the clause must clearly limit coverageto business interruptions caused solely by insured damages. (Rec. Doc. 32 at 15). Again, the
Court declines to rewrite the plain policy language. See Gaspard v. Offshore Crane and Equip. ,
1995 WL 110616 at *2 (E.D.La. 1995). The policy quite clearly precludes recovery when nobusiness would have taken place had the covered damage not occurred. See Cargill,
Incorporated v. Appalachian Insurance Company of Providence , 1983 WL 496522 at *6
(D.Minn. 1983) (“[T]he question to be answered is, ‘What business interruption loss, if any,would the insured have sustained had the covered property damage not occurred?’”).
MECO complains that this results in the unacceptable outcome that if nearby properties
are damaged due to flooding and MECO’s business is interrupted, their losses would not becovered. (Rec. Doc. 32 at 16). Although not MECO’s preferred outcome, this is nonetheless anaccurate portrayal of the exclusion as written.
Finally, MECO compares the language of the Business Interruption Endorsement with
the language of the endorsement exclusion to support its claim that its damages should be
7covered. The Business Interruption Endorsement covers business interruption losses:
[d]irectly resulting from direct physical loss or damage, of the type insured by this policy
to property not otherwise excluded, utilized by the insured, and at a location, but only tothe extent the Insured is unable to make up production and resume or continue operationsor services, partially or entirely, by utilizing damaged or undamaged property all whetheror not at a location(s).
(Rec. Doc. 26-5 at 41). The covered period runs until “physically lost or damaged propertycould be repaired . . . at the location that existed prior to such loss or damage.” (Rec. Doc. 26-5at 41). MECO argues that this language is plainly location specific–that is, that the policy coversbusiness interruption for the period of time it would take to repair the France Road property.
By contrast, the interruption exclusion does not reference location. It simply excludes
time periods “in which goods would not have been produced . . . for any reason other than directphysical loss or damage insured by the policy.” (Rec. Doc. 26-5 at 44). MECO concludes thatbecause it opened temporary operations in Stafford, Texas, on September 14, 2005, only the twoweeks between Katrina’s landfall and the start of the Stafford operations are excluded. (Rec.
Doc. 32 at 23). It therefore seeks recovery from September 14, 2005, until May 1, 2006, theestimated date the France Road operation could have been repaired.
Affiliated argues that the exclusions clause must be read in conjunction with the coverage
itself. (Rec. Doc. 35-2 at 7). They have the stronger argument. The Endorsement itself islocation-specific, covering business interruption at the France Road operation. It follows thatexclusions from that Endorsement are also limited to interruption at the France Road operation. The strongest indicator of this intent, apar t from the conceivable loopholes mentioned in
Affiliated’s briefing (Rec. Doc. 35-2 n.8), is the us e of the conditional “would” in the text of the
exclusions. The phrase “ would not have been produced” indicates reference to the damaged
8location. In other words, the Endorsement covers a time period at a specific location when, due
to a covered incident, goods cannot be produced. The exclusion excepts time periods where,regardless of the covered incident, goods would not have been produced. If temporarily setting
up shop elsewhere were an acceptable manner of evading the exclusion, the exclusion wouldhave excluded time periods when goods “ are not” or “ were not” produced.
It is undisputed that MECO calculated that the flood damage at the France Road property
could not have been restored sooner that December 1, 2006. (Rec. Doc. 32-2 at 8). This is laterthan the claimed business interruption for wind damage, which was until May 1, 2006. Thus,flood damage at that property would have prev ented any business from transpiring at that
location, regardless of the wind damage. The Court therefore holds that MECO cannot recoverunder the business interruption endorsement due to the 6(a) Exclusion.
d. Property Damage Claim
Because MECO’s Business Interruption claim is not covered under the policy, its sole
remaining covered claim is for wind-related property damage totaling $271,711.77. Affiliatedargues that although Landmark paid its $1,250,000 limits on MECO’s wind claims, theattachment point for Affiliated’s policy has not been triggered because the Affiliated policy doesnot cover the business interruption claim, as discussed in Part c, above. (Rec. Doc. 26-2 at 14-15).
Section D, “Insurance Provided” in the policy indicates that it “covers excess only of
such loss which is greater than an underlying amount of $1,250,000 in accordance with theexcess of loss provision.” (Rec. Doc. 26-5 at 18). The excess of loss provision reads: “the total
amount of such loss net of salvage, subrogation or other recoveries will first be determined,
9disregarding . . . [a]ny loss or damage not cove red by this policy, and/or any underlying coverage
or underlying policy of insurance.” (Rec. Doc. 26-5 at 18). Although this language seemsstraightforward, MECO contends that a later provi sion limits the application of the excess of loss
provision to certain extension of coverage sub-limits. That provision reads: “Excess of Loss
Provision Coverage Exclusion: SECTION E, EXCESS OF LOSS PROVISION, only applies to
the Extensions of Coverage Sub-limits, SECTION G 1-19, 21-25.” (Rec. Doc. 26-5 at 9). TheExtensions of Coverage Sub-limits are a list of types of expenses that have additional coveragelimits (e.g., Firefighting Materials and Expenses: $100,000). (Rec. Doc. 26-5 at 6). MECOargues that this exclusion limits the application of the excess of loss provision to those listedsub-limits (G1-19 and 21-25).
Adopting MECO’s argument would render Section D, Insurance Provided, inoperable
because Section D depends on the Excess of Loss Provision to determine whether the $1,250,000limit has been met. The Court declines to adopt such an interpretation. See Bonin , 930 So.2d at
910. MECO’s property damage claim must also be dismissed.
e. Wrongful Adjustment and Bad faith claims
Because the Court finds that Affiliated’s contract interpretation was reasonable, and
correct, the bad faith claims cannot survive. See Phillips v. Patterson Ins. Co. , 813 So.2d 1191
(La. Ct. App. 2002).
Counts 2 through 4 of MECO’s complaint must be dismissed.Accordingly,IT IS ORDERED that Affiliated’s Motion for Summary Judgment (Rec. Doc. 26) is
GRANTED.
10New Orleans, Louisiana, this 30th day of March, 2010.
_______________________________________
HELEN G. BERRIGAN
UNITED STATES DISTRICT JUDGE