IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________________________
No. 99-30828
_______________________________________
ALTON OCHSNER MEDICAL FOUNDATION, Plaintiff-Appellant,
and
BROADMOOR CONSTRUCTION CO., Intervenor-Appellant,
versus
ALLENDALE MUTUAL INSURANCE CO., Defendant-Appellee.
_________________________________________________
Appeals from the United States District Court
for the Eastern District of Louisiana
_________________________________________________
August 2, 2000
Before WIENER and STEWART, Circuit Judges, and ROSENTHAL*, District
Judge:
WIENER, Circuit Judge:
In this diversity case involving interpretation of an “all-
risk” insurance policy under Louisiana law, Plaintiff-Appellant
Alton Ochsner Medical Foundation (“Ochsner”) appeals the district
court’s grant of summary judgment to Defendant-Appellee Allendale
Mutual Insurance Co. (“Allendale”). We affirm.
I.
Facts and Proceedings
*
District Judge of the Southern District of Texas, sitting by
designation.
1
In 1991, Ochsner purchased from Allendale an all-risk property
insurance policy for a three-year term, beginning June 1, 1991 and
ending May 31, 1994. The policy insured several properties,
including the Ochsner Clinic in New Orleans. In November 1991,
construction was begun on an Atrium Tower (“the Tower”) on
Ochsner’s Jefferson Parish (Louisiana) campus. The Tower was
planned as a fifteen-story building, but the initial phase of
construction called for only five stories to be built. The Tower’s
foundation, designed to support the entire fifteen-story building,
was completed in July 1992. It consisted of 70 groups of pre-cast
concrete piles with each group covered by a reinforced pile cap.
In January 1994, prior to completion of the Tower’s initial,
five-story phase of construction, Oschner’s general contractor,
Plaintiff-Intervenor-Appellant Broadmoor Construction Co.
(“Broadmoor”) informed Ochsner of cracking in three of the pile
caps. Ochsner obtained an initial report as well as several
follow-up reports from its project engineer, architect, and general
contractor. Ochsner also hired Eustis Engineering Company, Inc.
and, later, McKee & DeVille Consulting Engineers, Inc. to
investigate the cracking and to make recommendations. The studies
revealed that nine of the caps exhibited cracking, but concluded
that the damage was minor and presented no major structural
implications. Meanwhile, Ochsner authorized the completion of
the initial five floors. Thereafter, in late 1994 and early 1995,
based on the recommendations of the various contractors and
2
consultants, Ochsner spent $130,000 out-of-pocket for repairs
consisting of injecting epoxy grout into the cracks and placing a
concrete jacket around one group of the piles. Ochsner did not
notify Allendale about the initial cracking or about the
investigations and repairs it unilaterally commissioned at its own
expense.
In April 1996, Ochsner discovered additional cracking in the
pile caps, including renewed cracking in one of the previously
repaired caps. Ochsner hired yet another engineering firm, Wiss,
Janney, Elstner Associates, Inc. (“Wiss, Janney”) to investigate
the problem. For the first time, by letter dated August 22, 1996,
Ochsner notified Allendale of the cracking. In April 1997, Wiss,
Janney completed a report indicating that the cracking was more
severe than observed in 1994 and that the capacity of the pile caps
to bear the weight of the building had been reduced. According to
Wiss, Janney, the cracking resulted from “thermal stresses that
developed during early hydration,” exacerbated by “time-dependent
drying shrinking” and, with respect to at least one cap,
“[d]isplacement of the formwork while the concrete was in a plastic
or semi-rigid state.” Wiss, Janney recommended structural
reinforcement of the caps.
Allendale investigated Ochsner’s claim, including review of
the expert reports and, in a letter dated May 21, 1997, denied
coverage on the basis of policy exclusions for (1) “faulty
workmanship” and (2) “cracking.” Allendale also noted that Ochsner
3
had failed to furnish notice to the insurer within 90 days of loss,
as required by the policy. The parties agreed to extend the
contractual time limit for the insured to bring suit challenging
denial of coverage, at least for those claims not barred by the
statute of limitations. Accordingly, Ochsner filed a Complaint for
Declaratory Judgment in June 1998, alleging that the cracking in
the pile caps “was caused by design error and faulty construction
methods occurring during the original construction of the pile
caps” and seeking indemnification for “all costs and expenses
associated with the repair of the pile caps” supporting the Tower.
