IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
No. 99-20721
_______________
INSURANCE COMPANY OF NORTH AMERICA, Surety for Maitland
Brothers Company and as Assignee and Equitable suborgee of
the claims of Maitland Brothers Company; MAITLAND BROTHERS
CO, by its Trustee in Bankruptcy Maryleen Thomas,
Plaintiffs - Counter Defendants -
Appellants - Cross-Appellees,
VERSUS
ABERDEEN INSURANCE SERVICES, INC; ET AL,
Defendants,
ABERDEEN INSURANCE SERVICES, Inc; ST ANDREWS
INSURANCE SERVICES, INC.,
Defendants-Cross Defendants-
Appellees-Cross-Appellees,
VERSUS
INDEMNITY MARINE ASSURANCE CO LTD; COMPAGNIE D'ASSURANCES
MARITIMES AERIENNES ET TERRESTRES; ASSURANCES GENERALES DE
FRANCE IART; SPHERE DRAKE INSURANCE PLC; COMMERCIAL UNION
ASSURANCE COMPANY; THE TOKIO MARINE & FIRE INSURANCE CO (UK)
LTD; THE YORKSHIRE INSURANCE CO LTD; NORTHERN ASSURANCE CO
LTD; TERRA NOVA INSURANCE CO; ASSICURAZIONI GENERALI; ATLAS
ASSURANCE CO LTD; THE SCOTTISH LION INSURANCE CO LTD; FOLKSAM
INTERNATIONAL INSURANCE CO (UK) LTD; AEGON INSURANCE COMPANY
(UK) LIMITED; SKANDIA MARINE INSURANCE COMPANY (UK) LIMITED,
Defendants - Counter Claimants -
Appellees - Cross-Appellants.
_________________________
Appeals from the United States District Court
for the Southern District of Texas, Houston
_________________________
June 25, 2001
Before JOLLY, MAGILL* and BENAVIDES, Circuit Judges.
MAGILL, Circuit Judge:
In January 1997, Appellants Insurance Company of North
America ("INA") and Maitland Brothers Company ("Maitland")
brought suit against Aberdeen Insurance Services, Inc.
("Aberdeen") and various London Underwriters (the "Underwriters")
in federal district court, seeking coverage under an insurance
policy issued by Aberdeen to Offshore Diving and Salvage, Inc.
("Offshore"), a Maitland subcontractor. The Underwriters filed a
counterclaim, alleging Appellants brought their suit in bad
faith. After an eight-day trial, a jury entered a special
verdict, deciding in favor of INA and Maitland. However, the
district court concluded that there was insufficient evidence to
support the jury's findings as to some of the questions that
formed the special verdict. Therefore, the court entered
judgment as a matter of law under which INA and Maitland received
no damages, but denied the Underwriters' motion for judgment as a
matter of law on their counterclaim. Maitland and INA appeal the
district court's partial reversal of the jury's findings and
judgment in favor of the Underwriters. The Underwriters cross-
appeal the district court's denial of their motion for judgment
as a matter of law on their counterclaim. Because we conclude
*
Circuit Judge of the Eighth Circuit, sitting by
designation.
2
that the district court erred insofar as it overruled the jury's
verdict, we reverse the district court's partial grant of
judgment as a matter of law for the Underwriters and affirm the
district court's denial of the Underwriters' motion for judgment
as a matter of law on their counterclaim.
I.
A. The DOE Contract
In November 1993, the United States Department of Energy
(the "DOE") contracted with Maitland to construct a pipeline from
the Strategic Petroleum Reserve at Bryan Mound, Texas to the Gulf
of Mexico. As part of the contract between the DOE and Maitland
(the "DOE Contract"), the DOE required Maitland to maintain
comprehensive general liability and third party property damage
insurance, naming the United States as an additional insured. In
addition, the DOE required that its Contracting Officer receive
thirty days advance written notice, by mail, of any changes in,
or cancellation of, such insurance policies. The DOE Contract
also contained the Federal Acquisition Regulations (the "FAR")
applicable to the project. One of these FAR, titled "Insurance
- Work on a Government Installation" ("FAR 47"), required
Maitland to maintain certain types of insurance, certify that the
required insurance had been obtained, and provide at least thirty
days notice of cancellation. Additionally, FAR 47 stated: "The
Contractor shall insert the substance of this clause, including
3
this paragraph (c), in subcontracts under this contract that
require work on a Government installation." The DOE Contract
also provided that Maitland was fully responsible for all acts
and omissions of its subcontractors. Appellant INA was the
surety under the performance and payment bonds issued to Maitland
pursuant to the DOE Contract's requirements.
