United States District Court, E.D. Louisiana
ORDER AND REASONS
SARAH S. VANCE, District Judge.
Before the Court are three motions for summary judgment and a motion to dismiss. The first motion, filed by Bollinger,  seeks a ruling that its liability insurer, XL Specialty Insurance Company, is obligated to pay Bollinger the defense costs it has incurred in defending against an underlying lawsuit. Bollinger also requests that the Court award it statutory penalties, attorneys' fees, costs, and legal interest. The second motion, filed by XL, seeks a ruling that XL is not required to reimburse Bollinger for those defense costs. In the third motion, filed by Continental Insurance Company, Bollinger's excess liability insurer, Continental, contends that its insurance policies do not afford Bollinger defense or indemnity in the underlying lawsuit. The fourth motion, filed by XL,  seeks to dismiss Bollinger's First Amended and Supplemental Complaint,  which was filed after briefing was nearly complete on the three motions for summary judgment. The Court heard oral argument on the motions for summary judgment on July 1, 2014.
The Court finds that XL is entitled to summary judgment because the policy unambiguously does not cover the allegations in the underlying lawsuit. Accordingly, the Court GRANTS XL's motion for summary judgment and DENIES Bollinger's cross-motion for summary judgment. In light of the Court's grant of summary judgment in XL's favor, XL's motion to dismiss Bollinger's amended complaint is DENIED as moot.
The Court GRANTS Continental's motion for summary judgment because the only claims remaining in the underlying lawsuit are not covered by Continental's excess policies.
This is an insurance coverage dispute regarding whether XL and Continental are obligated to pay defense costs that Bollinger incurred in defending against a False Claims Act suit brought by the United States. Both the False Claims Act suit and the present action are substantively and procedurally complex, and so it is necessary to set out the background of this case in some detail. The Court will, first, describe the underlying lawsuit giving rise to Bollinger's claim for insurance coverage and outline the events leading to the present litigation; second, set forth the procedural history of this case; third, analyze the provisions of the various insurance policies that Bollinger claims provide coverage for the underlying lawsuit; and finally, identify the various grounds upon which the parties move for summary judgment.
A. The Underlying Lawsuit
1. The United States' Allegations
The underlying lawsuit arose out of Bollinger's involvement in the United States Coast Guard's Deepwater program to modernize its fleet of water vessels, aircraft, and electronics systems. The United States alleged that Bollinger violated the False Claims Act, 31 U.S.C. §§ 3729, et seq., and committed fraud and negligent misrepresentation in connection with its work on that program. The facts giving rise to that suit, as alleged in the United States' complaint, are as follows.
In 1999, the United States selected Integrated Coast Guard Systems (ICGS), an entity comprised of Lockheed Martin Corporation (LMC) and Northrop Grumman Ship Systems, Inc. (NGSS), to serve as lead contractor of the Deepwater program, and ICGS in turn subcontracted a portion of that work to Bollinger. Bollinger was responsible for incorporating a thirteen-foot extension into eight 110-foot Coast Guard patrol boats. Bollinger's responsibilities included the "design, engineering, performance requirements, and construction" of the modified cutters.
During the initial stages of the program, the Coast Guard grew concerned about the feasibility of extending the cutters. Specifically, the Coast Guard worried "that lengthening the vessel[s] w[ould] increase primary stress in the hull girder" and consequently make the vessels more susceptible to damage. In October 2000, in response to these concerns, Bollinger prepared a longitudinal strength analysis that compared the section modulus (a measure of the vessel's longitudinal strength) of its design with the section modulus required by the American Bureau of Shipping (ABS). Bollinger submitted this analysis to the Coast Guard stating that "the required section modulus is 3113 [inches cubed] and the actual section modulus of the patrol boat is 7152 [inches cubed]." This statement indicated that Bollinger's proposed design of the modified cutters yielded a section modulus that was greater than the ABS standard by a factor of 2.3. Bollinger allegedly obtained this value by using a thicker hull plating in its design calculations than would actually be used in the modified cutters. The United States alleged that, because "there was no provision in the proposal for replacing the hull plating on the 100-Ft [boats] with thicker hull plating during the conversion, using this thicker hull plating in the calculations was not reasonable."
