James v. Hyatt Corp. of Delaware

United States Court of Appeals,

Fifth Circuit.

No. 92-3105.

Summary Calendar.

Grace JAMES, Plaintiff,

v.

HYATT CORP. OF DELAWARE, d/b/a Hyatt Regency New Orleans, et al., Defendants.

HYATT CORP. OF DELAWARE and National Union Fire Insurance Company, Pittsburg, Pa.,
Third-Party Plaintiffs-Appellees,

v.

SCHINDLER ELEVATOR CORPORATION and the Hartford Insurance Company, Third-Party
Defendants-Appellants.

Jan. 22, 1993.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before POLITZ, Chief Judge, KING and BARKSDALE, Circuit Judges.

POLITZ, Chief Judge:

Schindler Elevator and The Hartford Insurance Co., third-party defendants, appeal an adverse

judgment. We reverse and render judgment in favor of Schindler and The Hartford.

Background

Grace James filed suit in state court against Hyatt Corporation of Delaware and its

comprehensive general liability insurer, National Union Fire Insurance Company of Pittsburg,

claiming that she was injured as a result of an escalator malfunction in Hyatt's hotel in New Orleans.

Hyatt and National Union removed the case to federal court and Hyatt impleaded Schindler, the

escalator maintenance contractor. Shortly before the scheduled trial Hyatt and National Union settled

with James. Hyatt then filed an amended third-party complaint adding National Union as third-party

plaintiff and The Hartford as third-party defendant.

In the third-party action, Hyatt and National Union sought to recover under an indemnity

provision of the Service Agreement between Hyatt and Schindler which also required Schindler to
maintain a comprehensive general liability policy on its own behalf and an owners and contractors

protective liability policy naming Hyatt as an insured.1 Hyatt and National Union claimed that under

the CGL and OCPL policies The Hartford had an obligation to defend Hyatt in the James action.

The matter was tried by consent before a magistrate judge2 who, after trial, found neither

negligence nor strict liability as relates to Schindler nor any requirement to indemnify Hyatt for the

settlement. The trial judge concluded, however, that under the two policies The Hartford had a duty

to defend Hyatt. Judgment was rendered against Schindler and The Hartford in solido for the full

amount of the settlement plus statutory penalties, attorney's fees, and costs. Schindler and The

Hartford timely appealed.

Analysis

We review judgments rendered by a magistrate judge pursuant to 28 U.S.C. § 636(c) as we

would those rendered by a district judge.3 The interpretation of the terms of indemnity and insurance

contracts are matters of law which we review de novo.4 Findings of fact are upheld unless clearly

erroneous.5

A. HARTFORD'S LIABILITY

The Comprehensive General Liability Policy

1
The service agreement provides:

Contractor [Schindler] agrees to indemnify Hyatt and hold it harmless from and
against any direct loss suffered in any liability to third-parties (including without
limitation, the employees of either of them) when such loss or liability is directly
due to the bodily injury of any person or damage to any property directly caused
by the negligent acts or omissions of contractors or those of its employees,
sub-contractors, agents or servants in the performance of any work under this
agreement. This indemnity agreement shall include attorney's fees and settlements
of claim or suit.
2
28 U.S.C. § 636(c).
3
28 U.S.C. § 636(c)(3); Gulf States Enterprises v. R.R. Tway, Inc., 938 F.2d 583 (5th
Cir.1991).
4
Musgrove v. Southland Corp., 898 F.2d 1041 (5th Cir.1990); Truehart v. Blandon, 884 F.2d
223 (5th Cir.1989).
5
Fed.R.Civ.P. 52; Gulf States, 938 F.2d at 586.
 Reading the CGL policy's contractual liability provision in conjunction with the Service

Agreement, the trial judge concluded that The Hartford had a duty to defend Hyatt. The Hartford

counters that it had no duty to defend Hyatt under the CGL policy because Hyatt was not a named

insured.

Under Louisiana law an insurer has no duty to defend one who is not a named insured. In

Musgrove, Lopez, and Ordonez,6 the insureds each contractually agreed to provide liability insurance

covering a third party but failed to do so. In each instance the court found that the insurer had no

duty to defend the third party. In Ordonez the court held that the insurer had no duty to defend the

contractual indemnitee of its insured. Under the contractual liability provision of the policy at issue

therein, the insurer's exposure was "limited to damages for which the named insured becomes liable

as a result of a contractual agreement to indemnify or hold harmless."7 In the case at bar, James'

complaint stated a claim for which Schindler ultimately could have been held liable under the

indemnity agreement; as a result, the contractual liability provision required The Hartford to defend

its insured—Schindler. But The Hartford had no concomitant duty to defend Hyatt under the CGL

policy. In ruling to the contrary, the magistrate judge erred.

