Judgment rendered May 18, 2022. Application for rehearing may be filed within the delay allowed by Art. 2166, La. C.C.P.
No. 54,015-CA No. 54,016-CA (Consolidated Cases)
COURT OF APPEAL SECOND CIRCUIT STATE OF LOUISIANA
*****
No. 54,015-CA No. 54,016-CA
STATE OF LOUISIANA, EMPLOYERS MILITARY DEPARTMENT MUTUAL AND DEPARTMENT OF CASUALTY PUBLIC SAFETY, OFFICE COMPANY A/S/O OF STATE POLICE THE VILLAGE OF Plaintiffs-Appellees DIXIE INN, LOUISIANA Plaintiffs-Appellees
versus versus
EXPLO SYSTEMS, INC., EXPLO SYSTEMS, CRUM AND FORSTER INC., AND CRUM & SPECIALTY INSURANCE FORSTER SPECIALTY COMPANY AND SENECA INSURANCE SPECIALTY INSURANCE COMPANY COMPANY Defendants-Appellants Defendants-Appellants
Appealed from the Twenty-Sixth Judicial District Court for the Parish of Webster, Louisiana Trial Court Nos. 73438 and 73443
Honorable Allen Parker Self, Jr., Judge
WEEMS, SCHIMPF, HAINES, Counsel for Appellants, SHEMWELL, & MOORE, APLC Crum & Forster By: Carey T. Schimpf Specialty Insurance Kenneth P. Haines Company and Seneca Specialty Insurance Company
THOMPSON, COE, COUSINS & IRONS, LLP Counsel for Appellants, By: Christina Anne Culver Crum & Forster Brian S. Martin Specialty Insurance Kevin Risley Company and Seneca Specialty Insurance Company
PATRICK R. JACKSON, APLC Counsel for 1st Appellees, By: Patrick R. Jackson State of Louisiana, Military Department and Department of Public Safety, and Office of State Police
PETTIETTE, ARMAND, DUNKELMAN, Counsel for 2nd Appellees, WOODLEY, BYRD & CROMWELL, L.L.P. Employers Mutual By: E. Henry Byrd, IV Casualty Company A/S/O Joshua Phillip Monteleone The Village of Dixie Inn Joseph Samuel Woodley
Before MOORE, PITMAN, STONE, HUNTER, and O’CALLAGHAN (Ad Hoc), JJ.
O’CALLAGHAN, J. (Ad Hoc), concurs in part and dissents in part for the reasons assigned.
MOORE, C.J., concurs in part and dissents in part for the reasons assigned by O’Callaghan, J. (Ad Hoc). STONE, J.
The instant litigation arises out of an explosion at Camp Minden,
which the Louisiana Military Department (“LMD”) leased in part to Explo
Systems (“Explo”). The latter was insured by Crum & Forster Specialty Ins.
Co. (“Crum & Forster”) and Seneca Specialty Ins. Co. (“Seneca”), effective
at the time of the explosion and ensuing investigation and emergency
response. Currently before this court is the appeal of defendant-insurers
Crum & Forster and Seneca (collectively, “the insurers”) from the grant of a
partial motion for summary judgment in favor of the plaintiffs, the Louisiana
State Police (“LSP”) and the LMD, in the 26th Judicial District Court,
Honorable Parker Self presiding. Specifically, the trial court judgment
declared the policy exclusion on which the insurers relied in denying
coverage unenforceable. For the following reasons, we reverse.
FACTS
Prior to the issuance of the insurers’ policies in question, insurance
representatives conducted a site visit at Camp Minden. A report based on
that site visit was generated and provided to the underwriters who,
obviously, approved issuance of the respective policies.
