Mid-Continent Casualty Company v. Petroleum Solutions, Inc.
Filing
93
MEMORANDUM AND ORDER granting in part and denying in part 62 Motion for Summary Judgment; granting in part and denying in part 68 Motion for Summary Judgment; granting 79 Motion for Leave to File Sur-Reply. (Signed by Judge Nancy F Atlas) Parties notified.(TDR, 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.
§
July 29, 2016
David J. Bradley, Clerk
CIVIL ACTION NO. 4:09-0422
MEMORANDUM AND ORDER
TABLE OF CONTENTS
I.
Introduction...................................................................................................... 2
II.
Background ...................................................................................................... 3
A.
The Fuel Tank and the Flex Connector ................................................. 4
B.
The State Court Litigation ..................................................................... 5
C.
Communications Between PSI and Mid-Continent ............................ 11
D.
Procedural Posture............................................................................... 12
III.
Legal Standard ............................................................................................... 13
IV.
Analysis ......................................................................................................... 14
A.
Legal Principles for Interpretation of Insurance Contracts ................. 14
B.
Legal Bases of the Titeflex Judgment: Texas Civil Practice &
Remedies Code § 82.002 ..................................................................... 17
C.
The Duty to Cooperate ........................................................................ 26
D.
Coverage for the Titeflex Judgment Under the Policy ....................... 35
1.
Policy Section I(A)(1)(b): “‘Property Damage’ To Which
This Insurance Applies” ............................................................ 37
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a.
b.
Occurrence ...................................................................... 42
c.
Policy Period ................................................................... 43
d.
Prior Knowledge of Property Damage ........................... 44
e.
Professional Liability Endorsement ............................... 45
f.
2.
Property Damage ............................................................ 38
Conclusion on “‘Property Damage’ to Which This
Insurance Applies”.......................................................... 47
Section I(A)(1)(a): “Damages Because of . . . ‘Property
Damage’” .................................................................................. 48
a.
b.
“Because of” ................................................................... 51
c.
3.
Damages ......................................................................... 48
Conclusion on Coverage for “Damages Because of
. . . ‘Property Damage’” .................................................. 66
Money Damages ....................................................................... 67
a.
Definition of “Money Damages” .................................... 67
b.
Coverage for Money Damages ....................................... 68
4.
Exclusion q. ............................................................................... 73
5.
Conclusion on Coverage ........................................................... 74
E.
F.
V.
Texas Insurance Code ......................................................................... 75
Section 38.001 Attorney’s Fees Request ............................................ 76
Conclusion and Order .................................................................................... 76
Appendix .................................................................................................................. 79
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
2
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“Motions”) [Docs. # 68, # 68-1].1 At the Court’s request, PSI and Mid-Continent
each filed a supplemental briefs.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
denies in part the Mid-Continent Motion. The Court decides as a matter of law all
issues presented by the parties except the question of whether PSI satisfied its duty
to cooperate under the Mid-Continent insurance policy, an issue on which there is
need for a trial.
II.
BACKGROUND
The parties dispute whether a commercial general liability (“CGL”) policy
issued by Mid-Continent (the “Policy”)3 provides coverage for a judgment
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
236, 241, 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].
3
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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
and Order (“Appendix”). The following facts are not in dispute for the 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.4 PSI purchased a component part for the fuel tank from Titeflex
Commercial Products (“Titeflex”).5 In October 2001, Head discovered that 20,000
gallons of fuel had seeped into the soil under the truck stop.6 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.7 PSI and Mid-Continent theorized that a flex connector
manufactured by Titeflex in the fuel tank was faulty.8
3
(continued…)
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.
4
Exh. 5 to PSI Motion, Mid-Continent Investigation Memorandum [Doc. # 63-7],
at 2, ¶ 1.
5
See Exh. A6 to Mid-Continent Motion, Letter from Mark Barron to Titeflex
Commercial Products, dated Jan. 22, 2002 [Doc. # 68-10].
6
Petroleum Sols., Inc. v. Head, 454 S.W.3d 482, 485 (Tex. 2014).
7
Exh. A2 to Mid-Continent Motion, Facsimile from Tom Barron to Jim Boam,
dated Nov. 18, 2001 [Doc. # 68-6], at 2.
8
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.
4
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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.9 The expert inspected the flex connector but
found no conclusive evidence that the part was defective.10 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.11
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”).12
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.13 MidContinent assumed PSI’s defense under a reservation of rights.14
9
Exh. 8 to PSI Motion, Letter from Elizabeth Neally to Steve Hintze, dated Oct. 21,
2002 [Doc. # 63-10], at 1.
10
Exh. A9 to Mid-Continent Motion, Letter from Elizabeth Neally to Steve Hintze,
dated Apr. 9, 2002 [Doc. # 68-13], at ECF page 3.
11
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].
12
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].
13
See id., at 2–3, ¶¶ 6–11.
14
See Section II.C, infra, for a description of Mid-Continent’s reservation of rights
letters.
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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,
§ 82.002 of the Texas Civil Practice and Remedies Code (“Section 82.002”).15
Several months later, on January 30, 2007, Head filed a First Amended Original
Petition, which added a strict products liability claim against Titeflex.16
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.17
On March 7, 2008, Head nonsuited his claims against Titeflex
without prejudice18 and shortly thereafter filed an amended petition that alleged
claims only against PSI.19
15
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’s
pleading references Section 82.003, but this appears to have been a typo. PSI’s
claim was treated as Section 82.002 throughout the State Court Litigation. Section
82.002 is discussed in detail in Section IV.B, infra.
16
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.
17
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].
18
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].
19
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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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 trial court and Jennifer Hogan (“Hogan”)
as appellate counsel.
Hogan also offered legal advice during the trial court
proceedings.20 After Head nonsuited 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 vis-à-vis Head.21
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.”22 Vicinaiz relayed to Mid-Continent
and PSI that Titeflex offered to dismiss its Counterclaim if PSI dismissed its
Affirmative Claim.23
As a result, on August 12, 2008, PSI dismissed its
20
See, e.g., Exh. 17 to PSI Motion, Letter from Hogan to Robert Bryant, dated Feb.
29, 2008 [Doc. # 63-19].
21
Exh. A30 to Mid-Continent Motion, Letter from Vicinaiz to Robert Bryant, dated
May 14, 2008 [Doc. #68-34], at 2.
22
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 30 and accompanying
text.
23
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
(continued…)
7
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Affirmative Claim without prejudice.24 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”).25 Titeflex gave PSI two
days, until August 15, 2008, to accept the Settlement Offer.26
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.27 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.28
(continued…)
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.”).
24
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.
25
Exh. 26 to PSI Motion, Letter from Thomas A. Cowen to Vicinaiz, dated Aug. 13,
2008 [Doc. # 63-28].
26
Id.
27
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].
