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Ace American Insurance Co. v. The Wattles Co.

United States Court of Appeals, Eleventh Circuit

July 19, 2019

ACE AMERICAN INSURANCE COMPANY, a Pennsylvania corporation, Plaintiff-Counter Defendant-Appellant,
THE WATTLES COMPANY, a Washington corporation, Defendant-Counter Claimant-Appellee.

          Appeal from the United States District Court for the Northern District of Georgia

          Before ED CARNES, Chief Judge, ANDERSON and JULIE CARNES, Circuit Judges.


         This appeal involves a complicated property insurance coverage dispute between an insurer and a landlord claiming through its prior tenant, the named insured under the relevant policy. The insurer, Ace American Insurance Company ("Ace"), appeals the judgment of the district court granting summary judgment- and a coverage award of $1, 133, 918.93-to the landlord, The Wattles Company ("Wattles"). Ace argues that the $2 million policy deductible has not been met.[1]Because the district court erred in concluding the deductible was satisfied, we reverse and remand with instructions to enter summary judgment-and an order declaring that the policy does not provide coverage for Wattles's claims-in favor of Ace.

         I. BACKGROUND

         A. Factual Background.

         1. Exide leases industrial building from Wattles for use in its battery formation operations.

         Starting in the early 1980s, Wattles leased an industrial office building and warehouse located in Sumner, Washington (the "Building") to Exide Technologies, Inc. ("Exide"). Under a series of written lease agreements, Exide used the Building to conduct battery formation operations until about 2009. These operations involved filling lead batteries with sulfuric acid and charging them, which caused sulfuric acid mist to be emitted into the warehouse space within the Building.

         2. Exide works through its insurance broker to obtain insurance policies from Ace and other insurers as part of a worldwide property insurance program for 2006-2007.

         Sometime in 2006, Exide instructed its insurance broker Marsh USA ("Marsh") to renew its international property insurance program for the 2006-2007 term. Marsh then sent an underwriting submission out into the marketplace requesting quotes from various insurers. Ace responded to the underwriting submission through its managing general agent Starr Technical Risks Agency, Inc. ("Starr"), and Exide eventually authorized Marsh to instruct Starr to bind coverage for a portion of the 2006-2007 program. Starr primarily worked with the insured's broker (Marsh) and not the insured (Exide) in underwriting Ace's portion of the insurance program. As Ace's managing general agent, Starr had "entire authority" to issue and sign insurance policies for Ace.

         Starr, on behalf of Ace, issued revised Binder No. 0638, which identified Exide as the named insured and revealed total insured property values in excess of $3 billion. Ace agreed to provide up to $60 million per occurrence in coverage, or up to 20% of the cumulative limit of the $300 million per occurrence program assembled by Marsh. Several other insurers, including AIG and Allianz, covered the remaining $240 million in risk. Exide agreed to pay Ace a total annual premium equal to $900, 000.

         Ace, through Starr, eventually issued property insurance Policy No. PGL N0 19 28 24 7 (the "Policy"), which covers the period from September 1, 2006 through September 1, 2007. The Policy is not a general liability policy; rather, it is a policy of property insurance. It "insures against all risks of direct physical loss of or damage occurring during the Term[2] of Insurance to property described [in the Policy]." The record before this Court does not contain a schedule describing the specific property locations insured under Exide's 2006-2007 insurance program, but the "Global Property/Boiler & Machinery Program Specifications" (the "Program Specifications") included at the beginning of the Policy identify a "Worldwide" territory, excluding Afghanistan, Cuba, Iran, Iraq, Libya, North Korea, and any other countries subject to U.S. State Department trade or economic sanctions. The Policy also identifies specific program sublimits applicable to losses occurring in the Netherlands, Germany, Japan, and Mexico. In addition to domestic endorsements applicable in thirty-seven states within the United States, the Policy contains coverage exclusions that refer to the countries of Spain, France, Germany, and South Africa. Notwithstanding the clearly international character of Exide's 2006-2007 insurance program (of which the Policy is a part), Ace and Exide agreed that the law of the State of Georgia would govern the interpretation of the terms and conditions of the Policy.

         3. The Policy includes three coverages that are potentially relevant in this case, all of which are subject to a $2 million per occurrence deductible.

         The Policy covers three specific categories of losses that potentially relate to this case.[3] First, section 7.A. (3) of the Policy (the "Leased Property Coverage Provision") covers damage to "Real and Personal Property of others . . . which is in the Insured's [Exide's] care, custody, or control." Second, and most relevant to our disposition of this appeal, section 8. (J) of the Policy (the "Tenants and Neighbors Provision") expressly extends coverage under the Policy to include

(1) (a) The liability which the Insured incurs as a tenant for damage to real and personal property by a peril insured against;
(b) The liability which the Insured incurs for damage to real or personal property from a peril spreading from the Insured's premises to the premises of neighbors and co-tenants;
(c) The liability which the Insured incurs as landlord for damage to the personal property of tenants by a peril insured against as a result of constructional defects or lack of maintenance.
(2) This extension applies only to liability incurred in those countries in which a Napoleonic or other civil or commercial code applies due to loss or damage by a peril as defined by such code and as insured hereunder.

