Mid-Continent Casualty Company v. Petroleum Solutions, Inc.
Filing
109
AMENDED MEMORANDUM AND ORDER (Signed by Judge Nancy F Atlas) Parties notified.(sashabranner, 4)
United States District Court
Southern District of Texas
ENTERED
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
MID-CONTINENT CASUALTY CO., §
Plaintiff,
§
§
v.
§
§
PETROLEUM SOLUTIONS, INC.,
§
BILL HEAD d/b/a BILL HEAD
§
ENTERPRISES, and TITEFLEX
§
CORP.,
§
Defendants.
§
September 29, 2016
David J. Bradley, Clerk
CIVIL ACTION NO. 4:09-0422
AMENDED MEMORANDUM AND ORDER
TABLE OF CONTENTS
I.
Introduction......................................................................................................3
II.
Background ......................................................................................................4
A.
The Fuel Tank and the Flex Connector ................................................. 5
B.
The State Court Litigation ..................................................................... 6
C.
Communications Between PSI and Mid-Continent ............................12
D.
Procedural Posture...............................................................................13
III.
Legal Standard ...............................................................................................14
IV.
Analysis .........................................................................................................15
A.
Legal Principles for Interpretation of Insurance Contracts ................. 15
B.
Legal Basis of the Titeflex Judgment: Texas Civil Practice &
Remedies Code § 82.002 .....................................................................18
1.
2.
C.
Section 82.002: General Legal Principles................................18
Components of the Titeflex Judgment ......................................22
The Duty to Cooperate ........................................................................30
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D.
Coverage for the Titeflex Judgment Under the Policy .......................44
1.
Policy Section I(A)(1)(b): “‘Property Damage’ To Which
This Insurance Applies” ............................................................46
a.
b.
Occurrence ......................................................................52
c.
Policy Period ...................................................................53
d.
Prior Knowledge of Property Damage ...........................54
e.
Professional Liability Endorsement ...............................54
f.
2.
Property Damage ............................................................47
Conclusion on “‘Property Damage’ to Which This
Insurance Applies”..........................................................57
Section I(A)(1)(a): “Damages Because of . . . ‘Property
Damage’” ..................................................................................57
a.
b.
“Because of” ...................................................................65
c.
3.
Damages .........................................................................57
Conclusion on Coverage for “Damages Because of
. . . ‘Property Damage’” ..................................................78
Money Damages .......................................................................79
a.
Definition of “Money Damages”....................................79
b.
Coverage for Money Damages .......................................80
4.
Exclusion q. ...............................................................................86
5.
Public Policy .............................................................................86
6.
Conclusion on Coverage ...........................................................89
E.
F.
V.
Texas Insurance Code .........................................................................89
Section 38.001 Attorney’s Fees Request ............................................90
Conclusion and Order ....................................................................................91
Appendix ..................................................................................................................94
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2
I.
INTRODUCTION
This insurance coverage case raises various legal issues suitable for a law
school examination.
Pending are the parties’ cross-motions for summary
judgment. Defendant Petroleum Solutions, Inc. (“PSI”) has filed a Motion for
Summary Judgment (“PSI Motion”) [Docs. # 62, # 63]. Plaintiff Mid-Continent
Casualty Company (“Mid-Continent”) responded and filed a Cross-Motion for
Summary Judgment (“Mid-Continent Motion,” and, with the PSI Motion, the
“Motions”) [Docs. # 68, # 68-1]. 1 At the Court’s request, PSI and Mid-Continent
each filed a supplemental brief.2 The Court heard argument on the Motions on
June 6, 2016. See Hearing Minutes and Order [Doc. # 87].
The Motions are now ripe for determination. After carefully considering the
parties’ briefing, all matters of record, and the applicable legal authorities, the
Court grants in part and denies in part the PSI Motion and grants in part and
1
PSI filed a combined Response to the Mid-Continent Motion and Reply in support
of its Motion (“PSI Reply”) [Doc. # 72]. Mid-Continent filed a Reply in support
of its Motion (“Mid-Continent Reply”) [Doc. # 74]. PSI filed a Motion for Leave
to File Sur-Reply [Doc. # 79], with the proposed Sur-Reply attached [Doc.
# 79-1]. Mid-Continent opposed this filing [Doc. # 82]. PSI’s Motion is granted.
Mid-Continent filed Objections [Doc. # 75] to certain exhibits attached to the PSI
Reply because these exhibits were not produced during the discovery period. PSI
argued in Response that Mid-Continent would not be prejudiced by the admission
of these exhibits. See PSI Response to Objections [Doc. # 78]. The Court
concludes that Mid-Continent is not prejudiced by the exhibits. See infra notes
266, 271, and accompanying text. Mid-Continent’s Objections are overruled.
2
See Order [Doc. # 83]; PSI Supplemental Brief [Doc. # 86]; Mid-Continent
Supplemental Brief [Doc. # 85]. Following oral argument, PSI filed a Motion for
Leave to File Supplemental Summary Judgment Evidence (“PSI Post-Argument
Brief”) [Doc. # 88], which motion the Court granted. See Order [Doc. # 89].
Mid-Continent filed a Response to the Motion for Leave to File Supplemental
Summary Judgment Evidence (“Mid-Continent Post-Argument Brief”) [Doc.
# 90].
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3
denies in part the Mid-Continent Motion. The Court decides as a matter of law all
issues presented by the parties except the questions of whether PSI satisfied its
duty to cooperate under the Mid-Continent insurance policy and several questions
relating to the exact amount of Mid-Continent’s coverage obligation, issues on
which a trial is needed. 3
II.
BACKGROUND
The parties dispute whether a commercial general liability (“CGL”) policy
issued by Mid-Continent (the “Policy”) 4 provides coverage for a judgment
rendered against PSI in litigation in Texas state court. The provisions of the Policy
that are relevant to this dispute are excerpted in the Appendix to this Memorandum
3
The Court issued its original Memorandum and Order [Doc. # 93] deciding the
Motions on July 29, 2016. The parties subsequently moved for reconsideration on
numerous issues. PSI filed a Motion to Alter or Amend (“PSI Recon. Motion”)
[Doc. # 94], objecting to the Court’s holdings regarding the manner in which the
duty to cooperate applies to the coverage dispute at bar and limiting the scope of
coverage to only a portion of the Titeflex Judgment. Mid-Continent filed a
Response (“Mid-Continent Recon. Response”) [Doc. # 100], to which PSI replied
(“PSI Recon. Reply”) [Doc. # 101].
Mid-Continent filed a Motion to Alter or Amend (“Mid-Continent Recon.
Motion”) [Doc. # 99], objecting to the Court’s comments on an issue of Texas
surety law and asserting that the doctrine of concurrent causation bars any
recovery by PSI. Mid-Continent also asserted for the first time that public policy
counsels against a finding of coverage in this case. PSI filed a Response (“PSI
Recon. Response”) [Doc. # 102], to which Mid-Continent replied (“Mid-Continent
Recon. Reply”) [Doc. # 103].
The Court carefully considered the parties’ arguments and authorities. The Court
hereby VACATES the July 29 Memorandum and Order, and incorporates the
results of its new analysis in this Amended Memorandum and Order.
4
Exhs. 1–1a to PSI Motion, Certified Copy of Mid-Continent Casualty Company
Policy No. 04-GL-00051591 (“Policy”) [Docs. # 63-2, #63-3]. All references
herein to the Policy are to the Commercial General Liability Coverage Form
(“CGL Form”), as amended by the Professional Liability Endorsement. See
Policy [Doc. # 63-2], at ECF pages 14–26, 40.
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and Order (“Appendix”). The following facts are not in dispute for purposes of the
Motions for Summary Judgment.
A.
The Fuel Tank and the Flex Connector
In 1997, Bill Head (“Head”) contracted with PSI to construct and install an
underground fuel storage system at his Silver Spur Truck Stop (“Silver Spur”) in
Pharr, Texas. 5 PSI purchased a component part for the fuel tank from Titeflex
Commercial Products (“Titeflex”).6 In October 2001, Head discovered that 20,000
gallons of fuel had seeped into the soil under the truck stop. 7 Head attributed the
damage to a leak in the fuel storage system and contacted PSI. PSI notified MidContinent of the fuel spill because PSI believed any resulting liability would be
covered by the Policy. 8 PSI and Mid-Continent theorized that a flex connector
manufactured by Titeflex in the fuel tank was faulty. 9
Counsel was retained by Mid-Continent in 2002 to represent PSI in any
potential litigation arising out of the fuel leak.
Counsel submitted the flex
connector to an expert for testing. 10 The expert inspected the flex connector but
5
Exh. 5 to PSI Motion, Mid-Continent Group Office Memorandum from Larry
Liveringhouse to John Delaney, dated Feb. 25, 2002 [Doc. # 63-5], at 2.
6
See Exh. A6 to Mid-Continent Motion, Letter from Mark Barron to Titeflex
Commercial Products, dated Jan. 22, 2002 [Doc. # 68-10].
7
Petroleum Sols., Inc. v. Head, 454 S.W.3d 482, 485 (Tex. 2014); see Exh. 5 to PSI
Motion, Mid-Continent Group Office Memorandum from Larry Liveringhouse to
John Delaney, dated Feb. 25, 2002 [Doc. # 63-5], at 2.
8
Exh. A2 to Mid-Continent Motion, Facsimile from Tom Barron to Jim Boam,
dated Nov. 18, 2001 [Doc. # 68-6], at 2.
9
Exh. 5 to PSI Motion, Mid-Continent Group Office Memorandum from Larry
Liveringhouse to John Delaney, dated Feb. 25, 2002 [Doc. # 63-5], at 2.
10
Exh. 8 to PSI Motion, Letter from Elizabeth Neally to Steve Hintze, dated Oct. 21,
2002 [Doc. # 63-10], at 1.
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found no conclusive evidence that the part was defective.11 The expert caused the
flex connector to be stored in W.H. Laboratories’ storage facility, which was torn
down in 2006, causing the part to be lost.12
B.
The State Court Litigation
On February 13, 2006, Head filed suit against PSI in the 398th District Court
of Hidalgo County (the “State Court Litigation”). 13
Head alleged claims for
Breach of Warranty of Fitness, Breach of Implied Warranty of Good and
Workmanlike Services, and Negligence. Head alleged that PSI had contended that
the fuel leak was caused by a faulty flex connector, but the Original Petition
alleged more broadly that PSI was at fault because it sold and installed the fuel
storage tank, including the flex connectors and the leak detection system. 14 MidContinent assumed PSI’s defense under a reservation of rights.15
On October 5, 2006, PSI filed a third-party action against Titeflex, which
alleged that Titeflex was responsible for the failure of the fuel storage system and
therefore PSI was “entitled to contribution and/or indemnity” from Titeflex (the
“Affirmative Claim”) under the Texas Products Liability Act, specifically,
11
Exh. A9 to Mid-Continent Motion, Letter from Elizabeth Neally to Steve Hintze,
dated Apr. 9, 2002 [Doc. # 68-13], at ECF page 3.
12
See Exh. 15 to PSI Motion, Letter from John Delaney to Robert Bryant, dated
Sept. 26, 2006 [Doc. # 63-17]; Exh. 16 to PSI Motion, Letter from Robert Bryant
to Victor Vicinaiz, dated Sept. 26, 2006 [Doc. # 63-18].
13
Exh. A14 to Mid-Continent Motion, Plaintiff’s Original Petition, Bill Head v.
Petroleum Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County,
Tex. Feb. 13, 2006) [Doc. # 68-18].
14
See id., at 2–3, ¶¶ 6–11.
15
See Section II.C, infra, for a description of Mid-Continent’s reservation of rights
letters.
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§ 82.002 of the Texas Civil Practice and Remedies Code (“Section 82.002”).16
Several months later, on January 30, 2007, Head filed a First Amended Original
Petition, which added a strict products liability claim against Titeflex. 17
During discovery in the State Court Litigation, on January 4, 2008, Titeflex
moved for a spoliation instruction against PSI for PSI’s failure to produce the flex
connector.18
On March 7, 2008, Head non-suited his claims against Titeflex
without prejudice 19 and shortly thereafter filed an amended petition that alleged
claims only against PSI. 20
In the first half of 2008, PSI and Mid-Continent debated whether to dismiss
PSI’s Affirmative Claim against Titeflex.
Mid-Continent had retained Victor
Vicinaiz (“Vicinaiz”) to represent PSI in the trial court and Jennifer Hogan
(“Hogan”) as appellate counsel. Hogan also offered legal advice during the trial
16
Exh. A22 to Mid-Continent Motion, Defendant Petroleum Solutions, Inc.’s Third
Party Action, Bill Head v. Petroleum Sols., Inc., Cause No. C-416-06-I (398th
Dist. Ct., Hidalgo County, Tex. Oct. 5, 2006) [Doc. # 68-26], at 2, § IV. PSI
references Section 82.003 in its pleading, but this appears to have been a typo.
PSI’s claim was treated as a Section 82.002 claim throughout the State Court
Litigation. Section 82.002 is discussed in detail in Section IV.B.2, infra.
17
Exh. A24 to Mid-Continent Motion, Plaintiff’s First Amended Original Petition,
Bill Head v. Petroleum Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo
County, Tex. Jan. 30, 2007) [Doc. # 68-28], at 3–4, ¶¶ 9–14.
18
Exh. A26 to Mid-Continent Motion, Defendant’s, Titeflex Corporation, Motion
for Sanctions for Spoliation of Evidence, Bill Head v. Petroleum Sols., Inc., Cause
No. C-416-06-I (398th Dist. Ct., Hidalgo County, Tex. Jan. 4, 2008) [Doc.
# 68-30].
19
Exh. A28 to Mid-Continent Motion, Plaintiff’s Notice of Non-Suit Without
Prejudice of Third-Party/Defendant Titeflex Corporation, Bill Head v. Petroleum
Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County, Tex. Mar. 7,
2008) [Doc. # 68-32].
20
Exh. A29 to Mid-Continent Motion, Plaintiff’s Second Amended Original
Petition, Bill Head v. Petroleum Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct.,
Hidalgo County, Tex. Apr. 7, 2008) [Doc. # 68-33].
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court proceedings. 21 After Head non-suited his claims against Titeflex without
prejudice, Vicinaiz advised that PSI similarly should dismiss its Affirmative Claim
without prejudice to simplify the State Court Litigation because Titeflex was
“vigorously defending itself,” and the defense was undercutting PSI’s position visà-vis Head. 22
On May 19, 2008, Titeflex filed a counterclaim against PSI (the “Titeflex
Counterclaim”) requesting indemnification of “costs of court, reasonable expenses,
and attorney’s fees arising subsequent to the entry of [Head’s] Notice of Non-Suit
[on March 7, 2008] which were expended in defense of this action and in
prosecution of this demand for indemnity.” 23 Vicinaiz relayed to Mid-Continent
and PSI that Titeflex offered to dismiss its Counterclaim if PSI dismissed its
Affirmative Claim. 24
As a result, on August 12, 2008, PSI dismissed its
21
See, e.g., Exh. 17 to PSI Motion, Letter from Hogan to Robert Bryant, dated Feb.
29, 2008 [Doc. # 63-19].
22
Exh. A30 to Mid-Continent Motion, Letter from Vicinaiz to Robert Bryant, dated
May 14, 2008 [Doc. #68-34], at 2.
23
Exh. A31 to Mid-Continent Motion, Original Counter Claim of Titeflex
Corporation Against Petroleum Solutions, Inc., Bill Head v. Petroleum Sols., Inc.,
Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County, Tex. May 19, 2008)
[Doc. # 68-33]. This type of claim is sometimes referred to as a request for “fees
for fees.”
Titeflex also requested recovery of “damages awarded to PSI as against Titeflex
that are properly attributable to PSI’s own wrongful conduct.” Titeflex
subsequently abandoned this latter request. See infra note 31 and accompanying
text.
24
Exh. A32 to Mid-Continent Motion, Email from Vicinaiz to Robert Bryant and
Michael A. McGurk, dated June 1, 2008 [Doc. # 68-36], at ECF page 2 (“I have
spoken with Tom Cowen, the attorney for Titeflex and he has suggested that
Petroleum Solutions dismiss their third party action and in turn they will dismiss
their counterclaim.”).
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Affirmative Claim without prejudice.25 On August 13, 2008, Titeflex explained
that it would only dismiss its Counterclaim if PSI would agree to mutual dismissal
of their claims with prejudice (the “Settlement Offer”).26 Titeflex gave PSI two
days, until August 15, 2008, to accept the Settlement Offer.27
Vicinaiz advised Mid-Continent and PSI that PSI’s dismissal of its claims
against Titeflex likely disposed of the Titeflex Counterclaim because it was merely
a reformulation of Titeflex’s Answer to PSI’s Affirmative Claim.
Titeflex
maintained nevertheless that its Counterclaim remained valid despite PSI’s
dismissal. Vicinaiz as well as Mid-Continent personnel urged PSI to accept the
Settlement Offer. 28 PSI decided to reject the Settlement Offer because PSI wanted
to retain the option to pursue an indemnity action against Titeflex, if necessary, in
light of Mid-Continent’s reservation of rights regarding the defense of PSI against
Head’s claims. 29
25
Exh. A36 to Mid-Continent Motion, Notice of Non-Suit, Bill Head v. Petroleum
Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County, Tex. Aug. 12,
2008) [Doc. # 68-40]. PSI and Mid-Continent intended to continue to designate
Titeflex as a responsible third party. See Exh. A32 to Mid-Continent Motion,
Email from Robert Bryant to Vicinaiz, dated Aug. 11, 2008 [Doc. # 68-36], at
ECF page 7.
26
Exh. 26 to PSI Motion, Letter from Thomas A. Cowen to Vicinaiz, dated Aug. 13,
2008 [Doc. # 63-28].
27
Id.
28
Exh. A37 to Mid-Continent Motion, Letter from Vicinaiz to Robert Bryant, dated
Aug. 12, 2008 [Doc. # 68-41]; Exh. A38 to Mid-Continent Motion, Emails
between Robert Glover and Vicinaiz, dated Aug. 14, 2008 [Doc. # 68-42].
29
Exh. 29 to PSI Motion, Letter from Michael A. McGurk to Robert Bryant, dated
Aug. 18, 2008 [Doc. # 63-31].
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On September 15, 2008, a month after Titeflex’s Settlement Offer had
expired, Titeflex amended its counterclaim. 30
As amended, the Titeflex
Counterclaim asserted a Section 82.002 claim, which requested “all past and future
costs of court, reasonable expenses, and reasonable and necessary attorney’s fees
which were expended in defense of this action and in prosecution of this demand
for indemnity.” 31
The State Court Litigation proceeded to trial in September 2008 on Head
and Titeflex’s respective claims against PSI. The judge instructed the jury that PSI
had “destroyed, lost, or failed to produce . . . material evidence” and that the jury
could presume that this evidence was unfavorable to PSI.32 On September 29,
2008, the jury returned verdicts in favor of Head and Titeflex. 33
Head was
awarded $1,131,321.26 in damages and prejudgment interest and $91,500.00 in
attorney’s fees against PSI. 34 The jury awarded Titeflex $382,334.00 in attorneys’
30
Exh. A42 to Mid-Continent Motion, Second Amended Counter Claims of
Defendant, Titeflex Corporation, Against Petroleum Solutions, Inc. (“Titeflex
Amended Counter Claim”), Bill Head v. Petroleum Sols., Inc., Cause No. C-41606-I (398th Dist. Ct., Hidalgo County, Tex. Sept. 15, 2008) [Doc. # 68-46].
Although Titeflex entitled this pleading “Second Amended Counter Claims”
(emphasis added), counsel explained at oral argument that Titeflex had not
previously amended its counterclaim.
31
Id., at 4. Titeflex did not specifically reference Section 82.002 in its pleading, but
its claim was treated as arising under that statute throughout the State Court
Litigation. See infra Section IV.B.2.
32
Exh. A46 to Mid-Continent Motion, Court’s Charge to the Jury, Bill Head v.
Petroleum Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County,
Tex. Nov. 5, 2008) [Doc. # 68-50], at 4.
33
Exh. 4 to PSI Motion, Final Judgment, Head v. Petroleum Sols., Inc., Cause No.
C-416-06-1 (398th Dist. Ct., Hidalgo County, Tex. Jan. 13, 2009) [Doc. # 63-6], at
1.
34
Id., at 3.
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fees, $68,519.12 in expenses, $12,393.35 in costs, and postjudgment interest at 5%
from the day of the judgment until its satisfaction (the “Titeflex Judgment”). 35
PSI appealed the judgment in favor of Head contending the trial judge’s
spoliation sanctions were in error. PSI also appealed the Titeflex Judgment on the
ground that Titeflex could not satisfy the requirements of Section 82.002, the
statute pursuant to which it sought indemnification from PSI. 36 The Corpus Christi
Texas Court of Appeals affirmed, 37 and PSI petitioned for review by the Texas
Supreme Court. The Texas Supreme Court issued an opinion on July 11, 2014, but
substituted a new opinion on reconsideration on December 19, 2014. The Texas
Supreme Court reversed the judgment in favor of Head, holding the trial court’s
spoliation instruction was error, and remanded for retrial on Head’s claims. The
Texas Supreme Court rejected PSI’s challenges to the Titeflex Judgment, finding
that the erroneous spoliation instruction did not affect the verdict in favor of
Titeflex. The Texas Supreme Court accordingly affirmed the Titeflex Judgment.38
Recently, on remand, the trial court entered summary judgment for PSI on Head’s
claims. 39
35
Id.
36
Petroleum Sols., Inc. v. Head, 454 S.W.3d 518, 567 (Tex. App.—Corpus Christi
2011), aff’d in part, rev’d in part, 454 S.W.3d 482 (Tex. 2014).
37
Id., at 579.
38
See Petroleum Sols., Inc. v. Head, 454 S.W.3d 482, 493 (Tex. 2014) (“PSI v.
Head”).
39
See Exh. B to Supplemental Joint Status Report, Order on Defendant Petroleum
Solutions, Inc.’s Supplemental Motion for Summary Judgment and Motion to
Reconsider, Head v. Petroleum Sols., Inc., Cause No. C-416-06-1 (398th Dist. Ct.,
Hidalgo County June 27, 2016) [Doc. # 92-1].
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11
C.
Communications Between PSI and Mid-Continent
Mid-Continent sent six reservation of rights letters to PSI over the course of
the State Court Litigation, 40 of which the fifth and sixth letters are relevant to the
dispute at bar. The fifth letter, which was sent on August 26, 2008, did not address
specifically the Titeflex Counterclaim, but stated that “Mid-Continent reserves its
right to decline any duty to PSI, including, but not limited to, PSI’s failure to
cooperate in our investigation and defense of this claim/suit.” 41 In the sixth letter,
sent on September 19, 2008, Mid-Continent explained that its coverage position in
the fifth letter applied to the Titeflex Counterclaim. 42 Noting that Titeflex sought
indemnification only of attorney’s fees, costs of court, and reasonable expenses,
Mid-Continent reserved the right in the sixth letter to disclaim coverage because
these items “may not constitute damages because of ‘property damage’ or ‘bodily
injury’ caused by an ‘occurrence’ as defined by the Mid-Continent Policy.” 43
After the Texas Supreme Court affirmed the Titeflex Judgment in its July
11, 2014 opinion, Mid-Continent denied coverage for the Titeflex Counterclaim on
July 30, 2014. 44 In the denial letter, Mid-Continent took the position that PSI’s
40
See Exhs. A10, A17, A19, A33, A40, and A43 to Mid-Continent Motion [Docs.
# 68-14, # 68-21, # 68-23, # 68-37, # 68-44, # 68-47].
41
Exh. A40 to Mid-Continent Motion, Letter from Rod Evans to Mark Barron, dated
Aug. 26, 2008 [Doc. # 68-44], at 7.
