AGIP Petroleum Co v. Gulf Island Fab Inc

• Court: Court of Appeals for the Fifth Circuit
• Decided: November 30, 2001
• Docket: 00-20487
• Status: Unpublished

Opinion

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

No. 00-20487

AGIP PETROLEUM COMPANY, INC.,

Plaintiff-Appellant,

versus

GULF ISLAND FABRICATION, INC.,

Defendant—Third Party Plaintiff—Appellant—Appellee,

SNAMPROGETTI USA, INC.,

Third Party Defendant—Counter Claimant—Appellant,

PETRO-MARINE ENGINEERING OF TEXAS, INC.,

Third Party Defendant—Appellant,

UNDERWRITERS, Subscribing to Policy No. SJ0002, SJ0003A, and SJ0003B issued by Sedgwick Energy (Insurance Services),

Third Party Defendant—Counter Defendant—Appellee.

Plaintiff—Appellant,

Defendant—Third Party Plaintiff—Appellant—Appellee, SNAMPROGETTI USA, INC.; MCDERMOTT, INC.,

Defendants—Counter Claimants—Appellants—Appellees,

Defendant—Appellant—Appellee,

UNDERWRITERS, Subscribing to Policy No. SJ0002, SJ0003A, and SJ0003B issued by Sedgwick Energy (Insurance Services),

_________________________________________________________________

Appeal from the United States District Court for the Southern District of Texas (H-94-CV-3547) _________________________________________________________________ November 28, 2001

Before HIGGINBOTHAM, BARKSDALE, and STEWART, Circuit Judges.

PER CURIAM:*

Primarily at issue is whether, under Texas law, an insurance

policy exclusion for “physical loss and/or damage to” insured

property excludes coverage for loss of use of that property.

Claiming coverage under their insurance policy against a loss of

use action brought against them by Agip Petroleum Company, Inc.,

another insured under that policy, contractors of Agip contest the

no-coverage summary judgment. AFFIRMED.

* 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 R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR.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.

2 I.

Agip is a developer of off-shore oil and gas production. Its

off-shore drilling platform at issue was designed, manufactured,

and to be installed for Agip by four contractors: Snamprogetti

USA, Inc., was responsible for engineering and supervising

construction of the platform; Petro-Marine Engineering of Texas,

Inc., a Snamprogetti subcontractor, for designing the platform;

Gulf Island Fabrication, Inc., for fabricating the platform; and

McDermott, Inc., for transporting the platform components to the

drilling site in the Gulf of Mexico and for attaching the platform

to the sea bed.

The platform jacket consists of the legs that rest on the sea

bed and upon which the platform deck is installed. During the

jacket’s installation, it toppled and sank. It was recovered,

repaired, and installed at the off-shore site. The cost of repair

was covered by an insurance policy purchased by AGIP, under which

it was a principal insured and the Contractors were other insureds.

The policy is a hybrid of a builder’s risk policy (Section I)

and a comprehensive general liability policy (Section II).

Restated, it provided two types of coverage. As noted, Section I

provided the builder’s risk coverage; it is entitled “PHYSICAL

DAMAGE”. Section II, entitled “THIRD PARTY LIABILITIES ETC.”,

provided the comprehensive general liability coverage.

Section I (“PHYSICAL DAMAGE”) insured “against all risks of

physical loss and/or damage to the property covered hereunder,

3 except as hereinafter mentioned”. The insured property included

“the works executed in the performance of all contracts relating to

this entire project ... and all materials, components, ... or any

other property destined to become a part of the completed

project....” Excluded from coverage under Section I was “[l]oss of

use or delay in ‘start-up’ of the insured property however caused”.

Accordingly, pursuant to Section I, Agip could (and did)

recover from the insurer for the structural damage to the platform

but not for loss of use due to the production-delay resulting from

the platform’s sinking. As a result, two actions were filed.

In the first action, Agip sued the Contractors for claimed

damages sustained because of the loss of use of the platform.