Explo was in the business of, among other things, “demilitarizing” the
military’s excess munitions (explosives). The United States Army’s Joint
Munitions Command (“JMC”) held a public bid auction soliciting private
enterprises to bid on a contract to demilitarize munitions containing M6
propellant charges. In competing for the contract, Explo represented to the
JMC that it had unused capacity to (properly) store 70 million pounds of
explosives; however, it was revealed – after the Camp Minden explosion – that capacity did not exist. In March of 2010, the JMC awarded that contract
to Explo. In exchange for demilitarizing the explosives, the United States
Government paid Explo millions of dollars. In connection with this
arrangement, the JMC required Explo to contractually agree to abide by all
applicable laws and regulations and to submit documentation of its
dispositions of the explosives, including the quantity disposed and the
identity of the recipient of the explosives (if any).1 The purpose of this
documentation was to enable the JMC to track the movement of the
explosives and Explo’s inventory levels. Explo quickly reached maximum
lawful storage capacity for the demilitarized M6 propellant, but never
informed the JMC. Instead, Explo submitted fraudulent disposition receipts
to hide the storage capacity problem from the JMC.
Explo’s demilitarization operation was subject to strict regulation and
monitoring. This involved several agencies, including the Defense Contract
Management Agency, the LMD, the Louisiana Department of
Environmental Quality, and the federal Environmental Protection Agency.
The regulations included a maximum limit on the total net amount of
explosives Explo was allowed to have in its respective permitted explosives
storage magazines at Camp Minden. The regulations also specified the type
and location of structures Explo was to use to store the explosives
(hereinafter referred to as “storage magazines”) and the minimum distances
between storage magazines. The Louisiana National Guard made periodic
inspections at Camp Minden meant, in part, to assess Explo’s compliance
1 These documents are referred to as “End User Certificates,” often abbreviated as EUCs. 2 with the applicable laws and regulations, including inventory limits and
compliance with storage protocol.
Explo violated the law and its contract with the JMC by receiving and
holding more M6 propellant at Camp Minden at one time than it could
properly store.2 The JMC paid Explo based on the amount of M6 propellant
Explo demilitarized (i.e., not based on how much was fully disposed). Explo
could demilitarize more explosives than it could properly store or dispose.
Thus, inventory limits—had they been obeyed—would have restricted
Explo’s monetary earnings. As previously mentioned, once the facility
reached its maximum lawful capacity, Explo submitted to the JMC
disposition receipts (called “EUCs”) which, in the aggregate, overstated the
amount of Explo’s outgoing deliveries of demilitarized M6 propellant by
several million pounds. This deception induced the JMC to continue
delivering the explosives despite the excess over the lawful storage capacity.
It also enabled Explo to avoid regulatory enforcement. Additionally, Explo
knew when the inspectors were coming and would hide the excess
explosives off-site in the woods nearby until completion of the inspection.
Also, the doors of the permitted storage magazines were required to bear
placards indicating the contents of the building. Explo would flip the
placards so the blank rear side was showing to create the impression that
there was nothing inside when, in fact, the magazines were at or beyond
maximum capacity. Explo also obstructed the inspections by piling up
objects so as to block the inspector’s access to certain areas in a seemingly
innocuous manner.
2 Several Explo officials pled guilty to conspiracy to defraud the United States and to making false statements to federal officers in relation to the demilitarization contract and operation. 3 As alluded to above, Explo actually sent some demilitarized M6
propellant to various third parties, including Boren Mining Co. In February
of 2012, approximately eight months prior to the Camp Minden explosion,
Boren returned multiple truckloads of M6 propellant, which Explo left
stored in the 18-wheeler trailers in which they arrived up to (and beyond) the
October 15, 2012 explosion.
The October 15, 2012 explosion was actually two separate explosions,
one being the contents of magazine 2464 (i.e., over 124,000 pounds of
smokeless powder) and the other being the contents of the nearby 18-
wheeler trailer. It is unclear which detonated first, but surveillance video
showed that the latter explosion was bigger than the first. Also, it is clear
that the first detonation caused the second detonation because of its
proximity.
There is a contradiction in the summary judgment evidence regarding
whether the 18-wheeler trailer that exploded contained smokeless powder or
M6 propellant. On one hand, a report generated by the LSP investigator who
responded to the explosion on the following day indicated: (1) the trailer
contained smokeless powder, and it spontaneously detonated first due to
“decomposition”; and (2) the initial detonation caused the smokeless powder
in magazine 2464 to also detonate.