42
Exh. A43 to Mid-Continent Motion, Letter from Rod Evans to Mark Barron, dated
Sept. 19, 2008 [Doc. # 68-47], at 1 (“The Counter Claim of Titeflex Corporation
against PSI is part of the suit for which Mid-Continent has presently agreed to
provide coverage subject to a reservation of rights. . . . We believe our coverage
position letter of August 26, 2008 is sufficient to also address the Counter Claim
of Titeflex Corporation against PSI . . . .”).
43
Id., at 1–2.
44
Exh. A47 to Mid-Continent Motion, Letter from Robert Glover to Mark Barron,
dated July 30, 2014 [Doc. # 63-51], at 1.
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rejection of the Settlement Offer constituted a failure of cooperation that permitted
Mid-Continent to deny coverage. 45 Mid-Continent further cited “Exclusion q” of
the Policy, which excludes losses “caused intentionally by or at the direction of the
insured.” 46
D.
Procedural Posture
On February 12, 2009, Mid-Continent filed the complaint in this case
seeking declaratory relief that the judgment against PSI in the State Court
Litigation was not covered under the Policy. 47 In 2010, the Court stayed the case
pending completion of the state court appellate process.48 When the Titeflex
Judgment became final after the Texas Supreme Court’s December 19, 2014
decision, this Court reopened this case to resolve the coverage issues regarding the
Titeflex Judgment. 49
Mid-Continent seeks a declaratory judgment that the Titeflex Judgment is
not covered by the Policy on the grounds that (1) the language of the Policy does
not support a finding of coverage, (2) Exclusion q applies to the Titeflex
Judgment, and (3) PSI breached a duty to cooperate with Mid-Continent when PSI
rejected the Settlement Offer. 50 PSI has counterclaimed on the grounds that MidContinent’s denial of coverage constituted (1) a breach of contract and (2) a breach
45
Id., at 4–5.
46
Id., at 5.
47
Original Complaint for Declaratory Judgment [Doc. # 1].
48
Order [Doc. # 38].
49
See Order [Doc. # 40]; Second Amended Complaint for Declaratory Judgment
[Doc. # 50], at 5, ¶ 23 (“Mid-Continent and PSI agreed to re-open this
administratively closed case to adjudicate the coverage issues as to the Titeflex
judgment.”).
50
Second Amended Complaint for Declaratory Judgment [Doc. # 50], at 5,
¶¶ 24–31.
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of Chapter 541 of the Texas Insurance Code. 51 The parties now move for summary
judgment on all issues.
III.
LEGAL STANDARD
Rule 56 of the Federal Rules of Civil Procedure provides for the entry of
summary judgment against a plaintiff who fails to make a sufficient showing of the
existence of an element essential to his case and on which he will bear the burden
at trial. 52 Summary judgment “should be rendered if the pleadings, the discovery
and disclosure materials on file, and any affidavits show that there is no genuine
issue as to any material fact and that the movant is entitled to judgment as a matter
of law.”53
In deciding whether a genuine and material fact issue has been created, the
court reviews the facts and inferences to be drawn from them in the light most
favorable to the nonmoving party. 54 A genuine issue of material fact exists when
the evidence is such that a reasonable jury could return a verdict for the nonmovant.55
The Court may make no credibility determinations or weigh any
evidence, and must disregard all evidence favorable to the moving party that the
51
Defendant’s Answer to Second Amended Complaint for Declaratory Judgment
and Counterclaim [Doc. # 51], at 9–11.
52
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Curtis v. Anthony, 710 F.3d
587, 594 (5th Cir. 2013); Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.
1994) (en banc) (per curiam).
53
FED. R. CIV. P. 56(a); Celotex, 477 U.S. at 322–23; Curtis, 710 F.3d at 594.
54
Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 412 (5th
Cir. 2003).
55
Tamez v. Manthey, 589 F.3d 764, 769 (5th Cir. 2009) (citing Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986)).
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14
jury is not required to believe.56
The Court is not required to accept the
non-movant’s conclusory allegations, speculation, and unsubstantiated assertions
which are either entirely unsupported, or supported by a mere scintilla of
evidence.57 Affidavits cannot preclude summary judgment unless they contain
competent and otherwise admissible evidence.58
“When evidence exists in the summary judgment record but the nonmovant
fails even to refer to it in the response to the motion for summary judgment, that
evidence is not properly before the district court.” 59 “Rule 56 does not impose
upon the district court a duty to sift through the record in search of evidence to
support a party’s opposition to summary judgment.” 60
IV.
ANALYSIS
A.
Legal Principles for Interpretation of Insurance Contracts
The Court has subject matter jurisdiction over this action based on complete
diversity of citizenship of the parties. The Court is bound to apply the substantive
law of the forum state and follow federal procedural rules. 61 Here, the parties
agree that Texas law governs substantive issues of insurance law.
56
Chaney v. Dreyfus Serv. Corp., 595 F.3d 219, 229 (5th Cir. 2010) (citing Reaves
Brokerage Co., 336 F.3d at 412–13).
57
Id. (citing Reaves Brokerage, 336 F.3d at 413); Little, 37 F.3d at 1075.
58
See FED. R. CIV. P. 56(c)(4); Love v. Nat’l Med. Enters., 230 F.3d 765, 776 (5th
Cir. 2000).
59
Malacara v. Garber, 353 F.3d 393, 405 (5th Cir. 2003).
60
Id. (internal citations and quotations omitted); Williams v. Valenti, 432 F. App’x
298, 302 (5th Cir. 2011).
61
See Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Hall v. G.E. Plastic Pac.
PTE Ltd., 327 F.3d 391, 395 (5th Cir. 2003).
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15
Under Texas law, the meaning of an insurance contract is determined under
the standards applicable to contracts generally. 62 A court’s primary concern is to
give effect to the intention of the parties as expressed by the policy language. 63
“If the contract is worded so that it can be given a definite meaning, it is
unambiguous and a judge must construe it as a matter of law.” 64 A contract is
ambiguous only “when its meaning is uncertain and doubtful or it is reasonably
susceptible to more than one meaning.” 65 The determination of whether a contract
is ambiguous is a question of law. 66 Only if the contract is subject to more than
one reasonable interpretation will it be deemed ambiguous and interpreted in favor
of coverage for the insured.67
62
See One Beacon Ins. Co. v. Crowley Marine Servs., 648 F.3d 258, 271 (5th Cir.
2011); Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487, 491 (5th Cir.
2000); Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987).
63
Am. Nat’l Gen. Ins. Co. v. Ryan, 274 F.3d 319, 323 (5th Cir. 2001) (citing Ideal
Lease Serv., Inc. v. Amoco Prod. Co., 662 S.W.2d 951, 953 (Tex. 1983)).
64
Int’l. Ins. Co. v. RSR Corp., 426 F.3d 281, 291 (5th Cir. 2005); Royal Indem. Co.
v. Marshall, 388 S.W.2d 176, 181 (Tex. 1965).
65
Kern v. Sitel Corp., 517 F.3d 306, 309 (5th Cir. 2008) (quoting Coker v. Coker,
650 S.W.2d 391, 393 (Tex. 1983)). “The fact that the parties disagree as to
coverage does not create an ambiguity.” Valmont Energy Steel, Inc. v.
Commercial Union Ins. Co., 359 F.3d 770, 773 (5th Cir. 2004); see also Gilbane
Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589, 597 (5th Cir. 2011); Forbau v. Aetna
Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994).
66
Am. Int’l. Specialty Lines Ins. Co. v. Rentech Steel, L.L.C., 620 F.3d 558, 562 (5th
Cir. 2010) (citing Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462,
464 (Tex. 1998)).
67
Lambrecht & Assocs., Inc. v. State Farm Lloyds, 119 S.W.3d 16, 20 (Tex. App.—
Tyler 2003, no pet.) (citing Grain Dealers Mut. Ins. Co. v. McKee, 943 S.W.2d
455, 458 (Tex. 1997)); see also Swift Energy Co., 206 F.3d at 491.
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16
Mid-Continent requests a declaration that it did not breach the Policy’s terms
by declining coverage over the Titeflex Judgment. PSI counterclaims that MidContinent breached that contract. 68 In Texas,
The essential elements of a breach of contract action are: (1) the
existence of a valid contract; (2) performance or tendered
performance by the plaintiff; (3) breach of the contract by the
defendant; and (4) damages sustained by the plaintiff as a result of the
breach.69
There is no dispute that the Policy is a valid contract. The parties’ disputes center
on the other contract claim elements. They dispute whether PSI failed to cooperate
with Mid-Continent and thus breached the contract’s cooperation clause.70 The
parties also proffer competing interpretations of various provisions of the Policy. 71
The parties do not dispute that, if Mid-Continent is found to have breached the
terms of the Policy, PSI suffered damages, but the parties disagree on the amount
of coverage due. Foundational legal analysis is necessary to rulings on the contract
issues.
The Court first addresses the legal basis of the Titeflex Judgment. The
Court then concludes that the cooperation clause applies to PSI’s conduct in
declining the Titeflex Settlement offer of mutual dismissal with prejudice, but
determines that genuine issues of material fact exist regarding whether PSI
breached that duty. The Court also concludes that the Policy provides indemnity to
68
See Defendant’s Answer to Second Amended Complaint for Declaratory
Judgment and Counterclaim [Doc. # 51], at 9.
69
Smith Int’l, Inc. v. Egle Grp., 490 F.3d 380, 387 (5th Cir. 2007) (quoting Valero
Mktg. & Supply Co. v. Kalama Int’l, L.L.C., 51 S.W.3d 345, 351 (Tex. App.—
Houston [1st Dist.] 2001, no pet.)).
70
See infra Section IV.C.
71
See infra Section IV.D.
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17
PSI for a portion of the Titeflex Judgment and that the remainder of the parties’
arguments lack merit.
B.
Legal Basis of the Titeflex Judgment: Texas Civil Practice &
Remedies Code § 82.002
This case presents a question of first impression: Does a CGL policy provide
coverage for a judgment against a manufacturer for loss incurred in meeting its
statutory obligation under Section 82.002 of the Texas Civil Practice and Remedies
Code, 72 which requires manufacturers to indemnify an innocent seller for losses
incurred by the seller in a products liability action. A brief review of the language
and purpose of Section 82.002 provides essential context.
1.
Section 82.002: General Legal Principles
Titeflex obtained its Judgment pursuant to Section 82.002. The parties and
state trial court did not specify which subsections were implicated.
Section 82.002(a).— Section 82.002(a) creates the primary cause of action
for an innocent seller to obtain indemnity from a manufacturer. Section 82.002(a)
provides:
A manufacturer shall indemnify and hold harmless a seller against
loss arising out of a products liability action, except for any loss
caused by the seller’s negligence, intentional misconduct, or other act
or omission . . . for which the seller is independently liable.
A “products liability action” is “any action against a manufacturer or seller for
recovery of damages arising out of personal injury, death, or property damage
allegedly caused by a defective product whether the action is based in strict tort
liability, strict products liability, negligence, misrepresentation, breach of express
72
Texas Products Liability Act § 82.002, TEX. CIV. PRAC. & REM. CODE § 82.002
(eff. Sept. 1, 1993).
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18
or implied warranty, or any other theory or combination of theories.”73
A
“manufacturer” is “a person who is a designer, formulator, constructor, rebuilder,
fabricator, producer, compounder, processor, or assembler of any product or any
component part thereof and who places the product or any component part thereof
in the stream of commerce.” 74 A “seller” is “a person who is engaged in the
business of distributing or otherwise placing, for any commercial purpose, in the
stream of commerce for use or consumption a product or any component part
thereof.” 75 As clarified by the Texas Supreme Court in the underlying dispute
between PSI and Head, under Section 82.002, “an innocent seller who suffers loss
is protected regardless of whether it is upstream or downstream of [the] product’s
manufacturer.”76
The Texas Supreme Court explained the purpose of Section 82.002 in 1999:
Viewed in context, section 82.002 is a part of a scheme to protect
manufacturers as well as sellers of products. First, the new law
ensured that the relatively small seller need not fear litigation
involving problems that are really not in its control. Second, it
established uniform rules of liability so that manufacturers could
make informed business decisions and plaintiffs could understand
their rights.77
The enactment of Section 82.002 altered allocation of responsibility for losses
attributable to products liability actions under Texas law. “Under the common
73
Id., § 82.001(2). “[A] ‘products liability action’ includes not only products
liability claims but also other theories of liability properly joined thereto, such as
[an] allegation of negligence . . . .” Meritor Auto., Inc. v. Ruan Leasing Co., 44
S.W.3d 86, 91 (Tex. 2001).
74
TEX. CIV. PRAC. & REM. CODE § 82.001(4).
75
Id., § 82.001(3).
76
PSI v. Head, 454 S.W.3d at 494.
77
Fitzgerald v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864, 868–69 (Tex.
1999).
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19
law, a manufacturer was not required to indemnify a seller of its products ‘unless
and until there was a judicial finding of negligence on the part of the
manufacturer.’” 78 After enactment of Section 82.002, however, the manufacturer
became the seller’s indemnitor when an injured person or entity makes an
allegation against the seller. 79 The manufacturer owes the seller the indemnity
even if the manufacturer is ultimately not found liable. 80 Under Section 82.002(b),
“‘loss’ includes court costs and other reasonable expenses, reasonable attorney
fees, and any reasonable damages.”
In General Motors Corp. v. Hudiburg, the Texas Supreme Court also
explained in 2006 that a party may be both a manufacturer and seller.81 This
situation arises when one party manufactures an item that it sells to another party
who uses that item as part of a product. In that circumstance, the first party is a
component-product
manufacturer
and
the
second
is
a
finished-product
78
Toyota Indus. Equip. Mfg., Inc. v. Carruth-Doggett, Inc., 325 S.W.3d 683, 687
(Tex. App.—Houston [1st Dist.] 2010) (quoting Owens & Minor, Inc. v. Ansell
Healthcare Prods. Inc., 251 S.W.3d 481, 483 (Tex. 2008)); see also Humana
Hosp. Corp. v. Am. Med. Sys., Inc., 785 S.W.2d 144 (Tex. 1990).
79
Gen. Motors Corp. v. Hudiburg, 199 S.W.3d 249, 256 (Tex. 2006) (“The duty to
indemnify is triggered by the injured claimant’s pleadings.”). Losses for which
the seller is held independently liable are excluded from the manufacturer’s
indemnification obligation. Unlike the manufacturer’s indemnification obligation,
which is trigged by allegations, this exception only applies if there is an
adjudication on the merits that the seller was liable. PSI v. Head, 454 S.W.3d at
492 (citing Meritor Auto., Inc. v. Ruan Leasing Co., 44 S.W.3d 86, 91 (Tex.
2001)).
80
Section 82.002(e)(1) provides that this duty “applies without regard to the manner
in which the action is concluded.” Further, the duty “is in addition to any duty to
indemnify established by law, contract, or otherwise.” TEX. CIV. PRAC. & REM.
CODE § 82.002(e)(1).
81
Hudiburg, 199 S.W.3d at 256 (“By [the] definitions [in Section 82.001], all
manufacturers are also sellers, but not all sellers are manufacturers.”).
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20
manufacturer. The Texas Supreme Court has explained that the manufacturerseller relationship is bi-directional in this situation:
[T]he manufacturer of a component product alleged by a claimant to
be defective has a duty to indemnify an innocent seller/manufacturer
of a finished product which incorporates the component from loss
arising out of a products liability action related to the alleged defect,
but the manufacturer of an allegedly defective finished product has a
duty to indemnify the innocent seller/manufacturer of a component
product for the same loss.82
If an injured person or entity asserts claims against both the component-part and
finished-product manufacturers, the manufacturers may assert competing Section
82.002(a) claims against each other. Where two parties pursue competing Section
82.002(a) claims, “the burden will ultimately fall on the party whose product is
found to be defective.” If neither product is defective, both Section 82.002(a)
claims fail. 83
Attorney’s Fees Under Section 82.002(g).— Section 82.002(g) authorizes
fee-shifting for an innocent seller who successfully prosecutes an indemnity claim
under Section 82.002(a). Section 82.002(g) provides:
A seller is entitled to recover from the manufacturer court costs and
other reasonable expenses, reasonable attorney fees, and any
reasonable damages incurred by the seller to enforce the seller’s right
to indemnification under this section.
82
83
Id.
PSI v. Head, 454 S.W.3d at 494; see also Hudiburg, 199 S.W.3d at 256–57 (“If
neither the component-product manufacturer nor the finished-product
manufacturer is innocent, depending not on allegations but on proof, both
indemnity claims under the statute will fail. If both are innocent, again depending
on proof, the indemnity claims offset each other.”).
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21
2.
Components of the Titeflex Judgment
PSI and Titeflex’s Section 82.002(a) Claims.— Head’s Original Petition
asserted claims only against PSI.84 PSI asserted a Section 82.002(a) claim against
Titeflex based on its contention that a flex connector manufactured by that
company caused the leak.85 Head then amended his Petition to name Titeflex as a
co-defendant and added allegations that Titeflex was responsible for the fuel leak.
Eventually, Head non-suited his claims against Titeflex. Titeflex then filed a
counterclaim against PSI seeking attorney’s fees incurred subsequent to Head’s
non-suit of Titeflex.86 Titeflex subsequently amended its counterclaim to include
all fees and costs incurred from the time PSI filed its Affirmative Claim on
October 5, 2006, including the period in which Head had a direct claim against
Titeflex. 87
84
See Exh. 14 to Mid-Continent Motion [Doc. # 68-18].
85
PSI pleaded its claim pursuant to “Section 82.003” of the Texas Civil Practice and
Remedies Code, “Liability of Nonmanufacturing Sellers,” which provision states
the elements a claimant must prove to hold a seller who did not manufacture a
product liable for injury caused by the product. See Exh. A22 to Mid-Continent
Motion, Defendant Petroleum Solutions, Inc.’s Third Party Action, Bill Head v.
Petroleum Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County,
Tex. Oct. 5, 2006) [Doc. # 68-26], at 2, § IV. It appears that PSI intended to plead
a claim pursuant to Section 82.002 and PSI’s claim was treated as such in the State
Court Litigation. PSI alleged it and Head should recover all “damages” (which PSI
did not specify) under products liability law. Id., at 3.
86
Exh. A31 to Mid-Continent Motion, Original Counter Claim of Titeflex
Corporation Against Petroleum Solutions, Inc., Bill Head v. Petroleum Sols., Inc.,
Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County, Tex. May 19, 2008)
[Doc. # 68-33].
87
Titeflex Amended Counter Claim [Doc. # 68-46].
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22
In this case, Titeflex, a component-product manufacturer, and PSI, a
finished-product manufacturer, 88 were “both manufacturers and sellers vis-à-vis
each other,”89 and both asserted Section 82.002 claims. However, only Titeflex
pursued through trial its Section 82.002(a) claim for losses incurred in the State
Court Litigation.90 For purposes of Section 82.002(a), the existence of allegations
by Head against Titeflex was sufficient to sustain a judgment in favor of Titeflex
as seller-indemnitee against PSI as manufacturer-indemnitor for attorney’s fees and
expenses incurred as a result of the Head claims against Titeflex. 91 In addition,
Section 82.002(g) permitted Titeflex to recover additional attorney’s fees, expenses
and costs incurred through trial on the Section 82.002(a) claim as a “seller” for
indemnity against PSI, the “manufacturer.” 92 The evidence submitted to the jury in
88
The Texas Supreme Court held in PSI v. Head that the fuel tank was a “product.”
See 454 S.W.3d at 494–95.
89
Id., at 494.
90
See Exh. A36 to Mid-Continent Motion, Notice of Non-Suit, Bill Head v.
Petroleum Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County,
Tex. Aug. 12, 2008) [Doc. # 68-40].
91
There was no evidence at trial that Titeflex was independently liable for the
damage to Head. The only questions submitted to the jury in the State Court
Litigation regarding the Titeflex Counterclaim were: (1) “Is Petroleum Solutions,
Inc. a manufacturer?”; (2) “Is Titeflex Corporation a seller?”; (3) “What is a
reasonable fee for the necessary services of the attorneys for Titeflex Corporation
in this case, stated in dollars and cents?”; and (4) “What amount, if any, in
expenses were reasonably incurred by Titeflex Corporation in this lawsuit?” See
Exh. A46 to Mid-Continent Motion, Court’s Charge to the Jury, Bill Head v.
Petroleum Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County,
Tex. Nov. 5, 2008) [Doc. # 68-50], at 32–34 (Questions 13–16).
92
See Titeflex’s Amended Counter Claim [Doc. # 68-46], at 4 (“Titeflex is entitled
to recover from PSI all past and future costs of court, reasonable expenses, and
reasonable and necessary attorney’s fees which were expended in defense of this
action and in prosecution of this demand for indemnity.” (emphasis added)); Final
Judgment, Exh. A44 to Mid-Continent Motion [Doc. # 68-48], at 3 (awarding
(continued…)
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23
the State Court Litigation and the Titeflex Judgment compensated Titeflex for its
attorney’s fees, expenses and costs incurred as a result of litigation of three claims:
(1) defense against Head’s products liability claims; (2) defense against PSI’s
Affirmative Claim under Section 82.002(a); and (3) prosecution against PSI
pursuant to Section 82.002(g) for recovery of Titeflex’s Section 82.002(a)
indemnity claim. The Titeflex Judgment did not segregate these components.
Analysis of coverage under the Policy requires consideration of each component
separately.
Defense Against PSI’s Affirmative Claim as a Component of the Titeflex
Judgment.— As noted, in addition to the loss suffered by Titeflex in defending
against Head’s claims (component (1) above), the Titeflex Judgment includes
attorney’s fees, expenses and costs that Titeflex incurred in defending against
PSI’s Affirmative Claim asserted under Section 82.002(a) (component (2) above).
PSI asserted its claim for indemnity against Titeflex on October 5, 2006, before
Head asserted his direct claims on January 30, 2007, and PSI did not non-suit that
claim until mid-August 2008, more than five months after Head dismissed his
Titeflex claims in March.
PSI’s State Court Litigation counsel, selected and
advised by Mid-Continent, did not object in the Texas trial court to the inclusion of
Titeflex’s losses related to defense against PSI’s Section 82.002(a) claim in the
evidence of attorney’s fees, expenses and costs submitted to the jury. On appeal,
PSI unsuccessfully sought to challenge that portion of the Titeflex Judgment based
on these fees. The Texas Court of Appeals held that PSI had waived the issue. 93
(continued…)
Titeflex “attorney fees for services rendered through the trial of this case”
(emphasis added)).
93
Petroleum Sols., Inc. v. Head, 454 S.W.3d 518, 577 (Tex. App.—Corpus Christi
2011), aff’d in part, rev’d in part, 454 S.W.3d 482 (Tex. 2014). This issue was
(continued…)
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24
The Section 82.002(a) obligation is for “indemnity” and does not reach fees,
expenses and costs incurred by Titeflex, a component-product manufacturer, in
defending against an unsuccessful Section 82.002 claim by PSI, the finishedproduct manufacturer. 94
As stated in Equitable Recovery, L.P. v. Heath Ins.
Brokers of Tex., L.P., the general rule under Texas law is that “[t]here can be no
contribution or indemnity between two parties based on a direct claim between
them.” 95 The scope of Section 82.002 indemnification must be interpreted in light
of this principle. The statutory obligation does not extend to losses (such as fees
and expenses) caused by litigation between manufacturers/sellers asserting
competing Section 82.002 claims against each other.
(continued…)
not presented for review by the Texas Supreme Court. Instead, the Texas
Supreme Court’s analysis was confined to the following issues concerning the
Titeflex Judgment: (1) the nature of the duty to indemnify between finishedproduct manufacturers and component-product manufacturers; (2) whether
improvement to real property may constitute a product; and (3) whether the
Titeflex Judgment was affected by the trial court’s erroneous spoliation
instruction.
94
Section 82.002(a) provides:
A manufacturer shall indemnify and hold harmless a seller against loss
arising out of a products liability action, except for any loss caused by the
seller’s negligence, intentional misconduct, or other act or omission . . . for
which the seller is independently liable. (Emphasis added.)
95
235 S.W.3d 376, 387 (Tex. App.—Dallas 2007, pet. denied). No party has cited
authority that Section 82.002 should be interpreted as an exception to this rule.