Meanwhile, Wiss, Janney returned to the Tower in November 1998
and observed new cracking in ten previously intact pile caps and
significant widening of the cracks in the original nine caps.
Wiss, Janney concluded that “under existing conditions there exists
a material impairment of structural integrity” of the Tower and
that “construction of additional floors could pose substantial
risks.” Ochsner remained in regular contact with Allendale about
the deterioration of the foundation. Ochsner maintains that its
intention has always been to build the ten additional stories of
the Tower.
The parties filed cross-motions for summary judgment based on
stipulated facts, and the district court granted Allendale’s,
concluding that Ochsner failed to comply with the notice and
contractual suit limitation provisions of the policy.
Alternatively, the district court determined that the alleged loss
4
fell within the two policy exclusions identified by Allendale.
After Ochsner’s timely notice of appeal, Broadmoor filed a Motion
to Extend Ruling on Cross-Motions for Summary Judgment to include
it as Intervenor, which the district court granted, thus Broadmoor
is also a party to this appeal.
II.
Analysis
We review the grant of summary judgment de novo applying the
same standard as the district court.1
In its alternative holding, the district court determined that
two exclusions in the all-risks policy apply and thus Allendale has
no duty to indemnify Ochsner. We agree.
The Allendale policy insures Ochsner “against all risks of
physical loss or damage, except as hereinafter excluded, to the
property described hereinafter.” As we observed in another case
involving an all-risk policy construed under Louisiana law:
A policy of insurance insuring against “all risks”
creates a special type of coverage that extends to risks
not usually covered under other insurance; recovery under
an all-risk policy will be allowed for all fortuitous
losses not resulting from misconduct or fraud, unless the
policy contains a specific provision expressly excluding
the loss from coverage.2
1
Wheeler v. United States, 116 F.3d 749, 754 (5th Cir. 1997)
(reviewing district court’s disposition of cross-motions for
summary judgment decided on stipulated facts).
2
U.S. Indus., Inc. v. Aetna Cas. & Sur. Co., 690 F.2d 459,
461 (5th Cir. 1982) (construing Louisiana law and citing Dow Chem.
Co. v. Royal Indem. Co., 635 F.2d 379, 387 (5th Cir. 1981)
(construing Texas law)).
5
Among the specific exclusions in the Allendale policy are two that
are relevant to this case. “This policy does not insure against:”
3. faulty workmanship, material, construction, or
design from any cause, unless physical damage not
excluded by this Policy results, in which event,
this Policy will cover only such resulting damage
[and]
7. settling, cracking, shrinking, bulging, or
expansion of pavements, foundations, walls, floors,
or ceilings; unless physical damage not excluded by
this Policy results, in which event, this Policy
will cover only such resulting damage (emphasis
added to both).
Ochsner does not dispute that the damage to the Tower foundation
was the result of “faulty workmanship, material, construction, or
design” or that the conditions complained of implicate “cracking .
. . of . . . foundations” and that both conditions are expressly
excluded. In fact, Ochsner’s Complaint for Declaratory Relief
itself describes “cracking” and “pile cap cracking” repeatedly, and
alleges: “On information and belief, the cracking of the pile caps
was caused by design error and faulty construction methods
occurring during the original construction. . .” (emphasis added).
Moreover, Ochsner’s course of action, from the time it first
became aware of the cracking, demonstrates its understanding that
the policy exclusions are applicable. Ochsner asserts that, on
discovery of the initial, minor cracking in 1994, it “reasonably
concluded” that the damage was within the “faulty workmanship” and
“cracking” exclusions. Ochsner further contends that, until the
middle of 1996, it “had no reason to believe” that the cracking
6
resulted in physical damage that would be covered by the policy,
and “when [it] did reasonably form that belief, it provided notice
to Allendale.” Having made its unilateral determination regarding
coverage, Ochsner undertook active management of the situation by
(1) obtaining multiple reports from its own project engineer,
architect, and general contractor; (2) hiring no fewer than three
outside engineering consulting firms to investigate the cracking
and to make recommendations; (3) authorizing completion of the
first phase of construction; and (4) commissioning and paying for
for $130,000 repairs to the cracked caps.