28
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.29
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.”30
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.31 On September 29,
2008, the jury returned verdicts in favor of Head and Titeflex.32
Head was
awarded $1,131,321.26 in damages and prejudgment interest and $91,500.00 in
attorney’s fees against PSI.33 The jury awarded Titeflex $382,334.00 in attorneys’
29
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.
30
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.
31
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.
32
Exh. 4 to PSI Motion, Final Judgement, Head v. Petroleum Solutions, Inc., Cause
No. C-416-06-1 (398th Dist. Ct., Hidalgo County, Tex. Jan. 13, 2009) [Doc.
# 63-6], at 1.
33
Id., at 3.
9
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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”).34
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.35 The Corpus Christi
Texas Court of Appeals affirmed,36 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.37
Recently, on remand, the trial court entered summary judgment for PSI on Head’s
claims.38
34
Id.
35
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).
36
Id., at 579.
37
See Petroleum Sols., Inc. v. Head, 454 S.W.3d 482, 493 (Tex. 2014) (“PSI v.
Head”).
38
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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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,39 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.”40 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.41 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.”42
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, 2014.43 In the denial letter, Mid-Continent took the position that PSI’s
39
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].
40
Exh. A40 to Mid-Continent Motion, Letter from Rod Evans to Mark Barron, dated
Aug. 26, 2008 [Doc. # 68-44], at 7.
41
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 . . . .”).
42
Id., at 1–2.
43
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.44 Mid-Continent further cited “Exclusion q” of
the Policy, which excludes losses “caused intentionally by or at the direction of the
insured.”45
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.46 In 2010, the Court stayed the case
pending completion of the state court appellate process.47
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.48
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) the Exclusion q applies to the Titeflex
Judgment, and (3) PSI breached a duty to cooperate with Mid-Continent when PSI
rejected the Settlement Offer.49 PSI has counterclaimed on the grounds that MidContinent’s denial of coverage constituted (1) a breach of contract and (2) a breach
44
Id., at 4–5.
45
Id., at 5.
46
Original Complaint for Declaratory Judgment [Doc. # 1].
47
Order [Doc. # 38].
48
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.”).
49
Second Amended Complaint for Declaratory Judgment [Doc. # 50], at 5,
¶¶ 24–31.
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of Chapter 541 of the Texas Insurance Code.50 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.51 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.”52
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.53 A genuine issue of material fact exists when
the evidence is such that a reasonable jury could return a verdict for the nonmovant.54
The Court may make no credibility determinations or weigh any
evidence, and must disregard all evidence favorable to the moving party that the
50
Defendant’s Answer to Second Amended Complaint for Declaratory Judgment
and Counterclaim [Doc. # 51], at 9–11.
51
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).
52
FED. R. CIV. P. 56(a); Celotex, 477 U.S. at 322–23; Curtis, 710 F.3d at 594.
53
Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 412 (5th
Cir. 2003).
54
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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jury is not required to believe.55
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.56 Affidavits cannot preclude summary judgment unless they contain
competent and otherwise admissible evidence.57
“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.”58 “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.”59
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.60 Here, the parties
agree that Texas law governs substantive issues of insurance law.
55
Chaney v. Dreyfus Serv. Corp., 595 F.3d 219, 229 (5th Cir. 2010) (citing Reaves
Brokerage Co., 336 F.3d at 412–13).
56
Id. (citing Reaves Brokerage, 336 F.3d at 413); Little, 37 F.3d at 1075.
57
See FED. R. CIV. P. 56(c)(4); Love v. Nat’l Med. Enters., 230 F.3d 765, 776 (5th
Cir. 2000).
58
Malacara v. Garber, 353 F.3d 393, 405 (5th Cir. 2003).
59
Id. (internal citations and quotations omitted); Williams v. Valenti, 432 F. App’x
298, 302 (5th Cir. 2011).
60
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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Under Texas law, the meaning of an insurance contract is determined under
the standards applicable to contracts generally.61 A court’s primary concern is to
give effect to the intention of the parties as expressed by the policy language.62
“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.”63 A contract is
ambiguous only “when its meaning is uncertain and doubtful or it is reasonably
susceptible to more than one meaning.”64 The determination of whether a contract
is ambiguous is a question of law.65 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.66
61
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).
62
Am. Nat. 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)).
63
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).
64
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).
65
Am. Intern. 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)).
66
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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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.67 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.68
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.69 The
parties also proffer competing interpretations of various provisions of the Policy.70
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
67
See Defendant’s Answer to Second Amended Complaint for Declaratory
Judgment and Counterclaim [Doc. # 51], at 9.
68
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.)).
69
See infra Section IV.C.
70
See infra Section IV.D.
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PSI for a portion of the Titeflex Judgment and that the remainder of the parties’
arguments lack merit.
B.
Legal Bases 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,71 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.
Section 82.002(a).— 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) 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
or implied warranty, or any other theory or combination of theories.”72
A
71
Texas Products Liability Act § 82.002, TEX. CIV. PRAC. & REM. CODE § 82.002
(eff. Sept. 1, 1993).
72
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
(continued…)
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“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.”73 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.”74 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.”75
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.76
The enactment of Section 82.002 altered allocation of losses from products liability
actions under Texas law.
“Under the common law, a manufacturer was not
required to indemnify a seller of its products ‘unless and until there was a judicial
(continued…)
[an] allegation of negligence . . . .” Meritor Auto., Inc. v. Ruan Leasing Co., 44
S.W.3d 86, 91 (Tex. 2001).
73
TEX. CIV. PRAC. & REM. CODE § 82.001(4).
74
Id., § 82.001(3).
75
PSI v. Head, 454 S.W.3d at 494.
76
Fitzgerald v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864, 868–69 (Tex.
1999).
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finding of negligence on the part of the manufacturer.’”77 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.78 The manufacturer
owes the seller the indemnity even if the manufacturer is ultimately not found
liable.79 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.80 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
manufacturer. The Texas Supreme Court has explained that the manufacturerseller relationship is bi-directional in this situation:
77
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).
78
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)).
79
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).
80
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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[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.81
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.82
Attorney’s Fees Under Section 82.002(g).— In addition to recovery of
attorney’s fees in defense of an underlying products liability action filed by a third
party under Section 82.002(a), Section 82.002(g) authorizes fee-shifting for a seller
who successfully prosecuted 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.
81
Hudiburg, 199 S.W.3d at 256.
82
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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PSI and Titeflex’s Section 82.002(a) Claims.— Head’s Original Petition
asserted claims only against PSI.83 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.84 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.85 Titeflex subsequently amended its counterclaim to include
all fees and costs incurred since PSI filed the Affirmative Claim on October 5,
2006, including the period in which Head had a direct claim against Titeflex.86
In this case, Titeflex, a component-product manufacturer, and PSI, a
finished-product manufacturer,87 were “both manufacturers and sellers vis-à-vis
each other,”88 and both asserted Section 82.002 claims. However, only Titeflex
83
See Exh. 14 to Mid-Continent Motion [Doc. # 68-18].