Indeed, PSI urged the Corpus Christi Texas Court of Appeals to reduce the
Titeflex Judgment based on this rule. See Brief for Appellant Petroleum
Solutions, Inc., Petrol. Sols., Inc. v. Head, 454 S.W.3d 518 (Tex. App.—Corpus
Christi 2011), 2010 WL 1768424, at *65–66. The Corpus Christi Texas Court of
Appeals did not reach the question because it concluded PSI had waived the
objection in the trial court. See Petroleum Sols., Inc. v. Head, 454 S.W.3d 518,
577 (Tex. App.—Corpus Christi 2011), aff’d in part, rev’d in part, 454 S.W.3d
482 (Tex. 2014).
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25
PSI argues that the Texas Supreme Court in Fresh Coat, Inc. v. K–2, Inc.
referred in passing to a Section 82.002(a) claim as “brought in a ‘products liability
action.’” 96 PSI relies on this thin reed to maintain that a Section 82.002 claim
creates an exception from the rule stated in Equitable Recovery,97 and that,
accordingly, losses attributable to defense against a Section 82.002 claim are losses
“arising out of a products liability action” indemnifiable under Section 82.002(a). 98
The Court is unpersuaded that Fresh Coat overrules or modifies the holding in
Equitable Recovery that “[t]here can be no indemnity between two parties based on
a direct claim between them.” 99 Indeed, Equitable Recovery was not mentioned by
the Texas Supreme Court in Fresh Coat. The phrase in Fresh Coat on which PSI
relies was in the context of an entirely different point and, at best, is dicta. 100 And,
96
318 S.W.3d 893, 900 (Tex. 2010).
97
PSI only seeks to distinguish Equitable Recovery and does not dispute that it states
a generally valid principle of Texas law. See PSI Recon. Reply [Doc. # 101], at 8
(“PSI does not dispute the general rule as espoused by Equitable Recovery, but
this case is about claims under Chapter 82 of the Texas Civil Practice and
Remedies Code.”). PSI relies solely on the contention that Section 82.002 is a
legal exception to the rule stated in Equitable Recovery and does not seek to
distinguish that case on its facts.
98
See PSI Recon. Reply [Doc. # 101], 13–14.
99
235 S.W.3d at 387.
100
The question presented in Fresh Coat was whether a manufacturer’s Section
82.002(a) obligation “covers a settlement payment made by [a seller] to [a
plaintiff] where the [seller] may have been independently obligated by contract to
indemnify” the plaintiff. See 318 S.W.3d at 895. The settlement payment in
question related directly to compensation to the plaintiff for damage caused by the
products liability wrongs. The Texas Supreme Court rejected the manufacturer’s
argument that the exception in Section 82.002(a) for a seller’s independent
liability covered the settlement payments because that exception only applies
where the seller is actually at fault. See id., at 901 (“[W]hat is important is not
merely whether a seller is independently liable, but why.”). There was no
discussion of indemnification of attorney’s fees, expenses and costs.
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26
the Texas Supreme Court was without the benefit of briefing by the parties or
analysis on the question at bar. The Court concludes that the fees, expenses and
costs incurred by Titeflex in defending solely against PSI’s Affirmative Claim
were not recoverable under Section 82.002(a). 101
Section 82.002(g) Component of the Titeflex Judgment.— The Titeflex
Judgment did not distinguish between the indemnity required by Section 82.002(a)
and the fees, expenses and costs awarded as part of the fee-shifting provision in
Section 82.002(g) (component (3) of the Titeflex Judgment).102 Examination of
the timeline of the State Court Litigation reveals that these amounts appear to be
easily segregated for the purposes of this coverage dispute.
The Section 82.002(a) indemnification obligation includes a causation
requirement. Statutory indemnity under Section 82.002(a) applies only to “losses
related to allegations that the [manufacturer’s product] was defective.” 103 This
indemnification obligation is often triggered by the injured person’s allegations
against the seller and generally terminates when those allegations are no longer
asserted in an action. For example, in Seelin Medical, Inc. v. Invacare Corp., a
Texas Court of Appeals held that a manufacturer’s duty to indemnify the seller
101
Also, this conclusion does not address a possible estoppel based on PSI’s
counsel’s waiver of the issue of allocation of fees at the trial in the State Court
Litigation between those incurred defending against Head’s claims and those
defending against PSI’s Affirmative Claim. See infra notes 238 and 240-244, and
accompanying text.
102
Section 82.002(g) provides:
A seller is entitled to recover from the manufacturer court costs and other
reasonable expenses, reasonable attorney fees, and any reasonable damages
incurred by the seller to enforce the seller’s right to indemnification under
this section.
103
Hudiburg, 199 S.W.3d at 262.
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27
began when the injured person sued both seller and manufacturer based on
allegations that the manufacturer was at fault for the injury. 104 The obligation to
indemnify terminated when the injured person adopted a different theory of
liability, alleging a different manufacturer was at fault, and abandoned its original
allegations. That abandonment, however, did not retroactively eliminate the duty
to indemnify for losses incurred while those allegations were pending in the
case.105 The Section 82.002(a) component of the Titeflex Judgment is therefore
measured by losses incurred by Titeflex that were caused by Head’s products
liability claims.
On January 30, 2007, Head asserted products liability claims against Titeflex
in his First Amended Original Petition.106 According to the Texas Supreme Court,
these allegations triggered PSI’s indemnification obligation.107 Head non-suited
104
See Seelin Med., Inc. v. Invacare Corp., 203 S.W.3d 867, 871–72 (Tex. App.—
Eastland 2006, rev. denied, Apr 27, 2007).
105
Id., at 871.
106
In his amended pleading, Head alleged, “[a]s stated in [PSI’s] third party action,
Petroleum Solutions purchased the underground flex connector from Titeflex.
Titeflex manufactured the flex connector. Titeflex is strictly liable for damages
caused by the defective flex connector.” Exh. A24 to Mid-Continent Motion
[Doc. # 68-28], at 3, ¶ 9. The First Amended Original Petition further alleged that
Head had performed “an emergency response cleanup” upon learning of the leak
and that “the TRNCC [Texas Natural Resource Conservation Commission]
ordered a full remediation which is being prepared by the plaintiff.” Id., at 4, ¶ 11.
Head noted that “Health & Safety Code, Tex. H. & S. Code § 361.344 provides
that a party may recover expenses of cleanup and remedial action performed
pursuant to TNRCC mandated corrective action,” so “[t]he responsible parties,
Titeflex and Petroleum Solutions, Inc. are responsible for the cleanup costs.” Id.,
at 4, ¶¶ 10–11.
107
PSI v. Head, 454 S.W.3d at 493 (“Based on Head’s pleadings, [PSI] . . . owed
Titeflex . . . a duty to indemnify it under section 82.002 for losses arising out of
this products liability action, to the extent Titeflex was not independently liable for
those losses.” (footnote omitted)).
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28
his claims against Titeflex on March 7, 2008. There is no contention or record
evidence that Titeflex defended against a products liability claim following that
date. Titeflex’s continued participation in the State Court Litigation related only to
the Section 82.002 claims, that is, as a plaintiff on its Counterclaim against PSI
filed May 19, 2008, and, until August 12, 2008, as a defendant to PSI’s
Affirmative Claim.
Therefore, the amount of PSI’s obligation under Section
82.002(a) comprises losses incurred by Titeflex while Head’s claim against
Titeflex was pending between January 30, 2007, and March 7, 2008. The precise
amount of these fees and expenses must be determined at trial. 108
To recap, the parties asserted various claims in the different proceedings
pertinent to the coverage action at bar. These claims are: (1) Head’s state law
products liability claim against PSI; (2) Head’s state law products liability claim
against Titeflex; (3) PSI’s Section 82.002 claim against Titeflex; (4) Titeflex’s
Section 82.002(a) claim against PSI; (5) Titeflex’s claim against PSI for feeshifting under Section 82.002(g); and (6) Mid-Continent’s declaratory judgment
claim and PSI’s claims against Mid-Continent, both seeking rulings on coverage
under the Policy. It is critical to bear in mind the posture of the parties when
undertaking analysis of each issue.
108
The Court attempted to determine this amount from the billing records submitted
to the jury in the State Court Litigation. See Exh. 57 to PSI Motion [Docs. # 88-1
to # 88-9]. The parties, however, disagree about what should be included and the
issue will be resolved at trial. Furthermore, this analysis is subject to the outcome
at trial of the fact dispute about whether the waiver by PSI through the counsel
selected by Mid-Continent of the issue of allocation of Titeflex’s fees attributable
to defense against Head’s claims as opposed to defense against PSI’s Affirmative
Claim should work an estoppel in this coverage litigation. See infra notes 238 and
240-244, and accompanying text.
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29
C.
The Duty to Cooperate
Mid-Continent seeks summary judgment that coverage does not exist under
the Policy because PSI failed to cooperate in the conduct of the State Court
Litigation when, on August 15, 2008, it rejected Titeflex’s Settlement Offer of
mutual dismissals with prejudice. In response, PSI argues that accepting Titeflex’s
Settlement Offer of dismissal with prejudice of PSI’s Affirmative Claim would
have been a bad bargain for PSI, because PSI faced potential liability to Head for
which Mid-Continent had reserved the right to deny coverage, and PSI hoped for a
potential alternative avenue for relief. PSI also argues that Mid-Continent seeks an
unprecedented expansion of the duty to cooperate to include a litigation decision
by an insured regarding an affirmative claim against a third party. 109
The Court concludes that the duty to cooperate applies to PSI’s rejection of
the Settlement Offer, but that a genuine issue of material fact remains regarding
whether PSI’s conduct actually breached that duty.
Definition of the Duty to Cooperate in the Policy.— The duty to cooperate
is created in the Policy in section IV(2), “Duties In The Event Of Occurrence,
Offense, Claim Or Suit.”110 That provision states in pertinent part:
c.
You and any other involved insured must:
(3)
* * * *
Cooperate with us in the investigation or settlement of
the claim or defense against the ‘suit’[.] 111
109
The Court rejects PSI’s contentions that Mid-Continent is estopped from raising
the duty to cooperate. Mid-Continent’s August 26, 2008 Letter informed PSI that
the insurer reserved the right to disclaim coverage based on PSI’s failure to
cooperate. See Exh. A40 to Mid-Continent Motion [Doc. # 68-44], at 7. MidContinent’s September 19, 2008 Letter to PSI clarified sufficiently that this
statement applied to the Titeflex Counterclaim. See Exh. A43 to Mid-Continent
Motion [Doc. # 68-47], at 1.
110
See infra Appendix, at 94–97.
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The Policy does not define the term “claim.” As used in Policy section IV(2),
“claim” refers to a request for relief against the insured, here, PSI. 112 The Policy
has a definition for “suit”:
“Suit” means a civil proceeding in which damages because of “bodily
injury”, “property damage” or “personal and advertising injury” to
which this insurance applies are alleged. 113
Because “suit” is defined to include the entire “civil proceeding,” the assertion of,
or retention of a right to assert, a right of action by PSI in response to a claim
against it is part of “defense against” a “suit” under the Policy.
The duty to cooperate set forth in Policy section IV(2)(c)(3) (the
“cooperation clause”) is a standard provision in insurance policies and is “intended
to guarantee to insurers the right to prepare adequately their defense on questions
of substantive liability.” 114 A violation of the cooperation clause will preclude
coverage where the violation prejudices the insurer. 115 Examples of prejudice to
the insurer include deprivation of a valid defense or opportunity to engage in
settlement discussions. 116
As the party asserting a claim for breach of contract, PSI bears the burden of
establishing that it performed under the Policy, including fulfilling its obligations
111
(continued…)
Policy [Doc. # 63-2], at CGL Form page 9 (ECF page 22), § IV(2)(c)(3).
112
See id., § IV(2).
113
Id., at CGL Form page 13 (ECF page 27), § V(18)
114
Quorom Health Res., L.L.C. v. Maverick Cnty. Hosp. Dist., 308 F.3d 451, 468 (5th
Cir. 2002) (quotation omitted).
115
Id., at 468 (“To breach its duty to cooperate, an insured’s conduct must materially
prejudice the insurer’s ability to defend the lawsuit on the insured’s behalf.”).
116
U.S. Cas. Co. v. Schlein, 338 F.2d 169, 173 (5th Cir. 1964).
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under the cooperation clause.
Mid-Continent, however, bears the burden of
showing that it was prejudiced by any failure to cooperate. 117
The “Duty to Cooperate” Encompasses Settlement of PSI’s Affirmative
Claim.— There is no dispute that Mid-Continent sought to settle Titeflex’s claim
against PSI through the Settlement Offer. PSI challenges whether Mid-Continent
could require PSI’s cooperation because the Settlement Offer’s terms prejudiced
PSI’s Affirmative Claim.
The Policy contains no textual limitation on the terms or scope of settlement
that are governed by the Policy’s cooperation clause. 118
A settlement is a
compromise that is often based on exchange of items of value. Here, the items of
value were PSI and Titeflex’s respective causes of action under Section 82.002.
PSI argues that the cooperation clause’s phrase “settlement of the claim”
encompasses purely defensive actions related to Titeflex’s specific claim against
PSI, but does not extend to what PSI characterizes as its offensive strategy, here,
PSI’s Affirmative Claim under Section 82.002. PSI’s contention is off the mark.
The cooperation clause authorizes Mid-Continent to request cooperation in
“settlement of the claim . . . or defense against the ‘suit’.” The entire clause must
117
Schlein, 338 F.2d at 174 (“Texas imposes on the insurer claiming a breach [of the
cooperation clause] the burden of establishing that the [failure to cooperate]
prejudiced the insurer.”). Mid-Continent cites an intermediate Texas appellate
decision, Progressive Cty Mut. Ins. Co. v. Trevino, 202 S.W.3d 811 (Tex. App.—
San Antonio 2006, pet. denied) (citing Harwell v. State Farm Mut. Auto. Ins. Co.,
896 S.W.2d 170 (Tex. 1995)), for the proposition that the cooperation clause
creates a condition precedent to coverage. The key attribute of a condition
precedent is that even a minor failure to fulfill such a condition defeats a claim for
breach of contract. See, e.g., Members Mut. Ins. Co. v. Cutaia, 476 S.W.2d 278
(Tex. 1972). The requirement that the insurer show actual prejudice therefore
makes a decision on the condition precedent issue academic.
118
The legal term “settlement” has a broad meaning: “[a]n agreement ending a
dispute or lawsuit.” Settlement, BLACK’S LAW DICTIONARY (10th ed. 2014).
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be read in light of the broad definition of “suit,” which includes the entire “civil
proceeding.” PSI’s Affirmative Claim was integral to PSI’s defensive strategy in
the State Court Litigation. Therefore, PSI’s attempt now to exclude that claim
from the range of potential aspects of settlement that are within the cooperation
clause is rejected.119
Dismissal of the Affirmative Claim with prejudice was
among the items of value that could be offered to Titeflex as part of a “settlement
of the claim.” 120
119
PSI argues that this interpretation of “claim or ‘suit’” grants Mid-Continent
excessive settlement authority under the Policy. The same phrase appears in
Policy section I(A)(1)(a), which provides, in pertinent part, “[w]e [Mid-Continent]
may, at our discretion, investigate any ‘occurrence’ and settle any claim or ‘suit’
that may result.” See Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14),
§ I(A)(1)(a). PSI contends that application of the Court’s interpretation of the
phrase “claim or ‘suit’” in the cooperation clause to include the entire civil
proceeding would grant Mid-Continent “unfettered right to dismiss PSI’s
affirmative claim.” This argument is rejected for two reasons.
First, the Policy defines “suit” as a “civil proceeding.” See Policy [Doc. # 63-2],
at CGL Form page 13 (ECF page 27), § V(18). The plain meaning of “civil
proceeding” is broader than solely claims against the insured party. Second, PSI’s
interpretation of Policy section I(A)(1)(a) is overbroad. The right of the insurer to
settle under section I(A)(1)(a) is modified by the other provisions of the Policy,
including the reasonableness inquiry under the cooperation clause. See infra notes
123-127 and accompanying text. Indeed, PSI’s broad reading of section I(A)(1)(a)
that the settlement authority in Policy section I(A)(1)(a) provided the insurer
“unfettered discretion” over the entire civil proceeding would make the
cooperation clause in Policy section IV superfluous.
120
PSI argues that Mid-Continent attempts to transform the Policy’s cooperation
clause into a “hammer clause.” PSI Recon. Reply [Doc. # 101], at 16 & n.41. A
hammer clause is a negotiated feature of an insurance policy. The Policy in this
case does not contain such a clause. A hammer clause provides the insurer with
additional rights to limit its exposure under the policy. See Jonathan L. Schwartz,
Esq., & Seth L. Laver, Esq., The Case of the Missing Insured: A Tricky Variation
on the Consent to Settle, 10 No. 21 WESTLAW J. INS. BAD FAITH 2, at *2 (Feb. 18,
2015) (“A typical hammer provision states as follows: ‘The company [the insurer]
shall . . . not settle any claim without the written consent of the named insured,
which consent shall not be unreasonably withheld. If, however, the named insured
(continued…)
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33
Whether PSI’s Rejection of the Settlement Offer Did or Did Not Violate
the Cooperation Clause as a Matter of Law.— “Determination of what constitutes
a breach of the cooperation clause of a liability policy is usually a question of
fact.”121 The cooperation clause is violated where the insured’s conduct is not
“reasonable and justified under the circumstances.” 122 Neither party has carried its
(continued…)
refuses to consent to a settlement recommended by the company and elects to
contest the claim or continue legal proceedings in connection with such claim, the
company’s liability for the claim shall not exceed the amount for which the claim
could have been settled, including claims expenses up to the date of such refusal,
or the applicable limits of liability, whichever is less.’”); see also Sec. Ins. Co. of
Hartford v. Schipporeit, Inc., 69 F.3d 1377, 1383 (7th Cir. 1995) (“This settlement
language in the policy speaks to a relatively narrow situation. If an insured is
presented with an opportunity to dispose of a claim and the insurer recommends
that the claim be resolved, the insured may refuse to accept the insurer’s
recommendation only at his peril. The risk of loss over and above the proposed
settlement passes to the insured.”); Scottsdale Ins. Co. v. Ala. Mun. Ins. Corp., No.
2:11-cv-668-MEF, 2013 WL 5231928, at *13 (M.D. Ala. Sept. 16, 2013)
(discussing consequences of enforcement of the hammer clause’s terms). Unlike
the limitation of coverage under a hammer clause, a material breach of the
cooperation clause, as Mid-Continent claims occurred here, voids coverage
entirely. The hammer clause is therefore irrelevant to the analysis of PSI’s
obligations under the Policy’s cooperation clause.
121
Frazier v. Glens Falls Indem. Co., 278 S.W.2d 388, 391 (Tex. Civ. App.—Fort
Worth 1955, writ ref’d n.r.e.). Neither party cites Texas law regarding the
applicable standard for resolving the factual question of whether an insured’s
actions violate the cooperation clause.
122
Id., at 392; see also 14 COUCH ON INSURANCE § 199:50 (3d ed. 2015) (“An
insured cannot arbitrarily or unreasonably decline to assist in making a fair and
legitimate defense to be made in his or her name.” (emphasis added)); 4-32 NEW
APPLEMAN LAW OF LIABILITY INSURANCE § 32.04 (2016) (“Where the
cooperation provision is limited to general terms, the scope of the policyholder’s
duties will depend on what is reasonable given the totality of the circumstances.”).
In Frazier, the alleged violation of the cooperation clause was the insured’s refusal
to sign a statement prepared by the insurer. 278 S.W.2d at 392. The insurer in
Frazier also argued that the insured had violated the cooperation clause by
colluding with the victim plaintiff. The Frazier court held that collusion between
(continued…)
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burden to show the absence of a genuine issue of material fact regarding the
reasonableness of PSI’s rejection of the settlement offer.
The record includes many facts that must be weighed to determine the
reasonableness of PSI’s rejection of the Settlement Offer.
PSI’s independent
counsel explained in a letter on August 18, 2008, that PSI saw several reasons not
to accept the Settlement Offer. 123 PSI had received advice from Hogan earlier in
the State Court Litigation that PSI had a strong claim under Section 82.002 while
Hogan saw weaknesses in Titeflex’s Counterclaim. 124 Counsel had advised that
the Titeflex Counterclaim was a mere reformulation of PSI’s Affirmative Claim, so
PSI may have believed dismissal without prejudice of its Affirmative Claim
resulted in automatic dismissal of the Titeflex Counterclaim. 125 PSI took the
position that it was only a “seller” and Titeflex only a “manufacturer,” so it
believed that allegations in Head’s pleadings were sufficient to support a Section
(continued…)
plaintiff and insured constitutes a violation of the cooperation clause where the
insured acted fraudulently. Mid-Continent does not argue that PSI colluded with
Titeflex, so this portion of Frazier is inapposite.
123
Exh. 29 to PSI Motion, Letter from Michael A. McGurk to Robert Bryant, dated
Aug. 18, 2008 [Doc. # 63-31].
124
Hogan advised on June 2, 2008,
I do not think that Titeflex has much of a claim to have been sued as an
innocent seller. The plaintiff also now has no claim against Titeflex, so any
claim they could assert for indemnity (and I don’t know what that claim
might be) would be limited to what Titeflex might have expended
defending the plaintiff’s claims while those claims existed. Titeflex has no
claim against us to recover from us because we sued it.
Exh. 18 to PSI Motion, Email from Hogan to Michael A. McGurk, Vicinaiz, and
Robert Bryant, dated June 2, 2008 [Doc. # 63-20].
125
Exh. 27 to PSI Motion, Letter from Vicinaiz to Robert Bryant, dated Aug. 12,
2008 [Doc. # 63-29], at 1–2.
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82.002 claim against Titeflex even though the loss of the flex connector would
make proving liability on the merits difficult. 126 Most importantly, PSI viewed the
deal as a bad bargain because Mid-Continent had reserved the right to disclaim
coverage of potential liability to Head.127 Finally, PSI had a mere 48 hours to
evaluate the Settlement Offer.
Mid-Continent’s position also finds some support in the record. Titeflex had
represented that it would seek recovery in excess of $350,000 128 and counsel had
advised that the trial court judge would permit the Titeflex Counterclaim to
proceed. 129
Even if PSI had some possibility of success, acceptance of the
Settlement Offer would have resolved significant short-term exposure with
certainty.
Further, while the allegations about the flex connector may have
triggered a duty on Titeflex’s part, Hudiburg had already established principles of
law that suggest allegations are not sufficient where there are competing Section
82.002 claims between a component-part manufacturer and a finished-product
manufacturer.130 PSI’s position on the merits had been significantly weakened by
126
See Exh. 21 to PSI Motion, Letter from Vicinaiz to Thomas A. Cowen, dated Mar.
19, 2008 [Doc. # 63-23], at 3 (“Titeflex’s duty to indemnify PSI exists because the
plaintiff, Head, has ab initio, and to this date, alleged that Titeflex’s flex connector
was defective. PSI does not have to possess the flex connector or be able to
produce the flex connector to Titeflex in order to obtain indemnity.”).
127
See, e.g., Exh. 28 to PSI Motion, Email from Vicinaiz to Robert Glover, dated
Aug. 14, 2008 [Doc. # 63-30], at ECF page 1 (noting that PSI was opposed to the
Settlement Offer due to Mid-Continent’s reservation of rights).
128
Exh. 26 to PSI Motion, Letter from Thomas A. Cowen to Vicinaiz, dated Aug. 13,
2008 [Doc. # 63-28].
129
Exh. 27 to PSI Motion, Letter from Vicinaiz to Robert Bryant, dated Aug. 12,
2008 [Doc. # 63-29], at 2.
