Defense costs of Hurricane Katrina class actions not covered by excess policy

The Second U.S. Circuit Court of Appeals reversed in part a district court's judgment in a declaratory action involving multiple insurers of a construction materials company insured that was the subject of numerous class actions arising from the claim that a barge operated by the insured caused the breach of the New Orleans levee during Hurricane Katrina. Defense costs incurred by two of the insured's retained law firms were not covered under an applicable excess policy.

On Sept. 9, 2005, the Wall Street Journal published an article suggesting the possibility that the New Orleans levee was breached as a result of a barge smashing through the levee during Hurricane Katrina. The barge was identified as Barge ING 4727, owned by Ingram Barge Co., and the operator responsible for mooring the barge was Lafarge North America Inc.

Lafarge, a major construction material supplier, immediately retained Goodwin Procter L.L.P., a law firm, and on Goodwin's suggestion retained Chaffe McCall L.L.P. as local counsel. Lafarge also informed its primary insurer, New York Marine and General Insurance Co. (NYMAGIC) of the potential liability.

Four class actions were filed against Lafarge seeking combined damages of over $100 billion. NYMAGIC agreed to pay for defense fees of its retained counsel and Lafarge's expert fees and expenses, and these expenditures exhausted NYMAGIC's $5 million policy limit. Under an excess policy issued by NYMAGIC, American Home Assurance Co. (AHAC) and Northern Assurance Co. of America (NACA) (collectively, the excess insurers) paid 40% of the remaining defense costs.

Lafarge asserted that, under a separate excess policy issued by AHAC and NACA, those two insurer were required to pay the remaining 60% of the defense costs. AHAC and NACA disputed this obligation. NYMAGIC sued Lafarge seeking a declaration as to its ongoing policy obligations, and the remaining insurers were joined to the suit and asserted similar declaratory judgment claims. A district court granted Lafarge the fees and expenses of two of the three law firms it retained without NYMAGIC's knowledge or consent. All parties appealed.

The Second Circuit concluded that the excess policy did not follow form with the primary policy, and under its terms extended coverage for legal expenses that were not covered by the primary policy. The only limitation to the excess policy's coverage of legal expenses was the general rule that coverage be for reasonable legal expenses.

In that regard, the Second Circuit agreed with the excess insurers that Lafarge's retention of Goodwin Proctor and Chaffe breached the plain terms of a "naming clause" contained in the primary policy and as a result was unreasonable. Because the excess policy required the primary policy to be maintained in full effect, the excess policy did not cover the fees and expenses claimed by Goodwin Procter or by Chaffe. The district court's order was accordingly reversed in relevant part and remanded for further consistent proceedings.

Counsel for Lafarge : Anthony J. Pruzinsky, John J. Sullivan, Robert G. Clyne, Hill Rivkin & Hayden L.L.P., 212-669-0600, New York.

Counsel for NYMAGIC : David H. Fromm, Michael P. Naughton, Brown Gavalas & Fromm L.L.P., 212-983-8500, New York.

Counsel for AHAC and NACA : John A.V. Nicoletti, Nooshin Namazi, Kevin J.B. O'Malley, Nicoletti Hornig & Sweeney, 212-220-3830, New York.

Source: New York Insurance Law and Litigation Alert, 04/30/2010

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