Third, subject to a $500, 000 sublimit, section 8. (F) of the Policy (the "Defense Costs Provision") covers "the costs and fees to defend any claim or suit against the Insured alleging physical loss or damage as insured against to property of others in the care, custody or control of the Insured." Like other coverages under the Policy, these three coverages-damage to property leased by Exide, liability incurred by Exide under the Tenants and Neighbors Provision, and Exide's own defense costs-are all subject to an occurrence-based deductible before the Policy provides any coverage at all.

         In this regard, the Policy had a "Program Deductible" of $2 million per occurrence for all perils. In determining whether the deductible is satisfied, the Policy requires that "[a]ll losses, damages or expenses arising out of any one occurrence shall be adjusted as one loss, and from the amount of such adjusted loss shall be deducted [$2, 000, 000]." Where defense costs are involved, the Policy also requires that the amount of any defense costs "shall be included within and not additional to the total amount of the loss to which this policy's limits and deductibles shall be applied." With these basic Policy provisions in mind, we turn to consider the somewhat complicated procedural history of this case.

         B. Procedural Background.

         1. Wattles sues Exide in Superior Court in the State of Washington.

         Under its relevant lease with Wattles, Exide was required to keep the Building "in good order, condition and repair" and surrender it to Wattles "in good condition . . . ordinary wear and tear excepted." Exide's battery formation operations took a toll on the Building over the years, and the sulfuric acid mist emissions that resulted from those operations were at least partly to blame for significant damage to some of the Building's structural components (including the Building's wooden roof trusses).

         In March 2013, Wattles filed suit against Exide in Superior Court in Pierce County, Washington (the "State Court Litigation") alleging that Exide breached its obligations under the lease "by failing to keep the property in good order, condition and repair; by us[ing] the property in a manner that tended to create waste; by failing to repair structural damage caused by Exide's operations; and by failing to remove the contaminants present at the property as a result of Exide's operations." In addition to its breach of contract claim, Wattles also alleged that "Exide breached its tort duty to avoid an unreasonable and improper use of Wattles'[s] property so that no substantial damage would be done to it," and that "Exide breached its implied duties of good faith and fair dealing by failing to disclose to Wattles the risks of Exide's operations, and by failing to take reasonable measures to mitigate the risks those operations posed to Wattles'[s] property." Although section 6.2 of the relevant lease required Exide to "comply promptly with all applicable statutes, ordinances, rules, regulations, orders, and requirements in effect during the term or any part of the term hereof regulating the use by [Exide] of the [Building]," Wattles's trial brief did not argue that Exide breached the lease as a result of (or that Wattles's damages arose from) Exide's failure to comply with any statutes, ordinances, rules, regulations, orders, or other requirements regulating Exide's use of the Building during the term of the lease.

         2. Exide seeks bankruptcy protection; automatic stay is lifted to allow Wattles to continue State Court Litigation against Exide and pursue recovery of any final judgment or settlement from Exide's insurers (including Ace).

         In June 2013, three months after Wattles filed suit against Exide in state court, Exide sought bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. This temporarily stayed the State Court Litigation. In March 2015, the bankruptcy court entered an order styled as an "Order Approving Stipulation Between the Debtor [Exide] and The Wattles Company to Lift the Automatic Stay for a Limited Purpose" (the "Lift-Stay Order"). The Lift-Stay Order, which incorporated by reference a consensual stipulation executed by counsel for Exide and counsel for Wattles, lifted the automatic stay for the sole purpose of allowing Wattles to prosecute the State Court Litigation against Exide to a final judgment. It also authorized Wattles to engage in legal actions with Exide's insurers to collect against Exide's insurance coverage, but specifically provided that Wattles could "attempt to recover any liquidated final judgment or settlement with respect to the State Court [Litigation]" only from policies issued to Exide that cover the State Court Litigation. Importantly, "[a]ny final judgment or settlement in the State Court [Litigation was to be] reduced by the amount of any applicable deductible." The Lift-Stay Order stated that it was not to be deemed or construed to modify, limit, or expand the terms and conditions (including deductibles) of any of the insurance policies issued to Exide, and that Exide's insurers expressly "reserve[d] their rights, defenses, and arguments they may have in any action with Wattles" under such policies. In other words, the Lift-Stay Order did not "constitute an assignment of the insurance policies or any rights thereto," but instead granted Wattles a limited right to pursue recovery of any "liquidated final judgment or settlement" from Exide's insurers (including Ace), subject to the insurers' rights and defenses under the relevant policies, including applicable deductibles.

         3. Wattles obtains final judgment against Exide in State Court Litigation in the amount of $2, 273, 623.93, plus post-judgment interest.

