Millis Development & Construction, Inc. et al v. America First Insurance Company
Filing
29
MEMORANDUM OPINION granting in part, denying in part 11 MOTION for Partial Summary Judgment, granting in part, denying in part 21 MOTION for Partial Summary Judgment and Brief in Support.(Signed by Magistrate Judge Nancy K. Johnson) Parties notified.(sbutler, )
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
MILLIS DEVELOPMENT & CONSTRUCTION, §
INC. and MT. HAWLEY INSURANCE
§
COMPANY,
§
§
Plaintiffs,
§
§
v.
§
§
AMERICA FIRST LLOYD’S INSURANCE
§
COMPANY,
§
§
Defendant.
§
CIVIL ACTION NO. H-10-3260
MEMORANDUM OPINION
Pending before the court1 are Defendant’s Motion for Partial
Summary Judgment (Doc. 11) and Plaintiff’s Motion for Partial
Summary Judgment (Doc. 21). The court has considered the motions,
all relevant filings, and the applicable law. For the reasons set
forth
below,
the
court
GRANTS
IN
PART
AND
DENIES
IN
PART
Plaintiff’s Motion for Partial Summary Judgment, and GRANTS IN PART
AND DENIES IN PART Defendant’s Motion for Partial Summary Judgment.
I.
Background
Mt. Hawley Insurance Company (“Mt. Hawley” or “Plaintiff”)
brought this action against America First Lloyd’s Insurance Company
(“America First” or “Defendant”) seeking a declaratory judgment on
the coverage obligations allegedly owed by America First to Millis
Development and Construction, Inc. (“Millis”) and Trendmaker Homes,
Inc. (“Trendmaker”) as defendants in a personal injury lawsuit
1
The parties consented to proceed before the undersigned magistrate
judge for all proceedings, including trial and final judgment, pursuant to 28
U.S.C. § 636(c) and Federal Rule of Civil Procedure 73. Doc. 16 & 27.
pending in Harris County (the “Underlying Action”).
2
Defendant
filed its motion for summary partial judgment seeking the following
declarations: (1) that it owed no duty to defend Trendmaker in the
Underlying Action; (2) that its duty to defend Millis began with
the filing of the sixth amended petition in the Underlying Action;
and (3) that it had pro rata liability with Mt. Hawley for the
costs incurred in defending Millis in the Underlying Action.3
In response, Plaintiff moved to amend its complaint and filed
its second amended complaint on June 13, 2011.4 Plaintiff then
filed its motion for partial summary judgment seeking the following
declarations from the court: (1) that both Millis and Trendmaker
are additional insureds on the America First policy; (2) that
America First’s duty to defend Millis and Trendmaker was triggered
by the filing of the original petition in the Underlying Action;
(3) that America First owes primary and non-contributory coverage
to Millis and that Mt. Hawley provides excess coverage for Millis;
(4) that America First has a duty to pay its pro rata share of
defense and indemnity costs incurred on behalf of Trendmaker.5
Plaintiff also seeks summary judgment on its breach of contract
claims
against
America
First
and
alleges
that
America
First
breached its insurance contract to defend and indemnify both Millis
2
See Doc. 20, Pl’s 2d Am. Compl., p. 2.
3
See Doc. 11, Def’s Mot. for Partial Summ. J., p. 3.
4
See Doc. 20, Pls.’ 2d Am. Compl., p. 1-14. Millis brings an
additional breach of contract claim against America First in this complaint. Mt.
Hawley also added other claims in this complaint, which are not addressed by the
court at this time.
5
See Doc. 21, Pls.’ Mot. for Partial Summ. J. & Br. in Supp., p. 9-25.
2
and Trendmaker in the Underlying Action.6 Plaintiff claims that
because of America First’s alleged breaches of contract, Plaintiff
is
entitled
through
contractual
and
equitable
subrogation
to
recover defense and indemnity costs expended on behalf of Millis
and Trendmaker in the Underlying Action as well as other costs and
attorney’s fees in bringing this action.7
A. The Underlying Action
In September 2009, Wayne Gordon (“Gordon”), the plaintiff in
the Underlying Action, filed his original petition.8 Gordon alleged
that he was injured on February 2, 2009, in the course and scope of
his employment for Dynamic Air Balancing, Inc., while performing
his job duties at a project owned by Trendmaker and controlled by
Trendmaker and general contractor Millis.9 The following is the
relevant portion of Gordon’s original petition:
On February 2, 2009, Plaintiff Wayne Gordon, was in the
course and scope of his employment for Dynamic Air
Balancing, Inc, was performing his job duties at the
Cross Creek Ranch Visitors & Recreation Center. The
Visitors & Recreation Center was under the control of the
developer, Trendmaker Homes, Inc. and/or the general
contractor, Millis Development and Construction, Inc. On
the day in question, Plaintiff was attempting to climb an
attic ladder when he fell.10
Gordon initially amended his petition in the Underlying Action five
6
See id.
7
See id.
8
See Doc. 21, Ex. 4A to Pls.’ Mot. for Partial Summ. J., Gordon’s Orig
9
See id.
10
Id.
Pet.
3
times, making very similar allegations.11
Plaintiff’s First Amended Petition
On February 2, 2009, Plaintiff Wayne Gordon, was in the
course and scope of his employment for Dynamic Air
Balancing Inc., was performing his job duties at the
Cross Creek Ranch Fitness Center. The Fitness Center was
under the control of the developer, Trendmaker Homes,
Inc. and/or the general contractor, Millis Development
and Construction, Inc. On the day in question, Plaintiff
was attempting to climb an attic ladder when he fell.12
Plaintiff’s Second Amended Petition
On February 2, 2009, Plaintiff Wayne Gordon, was in the
course and scope of his employment for Dynamic Air
Balancing, Inc., was performing his job duties at the
Cross Creek Ranch Fitness Center. The Fitness Center was
under the control of the developer, Trendmaker Homes,
Inc. and/or the general contractor, Millis Development
and Construction, Inc. On the day in question, Plaintiff
was attempting to climb an attic ladder when he fell. 13
Plaintiff’s Third Amended Petition
On February 2, 2009, Plaintiff Wayne Gordon, was in the
course and scope of his employment for Dynamic Air
Balancing, Inc., was performing his job duties at the
Cross Creek Ranch Fitness Center. The fitness center was
under the control of the developer, Trendmaker Homes,
Inc. and/or the general contractor, Millis Development
and Construction, Inc, and/or Insite Architecture, Inc.
On the day in question, Plaintiff was attempting to climb
an attic ladder when he fell.14
Plaintiff’s Fourth Amended Petition
On February 2, 2009, Plaintiff Wayne Gordon, was in the
course and scope of his employment for Dynamic Air
Balancing, Inc., was performing his job duties at the
11
See Doc. 21, Ex. 4 to Pls.’ Mot. for Partial Summ. J., Pleadings in
the Underlying Action.
12
See Doc. 21, Ex. 4B to Pls.’ Mot. for Partial Summ. J., Gordon’s 1st
Am. Orig Pet.
13
See Doc. 21, Ex. 4C to Pls.’ Mot. for Partial Summ. J., Gordon’s 2d
Am. Orig. Pet.
14
See Doc. 21, Ex. 4D Pls.’ Mot. for Partial Summ. J., Gordon’s 3d Am.
Orig Pet.
4
Cross Creek Ranch Fitness Center. The fitness center was
under the control of the developer, Trendmaker Homes,
Inc. and/or the general contractor, Millis Development
and Construction, Inc, and/or Insite Architecture, Inc.