130
See supra notes 79–83 and accompanying text. PSI’s independent counsel
acknowledged that the Titeflex Counterclaim was modeled on Hudiburg. See
(continued…)
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the loss of the flex connector and its expert witness. 131 These considerations, along
with other relevant facts, must be weighed by a trier of fact. The Court cannot
decide as a matter of law whether PSI’s conduct was reasonable. 132
Neither party provides authority that establishes that the cooperation clause
was or was not violated as a matter of law. PSI cites Progressive County Mutual
Insurance Co. v. Trevino 133 and State Farm Lloyds v. Brown.134 These cases
involved egregious examples of uncooperative behavior.135
Mid-Continent
(continued…)
Exh. 29 to PSI Motion, Letter from Michael A. McGurk to Robert Bryant, dated
Aug. 18, 2008 [Doc. # 63-31], at 2.
131
Exh. 27 to PSI Motion, Letter from Vicinaiz to Robert Bryant, dated Aug. 12,
2008 [Doc. # 63-29], at 2.
132
PSI describes a parade of horribles that may ensue from application of the duty to
cooperate under these circumstances. PSI’s arguments regarding the “negative
consequences” of applying the duty to cooperate in this context, see PSI Recon.
Motion [Doc. # 94], at 12–15, relate to evaluation of the reasonableness of PSI’s
actions, and not general principles of law. The reasonableness inquiry in this case
includes consideration of the effect of the Settlement Offer on PSI’s interests,
which inquiry offers PSI sufficient protection. The Court finds unpersuasive PSI’s
assertion that application of the duty to cooperate would leave it “without
protection from settlement offers that adversely affect its interest.”
PSI claims that an insurer’s duties to the insured are limited to the duty to defend
and duty to indemnify, neither of which, according to PSI, protects PSI from MidContinent’s insistence on settlement of the Affirmative Claim. See PSI Recon.
Reply [Doc. # 101], at 18. PSI overlooks the interaction of the cooperation clause
with the duty to indemnify. The insurer will not be relieved of its obligation under
the duty to indemnify unless it can show that the insured unreasonably withheld
cooperation in settlement of a claim and that that lack of cooperation prejudiced
the insurer. Under the Court’s interpretation, a reasonable disagreement or
technical violation will not operate to void coverage.
133
202 S.W.3d 811.
134
Civ. A. No. 3:08-cv-318-O, 2009 WL 2902511 (N.D. Tex. Sept. 9, 2009).
135
Trevino, 202 S.W.3d at 817 (“Given [the insured’s] lack of cooperation with his
defense, his filing of a pro se answer and frivolous counterclaim despite having
(continued…)
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37
concedes that PSI’s actions do not resemble the facts of those cases. 136 However,
nothing in these cases sets a standard for a finding of failure to cooperate as a
matter of law.137
Similarly, Mid-Continent’s reliance on Laster v. American
National Fire Insurance Co.138 is misplaced. Like the insureds in Trevino and
Brown, the insured in Laster failed to participate in litigation to an egregious
extent, which conduct invited a substantial adverse judgment. 139
(continued…)
counsel hired by [the insurer] to represent him, his adamancy about [the insurer]
not paying on the claim, and his guardian’s telephone message indicating that [the
insured] did not intend ‘to be involved in this at all’, the attorney hired by [the
insurer] was simply not permitted to appear on [the insured]’s behalf in court.”);
Brown, 2009 WL 2902511, at *1, *3 (holding that insurer was prejudiced by
failure to cooperate where insured missed appointments with counsel, failed to
assist with responses to discovery requests, and did not appear for trial, resulting
in a verdict based on the opponent’s evidence alone).
136
See Mid-Continent Motion [Doc. # 68-1], at 26.
137
PSI also relies on a case in which a court found that the duty to cooperate did not
require the insured to waive its attorney-client privilege. Fugro-McClelland
Marine Geosciences, Inc. v. Steadfast Ins. Co., Civ. A. No. H-07-1731, 2008 WL
5273304, at *4 (S.D. Tex. Dec. 19, 2008) (Smith, M.J.). It is not apparent how
this ruling controls the analysis of an insured’s decision to reject a settlement
offer.
138
775 F. Supp. 985 (N.D. Tex. 1991) (McBryde, J.).
139
Id., at 999 (“A more glaring case of lack of cooperation by an insured . . . would
be difficult to find.”). Among other deleterious actions in the litigation, the
insured failed to respond to the plaintiff’s request for admissions, so facts giving
rise to liability were deemed to have been proven. See 775 F. Supp. at 985.
Mid-Continent relies on the statement in Laster that “[i]mplicit in an excess
insurance contract of this kind is an obligation on the part of the insured to take
reasonable steps to avoid legal liability or to minimize the amount of his legal
liability,” 775 F. Supp. at 995, to argue that PSI should have accepted the
settlement offer to minimize its amount of legal liability. This discussion in
Laster, however, relates to an “excess insurer’s rights,” see id. (emphasis added),
and is separate from the duty of an insured to cooperate with its primary insurer.
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Mid-Continent’s cited authorities involving jurisdictions other than Texas
are also inapposite.140 These cases concern bad faith claims against insurers for
liability on excess judgments. 141 In each instance, the insured rejected a settlement
offer, an excess judgment ensued, and the judgment creditor later stepped into the
insured’s shoes.142 The judgment creditor sued the insurer for the amount of the
excess judgment asserting that the insurer had acted in bad faith when the insured
rejected the settlement offer. 143 Each court held that the insurer was not liable to
the judgment creditor because the insurer had fulfilled its duty to advise the insured
regarding the risks of rejecting the settlement offer. 144
These cases are not probative on the question of whether PSI breached the
cooperation clause.
None of these cases addressed the contractual duty to
cooperate in the applicable insurance policies. Under the applicable law in the
140
See Maldonado v. First Liberty Ins. Corp., 342 F. App’x 485 (11th Cir. 2009)
(Florida law); Carlile v. Farmers Ins. Exch., 219 Cal. Rptr. 773 (Cal. Ct. App.
1985); Bos. Old Colony Ins. Co. v. Gutierrez, 386 So.2d 783 (Fla. 1980).
141
In a typical bad faith action predicated on the duty to accept a reasonable
settlement offer, the allegation is that the insurer rejected a reasonable settlement
offer and should be liable for the portion of the ensuing judgment that is in excess
of the policy limit. Under Texas law, an insurer’s duty to accept a reasonable
settlement offer, which was first articulated in G.A. Stowers Furniture Co. v. Am.
Indem. Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929, holding approved), “shifts
the risk of an excess judgment from the insured to the insurer by subjecting an
insurer to liability for the wrongful refusal to settle a claim against the insured
within policy limits.” AFTCO Enters., Inc. v. Acceptance Indem. Ins. Co., 321
S.W.3d 65, 69 (Tex. App.—Houston [1st Dist.] 2010, pet. denied).
142
Maldonado, 342 F. App’x at 486; Carlile, 219 Cal. Rptr. at 774–75; Gutierrez,
386 So. 2d at 784.
143
Maldonado, 342 F. App’x at 486–87; Carlile, 219 Cal. Rptr. at 776; Gutierrez,
386 So. 2d at 784–85.
144
Maldonado, 342 F. App’x at 487–88; Carlile, 219 Cal. Rptr. at 776; Gutierrez,
386 So. 2d at 785.
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39
respective jurisdictions, the insurer had a duty of good faith and fair dealing to
advise its insured about the risks of rejecting a viable settlement. The focus there
was on the insurer’s actions and whether the insurer’s conduct justifies extracontractual recovery for bad faith or on any other theory warranting a recovery in
excess of the policy limits. 145
Prejudice.— Under Texas law, entry of an adverse judgment against an
insured constitutes prejudice to the insurer if that judgment would not have been
entered if the insured had cooperated. 146 If PSI is found to have breached the
cooperation clause by rejecting the Settlement Offer, a finding the Court has not
made, Mid-Continent was prejudiced as a matter of law by the entry of the Titeflex
Judgment.
PSI argues that the Titeflex Judgment itself is not evidence of prejudice
because “[t]he mere fact that the insurer owes money that it does not wish to pay
145
See, e.g., Maldonado, 342 F. App’x at 487 (“[T]he focus in a bad faith case is not
on the actions of the claimant but rather on those of the insurer in fulfilling its
obligations to the insured.” (quoting Berges v. Infinity Ins. Co., 896 So. 2d 665,
677 (Fla. 2005))).
146
See Rodriquez v. Tex. Farmers Ins. Co., 903 S.W.2d 499, 509 (Tex. App.—
Amarillo 1995, no writ) (“It is undisputed that because of their agreement with the
Ortegas, the Rodriquezes failed to cooperate with Farmers in its efforts to set aside
the default judgment. Their failure to cooperate, in violation of their obligation
under the insurance policy, resulted in prejudice to Farmers in the amount of 1.65
million dollars [the amount of the default judgment], which was more than 16
times the coverage under Farmer’s policy. Thus, Farmers was prejudiced as a
matter of law . . . .”); see also Liberty Mut. Ins. Co. v. Cruz, 883 S.W.2d 164, 166
(Tex. 1993) (per curiam) (holding that insurer was prejudiced in the amount of the
judgment as a matter of law by failure to send any notice of the suit and
subsequent entry of a default judgment); see generally 14 COUCH ON INSURANCE
§ 199:79 (3d ed. 2016) (noting that entry of an adverse judgment against the
insured may constitute prejudice under the duty to cooperate).
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40
does not constitute prejudice as a matter of law.” 147
PSI relies on the case
Insurance Co. of North America v. McCarthy Brothers Co., 148 but reads it too
broadly.
McCarthy Brothers addressed whether an insurer could assert the
“consent to settle” clause to disclaim coverage of a settlement entered into by the
insured without the insurer’s consent. The court restated the rule that a mere
technical violation of a provision does not permit an insurer to disclaim coverage.
Thus, regarding the “consent to settle” clause, an insurer is not prejudiced by an
insured’s voluntary assumption of liability where the insurer would nevertheless
have consented to the settlement. 149
If the facts at bar, namely, PSI’s refusal to accept Titeflex’s offer of mutual
dismissals with prejudice, support a finding that PSI acted unreasonably, PSI’s
rejection of the settlement offer would not be a mere technical violation of the
cooperation clause. Acceptance of the Settlement Offer would have resulted in
complete avoidance of PSI’s liability to Titeflex and, therefore, no claim for
coverage for Titeflex’s claim. 150
Instead, a substantial judgment was entered
147
PSI Recon. Motion [Doc. # 94], at 16 (quoting Ins. Co. of N. Am. v. McCarthy
Bros. Co., 123 F. Supp. 373, 379 (S.D. Tex. 2000) (Kent, J.)).
148
123 F. Supp. 373, 379 (S.D. Tex. 2000) (Kent, J.).
149
See id. (citing Hernandez v. Gulf Grp. Lloyds, 875 S.W.2d 691, 693–94 (Tex.
1994)).
150
PSI also cites St. Paul Guardian Ins. Co. v. Centrum G.S. Ltd., 383 F. Supp. 2d
891 (N.D. Tex. 2003) (Lindsay, J.), in which the district court held that “an
insurer’s inability or failure to obtain a smaller settlement, or more favorable
settlement, [does not] constitute[] prejudice sufficient to relieve an insurer of its
duty to defend or indemnify its insured.” Id., at 902. Centrum involved late
notice to the insurer. The notice was given two years after the filing of the
liability lawsuit, but more than two years before that case went to trial. It does not
appear that the late notice was alleged to have caused the entry of an adverse
judgment.
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against PSI, for which PSI seeks indemnity. PSI therefore deprived Mid-Continent
of the opportunity to avoid liability entirely. 151
Waiver.— PSI argues that Mid-Continent waived the right to rely on the
cooperation clause to deny coverage.152 “Waiver is the intentional relinquishment
of a right actually known, or intentional conduct inconsistent with claiming that
right.” 153 The elements of waiver are “(1) an existing right, benefit, or advantage
held by a party; (2) the party’s actual knowledge of its existence; and (3) the
party’s actual intent to relinquish the right, or intentional conduct inconsistent with
the right.”154 Waiver may be resolved as an issue of law where surrounding facts
and circumstances are undisputed.155
PSI argues that Mid-Continent cannot invoke the cooperation clause because
Mid-Continent remained silent regarding the cooperation clause until after the
Texas Supreme Court’s decision in 2014 affirming the Titeflex Judgment.156
Under Texas law, “[s]ilence or inaction, for so long a period as to show an
intention to yield the known right, is . . . enough to prove waiver.” 157
Mid-
Continent indicated its intent to rely on the cooperation clause in letters sent to PSI
151
See Rodriquez, 903 S.W.2d at 509 (holding that an insurer was prejudiced by
insured’s lack of cooperation where insured’s actions prevented insurer from
vacating an infirm default judgment).
152
PSI Recon. Motion [Doc. # 94], at 17–19.
153
Ulico Cas. Co. v. Allied Pilots Ass’n, 262 S.W.3d 773, 778 (Tex. 2008).
154
Id.
155
See Addicks Servs., Inc. v. GGP-Bridgeland, LP, 596 F.3d 286, 299 (5th Cir.
2010).
156
See PSI Recon. Motion [Doc. # 94], at 18–19.
157
Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640, 643 (Tex. 1996).
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in August and September of 2008.158 PSI has cited no authority requiring a more
particularized notice.159
PSI argues that Mid-Continent acted inconsistently with an intention to
assert the duty to cooperate regarding Titeflex’s requirement of PSI’s dismissal of
its claim with prejudice. 160 PSI points to Mid-Continent’s defense of PSI through
the appeal to the Texas Supreme Court. This argument fails. That defense was
pursuant to a reservation of rights, which reservation included the duty to
cooperate. 161
158
See supra note 109 (discussing Exh. A40 to Mid-Continent Motion, Letter from
Rod Evans to Mark Barron, dated Aug. 26, 2008 [Doc. # 68-44]; Exh. A43 to
Mid-Continent Motion, Letter from Rod Evans to Mark Barron, dated Sept. 19,
2008 [Doc. # 68-47]).
159
While Mid-Continent’s reference to the cooperation clause was vague, the record
reveals various communications between PSI and Mid-Continent about the
parties’ disagreement whether PSI should accept Titeflex’s offer to dismiss the
parties’ respective indemnity claims with prejudice. Mid-Continent clearly and
repeatedly stated its view to PSI’s representatives that PSI should accept the
Settlement Offer. See Exh. A37 to Mid-Continent Motion, Letter from Vicinaiz to
Robert Bryant, dated Aug. 12, 2008 [Doc. # 68-41]; Exh. A38 to Mid-Continent
Motion, Emails between Robert Glover and Vicinaiz, dated Aug. 14, 2008 [Doc.
# 68-42]. Mid-Continent’s references to the cooperation clause do not constitute
“intentional conduct inconsistent” with its right to rely on that clause.
PSI’s argument that it was deprived of the ability to make an informed decision is
irrelevant to the waiver analysis. Instead, this argument would relate to the
reliance element of an estoppel claim, which argument is rejected above. See
generally supra note 109. To the extent PSI argues that Mid-Continent should
have been clearer in its reservation of rights letters in August and September 2008,
that argument is addressed by PSI’s claim under Texas Insurance Code
§ 541.060(a)(4). The Court grants summary judgment to Mid-Continent on the
Insurance Code claim. See infra Section IV.E.
160
See PSI Recon. Motion [Doc. # 94], at 19.
161
See supra note 110. PSI also notes that Mid-Continent did not reference the duty
to cooperate in its initial pleadings in this case. See Complaint [Doc. # 1]; First
Amended Complaint [Doc. # 2]. PSI cites no authority, however, that a party
(continued…)
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Finally, PSI relies on Mid-Continent’s refusal to waive the “no voluntary
assumption of liability” condition when, while the Titeflex Judgment was on
rehearing at the Texas Supreme Court in 2014, PSI and Titeflex considered
negotiating a settlement.162 By this time, Mid-Continent had denied coverage for
the Titeflex Judgment based expressly on the duty to cooperate. The Court sees no
discernible connection between Mid-Continent’s positions on the two provisions.
Conclusion on the Duty to Cooperate.— There is a fact issue whether PSI’s
conduct declining to settle its Affirmative Claim against Titeflex with prejudice in
exchange for Titeflex’s dismissal of its claim against PSI violated PSI’s contractual
duty to cooperate in the settlement of claims or defenses. Summary judgment is
therefore denied on both parties’ motions on this issue. Because of the extensive
briefing and intricacy of the other coverage issues, which, with minor exceptions,
can be determined as a matter of law, judicial economy dictates that the Court
resolve the remaining questions prior to trial on the cooperation clause.
D.
Coverage for the Titeflex Judgment Under the Policy
In the State Court Litigation, Titeflex sought recovery from PSI of attorney’s
fees, expenses and court costs only. Because an injured plaintiff’s allegations
(continued…)
waives an argument merely by first pleading it in a properly filed amended
complaint. The Court recognizes that the Second Amended Complaint [Doc.
# 50], in which Mid-Continent first pleaded the duty to cooperate, was not filed
until six years after the First Amended Complaint. That delay, however, is
attributable to the duration of the appellate proceedings in the State Court
Litigation. This coverage dispute was stayed and administratively closed on
December 11, 2009, less than a year after Mid-Continent commenced it. See
Minute Entry Order [Doc. # 33]. During that period, no substantive litigation
occurred. The Second Amended Complaint was filed approximately one month
after this case was reopened in 2015. See Order Reopening Case [Doc. # 40].
162
See PSI Recon. Motion [Doc. # 94], at 19.
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against an innocent seller trigger the manufacturer’s duty to indemnify, a
manufacturer may be responsible for the cost of the seller’s defense regardless of
the manufacturer’s ultimate liability. 163 Section 82.002(a) thus places the innocent
seller’s defense costs on the manufacturer. This case presents the question of
whether the seller’s defense costs may be shifted to the manufacturer’s CGL
carrier. 164
PSI bears the burden of demonstrating coverage under the Policy while MidContinent bears the burden of establishing the applicability of any exclusions to
coverage.165
163
See Honeywell v. GADA Builders, Inc., 2012 OK CIV APP 11, ¶ 26, 271 P.3d 88,
97 (Okla. Civ. App. 2012) (“A manufacturer’s statutory duty to indemnify a seller
for attorney fees and costs is analogous with an insurer’s duty to defend the
insured. The insurer and the manufacturer are obligated to finance the insured and
seller’s defense, respectively. The insurer defends on behalf of the insured and the
manufacturer indemnifies the seller for its defense costs.”); see also Seelin, 203
S.W.3d at 870 (analogizing manufacturer’s duty to indemnify seller based on
allegations against seller to “the eight-corners rule used to determine an insurer’s
duty to defend”); see generally supra notes 72–75 and accompanying text.
164
Under Texas law, the innocent seller’s insurer may assert the seller’s Section
82.002 cause of action to recover its legal fees. See Graco, Inc. v. CRC, Inc. of
Tex., 47 S.W.3d 742 (Tex. App.—Dallas 2001, pet. denied) (rejecting the
argument that the insurer does not qualify for Section 82.002 recovery of legal
fees because an insurer is not a “seller” as defined in Section 82.001(3)).
165
Guar. Nat’l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998) (“The
insured bears the initial burden of showing that there is coverage, while the insurer
bears the burden of proving the applicability of any exclusions in the policy.”).
PSI contends that Mid-Continent admitted that certain requirements for coverage
had been met. See PSI Reply [Doc. # 72], at 12–13. Mid-Continent responds that
PSI admitted the Policy does not cover the Titeflex Judgment. See Mid-Continent
Reply [Doc. # 74], at 6. Neither purported admission bears the weight the
respective party places on it. The Court therefore reaches the merits of the
coverage dispute.
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The scope of CGL coverage for bodily injury and property damage is
established by the Policy’s “Insuring Agreement” at section I(A)(1)(a):
We [Mid-Continent] will pay those sums that the insured [PSI]
becomes legally obligated to pay as damages because of ‘bodily
injury’ or ‘property damage’ to which this insurance applies.166
For PSI to carry its burden on the coverage issue on summary judgment, PSI must
show that there is no genuine issue of material fact that (1) there was “‘property
damage’ to which this insurance applies” 167 and (2) the Titeflex Judgment was
awarded as “damages because of” that property damage. PSI also argues for
coverage because there are money damages to which the Professional Liability
Endorsement may apply, an argument the Court addresses in Section III.D.3, infra.
Mid-Continent invokes one exclusion in this case, Exclusion q, which is addressed
in Section IV.D.4, infra.
1.
Policy Section I(A)(1)(b): “‘Property Damage’ To Which
This Insurance Applies”
Section I(A)(1)(b) of the Insuring Agreement defines the scope of the phrase
“‘property damage’ . . . to which [the Policy] applies.”
Section I(A)(1)(b)
provides:
b.
This insurance applies to . . . “property damage” only if:
(1)
The . . . “property damage” is caused by an “occurrence”
that takes place in the “coverage territory”; and
(2)
The . . . “property damage” occurs during the policy
period; and
166
Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(a). See infra
Appendix, at 94.
167
No party argues the dispute involves bodily injury.
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(3)
Prior to the policy period, no insured . . . knew that the
. . . “property damage” had occurred, in whole or in
part. . . . 168
The Court first determines whether there is a genuine issue of material fact
regarding the existence of “property damage” as defined by the Policy. There is no
dispute the injury to Head’s real property is “property damage” within the Policy’s
definition. The Court therefore focuses in more detail on whether that property
damage is causally connected to an “occurrence,” as defined by the original Policy
language. The Court then examines the timing of the property damage. The Court
concludes that there was “‘property damage’ . . . to which [the Policy] applies.” In
the alternative, the Court determines that the Policy “applies” to the damage to
Head’s property pursuant to the Professional Liability Endorsement’s definition of
“occurrence.” 169
a.
Property Damage
Whether There Was “Property Damage.”— The Policy defines “property
damage” as:
a.
Physical injury to tangible property, including all resulting loss
of use of that property. All such loss of use shall be deemed to
occur at the time of the physical injury that caused it; or
b.
Loss of use of tangible property that is not physically injured.
All such loss of use shall be deemed to occur at the time of the
“occurrence” that caused it.170
Neither party disputes that the fuel leak occurred on Head’s property. While the
question of liability was not resolved in the State Court Litigation, 171 it is
168
Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(b), as
amended by Amendment of Insuring Agreement – Known Injury or Damage page
1 (ECF page 28), § I(A)(1)(b)(3).
169
See infra Section IV.D.1.e.
170
Policy [Doc. # 63-2], at CGL Form page 13 (ECF page 26), § V(17).
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undisputed in the Motions that the fuel leak caused damage to Head’s land. As the
Texas Supreme Court noted in the appeal of the judgment against PSI, “[t]he Texas
Natural Resource Conservation Commission (now the Texas Commission on
Environmental Quality) recorded a recovery of approximately 20,000 gallons of
diesel fuel from the surrounding ground.”172 The damage resulting from the oil
spill constitutes a “physical injury” to Head’s “tangible property” at Silver Spur. 173
Therefore, it cannot reasonably be disputed that there was damage to Head’s
property that satisfies the definition of “property damage” in the Policy.
Effect of the Absence of a Finding of Liability to Head in the State Court
Litigation on “‘Property Damage’ to Which This Insurance Applies.”— MidContinent argues that there is no “property damage to which this insurance
applies” because there has been no final judgment in the State Court Litigation and
thus PSI has not been found legally responsible for the damage to Head’s
property. 174 Subsequent to completion of the briefing on the pending Motions,
171
(continued…)
The basis for summary judgment in favor of PSI did not relate to the merits of
Head’s claims. See Exh. A to Supplemental Joint Status Report, Docket Sheet for
Head v. Petroleum Sols., Inc., Cause No. C-416-06-1 (398th Dist. Ct., Hidalgo
County, Tex.) [Doc. # 91-1], at ECF page 7 (noting that counsel for Head had
withdrawn and directing that, unless new counsel entered an appearance by June
24, 2016, PSI’s motion for summary judgment would be granted).
172
PSI v. Head, 454 S.W.3d at 485.
173
See, e.g., Mid-Continent Cas. Co. v. Acad. Dev., Inc., 476 F. App’x 316 (5th Cir.
