     Case: 10-30916     Document: 00511546162         Page: 1     Date Filed: 07/20/2011




             IN THE UNITED STATES COURT OF APPEALS
                      FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                      Fifth Circuit

                                                                            FILED
                                                                           July 20, 2011

                                      No. 10-30916                         Lyle W. Cayce
                                                                                Clerk

BERK-COHEN ASSOCIATES, L.L.C.,

                                                  Plaintiff - Appellee

v.

LANDMARK AMERICAN INSURANCE COMPANY,

                                                  Defendant - Appellant


                    Appeal from the United States District Court
                        for the Eastern District of Louisiana
                              USDC No. 2:07-CV-9205


Before JONES, Chief Judge, and KING and BARKSDALE, Circuit Judges.
PER CURIAM:*
         This insurance case asks the court to determine the extent of coverage
available following a calamitous 15 months, during which an apartment building
was hit by a tornado, a hurricane, a fire, and an out-of-control vehicle.
Interpreting the contract in question, we affirm the district court’s calculation
of lost business income but reverse its imposition of a statutory penalty for bad
faith.



         *
         Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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                                  No. 10-30916

                                  Background
      Berk-Cohen Associates, L.L.C. (“Berk-Cohen”) owns a number of
properties, among them the Forest Isle apartment complex. Between August
2005 and October 2006, Forest Isle suffered damage from a tornado, Hurricane
Katrina, a fire on the property, and a motorist’s collision with a transformer that
supplied power to the building. Berk-Cohen submitted claims to its insurer,
Landmark American Insurance Company (“Landmark”), following each of these
misfortunes. Landmark paid over $20 million to cover the cost of repairs and to
compensate Berk-Cohen for lost business income.
      The insurance policy in effect between Berk-Cohen and Landmark did not
cover losses at Forest Isle “caused directly or indirectly by Flood.” The policy
did, however, extend to losses resulting from wind damage. In the case of a
covered cause of loss (e.g., wind damage), Landmark insured Berk-Cohen against
both property damage and lost business income. According to the policy, the
latter is a product of several factors, among them “[t]he likely Net Income of the
business if no physical loss or damage had occurred . . . .” The policy then
narrows the scope of lost business income by excluding “any Net Income that
would likely have been earned as a result of . . . favorable business conditions
caused by the impact of the Covered Cause of Loss on customers or on other
businesses.” Invoking this restriction, Landmark refused Berk-Cohen’s demand
for additional lost income due to increased rents following Hurricane Katrina.
Landmark reasoned that the increased rents resulted from flooding around New
Orleans and that damage caused “directly or indirectly” by floods was excluded
under the policy. As a result, Landmark declined to increase its calculation of
lost business income to the extent that any foregone income arose from flooding.
      Berk-Cohen responded with this lawsuit. Following a bench trial, the
district court held that favorable business conditions attributable to flooding in
other buildings were nevertheless appropriate considerations in computing the

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business income that Berk-Cohen lost as a result of the wind damage to its own
building.     Additionally,     the     district   court   found   that   Landmark’s
misinterpretation of its policy entitled Berk-Cohen to statutory damages and
attorney’s fees. Landmark appeals.
                                      Discussion
      This court reviews the district court’s interpretation of an insurance policy
de novo. Old Republic Ins. Co. v. Comprehensive Health Care Assoc., 2 F.3d 105,
107 (5th Cir. 1993). The district court’s interpretation of state law is likewise
subject to de novo review, but we review the findings of fact during a bench trial
for clear error. Water Craft Mgmt. LLC v. Mercury Marine, 457 F.3d 484, 488
(5th Cir. 2006).
                              A. Calculation of Loss
      The district court correctly held that the insurance policy between Berk-
Cohen and Landmark permits recovery for lost business income due to the
favorable business conditions in the wake of Hurricane Katrina. Although flood-
related damages to Forest Isle are themselves excluded, stimulated demand as
a result of flood damage to other structures is a proper consideration in
calculating lost income.
      Under Louisiana law, “[a]n insurance policy is a contract between the
parties and should be construed using the general rules of interpretation of
contracts set forth in the Civil Code.” Huggins v. Gerry Lane Enters., 957 So.2d
127, 129 (La. 2007). As such, each provision “must be interpreted in light of the
other provisions so that each is given the meaning suggested by the contract as
a whole.” LA. CIV. CODE art. 2050. Any ambiguity that remains after applying
normal cannons of contract interpretation “is to be construed against the insurer
and in favor of coverage.” Huggins, 957 So.2d at 129.
      At the heart of the present case is the contractual provision allowing Berk-
Cohen to recover its lost business income. Under the policy, lost income includes

