Swire Pacific Holdings Inc. v. Zurich Insurance

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
________________________ ELEVENTH CIRCUIT
MARCH 07, 2002
THOMAS K. KAHN
No. 01-12597 CLERK
________________________

D.C. Docket No. 99-02835-CV-DLG

SWIRE PACIFIC HOLDINGS INC.,

Plaintiff-Appellant,

versus

ZURICH INSURANCE, CO.,

Defendant,

ZURICH AMERICAN INSURANCE COMPANY,

Defendant-Appellee.
__________________________

Appeal from the United States District Court
for the Southern District of Florida
_________________________
(March 7, 2002)

Before CARNES, BARKETT and KRAVITCH, Circuit Judges.
CARNES, Circuit Judge:

This diversity case involves an insurance coverage dispute between Swire

Pacific Holdings, the owner and developer of a high-rise condominium in Florida,

and Zurich American Insurance Company as successor in interest to Zurich

Insurance Company, under a Builder’s Risk Policy. Swire sued Zurich seeking to

recover under the policy the costs it had incurred in correcting design defects in the

condominium. The district court granted summary judgment in favor of Zurich,

and Swire appeals.

Some or all of the following questions are presented: (1) whether the

policy’s Design Defect Exclusion Clause bars coverage for Swire’s loss; (2)

whether the policy’s Sue and Labor Clause applies only in the case of an actual,

covered loss; and (3) whether the policy’s Sue and Labor Clause, if it applies,

covers the cost of repairing the structural deficiencies in the condominium

building. Each of these questions involves issues of Florida law for which the

answer is unclear, and Zurich has indicated to us that these policy provisions are

commonplace and can be found in thousands of builder’s risk policies issued for

projects in the State of Florida. That is why we are going to certify the controlling

questions of law to the Florida Supreme Court.

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 I. BACKGROUND

A. FACTS

Swire purchased from Zurich a builder’s risk policy, effective February 24,

1997 through February 24, 1999, which was drafted in relevant part by Zurich. The

policy insured the Two Tequesta Point Condominium Project, located in Miami,

Florida. Swire is one of the insureds under the policy.

In March of 1998, the City of Miami’s Building Department informed Swire

that Richard Klein, the structural engineer on the condominium project, was being

investigated in connection with certain design projects for failure to comply with

appropriate governmental building codes and ordinances. Swire’s agent, CHM

Consulting Engineers, performed a peer review of Klein’s structural work on the

project and the potential claim of damage arising from that structural work. While

the peer review was underway, the City of Miami halted the issuance of a

certificate of occupancy. The peer review revealed numerous errors and omissions

in the project that had to be corrected.

As a result of the design defects, Swire altered the plans and construction to

bring the building into compliance with appropriate governmental building codes.

Swire spent approximately $4.5 million in costs to correct the structural

deficiencies and filed a claim with Zurich under its builder’s risk policy seeking

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coverage for those costs. Zurich denied coverage on the ground that Swire’s claim

dealt “with the cost of correcting a design defect and not any physical loss or

damage resulting from the defect.”

The relevant provisions of the policy at issue are the Insuring Agreement,

the Design Defect Exclusion Clause, and the Sue and Labor Clause. The Insuring

Agreement, set forth in the policy’s “Coverage” section, provides:

Subject to the limitations, exclusions, terms and conditions contained
herein, this Policy insures, in respect of occurrences happening during
the term of this Policy, against:

Physical loss or damage to the property insured, except as excluded
hereunder.

The Design Defect Exclusion Clause, set forth in the “Exclusions and Limitations”

section of the policy, excludes:

Loss or damage caused by fault, defect, error or omission in design,
plan or specification, but this exclusion shall not apply to physical loss
or damage resulting from such fault, defect, error or omission in
design, plan or specification.

The Sue and Labor Clause, set forth in the policy’s “Conditions” section, provides:

In case of loss or damage, it shall be lawful and necessary for the
INSURED . . . to sue, labor and travel for, in and about the defense,
safeguard and recovery of the insured property hereunder or any part
thereof without prejudice to this insurance, nor shall the acts of the
INSURED or the Company, in recovering, saving, and preserving the
property INSURED in case of loss or damage be considered a waiver
or an acceptance of abandonment. The expenses so incurred shall be
borne by the INSURED and the Company, proportionately to the

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 extent of their respective interests.

B. PROCEDURAL HISTORY

In October of 1999, Swire filed a two-count lawsuit against Zurich. Count I

sought declaratory and monetary relief to determine Swire’s rights to insurance

coverage under the Builder’s Risk Policy. Count II sought recovery of money

damages arising out of Zurich’s failure to provide coverage for loss incurred in

correcting the structural deficiencies of the building. Zurich filed an answer

containing affirmative defenses. The fourth one asserted that Swire’s loss was

specifically excluded from coverage due to the Design Defect Exclusion Clause of

the policy.