2012) (holding that alleged water leakage onto plaintiffs’ properties constituted
sufficient allegation of property damage to trigger insurer’s duty to defend).
174
The Titeflex Judgment does not rest on a finding that PSI was liable to Head
because, under Section 82.002(a), the duty to indemnify “is triggered by
allegations of a defect in the manufacturer-indemnitor’s product and is not
dependent on an adjudication of the indemnitor’s liability.” PSI v. Head, 454
S.W.3d at 492.
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summary judgment in PSI’s favor was entered in the State Court Litigation.175
While the argument that coverage here depends on the outcome on Head’s claims
in the State Court Litigation is enticing, the Court ultimately is unconvinced
because Mid-Continent’s construction is contrary to the language of the Policy
when read in its entirety.
Section I(A), “Coverage A – Bodily Injury and Property Damage Liability,”
describes the scope of the CGL coverage under the Policy for damage to a third
party’s property. 176 Section I(A) includes two subsections: “Insuring Agreement,”
section I(A)(1), and “Exclusions,” section I(A)(2). Section I(A)(1)(a) provides the
seminal coverage commitment by Mid-Continent: “We will pay those sums that
the insured becomes legally obligated to pay as damages because of . . . ‘property
damage’ to which this insurance applies. . . .” Section I(A)(1)(b) clarifies that “this
insurance applies to . . . ‘property damage’” and narrows the coverage to damage
that meets the “occurrence,” “coverage territory,” and “policy period”
requirements.
The coverage expressly is restricted by elimination of certain
circumstances set forth in section I(A)(2), the Policy’s exclusions from coverage.
The exclusions are introduced with the phrase “[t]his insurance does not apply
175
See Exh. B to Supplemental Joint Status Report, Order on Defendant Petroleum
Solutions, Inc.’s Supplemental Motion for Summary Judgment and Motion to
Reconsider, Head v. Petroleum Sols., Inc., Cause No. C-416-06-1 (398th Dist. Ct.,
Hidalgo County June 27, 2016) [Doc. # 92-1].
176
Policy [Doc. # 63-2], at CGL Form pages 1–4 (ECF pages 14–17), § I(A). The
CGL Form contains two additional coverage agreements that are not relevant to
this dispute. See id., at CGL Form page 5 (ECF page 18), § I(B) (“Coverage B –
Personal and Advertising Injury Liability”); id., at CGL Form pages 5–6 (ECF
pages 18–19), § I(C) (“Coverage C – Medical Payments”); see infra Appendix, at
95.
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to . . . .” 177
The wording of these two sections thus contractually covers the
universe of covered and excluded events.
Contrary to Mid-Continent’s
contentions, the phrase “to which this insurance applies,” read in context, is a
category of circumstances defined by subsections I(A)(1)(b)–(d), not an additional
independent substantive restriction on the property damage within the scope of
coverage.178 Indeed, Mid-Continent’s argument falls by its own weight because,
other than as a reference to subsections in sections I(A)(1) and (2), the phrase has
no content.
Mid-Continent’s argument that there is no coverage unless and until PSI
suffers an adverse judgment regarding the property damage therefore fails. Mid177
Policy [Doc. # 63-2], at CGL Form pages 1–4 (ECF pages 14–17), § I(A)(2); see
Weedo v. Stone-E-Brick, 405 A.2d 788, 790 (N.J. 1979) (“The qualifying phrase,
‘to which this insurance applies’ underscores the basic notion that the premium
paid by the insured does not buy coverage for all property damage[,] but only
[buys coverage] for that type of damage provided for in the policy. The
limitations on coverage are set forth in the exclusion clauses of the policy, whose
function it is to restrict and shape the coverage otherwise afforded.”); see
generally 7 COUCH ON INSURANCE § 101:7 (3d ed. 2015) (“‘All-Risk’ policies
provide coverage for all risks unless the specific risk is excluded. In an ‘All-Risk’
policy, the insured has the initial burden to prove that the loss occurred. The
burden then shifts to the insurer to prove that the cause of the loss is excluded by
the policy.”). The question of the applicability of a Policy exclusion from
coverage in determining an insurer’s indemnity is distinct from the question of the
insured’s liability. Indeed, an insured can be liable to another party for injuries or
damages but be denied recovery because, in the second stage of the analysis, the
benefits are excluded by the policy terms.
178
PSI argues that section I(A)(1)(d-bis), added to the Policy by the Professional
Liability Endorsement [Doc. # 63-2], at ECF page 40, is a separate grant of
coverage that is not tied to the requirements of Policy section I(A)(1)(a). See infra
Section IV.D.3. Section I(A)(1)(d-bis), however, merely creates a definition of
occurrence that is relevant to the analysis of Section I(A)(1)(b). See infra Section
IV.D.1.b. The numbering of several amendments to the Policy overlaps with
different provisions in the original text. The Court uses “-bis” to distinguish the
provision introduced by amendment. See generally infra Appendix, at 94-97.
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Continent cannot imply limitations on coverage into the general Policy language
“to which this insurance applies.” 179 Accordingly, no formal or judicial finding of
liability by PSI to Head is necessary for the damage to Head’s property to
constitute “‘property damage’ to which this insurance applies.”180 Instead, for the
purposes of “‘property damage’ . . . to which this insurance applies,” the critical
issues are whether the damage to Head’s property was (1) caused by an
“occurrence” in the “coverage territory” (2) within the applicable policy period.181
179
As discussed hereafter, see infra Section IV.D.2.b and note 228, several courts
have concluded that coverage exists for amounts owed to a third party arising out
of an incident resulting in damage where the insured was not ultimately found
liable to the third party for that damage. See Spirco Envtl., Inc. v. Am. Int’l
Specialty Lines Ins. Co., 555 F.3d 637 (8th Cir. 2009) (holding coverage existed
for indemnification payment by contractor to its surety for surety’s expenses in
arbitration where contractor had prevailed in the arbitration); Merrick Constr. Co.
v. Hartford Fire Ins. Co., 449 So. 2d 85 (La. App. 1st Cir. 1984) (holding
coverage existed for indemnification payment by contractor to its surety for
surety’s expenses in litigation where both contractor and surety were dismissed
from litigation prior to trial).
180
At oral argument, Mid-Continent argued that the phrase “legally obligated to pay”
narrows the scope of the phrase “to which this insurance applies.” MidContinent’s contention is rejected. The former phrase modifies the preceding
noun, “those sums,” and not the subsequent clauses of the sentence. See infra
Appendix, at 94.
181
The exclusions listed in Policy section I(A)(2) are not relevant to this coverage
dispute. Mid-Continent has not meaningfully sought to avoid coverage of the
Titeflex Judgment on that basis. The Court rejects Mid-Continent’s argument in
its Reply [Doc. # 74], at 10, regarding PSI’s alleged admission of liability for the
damage to Head’s property. See PSI Reply [Doc. # 72], at 15 (“PSI’s design and
installation of the underground storage tank for Head led to the failure of the UST
system . . .”). The statement merely addresses whether there is a causal link
between PSI’s professional services and the property damage. That causation
issue is discussed below. See infra Section IV.D.1.e. Therefore, the belated effort
to apply exclusions from Policy section I(A)(2) fails.
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b.
Occurrence
Definition of “Occurrence.”— The Policy defines “occurrence” in section
V, “Definitions,” paragraph 13:
“Occurrence” means an accident, including continuous or repeated
exposure to substantially the same general harmful conditions.182
Under this definition, “[a]n ‘occurrence’ depends on the fortuitous nature of the
event, that is, whether the damage was expected or intended from the standpoint of
the insured.”183 There is no evidence in the summary judgment record that the fuel
leak from the fuel storage system PSI constructed was “expected or intended from
the standpoint of [PSI].” 184 Nor is it disputed that the fuel leak caused the property
damage that is the subject of the underlying State Court Litigation, even if liability
for that damage remains unresolved. Therefore, there were events that qualify as
an “accident” that caused property damage to Head’s land. That sequence of
events satisfies the definition of “occurrence” under Policy section V(13).
Coverage Territory.— There is no dispute that Head’s property at Silver
Spur is in Texas and that Texas is within the “coverage territory.” There is,
therefore, no genuine issue of material fact regarding section I(A)(1)(b)(1).
182
Policy [Doc. # 63-2], at CGL Form page 12 (ECF page 25), § V(13).
183
Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 16 (Tex. 2007).
184
Mid-Continent suggests that the property damage was not accidental because Head
pursued breach of contract and intentional tort claims against PSI in the State
Court Litigation and elected not to recover on his negligence claim at trial. Under
Texas law, damage resulting from an intentional tort is not “accidental.” Lamar
Homes, 242 S.W.3d at 8. The verdict on the breach of contract and intentional tort
claims was vacated by the Texas Supreme Court. On remand, the trial court
entered summary judgment in favor of PSI. Therefore, there has been no finding
that the property damage at Silver Spur resulted from an intentional tort. This
argument that the property damage was not accidental is unavailing.
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c.
Policy Period
Policy section I(A)(1)(b)(2) requires that “property damage” occur during
the “policy period” May 1, 2001 to May 2, 2002 (the “Policy Period”).185 The
Texas Supreme Court has interpreted the terms “occurrence” in section V(13) and
“property damage” in section V(17), as used in section I(A)(1)(b)(ii), to mean,
“property damage . . . occur[s] when actual physical damage to the property
occurred.”186 In Head’s Second Amended Petition, the operative pleading in the
State Court Litigation, he alleged that “[i]n November 2001, a release of diesel fuel
occurred from the UST System.” 187 Mid-Continent does not argue that coverage is
defeated because some property damage occurred outside the Policy Period, and
any such argument is waived. 188 Mid-Continent has not raised a genuine issue of
material fact that the property damage in issue did not occur during the Policy
Period.189
185
Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(b) (2)
186
Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 24 (Tex. 2008)
(“The date that the physical damage is or could have been discovered is
irrelevant.”).
187
Exh. A29 to Mid-Continent Motion, Plaintiff’s Second Amended Original
Petition, Bill Head v. Petroleum Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct.,
Hidalgo County, Tex. Apr. 7, 2008) [Doc. # 68-33], at 2, ¶ 6.
188
Mid-Continent originally reserved the right to argue that the damage to Head’s
property resulted from an ongoing leak. See Exhibit A10 to Mid-Continent
Motion, Letter from Larry Liveringhouse to Mark Barron, dated May 21, 2001
[Doc. # 68-14], at 2 (reserving right to disclaim coverage if the fuel leak was not a
“sudden and accidental” release). Although Mid-Continent noted this reservation
of rights in the facts section to its brief, it did not press the argument. See MidContinent Motion [Doc. # 68-1], at 5.
189
To the extent Mid-Continent argues that there is an insufficient causal link
between the 2001 property damage and the 2008 Titeflex Judgment, that issue is
not relevant to the relationship between the property damage and the Policy
Period. This argument pertains instead to the requirement in Policy section
(continued…)
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d.
Prior Knowledge of Property Damage
The Policy does not cover “property damage” of which the insured had
knowledge “[p]rior to the policy period.” 190 There is no contention that PSI was
aware of the fuel leak prior to the commencement of the Policy Period on May 1,
2001.
e.
Professional Liability Endorsement
The Professional Liability Endorsement inserts an alternative route to
satisfying the requirement of “‘property damage’ to which this insurance applies.”
The Endorsement creates an alternative definition of “occurrence”:
‘Bodily Injury’, ‘Property Damage’ or ‘Money Damages’ arising out
of the rendering or failure to render professional services shall be
deemed to be caused by an ‘occurrence’.191
Under the language of the Professional Liability Endorsement, “an ‘accident’ is not
necessary to trigger coverage” because the verb “deemed” obviates the need to
(continued…)
I(A)(1)(a) that PSI became “legally obligated to pay . . . damages because of . . .
‘property damage’” (emphasis added). See infra Section IV.D.2.b.
Mid-Continent also argues that PSI’s litigation decision refusing to dismiss with
prejudice its claim against Titeflex should be considered in the determination of
the threshold issue of the scope of coverage under sections I(A)(1)(a) and (b).
This argument must instead be addressed in the framework of the contractual duty
to cooperate. See supra Section IV.C; see also infra Section IV.D.2.b.
Finally, Mid-Continent’s contention that the date of entry of the Titeflex Judgment
is the relevant date pertains to PSI’s argument that the entirety of the Titeflex
Judgment is covered as “Money Damages” under the Professional Liability
Endorsement. See infra Section IV.D.3.
190
Policy [Doc. # 63-2], at ECF page 28, Amendment of Insuring Agreement –
Known Injury or Damage, § I(A)(1)(b)(iii).
191
Policy [Doc. # 63-2], at ECF page 40, § I(A)(1)(d-bis) (emphasis added).
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point to an actual event.192 If the damage to Head’s land arose out of PSI’s
professional services, then the requirement in the Insuring Agreement, Policy
section I(A)(1)(b)(1), that the property damage be “caused by an ‘occurrence’” is
satisfied. If this “occurrence” also meets the coverage territory, policy period, and
prior knowledge requirements, then the terms of “‘property damage’ to which this
insurance applies” are satisfied.
Whether PSI Rendered “Professional Services.”— Although the Policy
does not define “professional services,” the phrase has acquired an established
definition in Texas insurance law. To constitute a professional service, “the task
must arise out of acts particular to the individual’s specialized vocation, [and] . . . it
must be necessary for the professional to use his specialized knowledge or
training.”193 The design and installation of a fuel storage tank are acts particular to
PSI’s specialization in the field of petroleum storage systems, and thus are
professional services.
Mid-Continent does not meaningfully dispute that the
design and installation of the fuel tank on Head’s property constitutes “professional
services.”194
192
See Jackson v. McKay-Davis Funeral Home, Inc., 717 F. Supp. 2d 809, 819 (E.D.
Wis. 2010) (interpreting identical language regarding occurrences in a professional
services endorsement).
193
Nat’l Cas. Co. v. W. World Ins. Co., 669 F.3d 608, 615 (5th Cir. 2012) (quoting
Admiral Ins. Co. v. Ford, 607 F.3d 420, 425 (5th Cir. 2010)).
194
See Mid-Continent Motion [Doc. # 68-1], at 21 (“PSI arguably rendered
professional services when it installed the fuel tank at Silver Spur . . . .”). At oral
argument, Mid-Continent contended that the Titeflex Judgment does not arise out
of “professional services” because it concerns the manufacturer-seller relationship
between PSI and Titeflex. Mid-Continent suggested that the Professional Liability
Endorsement only applies to claims involving allegations regarding “professional
services.” That argument focuses on the wrong causal chain. The “occurrence”
exists because property damage arose out of professional services. Mid(continued…)
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55
Whether the Property Damage Arose out of Professional Services.— For
“property damage” to be caused by an “occurrence” for purposes of the
Professional Liability Endorsement, the damage to Head’s property must “aris[e]
out of” PSI’s rendering of the professional services of designing and installing the
fuel tank. Texas insurance law defines “arising out of” broadly. The phrase
requires “that there is simply a ‘causal connection or relation,’ which is interpreted
to mean that there is but for causation, though not necessarily direct or proximate
causation.”195 There is no dispute the 20,000 gallons of oil leaked from the tank
that PSI installed. Property damage to Head’s land would not have occurred but
for the design and installation of that fuel tank. Thus, the damage to Head’s
property “arose out of” PSI’s work,196 and, under the terms of the Professional
Liability Endorsement, the property damage in issue in the State Court Litigation is
deemed to have been caused by an occurrence.
Coverage Territory, Policy Period, and Prior Knowledge.— The
relationship between PSI’s professional services and the damage to Head’s
property
meets
“occurrence.”
the
Professional
Liability
Endorsement’s
definition
of
As previously explained, this property damage was within the
coverage territory and occurred within the Policy Period. PSI did not have prior
knowledge of the property damage.
(continued…)
Continent’s argument relates to whether the Titeflex Judgment is “because of” that
property damage. See infra Section IV.D.2.b.
195
Utica Nat’l Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198 (Tex. 2004)
(quoting Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d 153, 156 (Tex. 1999)); id.
(noting further that “[o]ther jurisdictions also interpret ‘arising out of’ to exclude a
proximate cause requirement”).
196
This, however, is not a conclusion or finding that PSI is liable to Head.
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56
f.
Conclusion on “‘Property Damage’ to Which This
Insurance Applies”
The damage to Head’s property satisfies the elements of Policy section
I(A)(1)(b). The damage was caused by an occurrence pursuant to the terms of the
original Policy and the terms of the Professional Liability Endorsement. The
property damage occurred within the Policy Period. Therefore, the damage to
Head’s property is “‘property damage’ to which this insurance applies.” Coverage
may be available for the Titeflex Judgment if PSI became legally obligated to pay
it as “damages because of” that property damage, or if the Professional Liability
Endorsement creates additional forms of coverage, subjects to which the Court
now turns.
2.
Section I(A)(1)(a): “Damages Because of . . . ‘Property
Damage’”
In Policy section I(A)(1)(a), Mid-Continent agrees to pay “those sums that
the insured becomes legally obligated to pay as damages because of . . . ‘property
damage’ to which this insurance applies.” 197 As explained above, damage to
Head’s property is “‘property damage’ to which this insurance applies.” This
coverage dispute raises two additional questions regarding section I(A)(1)(a):
(1) whether the Titeflex Judgment constitutes “damages”; and (2) whether PSI
became legally obligated to pay the Titeflex Judgment “because of” the damage to
Head’s property.
a.
Damages
Only the portion of the Titeflex Judgment awarded pursuant to Section
82.002(a) constitutes covered “damages” under the Policy. As discussed earlier, 198
197
Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(a).
198
See supra Section IV.B.2.
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there are two authorized components of the Titeflex Judgment: (1) indemnification
under Section 82.002(a) for the loss (i.e., attorney’s fees, expenses and costs)
Titeflex incurred in defending against Head’s claims; and (2) Titeflex’s recovery
under Section 82.002(g) for its fees, expenses and costs incurred in successfully
prosecuting its Section 82.002(a) claim against PSI.199 As explained below, the
first constitutes “damages” under Texas law and the Policy, but the second does
not.
Whether Attorney’s Fees May Constitute “Damages” Under the Policy.—
The Policy does not define “damages.” The parties and Court must look to Texas
law to define “damages.”
Mid-Continent relies on the general Texas rule
summarized in In Re Nalle Plastics Family Limited Partnership 200 that attorney’s
fees do not constitute compensatory damages.201 PSI relies on an exception to this
199
See Exh. A42 to Mid-Continent Motion, Second Amended Counter Claims of
Defendant, Titeflex Corporation, Against Petroleum Solutions, Inc., Bill Head v.
Petroleum Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County,
Tex. Sept. 15, 2008) [Doc. # 68-46], at 4 (“Titeflex is entitled to recover from PSI
all past and future costs of court, reasonable expenses, and reasonable and
necessary attorney’s fees which were expended in defense of this action and in
prosecution of this demand for indemnity.” (Emphasis added)); Exh. A44 to MidContinent Motion, Final Judgment, Bill Head v. Petroleum Sols., Inc., Cause No.
C-416-06-I (398th Dist. Ct., Hidalgo County, Tex. Jan. 13, 2009) [Doc. # 68-48],
at 3 (awarding Titeflex “attorney fees for services rendered through the trial of
this case” (emphasis added)). The Court has held above that attorney’s fees,
expenses and costs associated solely with Titeflex’s defense against PSI’s
Affirmative Claim are not losses indemnifiable under Section 82.002(a). See
supra notes 93-101 and accompanying text.
200
406 S.W.3d 168, 171 (Tex. 2013)
201
See Mid-Continent Motion [Doc. # 68-1], at 18 & n.105 (citing In re Nalle, 406
S.W.3d at 171).
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rule, also recognized by In re Nalle, for attorney’s fees awarded as damages
pursuant to a substantive cause of action. 202
The general rule excluding attorney’s fees from compensatory damages is
based on statutory interpretation of § 38.001 of the Texas Civil Practice and
Remedies Code. That statute is a fee-shifting provision that permits recovery of
attorney’s fees in certain actions “in addition to the amount of a valid claim and
costs.” 203 The use of “in addition to” in this statute evidences that attorney’s fees
are a form of recovery separate from compensatory damages. 204
Attorney’s fees are deemed “compensatory damages” where they are a loss
recovered through an independent cause of action.
Certain attorney’s fees
recovered in In re Nalle constituted damages for breach of contract. The Texas
Supreme Court explained:
While attorney’s fees in prosecuting this claim are not compensatory
damages, the fees comprising the breach-of-contract damages are. If
the underlying suit concerns a claim for attorney’s fees as an element
of damages, . . . then those fees may properly be included in a judge
or jury’s compensatory damages award.205
202
See 406 S.W.3d at 174 (“reject[ing] the idea that attorney’s fees can never be
considered compensatory damages”).
203
TEX. CIV. PRAC. & REM. CODE § 38.001.
204
In re Nalle, 406 S.W.3d at 172–73 (“[S]uits cannot be maintained solely for the
attorney’s fees; a client must gain something before attorney’s fees can be
awarded.”).
205
Id., at 175 (interpreting “compensatory damages” in Texas supersedeas bond
statute); see also Richardson v. Wells Fargo Bank, N.A., 740 F.3d 1035, 1038 (5th
Cir. 2014) (“For example, attorney’s fees are considered damages if the fees are
incurred in litigation with a third party, or if the fees are unpaid legal bills sought
in a breach of contract action against a client, or if the fees are expended before
litigation to obtain title from a third party to whom defendants had wrongfully
transferred title.”); Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. Nat’l Dev. &
Research Corp., 299 S.W.3d 106, 111 (Tex. 2009) (“We also agree with NDR that
(continued…)
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59
Whether
Attorney’s
Fees
Awarded
Under
Section
82.002
for
Indemnification Constitute Damages.— An award of attorney’s fees under
Section 82.002(a) is an award of compensatory damages.
Section 82.002(a)
provides compensation for a “loss arising out of a products liability action.”
Section 82.002(b) defines “loss” to include “court costs and other expenses,
reasonable attorney fees, and any reasonable damages.” 206
Section 82.002(a)
creates an independent cause of action that, as the Titeflex Judgment exemplifies,
may comprise solely attorney’s fees, expenses and court costs incurred in defense
of claims by a third party in an underlying products liability action. 207 The portion
of the Titeflex Judgment awarded pursuant to Section 82.002(a) constitutes
“damages” under In re Nalle and therefore constitutes “damages” for purposes of
Policy section I(A)(1)(a).
In contrast, attorney’s fees, expenses and costs awarded to Titeflex pursuant
to Section 82.002(g) incurred in prosecuting its Section 82.002(a) claim against
PSI for indemnity do not meet the definition of compensatory “damages” under
prevailing law. Section 82.002(g) fees are ancillary to recovery on the substantive
cause of action created by Section 82.002(a). Section 82.002(g) is a fee-shifting
(continued…)
it may recover damages [in legal malpractice action] for attorney’s fees it paid to
its attorneys in the underlying suit to the extent the fees were proximately caused
by the defendant attorneys’ negligence.” (footnote omitted)).
206
Cf. Damages, BLACK’S LAW DICTIONARY (10th ed. 2014) (defining “damages” as
“[m]oney claimed by, or ordered to be paid to, a person as compensation for loss
or injury” (emphasis added)).
207
This is unlike § 38.001 of the Texas Civil Practice and Remedies Code, which
requires the plaintiff to prevail on an underlying substantive claim.
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provision for successful claims against a product manufacturer. 208 The component
of the Titeflex Judgment comprising the fees, expenses and costs incurred under
Section 82.002(g) for successfully prosecuting the claim against PSI for
indemnification as an innocent seller of a component of PSI’s product is not a
covered loss as “damages because of . . . ‘property damage.’” The precise fees,
expenses and costs attributable to Titeflex’s Section 82.002(g) recovery will need
to be ascertained at trial.209
Citing cases that interpreted “damages” to include both compensatory and
punitive damages, PSI argues that “damages” also includes a fee-shifting award.