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“[t]he likely Net Income of the business if no physical loss or damage had
occurred, but not any Net Income that would likely have been earned as a result
of . . . favorable business conditions caused by the impact of the Covered Cause
of Loss . . . .” (emphasis added). The “Covered Cause of Loss” in this case is
wind. Consequently, Berk-Cohen may not recover for lost business income as a
result of wind damage suffered by customers and competing businesses. On the
other hand, any increase in customers’ demand or reduction in competitors’
supply due to flooding at other properties is a permissible factor in calculating
lost business income.
      Landmark would employ the policy’s flood exclusion, which bars recovery
for “damage caused directly or indirectly by Flood,” to reach the opposite
conclusion. But this reading extends the flood exclusion beyond its function. By
its own terms, the flood exclusion applies to “all coverage parts” of the policy. If
coverage is permissible—and Landmark does not deny that the policy covers
wind damage—then the flood exclusion has nothing further to say, and the only
remaining issue is calculation of damages. The policy expressly permits that
calculation to consider favorable business conditions. We decline to use a
limitation on coverage to alter the calculation of damages for a covered loss.
      The district court’s reading of the insurance policy harmonizes the two
contested provisions—i.e., coverage for lost business income and the flood
exclusion—and honors the Huggins rule favoring broad coverage.
                            B. Statutory Penalties
      Louisiana law authorizes penalties against an insurer that fails to pay
claims within 30 days of a demand letter and written proof of loss, “when such
failure is found to be arbitrary, capricious, or without probable cause . . . .” LA.
REV. STAT. ANN. § 22:1892(B)(1) (2009). The penalty is “fifty percent of the
difference between the amount paid or tendered and the amount found to be due



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as well as reasonable attorney fees and costs.”1 Id. This is a penalty statute
which, according to Louisiana law, must be “strictly construed.” La. Bag Co. v.
Audubon Indem. Co., 999 So.2d 1104, 1120 (La. 2008). The penalty does not
apply “when there is a reasonable and legitimate question as to the extent and
causation of a claim . . . .” Id. at 1114. In Louisiana Bag, the Louisiana
Supreme Court assessed penalties against an insurer that refused to pay the
uncontested portion of a claim and refused coverage for lost inventory. On both
issues, the court held that no reasonable uncertainty existed as to the insurer’s
obligation to pay, making its refusal arbitrary and without probable cause. Id.
at 1116.
       The present case is unlike Louisiana Bag. The scope of the flood exclusion,
with its reference to all damage “caused directly or indirectly” by flooding, is
susceptible to different interpretations.          Landmark was therefore neither
arbitrary nor capricious in refusing to compensate Berk-Cohen based on
favorable business conditions arising from post-Katrina flooding. Landmark also
distanced itself from the insurer in Louisiana Bag by paying over $20 million on
the undisputed portions of Berk-Cohen’s claims. See French v. Allstate Indem.
Co., 637 F.3d 571, 585 (5th Cir. 2011) (interpreting Louisiana Bag as creating
a rule in favor of penalties when an insurer fails to pay the undisputed amount
due). Because this case is distinguishable from Louisiana Bag, we follow our
long line of precedent refusing to assess statutory penalties where an insurer
makes a good-faith error in interpreting its policy. Morey v. W. Am. Specialized
Transp. Servs., 968 F.2d 494, 499 (5th Cir. 1992) (“This Court, however, has
taken the position that an unfavorable judgment does not automatically subject


       1
        An earlier version of the statute fixed damages at 25% of the unpaid amount and did
not allow a plaintiff to recover attorney’s fees. LA. REV. STAT. ANN. § 22:658(B)(1) (2004).
Landmark argues that the earlier version of the statute should control this case. Because we
find no bad faith in Landmark’s interpretation of its policy, we need not reach the issue
whether the earlier or later version of the statute applies.

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                                       No. 10-30916

an insurer to penalties under La.R.S. § 22:658.”); Saavedra v. Murphy Oil
U.S.A., Inc., 930 F.2d 1104, 1111 (5th Cir. 1991) (“Even though we disagree with
the district court . . . , we conclude that [the insurer’s] denial was nevertheless
not ‘arbitrary or capricious.’”); Woods v. Dravo Basic Materials Co., 887 F.2d 618,
623 (5th Cir. 1989) (“[I]t is not apparent from the statute that the Louisiana
legislature intended insurers to pay penalties whenever they err in their
interpretation of coverage.”). Following Louisiana Bag, this court has reaffirmed
this view on similar facts. Seacor Holdings, Inc. v. Commonwealth Ins. Co.,
635 F.3d 675 (5th Cir. 2011). Penalties were unwarranted in Seacor because the
insurer “promptly paid . . . over $4 million to cover undisputed damages and
looked to judicial assistance to resolve disputes that bore on [other policy
provisions].” Id. at 685. The same pattern of payment followed by good-faith
litigation has unfolded in this case. We therefore follow this court’s precedent
in refusing to impose penalties based on interpretive error alone.
       Because Landmark was not arbitrary or lacking probable cause to believe
that its contract with Berk-Cohen excluded lost income resulting from flooding
in other buildings, the district court should not have assessed statutory penalties
against Landmark.2
                                       Conclusion
       The insurance policy between Berk-Cohen and Landmark excludes
coverage for flood damages at the Forest Isle property. The flood exclusion does
not, however, prevent Berk-Cohen from recovering lost business income due to
the favorable business conditions arising from flood damage to other buildings.




       2
         Landmark argues in its briefs that the district court erred in imposing pre-judgment
interest on the penalties assessed. Because we hold that penalties are inappropriate in this
case, the question of how to calculate interest on the same is moot. In all other respects, the
district court’s calculation of damages is correct.

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On this issue, we AFFIRM the district court. We REVERSE, however, on the
assessment of statutory damages against Landmark.
                      AFFIRMED IN PART AND REVERSED IN PART.




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