Swire sought partial summary judgment on Count I of its complaint and on

Zurich’s fourth affirmative defense, arguing that Swire was entitled as a matter of

law to a declaration that the Design Defect Exclusion Clause invoked by Zurich

does not apply to costs incurred by Swire under the policy’s Sue and Labor Clause.

Swire alternatively argued that the Design Defect Exclusion Clause does not

exclude any costs for work that necessarily damages or destroys portions of the

insured property as a result of required remediation or repair of defective property.

Zurich moved for summary judgment in its favor on the grounds that the Design

Defect Exclusion Clause bars coverage for Swire’s claim, the Design Defect

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Exclusion Clause applies to sue and labor expenses, and the Sue and Labor Clause

at issue applies only to actual, covered loss or damage anyway.

The district court granted summary judgment in favor of Zurich. It

concluded that Swire’s loss was an excluded loss under the policy’s Design Defect

Exclusion Clause. The court also held that the policy’s Sue and Labor Clause did

not provide coverage for otherwise excluded losses. Relying on Southern

California Edison Co. v. Harbor Insurance Co., 148 Cal. Rptr. 106 (Cal. Ct. App.

1978), the court reasoned that sue and labor expenses are reimbursable only to the

extent that they are incurred for the benefit of the insurer in mitigating or

preventing a covered loss. The court held that the answer to the question of

whether expenses are incurred for the benefit of the insurer lies not in whether the

insured’s actions may potentially benefit the insurer in some way, but in whether

the insured’s actions “correlate to an excluded loss.” Because the actions taken by

Swire correlated to the excluded loss of repairing design defects, the court found

that the costs incurred by Swire were not incurred for the benefit of Zurich and

thus were not reimbursable under the Sue and Labor Clause. The district court

stated that it was unnecessary to reach the issue of whether the Sue and Labor

Clause applies only when an actual, covered loss has occurred.

On appeal, Swire contends that the district court erred in holding that the

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Design Defect Exclusion Clause applies to its loss, and in holding that any loss to

which that clause applies is also excluded from coverage under the policy’s Sue

and Labor Clause. Zurich, as expected, lauds the district court’s holding and

reasoning, and repeats them as its contentions. Zurich also argues that the Sue and

Labor Clause does not apply in the circumstances of this case, anyway, because no

covered loss had occurred at the time of the expenditures.

II. DISCUSSION

We review de novo the district court’s grant of summary judgment. Squish

La Fish, Inc. v. Thomco Specialty Prods., Inc., 149 F.3d 1288, 1290 (11th Cir.

1998).

A. THE DESIGN DEFECT EXCLUSION CLAUSE

The policy’s Design Defect Exclusion Clause excludes coverage for “[l]oss

or damage caused by fault, defect, error, or omission in design, plan or

specification.” Part of that clause, however, is the “ensuing loss” provision, which

states that “physical loss or damage resulting from such fault, defect, error or

omission in design, plan or specification” is covered under the policy. Swire

asserts that the Design Defect Exclusion Clause considered as a whole is

ambiguous and therefore should be construed against Zurich, the insurer and

drafter. The district court rejected Swire’s argument that the clause is ambiguous

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and held that Swire’s loss fell within the exclusion for “[l]oss or damage caused by

[a] . . . defect” and not within the “ensuing loss” provision. That conclusion was

based upon the undisputed fact that the building had not collapsed at the time of

the repairs.

Several decisions support the district court’s holding that the Design Defect

Exclusion Clause is not ambiguous and that the loss at issue – the cost of

correcting of design defects – cannot constitute “physical loss” under the “ensuing

loss” provision because it was incurred to correct an excluded peril. See Laquila

Constr., Inc. v. Travelers Indem. Co., 66 F. Supp. 2d 543, 544-45 (S.D.N.Y. 1999)

(where builder’s risk policy contained an exclusion for the cost of making good

faulty workmanship but had an “ensuing loss” provision for physical damage

resulting from such faulty workmanship, a claim for cost of repairing defective

concrete fell “squarely into the exclusion clause”), aff’d, 216 F.3d 1072 (2d Cir.

2000) (unpublished); Schloss v. Cincinnati Ins. Co., 54 F. Supp. 2d 1090, 1094-96

(M.D. Ala. 1999) (where homeowner’s insurance policy contained an exclusion for

loss caused by rot, and the exclusion was subject to an “ensuing loss” provision,

the costs associated with repairing rot damage were excluded and did not fall under

the “ensuing loss” provision), aff’d, 211 F.3d 131 (11th Cir. 2000) (unpublished);

Allianz Ins. Co. v. Impero, 654 F. Supp. 16, 17-18 (E.D. Wash. 1986) (where

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builder’s risk policy contained an exclusion for cost of making good faulty

workmanship and had an “ensuing loss” provision, losses incurred in repairing a

defectively erected concrete wall were not covered). But those decisions did not

involve Florida law, and the parties have not cited, nor have we found, a decision

applying Florida law to this issue.