On the other hand, testimony of Brett Spiers, a federal agent who was
involved in the investigation, indicated that it was actually M6 propellant
(returned from Boren Mining Co. in February 2012) in the 18-wheeler trailer
that detonated. He admitted he is not an explosives expert, but still believes
that magazine 2464 exploded first and the 18-wheeler trailer exploded
because it was too close to the magazine. Spiers also testified that the 4 smokeless powder in magazine 2464 was stored properly. Lionel Koons, the
Explo official in charge of storage and movement of explosives at Explo’s
Camp Minden site, testified at his federal sentencing hearing that he knew
the M6 propellant that exploded in the trailer was stored improperly.
The ensuing investigation also discovered that Explo had a total of 18
million pounds of explosives at Camp Minden after the explosion, including
over 15.6 million pounds of demilitarized M6 propellant. Explo stored the
excess explosives (i.e., above lawful storage capacity) in improper
containers, such as cardboard boxes and bags lying on the ground outdoors,
and left explosives sitting in 18-wheeler trailers for several months at a time.
It also loaded the excess into buildings not licensed for storing explosives.
Nearby residential areas were evacuated upon this discovery, and the
governor declared a state of emergency. The LSP sent a team to Camp
Minden to secure the improperly stored explosives, move them from unsafe
storage to safe storage, and, ultimately dispose of them. This process took
years.
Several Explo officials (managers, executives, owners, and
employees) pled guilty to crimes in connection with Explo’s operations and
with its fraudulent inducement of the JMC to grant the demilitarization
contract and to continue delivering explosives after Explo inventory had
reached maximum proper storage capacity. Three Explo officials, including
inventory and traffic control manager Lionel Koons,3 pled guilty to
“Careless …[storage]… of explosives” in violation of La. R.S. 40:1472.18,
which, in relevant part, states:
3 Lionel Koons directed the storage and movement of the explosives at Explo’s Camp Minden site. 5 No person shall store…explosives …as defined by R.S. 40:1472.2, in a careless or imprudent manner without regard for the hazards or circumstances in which the explosives…are being stored
In turn, La. R.S.40:1472.2, in relevant part, provides:
“Explosives” means any chemical compound, mixture, or device, the primary or common purpose of which is to function by explosion. The term includes but is not limited to dynamite and other high explosives and black powder in quantities in excess of five pounds
Several Explo officials pled guilty to federal crimes as well,
including: (1) conspiracy to defraud the United States, the object of which
was to receive money from the government to which Explo was not entitled;
and (2) the making of false statements to the government regarding Explo’s
operations and storage capacity. The federal guilty pleas included
stipulations to detailed factual predicates.
PROCEDURAL HISTORY
The LMD and the LSP filed suit against Explo and its insurers. The
LSP seeks to recover the costs of their investigation triggered by the
explosion and for the response to the emergency created by Explo’s vast
improper storage of the explosives that did not accidentally detonate. The
LMD seeks damages stemming from the explosion on its property, as well as
for the pollution caused by the explosion and by the illegal possession and
storage of explosives that did not detonate.
Relying on exclusions in their respective policies for damage caused
by the insured’s criminal, fraudulent, or dishonest conduct, the insurers
denied coverage of the plaintiffs’ claims. In response, the plaintiffs added
claims for bad faith against the insurers pursuant to La. R.S. 22:1973.
6 At this point, we explain the circumstances underpinning the trial
court’s issuance of a discovery sanction against the insurers. In the course of
this litigation, the plaintiffs allegedly made discovery requests which
required the defendants to disclose the pre-issuance site visit report;
however, the record does not contain an order compelling discovery prior to
the imposition of the discovery sanction.
The first discovery-related motion contained in the record is a motion
to establish spoliation and sanctions, which was filed on behalf of the
plaintiffs on September 29, 2017. Shortly thereafter, the defendants tendered
the site visit report, thus mooting the motion for spoliation and sanctions.