B. The Offshore Subcontract
On November 16, 1994, Maitland entered into a contract (the
"Subcontract") with Offshore, under which Offshore was to provide
diving services in connection with Maitland's construction of the
pipeline. Prior to signing the Subcontract, Maitland's
comptroller, Peter Comly, discussed insurance requirements with
Offshore and spoke to Offshore's insurer, Aberdeen. After the
parties signed the Subcontract, Aberdeen sent Maitland a
certificate of insurance confirming that Maitland was an
additional insured on Offshore's policies, that the required
insurance was in effect, and that Maitland would be provided
thirty days notice prior to cancellation of Offshore's insurance.
Paragraph One of the Subcontract stated: "[t]he Sub-contractor
assumes with respect to the General contractor all of the
obligations which the General contractor owes to the owner under
the contract and all of the contract documents forming part of
the contract for the DOE Contract . . . ."
4
C. Offshore's Insurance
Aberdeen was the domestic broker for Offshore's
comprehensive general liability and property damage insurance
policy (the "Cover Note"). The Underwriters subscribed to the
security on the Cover Note. Offshore paid the bulk of the Cover
Note through a premium financing agreement with Premium Finance
Specialists, Inc. ("PFS") that required Offshore to pay PFS in
monthly installments. Offshore failed to make its scheduled
premium payments to PFS, so, on January 3, 1995, PFS issued
Offshore a Note of Intent to Cancel. The Cover Note was canceled
effective January 15, 1995. Maitland received no notice of the
cancellation.
D. The Accident
On March 2, 1995, Offshore's anchors struck a portion of the
pipeline, breaking it into two sections.1 On March 6, Peter
Comly telephoned Aberdeen to inform it of the pipe break. He
explained that Maitland was responsible for the repairs and asked
Aberdeen to investigate. On March 7, Aberdeen sent a notice of
cancellation to Maitland, indicating that the Cover Note had been
cancelled effective January 15, 1995 due to Offshore's failure to
pay its premiums. The Underwriters denied coverage of the loss
1
An earlier, unrelated break had taken place on February 6,
1995.
5
in an April 3, 1995 letter stating that the accident "was outside
the policy period and therefore of no concern to Underwriters."
E. Repair of the Pipeline
After receiving the Underwriters' April 3 letter, Maitland
contacted INA, its insurer, for financial assistance in repairing
the pipeline. The DOE informed Maitland that under the DOE
Contract, Maitland was responsible for its subcontractors'
performance and thus was responsible for the delays caused by the
March 2 accident. Maitland devised a repair plan, which the DOE
approved. Maitland attempted repairs until mid-July, when INA
became dissatisfied with Maitland's repair efforts and removed it
from the job. INA hired J. Ray McDermott ("McDermott") to
complete the repairs. On July 30, 1995, McDermott struck the
pipeline, causing additional damage. McDermott billed
approximately $2.2 million for its work, of which INA paid
$700,000 for work prior to the July 30 pipe break. Subsequently,
INA, McDermott, and McDermott's insurer entered into a negotiated
settlement (the "McDermott Settlement"), in which they
apportioned the damage caused by Offshore's March 2 break and
McDermott's July 30 break, concluding that $769,000 of
McDermott's work was related solely to repairing Offshore's
break.
When the contract between Maitland and the DOE was not
timely completed, the DOE was entitled under the contract to
6
assess liquidated damages of $5400 per day against Maitland.
Following completion of the project, INA and the DOE entered into
a settlement agreement under which the DOE assessed liquidated
damages of $615,000 (the "DOE Settlement").
F. The Proceedings Below
In January 1997, INA and Maitland sued Aberdeen and the
Underwriters, alleging that: (1) Maitland was an additional
insured entitled to coverage under Offshore's Cover Note; (2) the
Cover Note required that the Underwriters give Maitland thirty
days notice prior to cancellation; and (3) the January 15, 1995
cancellation of the Cover Note was ineffective as to Maitland
because the Underwriters failed to provide the required notice.
The Underwriters counterclaimed, alleging that Appellants' suit
was baseless and brought in bad faith.