According to the complaint, the Coast Guard, relying in part on Bollinger's representations that the modified cutters would possess sufficient hull strength, selected IGCS to perform the work on the Deepwater program. The Coast Guard and ICGS entered into a contract in June 2002. The contract "contained a Contract Data Requirements List (CDRL), which identified information that ICGS and its subcontractors were required to provide the Coast Guard concerning the assets and other contract deliverables, " and the contract required that "[f]inal deliverables... accurately represent the delivered condition of each asset." Specifically, the contract "required ICGS and its subcontractors to provide the Coast Guard with CDRL S012-11, a Hull Load and Strength Analysis (HLSA) to verify that the 123-Ft WPB modification design met program and contract requirements."
In August 2002 the Coast Guard awarded the first Delivery Task Order for modification of the 110-foot patrol boats. Later in August 2002, ABS offered to provide Bollinger with a "confidential assessment" of the proposed hull design for the converted boats. Bollinger executives discussed the offer internally, but ultimately decided to decline the offer, allegedly because they were concerned that an ABS assessment "would find that the 123-Ft WPB design would require additional structure or structural support."
Around the same time, Bollinger performed three different calculations of the section modulus of the proposed 123-foot cutter design using three different sets of input values. Two of the calculations yielded a section modulus below the ABS standard; the third yielded a value of 5232 cubic inches, which was above the standard but still significantly below the value contained in Bollinger's initial longitudinal strength analysis. On September 4, 2002, Bollinger submitted an initial version of CDRL S012-11 "that reported an actual section modulus of 5, 232 cubic inches, the highest of the calculated values." It then submitted a final version of CDRL S012-11 on December 16, 2002, again "reporting that the actual section modulus was 5, 232 cubic inches."
The complaint alleges that the input values used to obtain this highest result "did not reflect the actual structural characteristics of the converted vessels." Bollinger did not report the two lower section modulus values to the Coast Guard. The complaint further alleges that Bollinger told the Coast Guard that ABS would review the section modulus calculation of the proposed design and would "review compliance with ABS rules, " but Bollinger never in fact requested such a review.
Bollinger delivered the first of the 123-foot vessels, the USCGC MATAGORDA, to the Coast Guard in March 2004. In September 2004, the "MATAGORDA suffered a structural casualty that included buckling of the hull." According to the United States, a subsequent Coast Guard and IGCS investigation revealed that Bollinger had misrepresented the longitudinal strength of the hulls of the cutters it delivered to the United States. The United States further alleged that the eight vessels, all delivered after March 2004,  had insufficient longitudinal strength and consequently were unusable. The Coast Guard and ICGS made efforts to increase the longitudinal strength of the modified cutters, but they were unsuccessful.
2. Procedural History of the Underlying Suit
On December 14, 2006, the U.S. Department of Justice issued a litigation hold letter to Bollinger, advising Bollinger that it had opened an investigation into Bollinger's role in the Deepwater project and requesting that Bollinger retain documents related to the conversion of the 110-foot patrol boats.
On May 17, 2007, the United States officially revoked acceptance of the eight cutters, explaining that "hull and shaft alignment problems" with the cutters had compromised their "physical integrity... to such a degree the performance specifications under the contract cannot be achieved and sustained." On June 14, 2007, Bollinger entered into a "Sponsorship Agreement" with NGSS providing that the two parties would cooperate in attempting to resolve the Coast Guard's claims.
On November 29, 2007, the government issued a subpoena duces tecum to Bollinger that covered several categories of documents related to Bollinger's work on the Deepwater project.