On the day in question, Plaintiff was attempting to climb
an attic ladder when he fell.15
Plaintiff’s Fifth Amended Petition
On February 2, 2009, Plaintiff Wayne Gordon, was in the
course and scope of his employment for Dynamic Air
Balancing, Inc., was performing his job duties at the
Cross Creek Ranch Fitness Center. The fitness center was
under the control of the developer (Trendmaker Homes,
Inc.), the general contractor (Millis Development and
Construction,
Inc.)
and
the
architect
(Insite
Architecture Inc.) On the day of his injury, Plaintiff
was utilizing an attic ladder that had been specified by
Insite, order and installed by Millis Development, and
inspected and approved by Trendmaker. Unfortunately, the
attic ladder was insufficient for its intend use as it
was too short and unstable. The ladder was the only means
of ingress/egress into the area. As a result of the
negligent acts and omissions of Defendants and the
deficiencies that existed with regards to the ladder,
Plaintiff fell and sustained severe injuries.16
On June 23, 2010, Gordon filed his sixth amended original petition,
which, in addition to the same allegations set forth in the first
through fifth amended petitions, specifically identified Texas
Mechanical Contractors (“TMC”) as the party who hired Dynamic Air
to do the heating, ventilation, and air conditioning (“HVAC”) work
at the Fitness Center.
17
The relevant portion of Gordon’s sixth
amended petition appeared as follows:
On February 2, 2009, Plaintiff Wayne Gordon, was in the
course and scope of his employment for Dynamic Air
Balancing, Inc., was performing his job duties at the
15
See Doc. 21, Ex. 4E to Pls.’ Mot. for Partial Summ. J., Gordon’s 4th
Am. Orig Pet.
16
See Doc. 21, Ex. 4F to Pls.’ Mot. for Partial Summ. J., Gordon’s 5th
Am. Orig Pet.
17
See Doc. 21, Ex. 4G to Pls.’ Mot. for Partial Summ. J., Gordon’s 6th
Am. Orig Pet.
5
Cross Creek Ranch Fitness Center. The Cross Creek Ranch
Fitness Center was part of a development undertaken by
Trendmaker. Plaintiff will show onto this Court and jury
that Trendmaker contractually retained the Millis
Development to serve as the general contractor for the
construction project that included the Fitness Center
facility where Plaintiff was injured. Millis Development,
in turn, contracted with Texas Mechanical Contractors
retained Dynamic Air Balancing, Inc. (the employer of
Plaintiff) to balance the air-conditioning flow from the
units that had been installed by Texas Mechanical
Contractors.
During
this
ongoing
construction
project/process, Trendmaker, Millis and Texas Mechanical
Contractors supervised and scheduled the work activities
as the construction was not yet completed.
It was during the work in progress that Plaintiff
sustained his injuries on the job site.18
In each amended petition in the Underlying Action, Gordon
averred that he was injured during the course and scope of his
19
employment and while performing his assigned job duties.
Specifically, Gordon alleged defective and negligent construction,
an unreasonably dangerous property condition, violations of the
Texas Deceptive Trade Practices Act, and gross negligence by both
Millis
and
Trendmaker.20
Gordon’s
sixth
through
petitions are the only ones that mention TMC.21
defendant
in
any
petition.22
Trendmaker
and
ninth
amended
TMC is not a named
Millis
are
named
defendants in every amended petition in the Underlying Action.23
B. The America First Policy
18
See Doc. 21, Ex. 4G to Pls.’ Mot. for Partial Summ. J., Gordon’s 6th
Am. Orig Pet.
19
See Doc. 20, Pls.’ 2d Am. Compl., p. 3.
20
See id.
21
See Doc. 11, Def.’s Mot. for Partial Summ. J., p. 2.
22
See Doc. 21, Ex. 4 to Pls.’ Mot. for Partial Summ. J., Pleadings in
Underlying Action; Doc. 11, Ex.’s C-H to Def.’s Mot. for Partial Summ. J.
23
See id.
6
America First issued policy No. CCP8069882 to TMC (“America
First Policy”), which included commercial general liability (“CGL”)
coverage for the policy period of September 3, 2008, through
September
3,
2009.24
The
America
First
Policy
contained
the
following provision for additional insured coverage (“Additional
Insured Provision”):
Who Is An Insured is amended to include as an insured any
person or organization when you and such a person or
organization have agreed in writing in a contract,
agreement or permit that such person or organization be
added as an additional insured on your policy to provide
insurance such as afforded under this coverage part.
Such person or organization is an additional insured only
with respect to liability arising out of (a) Your ongoing
operation performed for that person or organization; or
(b) Premises or facilities owned or used by you.
With respect to provision 1.a. above, a person’s or
organization’s
status
as
an
insured
under
this
endorsement ends when your operations for that person or
organization are completed.25
The
America
First
Policy
also
contains
an
other-insurance
provision:
4. Other Insurance
If other valid and collectible insurance is available to
the insured for a loss we cover under Coverages A or B of
this Coverage Part, our obligations are limited as
follows:
a. Primary Insurance
This insurance is primary except when b. below applies.
If this insurance is primary, our obligations are not
affected unless any of the other insurance is also
primary. Then, we will share with all that other
24
See Doc. 21, Ex. 2 to Pls.’ Mot. for Partial Summ. J., America First
Policy Excerpts with Dep. on Written Contract, p. 31.
25
See Doc. 11, Ex. A to Def.’s Mot. for Partial Summ. J., p. 3.
7
insurance by the method described in c. below.2627
. . . .
c. Method of Sharing
If all of the other insurance permits contribution by
equal shares, we will follow this method also. Under this
approach each insurer contributes equal amounts until it
has paid its applicable limit of insurance or none of the
loss remains, whichever comes first.
If any of the other insurance does not permit
contribution by equal shares, we will contribute by
limits. Under this method, each insurer’s share is based
on the ratio of its applicable limit of insurance to the
total applicable limits of insurance of all insurers.
C. The Mt. Hawley Policy
Mt. Hawley issued a CGL Policy, No. MGL0152705 (“Mt. Hawley
Policy”), with a policy period of August 15, 2008, through August
15, 2009, to Millis.28 The Mt. Hawley Policy contained the following
contractual subrogation condition:
8. Transfer of Rights of Recovery Against Others To Us
If the insured has rights to recover all or part of any
payment we have made under this Coverage Part, those
rights are transferred to us. The insured must do nothing
after loss to impair them. At our request, the insured
will bring “suit” or transfer those rights to us and help
us enforce them.
The Mt. Hawley Policy also contained the following other-insurance
provision set forth in the “Amendment of Other Insurance - Excess
Provision (Construction Contacts)” endorsement:
(3) This insurance is excess over any other insurance
26
Subsection b listed circumstances under which America First would
provide excess coverage, none of which apply to the facts before this court.
27
See Doc. 21, Ex. 2 to Pls.’ Mot. for Partial Summ. J.,p. 31, America
First Policy Excerpts with Dep. on Written Contract.
28
See Doc. 21, Ex. 5 to Pls.’ Mot. for Partial Summ. J., Mt. Hawley
Policy.
8
whether primary, excess, contingent or on any other basis
that is available to you as an additional insured or
contractual indemnitee under a policy issued to a
subcontractor. You are required to give notice of claim
to all “potential insurers” within thirty days of giving
notice of claim to us.
We have no duty under Coverage A or B to defend any claim
or “suit” that any other insurer has a duty to defend. If
no other insurer defends, we will undertake to do so, but
we will be entitled to your rights against all those
other insurers.