Again, these were damages Agip could not recover under Section I.

According to Agip, because of the production-delay, it lost the

ability to produce substantial amounts of gas and oil. In the

second action, the policy Underwriters, in Agip’s name, brought a

subrogation claim against the Contractors, seeking to recover the

substantial amount the Underwriters paid Agip under Section I for

the structural damage. The two actions were consolidated. The

Underwriters and Contractors filed cross motions for summary

judgment on whether, under policy Section II (“THIRD PARTY

LIABILITIES, ETC.”), the Underwriters were obligated to indemnify,

and provide a defense to, the Contractors against Agip’s loss of

use action.

Section II provides coverage where

4 the Assured shall become liable (under Contract or otherwise) to pay ... any sum ... in respect of any ... claim ... arising from ... the Assured’s operations in connection with the Project, that is to say:

Loss of life, personal injury or illness....

Loss of or damage to or loss of use of property of any kind or description, including all other direct or indirect or consequential loss resulting from loss of or damage to the property....

(Emphasis added.)

Section II contains the following cross liability clause. The

first paragraph of the clause reads:

In the event of one Assured incurring liability to any other of the Assureds, this insurance shall cover the Assured against whom claim is ... made in the same manner as if separate policies had been issued to each Assured. However, the inclusion of more than one Assured hereunder shall not operate to increase the limit of liability herein.

The second paragraph of the clause, — the linchpin for this appeal — reads, however:

In no case shall this Section II provide coverage for any physical loss and/or damage to or defect discovered in the property insured.

As discussed infra, it is this second paragraph that precludes

coverage for the Contractors.

Summary judgment was awarded the Underwriters. The district

court concluded the policy provided no coverage for the

Contractors, reasoning that, if coverage were provided, “Agip would

5 be recovering in a circular fashion from its insurer for excluded

risks [loss of use]”. Agip Petroleum Co., Inc. v. Gulf Island

Fabrication, Inc., et al., No. H-94-3382, at 2 (S.D. Tex. 4 Dec.

1997) (Agip-USDC). Furthermore, according to the district court,

when the policy is read as a whole in conjunction with Agip’s

choice to retain the risk of loss of use, rather than insure

against such risk, no coverage exists. The district court reasoned

that, if coverage existed under the policy, “the underwriters would

be paying twice the coverage they underwrote when insuring the

platform”. Agip-USDC, at 3.

The district court based its ruling on, inter alia, Agip’s not

being a third party to the policy so as to trigger the provisions

of Section II. In addition, it concluded that, even if Agip were

a third party, “Agip’s claims against the contractors are for the

losses to the insured property — the platform. No coverage

attaches to third-parties for property damage, even under the

contractors’ reading of section two for damage to the platform”.

Agip-USDC, at 6.

II.

The Contractors appealed the no-coverage ruling; Agip appealed

the rulings on its claims against the Contractors, but that appeal

is stayed pending settlement; and the Underwriters did not appeal

the summary judgment awarded the Contractors in regard to the

subrogation claim. Therefore, the only issue is whether coverage

6 exists under Section II for Agip’s loss of use claim against the

Contractors.

A summary judgment is reviewed de novo, applying the identical

standard used by the district court. E.g., Stewart v. Murphy, 174

F.3d 530, 533 (5th Cir.), cert. denied, 528 U.S. 906 (1999). Such

judgment should be granted if “the pleadings, depositions, answers

to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment

as a matter of law”. FED. R. CIV. P. 56(c). For this process, we

“view the pleadings and summary judgment evidence in the light most

favorable to the nonmovant”. Stewart, 174 F.3d at 533.

Because Section I expressly excludes coverage for loss of use,

Section II is the only possible basis for coverage. Even though

Section II covers third party liability, the Contractors assert

that, pursuant to the cross liability clause, coverage exists under

Section II where, as here, one insured sues another insured. The

Contractors concede, however, that, whether any coverage exists

against Agip’s loss of use claim is dependent upon the exclusion

contained in the cross liability clause.