B. THE SCOPE OF THE SUE AND LABOR CLAUSE

Swire contends that even if the Design Defect Exclusion Clause would

otherwise exclude the cost of repairing the structural deficiencies in the

condominium project, that cost is included because of the policy’s Sue and Labor

Clause. That contention raises two issues. The first is whether the policy’s Sue

and Labor Clause even applies where there has been no actual, covered loss. The

Sue and Labor Clause applies, by its terms, “[i]n the case of loss or damage.” In

light of that language, Zurich argues the clause has no application here because no

actual, covered loss had occurred at the time Swire incurred the costs of correcting

the structural deficiencies.

While several courts have addressed this issue, they have reached conflicting

results, and none of the decisions applied Florida law. See Witcher Constr. Co. v.

Saint Paul Fire and Marine Ins. Co., 550 N.W.2d 1, 7-8 (Minn. Ct. App. 1996)

(where policy provision requires the insured to “do everything possible to protect

9
the property from further damage” upon the occurrence of a covered loss, that

provision does not alter the insured’s common law duty to prevent harm to the

insured property or the insurer’s corresponding obligation to reimburse the insured

for such efforts); Wolstein v. Yorkshire Ins. Co., 985 P.2d 400, 409 (Wash. Ct.

App. 1999) (where sue and labor provision by its terms applies “in case of any

Loss or Misfortune,” a covered loss does not have to occur in order to invoke

coverage under the clause; actions taken to prevent a covered loss come within the

scope of the clause); Thornewell v. Ind. Lumbermens Mut. Ins. Co., 147 N.W.2d

317, 321 (Wis. 1967) (where policy provision permits the insured “[i]n the event of

loss hereunder” to make and be reimbursed for the cost of reasonable repairs, the

loss that has occurred must be one that is otherwise covered under the policy).

Several Fifth Circuit decisions state generally that, under a sue and labor

clause, the insured has a duty to minimize or prevent covered losses. See Blasser

Bros., Inc. v. N. Pan-American Line, 628 F.2d 376, 386 (5th Cir. 1980) (where sue

and labor provision applied “[i]n case of any loss or misfortune,” the court stated

that any action to preserve insured goods or mitigate damages would be included

expenses under the clause); Cont’l Food Prods., Inc. v. Ins. Co. of N. Am., 544

F.2d 834, 837 & n.1 (5th Cir. 1977) (stating that the insured has a duty under a sue

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and labor clause to protect insured property in order to minimize or prevent

covered losses); Reliance Ins. Co. v. The Escapade, 280 F.2d 482, 488 (5th Cir.

1960) (same). But those decisions all involve mitigation claims where an actual

loss took place before any expenses were incurred. See Blasser, 628 F.2d at 378;

Cont’l Food, 544 F.2d at 835; Escapade, 280 F.2d at 484.

C. THE EFFECT OF THE SUE AND LABOR CLAUSE

There is another issue raised by Swire’s contention that the cost of making

the structural repairs to the condominium building is covered by the Sue and Labor

Clause. That issue arises in this case only if the occurrence of a covered loss is not

a prerequisite to application of the clause. If the clause does apply even when there

has been no covered loss at the time the repairs are made, then what might be

called a “mixed motives” issue arises. The Sue and Labor Clause provides that

“[i]n case of loss or damage, it shall be lawful and necessary for [Swire] to sue,

labor and travel for, in and about the defense, safeguard and recovery of the

insured property hereunder.” Swire contends that the Sue and Labor Clause is a

separate insuring agreement, and that the repair action, even if taken to correct an

uncovered loss (a design defect), is covered by the clause because that action also

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prevented a future covered loss (the collapse of the building).1 Zurich, of course,

disagrees.

While both Swire and Zurich cite case law in support of their positions on

this issue, neither points to a Florida case directly on point. In support of its

position, Swire relies on a 1996 Minnesota appellate court decision, as well as a

1916 King’s Bench decision. See Witcher Const. Co. v. St. Paul Fire and Marine

Ins. Co., 550 N.W.2d 1, 2-3, 8 (Minn. Ct. App. 1996) (where property insurance

policy contained an exclusion for delay and loss of use as well as a provision

similar to a sue and labor clause, the policy’s exclusions for delay and loss of use

did not limit the expenses that are reimbursable, provided the insured directed its

1
This is a good place to note Swire’s argument that the district court decided disputed
facts against it when the court determined that Swire’s intentions, in correcting the structural
deficiencies, were to correct the defectively-designed building and not to prevent future covered
losses in the discharge of its duty to Zurich. In the district court the parties agreed that there
were no disputed facts preventing the case from being decided on summary judgment. It was
undisputed there that the City of Miami had halted the issuance of a certificate of occupancy for
the building because of the structural deficiencies, and that the expenditures in question had to
be made by Swire in order to bring the building into compliance with the building code.
Furthermore, in oral argument before us, counsel for Swire conceded that the building could not
be occupied until the design defects were corrected.