On December 23, 2008, Bollinger and the United States executed a statute of limitations tolling agreement. The agreement provided in relevant part:
WHEREAS, On December 5, 2008 the United States of America informed Bollinger... that the United States... [believes it] may have certain civil causes of action and administrative claims against Bollinger under the False Claims Act, 31 U.S.C. §§ 3729 et seq., other statutes and regulations including the Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801 et seq., equity, or the common law, arising from Bollinger's performance of conversion work on the U.S. Coast Guard Deepwater Program's 110 Foot Island Class vessels under Bollinger's contract with Northrop Grumman Ship Systems, Inc.; and
WHEREAS, the parties have entered into discussions relating to the possible settlement of the United States's above claims prior to suit;
NOW, THEREFORE, ... the United States and Bollinger agree that, as consideration for the United States not filing, or initiating claims against Bollinger under the False Claims Act, 31 U.S.C. §§ 3729 et seq., or the Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801 et seq., on or before December 31, 2008, the period of time between and including December 5, 2008 and May 5, 2009 shall be excluded when determining whether any civil or administrative claims are time-barred by the statute of limitations, laches, or any other time-related defenses. Bollinger further agrees it will not assert or argue in any judicial or administrative forum that the United States has failed to act in a timely fashion and will not plead statute of limitations, laches, or any other similar defense to any civil or administrative action filed or initiated against Bollinger on or before May 5, 2009 under the False Claims Act, 31 U.S.C. §§ 3729 et seq., other statutes and regulations, including the Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801 et seq., equity or the common law, based on the performance of conversion work on the U.S. Coast Guard Deepwater Program's 110 Foot Island Class vessels... except to the extent such defenses were available to Bollinger on or before December 5, 2008.
Bollinger has since confirmed that as of the date of execution of the Tolling Agreement, it had entered into settlement discussions with the United States regarding the Coast Guard's claims. Bollinger did not inform XL of its intent to enter into the Tolling Agreement. Bollinger and the United States agreed to extend the Tolling Agreement twenty-one times over the course of the next two and a half years.
Over the several-year course of the United States' investigation of the Deepwater project, Bollinger made several document productions to the United States, totaling about 40, 000 documents. It also made eight Bollinger employees available for interviews with the United States.
On July 29, 2011, the United States filed a complaint against Bollinger based on allegations that "Bollinger knowingly misled the Coast Guard to enter into a contract for the lengthening of Coast Guard cutters by falsifying data relating to the structural strength of the converted vessels." The United States' complaint alleged two violations of the False Claims Act, 31 U.S.C. §§ 3729 et seq., as well as common law fraud, negligent misrepresentation, and unjust enrichment.
On January 30, 2013, this Court dismissed the United States' complaint. See United States v. Bollinger Shipyards, Inc., Civil Action No. 12-920, 2013 WL 393037 (E.D. La. Jan. 30, 2013). The Court held that Bollinger's FCA allegations and its common law fraud claim were deficient because the United States had not plausibly alleged that Bollinger acted with the requisite scienter or that Bollinger's allegedly false statements were material. Id. at *6-10. The Court also held that, while the complaint stated a negligent misrepresentation claim based on its allegations that Bollinger submitted false section modulus values to the Coast Guard, that claim was time-barred. Id. at *11-14. Finally, the Court dismissed the United States' unjust enrichment claim because "there can be no claim for unjust enrichment when an express contract exists between the parties." Id. at *15. The Court granted the United States leave to amend its FCA and common law fraud allegations. Id. at *16.
The United States then filed an amended complaint, which presented additional factual allegations concerning Bollinger's alleged submission of false section modulus calculations to the Coast Guard. See United States v. Bollinger Shipyards, Civil Action No. 12-920, 979 F.Supp.2d 721, 2013 WL 5720340, at *1 (E.D. La. Oct. 21, 2013). This Court found that the United States had once again failed to plausibly allege that Bollinger acted with the requisite scienter to support an FCA or a common law fraud claim, and accordingly dismissed the suit with prejudice. Id. at *10-11. The United States has appealed that ruling to the Fifth Circuit. The United States has not appealed the Court's dismissal of its negligent misrepresentation, unjust enrichment, or common law fraud claims.