Following an eight-day trial, the jury found for INA and
Maitland on their claims against the Underwriters, concluding
that: (1) Maitland and Offshore agreed in the Subcontract that
Maitland would be an additional insured under the Cover Note; (2)
Maitland and Offshore agreed in the Subcontract that thirty days
notice of cancellation would be given to Maitland before
cancellation would be effective as to Maitland; (3) Maitland was
obligated to insert the substance of Clause 47 of the DOE
Contract (containing FAR 47) into the Subcontract; (4) the
Subcontract inserted the substance of Clause 47 of the DOE
7
Contract; (5) the Underwriters agreed in the Cover Note to
provide thirty days advance written notice of cancellation to
Maitland; (6) the Underwriters failed to give thirty days written
notice to Maitland prior to cancellation of the Cover Note; (7)
Maitland incurred a loss that was covered and payable under the
Cover Note; (8) Maitland faced potential liability to the DOE for
the damages caused by Offshore to the pipeline, and Appellees
entered into a reasonable, prudent, good-faith settlement with
the DOE to resolve that potential liability; (9) Appellants
incurred damages in the amount of $3,827,798.76 in settling with
the DOE; (10) Maitland presented Aberdeen, the Underwriters'
actual or apparent agent, with a claim for damages arising out of
the March 2, 1995 pipeline break; and (11) the Underwriters
denied Maitland's claim. The jury also found for Maitland and
INA on the Underwriters' counterclaim, concluding that Appellants
did not bring suit in bad faith or for purposes of harassment.
On June 30, 1999, the district court entered an order
finding that there was sufficient evidence to support the jury's
conclusions that: (1) Maitland and Offshore agreed in the
Subcontract that Maitland would be an additional insured under
the Cover Note; (2) Maitland and Offshore agreed in the
Subcontract that thirty days notice of cancellation would be
given to Maitland before cancellation would be effective as to
Maitland; (3) the Underwriters failed to give thirty days written
notice to Maitland prior to cancellation of the Cover Note; and
8
(4) Maitland incurred a loss that was covered and payable under
the Cover Note. However, the court also concluded that there was
insufficient evidence to support the jury's findings that: (1)
the Subcontract inserted the substance of Clause 47 of the DOE
Contract (which contained FAR 47); (2) the Underwriters agreed in
the Cover Note to provide thirty days advance written notice of
cancellation to Maitland; (3) Maitland faced potential liability
to the DOE for the damages caused by Offshore to the pipeline;
(4) Appellants incurred damages in the amount of $3,827,798.76 in
settling with the DOE; (5) Maitland presented Aberdeen, the
Underwriters' actual or apparent agent, with a claim for damages
arising out of the March 2, 1995 pipeline break; and (6) the
Underwriters denied the claim. The district court went on to
find as a matter of law that the Subcontract did not incorporate
by reference the substance of Clause 47 of the DOE Contract.
Finally, the court found that the Cover Note did not provide
coverage for liquidated damages. Based on these findings, the
court entered judgment that INA and Maitland receive no damages
from the Underwriters, and denied as moot the Underwriters'
motion for judgment as a matter of law on their counterclaim.
INA and Maitland appeal from the judgment of the district
court partially reversing the jury's findings. The Underwriters
appeal the district court's denial of their motion for judgment
as a matter of law on their counterclaim, as well as the court's
upholding of the jury's finding that Maitland suffered a loss
9
that was covered by Offshore's Cover Note.
II.
We review the district court's ruling on a motion for
judgment as a matter of law de novo, viewing all evidence in the
light most favorable to the verdict. Baltazor v. Holmes, 162
F.3d 368, 373 (5th Cir. 1998). All evidence and reasonable
inferences are viewed in favor of the nonmoving party. Id. If
the facts and inferences point so strongly and overwhelmingly in
favor of the moving party that reasonable jurors could not arrive
at a contrary verdict, the court properly granted the motion.
Robertson v. Bell Helicopter Textron, Inc., 32 F.3d 948, 950-51
(5th Cir. 1994). If there is substantial evidence – that is,
evidence of such quality and weight that reasonable and fair-
minded jurors might reach a different conclusion – then the court
should have denied the motion. Id. at 951.
III.
A. Notice of Cancellation
Appellants contend that the Underwriters were required to
provide Maitland with thirty days notice prior to the
cancellation of Offshore's Cover Note, and that the failure to do
so renders the cancellation ineffective as to Maitland. The
district court rejected the findings of the jury, which were
consistent with Appellants' contention. As neither the
Subcontract nor the Cover Note contains an express requirement
10
that the Underwriters provide Maitland with advance notice of
cancellation, Appellants advance several theories in support of
their argument that such notice was required.
First, Appellants assert that Article 24.17 of the Texas
Insurance Code imposed a statutory notice obligation upon the
Underwriters.2 Tex. Ins. Code Art. 24.17 (2001). Article 24.17
requires a premium finance company to issue a written notice of
intent to cancel for payment default to the insured prior to
mailing a notice of cancellation to the insurer. Id. Art.
24.17(c). Specifically, Article 24.17 provides, in pertinent
part: "All . . . contractual restrictions providing that the
insurance contract may not be cancelled unless notice is given to
a . . . third party apply where cancellation is effected under
this section." Id. Art. 24.17(e).
