The Fifth Circuit Court of Appeals limited a policyholder’s recovery in its most recent opinion, National Union Fire Insurance Company v. Gulf Island Fabrication (No. 11-30375, March 9, 2012).
On April 29, 2008, four cranes were being used to lift a piece of machinery at Gulf Island Facility’s heavy steel fabrication facility. One of the cranes side-loaded and collapsed, crushing one of the cranes and killing the crane operator inside. The other three cranes were substantially damaged. Shortly thereafter, Gulf Island rented substitute cranes to continue the building operation, ultimately incurring rental expenses in the approximate amount of $11,117,838. One of the cranes was deemed a total loss with a replacement cost value (RCV) of $3,459,807.
Gulf Island submitted a claim for the incurred rental expenses and repairs to the damaged cranes. Under a Reservation of Rights, National Union issued unallocated advance payments of $6,500,000. After issuing the payments, however, National Union declined to make any additional payments for the loss and filed declaratory action suit against Gulf Island claiming that recovery for the rental expenses was limited under the policy and that no further payments were owed to Gulf Island.
The policy limit at the time of the accident was $110,000,000. Gulf Island agreed to a $450,000 sublimit for the 2007-2008 policy period, but the 2008-2009 renewal declarations page did not show the $450,000 sublimit for rental equipment. During the litigation, National Union asked the court to reform the insurance contract, stating that both parties had intended to include the sublimit on the 2008-2009 policy declarations page and that the omission on the declarations page was a mistake.
The Rental Reimbursement Endorsement that read as follows:
If a limit of insurance is shown on the Declarations for Rental Reimbursement, we will reimburse you for expenses actually incurred for the rental of substitute equipment when such rental is:
1. Necessary due to “loss” to scheduled Covered
Property by a covered cause of loss, and
2. Substitute equipment is needed to continue, as
nearly as practicable, the normal operations on
work in progress at the time of “loss,” and
3. When you do not have ideal equipment available
which can perform functions similar to the
Covered Property that sustained the “loss.” Reimbursement is limited to such expense incurred during the period commencing seventy-two (72) hours after the “loss” unless another period is shown on the Declarations and coverage terminates, regardless of expiration of the policy, when the exercise of due diligence and dispatch the lost or damaged Covered Property has been replaced or repaired or the need for such equipment no longer exists, which ever first occurs.
This Company shall not be liable for more than the actual daily rental expense you incur not to exceed the limits of liability shown on the Declarations.
During the lawsuit, Gulf Island conceded that it intended to include the Rental Reimbursement endorsement for the 2008-2009 policy period, but argued that National Union waived the application of the sublimit when it instructed the company to rent cranes to avoid further business interruption losses and did not mention the sublimit in its Reservation of Rights letter. Gulf Island further argued that the rental expenses could also be covered under the BI/EE provisions and that policyholders should be given the benefit of coverage when there is more than one reasonable interpretation of a policy’s language.
The Business Interruption and Extra Expense provisions stated:
Interest and Property Insured
This Policy covers against loss directly resulting from necessary interruption of business caused by destruction of or damage to real or personal property covered herein . . . and arising from a peril covered hereunder and occurring during the term of this Policy . . .
d. Expense Related to Reducing Loss: This Policy also covers such expenses as are necessarily incurred for the purpose of reducing loss under this
Policy . . . but in no event shall the aggregate of such expenses exceed the amount by which the loss otherwise payable under this Policy is thereby reduced[.]
The term “Extra Expense,” wherever used in this Endorsement, is defined as the excess (if any) of the total cost incurred during the period of restoration chargeable to the operation of the Insured’s business, over and above the total cost that would normally have been incurred to conduct the business during the same period had no damage or destruction occurred[.]
National Union won at the trial level, but Gulf Island appealed. The Fifth Circuit Court of Appeals affirmed the lower court’s decision, stating that the endorsement was intended to be the sole source of coverage in this case:
A plain reading of the policy indicates that the Rental Reimbursement endorsement was intended by the parties to be the sole source of coverage for all rental reimbursement claims advanced by GIF. Had the parties intended for other provisions of the policy to cover rental reimbursement expenses, it would have been unnecessary to have a separate Rental Reimbursement endorsement in the policy at all. Additionally, the Rental Reimbursement endorsement contains specific language and restrictions governing GIF’s procurement and use of rental equipment pursuant to the policy. This narrow and specific language is only contained in the Rental Reimbursement endorsement and is not contained in any other provision in the policy, including the Business Interruption expenses and Extra Expenses sections, neither of which mention the phrase “rental reimbursement.” Consequently, it is clear that the parties intended for the Rental Reimbursement endorsement to be the sole source of coverage for GIF’s rental reimbursement claims. Since GIF does not dispute the $450,000 sublimit on the Rental Reimbursement endorsement, the district court did not err in holding that GIF’s reimbursement claims for the crane rental expenses were limited to that amount under the policy.