B. Procedural History of the Present Lawsuit
After the Coast Guard revoked acceptance of the ships in May
2007, Andrew St. Germain, Bollinger's Chief Financial Officer, wrote in an e-mail to Bollinger's insurance agent, Willis of Louisiana, that "[a]t this point, it may be prudent to put the appropriate underwriters on notice of this event." Michael Tubbs, a Willis employee, responded, "OK! We will need a copy of the executed subcontract between [Bollinger] and NGSS." The next day, Bollinger sent Tubbs the materials that he had requested. Tubbs then relayed that information to Mike Johnson at Trident Marine Managers, XL's claims administrator, and asked "whether that was a claim that should be reported." According to Tubbs, Johnson responded "that it was not a claim that needed to be reported because he [Johnson] interpreted the letter from the Department of [J]ustice to implicate possible criminal actions, which he said were not covered by the [XL] Policy." Johnson told Tubbs to "follow up if a specific claim for a specific dollar amount was made."
On June 14, 2007, Bollinger entered into the "Sponsorship Agreement" with NGSS that provided the two parties would cooperate in attempting to resolve the Coast Guard's claims. It did not seek XL's consent. Indeed, Bollinger did not inform XL of the existence of the agreement for over four years.
After the government issued the subpoena duces tecum on November 29, 2007, Bollinger contacted Willis to request again that Willis advise the appropriate underwriters of a "possible claim." By February 2008, however, Bollinger knew that Willis had not notified any insurers of the potential claim. Willis reasoned that "[i]t is doubtful that any underwriter would respond directly to the subpoena as no claim has been formally presented by any particular party and there is no claim of damage alleged at this point." The record indicates that neither Bollinger, Willis, nor Bollinger's subsequent insurance agent, Arthur J. Gallagher Risk Management Services, Inc.,  ever did in fact apprise any of Bollinger's insurers about the possibility of a claim related to the Deepwater project until days before the underlying lawsuit was filed.
On July 19, 2011, Bill Condon, a Gallagher employee, e-mailed an XL employee advising her of the Deepwater investigation and asking if XL had a file on the subject. Condon described the investigation as "a claim that should have been reported by Willis but apparently wasn't." Gallagher put Continental on notice of the possible claim one day later, on July 20.
Upon receipt of the United States' complaint on August 2, 2011, Bollinger notified XL of the FCA lawsuit. According to the affidavit of Andrew St. Germain, Bollinger's Chief Financial Officer, "[r]eceipt of the U.S. lawsuit was the first time Bollinger learned that the United States would allege that it had negligently misrepresented anything, or that it had allegedly enriched itself unjustly." On September 30, 2011, counsel for XL issued a reservation of rights letter to Bollinger stating that XL had not yet made a determination whether the insurance policies it had issued to Bollinger covered the United States' allegations. XL requested that the Bollinger entities "act as prudent uninsureds and file the necessary responsive pleadings in the lawsuit" while XL conducted an evaluation of Bollinger's claims.
In November 2011, XL requested that Bollinger produce certain documents that XL needed in order to perform a complete coverage analysis. The requested documents included those that Bollinger had produced to the United States in the course of the Deepwater investigation. Bollinger did not produce those documents until after XL and Bollinger had filed the suits regarding coverage consolidated in this case,  which according to XL, made it impossible for XL to determine whether coverage was owed to
Bollinger for the underlying suit. Denice Borne, Bollinger's Risk Manager, stated that Bollinger did not produce all the requested documents because "it was over 300, 000 documents[, ] [a]nd it just became too cumbersome to provide." It is undisputed that XL never denied or accepted coverage for defense of the underlying lawsuit, and Bollinger incurred its own attorneys' fees and costs defending against the United States' claims.
XL initiated this action on August 13, 2012, seeking a declaration that it owed no duty to defend or indemnify Bollinger against the claims brought by the United States in the underlying suit. XL's complaint for declaratory judgment alleged that (1) some or all of the claims in the underlying suit did not involve "property damage" or an "occurrence" as defined by the policy and therefore did not trigger the policy; (2) the claims fell within one or more policy exclusions; and (3) Bollinger breached its obligations under the policies in various material ways (failure to give notice, failure to cooperate, failure to obtain consent). On August 15, 2012, XL removed a related action that Bollinger had filed in Louisiana state court, which sought coverage and bad faith damages from XL and Continental. In that suit, Bollinger alleged that XL was liable to it under Policy No. PXMC-850942, which covered a policy period from December 31, 2006, to March 1, 2008, and that Continental was liable to it under "multiple policies of excess insurance... covering the period of December 31, 2006, through March 1, 2012." Bollinger also brought bad faith claims against both XL and Continental under Louisiana Revised Statutes §§ 22:1892 and 22:1973. Continental filed a counterclaim seeking a declaratory judgment that none of the policies issued by Continental to Bollinger afford Bollinger coverage, defense costs, or indemnity in connection with the United States' claims. The Court consolidated that case with the suit initiated by XL.