The record contains no indication that Ochsner, in assuming
management of the problem, made appropriate demands on its own
design professionals and building construction contractors to “make
it right,” while construction was ongoing. Neither does the record
reflect that Ochsner looked to coverage under any other insurance
policies it or its various independent design or construction
contractors carried. Yet, problems of the kind experienced during
the course of the Tower’s construction, produced by faulty design
or construction or a combination of both, are “usually covered by
other insurance.”3 And here, the design professionals’ errors and
omissions insurance or the general contractor’s comprehensive
general liability insurer (as well as Builder’s Risk, if material)
would “usually cover” such faulty design and construction damage.
3
U.S. Indus., 690 F.2d at 461.
7
For approximately two-and-one-half years after the initial cracking
was detected, and, for over two years after the expiration of the
policy, Ochsner operated as though it had no expectation that the
Allendale all-risk would cover the foundation damage.4
Nevertheless, Ochsner now contends that the damage to the
Tower is covered because the phrase, “unless physical damage not
excluded by this Policy results,” operates as an exception to the
exclusions. Ochsner argues that even if the initial, minor
cracking observed in 1994 fell under one or both of the exclusions,
the more severe cracking, described in 1997 by Wiss, Janney as
“material impairment of structural integrity,” constitutes
“resulting physical damage” not excluded, i.e., covered by the
policy. According to Ochsner, the parties intended to exclude
“routine,” “minor,” or “cosmetic” harm but to include “major” or
“extensive” physical damage.
In diametric opposition, Allendale interprets the policy’s
“unless” clauses to refer to physical damage that is “distinct and
separable” from excluded damage, making no quantitative distinction
between major and minor damage. According to Allendale, the only
4
Neither party argues, nor did the district court rely on,
the “Other Insurance” clause of the policy, but we note its
relevance to the issue of Ochsner’s apparent failure to seek
coverage of its loss from other sources: “The Company shall not be
liable for loss under this Policy if at the time of loss there is
any other insurance which would attach is this insurance had not
been effected, except that this insurance shall apply only as
excess and in no event as contributory insurance, and then only
after all other insurance has been exhausted.”
8
damage to the Tower is that occasioned to the foundation by “faulty
workmanship” or “cracking,” which is specifically excluded, no
matter how severe it may become over time, because no distinct or
separate damage has occurred. As examples of the distinction,
Allendale suggests that defective workmanship in installing the
wiring of a building would be excluded as “faulty workmanship” but
that if the defective wiring resulted in a fire, the fire damage to
other parts of the building would be covered as “resulting physical
damage.” In such an instance, however, coverage of fire damage
would not include the cost of re-wiring the building. Likewise,
“cracking” in the walls of a structure excludes repair of the
cracked walls, but if water were to invade the building through the
cracks, any water damage would be covered. In neither example
would the cost of re-doing the faulty work itself —— the bad wiring
or the cracking —— be covered. By these analogs, Allendale
illustrates the disagreement with Ochsner’s analysis: The policy
does not cover the foundation problems resulting from the faulty
design or construction, or both, which produced the cracking; it
would cover unrelated damages such as water damage produced by
incursion through the cracks to unrelated elements such as paint or
carpets.
Allendale’s interpretation is the more logical. To fall back
within coverage as “resulting physical damage,” the policy
contemplates damage that is different in kind, not merely different
in degree. Ochsner accepts that cracking or defective
9
construction, i.e., minor or “immaterial impairment,” of the
foundation is excluded from coverage, but then suggests that
“material impairment of structural integrity” is covered. We
perceive no basis in the policy for this proffered dichotomy.
Rather, we conclude that direct harm from cracking or faulty design
or construction is excluded (no matter how severe it is) “unless
physical damage not excluded by this Policy results,” that is,
unless damage of a different kind —— a kind that is not excluded ——
results. The word “results” supports this interpretation:
“Impairment of structural integrity” does not “result” from
cracking or faulty construction of the foundation; the cracked
foundation is the impaired structural integrity, i.e., the
inability of the faulty foundation to support the structure. To
put it another way, the minor damage to the foundation does not
“cause” the more severe structural impairment. The cracking is the
impairment; they are synonymous.