Punitive damages are a form of damages long recognized in the law. The analysis
in the cited authorities concerned issues specific to punitive damages, such as
whether insurance coverage for punitive damages contravenes public policy.210
208
Section 82.002(g), as a fee-shifting provision, is comparable to Section 38.001 of
the Texas Civil Practice and Remedies Code.
PSI incorrectly contends that Section 82.002(g) “specifically refers to the recovery
of attorneys’ fees by a seller as damages.” PSI Motion [Doc. # 63], at 26.
Subsection (g) in fact refers to recovery of “reasonable attorney fees” separate
from “reasonable damages” incurred to enforce the Section 82.002(a) claim.
209
See supra note 108 and accompanying text.
210
See, e.g., Westchester Fire Ins. v. Admiral Ins., 152 S.W.3d 172, 182–91 (Tex.
App.—Fort Worth 2004, pet. denied) (holding that insurance coverage of punitive
damages was not contrary to public policy); Am. Home Assur. Co. v. Safway Steel
Prods. Co., 743 S.W.2d 693, 701 (Tex. App. 1987, writ denied) (rejecting
argument that an award of punitive damages is not covered because “injuries
resulting from grossly negligent conduct are either intended or expected from the
insured’s standpoint”); see also Am. Int’l Specialty Lines Ins. Co. v. Res-Care,
Inc., 529 F.3d 649, 661–62 n.29 (5th Cir. 2008) (noting the holding in Safway
Steel, but not reaching the question of whether punitive damages are covered as
“damages”); Philadelphia Indem. Ins. Co. v. Stebbins Five Cos., Civ. A. No. 3:02cv-1279-M, 2004 WL 210636 (N.D. Tex. Jan. 27, 2004) (applying Safway Steel).
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PSI fails to explain how the analysis and conclusions regarding punitive damages
apply to the wholly distinct concept of fee-shifting.211
PSI also cites three cases in which it contends the courts found attorney’s
fees to be “damages.” These cases are uninformative and unpersuasive. The issue
of whether a fee-shifting award constitutes damages was either not raised or was
not meaningfully analyzed by these courts.
In Home Owners Management
Enterprises, Inc. v. Mid-Continent Casualty Co., Magistrate Judge Stickney in the
Northern District of Texas included in the covered amount the attorney’s fees
awarded against the insured in the underlying litigation. 212 It does not appear,
211
PSI suggests that the Court should not make a distinction between compensatory
and non-compensatory damages. PSI Recon. Reply [Doc. # 101], at 6. PSI urges
that it would be error to conclude that, because a fee-shifting award is not
compensatory damages, it is not “damages” under the Policy. PSI argues that the
fee-shifting award constitutes a form of non-compensatory damages. Under Texas
law, however, attorney’s fees are considered “costs.” See, e.g., Alma Grp., L.L.C.
v. Palmer, 143 S.W.3d 840, 846 (Tex. App. 2004) (“Palmer argues that the
attorney fees are damages. However, attorney fees are in the nature of costs, not
damages.”), cited in In re Nalle, 406 S.W.3d at 172 n.5. There is disagreement
among jurisdictions regarding this classification, but the Court must follow Texas
law. Compare Bd. of Cnty. Comm’rs of Larimer Cnty. v. Guarantee Ins. Co., 90
F.R.D. 405, 407 (D. Colo. 1981) (noting that attorney’s fees were not covered as
“damages because of injury” in civil rights suit because they are considered
“costs”), with City of Ypsilanti v. Appalachian Ins. Co., 547 F. Supp. 823 (E.D.
Mich. 1982) (“It is reasonable to say that an attorney fee award in a civil rights
suit is a form of ‘damage’ which the defendant contracted to cover.”). The Policy
addresses “costs” separately from “damages.” See Policy [Doc. # 63-2], at CGL
Form page 6 (ECF page 19), § I, Supplementary Payments – Coverages A and B,
1(e) (“We will pay, with respect to any claim we investigate or settle, or any ‘suit’
against an insured we defend: . . . All costs taxed against the insured in the
‘suit’.”). The Court does not reach the question of whether fees awarded under
Section 82.002(g) would constitute “costs taxed against” PSI under the
supplementary payment section of the Policy.
212
Home Owners Mgmt. Enters., Inc. v. Mid-Continent Cas. Co., No. 3:04-cv-2061BFH, 2005 WL 2452859, at *7, *9 (N.D. Tex. Oct. 3, 2005) (Stickney, M.J.), aff’d
294 F. App’x 814 (5th Cir. 2008). Mid-Continent asserts that the Fifth Circuit
(continued…)
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62
however, that the insurer disputed this point.213 The court neither analyzed the
issue nor cited any authority for its conclusion.
In Landstar Homes Dallas, Ltd. v. Mid-Continent Casualty Co., a district
court in the Northern District of Texas held that a duty to indemnify existed
regarding an arbitration award that included an award of attorney’s fees and
expenses against the insured to the injured third party. 214 Although the insurer
disputed the “breakdown for covered and uncovered attorneys’ fees from the
underlying claim,” the district court stated that this argument “relate[d] to potential
damage calculations” and did not reach the present issue in granting summary
(continued…)
held that the issue of the classification of attorney’s fees had been waived. The
Fifth Circuit, however, simply did not address this issue. The discussion of waiver
cited by Mid-Continent concerned whether “legally obligated to pay” was
restricted to tort liability only, or could also include an award based on breach of
contract. See 294 F. App’x at 817–18.
213
See Defendant Mid-Continent Casualty Company’s Motion for Summary
Judgment, Home Owners Mgmt. Enters., Inc. v. Mid-Continent Cas. Co., No.
3:04-cv-2061-BFH (N.D. Tex. Aug. 26, 2005), ECF No. 35, at 23 (arguing that
attorney’s fees could not be “characterized as damages because of ‘property
damage’ caused by an ‘occurrence’” because the underlying damages for “cost of
repair” were, according to Mid-Continent, not covered by the policy). PSI
suggests that the insurer in Home Owners Management independently contested
the classification of fee-shifting as “damages.” See PSI Recon. Reply [Doc.
# 101]. PSI misunderstands the insurer’s argument, which argument was merely
an extension of its point that the underlying damage was not within the scope of
the term “damages . . . because of ‘property damage.’”
214
Landstar Homes Dallas, Ltd. v. Mid-Continent Cas. Co., No. 3:10-cv-0014-K,
2010 WL 5071688, at *7 (N.D. Tex. Dec. 13, 2010).
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63
judgment on the insurer’s liability. 215 It also does not appear that the insurer
disputed whether attorney’s fees constitute “damages” under Texas law. 216
In Mid-Continent Casualty Co. v. Castagna, the Dallas Texas Court of
Appeals affirmed a finding of coverage for an arbitration award that included an
award of attorney’s fees under Texas Civil Practice and Remedies Code
§ 38.001. 217 It appears that the insurer did not raise on appeal the issue of whether
this fee-shifting was “damages,” nor did the court of appeals address it. Rather, the
insurer argued that the policy’s contractual liability exclusion applied because the
arbitrator’s award of attorney’s fees under § 38.001 indicated that the arbitrator
treated a potentially covered breach of implied warranty claim as a contract
claim. 218
Possibly more significantly, Home Owners Management and Landstar
Homes were decided eight and three years, respectively, before the Texas Supreme
Court’s decision in In re Nalle. The question presented in Castagna was unrelated
to the classification of a fee-shifting award as “damages” and that court did not
even cite In re Nalle.
215
Id.
216
See Defendants Mid-Continent Casualty Company’s and Great American
Insurance Company’s Brief in Support of Their Motion for Summary Judgment,
Landstar Homes Dallas, Ltd. v. Mid-Continent Cas. Co., No. 3:10-cv-0014-K
(N.D. Tex. Sept. 30, 2010), ECF No. 33.
217
Mid-Continent Casualty Co. v. Castagna, 410 S.W.3d 445, 460 (Tex. App.—
Dallas 2013, pet. denied).
218
Id. (“Mid-Continent argues that the damages were to the subject of the
construction contract—the residence, and by awarding attorneys’ fees under
section 38.001 of the civil practice and remedies code, the arbitrator ‘treated’ the
breach of implied warranty as a contract claim.”).
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64
None of PSI’s cited authorities are probative of the legal question presented
in the coverage dispute at bar: whether recovery under a fee-shifting provision
constitutes “damages” under Texas law.
The Texas Supreme Court squarely
addressed this issue in In re Nalle. PSI’s arguments that the principle in In re
Nalle should not apply to the interpretation of an insurance policy are
unpersuasive. 219
b.
“Because of”
General Principles.— The Section 82.002(a) damages claimed by Titeflex
may be covered under the Policy if PSI became legally obligated to pay them as
“damages because of . . . ‘property damage’” (emphasis added). “Because of”
means “[b]y reason of, on account of.” 220 In particular, “because of . . . ‘property
damage’” includes both compensation for the property damage and consequential
damages stemming from the property damage. 221 “Because of” has been very
broadly construed in Texas and elsewhere.
A key aspect of the parties’ dispute is whether “damages because of . . .
‘property damage’” includes Section 82.002 statutorily required reimbursement by
a defendant manufacturer of a co-defendant seller’s attorney’s fees, expenses and
219
In ascertaining the law of the forum state, a federal court “is bound to apply the
law as interpreted by the state’s highest court.” Ladue v. Chevron U.S.A., Inc.,
920 F.2d 272, 274 (5th Cir. 1991).
220
Because, OXFORD ENGLISH DICTIONARY (2016); see also Because of, MERRIAMWEBSTER ONLINE (2016) (“by reason of; on account of”). The Texas Supreme
Court has recognized that the phrase “because of” in a CGL policy is “susceptible
to a broad definition.” Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 499
(Tex. 2008); see also Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809, 814
(Tex. 2006) (holding that prejudgment interest was covered as “damages because
of bodily injury”).
221
See Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., 532 F.3d
398, 403 (5th Cir. 2008).
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65
costs incurred when the latter must defend against products liability litigation
instituted by a third-party plaintiff who suffered property damage related to the
manufacturer’s product.
Neither party has cited authority, and the Court
independently has located none, that addresses whether a CGL policy covers a
judgment pursuant to Section 82.002(a) or a similar indemnification obligation
arising out of a products liability suit. The Court applies Texas law on the
“because of” requirement in CGL polices. 222
The Titeflex Judgment as “Consequential Damages.”— The Titeflex
Judgment arose because of Head’s property damage at issue in the State Court
Litigation. Head alleged that Titeflex’s product had been a cause of that property
damage. 223 Titeflex would not have been sued but for that property damage. The
definition of “products liability action” in Texas Civil Practice and Remedies Code
§ 82.001(2), on which Section 82.002 remedies are based, requires that underlying
products liability action “aris[e] out of personal injury, death, or property
damage.” 224 The attorney’s fees, expenses and costs Titeflex incurred in defending
against Head’s claims (charged against PSI under Section 82.002(a)) thus were a
222
Mid-Continent has acknowledged that it is unable to locate any authority adopting
a narrower interpretation of “because of.” See Mid-Continent Post-Argument
Brief [doc. # 90], at 2 (“Mid-Continent has not located any case where ‘because
of’ was found to be more narrowly construed than Titeflex’s fees in defense of
PSI’s products liability claim.”).
223
In his amended pleading, Head alleged, “Titeflex is strictly liable for damages
caused by the defective flex connector.” Exh. A24 to Mid-Continent Motion,
Plaintiff’s First Amended Original Petition, Bill Head v. Petroleum Sols., Inc.,
Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County, Tex. Jan. 30, 2007) [Doc.
# 68-28], at 3, ¶ 9. The First Amended Original Petition further alleged that Head
had performed “an emergency response cleanup” upon learning of the leak and
that “Titeflex and Petroleum Solutions, Inc. are responsible for the cleanup costs.”
Id., at 4, ¶¶ 10–11.
224
TEX. CIV. PRAC. & REM. CODE § 82.001(2) (emphasis added).
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“loss,” under Section 82.002(a) and “damages” under the Policy that PSI incurred
“because of” Head’s property damage. 225
Reinforcing this interpretation is the fact that the Titeflex Judgment, to the
extent it includes Section 82.002(a) fees, expenses and costs, is comparable to
other forms of consequential damages that have been found by Texas courts to be
within the scope of “damages because of . . . ‘property damage,’” such as lost
profits, diminution in value, and miscellaneous economic costs associated with
responding to the original property damage. 226 The amounts of these other forms
225
See supra Section IV.D.2.a (analyzing Section 82.002(a) and contrasting
Titeflex’s recovery of attorney’s fees, expenses and costs pursuant to Section
82.002(g)’s fee-shifting provision, which are not “damages” under law or the
Policy).
226
See Puget Plastics, 532 F.3d at 403 (holding that policy providing coverage for
damages “because of” property damage encompassed “lost profits and diminution
in value” (Texas law)); Acad. Dev., Inc., 476 F. App’x at 319 (“[T]he ‘damages
because of . . . property damage’ provision in a CGL policy includes recovery
sought for economic losses, such as diminution in value, that are ‘attributable’ to
property damage.” (Texas law)); cf. Brainard, 216 S.W.3d at 814 (holding that
prejudgment interest was covered as “damages because of bodily injury”).
The Fifth Circuit’s interpretation of “because of” is consistent with other
jurisdictions. See, e.g., Wausau Underwriters v. United Plastics Grp., 512 F.3d
953, 956–57 (7th Cir. 2008) (“As in tort law, so in liability-insurance law, once
there is damage to property the victim can recover the nonproperty, including
business, losses resulting from that damage and not just the diminution in the
value of the property.” (Illinois law)); Am. Home Assur. Co. v. Libbey-OwensFord Co., 786 F.2d 22, 26 (1st Cir. 1986) (“[E]ven the post-1973 version of the
Comprehensive General Liability Policy, which restricts property damage to
‘physical injury to tangible property’ has been interpreted by courts and
commentators to cover consequential damages resulting from such physical
damage.”); Netherlands Ins. Co. v. Main St. Ingredients, LLC, No. CIV. 11-533
DSD/FLN, 2013 WL 101876, at *5 (D. Minn. Jan. 8, 2013) (“[The insurer] argues
that the damages [the plaintiff in the underlying litigation] sought—destroyed
inventory, credits and fees to customers, recall freight and additional costs—are
purely economic and not property damage. . . . The Policy, however, covers not
only property damage, but damages [the insured] must pay because of property
(continued…)
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of economic consequential damages are calculated independently, in ways
different from the direct damages covered by a CGL policy. It thus is immaterial
that the amount of Titeflex’s judgment is not measured by the damage to Head’s
property. 227 The Section 82.002(a) portion of the Titeflex Judgment constitutes
“damages” “because of” “property damage.” 228
(continued…)
damage.”), aff’d, 745 F.3d 909 (8th Cir. 2014); Conn. Ins. Guar. Ass’n v.
Fontaine, 900 A.2d 18 (Conn. 2006) (finding “because of bodily injury”
ambiguous and adopting more expansive reading that required coverage of loss of
consortium claim).
227
See Puget Plastics, 532 F.3d at 403.
228
This conclusion also is reinforced by decisions of courts in other jurisdictions that
granting CGL coverage for the indemnification obligation of a principal (the
insured under the CGL policy) due to its surety. See Merrick Constr. Co. v.
Hartford Fire Ins. Co., 449 So. 2d 85 (La. App. 1st Cir. 1984) (Louisiana law);
Spirco Envtl. Inc. v. Am. Int’l Specialty Lines Ins. Co., 555 F.3d 637 (8th Cir.
2009) (Missouri law). Each court held that a CGL policy covered a principal’s
indemnification of attorney’s fees incurred by its surety in defending a claim
involving the insured’s alleged wrongdoing or omission as to an obligee in the
surety relationship. The tripartite relationship between an injured plaintiff,
manufacturer, and seller in a products liability dispute is analogous to the
suretyship relationship among an obligee (the injured party), a principal (the party
that fails to perform an obligation), and a surety (who must make the obligee
whole by contract or law). A product-component seller in Texas, here, Titeflex,
that suffers a “loss” under Section 82.002(a) solely because of its innocent
involvement in a supply chain is comparable to a surety sued for the principal’s
conduct. Section 82.002 provides to the innocent seller the equivalent of a
surety’s right of action against its principal, the manufacturer. Thus, these cases
ordering CGL coverage for the surety are instructive.
Mid-Continent refers the Court to an intermediate Texas court’s opinion in
Armstrong v. Anderson, 91 S.W.2d 775, 780 (Tex. App.—El Paso 1936), rev’d on
other grounds, 120 S.W.2d 444 (Tex. Comm’n App. 1938, opinion adopted),
which held that:
The general rule is that when a surety is forced to pay the debt of his
principal a promise on the part of the principal to repay him the amount so
paid is implied and that the surety becomes a simple contract creditor of the
(continued…)
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68
Post-Occurrence Litigation Decisions as Part of Coverage Analysis.—
Mid-Continent argues that the Titeflex Judgment was caused by PSI’s decision to
reject the Settlement Offer, i.e., the mutual dismissal with prejudice of the claims
between itself and Titeflex, and not because of the damage to Head’s property.229
That contention is rejected.
Various doctrines of insurance law govern the impact of post-occurrence
litigation decisions on the insurer’s and the insured’s rights. Examples of policy
provisions governing the insurance relationship during litigation can be found in
the Policy in “Duties In The Event Of Occurrence, Offense, Claim or Suit,”
(continued…)
principal. We know of no rule of law which allows a simple contract
creditor to recover attorney’s fees.
The Armstrong court did not address insurance coverage at all. That court
acknowledged the concept of indemnity owed by a principal for “damages”
suffered by its surety. The court rejected the surety’s claim for its attorney’s fees
sought from the principal under a contract held unenforceable. Here, the Section
82.002(a) award to Titeflex is comparable to the principal’s duty to repay the
surety for the basic indemnity payments required by law.
229
Mid-Continent Motion [Doc. # 68-1], at 21 (“PSI’s failure to consent to a
dismissal of the third-party claim against Titeflex is what caused the Titeflex
Judgment.”); Mid-Continent Reply [Doc. # 74], at 8 (“[L]itigation decisions can
result in a judgment against an insured, just like PSI’s litigation decisions in the
[State Court Litigation] resulted in the Titeflex Judgment being entered against
it. . . . [T]he Titeflex Judgment was rendered against PSI because it refused to
settle . . . .”).
At oral argument, Mid-Continent contended that PSI’s independent counsel
imbricated coverage and litigation decisions in his August 18, 2008 letter. See
Exh. 29 to PSI Motion, Letter from Michael A. McGurk to Robert Bryant, dated
Aug. 18, 2008 [Doc. # 63-31]. PSI’s independent counsel argues in this letter that
Mid-Continent should have been more willing to settle the State Court Litigation
because its agents were responsible for the loss of the flex connector. The letter
does not suggest that any party’s litigation decision creates or voids coverage
under the terms of the Insuring Agreement, Policy section I(A)(1)(a).
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subsections IV(2)(b)–(d). 230 These clauses, respectively, require the insured to
provide to the insurer notice of the claim, require the insured’s cooperation with
and assistance to the carrier in certain aspects of the litigation related to the claim,
and impose restrictions on the insured’s ability to settle the claim.
These
provisions include detailed requirements following the inception of a lawsuit
against the insured. Each of these provisions has acquired legal meaning and
judicial gloss that govern its scope.231
230
Policy [Doc. # 63-2], at CGL Form page 9 (ECF page 22), § IV(2)(b)–(d); see
infra Appendix, at 95-96.
231
Regarding the notice requirements in Policy section IV(2)(b), Texas courts have
established standards for compliance. See, e.g., E. Tex. Med. Ctr. Reg’l
Healthcare Sys. v. Lexington Ins. Co., 575 F.3d 520, 525 (5th Cir. 2009) (“no level
of detail is specifically required” and presence of forwarding papers requirement
“suggests notice of the claim was not designed to bear the entire informational
burden”); PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 636–37 (Tex. 2008)
(holding that “an insured’s failure to timely notify its insurer of a claim or suit
does not defeat coverage if the insurer was not prejudiced by the delay”); Nat’l
Union Fire Ins. Co. of Pittsburgh, Pa. v. Crocker, 246 S.W.3d 603, 609 (Tex.
2008) (holding that an insurer’s actual knowledge of a suit against an additional
insured who failed to comply with notice-of-suit provisions does not preclude a
finding of prejudice); Pioneer Cas. Co. v. Blackwell, 383 S.W.2d 216, 219 (Tex.
Civ. App.—Waco 1964, writ ref’d n.r.e.) (noting the definition of “immediately”
as “within a reasonable time under the circumstances”).
As to Policy section IV(2)(c), the duty to cooperate, courts have imposed a
requirement that an insurer show that it was prejudiced by a violation of the duty
to cooperate and have rejected attempts by insurers to require absolute
cooperation. See supra Section IV.C. Courts also have required efforts by the
insurer to obtain cooperation from the insured. See, e.g., Wiles v. Capitol Indem.
Corp., 215 F. Supp. 2d 1029, 1031 (E.D. Mo. 2001) (“insurer must prove . . . the
exercise of reasonable diligence to secure cooperation before it can deny
coverage”); Admiral Ins. Co. v. Grace Indus., Inc., 409 B.R. 275, 283 (E.D.N.Y.
2009) (noting insurer must act diligently with efforts reasonably calculated to
secure the insured’s cooperation).
Finally, regarding Policy section IV(2)(d), a prohibition against an insured settling
the matter without the insurer’s agreement, it is clear that the insurer may
(continued…)
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In addition, case law imposes extra-contractual duties on and grants
additional rights to the insurer, the insured, and their counsel in litigating a
potentially covered claim. 232 For example, an insured is entitled to independent
counsel at the insurer’s expense if a conflict of interest precludes the insurer from
controlling the insured’s defense.233 Similarly, a New York court found that the
insured could make independent reasonable litigation decisions where defense of
covered claims could have increased the insured’s exposure to liability on claims
not covered by the policy. 234 “[T]hough the insured is contractually precluded
from settling a case, or otherwise assuming an obligation, without the consent of
(continued…)
contractually bar the insured from entering a settlement without the insurer’s
consent, but the insurer has a legal duty to accept a reasonable settlement offer.
See G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. Comm’n
App. 1929, holding approved); AFTCO Enters., Inc. v. Acceptance Indem. Ins.
Co., 321 S.W.3d 65, 69 (Tex. App.—Houston [1st Dist.] 2010, pet. denied).
232
These duties include, for example, the insurer’s duties to investigate thoroughly
and to disclaim coverage promptly. See, e.g., United Neurology, P.A. v. Hartford
Lloyd’s Ins. Co., 101 F. Supp. 3d 584, 593–94 (S.D. Tex.), aff’d, 624 F. App’x
225 (5th Cir. 2015) (citing Viles v. Security Nat’l Ins. Co., 788 S.W.2d 566, 568
(Tex. 1990)) (noting that the law “imposes upon the insurer a duty to investigate
thoroughly and in good faith”); N. Am. Capacity Ins. Co. v. Brister’s Thunder
Karts, Inc., 287 F.3d 412, 414 (5th Cir. 2002) (affirming decision that insurer who
waited three years to inform insured of intent to deny coverage had violated the
duty to disclaim coverage).
233
See, e.g., Hous. Auth. of City of Dallas v. Northland Ins. Co., 333 F. Supp. 595,
600–02 (N.D. Tex. 2004) (Lindsay, J.). Under Texas law, “[a] conflict of interest
exists that prevents the insurer from insisting on its contractual right to control the
defense when the insurer has reserved its rights and the facts to be adjudicated in
the liability lawsuit are the same facts upon which coverage depends.” Allstate
Cnty. Mut. Ins. Co. v. Wootton, No. 14-14-00657-CV, 2016 WL 1237872, at *9
(Tex. App.—Houston [14th Dist.] Mar. 29, 2016) ((citing N. Cnty. Mut. Ins. Co. v.
Davalos, 140 S.W.3d 685, 688 (Tex. 2004))).
234
Nelson Elec. Contracting Corp. v. Transcont’l Ins. Co., 660 N.Y.S.2d 220, 222
(N.Y. App. Div. 1997).