Article 24.17(e) offers no support for Appellants' claim
that the Underwriters were obligated to provide advance notice of
cancellation. It merely provides that any contractual provision
2
The Underwriters argue that Appellants failed to raise this
issue before the district court and thus should be foreclosed
from raising it on appeal. We note that Appellants neither
requested a jury instruction based on Article 24.17 nor objected
to the lack of such an instruction. Furthermore, Appellants also
failed to raise the issue in a motion for directed verdict or to
argue that Article 24.17 should preclude the district court from
granting Underwriters' motion for judgment as a matter of law.
However, Appellants did present testimony and argument at trial
regarding the application of Article 24.17, and the court
admitted the text of the statute into evidence for the jury's
consideration. Accordingly, although Appellants may have waived
this issue, we assume arguendo that it was raised sufficiently
before the district court.
11
requiring notice of cancellation to a third party remains in full
force and effect notwithstanding the additional notice
requirements imposed upon premium finance companies by Article
24.17. Thus, if the Underwriters were under a contractual
obligation to provide notice to Appellants prior to cancelling
Offshore's Cover Note, Article 24.17(e) simply would confirm that
this obligation exists even where the cancellation occurs
pursuant to a premium finance company's termination for
nonpayment of premiums. Conversely, if the Underwriters had no
such contractual notice obligation, Article 24.17 would not
create an independent notice requirement. Accordingly,
Appellants' argument that the Underwriters had an independent
statutory obligation to provide Maitland notice prior to
cancelling Offshore's policy fails.
Appellants next argue that the Underwriters' duty to provide
advance notice of cancellation was created by the incorporation
language in Paragraph 1 of the Subcontract between Maitland and
Offshore, which states: "[t]he Sub-contractor assumes with
respect to the General Contractor all of the obligations which
the General contractor owes to the owner under the [DOE
Contract]." Appellants argue that this clause incorporated the
provisions of the DOE Contract requiring thirty-day notice of
cancellation into the Subcontract by reference. Appellants
identify two provisions in the DOE Contract that arguably were
incorporated into the Subcontract, thereby imposing a duty to
12
provide Maitland with notice of cancellation: (1) FAR 47,
entitled "Insurance - Work on a Government Installation"; and (2)
Section 16.0 of the DOE contract, entitled "Insurance."
FAR 47 inserts 48 C.F.R. § 52.228-5 into the DOE Contract
verbatim, stating, in pertinent part:
(a) The Contractor shall . . . maintain during the
entire performance of this contract, at least the kinds
and minimum amounts of insurance required in the
schedule or elsewhere in the contract.
(b) . . . The policies evidencing required insurance
shall contain an endorsement to the effect that any
cancellation or any material change adversely affecting
the Government's interest shall not be effective . . .
until 30 days after the insurer or the Contractor gives
written notice to the Contracting Officer, whichever
period is longer.
(c) The Contractor shall insert the substance of this
clause, including this paragraph (c), in subcontracts
under this contract that require work on a Government
installation. . . .
Despite their failure to insert the text of FAR 47 into the
Subcontract, Appellants argue that the incorporation language in
Paragraph 1 inserted the substance of FAR 47, including the
thirty-day notice requirement. Generally, Federal Acquisition
Regulations "should be incorporated by reference to the maximum
practical extent." 48 C.F.R. § 52.102-1(a). However, it is clear
that unlike other Federal Acquisition Regulations, FAR 47 must be
"inserted" into certain contracts. See id. § 28.310(a) ("The
contracting officer shall insert the clause at 52.228-5,
Insurance - Work on a Government Installation, in solicitations
and contracts when a fixed-price contract is contemplated, the
13
contract amount is expected to exceed the simplified acquisition
threshold, and the contract will require work on a Government
installation.") (emphasis added). This specific requirement
supersedes the general principle that Federal Acquisition
Regulations may be incorporated by reference, and is at odds with
Appellants' argument that FAR 47 may be inserted automatically
into a contract via a general incorporation clause.3
Furthermore, FAR 47 itself contains the independent requirement
that "[t]he Contractor shall insert the substance of this clause
. . . in subcontracts under this contract." Id. § 52.228-5(c).
The plain meaning of these provisions contradicts Appellants'
argument that FAR 47 was incorporated into the Subcontract by
reference. Therefore, the district court correctly concluded
that the Subcontract did not incorporate FAR 47 as a matter of
law, and thus FAR 47 created no obligation for the Underwriters
to provide Maitland notice before cancelling Offshore's
insurance.
However, we agree with Appellants' alternative argument that
Section 16 of the DOE Contract imposed a duty upon the
Underwriters to provide notice of cancellation. Section 16
states, in pertinent part:
3
We also note that the DOE Contract itself contains the
entire text of FAR 47, rather than incorporating it by reference,
as Appellants contend is permissible.
