Last month, in Service One Cable T.V., Inc. v. Scottsdale Ins. Co., 2011-1469 (La. App. 1st Cir. February 10, 2012), the Louisiana First Circuit Court of Appeals decided that a cable service company did not have coverage under its commercial property damage or business income provision after a hurricane damaged the company’s cable distribution system.
Service One owns and operates a cable television company in Plaquemine, Louisiana. The company plant consists of two buildings, an administrative building and a headend building. The headend building houses electronic equipment that gathers and processes cable signals. The signals are delivered to customers through a 49–mile coaxial cable system. The coaxial cable system originates at, and is connected to, the headend building, then strung on a network of utility poles, which are not owned by Service One. The coaxial cable is ultimately connected to customers’ residences or businesses through a system of trunk and feed lines.
On September 1, 2008, Hurricane Gustav damaged Service One’s administrative and headend buildings, as well as its 49–mile coaxial cable distribution system. Service One’s commercial property carrier, Scottsdale, advanced $15,000 to the company for business interruption. The administrative and headend buildings were operational almost immediately after the hurricane; however, without the cable distribution system in place, cable service could not be delivered to customers.
Service One’s independent insurance agent assured it that the coaxial cable was covered under Scottsdale’s policy, so Service One contracted with a third party fiber optic company to restore the coaxial cable line system. Service One’s customers were back on line with access to cable television programming within 30 days of the hurricane.
Service One made a property damage claim for repair of the coaxial cables and for additional business income losses sustained while the cables were repaired. Scottsdale denied the claims. Scottsdale also contended that it overpaid the business income claim by $7,000 (of the $15,000 advance payment).
Service One filed a lawsuit in state court, but the trial court granted final summary judgment in favor of Scottsdale, determining Service One’s cable distribution system, which is hard wired to the headend building, was not an outdoor fixture or equipment of the covered building and that repair of the cable distribution system was not covered as an “extra expense” necessary for the restoration of normal business operations.
Service One appealed, but it was not successful in convincing the First Circuit Court of Appeals that its claim was covered under Scottsdale’s policy.
The Court of Appeals looked at the definition of “fixture” under the Louisiana Civil Code and concluded that the coaxial cable distribution system was not a covered fixture or equipment of the building, so the repairs to the cable system were not covered “extra expenses” under the business income provision of the policy.
The court wrote:
The 49–mile coaxial cable system for which Service One seeks coverage is not specifically mentioned on the Declarations page; therefore, it must be determined whether the coaxial cable system is part of one of the described premises. “Building” is defined by the policy as follows:
a. Building, meaning the building or structure described in the Declarations, including:
(1) Completed additions;
(2) Fixtures, including outdoor fixtures;
(3) Permanently installed:
(a) Machinery and
Service One maintains that the cable system qualifies as covered property because it is either an “outdoor fixture” or “permanently installed equipment.” In response, Scottsdale offers that the prevailing meaning of the term “fixture” does not encompass an item that is predominantly outside of and far removed from the building. Further, Scottsdale maintains the cable system is not permanently attached to the headend building.
The term “fixture” is undefined in the policy; however, this fact alone does not make the term ambiguous. […] Courts applying Louisiana law have equated the term “fixture” with the term “component part,” as used in the Louisiana Civil Code. […] Louisiana Revised Statutes section 10:9–102(a)(41) defines “fixtures” as “goods, other than consumer goods and manufactured homes, that after placement on or incorporation in an immovable have become a component part of such immovable as provided in Civil Code Articles 463, 465, and 466, or that have been declared to be a component part of an immovable under Civil Code Article 467.” Component parts are defined in Louisiana Civil Code article 465 as things incorporated into a building “so as to become an integral part of it, such as building materials.” Louisiana Civil Code article 466 further explains that “[o]ther things are component parts of a building … if they are attached to such a degree that they cannot be removed without substantial damage to themselves or to the building."
Service One established that the coaxial cable originated at the headend building and, through a system of trunk lines and feed lines, ultimately reaches individual customers. Service One also established that cutting the coaxial cable would disrupt cable service to customers. However, Service One failed to offer any evidence that the coaxial cable is permanently installed or that removal of the coaxial cable line from the headend building would cause “substantial damage” to either the headend building or to the coaxial cable, required elements to show that an item is a “fixture” under the Louisiana Civil Code.
Regarding the business income claim, Service One argued that because it is in the business of processing and distributing an electronic computer signal, cable services could not have been delivered to its customers without repairs to the 49–mile cable distribution system. Service One also argued Scottsdale waived its right to challenge coverage for repair of the cable distribution system when it advanced the $15,000 for loss of business income for the damage to the cable distribution system and not to “described premises” or building damages.
The Court of Appeals was again unsympathetic:
Waiver is generally understood to be the intentional relinquishment of a known right, power, or privilege. Emery v. Progressive Cas. Ins. Co., 10–0327 (La.App. 1 Cir. 9/10/10), 49 So.3d 17, 21; Steptore v. Masco Construction, Co., 93–2064 (La.8/18/94), 643 So.2d 1213, 1216. Waiver occurs when there is an existing right, knowledge of its existence, and an actual intention to relinquish it, or conduct so inconsistent with the intent to enforce the right as to induce a reasonable belief that it has been relinquished. Emery, 49 So.3d at 21; Steptore, 643 So.2d at 1216. A waiver may apply to any provision of an insurance contract, even though this may have the effect of bringing within coverage risks originally excluded or not covered. Emery, 49 So.3d at 21; Steptore, 643 So.2d at 1216.
Service One’s loss of business income from the hurricane is not attributed solely to the damage to the cable distribution system; the insured buildings also suffered damage, including a collapsed roof and water damage. Further, Service One employee Simpson, stated: “Scottsdale told us from the get-go [repair to the cable lines] wasn’t covered, about a month after the claim.” Scottsdale’s initial payment and its express denial of coverage for the coaxial cable system repairs cannot be construed as a waiver of its coverage defenses.
I have strong reservations about this ruling. The headend building lost its “functionality” when coaxial cable system failed. It is the only reason why a cable service provider would purchase a commercial property damage and business interruption policy from Scottsdale, but Service One was left with the short end of that stick. I also have reservations about the court’s finding that Scottsdale did not “waive” its argument that the repairs to the cable system were not covered extra expenses under the policy. Although, I did not have the benefit of reading all the depositions in this case, Scottsdale told Service One that the repairs to the cable system were not covered “about a month after the claim” and after it admittedly overpaid the advance on the business income loss. This should have been a question for a jury to decide.