84
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.
85
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].
86
Titeflex Amended Counter Claim [Doc. # 68-46].
87
The Texas Supreme Court held in PSI v. Head that the fuel tank was a “product.”
See 454 S.W.3d at 494–95.
88
Id., at 494.
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pursued through trial its Section 82.002(a) claim for losses incurred in the State
Court Litigation.89 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.90 In addition,
Section 82.002(g) permitted Titeflex to recover additional attorney’s fees and costs
incurred through trial on the Section 82.002(a) claim as a “seller” for indemnity
against PSI, the “manufacturer.”91
Identification of the Components of the Titeflex Judgment.— The Titeflex
Judgment did not distinguish between the indemnity required by Section 82.002(a)
and the fees and expenses awarded as part of the fee-shifting provision in Section
82.002(g). Examination of the timeline of the State Court Litigation reveals that
89
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].
90
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).
91
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
Titeflex “attorney fees for services rendered through the trial of this case”
(emphasis added)).
22
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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.”92 This
indemnification obligation is often triggered by the injured person or entity’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 began when the injured person sued both seller and manufacturer based on
allegations that the manufacturer was at fault for the injury.93 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.94
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.95 According to the Texas Supreme Court,
92
Hudiburg, 199 S.W.3d at 262.
93
See Seelin Med., Inc. v. Invacare Corp., 203 S.W.3d 867, 871–72 (Tex. App.—
Eastland 2006).
94
Id., at 871.
95
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
(continued…)
23
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these allegations triggered PSI’s indemnification obligation.96 Head non-suited 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, and, until
(continued…)
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.
96
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)).
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. However, the Section 82.002 indemnity obligation
does not appear to apply fees incurred by a component-product manufacturer, here
Titeflex, in defending against an unsuccessful Section 82.002 claim by the
finished-product manufacturer, here PSI. 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.” Equitable Recovery, L.P. v. Heath Ins. Brokers of Tex.,
L.P., 235 S.W.3d 376, 387 (Tex. App.—Dallas 2007, pet. denied). No party has
cited authority that Section 82.002 is an exception to this rule and, indeed, PSI
urged the Corpus Christi Texas Court of Appeals to reduce the Titeflex Judgment
on the ground that it included fees incurred in defending against PSI’s Affirmative
Claim. 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); see also 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.
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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. By the Court’s calculations, Titeflex incurred just under
$150,000 in fees and expenses during that time period.97
On May 19, 2008, Titeflex filed its Counterclaim for indemnity from PSI.
By the Court’s calculations, Titeflex incurred approximately $300,000 in fees and
expenses in prosecuting that Counterclaim through trial.
These fees were
recoverable pursuant to Section 82.002(g).98
In sum, various parties asserted 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 fee-shifting under
Section 82.002(g); and (6) PSI’s claim against Mid-Continent for coverage under
the Policy. It is critical to bear in mind the posture of the parties when undertaking
analysis of each issue.
97
This amount is derived from analysis of the billing records that were submitted to
the jury in the State Court Litigation. See Exh. 57 to PSI Motion [Docs. # 88-1 to
# 88-9]. The parties are invited to perform their own calculations and to submit a
supplement on the issue.
98
Titeflex’s counsels’ billing records commence on October 5, 2006, with receipt of
PSI’s Affirmative Claim. The balance of the Titeflex Judgment, approximately
$10,000, appears to relate to fees and expenses Titeflex incurred between that date
and January 30, 2007, when Head asserted his direct claims against Titeflex. To
the extent those fees and expenses were included in the Titeflex Judgment but
were not properly recoverable under either Section 82.002(a) or (g), that objection
was waived in the State Court Litigation. See supra note 96.
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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.99
The Court concludes that the duty to cooperate applies to PSI’s rejection of
the Settlement Offer, but that genuine issues of material fact remain 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.”100 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’[.]101
99
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 that this statement applied
to the Titeflex Counterclaim. See Exh. A43 to Mid-Continent Motion [Doc.
# 68-47], at 1.
100
See infra Appendix, at 80–81.
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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.102 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.103
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.”104 A violation of the cooperation clause will preclude
coverage where the violation prejudices the insurer.105 Examples of prejudice to
the insurer include deprivation of a valid defense or opportunity to engage in
settlement discussions.106
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
101
(continued…)
Policy [Doc. # 63-2], at CGL Form page 9 (ECF page 22), § IV(2)(c)(3).
102
See id., § IV(2).
103
Id., at CGL Form page 13 (ECF page 27), § V(18)
104
Quorom Health Res., L.L.C. v. Maverick Cnty. Hosp. Dist., 308 F.3d 451, 468 (5th
Cir. 2002) (quotation omitted).
105
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.”).
106
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.107
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.108
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
107
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 County Mutual Insurance 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.
108
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 the defensive strategy
adopted by PSI 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.
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.” 109
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.”110 The cooperation clause is violated where the insured’s conduct is not
“reasonable and justified under the circumstances.”111 Neither party has carried its
109
This interpretation of the cooperation clause does not leave an insured without
protection from settlement offers that adversely affect its interest. The insurer’s
duty of good faith and fair dealing constrains the insurer’s ability to enter into a
settlement that adversely affects the insured’s counterclaims or claims against
third parties. See, e.g., 14 COUCH ON INSURANCE § 203:43 (3d ed. 2015) (“An
insurer’s settlement of a claim against an insured which eliminates the insured’s
rights to obtain recovery for their affirmative claims of injury against a third
person can result in the insurer’s liability for bad faith.”); Bleday v. OUM Grp.,
645 A.2d 1358, 1362–63 (Pa. Super. 1994) (“[A] bad faith action may be
maintained against an insurer when the insurer settles a claim without regard to the
fact that it may be barring a counterclaim of the insured.”); Barney v. Aetna Cas.
& Sur. Co., 185 Cal. App. 3d 966, 982 (1986) (holding that insured had cause of
action for bad faith where insurer settled claim against insured arising out of a car
accident in a manner that precluded the insured from asserting her own substantial
claim against the other motorist).
110
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.
111
278 S.W.2d 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
(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.112 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.113 Counsel had advised that
the Titeflex Counterclaim was a mere reformulation of PSI’s Affirmative Claim, so
(continued…)
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
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.
112
Exh. 29 to PSI Motion, Letter from Michael A. McGurk to Robert Bryant, dated
Aug. 18, 2008 [Doc. # 63-31].
113
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].