14
The Contractor shall maintain, at his expense,
Workmen's Compensation, Liability Insurance, and all
other insurance as provided below. Provisions shall be
made for thirty (30) days advance written notice by
mail to the Contracting Officer of any changes in or
cancellation of any such insurance.
Appellants argue that this provision, which obligated Maitland to
provide for written notice to the DOE, in combination with
Paragraph 1 of the Subcontract, obligated Offshore to provide for
written notice to Maitland. The Underwriters respond that
Offshore was not aware of the notice requirement when it signed
the Subcontract, so no such duty existed. Alternatively, the
Underwriters claim that even if Section 16 obligated Offshore to
provide for advance notice, it imposed no duty upon the insurer
to provide notice of cancellation.
It is well settled that where a contract is incorporated by
reference into a subcontract, the subcontractor is conclusively
presumed to undertake the work subject to the conditions and
limitations of the prime contract. Hartwell v. Fridner, 217 S.W.
231, 235 (Tex. Civ. App. 1919). Furthermore, "[e]ach contracting
party owes a duty to the other party to read and know the
contents of the contract before each one signs it." Kaplan v.
Bernard Lumber Co., 710 S.W.2d 737, 740 (Tex. App. 1986).
Accordingly, when Offshore entered into the Subcontract, in which
the first paragraph contained a clause incorporating by reference
the terms of the DOE Contract, it is presumed to have knowingly
assumed duties under the DOE Contract. Therefore, we reject the
15
Underwriters' argument that Offshore had no duty to provide for
written notice to Maitland simply because Offshore allegedly was
unaware of its duties under the DOE Contract.
The Underwriters' second contention, that Section 16 imposes
no duty upon the insurer, is also flawed. Section 16 of the DOE
Contract imposed a duty upon Maitland to provide for notice of
cancellation, and Paragraph 1 of the Subcontract transferred that
duty to Offshore. The Underwriters' witnesses testified, and the
district court found, that the Cover Note's notice provision
automatically required the Underwriters to provide notice to
third parties if Offshore entered into a written contract
requiring such notice. Thus, because the Subcontract
incorporated Section 16 of the DOE Contract by reference, causing
Offshore to assume the duty of making provisions for notice of
cancellation to Maitland, the Cover Note's notice provisions
automatically required the Underwriters to provide notice to
Maitland.
We conclude that the district court erroneously relied on
Maitland's failure to insert the substance of FAR 47 into the
Subcontract in holding that the Underwriters had no duty to
provide notice of cancellation. Instead, we hold that Section 16
of the DOE Contract provided an independent basis for imposing
upon Offshore, and thus upon the Underwriters through the Cover
Note, the duty to provide notice to Maitland. Accordingly,
because the Subcontract incorporated Section 16 of the DOE
16
Contract by reference, the Underwriters had a duty to provide
Maitland with thirty days notice prior to cancellation of
Offshore's policy. We therefore reinstate the jury's finding
that the Underwriters had such a duty.
B. Coverage
Since the Underwriters' failure to provide the required
notice to Maitland before cancelling Offshore's Cover Note
renders the cancellation ineffective as to Maitland, we next must
address whether Offshore's Cover Note covered Maitland's loss,
and whether the Underwriters thus were obligated to compensate
Appellants for the loss. The district court upheld the jury's
finding that the Cover Note provided coverage for Maitland's
loss. However, the court rejected the jury's determination that
Maitland faced potential liability to the DOE and entered into a
settlement to resolve that liability.
Although the district court treated the issues of coverage
and potential liability separately, the issues are in fact
closely related. In arguing that there was no coverage for
Maitland's loss, the Underwriters contend that Maitland must be
"legally liable" for a DOE claim before there is a loss that the
Underwriters are obligated to pay, and that many liability
insurance policies require either that a claim be made or a suit
for damages be brought before insurer liability is triggered.
See 7 Couch on Ins. §§ 103:14-15 (3d ed. 1998). Since the DOE
never made a claim against Maitland, the Underwriters argue that
17
their liability on the policy was not triggered. We disagree.
The authority the Underwriters cite for the proposition that
a "claim" is required to trigger liability merely states that
"many policies of liability insurance" have such a requirement,
but it does not address whether the Cover Note has such a
requirement. The Cover Note states, in pertinent part:
This insurance is to indemnify or pay on behalf of
the Insured(s) . . . all sum(s) they may be liable or
obligated and/or responsible to pay as damages or by
reason of the liability being imposed upon the insured
whether it be assumed, under contract or otherwise,
arising out of the operation(s) of the Insured
worldwide (emphasis added).