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the insurance company, these limitations cannot be construed so broadly as to
prohibit the insured’s counsel from making tactical decisions, such as those at issue
here, which are part of a reasonable litigation strategy intended to decrease the
likelihood of liability on the part of the insured.” 235
Mid-Continent’s attempt to use PSI’s post-occurrence litigation decision as a
blanket bar to coverage in the framework of assessment of the Policy’s scope of
coverage undermines each of these other contractual provisions and legal
doctrines, which balance the competing interests of the insured and insurer. As
explained above, Mid-Continent will have the opportunity at trial on the
cooperation clause to challenge the reasonableness of PSI’s litigation decision. 236
Ultimately, the Titeflex Judgment is based on the applicability of Section
82.002 in the State Court Litigation. Titeflex could invoke that statute because
Head sued Titeflex because the property damage to his land gave rise to product
liability claims. The genesis of the Titeflex Judgment was the property damage.
While a sequence of events in litigation led to Titeflex’s success on its
Counterclaim, Mid-Continent’s narrow view of the cause of the Titeflex Judgment
draws an artificial dividing line.237 But for the property damage, which caused
235
Id.
236
Mid-Continent’s reliance on Trevino, 202 S.W.3d 811, reinforces the Court’s
conclusion. See Mid-Continent Reply [Doc. # 74], at 7. Trevino addressed the
duty to cooperate. See supra Section III.C (analyzing PSI’s duty to cooperate).
237
It is possible that Titeflex sued PSI because Mid-Continent urged PSI to sue
Titeflex as part of its strategy for the State Court Litigation. See Exh. 14 to PSI
Motion, Letter from Michael A. McGurk to Vicinaiz, dated Sept. 26, 2006 [Doc.
# 63-16] (inquiry from PSI’s independent counsel regarding whether MidContinent had decided to add Titeflex as a third-party defendant); Exh. 16 to PSI
Motion, Email from Robert Bryant to Vicinaiz, dated Sept. 26, 2006 [Doc.
# 63-18] (direction from Mid-Continent’s claim representative to Vicinaiz to add
Titeflex as third-party defendant for contribution). Recovery on the Affirmative
(continued…)
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Head to file suit against Titeflex, there would have been no Section 82.002 claim
giving rise to the Titeflex Judgment.
Waiver, Collateral Estoppel, and Concurrent Causation.— As explained
above, the Section 82.002(a) portion of the Titeflex Judgment was incurred during
the period the Head claim against Titeflex was pending. In its post-argument brief,
Mid-Continent contends that these fees and expenses were incurred by Titeflex in
defense of PSI’s Affirmative Claim as well as Head’s claim. PSI contends that
Mid-Continent is bound by the Texas Court of Appeals’ holding that the
distinction between Titeflex’s losses attributable to PSI and Head’s respective
claims was waived at trial in the State Court Litigation. 238 Mid-Continent objects
to coverage on the ground that the defense against PSI’s Affirmative Claim is a
“concurrent cause” of the Titeflex Judgment that is not covered under the Policy. 239
The Court addresses each issue in turn.
PSI asserts that any allocation of attorneys’ fees and costs within the Titeflex
Judgment is improper because Mid-Continent, through the counsel it chose to
defend PSI in the State Court Litigation, waived the right to segregate the fees in
that litigation and this waiver should apply for all purposes. 240 Thus, PSI maintains
(continued…)
Claim might have inured to Mid-Continent’s benefit. See Graco, 47 S.W.3d at
746–47 (holding that the innocent seller’s insurer may assert the seller’s Section
82.002 cause of action to recover its legal fees).
238
See supra note 93 and accompanying text.
239
See Mid-Continent Post-Argument Brief [Doc. # 90], at 3–6.
240
See Burton v. Nat’l Bank of Commerce of Dallas, 679 S.W.2d 115, 118 (Tex.
App.—Dallas 1984, no writ) (“[O]nce a right is waived, such right is lost forever
and cannot be reclaimed without the consent of the other party.” (citing Witt v.
Universal Auto. Ins. Co., 116 S.W.2d 1095 (Tex. App.—Waco 1938, writ
dism’d))); see also Songer v. Clement, 20 S.W.3d 188, 193–94 (Tex. App.—
(continued…)
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that Mid-Continent is now collaterally estopped from seeking such segregation in
this coverage suit. Mid-Continent counters that the Texas Court of Appeals’
holding that PSI waived any argument seeking to distinguish between Titeflex’s
losses attributable to PSI and to Head’s respective claims is insufficient for
application of collateral estoppel. 241 It is noted, however, that Mid-Continent cites
no Texas authority on collateral estoppel to support its contention. 242
After considering the parties’ contentions and evidence, the Court concludes
that the legal issue of whether Mid-Continent is bound by the waiver in the State
(continued…)
Texarkana 2000, no pet.) (“A waiver, by its nature, is a relinquishment of a right.
It is not reinstated by a new trial or mistrial.”).
241
See Mid-Continent Recon. Reply [Doc. # 103], at 4–5, ¶ 6. Mid-Continent also
argues that the disputed issue in this coverage dispute is not identical to the issues
litigated in the State Court Litigation because it is not among the four questions
submitted to the jury regarding the Titeflex Counterclaim. See Mid-Continent
Recon. Reply [Doc. # 103] (quoting Exh. A46 to Mid-Continent Motion, Court’s
Charge to the Jury, Bill Head v. Petroleum Sols., Inc., Cause No. C-416-06-I
(398th Dist. Ct., Hidalgo County, Tex. Nov. 5, 2008) [Doc. # 68-50], at 32–34
(Questions 13–16)). PSI does not argue that the distinction between Titeflex’s
losses attributable to PSI’s Affirmative Claim under Section 82.002(a) and Head’s
products liability claims against Titeflex was expressly presented. Instead, PSI
contends that the issue was implicitly but necessarily decided by the jury because
the jury awarded the entire sum sought. See PSI Recon. Reply [Doc. # 101], at 10.
242
It appears that Texas law applies. Weaver v. Tex. Capital Bank N.A., 660 F.3d
900, 906 (5th Cir. 2011) (“In determining the preclusive effect of an earlier state
court judgment, federal courts apply the preclusion law of the state that rendered
the judgment.” (citing Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S.
373, 381 (1985))).
Substantively, the Tenth Circuit recently held that “[a] finding that an issue of fact
or law is waived” is not sufficient to fulfill the requirement under federal law of
collateral estoppel that an issue be “actually litigated.” See In re Zwanziger, 741
F.3d 74, 77 (10th Cir. 2014). The complexity of the issue is highlighted by the In
re Zwanziger dissent, which made forceful points in favor of the contrary result
that a waiver does satisfy the “actually litigated” prong. See id., at 79–81
(Holloway, J., dissenting).
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Court Litigation cannot be resolved as a matter of law on the current record. To
assess the issue of waiver and PSI’s requested estoppel, there must be a trial to
determine the parties’ relationship and the events specifically related to the
decision in state court not to seek segregation among the fees claimed by Titeflex.
The argument by counsel and the deposition testimony of record are insufficient.
Any ruling at this juncture would be an advisory opinion. For instance, there are
issues whether Mid-Continent, in exercising its right to defend the insured, PSI, in
the State Court Litigation, held full responsibility for the strategic decisions and
omissions in that litigation, and whether the absence of a request at trial for
segregation was intentional, inadvertent, or by agreement with PSI. 243
These
circumstances must be explored at trial with the aid of meaningful briefing on
Texas law of collateral estoppel. 244
243
The summary judgment record gives some indication that Mid-Continent took the
lead role in determining litigation strategy throughout the State Court Litigation.
Compare Exh. A21 to Mid-Continent Motion, Letter from Michael A. McGurk to
Victor Vicinaiz, dated Sept. 26, 2006 [Doc. # 68-25] (PSI’s independent counsel
inquiring as to whether a decision had been made about adding Titeflex as a third
party in the State Court Litigation), with Exh. A20 to Mid-Continent Motion,
Status Report (Mid-Continent Inter-Office Correspondence), dated Sept. 26, 2006
[Doc. # 68-24] (“October 6, 2006 is the deadline to join responsible parties. We
have instructed defense counsel to add the flex connector manufacturer, TiteFlex,
as well as the manufacturer of the leak detection system.” (emphasis added)); see
also, e.g., Exh. 41 to PSI Motion, Email from Victor Vicinaiz to Robert Barron,
dated Oct. 3, 3008 [Doc. # 63-43]. But, the Court does not make a factual finding
in this regard.
244
The issues of waiver and collateral estoppel do not implicate the distinction
between fees and costs incurred pursuant to Section 82.002 subsection (a) and
those recoverable under subsection (g). No issue in the State Court Litigation
required determination of that allocation. Therefore, this issue was not necessarily
decided nor waived in the liability litigation. The issue of whether fee-shifting
under Section 82.002(g) is classifiable as “damages” under Texas state law was
presented for the first time in this coverage dispute.
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The concurrent causation doctrine requires that, “[w]hen covered and
excluded perils combine to cause an injury, the insured must present some
evidence affording the jury a reasonable basis on which to allocate the damage.” 245
Mid-Continent argues that the presence of a contributing cause that is not expressly
included in the Policy is sufficient to defeat coverage. Mid-Continent relies on two
cases that involve “named peril” property insurance policies, however, not an “allrisks” policy, as presented here.246 Mid-Continent’s argument is unavailing.
The concurrent causation doctrine is a function of an insured’s fundamental
burden of proof to demonstrate that damages for which coverage is sought are
within the scope of the policy.
There are significant differences between an
insured’s burden under a “named peril” policy and under an “all-risks” policy.
Named peril policies “cover[] losses caused by specified perils; to the extent not
specified, no coverage results.”247 Under an “all-risk” policy, coverage is “allowed
for fortuitous losses unless the loss is excluded by a specific policy provision; the
effect of such a policy is to broaden coverage . . . .” 248
Accordingly, Mid-
Continent’s named peril authorities are not persuasive. At best, they reinforce
245
Lyons v. Millers Cas. Ins. Co. of Tex., 866 S.W.2d 597, 601 (Tex. 1993).
246
See Poteet v. Kaiser, No. 2-06-397-cv, 2007 WL 4371359, at *1 (Tex. App.—Fort
Worth Dec. 13, 2007, pet. denied) (homeowners’ insurance policy offering
coverage for “sudden and accidental damage from smoke”); Kelly v. Travelers
Lloyds of Tex. Ins. Co., No. 14-05-00825-cv, 2007 WL 527911, at *3 (Tex.
App.—Houston [14th Dist.] Feb. 22, 2007) (“Under their homeowners’ policy, the
Kellys’ claim for personal property damage under Coverage B required proof of
‘physical loss’ to their personal property caused by a named peril.” (emphasis
added)).
247
10A COUCH ON INSURANCE § 148:48 (3d ed. 2016).
248
Id., § 148:50.
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PSI’s threshold obligation to demonstrate the loss is within Policy section
I(A)(1)(a)’s scope of coverage.
Mid-Continent has not argued that Titeflex’s defense of PSI’s claims are an
excluded cause. 249 The record indicates that all or a majority of the attorney’s fees
Titeflex incurred in defending against Head’s claims were for services inextricably
intertwined with its defense against PSI’s Affirmative Claim throughout the
relevant period. 250 While Mid-Continent has pointed to evidence that certain time
249
The authorities on which Mid-Continent relies involved coverage disputes in
which an explicitly excluded cause had been shown to apply. See, e.g., Nat’l
Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., 649 F. Supp. 2d
613, 646–52 (S.D. Tex. 2009) (CGL policy, impaired property exclusion); Lyons,
866 S.W.2d at 599 (homeowner’s insurance, foundation settlement exclusion);
Travelers Indem. Co. v. McKillip, 469 S.W.2d 160, 163 (Tex. 1971) (windstorm
coverage, snowstorm exclusion); All Saints Catholic Church v. United Nat’l Life
Ins. Co., 257 S.W.3d 800 (Tex. App.—Dallas 2008, no pet.) (commercial property
insurance, latent defect and wear and tear exclusions); Comsys Info. Tech. Servs. v.
Twin City Fire Ins. Co., 130 S.W.3d 181, 198–200 (Tex. App.—Houston [14th
Dist.] 2003, pet. denied) (errors and omissions policy, intentional acts exclusion);
Wallis v. United Servs. Auto. Ass’n, 2 S.W.3d 300, 304 (Tex. App.—San Antonio
1999, pet. denied) (homeowners’ insurance, earthquake, landslide, and earth
movement exclusion).
250
At trial in state court, counsel for Titeflex testified that the fees incurred in defense
of Head’s claims and in defense of PSI’s claims were “intertwined.” See
Petroleum Sols., Inc. v. Head, 454 S.W.3d 518, 578 (Tex. App.—Corpus Christi
2011), aff’d in part, rev’d in part, 454 S.W.3d 482 (Tex. 2014). Indeed, Titeflex’s
development of the spoliation sanctions strategy against PSI appears to have
prompted Head to dismiss his claims against Titeflex and focus on PSI. See Exh.
A26 to Mid-Continent Motion, Defendant’s, Titeflex Corporation, Motion for
Sanctions for Spoliation of Evidence, Bill Head v. Petroleum Sols., Inc., Cause
No. C-416-06-I (398th Dist. Ct., Hidalgo County, Tex. Jan. 4, 2008) [Doc. # 6830]; Exh. A28 to Mid-Continent Motion, Plaintiff’s Notice of Non-Suit Without
Prejudice of Third-Party/Defendant Titeflex Corporation, Bill Head v. Petroleum
Sols., Inc., Cause No. C-416-06-I (398th Dist. Ct., Hidalgo County, Tex. Mar. 7,
2008) [Doc. # 68-32]. Titeflex’s fees, to this extent, at least, appear to have been
incurred in defense of Head’s products liability claim and ultimately resulted in
Head dismissing that claim against Titeflex. The fact that the work was also
(continued…)
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entries indicate work done in defense of PSI’s claims, 251 the entries do not suggest
that the fees were incurred in connection with an excluded cause.
Mid-
Continent’s contentions regarding the doctrine of concurrent causation are rejected.
There remains, however, a genuine issue of material fact regarding exactly
what fees and expenses Titeflex incurred in defense of Head’s claims. 252 To the
extent fees or expenses were for work defending against Head’s claims, which
work was also helpful in countering PSI’s claims, the sums are recoverable and are
not barred by the concurrent cause doctrine. To the extent fees were incurred
solely in defense of PSI’s Affirmative Claim, which claim was brought under
Section 82.002 for indemnity and was not a product liability claim, the award to
Titeflex was not “damages” under the Policy “because of” “property damage” to
Head’s land. The parties may present testimony at trial regarding the purpose of
specific challenged fees and costs incurred by Titeflex. It is noted that if the Court
finds Mid-Continent waived the segregation issue under Section 82.002(a) for
purposes of this coverage action, then this factual inquiry is moot.
c.
Conclusion on Coverage for “Damages Because of . . .
‘Property Damage’”
The Policy covers the portion of the Titeflex Judgment awarded under
Section 82.002(a) because “those [are] sums that [PSI has] become[] legally
(continued…)
beneficial in defending against PSI’s Affirmative Claim is immaterial because
Titeflex’s legal strategy during the relevant period was equally applicable to both
Head and PSI’s claims against it.
251
See Mid-Continent Recon. Motion [Doc. # 99], at 6 & nn.22, 23.
252
As noted, the Court does not decide at this time the issue of whether fees incurred
during the periods of time that only PSI’s Affirmative Claim was pending against
Titeflex should be included. That issue will turn on whether there was a waiver
that estops Mid-Continent from challenging that allocation.
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obligated to pay as damages because of . . . ‘property damage’ to which this
insurance applies.” The Court next addresses PSI’s alternative argument that the
entirety of the Titeflex Judgment is covered as Money Damages under the
Professional Liability Endorsement.
3.
Money Damages
PSI argues, in the alternative to coverage of the Titeflex Judgment as
“damages because of . . . property damage,” that the Professional Liability
Endorsement creates coverage for “Money Damages” arising out of professional
services. The Endorsement includes “Money Damages” in its definition of an
occurrence and adds to the Policy a definition of the term “Money Damages.”253
The Court first examines whether the Titeflex Judgment meets the definition of
“Money Damages,” before turning to whether it is covered by the parties’ insuring
agreement. The Court concludes that the entire Titeflex Judgment does constitute
“Money Damages,” but, reading the Policy including the Professional Liability
Endorsement as a whole, the Endorsement does not provide coverage to PSI for the
Titeflex Judgment as “Money Damages.”
a.
Definition of “Money Damages”
Money Damages are defined broadly by the Professional Liability
Endorsement as “a monetary judgment, award, or settlement.” 254 The definition of
Money Damages is broader than the general meaning of “damages” under Texas
law, which is restricted to damages for a substantive cause of action. 255 Both the
253
Policy [Doc. # 63-2], at ECF page 40, § I(A)(1)(d-bis), § V(20).
254
Policy [Doc. # 63-2], at ECF page 40, § V(20). The definition of Money Damages
excludes certain forms of damages, such as “punitive or exemplary damages,” see
id., § V(20)(a)–(c), but those exceptions are not applicable to the Titeflex
Judgment.
255
See supra Section IV.D.2.a.
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Section 82.002(a) and (g) portions of the Titeflex Judgment fall within “Money
Damages” because both constitute “monetary judgments.” Although the Section
82.002(g) portion of the Titeflex Judgment is not covered as “damages” under
Policy section I(A)(1)(a), the entire Titeflex Judgment fits within a literal
interpretation of “monetary judgment” under the Professional Liability
Endorsement.
Both the Section 82.002(a) and (g) portions of the Titeflex
Judgment therefore constitute “Money Damages.”
b.
Coverage for Money Damages
The parties dispute whether the Professional Liability Endorsement expands
the Policy’s coverage to include Money Damages independent of “‘bodily injury’
or ‘property damage’.” As a threshold matter, PSI’s claim for coverage under the
“Money Damages” provisions fails because the Professional Liability Endorsement
does not explicitly amend the Insuring Agreement, section I(A)(1), to include
“Money Damages.”
The Court also determines that even if the parties had
intended such an amendment, coverage would be unavailable under the Policy.
The Court concludes that the Endorsement fails to create a new insuring agreement
to extend coverage to “Money Damages.”
Plain Meaning of the Insuring Agreement.— The Professional Liability
Endorsement introduces Money Damages as a term parallel to “property damage”
and “bodily injury” within the Endorsement. The Insuring Agreement in section
I(A)(1), however, is the seminal and only language granting insurance coverage
within the provisions at issue. Under section I(A)(1)(a), coverage exists when
“bodily injury” or “property damage” results from an “occurrence.”
The
Endorsement does not say that those Money Damages are insured.256 Thus, while
256
Compare Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(a)
(“We [Mid-Continent] will pay those sums that the insured [PSI] becomes legally
(continued…)
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the Professional Liability Endorsement deems “Money Damages” to be caused by
an “occurrence” when they arise out of the rendering of or failure to render
professional services,257 the Policy contains no language expanding the scope of
the Policy’s coverage to include “Money Damages” independent of and in addition
to “damages because of ‘bodily injury’ or ‘property damage.’”
The Professional Liability Endorsement only creates another definition of
“occurrence” to address an additional avenue for coverage tied to “bodily injury”
or “property damage” when these types of injury arise out of professional services.
In particular, the Endorsement’s alternative definition of “occurrence” does not
require an “accident” as otherwise would be required by the Policy, section V(13).
The Endorsement, by its terms, does not otherwise expand the scope of coverage
granted by Policy section I(A)(1).258
Insured PSI agrees that “the Professional Liability Endorsement—by its own
explicit reference to adding section d. to the insuring agreement—does not modify
paragraph a. of the insuring agreement of the Policy to include the phrase ‘Money
(continued…)
obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to
which this insurance applies.” (emphasis added)), and id., § I(A)(1)(b) (“This
insurance applies to ‘bodily injury’ and ‘property damage’ only if . . . .” (emphasis
added)), with id., at Professional Liability Endorsement page 1 (ECF page 40),
§ I(A)(1)(d-bis) (“‘Bodily Injury’, ‘Property Damage’ or ‘Money Damages’
arising out of the rendering or failure to render professional services shall be
deemed to be caused by an ‘occurrence.’” (emphasis added)).
257
See Jackson v. McKay-Davis Funeral Home, Inc., 717 F. Supp. 2d 809, 819 (E.D.
Wis. 2010).
258
See id. The Court rejects PSI’s argument that, without coverage for Money
Damages, the premiums for the Professional Liability Endorsement are tantamount
to merely purchasing four additional exclusions to coverage. See Policy [Doc.
# 63-2], at Professional Liability Endorsement page 1 (ECF page 40),
§ I(A)(2)(o-bis)–(r).
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Damages.’” 259 PSI argues, however, that the Policy merely “require[s] a showing
of ‘Property Damage’ during the Policy Period as set forth in paragraph 1.b” to
obtain coverage for “Money Damages.” 260
This interpretation is rejected as
without basis in the text of the Policy. “Money Damages” and “property damage”
are alternatives that create separate and parallel inquiries within the Endorsement.
While the Court concluded that there was “property damage” during the Policy
Period, there is no grant of coverage for “Money Damages” 261 by reason of a
finding of “property damage.”
Implied Amendment of the Insuring Agreement.—Even if the Court were
to imply “Money Damages” into the Insuring Agreement, section I(A)(1),
wherever the Policy references “bodily injury” and “property damage,” PSI’s
coverage claim nevertheless would fail. The Money Damages coverage analysis
would follow the steps of the foregoing analysis for coverage connected to the
property damage. 262 The first question is whether the Money Damages, here, the
Titeflex Judgment, “are [Money Damages] to which this insurance applies.” As
with the damage to Head’s property, the framework here requires analysis of
whether (1) the Money Damages were caused by an occurrence within the
coverage territory, 263 (2) the Money Damages occurred during the Policy Period,264
and (3) PSI had no prior knowledge of the Money Damages. 265
259
See PSI Reply [Doc. # 72], at 23.
260
See PSI Sur-Reply [Doc. # 79-1], at 11–12.
261
As distinct from “damages” under section I(A)(1)(a).
262
See supra Sections IV.D.1–2.
263
Compare supra Section IV.D.1.b.
264
Compare supra Section IV.D.1.c.
265
Compare supra Section IV.D.1.d.
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Under this methodology, the Titeflex Judgment cannot satisfy the Policy
Period requirement as applied to “Money Damages.” The relevant date for the
policy period applicable to property damage is the date on which the property
damage occurs. The relevant date for the policy period for Money Damages thus is
the date on which the Money Damages occur.
The Titeflex Judgment was
rendered on September 29, 2008, far outside the Policy Period of May 1, 2001 to
May 1, 2002.266 Therefore, it is unnecessary to determine whether the parties
intended to amend the Insuring Agreement.
Professional Liability Endorsement as a Separate Grant of Coverage.—
PSI seeks summary judgment contending that the Professional Liability
Endorsement creates freestanding coverage for all Money Damages under the
Policy, thus including the entire Titeflex Judgment. PSI urges that the Professional
Liability Endorsement does not alter section I(A)(1)(a). 267 PSI instead contends,
“[b]y its own language . . . the ‘Professional Liability Endorsement’ is its own
separate grant of coverage insofar as it grants coverage for ‘Bodily Injury,
Property Damage, or Money Damages arising out of the rendering or failure to
266
PSI argues that it may still prevail because it maintained CGL coverage under
substantially similar Mid-Continent policies in 2008 and 2009. See PSI Reply
[Doc # 72], at 27. That argument is rejected because PSI’s Counterclaim only
alleges coverage under the 2001–2002 Policy. See Defendant’s Answer to Second
Amended Complaint for Declaratory Judgment and Counterclaim [Doc. # 51], at
5, ¶ 38 (defining the “Policy” for the purposes of the Counterclaim as Policy No.