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PSI may have believed dismissal without prejudice of its Affirmative Claim
resulted in automatic dismissal of the Titeflex Counterclaim.114
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
82.002 claim against Titeflex even though the loss of the flex connector would
make proving liability on the merits difficult.115 Most important, PSI viewed the
deal as a bad bargain because Mid-Continent had reserved the right to disclaim
coverage of potential liability to Head.116 Furthermore, 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 $350,000117 and counsel had
advised that the trial court judge would permit the Titeflex Counterclaim to
proceed.118 Even if PSI had some possibility of success, the Settlement Offer
resolved significant short-term exposure with certainty.
Further, while the
allegations about the flex connector may have triggered a duty on Titeflex’s part,
114
Exh. 27 to PSI Motion, Letter from Vicinaiz to Robert Bryant, dated Aug. 12,
2008 [Doc. # 63-29], at 1–2.
115
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.”).
116
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).
117
Exh. 26 to PSI Motion, Letter from Thomas A. Cowen to Vicinaiz, dated Aug. 13,
2008 [Doc. # 63-28].
118
Exh. 27 to PSI Motion, Letter from Vicinaiz to Robert Bryant, dated Aug. 12,
2008 [Doc. # 63-29], at 2.
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Hudiburg had already established principles of law that suggest allegations are not
sufficient where there are competing Section 82.002 claims between a componentpart manufacturer and a finished-product manufacturer.119 PSI’s position on the
merits had been significantly weakened by the loss of the flex connector and its
expert witness.120 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.
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. Trevino121 and State Farm Lloyds v. Brown.122 These cases
involved egregious examples of uncooperative behavior.123
Mid-Continent
concedes that PSI’s actions do not resemble the facts of those cases.124 However,
119
See supra notes 78–82 and accompanying text. PSI’s independent counsel
acknowledged that the Titeflex Counterclaim was modeled on Hudiburg. See
Exh. 29 to PSI Motion, Letter from Michael A. McGurk to Robert Bryant, dated
Aug. 18, 2008 [Doc. # 63-31], at 2.
120
Exh. 27 to PSI Motion, Letter from Vicinaiz to Robert Bryant, dated Aug. 12,
2008 [Doc. # 63-29], at 2.
121
202 S.W.3d 811.
122
Civ. A. No. 3:08-cv-318-O, 2009 WL 2902511 (N.D. Tex. Sept. 9, 2009).
123
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
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).
124
See Mid-Continent Motion [Doc. # 68-1], at 26.
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nothing in these cases sets a standard for a finding of failure to cooperate as a
matter of law.125
Similarly, Mid-Continent’s reliance on Laster v. American
National Fire Insurance Co.126 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.127
Mid-Continent’s cited authorities involving jurisdictions other than Texas
are also inapposite.128 These cases concern bad faith claims against insurers for
liability on excess judgments.129 In each instance, the insured rejected a settlement
125
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.
126
775 F. Supp. 985 (N.D. Tex. 1991) (McBryde, J.).
127
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.
128
See Maldonado v. First Liberty Ins. Corp., 342 F. App’x 485 (11th Cir. 2009)
(Florida law); Carlile v. Farmers Ins. Exchange, 219 Cal. Rptr. 773 (Cal. Ct. App.
1985); Bos. Old Colony Ins. Co. v. Gutierrez, 386 So.2d 783 (Fla. 1980).
129
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.
(continued…)
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offer, an excess judgment ensued, and the judgment creditor stepped into the shoes
of the insured party.130 The judgment creditor sued the insurer for the amount of
the excess judgment asserting the theory that the insurer had acted in bad faith
when the insured rejected the settlement offer.131 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.132 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 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 extra-contractual
recovery for bad faith or on any other theory warranting a recovery in excess of the
policy limits.133
(continued…)
American Indemnity 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).
130
Maldonado, 342 F. App’x at 486; Carlile, 219 Cal. Rptr. at 774–75; Gutierrez,
386 So. 2d at 784.
131
Maldonado, 342 F. App’x at 486–87; Carlile, 219 Cal. Rptr. at 776; Gutierrez,
386 So. 2d at 784–85.
132
Maldonado, 342 F. App’x at 487–88; Carlile, 219 Cal. Rptr. at 776; Gutierrez,
386 So. 2d at 785.
133
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))).
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Prejudice.— Because the preliminary issue of the existence of a failure to
cooperate cannot be resolved on summary judgment in this case, the Court does
not reach the question of whether any such alleged failure prejudiced MidContinent.
Conclusion on the Duty to Cooperate.— There is a fact issue whether PSI’s
conduct in declining to withdraw its Affirmative Claim against Titeflex with
prejudice and thus PSI’s rejection of Titeflex’s Settlement Offer to dismiss its
Section 82.002 claim with prejudice violated PSI’s contractual duty to cooperate in
the settlement of claims or defenses. Summary judgment is therefore denied on
this issue to both parties. Because of the extensive briefing and intricacy of the
other coverage issues, which 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
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.134 Section 82.002(a) thus places the innocent
seller’s defense costs on the manufacturer. This case presents the question of
134
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 71–74 and accompanying text.
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whether the seller’s defense costs may be shifted to the manufacturer’s CGL
carrier.135
PSI bears the burden of demonstrating coverage under the Policy while MidContinent bears the burden of establishing the applicability of any exclusions to
coverage.136
The scope of CGL coverage for bodily injury and property damage is
established subsection (a) of the Policy’s “Insuring Agreement,” section I(A)(1):
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.137
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”138 and (2) the Titeflex Judgment was
awarded as “damages because of” that property damage. PSI also argues for
135
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)).
136
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.
137
Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(a). See infra
Appendix, at 79.
138
No party argues the dispute involves bodily injury.
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coverage because there are money damages to which the Professional Liability
Endorsement may apply, an argument the Court address 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.
(3)
Prior to the policy period, no insured . . . knew that the
. . . “property damage” had occurred, in whole or in
part. . . .139
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 damage to Head’s real property is “property damage” within that
definition. The Court therefore focuses in more detail on whether that property
damage is causally connected to an occurrence, as defined either 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
139
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).
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damage to Head’s property pursuant to the Professional Liability Endorsement’s
definition of “occurrence.”140
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.141
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,142 it is
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.”143 The damage resulting from the oil
140
See infra Section IV.D.1.e.
141
Policy [Doc. # 63-2], at CGL Form page 13 (ECF page 26), § V(17).
142
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).
143
PSI v. Head, 454 S.W.3d at 485.
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spill constitutes a “physical injury” to Head’s “tangible property” at Silver Spur.144
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 had 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.145 Subsequent to completion of the briefing on the pending Motions,
summary judgment in PSI’s favor was entered in the State Court Litigation.146
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
144
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).
145
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.
146
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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party’s property.147 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
to . . . .”148
The wording of these two sections thus contractually covers the
147
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
80.
148
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.
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universe of covered and excluded events.
Contrary to Mid-Continent’s
contentions, read in context, the phrase “to which this insurance applies” 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.149 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. MidContinent cannot imply limitations on coverage into the general Policy language
“to which this insurance applies.”150 Accordingly, no formal or judicial finding of
liability by PSI to Head is necessary for the damage to Head’s property to
149
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 infra Appendix, at 79.
