Welspun Pipes, Inc., et al. v. Liberty Mutual Fire Insurance Company
No. 17-1470
United States Court of Appeals for the Eighth Circuit
May 25, 2018
United States Court of Appeals
For the Eighth Circuit
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No. 17-1470
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Welspun Pipes, Inc., et al.
lllllllllllllllllllll Plaintiffs - Appellants
v.
Liberty Mutual Fire Insurance Company
lllllllllllllllllllll Defendant - Appellee
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Appeal from United States District Court
for the Eastern District of Arkansas - Little Rock
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Submitted: January 11, 2018
Filed: May 25, 2018
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Before LOKEN, GRUENDER, and KELLY, Circuit Judges.
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LOKEN, Circuit
On July 14, 2012, a fire damaged equipment vital to production at the Little
Rock steel pipe manufacturing plant of Welspun Tubular, LLC, a wholly owned
subsidiary of Welspun Pipes, Inc. (together, Welspun). The fire, which forced the
plant to temporarily cease operations, was a covered peril under the RM Select
Commercial Insurance Policy issued to Welspun by Liberty Mutual Fire Insurance
Company (Liberty Mutual). The policy provided real property, personal property,
equipment breakdown, loss of business income, and extra expense coverages. In
August 2012, Welspun submitted claims for real and personal property damage, loss
of business income, and extra expenses. In March 2013, Liberty Mutual settled all
claims except Welspun’s claim for an additional $14 million in mitigation costs.
In July 2013, Welspun brought this diversity action, alleging that its unpaid
mitigation costs were “necessary expenses” included in the policy’s loss of business
income coverage. Liberty Mutual responded that these costs could only be covered
as “extra expenses,” the policy limits of which were paid in the settlement. Ruling
on the parties’ cross motions for summary judgment, the district court1 dismissed
Welspun’s complaint. Welspun appeals. Reviewing de novo the district court’s
interpretation of the insurance contract and its grant of summary judgment, we affirm.
Source Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834, 836 (8th Cir. 2006)
(standard of review).
I.
A. Background Facts. In May 2012, Welspun was awarded a contract to
supply approximately 220,000 metric tons of Submerged Arc Welded Pipe for the
670-mile Seaway Loop Pipeline from Cushing, Oklahoma to Houston, Texas. At the
request of the Seaway construction manager, Enterprise Products Partners
(Enterprise), Welspun agreed to convert 36,592 metric tons to a different type of
Submerged Arc Welded Pipe that would be produced by a Welspun affiliate in India,
Welspun Tradings Ltd., at no additional cost to Enterprise. The remaining 180,000
metric tons would be produced at Welspun’s Little Rock facility for delivery on
August 31, 2013 (sales value $275 million). Production
to begin on July 25, 2012.
District of Arkansas.
The fire on July 14 suspended Little Rock operations. As the plant was
scheduled to operate at full production capacity through at least August 2013, leaving
no time to make up lost Seaway production time, Welspun concluded it would be
unable to meet the August 31, 2013 Seaway delivery date. Enterprise would not
accept a later date. Fearing it would lose the entire unsigned Seaway contract (a fear
Liberty Mutual argued was unjustified), Welspun proposed having its affiliate in
India, Welspun Tradings, produce 39,957 metric tons of pipe originally scheduled to
be produced in Little Rock. Enterprise accepted the proposal. Welspun Tubular’s
Vice President assured his counterpart at Welspun Tradings that Welspun Tubular
would bear all costs associated with the shift in production. Under this arrangement,
Welspun fulfilled its obligations under the Seaway contract. The incremental costs
Welspun incurred in shifting Seaway production from Little Rock to India are the
mitigation costs here at issue.
B. The Policy Provisions at Issue. Section C of the policy’s Coverages
provided that, when “coverage for loss of business income is provided,”2 Liberty
Mutual will pay for:
- The actual loss of business income you incur during a period of
- restoration directly resulting from damage by a peril insured against
- to the type of property covered by this policy at a covered location.
- The necessary expenses you incur in excess of your normal operating
- expenses that reduces your loss of business income. We will not pay
- more than we would pay if you had been unable to make up lost
- production or continue operations or services.
The policy defined business income for manufacturing operations as “[t]he net
sales value of production less the cost of all raw stock, materials and supplies utilized
in such production.” It defined period of restoration to mean, for buildings and
equipment, the period that “starts at the time of a covered loss” and ends when,
“using reasonable speed,” the building and equipment could be repaired or replaced
and “made ready for operations.” The policy also covered loss of business income
during an “Extended Period of Restoration,” defined as a period that starts “when the
period of restoration would end, and continues for no more than sixty (60)
consecutive days immediately following the period of restoration.”