We will pay only our share of the amount of loss, if any,
that exceeds the sum of:
(a) the total amount that all such other insurance would
pay for the loss in absence of this insurance; and
(b) The total of all deductible
amounts under all such insurance.
and
self-insurance
We will share the remaining loss, if any, with any other
insurance that is described in this Excess Insurance
provision and was not bought specifically to apply in
excess of the Limits of Insurance shown in the
Declarations of this Coverage Part.
“Potential Insurers” means all insurance companies who
may be obligated to defend the insured as either a named
insured or an additional insured. “Potential insurers”
includes the insurers of all subcontractors who were
contractually obligated to name the insured as an
additional insured on their own insurance policy(ies).29
D. The TMC/Millis Subcontract
On March 5, 2008, TMC entered into a contract with Millis to
perform work at the Cross Creek Ranch Visitors Center (“TMC/Millis
Subcontract”).30 Under the TMC/Millis Subcontract, Millis was named
the contractor and TMC was named the subcontractor.
31
It also
stated that Millis had previously entered into a contract with
29
See id.
30
See Doc. 21, Ex. 1 to Pls.’ Mot. for Partial Summ. J., TMC/Millis
Subcontract; Doc. 11-2, Ex. B to Defendant’s Motion for Partial Summary Judgment.
31
See id.
9
Trendmaker (“Trendmaker/Millis Contract”), dated February 22, 2008,
for work to be done at the Cross Creek Ranch Visitors Center, as
per the plans and specifications prepared by Insite Architecture,
Inc.32
The TMC/Millis Subcontract was for HVAC work at the Cross
Creek Ranch Visitors Center.33 It was priced at $154,450.34
The TMC/Millis Subcontract listed five attached exhibits,
including Exhibit A, and immediately followed the list with this
explanation:“[a]ll of which are made a part of said contract and
all of which are now made a part of this subcontract.”35 Exhibit A,
titled “Subcontractor’s Insurance Requirements,” provided that TMC
was required to obtain a CGL policy and make Millis and Trendmaker
additional insureds under that policy.36 Exhibit A also stated that
TMC’s policy would provide primary and non-contributory insurance
to Millis and Trendmaker as general contractor and owner of the
project, respectively.37 The TMC/Millis Subcontract was signed by
representatives of Millis and TMC.38
F. History of this Action
After receiving notice that Gordon had filed his original
petition in the Underlying Action, Mt. Hawley made tenders to
32
Id.
33
Id.
34
Id.
35
See Doc. 21, Ex. 1 to Pls.’ Mot. for Partial Summ. J., TMC/Millis
Subcontract; Doc. 11-2, Ex. B to Def.’s Mot. for Partial Summ. J.
36
Id.
37
Id.
38
Id.
10
America First on behalf of Millis and Trendmaker demanding that
America First defend and indemnify them against Gordon’s claims in
the
Underlying Action.
39
America
First
initially
denied
those
tenders in writing on March 24, 2009.40 On August 6, 2010, America
First verbally informed Mt. Hawley’s counsel that America First
would accept the defense and indemnity responsibility for Millis
but not Trendmaker.41 According to Mt. Hawley, an America First
representative stated that a formal acceptance of the tender would
be forthcoming.
Mt. Hawley claims that they did not hear from
American First, and thereafter brought this declaratory action. 42
On September 26, 2010, America First sent Mt. Hawley an
electronic communication accepting primary coverage responsiblity
for Millis in the Underlying Action.43 The following is the relevant
excerpt from that communication:
We do not dispute that Millis qualifies as an insured
under our policy, and that our coverage would be primary,
as Millis was the “person or organization” with whom
Texas Mechanical had the “agreement in writing to add
that person or organization as an additional insured.”
The issue is that Trendmaker does not qualify, as Texas
Mechanical did not have the written agreement in writing
with Trendmaker.44
On October 13, 2010, America First provided Mt. Hawley with a
39
See Doc. 20, Pls.’ 2d Am. Compl., p. 5, n. 17; Doc. 22, Def.’s Ans.
to Pls.’ 2d Am. Compl., p. 3, n. 17.
40
See id. at n.18; Doc. 21, Ex. 3 to Pls.’ Mot. for Partial Summ. J.,
America First Correspondence Denying Millis’s March 9, 2009 Tender.
41
See id.
42
Id.
43
See Doc. 21, Ex. 6-1 to Pls.’ Mot. for Partial Summ. J., America
First Correspondence.
44
See id.
11
formal acceptance of Mt. Hawley’s tender demand for defense and
indemnity of Millis in the Underlying Action.45
The relevant
portion of that correspondence appeared as follows:
[We] do not dispute that Millis qualifies as an insured
under our policy, and that our coverage would be primary,
as Millis was the “person or organization” with whom
Texas Mechanical had the “agreement in writing to add
that person or organization as an additional insured.”
However, Trendmaker does not qualify as an insured, as
Texas Mechanical did not have a written agreement in
writing with Trendmaker.46
In that same letter, America First stated that it had retained new
defense counsel for Millis.47 America First also requested Millis’s
current attorney to provide the new defense counsel with a copy of
the case file.48
On November 28, 2010, America First supplemented its October
13, 2010 letter with a letter in which American First again agreed
to provide Millis a defense against the claims asserted in the
Underlying Action subject to a reservation of rights.49 The letter
maintained that America First’s policy coverage for Millis was to
apply on “a primary non-contributing basis with Millis’s own CGL
policy issued through Mt. Hawley.”50 The reservation of rights
included in the letter expressed that America First reserved its
right to assert any coverage defenses or exclusions from coverage
45
See id.
46
Id.
47
Id.
48
Id.
49
See Doc. 21, Ex. 6 to Pls.’ Mot. for Partial Summ. J., America First
Correspondence.
50
Id.
12
that
may
arise
under
the
policy
for
the
allegations
in
the
Underlying Action.51
Mt. Hawley avers that it did not receive any reports or status
updates regarding Millis’s defense in the Underlying Action from
the new defense counsel after it assumed representation.
52
On
January 18, 2011, Mt. Hawley requested information regarding any
settlement demands and mediation proceedings that could implicate
Mt. Hawley’s excess coverage.53
On January 21, 2011, America
First’s defense counsel responded that mediation was set for
February 14, 2001, and requested that the two insurers try to
resolve some of the coverage issues so that mediation would not
fall apart.54
Then, on February 7, 2011, America First served its Motion for
Partial Summary Judgment (Doc. 11) in this case on Mt. Hawley.
55
According to Mt. Hawley, this was the first time that America First
notified Mt. Hawley that it expected Mt. Hawley to share defense
and indemnity costs for Millis, and that America First no longer
considered its coverage primary and non-contributory.56 In an e-mail
dated February 11, 2011, Mt. Hawley expressed its disagreement with
51
Id.
52
See Doc. 20, Pls.’ 2d Am. Compl., p. 7, n. 25; but see Doc. 22,
Def.’s Ans. to Pls.’ 2d Am. Compl., p. 4, n. 25 (“America First is without
sufficient knowledge to admit or deny the allegations in paragraph 25").
53
See id.
54
See Doc. 13-1, Ex. A to Def.’s Resp. to Pl.’s Mot. for Leave to File
2d Am. Compl., E-mail from Todd Lonergan to Greg Winslet, January 21, 2011.
55
See Doc. 13-2, Ex. B to Def.’s Resp. to Pl.’s Mot. for Leave to File
2d Am. Compl., E-mail from Todd Lonergan to Greg Winslet, February 7, 2011.