The Underwriters advance numerous bases for no coverage. It

is only necessary to address their assertion that, under Texas law,

the cross liability clause’s exclusion “for any physical loss

7 and/or damage to ... the property insured” excludes coverage for

loss of use.

A.

The parties agree that Texas law governs by virtue of the

forum selection clause in policy Endorsement 10. “A federal court

is required to follow the choice of law rules of the state in which

it sits.” Resolution Trust Corp. v. Northpark Joint Venture, 958

F.2d 1313, 1318 (5th Cir. 1992) (citing Klaxon Co. v. Stentor Elec.

Mfg. Co., 313 U.S. 487, 496 (1941)), cert. denied, 506 U.S. 1048

(1993); see, e.g., St. Paul Mercury Ins. Co. v. Lexington Ins. Co.,

78 F.3d 202, 205 (5th Cir. 1996). Under Texas choice of law rules,

parties to a contract may select the law that governs their

agreement. Exxon Corp. v. Burglin, 4 F.3d 1294, 1298 (5th Cir.

1993).

“A Texas court will enforce a contractual choice of law

provision unless (1) the contract bears no reasonable relation to

the chosen state or (2) the law of the chosen state violates a

fundamental public policy of Texas.” Id. at 1298 n.5; see DeSantis

v. Wackenhut Corp., 793 S.W.2d 670, 677 (Tex. 1990), cert. denied,

498 U.S. 1048 (1991). The parties agree to the application of

Texas law. Accordingly, neither maintains application of such law

would violate Texas public policy. Furthermore, Texas law bears a

reasonable relation to the policy; Agip, the primary insured, and

8 Sedgwick James of Texas, Inc., the insurance broker, were located

in Texas.

In sum, Texas law governs. Accordingly, the burden rests upon

the insurer to prove “the applicability of any exclusions in the

policy”. Guar. Nat’l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193

(5th Cir. 1998) (citing Telepak v. United Servs. Auto. Ass’n, 887

S.W.2d 506, 507 (Tex. App. — San Antonio 1994, writ denied)); see

Sink v. Progressive County Mut. Ins. Co., 47 S.W.3d 715, 718 (Tex.

App. — Texarkana 2001); TEX. INS. CODE ANN. § 21.58(b)(Vernon Supp.

2001) (“insurer has the burden of proof as to any avoidance or

affirmative defense that must be affirmatively pleaded under the

Texas Rules of Civil Procedure. Any language of exclusion in the

policy ... constitutes an avoidance or an affirmative defense”).

B.

That there is no coverage for the Contractors against the loss

of use claim seems clear from the plain wording of the policy.

Texas law bears this out.

1.

The part of Section I (¶ 8), providing coverage for damage to

the property, and the part of Section II (¶ 41), excluding cross

liability coverage for damage to the property, both use essentially

the same wording. Section I speaks of “physical loss and/or damage

to the property covered hereunder, except as hereinafter

mentioned”; Section II, of “physical loss and/or damage to ... the

9 property insured”. Therefore, arguably, loss of use would be

covered by the above quoted language in Section I, except for its

being expressly excluded later in that section (¶ 28.1.(c)).

In short, Section I speaks of coverage for physical damage,

but makes some exceptions, including for loss of use; Section II

speaks of no cross-liability for physical damage, and makes no

exceptions. As quoted supra, loss of use is covered pursuant to

the general coverage provision in Section II (¶ 40); but no

authority need be cited for a specific provision’s (cross

liability, ¶ 41) controlling a general one (coverage, ¶ 40).

In sum, the cross liability provision precludes coverage for

“physical loss and/or damage to ... the property insured”. No more

need be said. It was not necessary for the policy to go into

greater detail and say: “there is no cross liability for physical

loss and/or damage to the property insured; this exclusion means

that, among other possible exclusions, there is no cross liability

for loss of use arising out of physical loss and/or damage to the

property insured”. As discussed below, this plain reading comports

with Texas law.