In addition, Allendale’s interpretation is consistent with our
precedent. On facts similar to the instant case, we applied
Louisiana law to determine that the insured’s loss fell within the
“faulty workmanship” exclusion and thus was uncovered. In that
case, U.S. Industries v. Aetna Casualty & Surety Co.,5 the insured
was a general contractor hired to build a steel cylindrical tower,
240 feet high and 15 feet in diameter. The construction process
5
690 F.2d 459 (5th Cir. 1982).
10
involved fabricating steel plates, welding the plates together,
stacking the plates to the height of the tower, and finally, heat-
treating the “skin” of the completed tower to reduce stress. As a
result of the contractor’s negligence and misjudgment, excessive
heating occurred during the final, stress-reduction phase, causing
the metal to wrinkle and the tower to lean. The contractor sought
coverage from its insurer for the costs of dismantling and
rebuilding the tower.
We held that the loss was not covered because the “faulty
workmanship” exclusion applied. We construed that exception to
mean “a defect in the way some part of the (insured property) is
constructed.”6 In other words, “[i]t is the quality of the product
which is excluded from coverage, and not damage to the product
caused by negligence during the construction process.”7 For
example, we noted that if one of the insured’s employees ran a
truck into the tower during construction, knocking it over, that
damage clearly would be covered by the policy.8 Such an accident
would not bear directly on the quality of the product (the tower)
but would cause damage to it. By contrast, the wrinkling of the
metal skin of the tower as a result of excessive heating damaged
6
Id. (citing Equitable Fire & Marine Ins. Co. v. Allied Steel
Constr. Co., 421 F.2d 512, 514 (10th Cir. 1970)).
7
Id. (citing City of Barre v. New Hampshire Ins. Co., 396
A.2d 121, 122-23 (Vt. 1978)) (emphasis added).
8
Id.
11
the quality of the product itself. Likewise, in the instant case,
the cracking of the pile caps is damage to the quality of the
product itself; the cracking did not cause damage to the product.9
To further explain the distinction between excluded “faulty
workmanship” and included “property damage,” in U.S. Industries we
noted the importance of an event “extraneous” to the construction
process bringing about the loss.10 All-risk insurance policies
generally are viewed as “limiting recovery to those losses in which
the cause is ‘external to the structure insured,’ as opposed to an
‘internal’ or ‘inherent’ defect in the item of property which is
damaged.”11 For example, we noted that damage incurred when a
pipeline fell into a river as a result of a workman replacing a
fitting at one pier without first securing the pipe at another pier
was not within the faulty workmanship exclusion, and thus was
covered.12 Similarly, damage incurred when wooden arches blew down
in a strong wind, following the contractor’s negligent installation
9
Compare Trinity Indus., Inc. v. Insurance Co. of N. Amer.,
916 F.2d 267, 270 (5th Cir. 1990) (holding that “twist” or
misalignment of two modular sections of vessel’s hull was excluded
“faulty workmanship” because it had not led to any other damage or
catastrophe) with Dow Chemical Co. v. Royal Indem. Co., 635 F.2d
379 (5th Cir. Unit A Jan. 1981) (holding that all risk policy did
cover loss when concrete dome collapsed as a result of faulty
construction of styrofoam form over which concrete was poured).
10
690 F.2d at 462.
11
COUCH ON INSURANCE 3d, § 148:59, at 148-104 (1998) (citing City
of Barre, 396 A.2d 121).
12
Equitable Fire & Marine Ins. Co., 421 F.2d 512.
12
of only two rather than six guy-wires (as the construction plans
required) was not within the exclusion.13 In both those cases,
“[a]lthough errors in workmanship contributed to the causation, the
loss or damage . . . resulted fortuitously from events extraneous
to the construction process itself —— the fall into the river, the
gusting of the wind.”14 By contrast, in the instant case, no
extraneous event has occurred; neither has the Tower been damaged
by an external force. Therefore, unlike those examples, the loss
is excluded.
As a matter of perspective we must remain mindful that the
policy does not cover the costs of “making good” defective
construction.15 For example, if shoddy plumbing work caused pipes
to break and a building to flood, damaging the carpet, the policy
would cover the cost of replacing the carpet but not the cost of
repairing or replacing the shoddy plumbing job.16 This is
consistent with U.S. Industries, in which the insured sought
13
City of Barre, 396 A.2d 121.
14
U.S. Indus., 690 F.2d at 462 (emphasis added) (citations
omitted).