Nonetheless, in January 2018, the trial court issued the discovery sanction
declaring that the jury would be instructed that the “defendants had
constructive knowledge of the operations of Explo based upon a site visit,
which occurred six months before the policy of insurance was issued by
defendants to Explo.” The trial court made that finding of constructive
knowledge sua sponte, purportedly using the procedural vehicle of a
discovery sanction under La. C.C.P. art. 1471.
The parties filed cross motions for summary judgment. In ruling
thereon, the trial court deemed it conclusively established that the defendant
insurers had constructive knowledge of Explo’s criminal, fraudulent, and/or
dishonest conduct in conducting its operations prior to issuing the policies.
The trial court granted summary judgment in favor of the plaintiffs on the
issue of enforceability of the exclusions, reasoning that the exclusions were
unenforceable because the insurers constructively knew about the criminal,
fraudulent, or dishonest conduct months before the issuance of the policies.
The trial court denied the insurers’ MSJ sub silentio and excluded the 7 affidavit of the insurers’ proffered expert regarding the claims handling
process as it relates to the bad faith claim.
The insurers appealed, in substance asserting three assignments of
error: (1) the trial court erred in holding that the insurers’ prior knowledge of
the insured’s criminal conduct rendered the criminal, fraudulent, or
dishonest conduct exclusions unenforceable; (2) the trial court erred in using
a sua sponte discovery sanction to make the determination, for purposes of
summary judgment, that the insurers knew of the insured’s criminal conduct;
and (3) the trial court erred in excluding the affidavit of the claims handling
expert that the insurers proffered regarding the bad faith claim.
Relevant provisions – Crum & Forster policy
Crum & Forster issued policy number EPK – 100814 to Explo for the
period from September 12, 2012, through September 12, 2013. It contained
three coverage parts: (1) Commercial General Liability Occurrence
Coverage; (2) Third Party Pollution Liability Coverage; and (3) Onsite
Cleanup Pollution Liability Coverage. Additionally, a Designated
Operations Coverage Endorsement attached to the policy provided that
coverages under all three parts of the policy apply only to “bodily injury” or
“property damage” arising out of: (1) thermal treatment and disassembly of
ammunition; and (2) recycling and separation of remaining scrap. The policy
also excluded coverage for any claim based upon or “arising out of any
criminal, fraudulent, or dishonest act, omission or offense committed by
[Explo].”
Relevant provisions – Seneca policy
Seneca issued Commercial Property Policy Number SSP 22 011 76
to Explo for the period from January 22, 2012, through January 22, 2013. 8 The Building and Personal Property Coverage Form in the Seneca policy
provided that the insurer “will pay for direct physical loss of or damage to
Covered Property at the premises described in the Declarations caused by
or resulting from any Covered Cause of Loss.” “Covered property,” under
the policy, included buildings, business personal property of the insured,
and personal property of others in the care, custody, or control of the
insured for which a limit of insurance is shown in the Declaration section.
The policy also contained an exclusion barring coverage for any loss
or damage caused by or resulting from “[d]ishonest or criminal act by you,
any of your partners, members, officers, managers, employees (including
leased employees), directors, trustees, authorized representatives or anyone to
whom you entrust the property for any purpose: (1) Acting alone or in
collusion with others; or (2) Whether or not occurring during the hours of
employment.”
DISCUSSION
Sua sponte discovery sanction
The defendants assert that the trial court erred in imposing a discovery
sanction that the jury would be instructed that the insurers had knowledge of
Explo’s operations prior to issuing the policies and in deeming that fact
conclusively established for purposes of summary judgment.
The trial court cited La. C.C.P. art. 1471 as authorizing it to impose
the foregoing sanctions. In relevant part, that article states:
A. If a party or an officer, director, or managing agent of a party or a person designated under Article 1442 or 1448 to testify on behalf of a party fails to obey an order to provide or permit discovery, including an order made under Article 1464 or 1469, the court in which the action is pending may make such orders in regard to the failure as are just. (Emphasis added). 9 The record does not contain any “order to provide or permit
discovery” prior to the issuance of the discovery sanction. Likewise, it does
not contain any discovery request or motion to compel discovery prior to
issuance of the sanction. Based on the record, the trial court’s imposition of
the discovery sanction is wholly invalid under La. C.C.P. art. 1471(A)
because of the absence of any disobedience of an order compelling
discovery on the part of the insurers. In light of the clear and explicit
language of La. C.C.P. art. 1471, the trial court was completely without
authority to issue the discovery sanction.