150
As discussed hereafter, see infra Section IV.D.2.b, 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).
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constitute “‘property damage’ to which this insurance applies.”151 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.152
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.153
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.”154 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
151
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 79.
152
The exclusions listed in Policy section I(A)(2) are not relevant to this coverage
dispute. Mid-Continent has not sought to avoid coverage of the Titeflex Judgment
through application of an exclusion to the property damage itself. In its Reply
[Doc. # 74], at 10, Mid-Continent pointed to certain exclusions in response to a
statement by PSI that Mid-Continent contends is an admission of liability for the
damage to Head’s property. The statement is not an admission of liability. 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 . . .”). It 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.
153
Policy [Doc. # 63-2], at CGL Form page 12 (ECF page 25), § V(13).
154
Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 16 (Tex. 2007).
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the standpoint of [PSI].”155 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).
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”).156 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.”157 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
155
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.
156
Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(b) (2)
157
Don’s Building 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.”).
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occurred from the UST System.”158
Mid-Continent does not argue that any
property damage occurred outside the Policy Period and any such argument is
therefore waived.159 Mid-Continent has not raised a genuine issue of material fact
that the property damage in issue occurred outside the Policy Period.160
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.”161 There is no contention that PSI was
158
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.
159
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.
160
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
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, at 61–65.
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.
161
Policy [Doc. # 63-2], at ECF page 28, Amendment of Insuring Agreement –
Known Injury or Damage, § I(A)(1)(b)(iii).
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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’.162
Under the language of the Professional Liability Endorsement, “an ‘accident’ is not
necessary to trigger coverage” because the verb “deemed” obviates the need to
point to an actual event.163 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
162
Policy [Doc. # 63-2], at ECF page 40, § I(A)(1)(d-bis) (emphasis added).
163
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).
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training.”164 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.”165
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.”166 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
164
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)).
165
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. MidContinent’s argument relates to whether the Titeflex Judgment is “because of” that
property damage. See infra Section IV.D.2.b.
166
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”).
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property “arose out of” PSI’s work,167 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.168
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 it.
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.
167
This, however, is not a conclusion or finding that PSI is liable to Head.
168
At oral argument, Mid-Continent contended that the Titeflex Judgment relates to
the manufacturer-seller relationship between PSI and Titeflex, and not the
professional services rendered by PSI to Head.
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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.”169 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,170
there are two components of the Titeflex Judgment: (1) indemnification under
Section 82.002(a) for the loss (i.e., costs) Titeflex incurred in defending against
Head’s claims; and (2) recovery awarded to Titeflex under Section 82.002(g) for
its fees and costs incurred in successfully prosecuting its Section 82.002(a) claim
against PSI.171 As explained below, the first constitutes “damages” under Texas
law and the Policy, but the second does not.
169
Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(a).
170
See supra Section IV.B.
171
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.
(continued…)
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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 Partnership172 that attorneys’
fees do not constitute compensatory damages.173 PSI relies on an exception to this
rule, also recognized by In re Nalle, for attorney’s fees awarded as damages
pursuant to a substantive cause of action.174
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.”175 The use of “in addition to” in this statute evidences that attorneys’ fees
are a form of recovery separate from compensatory damages.176
Attorney’s fees are deemed “compensatory damages” where they are a loss
recovered through an independent cause of action.
Certain attorney’s fees
(continued…)
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)).
172
406 S.W.3d 168, 171 (Tex. 2013)
173
See Mid-Continent Motion [Doc. # 68-1], at 18 & n.105 (citing In re Nalle, 406
S.W.3d at 171).
174
See 406 S.W.3d at 174 (“reject[ing] the idea that attorney’s fees can never be
considered compensatory damages”).
175
TEX. CIV. PRAC. & REM. CODE § 38.001.
176
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.”).
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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.177
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.”178
Section 82.002(a)
creates an independent cause of action that, as the Titeflex Judgment exemplifies,
may comprise solely attorney’s fees and court costs incurred in defense of claims
by a third party in an underlying products liability action.179 The portion of the
177
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
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)).
178
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)).
179
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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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 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 a substantive cause of action. Section
82.002(g) is a fee-shifting provision for successful claims against a product
manufacturer.180 The component of the Titeflex Judgment comprising fees and
expenses 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.’” As noted above, according to the
Court’s calculations, this amount is approximately $150,000.181
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.”182 In particular, “because of . . . ‘property
180
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.
181
See supra note 97 and accompanying text.
182
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
(continued…)
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damage’” includes both compensation for the property damage and consequential
damages stemming from the property damage.183 “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 statutorily required reimbursement by a defendant
manufacturer of a co-defendant seller’s attorney’s fees 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, first
and foremost, applies the Texas “because of” requirement in CGL polices and,
second, considers CGL coverage regarding sureties, a circumstance among three
parties analogous to the parties’ relationships at bar.
Causation of the Titeflex Judgment as Consequential Damages.— The
Titeflex Judgment arose because of the underlying property damage at issue in the
State Court Litigation. Head’s allegations against Titeflex were based on his
contention that Titeflex’s product had been a cause of that property damage. 184
(continued…)
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”).
183
See Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., 532 F.3d
398, 403 (5th Cir. 2008).
184
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.
(continued…)
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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.”185 The
attorneys’ fees and costs Titeflex incurred in defending against Head’s claims
(charged against PSI under Section 82.002(a)) thus were a “loss,” under Policy
terms, PSI incurred “because of” Head’s property damage.186
Reinforcing this interpretation is the fact that the Titeflex Judgment, to the
extent it includes 82.002(a) fees 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.187 Just as the quantity of these other forms of
(continued…)
# 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.
185
TEX. CIV. PRAC. & REM. CODE § 82.001(2) (emphasis added).
186
See supra Section IV.D.2.a (explaining that Titeflex’s recovery of attorney’s fees
under Section 82.002(g) was a result of fee-shifting, which does not constitute
“damages”).
187
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
(continued…)
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economic consequential damages encompassed by the broad scope of “because of”
are sometimes not directly related to the value of the direct damages covered by a
CGL policy, it is immaterial that the amount of Titeflex’s judgment is not
measured by the damage to Head’s property.188 The Section 82.002(a) portion of
the Titeflex Judgment constitutes “damages” “because of” “property damage.”189
Coverage of Indemnification Obligations to Sureties.— Although there is
no authority addressing CGL coverage of an insured’s Section 82.002 obligations,
courts in other jurisdictions have addressed CGL coverage of a principal’s
indemnification obligations to its surety. The relationship between principal and
(continued…)
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
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).
188
See Puget Plastics, 532 F.3d at 403.
189
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.”).