Paragraph C.7. specified various actions that Welspun was required to take to
mitigate its loss of business income and provided that Liberty Mutual “will not pay
for any loss to the extent it can be reduced through these or any other means whether
at a covered location or any other location.” Paragraph C.9. provided that the most
Liberty Mutual will pay for loss of business income coverage is the lesser of “actual
loss of business income and necessary expense” or the policy limit on business
income loss liability ($68 million).
Section D of the Coverages provisions provided that, when “coverage for extra
expense is provided,” Liberty Mutual will pay for “[t]he actual extra expense you
incur during a period of restoration directly resulting from damage by a peril
insured against to the type of property covered by this policy at a covered location,”
but will not pay for “[a]ny loss or expense recoverable elsewhere in this policy.”
Extra expense was defined as “reasonable
temporarily continue as nearly normal as practicable the conduct of your business;
or 2. Of temporarily using property or facilities of yours or others.”
C. Procedural History. In September 2012, Welspun submitted a claim for
$47 million in business income losses, marking September 30 as the estimated end
of the period of restoration (POR), when its damaged assets would be repaired, and
extending the claim for a sixty-day extended period of restoration (EPOR) to
November 30, 2012. Welspun also claimed $13 million in mitigation costs incurred
in shifting Seaway production to India, incremental expenses such as a steel price
differential, shipping costs, and finishing costs to meet contract specifications. In
November, Welspun submitted a revised claim for $28 million in business income
losses through September 25 and $14.5 million in mitigation costs. Welspun stated
its calculations should not be considered final but did not submit another claim.
In the March 2013 settlement, Liberty Mutual paid Welspun $22 million for its
business income losses and $1 million for extra expenses (the Section D policy limit).
The settlement expressly left unresolved Welspun’s claim for approximately $14
million in mitigation costs. Welspun viewed the expenses as “necessary expenses”
under Paragraph C.2. because they allowed Welspun to reduce its loss of business
income by avoiding loss of the entire Seaway contract, whereas Liberty Mutual
viewed the mitigation costs as additional “extra expense” under Section D, the policy
limit of which was paid in the settlement. This lawsuit followed.
After discovery, Welspun and Liberty Mutual submitted cross motions for
summary judgment. The district court concluded that “necessary expenses” covered
by Paragraph C.2. of the policy must be expenses that reduce a covered business
income loss. “It would be absurd to construe the insurance contract to include
coverage for expenses incurred to avoid a loss that would not have been covered.”
Therefore, because the policy covered only business income losses that occurred
during the POR and the EPOR, necessary expenses must reduce a loss of business
income that would have occurred during that period.
Welspun’s brief opposing Liberty Mutual’s summary judgment motion stated:
“Welspun contends that the POR did not end until November, 2012, when its
operating condition was at its pre-fire operating capacity of six (6) days per week.”
Accepting for summary judgment purposes Welspun’s contention that the POR
extended to November 2012, which extended the EPOR to January 2013, the court
concluded that Welspun failed to show that its alleged mitigation costs reduced a
covered loss of business income during this period. Though Welspun’s expert opined
that saving the Seaway contract avoided a net business income loss of $69 million
over the life of the contract, there was no evidence that the expense of shifting some
production to Welspun Tradings in India “averted a net decrease in [Welspun’s]
production value” during the POR and EPOR. Moreover, Welspun’s expert opined
that Welspun “was considered to be operating at capacity for the foreseeable future.”
In these circumstances, the mitigation costs did not qualify as necessary expenses
because they did not reduce a covered loss of business income.
II.
A. On appeal, Welspun first argues the district court erred in limiting the
necessary expenses covered in Paragraph C.2. to expenses incurred to avoid or reduce
a loss of business income during the POR or EPOR, because that temporal
is not in the plain language of the Loss of Business Income coverage provisions. The
argument misleadingly recasts the district court’s decision. The court’s core ruling
was that necessary expenses, by reason of the policy’s plain language and evident
purpose, are expenses that reduce a covered loss of business income. An expense
reducing a covered loss, whenever incurred, could be a covered necessary expense
under Paragraph C.2. It is Paragraph C.1. and Paragraph A.7. of the Extensions of
Coverage provision that expressly limit the coverage of business income losses to
those incurred during the POR or the EPOR.
Turning to the district court’s core ruling, the common law imposed a duty on
the insured to mitigate a covered loss the insurer would otherwise pay, and a
corresponding right to compensation from the insurer for the cost of these efforts.
The right to compensation was often recognized even in the absence of an express
policy provision, but “to be recoverable, the mitigation expenses must relate to a
covered loss either existing or imminent.” 11A Steven Plitt, et al., Couch on
Insurance § 168.11, at 168-26 (3d ed. 2017); see Witcher Constr. Co. v. St. Paul Fire
& Marine Ins. Co., 550 N.W.2d 1, 7-8 (Minn. App. 1996).
