Cunard Line Ltd. v. Datrex, Inc.

Citations: 26 So. 3d 886; 9 La.App. 3 Cir. 656; 2009 La. App. LEXIS 2075; 2009 WL 4639630Docket: No. 09-656

Court: Louisiana Court of Appeal; December 8, 2009; Louisiana; State Appellate Court

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Third-Party Defendants Twin City Fire Insurance Company and The Hartford are appealing a trial court judgment that determined they had a duty to defend their insured, Datrex, Inc., against Cunard Line Limited Co.'s claims regarding a Low Level Lighting System purchased from Datrex in 1997. Cunard alleged in 2002 that the system failed to meet Coast Guard standards, prompting Datrex to seek coverage from the insurers, who subsequently denied it. Datrex then filed a third-party demand against the insurers. A partial summary judgment in 2003 confirmed the insurers' duty to defend, which was upheld despite Cunard’s claims being dismissed in 2004 due to prescription. In 2006, the insurers eventually paid $76,019.36 for defense costs. A final 2009 judgment held the insurers liable for additional defense costs, penalties, and attorney’s fees, leading to the current appeal.

The insurers argue against the trial court's finding of their duty to defend, citing established law that an insurer must defend its insured if the plaintiff's petition suggests any possibility of liability under the policy. The insurers contend that their policy exclusions clearly negate coverage for Cunard's claims, specifically citing exclusions for damage to property due to the insured's work, damage to the insured's product, and loss of use of property not physically injured. These exclusions are deemed applicable unless the damage was performed by a subcontractor, or unless the loss of use stems from sudden and accidental physical injury to the product or work after its intended use.

The trial court ruled on October 1, 2003, that insurers have a duty to defend Datrex in a case involving property damage claims by Cunard. The court reviewed the insurance policy provisions and relevant allegations, noting that general liability insurance does not cover a policyholder’s obligation to repair or replace defective work or products. The Commercial Liability Policy provides coverage for damages due to property damage, defined as physical injury to tangible property and the resulting loss of use, with loss occurring at the time of the physical injury.

The court found that if Cunard meets its evidentiary burden, property damage could be established. It examined various exclusions in the policy, determining that Exclusion J Five does not apply because Cunard is not claiming damage to land or buildings. Exclusion J Six also does not apply as it specifically excludes liability arising from completed operations hazards. Exclusion M Two was considered significant; however, it does not apply to Cunard's claims of consequential or incidental damages related to defects, as the product was installed and in use when problems arose. To invoke Exclusion M Two, any damage must be sudden and accidental, aligning with the definition of "accident" as an unexpected event. The court accepted this definition as the standard meaning of the term.

The Court determined that the issues on the ships were unforeseen and resulted in a loss of use, qualifying as an occurrence or accident under the insurance policies, thus triggering coverage. Cunard's claims for consequential and incidental damages, if they involve physical damage to the ships and the repair or replacement of LLL systems, would not fall under the exclusion in paragraph M Two. Although the policies contain a work product exclusion, they also offer separate coverage for products under the completed operations hazard with a limit of two million dollars. The exclusion in paragraph L does not apply to damage arising from work performed by subcontractors on behalf of Datrex. Any damage to the ship resulting from repairing defective products would be covered, as it is not part of the product itself. The Court concluded that the policy does not unambiguously exclude coverage for Cunard's claims, leading to the denial of Twin City and Hartford's Motion for Partial Summary Judgment. The insurers are required to defend Datrex in the lawsuit, as the duty to defend is based on the allegations in the petition, which do not clearly exclude coverage. The insurers' claim that the duty to defend should be retroactively canceled following a dismissal was rejected, as the duty to defend had already been established in October 2003, and only the petition and the policy are considered in such claims.

Insurers are seeking to be relieved from their duty to defend based on the outcome of the case, but established law mandates that they must provide a defense regardless of the suit's outcome. Consequently, their motion for summary judgment was denied. The insurers contest the awarded defense costs, claiming the bills were unreasonable, duplicative, and that an earlier assertion of prescription could have avoided much expense. They argue the trial court erred in denying them discovery to challenge the reasonableness of the fees. Datrex opposed this, citing work product and attorney-client privilege, leading the trial court to grant a protective order. The insurers did not pursue their discovery argument on appeal and failed to provide legal authority supporting their right to discover another party's work product, rendering their appeal meritless.

Regarding attorney fees, appellate courts typically do not overturn trial court decisions unless there is an abuse of discretion. The trial court confirmed the insurers' duty to defend created a conflict, necessitating Datrex to hire independent counsel, for which the insurers are liable for reasonable fees. However, Datrex does not have unlimited entitlement; the insurers are only responsible for reasonable costs, with disputes to be resolved through hearings. Datrex's Motion for Summary Judgment was granted, allowing them to control their defense and seek reimbursement for reasonable defense costs. The trial court also declined to impose a cap on attorney fees but was open to reviewing submitted bills for excessive charges.

Insurers did not request a hearing on the submitted defense bills but sought a cap on the hourly rate through a motion for summary judgment. The trial court determined that the defense costs charged by Datrex were reasonable, and there was no abuse of discretion in this finding. The insurers contested the trial court's award of interest on defense costs, arguing it should start from the date of judgment, but the court ruled that these costs are akin to damages, warranting interest from the date of demand instead.

Additionally, the insurers claimed the trial court erred in awarding penalties and attorney’s fees for their failure to pay defense costs, which the court found to be arbitrary and capricious. Datrex had amended its claim for penalties on March 6, 2003, after the insurers denied coverage and defense in their response. Despite acknowledging their obligation to provide a defense pending judicial determination, the insurers continued to contest their coverage obligations. Datrex filed a motion for partial summary judgment on October 1, 2003, which was granted, affirming the insurers' duty to defend and allowing Datrex to hire independent counsel due to a conflict of interest.

Datrex sent invoices demanding payment by November 21, 2003, but the insurers did not respond. A second amendment alleging arbitrary refusal to pay was filed in August 2007, and a further request for payment was made in September 2006. It wasn't until October 18, 2006, that the insurers issued a payment of $79,019.36, three years after the court's ruling. During this time, the insurers continued to file motions regarding coverage and fee caps, all of which were denied, while questioning the reasonableness of Datrex's legal fees.

A protective order was issued by the Court concerning Datrex's work product, which hindered insurers in assessing the reasonableness of an invoice. Despite this, the Court concluded that Datrex's tender of $79,019.36 was both conditional and unreasonable. On August 27, 2008, the Court awarded Datrex $219,580.74 in attorney fees for defending against Cunard’s claims. The Court determined that the insurers acted arbitrarily and capriciously by failing to pay attorney fees without probable cause, thus violating Louisiana statutes 22:658 and 22:1220, which are punitive and strictly construed. The insurers initially denied coverage in a May 2002 letter but later offered a conditional defense, which Datrex was advised to accept with limitations on hourly fees. Despite a ruling in October 2003 affirming the insurers' duty to defend, no unconditional payments were made, with a conditional payment occurring three years later for an inadequate amount. The Court criticized the prolonged litigation over attorney fees and noted that the insurers did not contest the trial court's account of their actions, only their reasonableness. The trial court found the insurers had breached their duty to defend. The Court affirmed this finding, stating that arbitrary and capricious actions are subject to a manifest error standard of review. Regarding appeals, additional attorney fees are typically granted when the defendant does not succeed and the plaintiff requests them according to proper procedure. The Court awarded Datrex $10,000 in additional fees for the appeal and affirmed the judgment, ordering the insurers to pay this amount and the costs of the appeal.