The Cover Note thus contains broad language, providing
coverage where the insured becomes "liable or obligated and/or
responsible to pay as damages." The Cover Note's broad language
distinguishes this case from the case law cited by the
Underwriters, which deals with policies providing coverage where
the insured has "become legally liable" or "legally obligated to
pay as damages." See Continental Oil Co v. Bonanza Corp., 706
F.2d 1365, 1374 (5th Cir. 1983); Data Specialties, Inc. v.
Transcontinental Ins. Co., 125 F.3d 909, 911 (5th Cir. 1997). It
is uncontroverted that Offshore was responsible for damage to the
pipeline as a result of the March 2 break, and that Section 21 of
the DOE Contract held Maitland "fully responsible for all acts
and omissions of [its] subcontractors." The DOE repeatedly
stated that it held Maitland responsible for the actions of its
subcontractors and for the delays caused by the March 2 break.
18
Accordingly, there was sufficient evidence in the record for the
jury to find that Maitland was "responsible to pay" for the
damages caused by Offshore, and thus that Offshore's Cover Note
covered Maitland's loss. Therefore, the district court correctly
denied the Underwriters' motion for judgment as a matter of law
on the coverage issue.
However, after determining that Offshore's Cover Note
provided coverage for Maitland's loss, the district court found
that there was insufficient evidence to support the jury's
findings that Maitland faced potential liability to the DOE as a
result of the damage caused by Offshore and that Maitland entered
into a settlement to resolve that liability. We disagree with
the district court's conclusion.
In support of its holding, the district court stated that
there was no evidence from any Maitland witness that the DOE ever
claimed that Maitland was responsible for the March 2, 1995
pipeline damage. However, at trial Appellants introduced a
letter from the DOE dated March 9, 1995, holding Maitland
responsible for its subcontractors' actions. Appellants also
introduced a July 6, 1995 letter, holding Maitland responsible
for the delays caused by the March 2, 1995 incident. These
letters contradict the district court's conclusion that the DOE
never claimed Maitland was responsible for the March 2 damage.
Moreover, the Cover Note's broad language, indemnifying Maitland
for all sums it "may be liable or obligated and/or responsible to
19
pay as damages," combined with the DOE Contract provision holding
Maitland "fully responsible for all acts and omissions of [its]
subcontractors," provides ample basis for the jury's conclusion
that Maitland was potentially liable to the DOE. Thus, we hold
that the district court erred in concluding that Maitland had no
potential liability to the DOE, and reinstate the jury's finding
to the contrary.
Appellants next contend that the district court erred in
finding that Maitland and/or INA did not enter into a reasonable,
prudent, and good-faith settlement with the DOE. Under Texas
law, where an indemnitee enters into a settlement with a third
party, it may recover from the indemnitor only upon a showing
that potential liability existed, and that the settlement was
reasonable, prudent, and in good faith under the circumstances.
Transamerica Ins. Co. v. Avenell, 66 F.3d 715, 721 n.15 (5th Cir.
1995). The settling indemnitee need not prove actual liability
to the third party before recovering from the indemnitor. Id.
Appellants identify two settlements that could have formed
the basis for the jury's conclusion that Maitland and/or INA
entered into a settlement of Maitland's potential liability, (1)
the McDermott Settlement and (2) the DOE Settlement. The
Underwriters respond that because the DOE was not a party to the
McDermott Settlement, it did not constitute a settlement of
Maitland's potential liability to the DOE for Offshore's pipeline
20
break. Underwriters further argue that the DOE Settlement
provides no basis for liquidated damages for two reasons: (1)
because Offshore's Cover Note did not cover the liquidated
damages resolved by the DOE Settlement; and (2) the liquidated
damages were not related to the pipeline damage caused by
Offshore.
We agree with the Underwriters that the McDermott Settlement
does not form the basis for indemnity; the DOE was not a party to
the McDermott Settlement, and thus the settlement could not have
resolved Maitland's potential liability to the DOE. However, we
disagree with the Underwriters' argument that the damages
resolved by the DOE Settlement were not related to the Offshore
pipeline damage. Indeed, the DOE's July 6, 1995 letter
explicitly holds Maitland responsible for the delay caused by the
March 2 pipeline break. Accordingly, whether the DOE Settlement
satisfies the requirement of a reasonable, prudent, good-faith
settlement of Maitland's potential liability to the DOE depends
upon whether the Offshore Cover Note provided coverage for
liquidated damages. If so, Appellants have met the requirement
for indemnification under Texas law.
The Underwriters, citing this Court's decision in Data
Specialties, contend that liquidated damages are not recoverable
under the Cover Note. In Data Specialities, the plaintiff
electrical contractor ("DSI") was hired to reconstruct an
electrical system at a manufacturing facility in Texas. 125 F.3d
21
at 910. In the course of DSI's work, a short circuit resulting
in an explosion caused property damage to the electrical system.