56
See Doc. 20, Pls.’ 2d Am. Compl, p. 7, n. 26.
13
America First’s current position on coverage, and stated that it
would attempt to settle on behalf of Trendmaker, but would not
spend any money on behalf Millis until American First had exhausted
its $1,000,000 policy limit.57
II.
Summary Judgment Standard
Summary judgment is warranted when the evidence reveals that
no genuine dispute exists regarding any material fact and the
moving party is entitled to judgment as a matter of law.
Fed. R.
Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986);
Brown v. City of Houston, Tex., 337 F.3d 539, 540-41 (5th Cir.
2003).
The movant must inform the court of the basis for the
summary judgment motion and must point to relevant excerpts from
pleadings, depositions, answers to interrogatories, admissions, or
affidavits that demonstrate the absence of genuine factual issues.
Celotex Corp., 477 U.S. at 323; Topalian v. Ehrman, 954 F.2d 1125,
1131 (5th Cir. 1992).
A material fact is a fact that is identified by applicable
substantive law as critical to the outcome of the suit.
Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Ameristar Jet
Charter, Inc. v. Signal Composites, Inc., 271 F.3d 624, 626 (5th
Cir. 2001).
To be genuine, the dispute regarding a material fact
must be supported by evidence such that a reasonable jury could
resolve the issue in favor of either party.
Anderson, 477 U.S. at
250; TIG Ins. Co. v. Sedgwick James of Wash., 276 F.3d 754, 759 (5th
57
See Doc. 13-3, Ex. C. to Def.’s Resp. to Pl.’s Mot. for Leave to File
2d Am. Compl., E-mail from Greg Winslet to Todd Lonergan, February 11, 2011.
14
Cir. 2002).
III.
Analysis
As this declaratory action is in federal court under diversity
jurisdiction, state law governs substantive matters. See Erie R.R.
v. Tompkins, 304 U.S. 64, 78 (1938).
Because Texas is the forum
state in this matter, the court applies Texas’ choice of law rules.
See Guar. Nat’l Ins. Co. v. Azrock Indus., 211 F.3d 239, 243 (5th
Cir. 2000)(citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S.
487, 496 (1941) (stating that a federal district court sitting in
diversity must apply the forum state’s conflict of laws rules)).
Any insurance policy payable to a “citizen or inhabitant” of Texas
by an insurance company doing business in Texas is held to be
governed by Texas law regardless of where the contract was executed
or to where the premiums are paid.
Tex. Ins. Code art. 21.42.
By
relying on Texas law in their briefs, the parties have conceded
that Texas law applies to the interpretation of the insurance
policies.
Pending before the court on summary judgment are four disputed
issues.
First,
whether
Trendmaker
qualifies
as
an
additional
insured on the America First Policy. Second, when, or at what
point, in the Underlying Action did America First’s duty to defend
begin. Third, how, or in what manner, should liability and costs be
apportioned between Mt. Hawley and America First. And, finally,
whether Mt. Hawley is entitled to recover from America First the
costs Mt. Hawley has expended in defending and indemnifying Millis
and Trendmaker in the Underlying Action.
15
A.
Whether Trendmaker is an Additional Insured Under the
America First Policy
In its motion for partial summary judgment, Plaintiff asks the
court to declare that Trendmaker is an additional insured on the
America First Policy and that, therefore, America First had a duty
to defend Trendmaker in the Underlying Action. Defendant argues in
its motion for partial summary judgment that it owes no duty to
defend Trendmaker and that Trendmaker is not an additional insured
under
the
First
between
contract”
America
TMC
Policy
and
because
Trendmaker
there
making
is
no
“direct
Trendmaker
an
additional insured under the America First Policy.
When construing insurance policies, the court uses the same
rules
of
construction
generally.
Nat’l
Union
that
apply
Fire
Ins.
to
Co.
construing
of
a
Pittsburgh,
contract
P.A.
v.
Crocker, 246 S.W.3d 603, 603 (Tex. 2008); State Farm Life Ins. Co.
v. Beaston, 907 S.W.2d 430, 433 (Tex. 1995). The court's primary
concern is enforcing the parties' expressed intent. See Forbau v.
Aetna Life Ins. Co ., 876 S.W.2d 132, 133 (Tex. 1994). This means
that the terms in an insurance contract will be given their
ordinary meaning unless the policy shows that the words were meant
in a technical or different sense. Gonzalez v. Mission Am. Ins.
Co., 795 S.W.2d 734, 736 (Tex. 1990);
Sec. Mut. Cas. Co. v.
Johnson, 584 S.W.2d 703, 704 (Tex. 1979).
The
America
First
Policy
provides
that
a
party
will
be
considered an additional insured “when you [TMC] and such a person
or organization [Mills or Trendmaker] have agreed in writing in a
contract, agreement, or permit” that such a person or organization
16
be added as an additional insured on the policy.
In other words,
in order for a party to be considered an additional insured under
the America First Policy, there must be a written contract in which
both TMC and that party have agreed that the party would be added
as an additional insured on the America First Policy. There is no
dispute between the parties that such an agreement exists between
TMC and Millis, and that, therefore, Millis is an additional
insured under the America First Policy.
The
parties
diverge,
however,
on
the
issue
of
whether
Trendmaker is an additional insured under the America First Policy.
Defendant argues that the language of the Additional Insured
Provision of the America First Policy mandates a direct contract
between TMC and any party it wishes to add as an additional
insured. Based on the evidence provided by both parties at summary
judgment, there is no written contract directly and explicitly
between TMC and Trendmaker in which TMC agrees to make Trendmaker
an additional insured under its America First Policy.
That being said, although a direct contract would satisfy the
Additional Insured Provision, a direct contract is not necessarily
required by the plain language of the policy.
Texas case law is
clear that the court must interpret the language of the policy as
it is written and must strictly construe it in an attempt to give
the language its literal reading. National Union Fire Ins. Co., 246
S.W.3d at 605. Contrary to Defendant’s position, a straightforward,
literal reading of the America First Policy does not require a
direct contract to exist between TMC and Trendmaker in order for
Trendmaker to be an additional insured under the policy.
17
All that
is required is a written contract in which both TMC and Trendmaker
have agreed that Trendmaker would be added as an additional insured
on the America First policy.
This is clear from the language of
the policy itself.
First, the actual wording of the Additional Insured Provision
does not include the words “direct” or “between” in reference to
the written contract. Nor are the words “have agreed” followed by
the words “with each other” or “together”. To add in those words
would require the court to narrow the scope of coverage within the
policy, and the court may not interpret the policy in a way that
gives new meaning to the terms of the policy. See Nat’l Union Fire
Ins. Co., 246 S.W.3d at 606 (explaining that the court must give
the
policy’s
words
their
plain
meaning,
without
inserting
additional provisions into the contract).
Furthermore,
the
Additional
Insured
Provision
does
not
require that both parties be signers of the written contract in
order for one of the parties to be considered an additional
insured. It only requires that both parties agree in a written
contract that one of the parties is to be an additional insured.
Moreover, while it is clear that a direct contract would meet
the requirements of the Additional Insured Provision, it is also
clear that both parties could agree that Trendmaker would be added
as an additional insured, and that both parties’ agreements could
be memorialized in writing, in the same contract, without the
parties being in a direct contract with each other. And while a
scenario such as this may seem unlikely at first blush, the present
case is perhaps the perfect example of when there can be such an
18
agreement without a direct contract between the parties.