15
See Trinity Indus., 916 F.2d at 271 (“[T]he parties did not
intend the policy to cover the costs of repairing defective initial
construction.”); CXY Chems. U.S.A. v. Gerling Global Gen. Ins. Co.,
991 F. Supp. 770, 778 (E.D. La. 1998) (citing policy exclusion for
“[t]he cost of making good faulty workmanship”).
16
See Lake Charles Harbor & Terminal Dist. v. Imperial Cas.
& Indem. Co., 857 F.2d 286, 287 (5th Cir. 1988) (no dispute that
policy excluded coverage for costs of replacing and repairing worn
cable that broke and sent heavy shuttle crashing into shiploader
but dispute regarding coverage for resulting damage to loader).
13
indemnity solely for the costs of re-doing the faulty construction
—— dismantling and rebuilding the metal tower —— which we held was
excluded. In like manner, the only costs for which Ochsner seeks
indemnity is the cost of correcting the faulty construction of the
Tower’s foundation: In its declaratory judgment complaint, Ochsner
sought only the “costs and expenses associated with the repair of
the pile caps.” The policy specifically excludes such costs from
coverage. The proof of this logic lies in the observation that
the only cost that would be associated with restoration of the
structural integrity of the Tower is the cost of repairing the
design and construction deficiencies of the foundation. Therefore,
we conclude that Ochsner has failed to identify any “resulting
damage” “not excluded by this Policy” that would allow it to avoid
the express exclusions for “cracking” and “faulty workmanship . .
. or design.” We affirm the district court’s conclusion that the
claim is not covered.
In closing, we take note of the Catch-22 in which Ochsner
placed itself by attempting to identify a loss that (1) occurred
during the policy period and (2) is not within the express
exclusions. The Allendale policy declares the policy period was to
be for three years, from June 1, 1991 to May 31, 1994: “[T]he
insurer’s obligation to pay is contingent on a covered loss
occurring during the policy period.”17 To satisfy this requirement,
17
COUCH ON INSURANCE 3d, § 102:2, at 101-9 to -10 (1998) (noting
principle is equally applicable to all-risks policies); see Hoffman
14
Ochsner points to the initial, minor cracking in 1994, which it
boldly admits falls within the exclusions. The policy also
requires that “[t]he Insured shall give immediate written notice to
this Company of any loss” and “within (90) ninety days after the
loss . . . the Insured shall render to this Company a proof of
loss.” To satisfy this requirement, Ochsner points to the
rediscovered, more severe cracking in 1996 and its August 1996
notice to Allendale. Yet these are not two separate events: The
cracking began in 1994 (or earlier) and progressed alluvially into
1997 and beyond. But it was all the same cracking caused by the
same fault or faults in design or workmanship during construction.
As we have already concluded that, on the facts before us, all of
the damage to date falls within the specific policy exclusions,18
we need not and therefore do not address and resolve the time of
loss and notice of claim discrepancy.
III.
Conclusion
We affirm the district court’s grant of summary judgment to
Allendale, adopting its alternative holding that (1) two express
v. State Farm Fire & Cas. Co., 16 Cal. Rptr. 2d 809, 810 (Cal. Ct.
App. 1993) (holding that property owners could not recover under
all-risk policy unless damage occurred during policy period).
18
We disagree, however, with the district court’s holding that
actual or imminent collapse of the Tower must occur before the loss
would be covered. Requiring Ochsner to build ten additional
“doomed” stories to gain insurance coverage would establish an
irrational incentive structure.
15
policy exclusions, for “cracking . . . of foundation” and “faulty
workmanship, material, construction, or design” apply, and (2)
Ochsner failed to identify separate and distinct “physical damage
not excluded by the Policy.” Ochsner’s understandable efforts to
create a separate non-excluded damage from the phrase, “material
impairment of structural integrity,” which appeared in a 1997
report prepared by an engineering consultant, fails. The
diminished structural integrity is indistinguishable from the
diminished capacity of the foundation which results directly and
only from deficient design or construction or a combination of
both. Because the policy’s exclusions clearly preclude indemnity
by Allendale for such design and construction damage to the
foundation, it owes Ochsner no indemnity.
AFFIRMED
16
Alton Ochsner Medical Foundation v. Allendale Mutual Insurance
Court: Court of Appeals for the Fifth Circuit
Date filed: 2000-08-02
Citations: 219 F.3d 501
Copy CitationsCombined Opinion