         The State Court Litigation concluded on July 7, 2016. Wattles obtained a final judgment (the "State Court Judgment") in the amount of $2, 273, 623.93 (the "Final Judgment Amount"). The State Court Judgment gives rise to three separate dollar amounts that must be considered in the context of this appeal. First, $1, 437, 293.75 of the $2, 273, 623.93 Final Judgment Amount is designated in the judgment summary as the "Judgment on Jury Verdict." This amount represents damages incurred by Wattles as a proximate result of Exide's breach of the relevant Building lease, including cost of repair damages. Second, the judgment summary designates the remaining $836, 330.18 of the Final Judgment Amount as "Attorney Fees." This amount represents the attorneys' fees incurred by Wattles (and not Exide[4]) during Wattles's prosecution of the State Court Litigation against Exide.[5] Third, and finally, the State Court Judgment also provided that the Final Judgment Amount would bear post-judgment interest in the amount of 12% per annum from the date of entry (July 7, 2016). According to the district court's calculations, by the time the district court entered its final coverage award in favor of Wattles in the later federal lawsuit, [6] the Final Judgment Amount had accrued $360, 295 in post-judgment interest.[7] Taken together, these three dollar amounts- $1, 437, 293.75 (the "Jury Verdict Amount"), $836, 330.18 (the "Wattles Attorneys' Fees Amount"), and $360, 295 (the "Post-Judgment Interest Amount")-total $2, 633, 918.93 in losses that are, subject to the $2 million deductible, potentially within the coverage of the Policy.

         4. Ace files a complaint in federal court seeking a declaration of non-coverage; Wattles counterclaims; both parties move the district court for summary judgment.

         Shortly before the State Court Litigation concluded, Ace filed a federal complaint in the District Court for the Northern District of Georgia seeking a declaratory judgment that the Policy afforded no coverage because, inter alia, "Exide has not incurred $2, 000, 000 of covered damages, inclusive of Defense Costs" as required by the Policy deductible. Wattles answered, asserted several affirmative defenses, and counterclaimed seeking declaratory relief stating that it was entitled to collect the full Final Judgment Amount ($2, 273, 623.93) from the State Court Judgment from Ace, plus post-judgment interest. Ace answered Wattles's counterclaims and asserted twenty-eight affirmative defenses of its own. As relevant here, Ace argued that the Policy deductible had not been satisfied because $2 million of covered damages had not been incurred.

         Wattles would eventually file three summary judgment motions. The gist of Wattles's position was that it was entitled to reimbursement from Ace for the $1, 437, 293.75 Jury Verdict Amount, the $836, 330.18 Wattles Attorneys' Fees Amount, plus the $360, 295 Post-Judgment Interest Amount, or a total of $2, 633, 918.93. Wattles also argued that the $2 million deductible should be reduced to $1.5 million to account for Exide's defense costs in the State Court Litigation, which the Policy covered up to a limit of $500, 000 (the "Exide Defense Costs Amount").[8]

         Ace filed its own motion for summary judgment. As relevant to this appeal, Ace argued that Wattles had not satisfied the Policy deductible because, even assuming the Jury Verdict Amount ($1, 437, 293.75) was covered by the Policy, Ace was not obligated to make any payments under the Policy "unless and until the covered property damage exceeds $2 million." With respect to the Wattles Attorneys' Fees Amount ($836, 330.18), Ace argued that amount did not count toward the deductible because the legal fees were not incurred by Exide (the named insured under the Policy) in defending against the State Court Litigation but were instead incurred by Wattles (a third-party to the Policy) in prosecuting that litigation against Exide.

         In its response to Ace's summary judgment motion, Wattles clarified that it did "not seek to recover its attorney's fees under the Defense Costs [P]rovision of the ACE Policy." Instead, it argued that the Wattles Attorneys' Fees Amount was covered under the Tenants and Neighbors Provision. Specifically, Wattles argued that the Wattles Attorneys' Fees Amount was covered under section 8. (J) of the Policy (and not under the Defense Costs Provision at section 8. (F) of the Policy) because it was a liability that Exide incurred "as a tenant for damage to real and personal property by a peril insured against." Wattles further argued that the condition in the Tenants and Neighbors Provision (i.e., that the extension applied "only to liability incurred in those countries in which a Napoleonic or other civil or commercial code applies due to loss or damage by a peril as defined by such code and as insured hereunder") was satisfied because Exide's liability under the State Court Judgment was "due to loss or damage to Wattles by a peril defined by not less than two applicable Washington commercial codes-OSHA[9] and the IBC[10]- as well as the civil code of Georgia."[11]

         Ace responded by arguing that Wattles failed to establish that Exide's liability to Wattles in the State Court Judgment arose in a country where a Napoleonic or other civil or commercial code applied, or that such liability arose out of any such code. Ace contended that the State Court Litigation arose out of common law property rights in the State of Washington (where the "common law of England was the law of decision"), and "not out of a code, Napoleonic or otherwise, that created an exclusive right to recover for property damage."

         5. The district court grants Wattles's second and third motions for summary judgment and enters coverage award in the ...

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