In the TMC/Millis Subcontract, TMC agreed to make Trendmaker
an additional insured under its America First policy.
In the
Trendmaker/Millis Contract, Trendmaker agreed to be an additional
insured on the CGL policy of any party subcontracted by Millis
pursuant
to
the
Trendmaker/Millis
Contract.
The
TMC/Millis
Subcontract was made pursuant to the Trendmaker/Millis Contract,
incorporating, through Ex. A, Trendmaker’s agreement that it be
added
as
an
additional
insured.
Therefore,
the
TMC/Millis
Subcontract is a contract in which both TMC and Trendmaker have
agreed in writing that Trendmaker should be added as an additional
insured in the America First Policy.58
No Texas court has interpreted this precise provision under
the same circumstances. Defendant encourages the court to look
outside Texas for guidance. The case Defendant cites is a state
trial court opinion from New York. See Brooklyn Hosp. Ctr. v.
OneBeacon Ins., 799 N.Y.S.2d 158 (N.Y. Sup. Ct. 2004).
In Brooklyn Hospital Center, the court held that an insurer
was not required to extend coverage to the hospital insofar as
there was no written agreement specifically between the insured and
the hospital requiring the hospital to be named as an additional
insured. Id. at 161. In that case, the insured was the employer of
the injured party in the underlying lawsuit. Id. The insured had
subcontracted work from the hospital’s manager and had a provision
in its subcontract that required it to add the hospital and the
58
The court recognizes that this approach to construing the America
First Policy may be seen as “splitting hairs,” but that is precisely the job of
a court in interpreting insurance policies and determining coverage.
19
hospital’s manager as additional insureds under its CGL policy. Id.
The policy issued to the insured included as insureds, “any person
or organization for whom [the insured] is performing operations
when [the insured] and such person or organization have agreed in
writing in a contract or agreement that such person or organization
be added as an additional insured.” Id. While the court found that
hospital’s manager was an additional insured because there was a
direct contract between the insured and the manager, the court held
that the hospital was not an additional insured because there was
no direct contract between the insured and the hospital. Id.
Besides the obvious difference that the New York case did not
apply Texas law, the court rejects the notion that plain meaning
can
be
derived
from
a
policy
provision
by
adding
words
and
requirements that limit coverage. The New York court altered the
meaning and scope of the additional insured provision by adding the
word “between” and interpreting the use of the word “such” as
requiring a direct contract. See Brooklyn Hosp. Ctr., 799 N.Y.S.2d
at 158-161. The court ignored the possibility that in a case such
as this, the two parties can each agree to something, which is then
memorialized in writing in a contract with only one of the parties
being a signer or party to that contract or agreement. The New York
court did not explain its rationale for adding the words “direct”
and “between” into the additional insured provision. However, in
the present case, the court is not inclined to follow the cited,
non-binding opinion because it would improperly restrict coverage.59
59
The court found on its own an Illinois appellate court opinion that
interpreted the same provision as requiring a direct contract between the
parties. See Westfield Insurance Co. v. FCL Builders Inc., 948 N.E.2d 115 (Ill.
20
To be clear, the court is not saying that the Additional
Insured Provision of the America First Policy is ambiguous or that
there is more than one reasonable interpretation of the policy.
Under Texas law, if the terms in a contract can be given a definite
or certain legal meaning, they are not ambiguous, and the court
will construe the contract as a matter of law. Fiess v. State Farm
Lloyds, 202 S.W.3d 744, 746 (Tex. 2006). Not every difference in
the interpretation of a contract creates an ambiguity. See Forbau,
876 S.W.2d at 134. More importantly, the mere disagreement over the
meaning of a particular provision in a contract does not make it
ambiguous. Kelley–Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d
462, 465 (Tex. 1998).
In order for an ambiguity to exist when the
parties advance conflicting interpretations, both interpretations
must be reasonable. See Columbia Gas Transmission Corp. v. New Ulm
Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996).
The court finds that the language of the Additional Insured
Provision
of
the
America
First
Policy
can
only
engender
one
reasonable meaning. That is, in order for a party to become an
additional insured under the America First Policy, TMC and that
party must have agreed in writing in a contract, agreement or
permit that the party will be added as an additional insured.60 In
the present case, both TMC and Trendmaker agreed that Trendmaker
App. Ct. 2011). The Illinois appellate court’s explanation for requiring a direct
contract is unconvincing to this court for the same reasons as the New York case.
60
The court notes that both parties’ applications of the Additional
Insured Provision are in a sense correct. A direct contract between TMC and
Trendmaker would satisfy the requirements of the policy, but so does a single
contract incorporating separate written agreements. Adding words into the
language of the policy and reducing the scope of coverage hardly seems like a
reasonable interpretation of the policy.
21
would be added as an additional insured under the America First
Policy. Both parties have put their agreements in writing, and
their agreements were expressed in a contract. Therefore, under the
plainest reading of the Additional Insured Provision, Trendmaker
qualifies as an additional insured under the America First Policy.61
B.
America First’s Duty to Defend Millis and Trendmaker
In the present case, there is no dispute between the parties
that America First has a duty to defend Millis in the Underlying
Action. Defendant claims, however, that its duty to defend Millis
and Trendmaker in the Underlying Action did not begin until Gordon
filed
his
sixth
amended
petition
in
the
Underlying
Action.
Plaintiff argues, conversely, that America First's duty to defend
was triggered with the filing of the original petition in the
Underlying Action.
Under Texas law, an insurer's duty to defend is determined by
the eight-corners rule, which holds that an insurer's duty to
defend its insured arises if the complaint in the suit against the
insured alleges facts that potentially support claims for which
there is coverage. Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d
61
As an aside, the court notes that its reading of the Additional
Insured Provision is also correct as a matter of policy.
As the court
understands the construction industry, it is the normal course of business to
have an arrangement such as this where the owner of a project hires a general
contractor who then hires a subcontractor on behalf of the owner. To require a
“direct contract” between subcontractor and owner in the present case would
disrupt usual business practices and create problems for owners, contractors,
subcontractors, and insurance companies doing business in the industry. Clearly,
in this case, TMC, Millis and Trendmaker all intended for Trendmaker to have
coverage under the America First Policy. America First is now trying to avoid its
coverage duties by making an argument that changes the meaning of the policy and
substantially narrows the scope of coverage.
22
819, 821-22 (Tex. 1997); Nat'l Union Fire Ins. Co. of Pittsburgh,
Pa. v. Merchs Fast Motor Lines, Inc. , 939 S.W.2d 139, 141 (Tex.
1997). In determining whether this duty exists, the court's only
job is to compare the four corners of the pleading with the four
corners of the insurance policy. Lincoln Gen. Ins. Co. v. Reyna,
401 F.3d 347, 350 (5th Cir. 2005).
When applying the eight-corners rule, the court considers the
factual allegations without regard to their truth or falsity.
GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d
305,
310
(Tex.
2006).
The
court
interprets
the
allegations
liberally and resolves all doubts regarding the duty to defend in
favor of the insured. Merchs. Fast Motor Lines, Inc., 939 S.W.2d at
141. Courts may generally not, however, (1) read facts into the
pleadings, (2) look outside the pleadings, or (3) imagine factual
scenarios which might trigger coverage.
Guar. Nat’l Ins. Co. v.
Azrock Indus., 211 F.3d 239, 243 (5 th Cir.2000); see also Fielder
Rd.