The common law duty to mitigate and corresponding right to expense
reimbursement are now often reflected in “loss of business income” or “business
interruption” policy provisions. See Nw. States Portland Cement Co. v. Hartford Fire
Ins. Co., 360 F.2d 531, 534-35 (8th Cir. 1966).3 The district court concluded these
basic common law principles were reflected in the business income loss provisions
of Liberty Mutual’s policy. The court noted that Paragraph C.2. expressly provides
that Liberty Mutual will not pay more than it would have paid under Paragraph C.1.
for the actual loss of business income incurred during a POR or EPOR that could not
be mitigated.
The parties and the district court agreed that Arkansas law governs this
diversity lawsuit. Under Arkansas law, courts interpreting an insurance policy should
consider “the object to be accomplished” and read its provisions together, not in
isolation. Cont’l Cas. Co. v. Davidson, 463 S.W.2d 652, 655 (Ark. 1971). Reading
the loss of business income policy provisions together, in light of their historical roots
and obvious purpose, we agree with the district court that “necessary expenses” in
Paragraph C.2. are limited to expenses that reduce a covered business income loss.
Paragraph C.1. provides loss of business income coverage for “[t]he actual loss of
insurance policies that obligates the insured to incur expenses to protect and repair
the insured vessel, and obligates the insurer to pay for these expenses even if the ship
becomes a total loss. See 12 Russ & Segalla, Couch on Insurance § 183.62 (3d ed.
1998). “The fundamental limitation on the insurer’s duty . . . to compensate the
insured for expenses incurred . . . is that the expenses in question must be incurred to
preserve the insured property from a peril insured against under the basic policy.” Id.
§ 183.163, at 183-117; accord GTE Corp. v. Allendale Mut. Ins. Co., 372 F.3d 598,
618 (3d Cir. 2004), applying this principle to the sue and labor clause in a non-
maritime property/business interruption policy.
business income . . . during a period of restoration.” Paragraph C.2. then covers
necessary expenses that reduce “your loss of business income.” Paragraph C.7.
imposes the insured’s common law duty to mitigate covered losses, if necessary by
incurring non-normal expenses that Paragraph C.2. then obligates Liberty Mutual to
reimburse.
and necessary expenses.
Welspun argues mitigation costs incurred to reduce even uncovered business
income losses qualify as necessary expenses under Paragraph C.2. Welspun starts
from the premise that Paragraph C.7 requires Welspun to mitigate all business income
losses, which in turn obligates Liberty Mutual to pay Welspun the costs it incurs in
mitigation. The premise is faulty. The common law duty to mitigate reflected in
Paragraph C.7. is a duty owed to the insurer to reduce the insurer’s obligation to
indemnify, which of course is limited to the insured’s covered losses. See
Metalmasters of Mpls., Inc. v. Liberty Mut. Ins. Co., 461 N.W.2d 496, 501 (Minn.
App. 1990) (“Mitigation is a duty the insured performs for the insurer’s benefit.”).
“Protective acts may be to the direct or incidental benefit of the assured so as to
prevent further loss to its own property—but it is patently clear that the primary
reason for such a [duty-to-mitigate] provision within the policy is for the [insurer’s]
protection against liability for greater loss.” Slay Warehousing Co. v. Reliance Ins.
Co., 471 F.2d 1364, 1367 (8th Cir. 1973).
Of course, a peril such as fire that is covered by property and business
interruption insurance can cause collateral or extended loss to the insured’s property
or business beyond the policy’s basic coverages. The insured may have no duty to
mitigate those losses, but it may procure an insurance policy that includes coverage
reimbursing expenses that mitigate such losses. That was the basis for our decision
in Midwest Regional Allergy v. Cincinnati Ins. Co., 795 F.3d 853, 858 (8th Cir.
2015), where we upheld a claim for extra expenses that did not reduce covered
business income loss because the claim fell under an Extra Expense provision in the
Additional Coverages section of the policy that covered expenses “not connected to
the Business Income provision.” Likewise the additional coverage for extra expenses
in Section D of the Liberty Mutual policy was not limited to expenses that reduce
covered losses.
An example demonstrates how these provisions interact. Suppose a fire at a
bakery threatened the loss of $75 in business income during the indemnified period.
Consistent with its duty to mitigate, the bakery spends $20 in mitigation and reduces
its covered business income loss to $35. Under Paragraph C.2., the $20 is a necessary
expense because it reduced a covered business income loss. Under Paragraph C.9.,
Liberty Mutual would pay the bakery $55 (if within the policy limit) -- $20 in
necessary expense and $35 in actual business income loss, which is below the $75
ceiling established by the second sentence of Paragraph C.2. On the other hand, if the
bakery spent $50 to reduce its covered business income loss to $35, the second
sentence would limit recovery to $75.