On December 12, 2012, Continental filed a motion for partial summary judgment on Bollinger's bad faith claims. On June 24, 2013, the Court issued an Order and Reasons granting Continental's motion on the grounds that the express language of the excess policy issued by Continental indicated that Continental had no duty to defend,  and that in any event no duty to defend could arise for an excess insurer before the underlying policy had been exhausted, which had not occurred. As Continental had therefore acted reasonably in denying Bollinger a defense, the Court dismissed Bollinger's bad faith claims against Continental.
On December 18, 2013, Bollinger filed a motion for summary judgment against XL, arguing that the Court should hold as a matter of law that the policies XL issued to Bollinger require XL to pay the costs of defense that Bollinger incurred in the underlying lawsuit. Bollinger further contends that XL was unreasonable in withholding payment of those costs, and hence should be liable for statutory penalties, attorneys' fees, costs, and interest. On April 3, 2014, XL filed a cross-motion for summary judgment, contending that XL is not responsible for Bollinger's defense costs, and seeking full summary judgment on its original complaint for a declaratory judgment that it has no duty to defend or indemnify Bollinger for the claims in the underlying suit. On April 8, Continental filed its own motion for summary judgment, arguing that it has no duty to defend or indemnify Bollinger against the underlying suit.
On April 28, 2014, after briefing on the three motions was mostly completed, Bollinger moved the Court for leave to file an amended complaint that lists additional insurance policies under which XL and Continental may be liable. The Court granted Bollinger's motion. Bollinger's complaint now alleges simply that it is the "named insured under multiple liability insurance policies issued by XL Specialty and Continental."
C. The Policies at Issue
1. The XL Policies
From September 30, 2001, through March 15, 2008, Bollinger obtained six separate Marine Comprehensive Liability policies from XL (the XL Policies). The policies are virtually identical in all relevant respects, save that they cover different policy periods. The Court will analyze Policy Number PXMC-850151, which covers the period from September 30, 2003 to September 30, 2004,  as a representative example of the XL Policies.
Section I of the policy, which sets forth the basic outline of the coverage it affords to Bollinger, provides in relevant part:
1. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence" and settle any claim or "suit" that may result....
2. This insurance applies to "bodily injury" and "property damage" only if:
a. The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory;" and
b. The "bodily injury" or "property damage" occurs during the policy period.
"Property damage" is defined as follows:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the "occurrence" that caused it.
A "suit" is defined as "a civil proceeding in which damage because of... property damage'... to which is this insurance applies are [ sic ] alleged." "Occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The parties do not dispute that all of the relevant events took place in the "coverage territory" as it is defined in the policy.
Section II of the policy contains several exclusions to coverage. Relevantly for purposes of this case, the policy does not apply to:
1. "Bodily injury" or "property damage" expected or intended from the standpoint of the insured....
26. "Property damage" to "impaired property" or property that has not been physically injured, arising out of:
a. A defect, deficiency, inadequacy or dangerous condition in your product' or your work;' or
b. A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to your product' or your work' after it has been put to its intended use.
27. Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:
a. "Your product";
b. "Your work"; or
c. "Impaired property".
if such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.
28. The failure of your products and/or "your work" to meet any predetermined level of fitness or performance and/or guarantee of such fitness or level or performance and/or any consequential loss arising therefrom.
e. Actual or alleged liability arising out of or incidental to any alleged violation(s) or any federal or state law regulating, controlling, and governing... deceptive acts and practices in trade and commerce...; or
f. Actual or alleged liability arising out of or contributed to by your ...