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surety is analogous to the manufacturer seller relationship under Section 82.002.190
Like the tripartite relationship between an injured plaintiff, manufacturer, and
seller in the products liability dispute in the State Court Litigation, suretyship
requires three parties: the obligee, the principal, and the surety.191 “[T]he surety
undertakes to perform to an obligee if the principal fails to do so.”192 If the surety
must make such a payment, then the surety has the right to seek indemnification
from the principal.193
A plaintiff who suffered injury from a product and sues the product’s
manufacturer for failure to provide a safe product is similar to an obligee who sues
a principal for failure to perform. Under joint and several liability in the Texas
products liability context, an injured plaintiff is permitted to join the seller of the
unsafe product as a co-defendant on the product liability claim. A seller found
liable solely because of its innocent involvement in a supply chain is comparable to
a surety sued for the obligee’s conduct.
The seller must share with the
manufacturer responsibility for the plaintiff’s damages.
Thus, Section 82.002
provides to the innocent seller the equivalent of a surety’s right of action against its
principal, the manufacturer.
Even if the seller is not found liable, the seller
commonly incurs costs of defense against the claims of the victim plaintiff. In
such cases, Section 82.002 provides certain remedies to the seller, including, as
190
Although Titeflex was a manufacturer of a component part, the Texas Supreme
Court also deemed Titeflex to be a “seller” of a product, and is referred to here as
such. See supra Section IV.B.
191
74 AM. JUR. 2d Suretyship § 1.
192
Id.
193
Id., § 121 (“After payment upon the principal’s obligation, a surety is entitled to
reimbursement from a principal, who has notice of the suretyship. Thus, the law in
such cases implies a promise on the part of the principal to reimburse the surety
for the amount paid.”).
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here, indemnification of attorney’s fees. Titeflex’s Section 82.002(a) claim thus is
analogous to a surety’s claim for indemnification of attorney’s fees incurred in
litigation against a claim by the obligee.
Certain jurisdictions impose an extracontractual legal duty on the principal
to indemnify its surety’s legal fees.194
The Court has identified from these
jurisdictions a couple of cases holding that a CGL policy covers a principal’s
indemnification of attorney’s fees incurred by its surety in defending a claim
involving the insured’s alleged wrongdoing. These surety-related cases provide a
framework for analyzing coverage for the indemnification of attorney’s fees under
the surety-like obligation created in Texas by Section 82.002(a).
In Merrick Construction Co. v. Hartford Fire Insurance Co.,195 the court
addressed recovery of a surety’s attorney’s fees. The Louisiana Department of
Transportation and Development (the “LDOTD”) engaged Merrick Construction
Co. (“Merrick”) for road construction work. Merrick obtained a surety bond from
194
See, e.g., Jackson v. Hollowell, 685 F.2d 961, 965 (5th Cir. 1982) (discussing
under Mississippi law “the well-established doctrine that a surety is entitled to
reimbursement for reasonable and necessary expenses incurred by the surety in
good faith in defending itself against a suit on a bond”); Frontier Ins. Co. v. Int’l,
Inc., 124 F. Supp. 2d 1211, 1214 (N.D. Ala. 2000) (“Thus, based on both
contractual and statutory rights, where a surety has sufficiently demonstrated that
it has made payments on bonds issued on behalf of its principal, the surety may
recover those payments, interest, and expenses, including attorney’s fees, as a
matter of law.” (citing ALA. CODE. § 8-3-5 (1975))); Lincoln Cnty. v. E. I. Du Pont
De Nemours & Co., 32 S.W.2d 292, 295 (1930) (“The general rule is undoubtedly
that a surety can recover of the principal only the amount or value which he has
actually paid in discharge or satisfaction of the principal's indebtedness. This
ordinarily includes, however, not only the amount of the original debt itself, but
also any interest which may have been due thereon, and any expenses or costs to
which the surety may have been subject to as a result of such payment.” (citing
Brentnal v. Helms, 1 Root 291, 292 (Conn. Super. Ct. 1791))).
195
449 So. 2d 85 (La. App. 1st Cir. 1984).
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St. Paul Fire & Marine Insurance Co. (“St. Paul”) for its work on the LDOTD
project. Merrick maintained CGL coverage through Harford Fire Insurance Co.
(“Hartford”).
The Hartford policy covered “all sums which the insured shall
become legally obligated to pay as damages because of . . . bodily injury.”196 A
motorist was injured on the road Merrick had built and sued Merrick and the
LDOTD, among others. The LDOTD filed a third-party claim against St. Paul in
its capacity as Merrick’s surety.
Although Merrick and the LDOTD were
dismissed from the motorist’s suit before trial, St. Paul incurred substantial
attorney’s fees in defending against the LDOTD’s third-party claim. St. Paul
sought indemnification for those fees from Merrick. Merrick then sought coverage
for the indemnification payment under the Hartford CGL policy, a request Hartford
denied.
The Louisiana court found CGL coverage existed because Merrick’s
liability to St. Paul “arises not just from the guaranty but from the legal provisions
governing suretyship, and the general purpose of liability insurance is to cover this
type of legal liability.”197
In Spirco Environmental, Inc. v. American International Specialty Lines
Insurance Company,198 the Eighth Circuit determined that a CGL policy covered a
payment by the insured, a contractor, to its surety as indemnification for fees the
surety incurred in an arbitration regarding alleged property damage.
The
contractor, Spirco Environmental (“Spirco”) maintained CGL coverage through
196
Id., at 88.
197
Id. Under Louisiana Law, “[a] surety may not recover from the principal obligor
more than he paid to secure a discharge, but he may recover by subrogation such
attorney’s fees and interest as are owed with respect to the principal obligation.”
LA. CIV. CODE ANN. art. 3052.
198
555 F.3d 637 (8th Cir. 2009).
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American International Specialty Lines Insurance Company (“American”).199
After Spirco completed the project, the building’s owner contended that Spirco had
caused damage in the course of its work and withheld the final payment. Spirco
instituted an arbitration, contending that other workers were responsible for the
damage.
The owner counterclaimed against Spirco and its surety, Insurance
Company of the State of Pennsylvania (“ICSP”).200 Although Spirco and surety
ICSP prevailed in the arbitration, the latter incurred substantial attorney’s fees in
the arbitration.
Surety ICSP then sought from Spirco indemnification of its
attorneys’ fees and arbitration expenses from Spirco. In turn, Spirco sought CGL
coverage under its CGL policy with American for any such indemnity.
Applying Missouri law, the Eighth Circuit concluded that this payment was
covered by Spirco’s CGL policy with American. Spirco and American disputed
whether indemnification of attorney’s fees and expenses incurred by surety ICSP
was too attenuated from the underlying property damage to be covered by the
American policy. The dispute hinged on whether American’s obligation to cover a
“‘Loss’ that occurred ‘as a result of’ property damage” included the surety’s
attorney’s fees.201 The Eighth Circuit’s interpretation of the causation requirement
was similar to the meaning of “because of” under Texas law.202 Based on the
principles of surety law, the Spirco court concluded that the indemnification
199
Id., at 639.