Id. The explosion was caused by a defective circuit breaker for
which DSI was not responsible. Id. DSI hired another electrical
contractor to repair the damage, and sought reimbursement for the
repair expenses under its commercial general liability ("CGL")
policy. Id. When the insurer denied coverage, DSI brought suit,
arguing that it was contractually obligated to repair the damage,
and that because there was property damage, the CGL policy
afforded coverage. Id. This Court held that the CGL policy did
not cover a contractual obligation triggered by an event for
which DSI was not at fault. Id. at 913.
The crucial difference between Data Specialties and this
case is that, unlike DSI, Maitland was at fault for the damage to
the pipeline caused by Offshore. Through the DOE Contract,
Maitland assumed responsibility for the acts and omissions of its
subcontractors, and thus was liable to the DOE for Offshore's
tortious conduct. Maitland therefore seeks coverage for
contractual damages incurred as a result of conduct for which it
was responsible.
The Underwriters next argue that this Court should not
recognize liability for contractual damages here because the
parties did not intend the Cover Note to afford coverage for
contractual risks, citing Trinity Industries, Inc. v. Insurance
Co. of North America, 916 F.2d 267 (5th Cir. 1990), and Bender
22
Shipbuilding & Repair Co. v. Brasileiro, 874 F.2d 1551 (11th Cir.
1989). However, neither Trinity nor Bender applies to this case.
In Trinity, this Court held that an insured's builder's risk
policy did not cover an arbitration award against the insured for
repairs to correct its defective workmanship. 916 F.2d at 269.
In reaching its decision, the Trinity court specifically
distinguished cases holding that coverage existed where defective
workmanship resulted in an accident. Id. at 270; see, e.g., Dow
Chem. Co. v. Royal Indem. Co., 635 F.2d 379 (5th Cir. 1981). In
Bender, the Eleventh Circuit held that a builder's risk policy
did not cover a liquidated damages settlement against an insured
for delayed construction of a dry dock. 874 F.2d at 1561.
However, as in Data Specialities, the insured in Bender was not
responsible for the damage to the dry dock that caused the
delays. Rather, the delay resulted from storm damage to the dry
dock during construction. Id. at 1553. Here, Maitland was
responsible for the damage to the pipeline which directly caused
the delay in its completion. Thus, the liquidated damages
awarded against Maitland were a direct consequence of the March 2
pipeline break and are covered by the Cover Note, which provided
coverage for "all other direct or indirect or consequential
losses arising from or occasioned by the Insured's operations."
Cover Note at Subsection I, ¶ B (emphasis added). Therefore, we
conclude that the jury had sufficient evidence upon which to base
its finding that the Cover Note covered Maitland's liquidated
23
damages, and reverse the district court's holding to the
contrary.
C. Claim Requirement
Appellants assert that the district court erred in
concluding that Maitland failed to make a claim to the
Underwriters for damages and that, as a result, the Underwriters
did not deny a claim. Appellants alternately contend that (1) no
claim was required, (2) Offshore's claim met the claim
requirement, and (3) Maitland did in fact make a claim.
With respect to Appellants' first argument, the Cover Note
specifically required that "in the event of any occurrence which
may result in loss, damage and/or expense for which this Assurer
may become liable, the Assured will use due diligence to give
prompt notice thereof. . . ." This language refutes Appellants'
contention that no claim was required.
However, notice to the insurer of an incident or occurrence
creating potential liability need not be made by the insured.
P.G. Bell Co. v. United States Fid. & Guar. Co., 853 S.W.2d 187,
192 (Tex. App. 1993). It is uncontroverted that Offshore made a
claim on the Cover Note, which satisfies the requirement of
prompt notice of the Offshore pipeline break. Furthermore,
Appellants presented evidence that Peter Comly, Maitland's
comptroller, contacted Aberdeen and informed it of the accident
and that Maitland was responsible under the DOE contract for
Offshore's acts and omissions. Accordingly, there was ample
24
evidence in the record upon which the jury could have relied in
reaching its conclusion that Maitland satisfied the Cover Note's
notice requirement. The district court thus erred in holding
that Maitland did not make a claim.
Appellants also challenge the district court's determination
that the Underwriters did not deny Maitland's claim. The court
based this finding on its conclusion that Maitland did not make a
claim, thus holding that the Underwriters could not have denied a
claim. However, the record supports Appellants' contention that
the Underwriters did in fact deny Maitland's claim. Appellants
presented a fax from the Underwriters to Aberdeen indicating that
the Cover Note had been cancelled and that the claims were
outside the policy period, as well as Aberdeen's letter to Peter
Comly attaching the Underwriters' fax, which stated that the
claims based on Offshore's pipeline damage were "of no concern to
Underwriters." This evidence provides ample support for the
jury's finding that the Underwriters denied Maitland's claim. In
light of our holding that there was sufficient evidence in the
record to support the jury's finding that Maitland did make a
claim on the Cover Note, as well as the evidence presented by
Appellants that the Underwriters denied Maitland's claim, we
conclude that the district court erred in holding that the Cover
Note did not obligate the Underwriters to compensate Maitland for
its loss.