Baptist
inferences
Church,
from
the
197
S.W.3d
petition
at
that
311.
may
The
lead
court
to
a
may
draw
finding
of
coverage. Gen. Star Indem. Co. v. Gulf Coast Marine Assocs., 252
S.W.3d 450, 456 (Tex.App.-Houston [14th Dist.] 2008, pet. denied).
And it is the factual allegations, not the legal theories, that
control. Fed. Ins. Co. v. Ace Prop. & Cas. Co., 429 F.3d 120, 125
(5th Cir.2005) (citing Merchs. Fast Motor Lines, Inc., 939 S.W.2d
at 141).
So long as the underlying suit alleges facts that may fall
within the scope of coverage, the insurer has a duty to defend. See
Northfield Ins. Co. v. Loving Home Care, 363 F.3d 523, 528 (5th Cir.
23
2004);
Merchs.
Fast
Motor
Lines,
Inc.,
939
S.W.2d
at
141.
Conversely, if the underlying suit does not allege facts within the
scope of policy coverage, an insurer has no duty to defend.
See
Merchs. Fast Motor Lines, Inc., 939 S.W.2d at 141.
In the present, case the America First Policy is not ambiguous
and can be assigned meaning as a matter of law. See Nat’l Union
Fire Ins. Co. of Pittsburgh, Pa. v. CBI Indus, 907 S.W.2d 517, 520
(Tex. 1995). The policy provides coverage for an additional insured
“only with respect to liability arising out of the insured's [TMC]
ongoing operations performed for that person or organization”, or
liability arising out of “the premises or facilities owned or used
by the insured [TMC].”62
Therefore, America First’s duty to defend
Millis and Trendmaker in the underlying action began when Gordon
alleged some sort of injury arising out of TMC's ongoing operations
performed for Millis and Trendmaker, or arising out of the premises
or facilities owned or used by TMC.
In his original petition, Gordon alleged that he was injured
while performing his duties at the Cross Creek Ranch Visitors &
Recreation Center and that he was acting in the course and scope of
his employment for Dynamic Air Balancing, Inc.
He also alleged
that the Visitor's and Recreation Center was under control of the
developer, Trendmaker and/or the general contractor, Millis. Gordon
claimed
that
his
injuries
were
the
result
of
Millis
and
Trendmaker’s negligence, and that, therefore, he was entitled to
62
See Doc. 21, Ex. 2 to Pls.’ Mot. for Partial Summ. J., America First
Policy Excerpts with Dep. on Written Contract, p. 31.
24
damages.
TMC was not mentioned by name anywhere in the original
petition.
Defendant claims that there are no allegations in the original
petition that would even suggest that Gordon's injury was in a
manner related to the work subcontracted by TMC. Defendant argues
that Plaintiff cannot show the connection between the alleged
injury and TMC without using extrinsic evidence. Defendant asserts
that under Texas law, the court cannot use extrinsic evidence to
establish that Gordon's injury arose out of TMC's operations and
thereby entitle Millis to additional insured coverage under the
America First Policy.
Conversely, Plaintiff argues that the original petition and
every amended petition thereafter sufficiently alleges liability
that potentially falls within the broad “arising out of” language
found in the America First Additional Insured Provision. First,
Plaintiff contends that, in the insurance context under Texas law,
an injury arises out of an operation if the operation simply brings
the person to the premises for the purposes of that operation.
Second, Plaintiff argues that Texas law does not require a specific
allegation of fault by TMC and that there is no requirement of an
attribution of fault between the insured, TMC, and additional
insured, Millis. Third, Plaintiff argues that the petition does not
need to specifically identify the named insured to trigger coverage
for an additional insured.
And finally, Plaintiff argues that
extrinsic evidence of TMC's subcontractor relationship with Dynamic
25
Air Balancing establishes America First's duty to defend Millis as
of the date of Plaintiff's Original Petition.
Ordinarily, as Defendant correctly notes, the court will not
consider facts outside the pleadings. See Liberty Mut. Ins. Co v.
Graham, 473 F.3d 596, 600 (5th Cir. 2006). The Supreme Court of
Texas
has
never
expressly
recognized
an
exception
to
the
eight-corners rule, however, it has acknowledged that other courts
have drawn a “very narrow exception” allowing extrinsic evidence
“only when relevant to an independent and discrete coverage issue,
not touching on the merits of the underlying third-party claim.”
Fielder Rd. Baptist Church, 197 S.W.3d at 308; see also Pine Oak
Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 654
(Tex. 2009).
In Fielder Road Baptist Church, the court resolved the case
before it without expressly approving of this exception because the
extrinsic evidence in that case was relevant to both coverage and
the merits, so the exception did not apply. 197 S.W.3d at 309.
However, the court noted the Fifth Circuit’s observation that, if
the Supreme Court of Texas were to recognize an exception to the
eight-corners rule, it would likely do so only under circumstances
where “it is initially impossible to discern whether coverage is
potentially implicated and when the extrinsic evidence goes solely
to a fundamental issue of coverage which does not overlap with the
merits of or engage the truth or falsity of any facts alleged in
the underlying case.” Id. at 308-09 (emphasis in original) (citing
26
Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531
(5th Cir. 2004)).
Indeed,
almost
every
intermediate
Texas
court
decision
allowing extrinsic evidence to establish the duty to defend has
permitted
extrinsic
evidence
on
the
basis
that
the
original
petition did not allege facts sufficient to determine if coverage
exists. See e.g. Int'l Serv. Ins. Co. v. Boll, 392 S.W.2d 158, 161
(Tex. Civ. App.--Houston 1965, writ ref'd n.r.e.). For example, in
Western Heritage Insurance Co. v. River Entertainment, the court
stated, “[W]hen the petition does not contain sufficient facts to
enable the court to determine if coverage exists, it is proper to
look to extrinsic evidence in order to adequately address the
issue.” 998 F.2d 311, 313 (5th Cir. 1993). In State Farm Fire &
Casualty Co. v. Wade, the court explained that extrinsic evidence
could be admitted in deciding the duty to defend when the facts
alleged in the original petition are insufficient to determine
coverage and “when doing so does not question the truth or falsity
of any facts alleged in the underlying petition.” 827 S.W.2d 448,
452-53 (Tex. App.-- Corpus Christi 1992, writ denied). Moreover, in
Gonzales v. American States Insurance Co., the court held that
facts extrinsic to the petition relating only to coverage, not
liability, may be considered to determine a duty to defend, where
such evidence does not contradict any allegation in the petition.
628 S.W.2d 184, 187 (Tex. App.--Corpus Christi 1982, no writ).
In applying the eight-corners rule to the present case, the
27
court cannot discern from the face of Gordon’s original petition in
the Underlying Action whether Gordon’s allegations arose out of
TMC's ongoing operations under the TMC/Millis subcontract. And,
although a very significant issue for the case before this court,
the relationship between Dynamic Air, TMC, and Millis is not
relevant to the merits of the Underlying Action. Based on the facts
alleged, it is impossible to determine whether Millis is afforded
coverage
under
the
America
First
Policy
for
defense
against
Gordon’s allegations. Gordon’s original petition only alleged that
Millis and Trendmaker were responsible for his alleged injuries and
that he was injured while acting within the scope of his employment
for Dynamic Air.
There is no explanation or indication of how
Dynamic Air was associated with Millis or Trendmaker, and it is
impossible to tell whether Gordon’s claims against Millis and
Trendmaker fall within coverage under the America First Policy.