2.

In maintaining that, under Texas law, the exclusion for

“physical loss and/or damage” includes excluding coverage for loss

of use, the Underwriters principally rely upon Employers Cas. Co.

v. Brown-McKee, Inc., 430 S.W.2d 21 (Tex. Civ. App. — Tyler 1968,

10 writ ref’d. n.r.e.). Brown-McKee contracted with Panhandle Wheat

Growers, Inc., to construct a grain elevator for it. Brown-McKee

was insured by Employers. After completion of the work, Panhandle

sued Brown-McKee, alleging: defects in the elevator allowed water

to enter and damage another’s stored grain; and, as a result, the

grain was removed from the elevator and Panhandle therefore lost

revenue. In turn, Brown-McKee sued Employers, because Employers

claimed that, under a policy exclusion, it had no duty to provide

a defense.

Under the policy, Employers agreed to defend Brown-McKee

against any suit that fell within the policy coverage — “injury to

or destruction of property, including the loss of use thereof,

caused by accident”. Id. at 23 (emphasis added; internal quotation

omitted). The policy, however, contained the following exclusion:

This policy does not apply:

...

... under [the above quoted provision] to injury to ... (4) any ... work completed by or for the named insured, out of which the accident arises.

Id. Employers maintained that this clause excluded coverage for

Panhandle’s loss of use claim. Brown-McKee countered that

Panhandle’s claim arose not from damage to the completed work but

instead from damage to the grain in the elevator and the removal of

the grain.

11 The court determined, however, that Panhandle’s action was not

for damage to the grain, but rather “for lost storage revenue,

which, in effect, is for loss of the use of the elevator”. Id. at

27. Most notably, for purposes of our analysis, the court held

that “loss of use of the elevator is merely an element of damage to

the elevator and coverage therefor is excluded under [the above

quoted] Exclusion”. Id. Accordingly, loss of use was held

exempted from coverage, even though the term was not used in the

exclusion.

Our court has recognized the Brown-McKee holding that loss of

use is an element of property damage. See Todd Shipyards Corp. v.

Turbine Serv., Inc., 674 F.2d 401, 422-23 & n.16 (5th Cir.)

(although expressing doubt that the result would be the same under

Louisiana law), cert. denied, 459 U.S. 1036 (1982). This is also

consistent with our court’s observation that, in general, courts

interpret “property damage to require (1) actual damage to tangible

property or (2) the loss of use of property with tangible monetary

value”. Snug Harbor, Ltd. v. Zurich Ins., 968 F.2d 538, 542 (5th

Cir. 1992) (applying Texas law but citing to New York, Florida, and

Wisconsin law for this statement).

Brown-McKee is clear: where an exclusion denies coverage for

damage to property, that exclusion forecloses coverage for loss of

use of that property. Furthermore, Brown-McKee is factually on

point. There, the policy covered loss of use to property that was

12 not part of Brown-McKee’s construction project. Here, the policy

provides coverage to the Contractors for loss of use of property

that is not part of the platform construction project. In Brown-

McKee, the policy excluded coverage for “injury to or destruction

of” the property constructed by Brown-McKee. Here, where one

insured sues another, excluded from coverage is “physical loss

and/or damage to” the insured property — in this case, the platform

jacket.

The policy at issue in Brown-McKee was a comprehensive general

liability (CGL) policy, whereas the policy here is termed by the

parties as a builder’s risk policy. This difference, however, does

not affect the applicability of Brown-McKee. A builder’s risk

policy is typically purchased by the party owning a property

interest in the construction work to be performed in order to

protect the property during construction. See Data Specialties,

Inc. v. Transcon. Ins. Co., 125 F.3d 909, 914 (5th Cir. 1997)

(applying Texas law and observing that a builder’s risk insurance

policy “reimburses the owner, or any party with an insurable

interest such as a mortgage holder, for the accidental loss,

damage, or destruction of the property”). A CGL policy, on the

other hand, can be purchased by the party performing the

construction work, as was the situation in Brown-McKee, to broadly

cover against tort liability incurred during construction. See id.