04-GL-000051591, “which was in effect from May 1, 2001 to May 1, 2002”); id.,
at 10, ¶ 67 (claiming that Mid-Continent is liable for breach of contract because
“Titeflex’s claims and subsequent judgment fall within the coverage afforded by
the Policy”).
267
See PSI Reply [Doc. # 72], at 23.
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render professional services.’” 268 This contention is not supported by the Policy or
the Endorsement language. 269
PSI advocates an unjustifiably expansive reading of the Professional
Liability Endorsement. PSI seeks to convert the definition of “occurrence” into a
freestanding grant of coverage for Money Damages arising out of the rendering of
or failure to render professional services, without regard for when or how the
Money Damages occurred, regardless if an insured was legally obligated to pay
them, and regardless of any Policy exclusion.270 The coverage PSI advocates
268
PSI Reply [Doc. # 72], at 12 (emphasis added).
269
PSI cites the Fifth Circuit’s decision in Davis-Ruiz Corp. v. Mid-Continent
Casualty Co., 281 F. App’x 267 (5th Cir. 2008), for the proposition that the
coverage created by the Endorsement cannot be “illusory.” See id., at 274.
Although the insuring agreement section was identical to Policy section I(A)(1)(a)
in this case, see 281 F. App’x at 270 n.2, the professional liability endorsement in
that case covered only “bodily injury” or “property damage,” and did not
introduce the concept of “Money Damages.” See Exh. 56 to PSI Motion
(Appendix to PSI Supplemental Brief), Excerpt of Copy of Mid-Continent
Casualty Company Policy No. 04-GL-000090137, CGL Policy for Davis-Ruiz
Corp. [Doc. # 86-2]. The Fifth Circuit merely held that one of the policy’s
exclusions could not be interpreted so broadly that it would nullify the additional
coverage under the professional liability endorsement. See 281 F. App’x at 274.
Nowhere did the Davis-Ruiz court hold that the endorsement was a stand-alone
insuring agreement.
270
Under PSI’s interpretation, nothing in the Endorsement links “Money Damages”
to the phrase “to which this insurance applies” in section I(A)(1)(a), which is
necessary to the application of this occurrence-based policy to specific incidents
by defining the coverage territory, the policy period, and exclusions to coverage.
See Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(b)(2)
(stating that “this insurance applies to ‘bodily injury’ and ‘property damage’ only
if” it is caused by an occurrence within the coverage territory during the policy
period); id., § I(A)(2) (stating “[t]his insurance does not apply to” a list of
exclusions to coverage). The Court cannot imply additional provisions to
circumscribe the purported freestanding coverage for Money Damages. United
Nat’l Ins. Co. v. Mundell Terminal Servs., Inc., 740 F.3d 1022, 1027 (5th Cir.
2014) (noting that Texas insurance law does not permit court to “remake [the
(continued…)
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84
would create cascading interpretive problems. PSI argues that the parties did not
intend the purported coverage of Money Damages under the Endorsement to be
tethered to a policy period. This construction of the Endorsement is without
precedent and is rejected. Indeed, the parties’ agreement to substantively identical
professional liability endorsements for later policy years with virtually identical
insuring agreements demonstrates intent to tie the Professional Liability
Endorsement in 2001–2002 to that Policy year. 271
(continued…)
parties’] contract by reading additional provisions into it” (quoting Gilbert Tex.
Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex.
2010))); see also PSI Reply [Doc. # 72], at 25 (stating that “adding language to the
Policy that does not exist . . . is in contravention of well-established Texas law”).
The arguments in PSI’s proposed Sur-Reply [Doc. # 79-1], at 10, are similarly
unconvincing.
271
See Exh. 48 to PSI Motion, Certified Copy of Mid-Continent Casualty Company
Policy No. 04-GL-635492 [Doc. # 72-5], at ECF page 9, [Doc. # 72-6], at ECF
page 27; Exh. 49 to PSI Motion, Certified Copy of Mid-Continent Casualty
Company Policy No. 04-GL-678112 [Doc. # 72-8], at ECF page 13, [Doc. # 72-9],
at ECF page 33; Exh. 50 to PSI Motion, Certified Copy of Mid-Continent
Casualty Company Policy No. 04-GL-720124 [Doc. # 72-14], at ECF page 17,
[Doc. # 72-15], at ECF page 37.
It is noted that Mid-Continent’s position that the Professional Liability
Endorsement offers absolutely no coverage for Money Damages is also
problematic. Mid-Continent’s interpretation renders superfluous the definition of
“occurrence” based on Money Damages and the addition of Money Damages to
the “Definitions” section of the Policy. Rules of contract construction counsel
against interpretations that make clauses meaningless. See, e.g., In re Deepwater
Horizon, 470 S.W.3d 452, 464 (Tex. 2015) (explaining court should “seek[] to
harmonize all provisions and render none meaningless” in interpreting insurance
contracts (quoting Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London,
327 S.W.3d 118, 126 (Tex. 2010)). Mid-Continent offers no explanation for why
the parties went to the trouble of including “Money Damages” in the new section
I(A)(1)(d-bis) and adding a specific definition of that term. Had PSI sued under
the 2008–2009 Policy, there would be a question regarding whether the addition of
the definition of occurrence based on Money Damages altered the scope of the
(continued…)
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4.
Exclusion q.
Mid-Continent argues that even if the Titeflex Judgment is within the scope
of the Insuring Agreement in section I(A)(1), it is excluded from coverage by
section I(A)(2)(q) (“Exclusion q”).272 Exclusion q precludes coverage for any
Loss caused intentionally by or at the direction of the insured; or any
dishonest, fraudulent, criminal, malicious and knowingly wrongful
acts.
Mid-Continent contends that PSI’s rejection of the Settlement Offer was an
intentional act that caused the loss.
Mid-Continent’s argument regarding
Exclusion q is a repackaging of its duty to cooperate argument as part of the initial
coverage analysis.273 This approach is contrary to the Policy language.274 MidContinent has therefore failed to carry its burden of showing that Exclusion q
applies.
5.
Public Policy
Based on Fifth Circuit authority that “the CGL policy language ‘legally
obligated to pay as damages’ applies only to tort-based obligations,” 275 MidContinent argues that the Court should not find “coverage under the Policy for
(continued…)
Insuring Agreement. The Court does not reach this question because PSI sued
only under the 2001–2002 Policy. See supra note 266.
272
Policy [Doc. # 63-2], at ECF page 40, § I(A)(2)(q).
273
See supra IV.C.
274
See supra Section IV.D.2.b, at 68–73.
275
Mid-Continent acknowledges that intervening rulings by the Texas Supreme Court
have cast doubt on the validity of this authority. See Mid-Continent Recon.
Motion [Doc. # 99], at 7 n.26 (citing Lamar Homes, Inc. v. Mid-Continent Cas.
Co., 242 S.W.3d 1, 13 (Tex. 2007)). It is unnecessary to resolve that issue. See
infra note 277.
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statutory indemnity, which is not a tort-based claim.” 276
Mid-Continent’s
argument misapprehends the relationship of the Titeflex Judgment to the grant of
coverage. This case arises out of an alleged tort-based obligation, namely, Head’s
allegation that PSI installed a defective fuel storage system that damaged Head’s
property. The Titeflex Judgment is covered as a species of consequential damages
flowing from this underlying tort cause of action. 277
Mid-Continent’s reliance on this Court’s decision in Acceptance Indemnity
Insurance Co. v. Maltez also is misplaced. 278 Mid-Continent argues that “there is a
strong public policy against requiring insurers to pay for damages caused by risks
never considered,” which public policy a finding of coverage would contravene by
“requir[ing] an insurer to pay for losses a third-party incurs in defense of a fourthparty’s claims.” 279 First, it is noted that Maltez is not binding authority. Second,
the question presented in Maltez was not whether the insured party sought
coverage for a type of risk the parties had not considered. Instead, Maltez involved
an effort by an uninsured corporate entity to obtain coverage under the theory that
it operated as a “single business enterprise” with the named insured corporate
entity. 280 The “single business enterprise” doctrine is a form of corporate veilpiercing. 281 The “risks never considered” about which the Court was concerned
276
Mid-Continent Recon. Motion [Doc. # 99], at 7.
277
The Court therefore does not reach whether Mid-Continent’s argument correctly
characterizes current Texas law.
278
Mid-Continent Recon. Motion [Doc. # 99], at 7–8 (discussing Acceptance Indem.
Ins. Co. v. Maltez, 619 F. Supp. 2d 289 (S.D. Tex. 2008) (Atlas, J.)).
279
Id., at 7.
280
See 619 F. Supp. 2d at 299–304.
281
In Maltez, the Court explained that the “single business enterprise” doctrine was
not widely accepted. Id., at 299–300.
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were the risks associated with the uninsured entity that sought coverage, which
entity was not an additional insured and could not have been analyzed in the
calculation of the policy premiums for the named insured. 282
Here, Mid-Continent argues that it should not be liable for coverage because
it did not consider the possibility that an award of attorney’s fees under Section
82.002(a) would be within the scope of coverage. 283
Essentially, Mid-Continent
argues that the Titeflex Judgment should not be covered because Mid-Continent
failed to anticipate the specific factual circumstance that has arisen. The Court’s
conclusion in Maltez depended on the true unforeseeability to the insurer of the
risks associated with a business enterprise that was not a named insured and that
had not been disclosed to the insurer. In contrast, coverage of a Section 82.002
indemnification obligation was foreseeable, but Mid-Continent apparently failed to
perceive that this cause of action would be within the insuring agreement it drafted.
It is not uncommon for an insurer to be contractually bound to provide coverage to
a named insured for a particular injury the insurer did not foresee. Mid-Continent
provides no binding authority for an exception in this regard.
282
Id., at 303–04.
283
Mid-Continent contends that a finding of coverage “requires the insurer to pay for
losses a third-party incurs in defense of a fourth-party’s claims.” See MidContinent Recon. Motion [Doc. # 99], at 7. This characterization of the Court’s
holding overlooks the specific context of Section 82.002. Section 82.002 creates a
cause of action that classifies costs in defense of an injured plaintiff’s products
liability claim as a claim for damages. Mid-Continent identifies no other statutes
or common law causes of action that would lead to the expanded universe of
coverage it describes. See Mid-Continent Recon. Motion [Doc. # 99], at 7.
Section 82.002 had been in existence for nearly a decade when Mid-Continent
issued the Policy, so Mid-Continent could have considered whether its Policy
provided coverage for that indemnification obligation when selling CGL coverage
to product manufacturers.
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6.
Conclusion on Coverage
PSI has carried its burden to establish that the Policy provides coverage for
part of the Titeflex Judgment. The portion of the Titeflex Judgment awarded
pursuant to Section 82.002(a) falls within the scope of “damages because of” the
“property damage” that occurred on Head’s property. The portion of the Titeflex
Judgment awarded pursuant to the fee-shifting provision of Section 82.002(g),
however, does not constitute “damages” and is not covered by the Policy. The
Professional Liability Endorsement’s “Money Damages” provision does not apply
because any Money Damages-based occurrence happened outside the Policy
Period. Therefore, only the Section 82.002(a) portion of the Titeflex Judgment,
approximately $150,000, is within the scope of the Policy’s Insuring Agreement. 284
E.
Texas Insurance Code
PSI claims that Mid-Continent violated the Texas Insurance Code,
§ 541.060(a)(4), by “failing within a reasonable time to” either “affirm or deny
coverage of a claim to a policyholder” or “submit a reservation of rights to a
policyholder.”285 This contention is without merit. The record demonstrates that
Mid-Continent apprised PSI that it might rely on the cooperation clause to deny
coverage as early as August 26, 2008, eleven days after PSI rejected the Settlement
Offer, and clarified that this coverage position applied to the Titeflex Counterclaim
284
This conclusion does not resolve the threshold question on which there is a
genuine fact issue: whether PSI met its duty to cooperate with Mid-Continent
when declining to settle the entire Titeflex lawsuit by abandoning its Affirmative
Claim with prejudice, see supra Section IV.C, or whether Mid-Continent is
estopped from arguing the Section 82.002(a) damages do not include fees,
expenses and costs attributable to Titeflex’s defense of PSI’s Affirmative Claim
before and after Head’s claims against Titeflex were pending, see supra notes 238
and 240-244, and accompanying text, in Section IV.D.2.b.
285
TEXAS INS. CODE § 541.060(a)(4)(A)–(B).
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on September 19, 2008.286 Mid-Continent issued a denial letter less than three
weeks after the Texas Supreme Court affirmed the Titeflex Judgment in July of
2014, which letter referenced Exclusion q as an additional basis for denial of
coverage.287
As PSI concedes, there are no “magic words” required for an
effective reservation of rights. 288
PSI has cited no authority that permits the
conclusion that Mid-Continent’s communications violate the Texas Insurance
Code. Summary judgment is granted in favor of Mid-Continent on PSI’s claim
under Chapter 541 of the Texas Insurance Code.
Further, because PSI has no viable claim under § 541.060 of the Texas
Insurance Code, its request for attorney’s fees pursuant to § 541.152 necessarily
fails.289
F.
Section 38.001 Attorney’s Fees Request
PSI also requests an award of attorney’s pursuant to § 38.001 of the Texas
Civil Practice and Remedies Code. Section 38.001(8) permits a party to recover
reasonable attorney’s fees on a successful claim for breach of contract. 290 Because
286
Exh. A40 to Mid-Continent Motion, Letter from Rod Evans to Mark Barron, dated
Aug. 26, 2008 [Doc. # 68-44], at 7; Exh. A43 to Mid-Continent Motion, Letter
from Rod Evans to Mark Barron, dated Sept. 19, 2008 [Doc. # 68-47], at 1 (“The
Counter Claim of Titeflex Corporation against PSI is part of the suit for which
Mid-Continent has presently agreed to provide coverage subject to a reservation of
rights. . . . We believe our coverage position letter of August 26, 2008 is sufficient
to also address the Counter Claim of Titeflex Corporation against PSI . . . .”).
287
Exh. A47 to Mid-Continent Motion, Letter from Robert Glover to Mark Barron,
dated July 30, 2014 [Doc. # 63-51], at 5.
288
See PSI Reply [Doc. # 72], at 48 (citing Nutmeg Ins. Co. v. Clear Lake City Water
Auth., 229 F. Supp. 2d 668, 694 (S.D. Tex. 2002) (Harmon, J.)).
289
See TEX. INS. CODE § 541.152(a) (permitting fee-shifting only for “a plaintiff who
prevails in an action under this subchapter” (emphasis added)).
290
Mid-Continent argues that it is exempted from § 38.001 by an exception in Section
38.006 of the same chapter. See Mid-Continent Motion [Doc. # 68-1], at 46 &
(continued…)
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there is a genuine issue of material fact regarding the duty to cooperate, PSI has
not yet succeeded on its claim for breach of contract. Summary judgment is
denied to both parties on PSI’s claim for attorney’s fees.
V.
CONCLUSION AND ORDER
Under the terms of the Policy at issue, the Court concludes that the Texas
statutory indemnification obligation under Texas Civil Practice and Remedies
Code Section 82.002(a) is within the scope of coverage under the product
manufacturer’s CGL Policy’s Insuring Agreement, but that an award to that seller
of fees, expenses and costs incurred in prosecuting that indemnity claim pursuant
to Section 82.002(g) are not covered.
The Court further holds that the Policy’s Professional Liability Endorsement
does not create an independent insuring agreement that alters this result, and PSI's
claim for “Money Damages” included within the Endorsement is not covered by
the policy period in suit.
The Court also concludes with regard to the Policy’s cooperation clause that
Mid-Continent has shown prejudice as a matter of law resulting from PSI’s
rejection of the Titeflex Settlement Offer for mutual dismissals with prejudice of
all claims between PSI and Titeflex. There exists, however, a genuine question of
material fact for trial regarding whether PSI was reasonable in declining to accept
Titeflex’s global Settlement Offer and agree to mutual releases with prejudice.
(continued…)
n.244 (citing Bituminous Cas. Corp. v. Vacuum Tanks, Inc., 75 F.3d 1048, 1056
(5th Cir. 1996)). Mid-Continent’s proffered interpretation of § 38.006 was
squarely rejected by the Texas Supreme Court in Grapevine Excavation, Inc. v.
Maryland Lloyds, 35 S.W.3d 1 (Tex. 2001), which abrogates the Fifth Circuit’s
interpretation of Texas law in Bituminous Casualty. See Hughes v. Tobacco Inst.,
Inc., 278 F.3d 417, 421 (5th Cir. 2001) (noting that the Fifth Circuit’s
interpretation of Texas law is binding on a district court, unless a subsequent state
court decision renders its prior decision clearly wrong).
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Furthermore, the Court concludes that triable issues of fact exist regarding:
1.
Whether, for purposes of this coverage case, any waiver by counsel
for PSI in the State Court Litigation of the allocation of Titeflex’s losses
attributable, respectively, to either PSI or Head’s claims against Titeflex
collaterally estops Mid-Continent from objecting to Policy coverage in this suit
attributable to Titeflex’s losses incurred solely in connection with defending
against PSI’s Affirmative Claims; and
2. (a) if there is no waiver as a result of the State Court Litigation, the
amounts within the Titeflex Judgment that are attributable to defense of solely
Head’s claims against Titeflex, or
(b) if there is a waiver as a result of the State Court Litigation, the
amounts within the Titeflex Judgment attributable to defense of both Head’s and
PSI’s claims against Titeflex.
Finally, the Court concludes that Policy Exclusion q and § 541.060(a)(4) of
the Texas Insurance Code are inapplicable as a matter of law.
The Court recognizes that this case raises several novel and complex
questions of Texas law. Further guidance from the Texas Supreme Court would be
valuable if appellate input is sought by the parties.
The Court does not reach the question of whether PSI is entitled to
attorney’s fees under Chapter 38 of the Texas Civil Practice and Remedies Code
because PSI has not yet prevailed on its claim for breach of contract. It is therefore
ORDERED Defendant’s Motion for Leave to File a Sur-Reply [Doc. # 79]
is GRANTED and the Proposed Sur-Reply [Doc. # 79-1] is deemed filed. It is
further
ORDERED that Plaintiff Mid-Continent Casualty Company’s Objections to
Petroleum Services, Inc.’s Summary Judgment Evidence [Doc. # 75] are
OVERRULED. It is further
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ORDERED that Defendant Petroleum Solutions, Inc.’s Motion for
Summary Judgment [Doc. # 62] is GRANTED in part in accordance with this
Memorandum and Order and DENIED in all other respects. It is further
ORDERED that Plaintiff Mid-Continent Casualty Co.’s Cross-Motion for
Summary Judgment [Doc. # 68] is GRANTED in part as stated in this
Memorandum and Order and DENIED in all other respects. It is further
ORDERED that Defendant Petroleum Solutions, Inc.’s Motion to Amend or
Alter [Doc. # 93] is GRANTED in part in accordance with this Memorandum and
Order and DENIED in all other respects. It is further
ORDERED that Plaintiff Mid-Continent Casualty Co.’s Motion to Amend
or Alter the Court’s Memorandum and Order [Doc. # 99] is GRANTED in part in
accordance with this Memorandum and Order and DENIED in all other respects.
It is further
ORDERED that the trial setting for October 19, 2016, is VACATED. The
Court will schedule a conference by separate order.
SIGNED at Houston, Texas, this __ day of September, 2016.
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APPENDIX
This Appendix includes relevant excerpts from the Policy. The provisions
are presented here in the order in which they appear in the Policy. Provisions
inserted by amendment have been combined with the original language of the
Policy. Where amendments to the Policy duplicated numbering of provisions in
the original Policy text, the Court employs “-bis” to distinguish the provisions.
SECTION I – COVERAGE, Coverage A. Bodily Injury and Property Damage
Liability
1.
Insuring Agreement:
a.
b.
We will pay those sums that the insured becomes legally obligated to
pay as damages because of “bodily injury” or “property damage” to
which this insurance applies. We will have the right and duty to
defend the insured against any “suit” seeking those damages.
However, we will have no duty to defend the insured against any
“suit” seeking damages for “bodily injury” or “property damage” to
which this insurance does not apply. We may, at our discretion,
investigate any “occurrence” and settle any claim or “suit” that may
result. . . .
* * * *
This insurance applies to “bodily injury” and “property damage” only
if:
(1) The “bodily injury” or “property damage” is caused by an
“occurrence” that takes place in the “coverage territory”;
(2) The “bodily injury” or “property damage” occurs during the policy
period; and
(3) Prior to the policy period, no insured . . . knew that the “bodily
injury” or “property damage” had occurred, in whole or in part. . . .
d.
* * * *
“Bodily injury” or “property damage” will be deemed to have been
known to have occurred at the earliest time when any insured listed
under Paragraph 1. of Section II - Who Is An Insured or any
“employee” authorized by you to give or receive notice of an
“occurrence” or claim:
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(1) Reports all, or any part, of the “bodily injury” or “property
damage” to us or any other insurer;
(2) Receives a written or verbal demand or claim for damages because
of the “bodily injury” or “property damage”; or
(3) Becomes aware by any other means that “bodily injury” or
“property damage” has occurred or has begun to occur. [Added by the
Amendment of Insuring Agreement – Known Injury or Damage]
* * * *
d-bis. “Bodily Injury”, “Property Damage” or “Money Damages” arising out
of the rendering or failure to render professional services shall be
deemed to be caused by an “occurrence”. [Added by the Professional
Liability Endorsement]
2.
Exclusions
q.
* * * *
Loss caused intentionally by or at the direction of the insured; or any
dishonest, fraudulent, criminal, malicious and knowingly wrongful
acts. [Added by the Professional Liability Endorsement]
* * * *
Coverage B – Personal and Advertising Injury Liability
* * * *
Coverage C – Medical Payments
* * * *
SECTION IV – COMMERCIAL GENERAL LIABILITY CONDITIONS
* * * *
2.
Duties in The Event Of Occurrence, Offense, Claim or Suit
* * * *
b.
If a claim is made or “suit” is brought against any insured, you
must:
(1)
Immediately record the specifics of the claim or “suit”
and the date received; and
(2)
Notify us as soon as practicable.
You must see to it that we receive written notice of the claim or
“suit” as soon as practicable.
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c.
You and any other involved insured must:
(1)
(2)
Authorize us to obtain records and other information;
(3)
Cooperate with us in the investigation or settlement of
the claim or defense against the ‘suit’; and
(4)
d.
Immediately send us copies of any demands, notices,
summonses or legal papers received in connection with
the claim or “suit”;
Assist us, upon our request, in the enforcement of any
right against any person or organization which may be
liable to the insured because of injury or damage to
which this insurance may also apply.
No insured will, except at that insured’s own cost, voluntarily
make a payment, assume any obligation, or incur any expense,
other than for first aid, without our consent.
* * * *
SECTION V – DEFINITIONS
13.
17.
* * * *
“Occurrence” means an accident, including continuous or repeated exposure
to substantially the same general harmful conditions.
* * * *
“Property damage” means:
a.
b.
18.
Physical injury or tangible property, including all resulting loss of use
of that property. All such loss of use shall be deemed to occur at the
time of the physical injury that caused it; or
Loss of use of tangible property that is not physically injured. All
such loss of use shall be deemed to occur at the time of the
“occurrence” that caused it.
“Suit” means a civil proceeding in which damages because of “bodily
injury”, “property damage” or “personal and advertising injury” to which
this insurance applies are alleged. “Suit” includes:
a.
An arbitration proceeding in which such damages are claimed and to
which the insured must submit or does submit with our consent; or
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b.
20.
Any other alternative dispute resolution proceeding in which such
damages are claimed and to which the insured submits with our
consent.
* * * *
“Money Damages” means a monetary judgment, award, or settlement and
does not include:
a.
Punitive or exemplary damages which are a multiple of compensatory
damages or penalties;
b.
The restitution of compensation and expenses paid to you for services
or goods;
c.
Judgments or awards arising from acts deemed uninsurable by law.
SIGNED at Houston, Texas, this 29th day of September, 2016.
NAN Y F. ATLAS
SENIOR UNI
STATES DISTRICT JUDGE
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