As
previously
explained,
the
Texas
Supreme
Court
has
implicitly acknowledged, if not officially recognized, that, in
cases such as this, where it is impossible to discern whether
coverage is potentially implicated and evidence is available that
goes solely to the issue of coverage without contradicting any fact
alleged in the underlying pleading, the narrow exception to the
eight-corners rule applies. See Fielder Rd. Baptist Church, 197
S.W.3d at 308-09. Because the underlying petition is silent as to
the relationship between Dynamic Air and Millis, facts indicating
that Trendmaker hired Millis, that Millis then subcontracted TMC,
and that TMC in turn subcontracted Dynamic Air, do not contradict
28
the pleadings and, therefore, may be considered as extrinsic
evidence within the very limited exception to eight-corners rule.
It is clear from the TMC/Millis Subcontract that Millis
contracted TMC to do HVAC work at the Cross Creek Visitors Ranch.
Both
parties
agree
that
TMC
was
to
perform
the
specifically at the Cross Creek Ranch Fitness Center.
HVAC
work
It is also
clear from the facts provided by both parties that TMC hired
Dynamic Air to do HVAC work at the Cross Creek Visitors Ranch.
These facts, while absent from the Gordon’s original petition, are
essential to determining America First’s duty to defend. More
importantly, these facts are readily ascertainable; they do not
change or alter any of the facts alleged in the Gordon’s original
petition; and they do not affect or speak to the merits of Gordon’s
claims.
Defendant argues that the present case is similar to Pine Oak
Builders,
where
the
Texas
Supreme
Court
refused
to
consider
extrinsic evidence that would show that the work, which was the
basis of the underlying action, was performed by a subcontractor
rather than the named defendants. The extrinsic evidence would have
brought the allegations within the coverage of the subcontractor’s
insurance policy. 279 S.W.3d at 654. The court refused to consider
the extrinsic evidence because it would have changed the facts as
alleged in the underlying lawsuit and shifted liability from the
contractor to the subcontractor. Id. Thus, the extrinsic evidence
would
have
affected
the
merits
of
the
underlying
claim.
Id.
Conversely, in the present case, the extrinsic evidence considered
would only address the issue of coverage and would have no bearing
29
on the outcome of the case or the distribution of liability among
the parties.
Furthermore, even though under a strict formulation of the
eight-corners rule the court should only consider what could have
been known at the filing of the original petition, in the present
case, the court has the fortunate ability to look at Gordon’s sixth
amended petition and see that the very facts available through
extrinsic evidence in his original petition have no effect on the
merits of those allegations and that they truly only address the
issue of coverage.
Because the facts alleged in Gordon’s original petition,
combined with readily ascertainable facts going solely to the issue
of coverage, present a claim that is potentially within coverage
under the America First Policy, the court finds that America
First’s duty to defend Millis and Trendmaker began with the filing
of the original petition in the Underlying Action. See Northfield
Ins. Co., 363 F.3d at 528; (explaining that under Texas Law, so
long as the underlying suit alleges facts that may fall within the
scope of coverage, the insurer has a duty to defend); Amerisure
Ins. Co. v. Navigators Ins. Co., 611 F.3d 299, 309 (5th Cir. 2010)
(“The court resolves all doubts regarding coverage in favor of
coverage.”) (citations omitted).
C.
Apportionment of Defense Costs Between America First and Mt.
Hawley.
In its third issue before the court, Defendant argues that the
defense costs incurred in the defense of Millis and Trendmaker in
the
Underlying
Action
and
any
30
duty
to
indemnify
Millis
and
Trendmaker should be apportioned between Mt. Hawley and America
First on a pro rata basis.
Defendant claims that the other-
insurance provisions in the Mt. Hawley Policy and the America First
Policy conflict and that, therefore, they must be disregarded.
Plaintiff agrees that defense costs for Trendmaker should be
apportioned between Mt. Hawley and America First on a pro rata
basis.
Plaintiff, however, argues that America First has primary,
non-contributory coverage for Millis and that the Mt. Hawley Policy
is excess to the America First Policy in providing coverage for the
Underlying Action.63
It is undisputed that Millis is insured under both the Mt.
Hawley Policy and the America First Policy. It is also undisputed
that either policy would provide primary, non-contributory coverage
in the absence of the other policy. Both policies however contain
differing other-insurance provisions.
The
America
First
Policy
contained
the
following
other-
insurance provision:
4. Other Insurance
If other valid and collectible insurance is available to
the insured for a loss we cover under Coverages A or B of
this Coverage Part, our obligations are limited as
follows:
a. Primary Insurance
This insurance is primary except when b. below applies.
If this insurance is primary, our obligations are not
affected unless any of the other insurance is also
primary. Then, we will share with all that other
insurance by the method described in c. below [indicating
pro rata].
63
Because both parties agree that America First and Mt. Hawley provide
pro-rata coverage for Trendmaker, the court only addresses the other-insurance
provisions as they relate to Millis.
31
The Mt. Hawley Policy contained the following other-insurance
provision set forth in the “Amendment of Other Insurance - Excess
Provision (Construction Contacts)” endorsement:
(3) This insurance is excess over any other insurance
whether primary, excess, contingent or on any other basis
that is available to you as an additional insured or
contractual indemnitee under a policy issued to a
subcontractor. You are required to give notice of claim
to all “potential insurers” within thirty days of giving
notice of claim to us.
We have no duty under Coverage A or B to defend any claim
or “suit” that any other insurer has a duty to defend. If
no other insurer defends, we will undertake to do so, but
we will be entitled to your rights against all those
other insurers.
We will pay only our share of the amount of loss, if any,
that exceeds the sum of:
(a) the total amount that all such other insurance would
pay for the loss in absence of this insurance; and
(b) The total of all deductible
amounts under all such insurance.
and
self-insurance
We will share the remaining loss, if any, with any other
insurance that is described in this Excess Insurance
provision and was not bought specifically to apply in
excess of the Limits of Insurance show in the
Declarations of this Coverage Part.
“Potential Insurers” means all insurance companies who
may be obligated to defend the insured as either a named
insured or an additional insured. “Potential insurers”
includes the insurers of all subcontractors who were
contractually obligated to name the insured as an
additional insured on their own insurance policy(ies).
When interpreting the relationship between two other-insurance
provisions, for many years, Texas’ courts have followed the Texas
Supreme Court’s decision in Hardware Dealers Mutual Fire Ins. Co.
v. Farmers Ins. Exch. (hereinafter “Hardware Dealers”), 444 S.W.2d
583 (Tex. 1969). In Hardware Dealers, the court announced the
following rule of interpretation:
32
When, from the point of view of the insured, she has
coverage from either one of two policies but for the
other, and each contains a provision which is reasonably
subject to a construction that it conflicts with a
provision in the other concurrent insurance, there is a
conflict in the provisions.
Id. at 589. After finding that the two policies were reasonably
subject to conflicting constructions, the court concluded that it
should disregard the conflicting provisions and apportion liability
between both insurers on a pro rata basis. Id. at 590.
Hardware Dealers thus created a two-step inquiry to discover
whether
two
other-insurance
provisions
actually
conflict.
In
conducting the test, the court must first look at the coverage
provided by each policy as if that policy were the only policy. The
court must consider whether “from the point of view of the insured,
she has coverage from either of the two policies but for the
other.” 444 S.W.2d at 589. Second, the court must evaluate the
impact that the two other-insurance provisions would have when read
together on the coverage of the insured, and whether “each contains
a provision which is reasonably subject to a construction that it
conflicts with a provision in the other concurrent insurance.” Id.
If the answer is yes to both steps, then the policies conflict and
coverage should be apportioned on a pro rata basis between the
insurers. Id.