For this reason alone, the trial court’s granting of the plaintiffs’ MSJ
must be reversed. This erroneous and abusive discovery sanction, whereby
the trial court deemed the insurers to know of illegal conduct on the part of
the insured, was the basis for the trial court’s ruling that the insurers
“waived” enforcement of the illegal conduct exclusions.
Waiver of exclusion
The insurers further argue that even if it is assumed arguendo that the
discovery sanction was proper, the doctrine of waiver (i.e., the intentional
relinquishment of a known right), nevertheless, would be inapplicable to the
illegal conduct exclusion. More specifically, they in effect argue that their
issuance of the policies with knowledge of excluded conduct legally could
not have constituted a “manifestation of an actual intention to relinquish the
right [to enforce the exclusion],” or “conduct so inconsistent with the intent
to enforce the [exclusion] as to induce a reasonable belief that it has been
relinquished.”4 For the reasons already discussed, we decline to decide
4 Quotations from Steptore v. Masco Const. Co., 93-2064 (La. 8/18/94), 643 So. 2d 1213. 10 whether the trial court, in rejecting that argument, was correct. This issue is
pretermitted.
Exclusion of affidavit of purported expert
We also pretermit the issue of whether the trial court erred in
excluding the affidavit of the insurers’ expert on the claims handling
process.
CONCLUSION
Based on the foregoing, the trial court’s summary judgment in favor
of the plaintiffs is REVERSED. The total cost of this appeal is $59,329.80.
One-half or $29,619.90 is taxed to the Louisiana State Police and the
remaining one-half or $29,619.90 is taxed to the Louisiana Military
Department.
11 O’CALLAGHAN, J. (Ad Hoc), concurs in part and dissents in part.
I respectfully concur in the portion of the majority’s opinion that
reverses the summary judgment in favor of the plaintiffs, the Military
Department and the Office of State Police. The trial court’s ruling on the
motion for sanctions, when placed in the proper perspective, simply does not
constitute positive summary judgment evidence that would show that the
defendants, Crum & Forster and Seneca, waived their illegal acts exclusions,
beyond a genuine issue of material fact. The trial court erred in granting
summary judgment.
I respectfully dissent from that portion of the majority opinion finding
that the original discovery sanction was improper. The sanction was
imposed for the defendants’ failure to turn the site report over to the
plaintiffs in a timely fashion. The majority opinion reasons that a breach of
court-ordered discovery is necessary before sanctions can be imposed. The
majority opinion incorrectly states that there was no discovery request prior
to the filing of the motion for sanctions and that there is no discovery request
in the record. The discovery requests were included as attachments to the
motion for sanctions. While there was no discovery order by the trial court,
that court acted within its discretion in imposing the original sanction for the
untimely production of the site report. In Cambrie Celeste LLC v. Starboard
Mgmt., LLC, 2016-1318 (La. App. 4 Cir. 11/6/17), 231 So. 3d 79, writ
denied, 17-2041 (La. 2/2/18), 235 So. 3d 1110, the fourth circuit reasoned:
La. C.C.P. art. 1471 sanctions are triggered when a party refuses or fails to comply with a discovery order. Even in the absence of such an order, La. C.C.P. art. 191 “authorizes trial courts to impose sanctions for [failing to adhere to discovery rules] since [such failure] clearly interferes with the court’s ability to fairly administer justice.” Carter v. Hi Nabor Super Mkt., LLC, 13-0529, p. 7-8 (La. App. 1 Cir. 12/30/14), 168 So. 1 3d 698, 704. Thus, “[a] trial court has the authority to impose sanctions on a party for [. . .] discovery misconduct under both its inherent power to manage its own affairs and the discovery articles provided in the Louisiana Code of Civil Procedure.” Id., 13-0529, p. 7, 168 So. 3d at 703. [Emphasis supplied.]
I therefore believe that the original sanction was authorized.