200
The details of the relationship between Spirco and its surety are recounted in a
companion decision. See Spirtas Co. v. Ins. Co. of the State of Pa., 555 F.3d 647,
649–52 (8th Cir. 2009).
201
555 F.3d at 641.
202
According to Missouri law, “as a result of” (or “resulting from”) restricts the scope
of coverage to damages that are a “reasonably apparent” or “natural and
reasonable incident or consequence of” the property damage. This standard is,
however, “somewhere short of proximate cause” in the legal sense. Id., at 642–43.
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payment to surety ICSP was a “result of” the property damage. “Rarely will
construction, demolition, or remediation projects that are substantial in scope not
involve sureties, and rarely will surety bonds not be dependent on indemnification
of the surety by the bond purchaser.”203 Further, “surety law, even in the absence
of an express indemnification agreement, may in many circumstances imply this
duty of indemnification.”204 Under these conditions, an indemnification payment
to a surety for expenses incurred in litigation is a “natural and reasonable incident
or consequence” of property damage related to a contractor’s work. Therefore, the
Eighth Circuit held that Spirco’s indemnification payment to ICSP was a “result”
of the underlying asbestos damage and was covered under the American policy.205
203
555 F.3d at 643.
204
Id. (citations omitted). Missouri is among the jurisdictions where the principal’s
indemnification obligation to its surety may include attorney’s fees as a matter of
law. See Lincoln County, 32 S.W.2d at 295.
205
The Court does not reach the question of whether an indemnification obligation
arising solely from a contractual agreement (rather than a statutory obligation, as
presented at bar) is within the scope of “damages because of ‘bodily injury’ or
‘property damage.’” Compare United Rentals, Inc. v. Mid-Continent Cas. Co.,
843 F. Supp. 2d 1309 (S.D. Fla. 2012) (explaining that there was no coverage for
indemnification payment because, “while [indemnitee’s] Cross-Claims against
[the indemnitor] may be motivated by the potential liability it may incur for . . .
bodily injuries, [the indemnitee]’s basis for seeking its own relief from [the
indemnitor] is not founded on any ‘bodily injury’ or ‘property damage,’ but rather
is rooted in contract”), with Natchitoches Par. Sch. Bd. v. Shaw, 620 So. 2d 412
(La. Ct. App. 3d Cir. 1993) (finding coverage for contractor’s indemnification of
surety where underlying dispute involved property damage and where the
indemnification agreement fell within “incidental contract” exception to the
policy’s exclusion of contractual liabilities). PSI cites Gibson & Associates, Inc.
v. Home Insurance Co., 966 F. Supp. 468 (N.D. Tex. 1997). The Court does not
rely on this decision as it is inapposite. The claim for coverage of an
indemnification obligation was based on the “insured contract” exception to
contractual liability exclusion, a question materially distinct from the issues in the
dispute at bar.
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In Texas, Section 82.002(a) imposes a legal obligation on manufacturers to
indemnify sellers for certain losses “arising out of a products liability action,”
including “reasonable attorney fees.”
Section 82.002(a) creates a legal duty
analogous to the indemnification obligation imposed by surety law on which the
Spirco and Merrick courts relied.206 Like the contractor-surety relationship that
frequently exists in connection with large construction projects,207 a manufacturerseller relationship is a predictable element of a products liability action. Section
82.002 “established uniform rules of liability so that manufacturers could make
informed business decisions and plaintiffs could understand their rights.”208 To the
extent Titeflex’s damages, i.e., its attorney’s fees, expenses, and costs, were
incurred in defense of Head’s claims, Section 82.002(a) requires PSI to indemnify
Titeflex akin to a surety relationship arising from the damage Head suffered. PSI’s
206
An early Texas court held that a surety has no legal right under Texas law to
recover attorney’s fees from the principal unless the parties’ contract provides for
such indemnification. See 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). That court’s conclusion on Texas surety law does
not undermine the relevance of Merrick and Spirco to the coverage analysis in this
action. The question presented in this case is whether Texas insurance law
extends coverage for a statutorily-created extra-contractual duty to indemnify a
third party’s attorney’s fees under Section 82.002. The legal duty to indemnify a
surety’s attorney’s fees under Louisiana and Missouri law is analogous to the legal
duty to indemnify an innocent seller under Texas law. Therefore, the Merrick and
Spirco courts’ application of insurance law principles to the judgments rendered
pursuant to Louisiana and Missouri law may inform this Court’s application of
Texas insurance law to a judgment rendered under Texas law. The Court does not
reach the content of Texas surety law because the similarity is between Section
82.002(a) and Louisiana and Missouri surety law, not between Section 82.002(a)
and Texas surety law.
207
See Spirco, 555 F.3d at 643.
208
Fitzgerald, 996 S.W.2d at 868–69.
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claim for coverage should be treated as the contractor’s claims in Merrick and
Spirco.209
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, and not the damage to Head’s property.210
Mid-
Continent’s contention is essentially that the Titeflex Judgment was “because of”
PSI’s litigation decisions, i.e., its unwillingness to dismiss its Affirmative Claim
with prejudice and thus not because of the property damage to Head’s land. 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
209
Exclusion o-bis, which is added to the CGL Form by the Professional Liability
Endorsement [Doc. # 63-2], at ECF page 40, § I(A)(2)(o-bis), excludes coverage
for “[a] claim arising out of advice rendered or failed to have been rendered with
respects to a bond, suretyship or insurance requirement.” That exclusion does not
affect the analogy of Merrick and Spirco to this case because this case does not
involve a suretyship.
210
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 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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the Policy in “Duties In The Event Of Occurrence, Offense, Claim or Suit,”
subsections IV(2)(b)–(d).211 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.212
211
Policy [Doc. # 63-2], at CGL Form page 9 (ECF page 22), § IV(2)(b)–(d); see
infra Appendix, at 80.
212
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 insurer’s 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).
(continued…)
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In addition, case law imposes extracontractual duties on and grants
additional rights to the insurer, the insured, and their counsel in litigating a
potentially covered claim.213 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.214 Similarly, a New York court found that the
insured could make independent reasonable litigation decisions where defense of
(continued…)
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
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).
213
These duties include a reciprocal duty of good faith and fair dealing as well as the
insurer’s duties to investigate thoroughly and to disclaim coverage promptly. See,
e.g., City of Midland v. O’Bryant, 18 S.W.3d 209, 215 (Tex. 2000) (noting that
Texas law “impose[s] an actionable duty of good faith and fair dealing” in
insurance relationships); see also Carpenter v. Auto. Club Interinsurance
Exchange, 58 F.3d 1296, 1303 (8th Cir. 1995) (holding that lack of an insured’s
good faith constitutes a valid defense by insurer); 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).