(“CGL policy covers the contractor for its tort liability”).

13 As stated supra, the policy in question is really a hybrid of

a builder’s risk policy and a CGL policy. Section I performs the

function of builder’s risk by insuring Agip’s interest in the

jacket against loss or damage. Section II is more akin to a CGL

policy, as it protects Agip and the Contractors from tort liability

to third parties. Accordingly, for our purposes, there is no

functional difference between the CGL policy in Brown-McKee and the

coverage in Section II.

There is a difference, however, in the relationship of the

parties in Brown-McKee and here. In Brown-McKee, the party that

owned the elevator and suffered the loss of use damages, Panhandle,

was not an insured under the policy and had nothing to do with its

purchase. Here, the owner of the jacket, Agip, purchased the

policy and is an insured under it. If there is no coverage under

Brown-McKee for a loss of use claim brought by a stranger to the

policy, it makes even more sense that, pursuant to the plain

wording of the policy at issue, there be no coverage when the party

claiming loss of use is the purchaser of, and a party to, the

policy. Again, Agip decided not to insure against loss of use

under Section I.

Therefore, under the Brown-McKee holding, Section II’s cross

liability clause exclusion for physical loss and/or damage to the

jacket also excludes coverage for loss of use of that jacket. The

14 Contractors present two reasons why Brown-McKee should not dictate

the outcome here.

First, they seize upon language in the Brown-McKee exclusion,

which prohibited coverage for “work completed by or for the named

insured, out of which the accident arises”. Brown-McKee, 430

S.W.2d at 23 (emphasis added). According to the Contractors, this

language distinguishes Brown-McKee from the situation at hand. The

Brown-McKee court, however, did not rely upon this language.

Furthermore, here, Section II requires that, for coverage to exist,

the damage must result from “the Assured’s operations in connection

with the Project” (“Coverage”, ¶ 40). This forecloses coverage

pursuant to the cross liability clause for property damage not in

connection with the Contractors’ role in the project. Instead of

distinguishing Brown-McKee, this language further demonstrates the

similarities between the policies at issue there and here.

The Contractors’ second assertion fares no better. According

to them, and discussed supra, because damages for loss of use are

expressly excluded from Section I coverage (¶¶ 8 & 28.1.(c)) but

expressly included in Section II coverage (¶ 40), the complete

absence of such exclusionary language from the subsequent Section

II cross liability exclusion (¶ 41) demonstrates no intent to

exclude coverage for loss of use. Under this theory, however, it

would be just as reasonable to conclude that, because of such

silence in the cross liability clause, loss of use is excluded. In

15 any event, and as discussed supra, the plain meaning of the policy

certainly does not support this contention.

Moreover, the Contractors cite no authority for this position.

Under Texas law, as we have concluded, an exclusion for property

damage subsumes loss of use. Because the policy included the loss

of use term in two instances but not in another does not change the

meaning, under Texas law, of property damage. In addition, failure

to so include this language does not create an ambiguity in the

policy where, under Texas law, there is only one reasonable

interpretation of the scope of the exclusion. See Columbia Gas

Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex.

1996) (“A contract is not ambiguous if it can be given a definite

or certain meaning as a matter of law.”).

III.

As the district court correctly observed, were we to hold that

Agip’s loss of use claim was not an element of property damage,

Agip and the Contractors would receive coverage for which the

parties to the policy never negotiated. To say the least, it would

be contrary to reason for Agip to recover from the Underwriters,

indirectly through the Contractors, what Agip could not recover

directly from the Underwriters. Texas law avoids such a result.

AFFIRMED