However, in my assessment, the trial court later incorrectly expanded the
sanction into a finding of fact that the defendants had knowledge of the
illegal and improper storage of explosives at the Explo site. This was
factually inaccurate and was not appropriate in the context of a motion for
summary judgment. The trial court erred in using the improper and
inaccurate finding of fact as the basis for granting partial summary judgment
in favor of the plaintiffs.
The result of reversing the summary judgment is that the matter goes
back to the district court for further proceedings. For this reason, I must also
respectfully dissent from the majority’s decision to pretermit the issue of the
expert witness, Robert I. Siegel. On further proceedings, such as a trial on
the merits, the parties should not have to relitigate this issue. I would
address this.
The defendants designated Siegel to opine on (1) the reasonableness
of their claims handling and their positions with respect to the damages
sought in the lawsuits, (2) the reasonableness of the plaintiffs’ respective
coverage positions under the policies at issue, and (3) the opinions set forth
in the written report he provided. The defendants argued that, based on two
decades of practical experience prosecuting and defending bad faith claims,
Siegel had “specialized knowledge” of the reasonableness of an insurer’s
claim-handling conduct which would help the jurors understand the evidence
pertaining to their handling of the instant claims. In their motion to exclude 2 his testimony, the plaintiffs argued that Siegel’s opinions were inadmissible
legal opinions on ultimate issues of insurance coverage and handling of
insurance claims, and he was not qualified to give expert testimony on
claims handling.
In its opinion/order of October 2, 2019, the court characterized the
defendants’ assertion that Siegel would not offer any legal opinions based on
coverage as “somewhat dubious.” The court found that the second page of
Siegel’s report expressed, in essence, legal opinions. As to the Daubert
standards, the court voiced reservations as to Siegel’s qualifications and
methodology.5 His qualifications were “specifically limited to the legal
expertise of insurance claims, not the handling or adjusting of claims that
would be appropriate for an experienced claims adjuster.” Also, no
specified methodology was offered. The court concluded that, despite his
insurance litigation experience, Siegel was not qualified as an attorney to
offer the proposed opinions.
The trial court is afforded great discretion regarding the decision to
allow expert testimony, and that decision will not be overturned on appeal
absent an abuse of that discretion. Blair v. Coney, 19-00795 (La. 4/3/20), __
So. 3d __, reh. denied (7/9/20), 298 So. 3d 168; Miller v. Rayville Mfg.,
53,573 (La. App. 2 Cir. 11/18/20), 307 So. 3d 1138; Parish of Jefferson v.
Housing Auth. of Jefferson Par., 17-272 (La. App. 5 Cir. 12/13/17), 234 So.
3d 207. Where an attorney is proffered to the trial court as an expert in a
particular area of law, various Louisiana Courts of Appeal have embraced
the rule that experts may not provide opinions regarding domestic (i.e.,
5 Daubert v. Merrell Dow Pharms. Inc., 509 U.S. 579, 113 S. Ct. 2786, 125 L. Ed. 2d 469 (1993). 3 Louisiana) law. Boone v. Boone, 39,544 (La. App. 2 Cir. 4/6/05), 899 So. 2d
823; Parish of Jefferson v. Housing Auth. of Jefferson Par., supra; Normand
v. Cox Commc’ns La., 14-563 (La. App. 5 Cir. 12/23/14), 167 So. 3d 156,
writ denied, 15-0158 (La. 4/10/15), 163 So. 3d 815; Crockerham v. La. Med.
Mut. Ins. Co., 17-1590 (La. App. 1 Cir. 6/21/18), 255 So. 3d 604. The
rationale for this rule is that the judge, being trained in the law, is the
ultimate arbiter of what the law is; to consider other legal opinions as to an
interpretation of the law would be, if not in actuality, at least in perception,
an abrogation of the judge’s responsibility. Parish of Jefferson v. Housing
Auth. of Jefferson, supra.
Based on my review of this extensive record, I would find no abuse of
the trial court’s discretion in excluding Siegel as an expert witness, and
affirm that portion of the judgment. I therefore concur in part and dissent in
part.