214
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))).
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covered claims could have increased the insured’s exposure to liability on claims
not covered by the policy.215 “[T]hough the insured is contractually precluded
from settling a case, or otherwise assuming an obligation, without the consent of
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.”216 PSI’s decision not to accept
the Settlement Offer with the abandonment with prejudice of PSI’s potential claim
was similarly part of a defensive litigation strategy that aimed to minimize PSI’s
exposure to liability potentially not covered by the Policy.
Mid-Continent’s attempt to use PSI’s litigation decisions in the framework
of the assessment of the 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.217
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 of the property damage to his land. 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
215
Nelson Elec. Contracting Corp. v. Transcont’l Ins. Co., 660 N.Y.S.2d 220, 222
(N.Y. App. Div. 1997).
216
Id.
217
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).
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view of the cause of the Titeflex Judgment draws an artificial dividing line.218 But
for the property damage, which caused Head to file suit against Titeflex, there
would have been no Section 82.002 claim giving rise to the Titeflex Judgment.
Concurrent Causation.— As explained above, the Section 82.002(a)
portion of the Titeflex Judgment is approximately $150,000. 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. MidContinent 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.219 That argument is unavailing.
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.” 220
Mid-Continent has not argued that Titeflex’s defense of PSI’s claims are an
excluded cause.221 The record indicates that the fees Titeflex incurred in defending
218
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
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).
219
See Mid-Continent Post-Argument Brief [Doc. # 90], at 3–6.
220
Lyons v. Millers Cas. Ins. Co. of Tex., 866 S.W.2d 597, 601 (Tex. 1993).
221
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
(continued…)
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against Head’s claims were inextricably intertwined with its defense against PSI’s
Affirmative Claim throughout the relevant period.222 Because the latter is not an
excluded peril, the obligation to allocate damages does not apply to this case.
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
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.
(continued…)
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) (homeowner’s insurance, earthquake, landslide, and earth
movement exclusion).
222
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). Titeflex’s fees all
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 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.
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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.”223
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.”224 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.225 Both the
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
223
Policy [Doc. # 63-2], at ECF page 40, § I(A)(1)(d-bis), § V(20).
224
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.
225
See supra Section IV.D.2.a.
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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.226 Thus, while
226
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
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)).
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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,227 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).228
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
Damages.’” 229 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.”230
This interpretation is rejected as
without basis in the text of the Policy. “Money Damages” and “property damage”
227
See Jackson, 717 F. Supp. 2d at 819
228
See Jackson v. McKay-Davis Funeral Home, Inc., 717 F. Supp. 2d 809, 819 (E.D.
Wis. 2010). 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).
229
See PSI Reply [Doc. # 72], at 23.
230
See PSI Sur-Reply [Doc. # 79-1], at 11–12.
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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”231 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.232 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,233 (2) the Money Damages occurred during the Policy Period,234
and (3) PSI had no prior knowledge of the Money Damages.235
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
231
As distinct from “damages” under section I(A)(1)(a).
232
See supra Sections IV.D.1–2.
233
Compare supra Section IV.D.1.b.
234
Compare supra Section IV.D.1.c.
235
Compare supra Section IV.D.1.d.
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May 1, 2002.236 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).237 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
render professional services.’”238 This contention is not supported by the Policy or
the Endorsement language.239
236
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”).
237
See PSI Reply [Doc. # 72], at 23.
238
PSI Reply [Doc. # 72], at 12 (emphasis added).
239
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
(continued…)
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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.240 The coverage PSI advocates
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
(continued…)
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.
240
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
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.
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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.241
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”).242 Exclusion q precludes coverage for any
241
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 definition 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
Insuring Agreement. The Court does not reach this question because PSI sued
only under the 2001–2002 Policy. See supra note 236.
242
Policy [Doc. # 63-2], at ECF page 40, § I(A)(2)(q).
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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
Mid-Continent’s argument regarding
intentional act that caused the loss.
Exclusion q is a repackaging of its duty to cooperate argument as part of the initial
coverage analysis.243 This approach is contrary to the Policy language.244 MidContinent has therefore failed to carry its burden of showing that Exclusion q
applies.
5.
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.”
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.245
243
See supra IV.C.
244
See supra Section IV.D.2.b, at 61–65.
245
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 abandon its Affirmative Claim against Titeflex with prejudice.
See supra Section IV.C.
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E.
Texas Insurance Code
PSI claims that Mid-Continent violated the Texas Insurance Code, Section
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.”246 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
on September 19, 2008.247 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.248
As PSI concedes, there are no “magic words” required for an
effective reservation of rights.249
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.
246
TEXAS INS. CODE § 541.060(a)(4)(A)–(B).
247
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 . . . .”).
248
Exh. A47 to Mid-Continent Motion, Letter from Robert Glover to Mark Barron,
dated July 30, 2014 [Doc. # 63-51], at 5.
249
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.)).
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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.250
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.251 Because
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
There are significant matters of first impression presented in this case.
Specifically, the circumstances of whether the CGL policy in issue provides
coverage for PSI’s statutory obligation as a manufacturer to indemnify Titeflex, a
seller, for losses, including attorney’s fees and costs arising out of a products
liability action, raise complex issues of insurance law. Under the terms of the
Policy at issue in this case, the Court concludes that the Texas statutory
indemnification obligation of Section 82.002(a) is within the scope of coverage
250
See TEX. CIV. PRAC. & REM. CODE § 541.152(a) (permitting fee-shifting only for
“a plaintiff who prevails in an action under this subchapter” (emphasis added)).
251
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 &
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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created by the Insuring Agreement, but that an award to the seller of fees incurred
in prosecuting the indemnity claim pursuant to Section 82.002(g) is not. The
Professional Liability Endorsement does not create an independent insuring
agreement that changes this result and PSI's claim for “Money Damages” included
within the Endorsement is not covered by the policy period in suit. Further, the
circumstances of this case raise significant questions regarding an insured’s duty to
cooperate in an insurer’s effort to settle a potentially covered claim against the
insured. The Court concludes that genuine issues of material fact remain regarding
whether insured PSI fulfilled its contractual duty to cooperate with insurer MidContinent when PSI refused to abandon its Affirmative Claim against Titeflex with
prejudice. 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 has not yet prevailed on its claim for breach of contract. Finally, the Court
concludes that Policy Exclusion q and Section 541.060(a)(4) of the Texas
Insurance Code are inapplicable as a matter of law. 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
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
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ORDERED that a pretrial conference is set in this case for August 18,
2016, at 1:00 p.m.
SIGNED at Houston, Texas, this 29th day of July, 2016.
NAN Y F. ATLAS
SENIOR UNI
STATES DISTRICT JUDGE
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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.
82
P:\ORDERS\a2008-2009\2009\0422MSJ.docx 160729.1729
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