Under Welspun’s interpretation of the policy, if the bakery incurs $75 of actual
business income loss during the period of indemnity, and spends $20 to reduce an
uncovered loss of business income in a later period, it is entitled to $95. In this
variation of the hypothetical, rather than reduce the insurer’s obligation to indemnify
actual business income loss, the $20 of “mitigation” expenses increases the insurer’s
coverage obligations. One would expect an additional coverage for this kind of
“extra expense” would be found in a separate section of the policy (here, Section D),
and be purchased separately. Cf. Liberty Mut. Ins. Co. v. Sexton Foods Co., 854
S.W.2d 365, 367 (Ark. App. 1993) (business interruption insurance is “designed to
prevent the insured from being placed in a
interruption of the business had occurred.”).
The second sentence of Paragraph C.2. provides that Liberty Mutual will not
pay more than it would pay if Welspun “had been unable to make up lost production
or continue operations or services.” We agree with the district court that Paragraph
C.2. is limited to additional expenses that are necessary because they reduce a
covered business income loss.
B. Welspun next argues that the district court erred in granting summary
judgment even if the court correctly interpreted the policy’s “necessary expenses”
coverage. The lengthy argument in essence refuses to accept the district court’s
interpretation of the business income loss provisions. Welspun begins by arguing that
the POR and EPOR periods are disputed, unresolved fact issues. This is a non-issue.
The district court accepted the position Welspun urged for summary judgment
purposes, that the POR ended in November 2012, not September 25, 2012 as Liberty
Mutual contended, which meant the EPOR extended through January 2013. Welspun
had the burden to prove it incurred necessary expenses to reduce covered business
income losses during this period. See Reynolds v. Shelter Mut. Ins. Co., 852 S.W.2d
799, 803 (Ark. 1993). The court could do no more than accept the position of the
party opposing summary judgment on this issue.
Welspun next argues the district court ignored that, before the fire, Welspun
had planned production for the Seaway contract during July, August, October, and
November 2012. This contention ignores footnote 7 of the court’s lengthy opinion.
It is undisputed the Little Rock plant was not operational between the date of the fire
and September 25, 2012. As the court explained, income from production lost during
this period, including scheduled Seaway production, was an actual business income
loss covered by Paragraph C.1. of the policy and paid as part of the March 2013
settlement. No mitigation costs Welspun incurred could have reduced that loss.
The planned Seaway production in October and November 2012 raised a more
complex question. Welspun alleged that saving the Seaway contract avoided a
business income loss of $69 million dollars over the life of the contract and allocated
a prorated $22 million loss over the EPOR period, resulting in a business income loss
reduction greater than the $14 million of claimed mitigation expenses. The district
court took a more fact-specific approach, concluding it was Welspun’s full production
schedule and its ability to shift production from other projects into this period that
reduced the covered business income loss Welspun incurred. Therefore, while
expenses Welspun incurred to save the Seaway contract may have preserved income
from pipe it produced after the EPOR and delivered to Seaway by August 2013, this
was not evidence satisfying Welspun’s burden to show that its “mitigation expenses”
reduced covered business income losses. After careful review of the summary
judgment record, we agree with the district court’s analysis. With the Seaway
contract safely kept in place, Welspun postponed production planned for that contract
between September 25, 2012, and January 2013, replacing it with other, higher
income projects that mitigated its covered business income loss (evidence submitted
by Welspun’s expert).4 There was no evidence
some Seaway production to India was “necessary” to satisfy Welspun’s duty to
mitigate Liberty Mutual’s obligation to indemnify covered business income losses.
Finally, Welspun argues that the district court’s interpretation of the policy
“penalizes” Welspun for undertaking its duty to mitigate loss of business income by
saving the Seaway contract. But Welspun persists in treating the duty to “mitigate”
as a general duty to save the insured from all loss. A duty is an obligation owed to
another, here, as the common law origins make clear, to the insurer that is obligated
to indemnify (cover) specific losses. Welspun argues it is unfair to deny coverage for
“mitigation” expenses that permitted it to “shift out” to a later period business income
from the Seaway contract that would otherwise have been lost. Of course, Welspun
was hardly “penalized” for spending $14 million to save a Seaway contract that
shifted production to other projects, primarily the Access NEX project. Because
Access NEX pipe had a higher sales value than Seaway pipe, Welspun made more
profit in October than if it produced Seaway pipe as originally planned, what
Welspun’s expert described as a “negative [business income] loss.”
would generate $69 million in profit. That was a sound business decision, and if the
expense was covered by insurance, so much the better. But as the plain language of
the Liberty Mutual policy, the origins of loss of business income coverage, prior
cases and insurance treatises, and the undisputed facts established in this summary
judgment record make clear, the incremental costs Welspun incurred in shifting some
Seaway production to an affiliate in India were not “necessary expenses” within the
meaning of Paragraph C.2. of the Liberty Mutual policy.
The judgment of the district court is affirmed.
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