The facts as presently developed are that Swire had to correct the structural deficiencies
in order to occupy the building, and that by correcting those deficiencies Swire may have
prevented the future collapse of the building, which would have been a covered loss. Whether
the collapse, if it occurred, would have happened during the period this insurance policy covered
is not known and is unknowable, at least on this record. If recovery of the cost of repairing the
structural defects under the Sue and Labor Clause is dependent upon whether the building would
have collapsed, or would have done so during the period of coverage, a remand for factual
development on that point will be necessary.

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efforts primarily at preventing an imminent covered loss); Wilson Bros. Bobbin

Co. v. Green, [1917] 1 K.B. 860, 860, 864 (1916) (where policy insuring goods on

board a steamship against “war risk” contained both an exclusion for “all claims

arising from delay” and a sue and labor clause, the exclusion for claims arising out

of delay did not affect recovery under the sue and labor clause where costs

associated with delay were incurred to avoid the loss of the goods never reaching

their destination). Zurich, on the other hand, points to Southern California Edison

v. Harbor Insurance Co., 148 Cal. Rptr. 106 (Cal. Ct. App. 1978), the decision that

the district court in this case relied on. In contrast to the courts in Witcher and

Wilson, the court in Edison held that the insured could not recover under a

builder’s risk policy’s Sue and Labor Clause for costs it claimed were incurred to

mitigate and prevent a covered loss (loss to the superstructure) where the means

(correcting a design defect) the insured used to mitigate and prevent the loss were

excluded from recovery under the policy’s exclusion for the “[c]ost of making

good faulty workmanship, construction or design.” Id. at 107, 111-13.

Swire does cite one Florida decision, although it recognizes that decision is

not on all fours with this case. It cites Steuart Petroleum Co., Inc. v. Certain

Underwriters at Lloyd’s London, 696 So. 2d 376 (Fla. Dist. Ct. App. 1997), for the

proposition that where, under Florida law, two insurance contract provisions are in

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conflict, the clause affording greater coverage should prevail. Id. at 379 (where

insurance policy’s Foam Loss Assumption Clause and Expenses to Reduce Loss

Clause both dealt with loss reduction expenses and conflicted, the court allowed

the latter clause, which afforded greater coverage, to prevail). Although Steuart

has the advantage of being a Florida decision, it is distinguishable. In contrast to

Steuart, only one of the provisions at issue here – the Sue and Labor Clause –

specifically deals with the subject of loss reduction expenses. This is not a case

where coverage is provided by two clauses. Moreover, the Steuart court’s holding

turned in part on the fact that the Expenses to Reduce Loss Clause was an

endorsement, which, to the extent it was inconsistent with the body of the policy,

controlled. Id. Here no endorsement is involved.

III. QUESTIONS CERTIFIED

We could guess how the Florida Supreme Court would decide this case, but

it would only be a guess. That Court alone can authoritatively decide the state law

issues we have discussed and any others that may be lurking in the facts of this

case. Accordingly, we respectively certify to the Florida Supreme Court the

following questions:

1. Whether the policy’s Design Defect Exclusion Clause bars coverage for

the cost of repairing the structural deficiencies in the condominium building;

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 2. If the first question is answered in the affirmative, whether the policy’s

Sue and Labor Clause applies only in the case of an actual, covered loss;

3. If the second question is answered in the negative, whether the policy’s

Sue and Labor Clause covers the cost of repairing the structural deficiencies in the

condominium building.

Our phrasing of the certified questions is merely suggestive, and it does not

in any way restrict the scope of inquiry by the Supreme Court of Florida. As we

have said before:

[T]he particular phrasing used in the certified question is not to
restrict the Supreme Court’s consideration of the problems involved
and the issues as the Supreme Court perceives them to be in its
analysis of the record certified in this case. This latitude extends to
the Supreme Court’s restatement of the issue or issues and the manner
in which the answers are given, whether as a comprehensive whole or
in subordinate or even contingent parts.

Martinez v. Rodriguez, 394 F.2d 156, 159 n.6 (5th Cir. 1968) (citations omitted).

Our obligation is to decide the case before us, and any answers the Florida

Supreme Court gives that aids us in doing so will be greatly appreciated, as always.

The entire record in this case, together with copies of the briefs of the

parties, is transmitted herewith.

QUESTIONS CERTIFIED.

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