The Owners and Contractors Protective Liability Policy

Hyatt was a named insured under the OCPL policy, and the magistrate judge found that The

Hartford had a duty to defend Hyatt under this policy as well. It is well-established that an insurer's

duty to defend is broader than its liability for damage claims. The insurer has a duty to defend its

insured provided the pleadings disclose any possibility of liability under the policy.8 An insurer may

refuse to defend only if the allegations of the petition unambiguously exclude coverage.9 Failure to

6
Musgrove; Lopez v. Hartford Accident & Indemnity Co., 495 So.2d 375 (La.App.), cert.
denied, 498 So.2d 757 and 498 So.2d 758 (La.1986); Ordonez v. W.T. Grant Co., 297 So.2d
780 (La.App.1974).
7
Ordonez, 297 So.2d at 783 (emphasis added).
8
Strauss v. Rivers, 595 So.2d 706 (La.App.1992).
9
Meloy v. Conoco, Inc., 504 So.2d 833 (La.1987); Jensen v. Snellings, 841 F.2d 600 (5th
Cir.1988).
acquit the duty to defend renders the insurer liable for the insured's expenses, including reasonable

attorney's fees.10 The Hartford contends that the magistrate judge erred in finding that the allegations

of plaintiff's complaint did not fall within an OCPL policy exclusion.

The OCPL policy covered bodily injury and property damage arising from Schindler's

performance of its duties under the Service Agreement, or arising from the negligence of the Hyatt

in connection with its general supervision of Schindler's work. The policy also contains the following

exclusions:

This insurance does not apply:

(b) to bodily injury or property damage occurring after

(1) all work on the project (other than service, maintenance or repairs), to be
performed by or on behalf of the named insured at the site of the covered operations
has been completed or

(2) that portion of the designated contractor's work out of which the injury arises has
been put to its intended use by any person or organization.

(Emphasis in original.)

The James' petition alleged that Hyatt and ABC Elevator Company did not adequately inspect

and maintain the escalator, and t hat the Hyatt failed to exercise reasonable care to guard against

accident or injury. This states a claim arising out of the operations performed by Schindler, the

escalator maintenance contractor. The essential question, however, is whether the allegations of the

petition unambiguously fall within one of the policy exclusions. We conclude that they do.

The Hartford contends that James' claims fall within exclusion (b)(2),11 arguing that the

OCPL policy covers only damage which occurs while service or maintenance work is in progress.

In effect, the policy treats each act of servicing or maintenance as a discreet insurable event.12

Schindler was not servicing or maintaining the escalator and the escalator was being put to its

10
Strauss v. Rivers.
11
The trial court addressed only the applicability of exclusion (b)(1).
12
Hyatt argues that exclusions (b)(1) and (b)(2) should be read together and that per (b)(1),
"service, maintenance, or repairs" are exempt from the exclusion. This argument is not
persuasive; sections (1) and (2) are joined in the disjunctive, thus the exclusions must be treated
separately.
intended use when James was injured. Accordingly, this occurrence falls within the (b)(2) exclusion.

Exclusion (b)(2) is similar to the completed operations exclusion found in many CGL

policies.13 Completed operations exclusions consistently have been held to be clear and

unambiguous.14 Hyatt contends that these completed operations exclusion cases are inapposite. We

do not agree. For example, in Rothman the exclusion was applied to an air conditioner repair

contractor. The Rothman court found that the policy did not cover the claims against the contractor

by a homeowner whose residence was destroyed by fire shortly after the contractor worked on his

heating system. Because the repair was complete when the fire began, the exclusion applied.15

Hyatt also maintains that by requiring Schindler to obtain an OCPL policy naming Hyatt as

the insured, the parties intended that Hyatt have protection equivalent to a CGL policy. If this was

the parties' intent, it is to be expected that their agreement would have insisted that Schindler obtain

a CGL policy on Hyatt's behalf.16 This is not an ambiguous policy; the policy Hyatt required

Schindler to obtain simply did not cover every possible claim related to the operation of the

escalator.17

We conclude that the court á quo erred in ruling that the plaintiff's claim was not within the

13
See Cell-O-Mar, Inc. v. Gros, 479 So.2d 386 (La.App.1985), cert. denied, 481 So.2d 1332
and 481 So.2d 1333 (La.1986); West Bros. of DeRidder, Louisiana, Inc. v. Morgan Roofing Co.,
376 So.2d 345 (La.App.1979); Aetna Casualty & Surety Co. v. Rothman, 331 So.2d 81
(La.App.1976). Under the completed operations exclusions, operations may be deemed complete
"when the portion of the work out of which the injury or damage arises has been put to its
intended use...."
14
Cell-O-Mar; Rothman.
15
The Rothman court found that "[t]he issue here is not ambiguity, confusion, or uncertainty
resulting from a misleading coverage provision, but rather the failure of the insured to purchase an
available coverage which the insured did not opt to secure." 331 So.2d at 86.
16
In negotiating the Service Agreement, Hyatt originally proposed that it be named as an
additional insured under the Schindler CGL policy. Schindler refused. We are not wont to
provide in the guise of interpretation of contracts a benefit to one party which specifically was
sought but refused by the other party.
17
"A liability policy not being a statutory policy, an insurer's liability is only as provided in the
policy and attached endorsements, and the parties are at liberty to select the types of risk to be
covered." Southwest Louisiana Hospital Association v. Hunt, 551 So.2d 818, 821
(La.App.1989) (citing Kendrick v. Mason, 234 La. 271, 99 So.2d 108 (1958)).
policy exclusions. We conclude that The Hartford was under no duty to defend Hyatt either under

the CGL or OCPL policy.

