[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.
2
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
3
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
4
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
5
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
6
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
7
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
8
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
10
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
11
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.
12
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
13
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;
14
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.
15