D. Damages
25
The Underwriters assert that the district court erred in
denying their motion for judgment as a matter of law concerning
the reasonableness of Maitland's repair efforts and Appellants'
attempt to segregate damages between the February 6 and March 2
pipeline breaks. In reviewing a district court's denial of a
motion for judgment as a matter of law, we must uphold the
verdict unless there was no legally sufficient evidentiary basis
for a reasonable jury to find as it did. Fed.R.Civ.P. 50(a)(1);
Hiltgen v. Sumrall, 47 F.3d 695, 700 (5th Cir. 1995).
Applying this standard, we conclude that there is ample
evidence in the record to support the jury's conclusion that
Maitland's attempts at repair were reasonable and made in good
faith. The repair strategies were discussed with and approved by
the DOE. In short, the Underwriters have failed to demonstrate
that Maitland's repairs were unreasonable, imprudent, or made in
bad faith, under the circumstances that existed at the time the
repairs were attempted. Accordingly, we affirm the district
court's denial of the Underwriters' motion for judgment as a
matter of law as to the reasonableness of Maitland's repair
efforts.
The Underwriters also contend that in calculating their
damages, Appellants did not properly segregate the repair costs
associated with the February 6, 1995 pipeline break from the
repair costs incurred as a result of the March 2 Offshore break.
26
In support of their segregation of damages, Appellants offered
the testimony of witnesses who examined every invoice and
described how each applied to the repairs of the March 2 pipeline
break.
The Underwriters cite numerous cases in support of the
proposition that recovery cannot be had for damages that are
speculative or conjectural in nature. See, e.g., Texas
Instruments, Inc. v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276,
279 (Tex. 1994); A.B.F. Freight Sys., Inc. v. Austrian Import
Serv. Inc., 798 S.W.2d 606, 615 (Tex. App. 1990). However, these
cases are inapposite to the situation here. For instance, in
Teletron, the court held that the plaintiff's claim for lost
profits was speculative in light of its inability to produce a
working model of the product. 877 S.W.2d at 281. Similarly, in
A.B.F. Freight Systems, the plaintiff admitted there was no way
of segregating the damaged goods and presented no objective facts
in support of its estimated damages. 798 S.W.2d at 615.
The Underwriters correctly note that "damages must be
ascertainable in some manner other than by mere speculation or
conjecture, or by reference to some fairly definite standard,
established experience, or direct inference from known facts."
Richter, S.A. v. Bank of Am. Nat'l Trust & Sav. Ass'n, 939 F.2d
1176, 1188 (5th Cir. 1991) (citing Berry Contracting, Inc., v.
Coastal States Petrochemical Co., 635 S.W.2d 759, 761 (Tex. App.
1982)). In this case, Appellants based their damages
27
segregation testimony on the established experience of Derf
Maitland, Maitland's president, in the construction industry and
the day-by-day itemization of charges contained in the various
invoices from International Diving and Consulting Services
("International Diving"). Mr. Maitland also testified that he
was positive that everything International Diving did on the
project was related to the March 2 pipeline break. Viewing the
evidence in the light most favorable to the verdict, Maitland
presented sufficient evidence to support the jury's damages
verdict.
Finally, Maitland and INA appeal the district court's
holding that there was no evidence to support the jury's verdict
that the amount of damages Appellants incurred in settling with
the DOE was $3,827,798.76. Although it concluded that the jury
properly resolved the issues of Maitland's segregation of damages
and reasonable repair efforts, the district court nonetheless
overturned the jury's verdict as to the amount of damages based
on its conclusion that there was no evidence that Maitland or INA
settled with the DOE. In light of our holding that Maitland and
INA entered into a settlement with the DOE arising from the
damage caused to the pipeline by Offshore and the resultant delay
in completion of the project, we hold that the district court
erred in overturning the jury's verdict solely based on its
belief that no such settlement existed.
IV.
28
Because we find that substantial evidence supported the
jury's verdict in this case, we REVERSE the district court's
partial grant of the Underwriters' motion for judgment as a
matter of law, AFFIRM the district court's denial in part of the
Underwriters' motion, and REMAND to the district court with
instructions to enter judgment in accordance with the jury's
verdict.
29
Insurance Co. of North America v. Aberdeen Insurance Services, Inc.
Court: Court of Appeals for the Fifth Circuit
Date filed: 2001-06-25
Citations: 253 F.3d 878
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