Statutory Penalties

Statutory penalties are available when the insurer's failure to pay a claim is "arbitrary,

capricious, or without probable cause."18 Because we find that the insurer was under no obligation

to defend or pay, the award of statutory penalties and third-party plaintiffs' attorney's fees must be

reversed.

B. SCHINDLER'S LIABILITY

The Indemnity Agreement

The trial court rendered judgment against Schindler and The Hartford "for $17,517.77 plus

statutory penalties and third party plaintiffs' attorneys fees and expenses." Schindler contends that

because the district court found Schindler was not negligent, there is no basis for such judgment

against it. Schindler's liability to Hyatt, if any, must be based upon the indemnity provisions of the

Service Agreement. The district court, however, expressly declined to address Schindler's liability

under that agreement.19 Interpretation and application of the indemnity agreement present purely

legal questions which we appropriately may address on appeal.

Generally, an indemnitee must establish his actual liability in order to recover payment from

an indemnitor. "[A]n indemnity agreement does not render the indemnitor liable until the indemnitee

actually makes payment or sustains loss."20 When the indemnity agreement also covers defense costs,

18
La.R.S. 22:658(b)(1).
19
For example, regarding the third-party plaintiff's right to reimbursement, the magistrate
judge's memorandum opinion notes:

Arguments on the grounds of indemnity principles and interpretation of the
particular indemnity provision need not be addressed. The resolution of the
reimbursement is based on the breach of the duty to defend.

As to Schindler this is incorrect as a matter of law. While the indemnity provision made
Schindler potentially liable for defense costs, it did not give rise to a duty to defend. See
Meloy.
20
Meloy, 504 So.2d at 839 (citations omitted).
the allegations of the complaint against the indemnitee are irrelevant to the indemnitor's obligation

to pay. The terms of the indemnity agreement itself govern the obligations of the parties.21

According to Hyatt, in the following situations an indemnitee settling with the plaintiff need

only demonstrate potential liability to recoup the amount of a reasonable settlement: (1) if the

indemnitee tenders the defense to the indemnitor, (2) the indemnity claim is founded upon a judgment,

or (3) the indemnity claim is based upon a written indemnity contract. In any event, the indemnitee

must also demonstrate that the amount of settlement was reasonable.

We are not persuaded that this contention accurately states controlling Louisiana indemnity

law.22 In the Sears case we find Sears seeking indemnification from its contractor, Shamrock, for

damages incurred as a result of a gas tank leak, including amounts Sears paid to the fire department

for clean-up reimbursement. The court found that "a negligence finding is a prerequisite to

indemnification by the contractor to the owner under this contract and as no negligence was found

herein, appellant is not entitled to indemnification." Whether the contractor was potentially liable for

the amounts paid the fire department was not even considered. In this case, the indemnity agreement

provided indemnity only for losses caused by Schindler. The trial judge found no negligence or other

basis for liability of Schindler. This finding has adequate record support. Accordingly, Schindler is

not required to indemnify either Hyatt or National Union.

C. STATUTORY PENALTIES

Schindler is cast in judgment with The Hart ford not only for the costs of defense and the

amount of the settlement, but also for statutory penalties. Schindler is not an insurer and thus cannot

be subject to statutory penalt ies. In addition, neither Schindler nor The Hartford had a duty to

21
Id.
22
In Terra Resources, Inc. v. Lake Charles Dredging & Towing, 695 F.2d 828 (5th Cir.1983),
a diversity case, we suggested a broader application of the Louisiana rule, actually triggering
indemnity by potential liability. No Louisiana case has followed Terra Resources in this regard.
To the contrary, a few months after the decision in Terra Resources, an intermediate appellate
court reaffirmed the Louisiana rule, Sears, Roebuck & Co. v. Shamrock Construction Co., 441
So.2d 379 (La.App.1983). The language of the indemnification agreement referred to the
indemnitor's negligence, as in the case at bar. The Louisiana court held that in such an instance, a
finding of the indemnitor's negligence was a prerequisite to indemnification.
defend; neither is liable for penalties.

For these reasons the judgment appealed is REVERSED and judgment in favor of the

third-party defendants, Schindler and The Hartford, is RENDERED.