A few years ago, the Fifth Circuit had the opportunity to
apply the Hardware Dealers test in Royal Insurance Co. of America
v. Hartford Underwrites Insurance Co., 391 F.3d 639, 644 (5th Cir.
2004). In Royal Insurance Co., the Fifth Circuit found that the two
other-insurance clauses in dispute could reasonably be read to
33
conflict even though the plain language of the policies could also
be read as not conflicting. Royal Ins. Co., 391 F.3d at 644. The
Fifth Circuit explained that from the viewpoint of the insured,
full coverage was available from either policy absent the existence
of the other and that, therefore, the substantive step of the
Hardware Dealers test applied and both insurers were liable for
their proportional share of coverage. Id.
In the present case, the Mt. Hawley Policy and the America
First Policy, respectively, provide primary insurance coverage to
Millis and each would provide Millis with full coverage for defense
against the claims in the Underlying Action absent the existence of
the other policy. Therefore, from the viewpoint of the insured,
Millis, full coverage would be available from either policy absent
the existence of the other. Because the court does not find this
case distinguishable from Royal Insurance, the court holds that the
Mt. Hawley and America First other-insurance provisions conflict
and that costs of defense and indemnification of Millis in the
Underlying Action should be apportioned between Mt. Hawley and
America First on a pro rata basis. See id.; see also Willbros RPI,
Inc.
v.
Continental Cas. Co.
, 601 F.3d 306, 313 (5
th
Cir.
2010)(affirming that Royal Insurance is controlling and finding
that two other-insurance clauses, nearly identical to the ones at
issue here, were in conflict notwithstanding the fact that a plain
language reading of the policies would not have left the insured
without coverage).
D.
Breach of Contract: Contractual and Equitable Subrogation
Plaintiff requests that the court declare that America First
34
owes Mt. Hawley its pro rata portion of the defense and indemnity
costs incurred by Mt. Hawley on behalf of Trendmaker and Millis in
the Underlying Action.
Defendant argues that the Texas Supreme
Court’s decision in Mid-Continent Insurance Co. v. Liberty Mutual
Insurance Co.(“Mid-Continent”), bars Mt. Hawley from recovering
from America First under a theory of subrogation because Millis and
Trendmaker have already been paid. 236 S.W.3d 765 (Tex. 2007)
Defendant claims that because Millis and Trendmaker have already
been reimbursed, they have no right to pursue America First, and,
therefore, there is nothing to subrogate. Thus, Mt. Hawley has no
cause of action under either a contractual or equitable subrogation
theory.
Under Texas law, contractual subrogation rights are created
between parties by agreement or contract granting the right to
pursue reimbursement from a third party in exchange for payment of
a loss. Mid-Continent, 236 S.W.3d at 744. When the insurer seeks to
recover through contractual subrogation, it “stands in the shoes of
the insured, obtaining only those rights held by the insured
against a third party, subject to any defense held by the third
party against the insured.” Id.
Mid-Continent involved a dispute between two primary insurers
who
each
provided
the
same
insured
with
a
policy
containing
$1,000,000 liability limits and other standard provisions. One of
the insurers also provided additional coverage under $10,000,000
excess policy. The two insurers admitted coverage and cooperatively
assumed defense of a lawsuit against their common insured.
One of
the insurers reached a settlement agreement for $1,500,000 and
35
demanded that the other insurer contribute its proportionate part.
The other insurer, however, only valued the case at $300,000 and
refused to contribute more than $150,000.
When the case finally
settled, the first insurer paid $1,350,000, while the other paid
$150,000.
Under theories of direct contribution and contractual
and/or equitable subrogation, the first insurer sued the other
insurer seeking to recover the other insurer’s pro rata portion of
the settlement.
The Texas Supreme Court held that the first insurer could not
recover against the other insurer under theories of contractual or
equitable subrogation. Id., at 774.
insured
had
been
fully
The court explained that the
indemnified
against
his
loss,
and,
therefore, had no contractual right to recover an additional pro
rata portion of the settlement from the other insurer.
The court
held that the first insurer, standing in the shoes of the insured,
likewise had no contractual rights against the other insurer that
it could assert in subrogation.
However,
in
subsequent
cases,
the
Fifth
Circuit
has
restricted the scope of Mid-Continent to apply only to the specific
facts of that case. See Colony Ins. Co. v. Peachtree Construction
Co., No. 09-11106, 2011 WL 2811523, at *7-9 (5th Cir. July 19, 2011)
(noting the court’s view that a broad reading of Mid-Continent was
at odds with foundational principles of Texas insurance law, as
well as in conflict with later decisions of the Texas Supreme
Court). In Trinity Universal Insurance Co. v. Employers Mutual
Casualty Co., the Fifth Circuit made it clear that
Mid-Continent
does not address the recovery of defense costs from a co-insurer
36
who violates its duty to defend a common insured. 592 F.3d 687 (5th
Cir. 2010).
Furthermore,
in
Amerisure
Insurance
Co.
v.
Navigators
Insurance Co., the Fifth Circuit rejected an overly broad view of
Mid-Continent’s subrogation exclusion and held that Mid-Continent
does not bar contractual subrogation simply because the insured has
been fully indemnified. 611 F.3d 299, 305-07 (5 th Cir. 2010); see
also Maryland Cas. Co. v. Acceptance Indem. Ins. Co., 639 F.3d 701
(5th Cir. 2011).
More importantly for the purposes of this case,
the Fifth Circuit also held in Amerisure that Mid-Continent does
not apply to bar contractual subrogation where an insurer has
denied coverage. Amerisure Ins. Co., 611, F.3d at 307.
In the present case, America First denied coverage entirely as
to Trendmaker and at least initially and in part as to Millis.
Because of America First’s denial of coverage, Mid-Continent does
not
apply
to
bar
Mt.
Hawley’s
recovery
under
a
theory
of
subrogation for America First’s pro rata share of the defense and
indemnity costs.
Mt. Hawley’s Insurance policy created a right of
contractual subrogation. And based on the court’s analysis of the
other-insurance clauses, the court finds that Trinity and Amerisure
operate
to
allow
Mt.
Hawley’s
contractual
subrogation
claim.
Therefore, Mt. Hawley is entitled to reimbursement from America
First under a theory of contractual subrogation for the amounts it
has paid over its pro rata share of the defense or indemnity costs
for Millis and Trendmaker in the Underlying Action.64
64
The court does not address Plaintiff’s equitable subrogation claim
because the court finds that Plaintiff has a right to contractual subrogation.
See Amerisure Ins. Co. v. Navigators Ins. Co., 611 F.3d 299 (5th Cir. 2010);
37
To the extent that plaintiffs are seeking summary judgment on
their remaining breach of contract claims, they have failed to show
as a matter of undisputed fact and law that they are so entitled.
IV.
Conclusion
Based on the foregoing, the court GRANTS IN PART AND DENIES IN
PART Plaintiff’s Motion for Partial Summary Judgment, and GRANTS IN
PART AND DENIES IN PART Defendant’s Motion for Partial Summary
Judgment. Because the court has not resolved all of the contract
issues in this case, the court DENIES any request for attorney’s
fees at this time.
The
court
RECOMMENDS
to
the
parties
that
they
pursue
alternative dispute resolution before expending further resources
on the remaining issues.
SIGNED in Houston, Texas, this 12th day of May, 2011.
citing Bay Rock Operating Co. v. St. Paul Surplus Lines Ins. Co., 298 S.W.3d 216,
225 (Tex.App.-San Antonio 2009, pet. denied).
38
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